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Filed Pursuant to Rule 497(b)
Registration File No.: 333-30775
DEAN WITTER NATIONAL MUNICIPAL TRUST
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 392-2550
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER 24, 1997
TO THE SHAREHOLDERS OF DEAN WITTER NATIONAL MUNICIPAL TRUST:
Notice is hereby given of a Special Meeting of the Shareholders of Dean
Witter National Municipal Trust ("National Municipal") to be held at the
Conference Room, 44th Floor, Two World Trade Center, New York, New York
10048, at 9:00 A.M., New York time, on October 24, 1997, and any adjournments
thereof (the "Meeting"), for the following purposes:
1. To consider and vote upon an Agreement and Plan of Reorganization,
dated June 30, 1997 (the "Reorganization Agreement"), between
National Municipal and Dean Witter Tax-Exempt Securities Trust
("Tax-Exempt"), pursuant to which substantially all of the assets
of National Municipal would be combined with those of Tax-Exempt
and shareholders of National Municipal would become shareholders of
Tax-Exempt receiving Class B shares of Tax-Exempt with a value
equal to the value of their holdings in National Municipal (the
"Reorganization"); and
2. To act upon such other matters as may properly come before the
Meeting.
The Reorganization is more fully described in the accompanying Proxy
Statement and Prospectus and a copy of the Reorganization Agreement is
attached as Exhibit A thereto. Shareholders of record at the close of
business on August 11, 1997 are entitled to notice of, and to vote at, the
Meeting. Please read the Proxy Statement and Prospectus carefully before
telling us, through your proxy or in person, how you wish your shares to be
voted. The Board of Trustees of National Municipal recommends you vote in
favor of the Reorganization. WE URGE YOU TO SIGN, DATE AND MAIL THE ENCLOSED
PROXY PROMPTLY.
By Order of the Board of Trustees,
Barry Fink,
Secretary
August 20, 1997
YOU CAN HELP AVOID THE NECESSITY AND EXPENSE OF SENDING FOLLOW-UP LETTERS
TO ENSURE A QUORUM BY PROMPTLY RETURNING THE ENCLOSED PROXY. IF YOU ARE
UNABLE TO BE PRESENT IN PERSON, PLEASE FILL IN, SIGN AND RETURN THE
ENCLOSED PROXY IN ORDER THAT THE NECESSARY QUORUM BE REPRESENTED AT THE
MEETING. THE ENCLOSED ENVELOPE REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES.
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DEAN WITTER TAX-EXEMPT SECURITIES TRUST
TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
(212) 392-2550
ACQUISITION OF THE ASSETS OF
DEAN WITTER NATIONAL MUNICIPAL TRUST
BY AND IN EXCHANGE FOR SHARES OF
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
This Proxy Statement and Prospectus is being furnished to shareholders of
Dean Witter National Municipal Trust ("National Municipal") in connection
with an Agreement and Plan of Reorganization, dated June 30, 1997 (the
"Reorganization Agreement"), pursuant to which substantially all the assets
of National Municipal will be combined with those of Dean Witter Tax-Exempt
Securities Trust ("Tax-Exempt") in exchange for shares of Tax-Exempt. As a
result of this transaction, shareholders of National Municipal will become
shareholders of Tax-Exempt and will receive Class B shares of Tax-Exempt with
a value equal to the value of their holdings in National Municipal. The terms
and conditions of this transaction are more fully described in this Proxy
Statement and Prospectus and in the Reorganization Agreement between National
Municipal and Tax-Exempt, attached hereto as Exhibit A. The address of
National Municipal is that of Tax-Exempt set forth above. This Proxy
Statement also constitutes a Prospectus of Tax-Exempt, which is dated, August
20, 1997, filed by Tax-Exempt with the Securities and Exchange Commission
(the "Commission") as part of its Registration Statement on Form N-14 (the
"Registration Statement").
Tax-Exempt is an open-end, diversified management investment company whose
investment objective is to provide a high level of current income exempt from
federal income tax, consistent with the preservation of capital. Tax-Exempt
seeks to achieve its investment objective by investing principally in
investment grade, tax-exempt fixed-income securities (see
"Synopsis--Comparison of National Municipal and Tax-Exempt").
This Proxy Statement and Prospectus sets forth concisely information about
Tax-Exempt that shareholders of National Municipal should know before voting
on the Reorganization Agreement. A copy of the Prospectus for Tax-Exempt,
dated July 28, 1997, is attached as Exhibit B and is incorporated herein by
reference. Also enclosed and incorporated herein by reference is Tax-Exempt's
Annual Report for the fiscal year ended December 31, 1996 and the succeeding
Semi-Annual Report for the six months ended June 30, 1997. A Statement of
Additional Information relating to the Reorganization, described in this
Proxy Statement and Prospectus (the "Additional Statement"), dated August 20,
1997, has been filed with the Commission and is also incorporated herein by
reference. Also incorporated herein by reference are National Municipal's
Prospectus dated November 26, 1996, and National Municipal's Annual Report
for its fiscal year ended September 30, 1996 and the succeeding Semi-Annual
Report for the six months ended March 31, 1997. Such documents are available
without charge by calling (212) 392-2550 or (800) 526-3143 (TOLL FREE).
Investors are advised to read and retain this Proxy Statement and Prospectus
for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
This Proxy Statement and Prospectus is dated August 20, 1997.
<PAGE>
TABLE OF CONTENTS
PROXY STATEMENT AND PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION................................................................................... 1
General........................................................................................ 1
Record Date; Share Information................................................................. 1
Proxies........................................................................................ 2
Expenses of Solicitation....................................................................... 2
Vote Required.................................................................................. 3
SYNOPSIS....................................................................................... 4
The Reorganization............................................................................. 4
Fee Table...................................................................................... 4
Tax Consequences of the Reorganization......................................................... 7
Comparison of National Municipal and Tax-Exempt ............................................... 7
PRINCIPAL RISK FACTORS......................................................................... 10
THE REORGANIZATION............................................................................. 11
The Proposal................................................................................... 11
The Board's Consideration...................................................................... 11
The Reorganization Agreement................................................................... 12
Tax Aspects of the Reorganization.............................................................. 14
Description of Shares.......................................................................... 16
Capitalization Table (unaudited)............................................................... 16
Appraisal Rights............................................................................... 16
COMPARISON OF INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS.................................. 16
Investment Objectives and Policies............................................................. 16
Investment Restrictions........................................................................ 17
ADDITIONAL INFORMATION ABOUT NATIONAL MUNICIPAL
AND TAX-EXEMPT................................................................................ 18
General........................................................................................ 18
Financial Information.......................................................................... 18
Management..................................................................................... 18
Description of Securities and Shareholder Inquiries............................................ 18
Dividends, Distributions and Taxes ............................................................ 18
Purchases, Repurchases and Redemptions......................................................... 18
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE.................................................... 19
FINANCIAL STATEMENTS AND EXPERTS............................................................... 19
LEGAL MATTERS.................................................................................. 19
AVAILABLE INFORMATION.......................................................................... 19
OTHER BUSINESS................................................................................. 20
Exhibit A--Agreement and Plan of Reorganization, dated as of June 30, 1997, by and between
Dean Witter National Municipal Trust and Dean Witter Tax-Exempt Securities Trust ............ A-1
</TABLE>
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DEAN WITTER NATIONAL MUNICIPAL TRUST
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 392-2550
PROXY STATEMENT AND PROSPECTUS
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER 24, 1997
INTRODUCTION
GENERAL
This Proxy Statement and Prospectus is being furnished to the shareholders
of Dean Witter National Municipal Trust ("National Municipal"), an open-end
diversified management investment company, in connection with the
solicitation by the Board of Trustees of National Municipal (the "Board") of
proxies to be used at the Special Meeting of Shareholders of National
Municipal to be held at the Conference Room, 44th Floor, Two World Trade
Center, New York, New York 10048 at 9:00 A.M., New York time, on October 24,
1997, and any adjournments thereof (the "Meeting"). It is expected that the
mailing of this Proxy Statement and Prospectus will be made on or about
August 20, 1997.
At the Meeting, National Municipal shareholders ("Shareholders") will
consider and vote upon an Agreement and Plan of Reorganization, dated June
30, 1997 (the "Reorganization Agreement"), by and between National Municipal
and Dean Witter Tax-Exempt Securities Trust ("Tax-Exempt") pursuant to which
substantially all of the assets of National Municipal will be combined with
those of Tax-Exempt in exchange for shares of Tax-Exempt. As a result of this
transaction, Shareholders will become shareholders of Tax-Exempt and will
receive Class B shares of Tax-Exempt equal to the value of their holdings in
National Municipal on the date of such transaction (the "Reorganization").
The shares to be issued by Tax-Exempt pursuant to the Reorganization will be
Class B shares of Tax-Exempt which will be issued at net asset value without
an initial sales charge (the "Tax-Exempt Shares"). Further information
relating to Tax-Exempt, its Class B shares as well as the other three classes
of shares (each, a "Class" and collectively, the "Classes") offered by
Tax-Exempt, is set forth herein and in Tax-Exempt's current Prospectus, dated
July 28, 1997 ("Tax-Exempt's Prospectus"), attached to this Proxy Statement
and Prospectus and incorporated herein by reference.
The information concerning National Municipal contained herein has been
supplied by National Municipal and the information concerning Tax-Exempt
contained herein has been supplied by Tax-Exempt.
RECORD DATE; SHARE INFORMATION
The Board has fixed the close of business on August 11, 1997 as the record
date (the "Record Date") for the determination of the Shareholders entitled
to notice of, and to vote at, the Meeting. As of the Record Date, there were
8,296,355 shares of National Municipal issued and outstanding. Shareholders
on
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the Record Date are entitled to one vote per share on each matter submitted
to a vote at the Meeting. A majority of the outstanding shares entitled to
vote, represented in person or by proxy, will constitute a quorum at the
Meeting.
To the knowledge of the Board, as of the Record Date, no person owned of
record or beneficially 5% or more of the outstanding shares of National
Municipal. As of the Record Date, the trustees and officers of National
Municipal, as a group, owned less than 1% of the outstanding shares of
National Municipal.
To the knowledge of Tax-Exempt's Board of Trustees, as of the Record Date,
no person owned of record or beneficially 5% or more of the outstanding
shares of Tax-Exempt. As of the Record Date, the trustees and officers of
Tax-Exempt, as a group, owned less than 1% of the outstanding shares of
Tax-Exempt.
PROXIES
The enclosed form of proxy, if properly executed and returned, will be
voted in accordance with the choice specified thereon. The proxy will be
voted in favor of the Reorganization Agreement unless a choice is indicated
to vote against or to abstain from voting on the Reorganization Agreement.
The Board knows of no business, other than that set forth in the Notice of
Special Meeting of Shareholders, to be presented for consideration at the
Meeting. However, the proxy confers discretionary authority upon the persons
named therein to vote as they determine on other business, not currently
contemplated, which may come before the Meeting. Abstentions and, if
applicable, broker "non-votes" will not count as votes in favor of the
Reorganization Agreement, and broker "non-votes" will not be deemed to be
present at the meeting for purposes of determining whether the Reorganization
Agreement has been approved. Broker "non-votes" are shares held in street
name for which the broker indicates that instructions have not been received
from the beneficial owners or other persons entitled to vote and for which
the broker does not have discretionary voting authority. The proxy may be
revoked at any time prior to the voting thereof by: (i) delivering written
notice of revocation to the Secretary of National Municipal at Two World
Trade Center, New York, New York 10048; (ii) attending the Meeting and voting
in person; or (iii) signing and returning a new proxy (if returned and
received in time to be voted). Attendance at the Meeting will not in and of
itself revoke a proxy.
In the event that the necessary quorum to transact business or the vote
required to approve or reject the Reorganization Agreement is not obtained at
the Meeting, the persons named as proxies may propose one or more
adjournments of the Meeting for a total of not more than 90 days in the
aggregate from the Record Date to permit further solicitation of proxies. Any
such adjournment will require the affirmative vote of the holders of a
majority of National Municipal's shares present in person or by proxy at the
Meeting. The persons named as proxies will vote in favor of such adjournment
those proxies which they are entitled to vote in favor of the Reorganization
Agreement and will vote against any such adjournment those proxies required
to be voted against the Reorganization Agreement.
EXPENSES OF SOLICITATION
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement and Prospectus, will be borne by Dean Witter
InterCapital Inc. (the "Investment Manager" or
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"InterCapital"). In addition to the solicitation of proxies by mail, proxies
may be solicited by officers and regular employees or certain affiliates of
National Municipal, including InterCapital and/or Dean Witter Trust Company
("DWTC"), without compensation other than regular compensation, personally or
by mail, telephone, telegraph or otherwise. Brokerage houses, banks and other
fiduciaries may be requested to forward soliciting material to the beneficial
owners of shares and to obtain authorization for the execution of proxies.
DWTC may call Shareholders to ask if they would be willing to have their
votes recorded by telephone. The telephone voting procedure is designed to
authenticate Shareholders' identities, to allow Shareholders to authorize the
voting of their shares in accordance with their instructions and to confirm
that their instructions have been recorded properly. No recommendation will
be made as to how a Shareholder should vote on the Reorganization Agreement
other than to refer to the recommendation of the Board. National Municipal
has been advised by counsel that these procedures are consistent with the
requirements of applicable law. Shareholders voting by telephone will be
asked for their social security number or other identifying information and
will be given an opportunity to authorize proxies to vote their shares in
accordance with their instructions. To ensure that the Shareholders'
instructions have been recorded correctly they will receive a confirmation of
their instructions in the mail. A special toll-free number will be available
in case the information contained in the confirmation is incorrect. Although
a Shareholder's vote may be taken by telephone, each Shareholder will receive
a copy of this Proxy Statement and Prospectus and may vote by mail using the
enclosed proxy card.
VOTE REQUIRED
Approval of the Reorganization Agreement by Shareholders requires the
affirmative vote of a majority (i.e., more than 50%) of the outstanding
shares of National Municipal represented in person or by proxy and entitled
to vote at the Meeting, provided a quorum is present at the Meeting. If the
Reorganization Agreement is not approved by Shareholders, National Municipal
will continue in existence and the Board will consider alternative actions.
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SYNOPSIS
The following is a synopsis of certain information contained in or
incorporated by reference in this Proxy Statement and Prospectus. This
synopsis is only a summary and is qualified in its entirety by the more
detailed information contained or incorporated by reference in this Proxy
Statement and Prospectus and the Reorganization Agreement. Shareholders
should carefully review this Proxy Statement and Prospectus and the
Reorganization Agreement in their entirety and, in particular, Tax-Exempt's
Prospectus, which is attached to this Proxy Statement and incorporated herein
by reference.
THE REORGANIZATION
The Reorganization Agreement provides for the transfer of substantially
all the assets of National Municipal, subject to stated liabilities, to
Tax-Exempt in exchange for the Tax-Exempt Shares. The aggregate net asset
value of the Tax-Exempt Shares issued in the exchange will equal the
aggregate value of the net assets of National Municipal received by
Tax-Exempt. On or after the closing date scheduled for the Reorganization
(the "Closing Date"), National Municipal will distribute the Tax-Exempt
Shares received by National Municipal to Shareholders as of the Valuation
Date (as defined below under "The Reorganization Agreement") in complete
liquidation of National Municipal and National Municipal will thereafter be
dissolved and deregistered under the Investment Company Act of 1940, as
amended (the "1940 Act"). As a result of the Reorganization, each Shareholder
will receive that number of full and fractional Tax-Exempt Shares equal in
value to such Shareholder's pro rata interest in the net assets transferred
to Tax-Exempt. Shareholders holding certificates representing their shares
will not be required to surrender their certificates in connection with the
Reorganization. However, such Shareholders will have to surrender such
certificates in order to receive certificates representing Tax-Exempt Shares
or to redeem, transfer or exchange the Tax-Exempt Shares received. The Board
has determined that the interests of Shareholders will not be diluted as a
result of the Reorganization.
FOR THE REASONS SET FORTH BELOW UNDER "THE REORGANIZATION--THE BOARD'S
CONSIDERATION," THE BOARD, INCLUDING THE TRUSTEES WHO ARE NOT "INTERESTED
PERSONS" OF NATIONAL MUNICIPAL ("INDEPENDENT TRUSTEES"), AS THAT TERM IS
DEFINED IN THE 1940 ACT, HAS CONCLUDED THAT THE REORGANIZATION IS IN THE BEST
INTERESTS OF NATIONAL MUNICIPAL AND ITS SHAREHOLDERS AND RECOMMENDS APPROVAL
OF THE REORGANIZATION AGREEMENT.
FEE TABLE
National Municipal and Tax-Exempt each pay expenses for management of
their assets, distribution of their shares and other services, and those
expenses are reflected in the net asset value per share of each such fund.
The following table illustrates expenses and fees that a Shareholder incurred
during National Municipal's fiscal year ended September 30, 1996 (assuming
the waiver of fees and reimbursement of expenses were not in effect). On July
28, 1997, Tax-Exempt began offering its shares in multiple classes, each with
different distribution arrangements and sales charges. Class B shares of
Tax-Exempt will be issued to National Municipal Shareholders in connection
with the Reorganization. Accordingly, expenses of Tax-Exempt that are set
forth in the table are for the fiscal year ended December 31, 1996 but they
have been restated to reflect the fees and expenses applicable to Class B
shares ("Class B Fees and Expenses"). The table below also sets forth pro
forma fees for the surviving combined fund (Tax-Exempt) reflecting what the
fee schedule would have been at December 31, 1996, if the Reorganization had
been
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consummated twelve (12) months prior to that date and assuming Class B Fees
and Expenses. Further information on the fees and expenses applicable to
Tax-Exempt's Class B shares as well as the other three classes of Tax-Exempt
shares is set forth herein and in Tax-Exempt's Prospectus, attached hereto
and incorporated herein by reference.
Shareholder Transaction Expenses
<TABLE>
<CAPTION>
NATIONAL TAX-EXEMPT PRO FORMA
MUNICIPAL (CLASS B) COMBINED
--------- --------- --------
<S> <C> <C> <C>
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering
price).................................... None None(1) None(1)
Maximum Sales Charge Imposed on Reinvested
Dividends................................. None None None
(as a percentage of the lesser of
original purchase price or redemption
proceeds)
Maximum Contingent Deferred Sales Charge
(as a percentage of the lesser of
original purchase price or redemption
proceeds) ................................ 3.00% during the 5.00% during the 5.00% during the
first year scaled first year scaled first year scaled
down to 1.00% during down to 1.00% during down to 1.00% during
the third year, the sixth year, the sixth year,
reaching zero reaching zero reaching zero
thereafter thereafter(2) thereafter(3)
Redemption Fees............................ None None None
Exchange Fee (as a percentage of original
purchase price of redemption proceeds) ... None None None
</TABLE>
Annual Fund Operating Expenses (As a Percentage of Average Net Assets)
<TABLE>
<CAPTION>
NATIONAL TAX-EXEMPT PRO FORMA
MUNICIPAL (CLASS B) COMBINED
--------- --------- --------
<S> <C> <C> <C>
Management Fees ................... 0.35%(4) 0.43% 0.42%(5)
12b-1 Fees(6) ..................... 0.59% 0.60%(7) 0.60%(7)
Other Expenses .................... 0.25% 0.05% 0.06%
---- ---- ----
Total Fund Operating Expenses .... 1.19% 1.08% 1.08%
</TABLE>
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1 During Tax-Exempt's fiscal year ended December 31, 1996, shares of
Tax-Exempt were sold exclusively with a front-end sales charge, the
maximum rate of which was 4.00% of the offering price. On July 28,
1997, however, Tax-Exempt began offering four Classes of shares.
Classes B, C and D shares are sold without a front-end sales charge.
Class A shares are currently sold with a maximum front-end charge of
4.25%.
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2 During Tax-Exempt's fiscal year ended December 31, 1996, there was no
contingent deferred sales charge ("CDSC") imposed upon redemptions
and/or repurchases of shares of Tax-Exempt. However, Class B shares of
Tax-Exempt are currently offered and subject to the CDSC set forth in
the table. Tax-Exempt shares held by certain employee benefit plans,
however, are subject to a different CDSC schedule (see "Purchases,
Exchanges and Redemptions" below).
3 The CDSC schedule of National Municipal (with the lower maximum CDSC
of 3.00%) will continue to apply (after the Reorganization) to the
Tax-Exempt Shares acquired by a Shareholder as a result of the
Reorganization and, accordingly, Shareholders acquiring Tax-Exempt
Shares as a result of the Reorganization will not pay a higher CDSC
on redemption of the Tax-Exempt Shares than the rate currently in
effect for redemptions of their National Municipal shares so long as
such Shareholder does not (i) exchange the Tax-Exempt Shares for
shares of another Dean Witter Fund which has a higher maximum CDSC
rate than 3.00% (a "Higher CDSC Fund") or (ii) having exchanged to
Dean Witter Global Short-Term Income Fund Inc. or any Exchange Fund
(as such term is defined herein), re-exchange back to Tax-Exempt
after the Reorganization. Under such circumstances, the CDSC schedule
of the Higher CDSC Fund acquired in the exchange will become
applicable upon the redemption of such fund's shares, or in the case
of shares of any of the Exchange Funds or Dean Witter Global
Short-Term Income Fund Inc. acquired in an exchange and then
subsequently re-exchanged back into Tax-Exempt, the CDSC applicable
to Tax-Exempt shares will be charged upon the redemption of any such
shares (see "Purchases, Exchanges and Redemptions" below).
4 Pursuant to an undertaking, the Investment Manager assumed all
expenses (except for any brokerage and 12b-1 fees) and waived the
compensation provided for in its Management Agreement until December
31, 1995. From January 1, 1996 through June 30, 1997, InterCapital
undertook to continue to waive management fees and to continue to
assume expenses (except for brokerage and 12b-1 fees) to the extent
such fees and expenses exceeded, on an annualized basis, 0.50% of the
daily net assets of the fund. As of July 1, 1997, InterCapital has
ceased voluntarily assuming expenses and waiving management fees for
National Municipal. Taking the waiver of fees and assumption of
expenses into effect, actual Management Fees for the fiscal year
ended September 30, 1996 were 0.20% and actual Other Expenses were
0.18%.
5 This rate reflects the anticipated lower advisory fee of Tax-Exempt
obtained by reaching a breakpoint in the advisory fee upon the
combination of the two funds based upon National Municipal's net
assets as of September 30, 1996 and Tax-Exempt's net assets as of
December 31, 1996, thus, a scaling down of the advisory fee to the
effective advisory fee rate shown.
6 The 12b-1 fee is accrued daily and payable monthly. The 12b-1 fee is,
in the case of National Municipal, calculated as a percentage of the
lesser of (a) the average daily net sales or (b) the average daily
net assets of the fund and, in the case of Tax-Exempt, calculated as
a percentage of average daily net assets. A portion of the 12b-1 fee
equal to 0.15% of average daily net assets is characterized as a
service fee within the meaning of the National Association of
Securities Dealers, Inc. ("NASD") guidelines.
7 For the fiscal year ended December 31, 1996, there was no 12b-1 fee
paid by Tax-Exempt. However, on June 30, 1997, a 12b-1 fee calculated
at the annual rate of 0.60% of the average daily net assets of Class
B was authorized for Class B shares of Tax-Exempt to take effect upon
implementation of the multiple class distribution structure on July
28, 1997. The 12b-1 fee rate shown in the table assumes the 12b-1 fee
was in effect for Tax-Exempt during its fiscal year ended December
31, 1996. The actual total fund operating expense ratio for
Tax-Exempt during the fund's fiscal year ended December 31, 1996 was
0.48% (this rate reflects that no 12b-1 fees were incurred during
this period).
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Example
To attempt to show the effect of these expenses on an investment over
time, the hypotheticals shown below have been created. Assuming that an
investor makes a $1,000 investment in either National Municipal or Class B
shares of Tax-Exempt or the new combined fund, that the annual return is 5%
and that the operating expenses for each fund are the ones shown in the chart
above; if the investment was redeemed at the end of each period shown below,
the investor would incur the following expenses by the end of each period
shown:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
National Municipal........... $42 $48 $65 $144
Tax-Exempt (Class B)......... $61 $64 $80 $132
Pro Forma Combined (Class
B).......................... $61 $64 $80 $132
</TABLE>
If such investment was not redeemed, the investor would incur the following
expenses:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
National Municipal........... $12 $38 $65 $144
Tax-Exempt (Class B)......... $11 $34 $60 $132
Pro Forma Combined (Class
B).......................... $11 $34 $60 $132
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL OPERATING EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. Long-term Shareholders of National Municipal or Class
B shareholders of Tax-Exempt may pay more in sales charges including
distribution fees than the economic equivalent of the maximum front-end sales
charges permitted by the NASD.
TAX CONSEQUENCES OF THE REORGANIZATION
As a condition to the Reorganization, National Municipal will receive an
opinion of Gordon Altman Butowsky Weitzen Shalov & Wein to the effect that
the Reorganization will constitute a tax-free reorganization for federal
income tax purposes, and that no gain or loss will be recognized by National
Municipal or the shareholders of National Municipal for Federal income tax
purposes as a result of the transactions included in the Reorganization. For
further information about the tax consequences of the Reorganization, see
"The Reorganization -- Tax Aspects of the Reorganization" below.
COMPARISON OF NATIONAL MUNICIPAL AND TAX-EXEMPT
INVESTMENT OBJECTIVES AND POLICIES. National Municipal and Tax-Exempt have
an identical investment objective, which is to seek a high level of current
income which is exempt from federal income tax, consistent with preservation
of capital. National Municipal and Tax-Exempt seek to achieve their
investment objective by investing at least 75% of their respective total
assets in: (a) Municipal Bonds which are rated at the time of purchase within
the three highest grades by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("Standard & Poor's"); (b) Municipal Notes
which at the time of purchase are rated in the two highest grades by Moody's
or Standard & Poor's, or if not rated, have outstanding one or more issues of
Municipal Bonds rated as set forth in clause (a); and (c) Municipal
Commercial Paper which at the time of purchase are rated P-1 by Moody's or
A-1 by Standard & Poor's.
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In addition, Tax-Exempt has a policy of investing at least 80% of its total
assets in tax-exempt securities which include Municipal Bonds and Municipal
Notes (together, "Municipal Obligations") and Municipal Commercial Paper
("Municipal Paper"), excluding tax-exempt securities which subject shareholders
to the federal alternative minimum tax ("AMT"). As such, the remaining 20% of
Tax-Exempt's total assets may be invested in Tax-Exempt securities that subject
investors to the AMT; whereas National Municipal may invest without limit in
Municipal Obligations (in which the fund may invest) that subject investors to
the AMT. Both funds also may invest up to 25% of their respective total assets
in Municipal Obligations (and, in the case of Tax-Exempt, Municipal Paper)
which are unrated or, if rated are not within the categories of Moody's or
Standard & Poor's listed above in clauses (a) and (b) (and, in the case of
Tax-Exempt, clause (c)). Both funds do not intend to invest more than 5% of
their respective net assets in Municipal Bonds which are rated, or deemed, by
the Investment Manager to be below investment grade. Additionally, up to 20% of
Tax-Exempt's total assets and up to 25% of National Municipal's total assets,
may be invested in taxable money market instruments under any one or more of
the following circumstances: (i) pending investment of proceeds of sale of fund
shares or of portfolio securities; (ii) pending settlement of purchases of
portfolio securities; and (iii) to maintain liquidity for the purpose of
meeting anticipated redemptions. In addition, up to 20% of National Municipal's
total assets and up to 25% of Tax Exempt's total assets may be invested in
taxable securities to maintain a defensive posture when, in the opinion of the
Investment Manager, it is advisable to do so. With respect to National
Municipal, the fund seeks to maintain under normal circumstances a dollar
weighted average maturity in excess of twenty years. Tax-Exempt does not have a
specific policy as to the portfolio's weighted average maturity.
The investment policies of both funds are similar and the principal
differences between them are further described under "Comparison of
Investment Objectives, Policies and Restrictions" below.
Other than Tax-Exempt's policy that, under normal market conditions, at
least 80% of its net assets will be invested in tax-exempt securities, the
investment policies of both National Municipal and Tax-Exempt are not
fundamental and may be changed by their respective Boards of Trustees.
INVESTMENT MANAGEMENT AND DISTRIBUTION PLAN FEES. National Municipal and
Tax-Exempt obtain investment management services from InterCapital. With
respect to National Municipal, the fund pays InterCapital monthly
compensation calculated daily at the annual rate of 0.35% of the fund's
average net assets. Pursuant to an undertaking, InterCapital assumed all the
fund's expenses (except for any brokerage and 12b-1 fees) and waived the
compensation provided for in its Management Agreement until December 31,
1995. From January 1, 1996 through June 30, 1997, InterCapital undertook to
continue to waive management fees and to continue to assume expenses (except
for brokerage and 12b-1 fees) to the extent such fees and expenses exceeded,
on an annualized basis, 0.50% of the average daily net assets of the fund. As
a result of such waiver and assumption of expenses, management fees for the
fiscal year ended September 30, 1996 amounted to a rate of 0.27% of the
fund's average daily net assets. As of July 1, 1997, InterCapital has ceased
voluntarily assuming expenses and waiving management fees for National
Municipal. With respect to Tax-Exempt, the fund pays InterCapital monthly
compensation calculated daily by applying the annual rate of: 0.50% to the
fund's first $500 million of average net assets; 0.425% to the fund's next
$250 million of average net assets; 0.375% to the fund's next $250 million of
average net assets; 0.35% to the fund's next $250 million of average net
assets; and 0.325% to the fund's average net assets exceeding $1.25 billion.
8
<PAGE>
Both National Municipal and Tax-Exempt have adopted distribution plans
(each, a "Plan") pursuant to Rule 12b-1 under the 1940 Act. Pursuant to
National Municipal's Plan, the fund pays to Dean Witter Distributors Inc.
(the "Distributor") a fee ("12b-1 fee"), which is accrued daily and payable
monthly, at the annual rate of 0.60% of the lesser of (a) the average daily
net sales of such fund's shares, or (b) the average daily net assets of the
fund. The 12b-1 fee applicable to Class B shares of Tax-Exempt pursuant to
its Plan is accrued daily and payable monthly at the annual rate of 0.60% of
average daily net assets allocated to that Class. For further information
relating to the 12b-1 fees applicable to Class B shares as well as
Tax-Exempt's other Classes of shares, see the section entitled "Purchase of
Fund Shares" in Tax-Exempt's Prospectus, attached hereto. 12b-1 fees
compensate the Distributor for the services provided and the expenses borne
by the Distributor and others in distribution of the funds' shares. The
Distributor also receives the proceeds of any CDSC paid by the funds'
shareholders at the time of redemption. (National Municipal's and
Tax-Exempt's respective CDSC schedules are set forth below under "Purchases,
Exchanges and Redemptions.")
OTHER SIGNIFICANT FEES. Both National Municipal and Tax-Exempt pay
additional fees in connection with their operations, including legal,
auditing, transfer agent and custodial fees. See "Synopsis -- Fee Table"
above for the percentage of average net assets represented by such "Other
Expenses."
PURCHASES, EXCHANGES AND REDEMPTIONS. National Municipal continuously
issues its shares to investors at a price equal to net asset value at the
time of such issuance. However, redemptions and/or repurchases are subject
under most circumstances to a CDSC. Likewise, Class B shares of Tax-Exempt
are currently offered at net asset value and redemptions and/or repurchases
are subject under most circumstances to a CDSC. The following are the
respective CDSC schedules applicable to each of National Municipal and Class
B shares of Tax-Exempt. Class B shares held by certain qualified
employer-sponsored benefit plans are subject to a reduced CDSC schedule.
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE PAYMENT MADE NATIONAL MUNICIPAL TAX-EXEMPT
- -------------------------------- ------------------ ----------
<S> <C> <C>
First ............................... 3.0% 5.0%
Second .............................. 2.0% 4.0%
Third ............................... 1.0% 3.0%
Fourth............................... none 2.0%
Fifth................................ none 2.0%
Sixth................................ none 1.0%
Seventh and thereafter............... none none
</TABLE>
The lower CDSC schedule of National Municipal will continue to apply to
Shareholders only with respect to the Tax-Exempt Shares acquired in the
Reorganization. However, the lower CDSC schedule will not apply if such
Shareholder: (i) exchanges his/her Tax-Exempt Shares after the Reorganization
for a fund with a higher CDSC schedule than National Municipal (a "Higher
CDSC Fund") or (ii) having exchanged to Dean Witter Global Short-Term Income
Fund Inc., Dean Witter Short-Term U.S. Treasury Trust, Dean Witter Limited
Term Municipal Trust, Dean Witter Short-Term Bond Fund, Dean Witter
Intermediate Term U.S. Treasury Trust and five Dean Witter money market funds
(collectively, the "Exchange Funds"), he/she re-exchanges back into
Tax-Exempt after the Reorganization. Under such circumstances, the CDSC
schedule applicable to the Higher CDSC Fund shares acquired in the exchange
will apply to redemptions of such fund's shares or, in the case of shares of
any of the Exchange Funds acquired in an exchange and then subsequently
re-exchanged back into Tax-Exempt, the CDSC schedule for Tax-Exempt (set
forth in the table above) will apply to redemptions of any of such shares.
9
<PAGE>
The CDSC charge is paid to the Distributor. Shares of Tax-Exempt and
National Municipal are distributed by the Distributor and offered by Dean
Witter Reynolds Inc. and other dealers who have entered into selected dealer
agreements with the Distributor. For further information relating to the CDSC
schedules applicable to Class B and the other Classes of Tax-Exempt's shares,
see the section entitled "Purchase of Fund Shares" in Tax-Exempt's
Prospectus.
Shares of each Class of Tax-Exempt may be exchanged for shares of the same
Class of any other Dean Witter Fund that offers its shares in more than one
Class (the "Multi-Class Funds") or Dean Witter Global Short-Term Income Fund
Inc. and Dean Witter High Income Securities ("CDSC Funds") without the
imposition of an exchange fee. National Municipal shares also may be
exchanged for Class B shares of any Multi-Class Fund or for shares of either
CDSC Fund. Both funds may be exchanged for shares of any of the Exchange
Funds. With respect to National Municipal and Tax-Exempt, no CDSC is imposed
at the time of any exchange, although any applicable CDSC will be imposed
upon ultimate redemption. During the period of time a shareholder remains in
an Exchange Fund, the holding period (for purposes of determining the CDSC
rate) is frozen. Both National Municipal and Tax-Exempt provide telephone
exchange privileges to their shareholders. For greater details relating to
exchange privileges applicable to Tax-Exempt, see the section entitled
"Shareholder Services" in Tax-Exempt's Prospectus.
Shareholders of National Municipal and Tax-Exempt may redeem their shares
for cash at any time at the net asset value per share next determined;
however, such redemption proceeds may be reduced by the amount of any
applicable CDSC. Both National Municipal and Tax-Exempt offer a reinstatement
privilege whereby a shareholder who has not previously exercised such
privilege whose shares have been redeemed or repurchased may, within thirty
days, in the case of National Municipal, and within thirty-five days, in the
case of Tax-Exempt, after the date of redemption or repurchase, reinstate any
portion or all of the proceeds thereof in shares of National Municipal or
Class B shares of Tax-Exempt, respectively, and receive a pro rata credit for
any CDSC paid in connection with such redemption or repurchase. National
Municipal and Tax-Exempt may redeem involuntarily, at net asset value, most
accounts valued at less than $100.
DIVIDENDS. Dividends from both National Municipal's and Tax-Exempt's
anticipated net investment income are declared daily and paid monthly and net
short-term capital gains and long-term capital gains distributions, if any,
are paid at least annually. Dividends and capital gains distributions of both
National Municipal and Tax-Exempt are automatically reinvested in additional
shares at net asset value unless the shareholder elects to receive cash.
PRINCIPAL RISK FACTORS
The net asset value of Tax-Exempt's and National Municipal's shares will
fluctuate due to various factors, including, principally, changes in
prevailing interest rates and the ability of the issuers of the funds'
portfolio securities to pay interest and principal on such obligations on a
timely basis. Generally, a rise in interest rates will result in a decrease
in the funds' respective net asset values per share, while a drop in interest
rates will result in an increase in the funds' net asset values.
Both funds invest in Municipal Bonds rated (or deemed to be rated) either
Baa by Moody's or BBB by Standard & Poor's, which have speculative
characteristics and, therefore, changes in economic conditions or other
circumstances are more likely to weaken their capacity to make principal and
interest payments than would be the case with investments in securities with
higher credit ratings.
10
<PAGE>
Both funds may also invest in futures and options, which may be considered
speculative in nature and which may involve greater risks than those
customarily assumed by certain other investment companies which do not invest
in such instruments.
The foregoing discussion is a summary of the principal risk factors. For a
more complete discussion of the risks of each fund, see "Investment Objective
and Policies -- Risk Considerations and Investment Practices" in each fund's
Prospectus.
THE REORGANIZATION
THE PROPOSAL
The Board of Trustees of National Municipal, including the Independent
Trustees, having reviewed National Municipal's financial position and the
prospects for achieving economies of scale through the Reorganization,
determined that the Reorganization is in the best interests of National
Municipal and its shareholders and that the interests of National Municipal's
shareholders will not be diluted as a result thereof, recommends approval of
the Reorganization by Shareholders. The Board believes that a combination of
National Municipal with Tax-Exempt is consistent with National Municipal's
stated investment objectives.
THE BOARD'S CONSIDERATION
At a meeting held on June 30, 1997, the Board, including all of the
Independent Trustees, unanimously approved the Reorganization Agreement and
determined to recommend that Shareholders of National Municipal approve the
Reorganization Agreement. In reaching this decision, the Board made an
extensive inquiry into a number of factors, particularly the comparative
expenses to be incurred in the operations of National Municipal and Class B
shares of Tax-Exempt. The Board also considered other factors, including, but
not limited to: the comparative investment performance and past growth in
assets of National Municipal and Tax-Exempt; the compatibility of the
investment objectives, policies, restrictions and portfolios of National
Municipal and Tax-Exempt; the terms and conditions of the Reorganization
which would affect the price of shares to be issued in the Reorganization;
the tax-free nature of the Reorganization; and any direct or indirect costs
to be incurred by National Municipal and Tax-Exempt in connection with the
Reorganization.
In recommending the Reorganization to Shareholders, the Board of National
Municipal considered that the Reorganization would have the following
benefits for Shareholders:
1. Once the Reorganization is consummated, the expenses which would be
borne by Class B shareholders of the combined fund should be lower on a
percentage basis than the actual expenses per share of National Municipal
(without taking the waiver of fees and reimbursement of expenses into
effect). This is because the Reorganization would result in Shareholders
becoming shareholders of a combined larger fund, and, thus, economies of
scale are achieved as various fixed expenses (e.g., auditing and legal) can
be spread over a larger number of shares. The Board noted that National
Municipal's expense ratio, assuming it had borne all of its expenses for its
fiscal year ended September 30, 1996 was 1.19%, whereas the expense ratio for
Tax-Exempt was 1.08% (based on the fiscal year ended December 31, 1996
assuming a 0.60% 12b-1 fee, as well as the other assumptions described in the
"Fee Table" above). The Board further noted that the Combined Fund is
expected to have a lower expense ratio than both funds currently do (taking
into account the other assumptions described in the "Fee Table" above). See
"Synopsis -- Fee Table," above.
11
<PAGE>
In addition, the Board noted that Shareholders who remain invested in
Tax-Exempt for approximately ten years from the Closing Date (as defined
below) will receive an additional benefit as a result of the automatic
conversion of Class B shares of Tax-Exempt into Class A shares of Tax-Exempt
after such period. As discussed more fully in Tax-Exempt's Prospectus,
attached hereto, once Shareholders are converted to Class A they will be
subject to the Class's 12b-1 fee of only 0.25% of the average daily net
assets of that Class. For greater details regarding the conversion feature,
including the method by which the 10 year period is calculated and the
treatment of reinvested dividends, see "Purchase of Fund Shares" in
Tax-Exempt's Prospectus.
2. Shareholders would have a continued participation in the municipal
markets through investment in Tax-Exempt, which has an identical investment
objective and substantially similar investment policies and restrictions to
National Municipal. Upon consummation of the Reorganization, the lower CDSC
schedule of National Municipal will continue to apply (with respect to the
Tax-Exempt shares acquired in the Reorganization) except under certain
circumstances in which such Tax-Exempt Shares are exchanged for another fund
as described herein under the section entitled "Comparison of National
Municipal and Tax-Exempt -- Purchases, Exchanges and Redemptions."
3. Shareholders will be able to purchase shares of Tax-Exempt at net asset
value and pursue similar investment goals in a combined larger and more
economically efficient fund.
4. The Board also took into consideration that effective July 28, 1997,
Tax-Exempt Shares will also be available to certain investors at net asset
value and, therefore, absent the Reorganization, Tax-Exempt will compete for
investor funds directly with National Municipal. The Reorganization should
allow for more concentrated selling efforts to the benefit of both National
Municipal and Tax-Exempt shareholders and avoid the inefficiencies associated
with the operation and distribution of two substantially similar funds.
5. The Reorganization will constitute a tax-free reorganization for
federal income tax purposes, and no gain or loss will be recognized by
National Municipal or its Shareholders for federal income tax purposes as a
result of transactions included in the Reorganization.
The Board of Trustees of Tax-Exempt, including a majority of such Trustees
who are not "interested persons" of Tax-Exempt, also have determined that the
Reorganization is in the best interests of Tax-Exempt and its shareholders
and that the interests of existing shareholders of Tax-Exempt will not be
diluted as a result thereof.
THE REORGANIZATION AGREEMENT
The terms and conditions under which the Reorganization would be
consummated, as summarized below, are set forth in the Reorganization
Agreement. This summary is qualified in its entirety by reference to the
Reorganization Agreement, a copy of which is attached as Exhibit A to this
Proxy Statement and Prospectus.
The Reorganization Agreement provides that (i) National Municipal will
transfer all of its assets, including portfolio securities, cash (other than
cash amounts retained by National Municipal as a "Cash Reserve" in the amount
sufficient to discharge its liabilities not discharged prior to the Valuation
Date (as defined below) and for expenses of the dissolution), cash
equivalents and receivables to Tax-Exempt on the Closing Date in exchange for
the assumption by Tax-Exempt of National Municipal's stated liabilities,
12
<PAGE>
including all expenses, costs, charges and reserves, as reflected on an
unaudited statement of assets and liabilities of National Municipal prepared
by the Treasurer of National Municipal as of the Valuation Date (as defined
below) in accordance with generally accepted accounting principles
consistently applied from the prior audited period, and the delivery of
Tax-Exempt Shares, (ii) such Tax-Exempt Shares would be distributed to the
Shareholders of National Municipal on the Closing Date or as soon as
practicable thereafter, (iii) National Municipal would be dissolved and (iv)
the outstanding shares of National Municipal would be canceled.
The number of Tax-Exempt Shares to be delivered to National Municipal will
be determined by dividing the value of National Municipal assets acquired by
Tax-Exempt (net of stated liabilities assumed by Tax-Exempt) by the net asset
value of a Tax-Exempt Share; these values will be calculated as of 4:00 p.m.
New York City time on the third day that the New York Stock Exchange is open
for business following the receipt of the requisite approval by the
shareholders of National Municipal of the Reorganization Agreement or at such
other time as National Municipal and Tax-Exempt may agree (the "Valuation
Date"). As an illustration, if on the Valuation Date, National Municipal were
to have securities with a market value of $95,000 and cash in the amount of
$10,000 (of which $5,000 was to be retained by it as the Cash Reserve), the
value of the assets which would be transferred to Tax-Exempt would be
$100,000. If the net asset value per share of Tax-Exempt were $10 per share
at the close of business on the Valuation Date, the number of shares to be
issued would be 10,000 ($100,000 (divided by) $10). These 10,000 Class B
shares of Tax-Exempt would be distributed to the former shareholders of
National Municipal. This example is given for illustration purposes only and
does not bear any relationship to the dollar amounts or shares expected to be
involved in the Reorganization.
On the Closing Date or as soon as practicable thereafter, National
Municipal will distribute pro rata to its Shareholders of record as of the
close of business on the Valuation Date, the Tax-Exempt Shares it receives.
Tax-Exempt will cause its transfer agent to credit and confirm an appropriate
number of Tax-Exempt Shares to each Shareholder. Certificates for Tax-Exempt
Shares will be issued upon written request of a Shareholder but only for
whole shares, with fractional shares credited to the name of the Shareholder
on the books of Tax-Exempt. Such Shareholders who wish certificates
representing their Tax-Exempt Shares must, after receipt of their
confirmations, make a written request to Tax-Exempt's transfer agent, Dean
Witter Trust Company, Harborside Financial Center, Jersey City, New Jersey
07311. Shareholders holding certificates representing their shares will not
be required to surrender their certificates in connection with the
Reorganization. However, such Shareholders will have to surrender such
certificates (or provide indemnities reasonably acceptable to Tax-Exempt in
respect of lost certificates) in order to receive certificates representing
Tax-Exempt Shares or to redeem, transfer or exchange the Tax-Exempt Shares
received.
The Closing Date will be the next business day following the Valuation
Date. The consummation of the Reorganization is contingent upon the approval
of the Reorganization by the shareholders of National Municipal and the
receipt of the other opinions and certificates set forth in Sections 6, 7 and
8 of the Reorganization Agreement and the occurrence of the events described
in those Sections, certain of which may be waived by National Municipal or
Tax-Exempt. The Reorganization Agreement may be amended in any mutually
agreeable manner, except that no amendment may be made subsequent to the
Meeting which would detrimentally affect the value of the shares of
Tax-Exempt to be distributed. InterCapital will bear all of the expenses
associated with the Reorganization. Management estimates that such expenses
associated with the Reorganization will not exceed $160,000.
13
<PAGE>
The Reorganization Agreement may be terminated and the Reorganization
abandoned at any time, before or after approval by National Municipal's
Shareholders by mutual consent of National Municipal and Tax-Exempt. In
addition, either party may terminate the Reorganization Agreement upon the
occurrence of a material breach of the Reorganization Agreement by the other
party or if, by January 31, 1998, any condition set forth in the
Reorganization Agreement has not been fulfilled or waived by the party
entitled to its benefits.
Under the Reorganization Agreement, within one year after the Closing
Date, National Municipal shall: either pay or make provision for all of its
liabilities and distribute any remaining amount of the Cash Reserve (after
paying or making provision for such liabilities and the estimated cost of
making the distribution) to former shareholders of National Municipal that
received Tax-Exempt Shares. National Municipal shall be dissolved and
deregistered as an investment company promptly following the distributions of
shares of Tax-Exempt to Shareholders of record of National Municipal.
The effect of the Reorganization is that Shareholders who vote their
shares in favor of the Reorganization Agreement are electing to sell their
shares of National Municipal (at net asset value on the Valuation Date
calculated after subtracting the Cash Reserve) and reinvest the proceeds in
Tax-Exempt Shares at net asset value and without recognition of taxable gain
or loss for Federal income tax purposes. See "Tax Aspects of the
Reorganization" below. As noted in "Tax Aspects of the Reorganization" below,
if National Municipal recognizes net gain from the sale of securities prior
to the Closing Date, such gain, to the extent not offset by capital loss
carryovers, will be distributed to Shareholders prior to the Closing Date and
will be taxable to Shareholders as capital gain.
Shareholders will continue to be able to redeem their shares at net asset
value next determined after receipt of the redemption request (subject to any
applicable CDSC) until the close of business on the business day next
preceding the Closing Date. Redemption requests received by National
Municipal thereafter will be treated as requests for redemption of shares of
Tax-Exempt.
TAX ASPECTS OF THE REORGANIZATION
At least one but not more than 20 business days prior to the Valuation
Date, National Municipal will declare and pay a dividend or dividends which,
together with all previous such dividends, will have the effect of
distributing to Shareholders all of National Municipal's investment company
taxable income for all periods since inception of National Municipal through
and including the Valuation Date (computed without regard to any dividends
paid deduction), and all of National Municipal's net capital gain, if any,
realized in such periods (after reduction for any capital loss carryforward).
The Reorganization is intended to qualify for Federal income tax purposes
as a tax-free reorganization under Section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the "Code"). National Municipal and
Tax-Exempt have represented that, to their best knowledge, there is no plan
or intention by Shareholders to redeem, sell, exchange or otherwise dispose
of a number of Tax-Exempt Shares received in the transaction that would
reduce Shareholders' ownership of Tax-Exempt Shares to a number of shares
having a value, as of the Closing Date, of less than 50% of the value of all
of the formerly outstanding National Municipal shares as of the same date.
National Municipal and Tax-Exempt have each further represented that, as of
the Closing Date, National Municipal and Tax-Exempt will qualify as regulated
investment companies.
14
<PAGE>
As a condition to the Reorganization, National Municipal and Tax-Exempt
will receive an opinion of Gordon Altman Butowsky Weitzen Shalov & Wein that,
based on certain assumptions, facts, the terms of the Reorganization
Agreement and additional representations set forth in the Reorganization
Agreement or provided by National Municipal and Tax-Exempt:
1. The transfer of substantially all of National Municipal's assets in
exchange for the Tax-Exempt Shares and the assumption by Tax-Exempt of
certain stated liabilities of National Municipal followed by the distribution
by National Municipal of the Tax-Exempt Shares to Shareholders in exchange
for their National Municipal shares will constitute a "reorganization" within
the meaning of Section 368(a)(1)(C) of the Code, and National Municipal and
Tax-Exempt will each be a "party to a reorganization" within the meaning of
Section 368 (b) of the Code;
2. No gain or loss will be recognized by Tax-Exempt upon the receipt of
the assets of National Municipal solely in exchange for the Tax-Exempt Shares
and the assumption by Tax-Exempt of the stated liabilities of National
Municipal;
3. No gain or loss will be recognized by National Municipal upon the
transfer of the assets of National Municipal to Tax-Exempt in exchange for
the Tax-Exempt Shares and the assumption by Tax-Exempt of the stated
liabilities or upon the distribution of Tax-Exempt Shares to Shareholders in
exchange for their National Municipal shares;
4. No gain or loss will be recognized by Shareholders upon the exchange of
the shares of National Municipal for the Tax-Exempt Shares;
5. The aggregate tax basis for the Tax-Exempt Shares received by each of
the Shareholders pursuant to the reorganization will be the same as the
aggregate tax basis of the shares in National Municipal held by each such
Shareholder immediately prior to the reorganization;
6. The holding period of the Tax-Exempt Shares to be received by each
Shareholder will include the period during which the shares in National
Municipal surrendered in exchange therefor were held (provided such shares in
National Municipal were held as capital assets on the date of the
Reorganization);
7. The tax basis of the assets of National Municipal acquired by
Tax-Exempt will be the same as the tax basis of such assets to National
Municipal immediately prior to the Reorganization; and
8. The holding period of the assets of National Municipal in the hands of
Tax-Exempt will include the period during which those assets were held by
National Municipal.
The Reorganization will be treated as a "change in ownership" under
Section 382 of the Code. It is not anticipated that any resulting limitations
on the use of any capital loss carryovers of National Municipal will be
material. In addition, the economic benefit of any capital loss carryovers of
National Municipal would be available to shareholders of the combined entity
with a resulting benefit to Tax-Exempt shareholders. It is not anticipated
that any such benefit will be material.
SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE EFFECT, IF
ANY, OF THE PROPOSED TRANSACTION IN LIGHT OF THEIR INDIVIDUAL CIRCUMSTANCES.
BECAUSE THE FOREGOING DISCUSSION ONLY RELATES TO THE FEDERAL INCOME TAX
CONSEQUENCES OF THE PROPOSED TRANSACTION, SHAREHOLDERS SHOULD ALSO CONSULT
THEIR TAX ADVISORS AS TO STATE AND LOCAL TAX CONSEQUENCES, IF ANY, OF THE
PROPOSED TRANSACTION.
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<PAGE>
DESCRIPTION OF SHARES
Class B shares of Tax-Exempt to be issued pursuant to the Reorganization
Agreement will, when issued, be fully paid and non-assessable by Tax-Exempt
and transferable without restrictions and will have no preemptive rights. As
discussed above, Class B shares of Tax-Exempt also have a conversion feature
pursuant to which approximately ten (10) years after the date of the original
purchase of shares, the shares will convert automatically to Class A shares,
based on the relative net asset values of the two Classes. For greater
details regarding the conversion feature, including the method by which the
10 year period is calculated and the treatment of reinvested dividends, see
"Purchase of Fund Shares" in Tax-Exempt's Prospectus attached hereto.
CAPITALIZATION TABLE (UNAUDITED)
The following table sets forth the capitalization of Tax-Exempt and
National Municipal as of December 31, 1996 and on a pro forma combined basis
as if the Reorganization had occurred on that date:
<TABLE>
<CAPTION>
NET ASSET
SHARES VALUE
NET ASSETS OUTSTANDING PER SHARE
---------- ----------- ---------
<S> <C> <C> <C>
National Municipal......... $ 84,298,410 7,924,172 $10.64
Tax-Exempt ................ $1,190,033,990 101,083,561 $11.77
Combined Fund (pro forma) $1,274,332,400 108,245,703 $11.77
</TABLE>
APPRAISAL RIGHTS
Shareholders will have no appraisal rights in connection with the
Reorganization.
COMPARISON OF INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES AND POLICIES
National Municipal and Tax-Exempt have an identical investment objective,
which is to seek a high level of current income exempt from federal income
tax, consistent with preservation of capital. National Municipal and
Tax-Exempt each seeks to achieve its investment objective by investing at
least 75% of its total assets in: (a) Municipal Bonds which are rated at the
time of purchase within the three highest grades by Moody's or Standard &
Poor's; (b) Municipal Notes which at the time of purchase are rated in the
two highest grades by Moody's or Standard & Poor's, or if not rated, have
outstanding one or more issues of Municipal Bonds rated as set forth in
clause (a); and (c) Municipal Paper which at the time of purchase are rated
P-1 by Moody's or A-1 by Standard & Poor's. In addition, Tax-Exempt has a
policy of investing at least 80% of its total assets in tax-exempt securities
which include Municipal Obligations and Municipal Paper, excluding tax-exempt
securities that subject shareholders to the AMT. As such, the remaining 20% of
Tax-Exempt's total assets may be invested in tax-exempt securities that subject
investors to the AMT; whereas National Municipal may invest without limit in
Municipal Obligations (in which the fund may invest) that subject investors to
the AMT. Both funds may also invest up to 25% of their respective total assets
in Municipal Obligations (and, in the case of Tax-Exempt, Municipal Paper)
which are unrated or, if rated are not within the categories of Moody's or
Standard & Poor's listed above in
16
<PAGE>
clauses (a) and (b) (and, in the case of Tax-Exempt, clause (c)). Both funds
do not intend to invest more than 5% of their respective net assets in
Municipal Bonds which are rated, or deemed by the Investment Manager to be,
below investment grade. Additionally, up to 20% of Tax-Exempt's total assets
and up to 25% of National Municipal's total assets, may be invested in
taxable money market instruments under any one or more of the following
circumstances: (i) pending investment of proceeds of sale of fund shares or
of portfolio securities; (ii) pending settlement of purchases of portfolio
securities; and (iii) to maintain liquidity for the purpose of meeting
anticipated redemptions. In addition, up to 20% of National Municipal's total
assets and up to 25% of Tax-Exempt's total assets may be invested in taxable
securities to maintain a defensive posture when, in the opinion of the
Investment Manager, it is advisable to do so. With respect to National
Municipal, the fund seeks to maintain under normal circumstances a dollar
weighted average maturity in excess of twenty years. Tax-Exempt does not have
a specific policy as to the portfolio's weighted average maturity.
Both funds may invest a portion of the fixed-income securities purchased
in zero coupon securities. Both funds also may enter into financial futures
and municipal bond index futures contracts ("futures contracts"), and options
thereon for hedging purposes. Both funds may not enter into futures contracts
or purchase options thereon (i) with respect to more than 5% of the value of
their respective total assets and (ii) if more than one-third of their
respective net assets would be hedged (this limitation also applies to sales
of options). Both funds may purchase or sell (write) listed options only on
debt securities as a means of achieving additional return or of hedging the
value of the fund's portfolio. Each fund may only buy or write covered
options that are listed on national securities exchanges. The total amount of
each fund's written covered options may not exceed 20% of the fund's total
assets. Each fund has an overall limitation that the cost of all outstanding
options may not exceed 10% of the fund's total assets.
Both Tax-Exempt and National Municipal may (i) purchase tax-exempt
securities on a when-issued or delayed delivery basis and (ii) enter into
repurchase agreements.
The investment policies of both National Municipal and Tax-Exempt are not
fundamental and may be changed by their respective Boards. The foregoing
discussion is a summary of the principal differences and similarities between
the investment policies of the funds. For a more complete discussion of each
fund's policies see "Investment Objective and Policies" in each fund's
respective Prospectus and "Investment Practices and Policies" in each fund's
respective Statement of Additional Information.
INVESTMENT RESTRICTIONS
The investment restrictions adopted by National Municipal and Tax-Exempt
as fundamental policies are substantially similar and are summarized under
the caption "Investment Restrictions" in their respective Prospectuses and
Statements of Additional Information. A fundamental investment restriction
cannot be changed without the vote of a majority of the outstanding voting
securities of a fund, as defined in the 1940 Act. The material differences
are as follows: (i) Tax-Exempt has a fundamental restriction that, with
respect to 100% of its total assets, it may not invest more than 5% of the
value of its total assets in the securities of any one issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities), whereas National Municipal is subject to the same
fundamental limitation with respect to only 75% of its total assets; (ii)
Tax-Exempt has a fundamental restriction that it may not purchase more than
10% of all outstanding taxable debt securities of any one issuer; whereas,
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National Municipal is subject to a 10% limitation as to all outstanding
voting securities of any one issuer, and such limitation applies with respect
to only 75% of National Municipal's total assets; and (iii) Tax-Exempt has a
fundamental restriction that it may not invest in common stocks, whereas
National Municipal does not have any such policy.
In addition, Tax-Exempt has a fundamental restriction that it may not
invest in securities of any issuer if, to the knowledge of such fund, any
officer, or director of the fund or of the Investment Manager, owns more than
1/2 of 1% of the outstanding securities of such issuer, and such officers and
trustees who own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of such issuer; whereas, National Municipal is subject
to such limitation on a non-fundamental basis.
ADDITIONAL INFORMATION ABOUT NATIONAL MUNICIPAL
AND TAX-EXEMPT
GENERAL
For a discussion of the organization and operation of Tax-Exempt and
National Municipal, see "The Fund and its Management," "Investment Objective
and Policies," "Investment Restriction" and "Prospectus Summary" in, and the
cover page of, their respective Prospectuses.
FINANCIAL INFORMATION
For certain financial information about Tax-Exempt and National Municipal,
see "Financial Highlights" and "Performance Information" in their respective
Prospectuses.
MANAGEMENT
For information about Tax-Exempt's and National Municipal's Board of
Trustees, the Investment Manager and the Distributor, see "The Fund and its
Management" and "Investment Objective and Policies" in, and the back cover
of, their respective Prospectuses.
DESCRIPTION OF SECURITIES AND SHAREHOLDER INQUIRIES
For a description of the nature and most significant attributes of shares
of National Municipal and Tax-Exempt, and information regarding shareholder
inquiries, see "Additional Information" in their respective Prospectuses.
DIVIDENDS, DISTRIBUTIONS AND TAXES
For a discussion of Tax-Exempt's and National Municipal's policies with
respect to dividends, distributions and taxes, see "Dividends, Distributions
and Taxes" in their respective Prospectuses as well as the discussion herein
under "Synopsis -- Purchases, Exchanges and Redemptions."
PURCHASES, REPURCHASES AND REDEMPTIONS
For a discussion of how Tax-Exempt's and National Municipal's shares may
be purchased, repurchased and redeemed, see "Purchase of Fund Shares,"
"Shareholder Services" and "Redemptions and Repurchases" in their respective
Prospectuses.
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MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
For a discussion of Tax-Exempt's performance, see management's letter to
shareholders in its Annual Report for its fiscal year ended December 31, 1996
and the succeeding Semi-Annual Report for the six month period ended June 30,
1997 accompanying this Proxy Statement and Prospectus. For a discussion of
National Municipal's performance, see its Annual Report for its fiscal year
ended September 30, 1996, and the succeeding Semi-Annual Report for the six
month period ended March 31, 1997.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of Tax-Exempt and National Municipal as of
December 31, 1996 and September 30, 1996, respectively, which are
incorporated by reference in the Statement of Additional Information relating
to the Registration Statement on Form N-14 of which this Proxy Statement and
Prospectus forms a part, have been audited by Price Waterhouse LLP,
independent accountants, for the periods indicated in its respective reports
thereon. Such financial statements have been incorporated by reference in
reliance upon such reports given upon the authority of Price Waterhouse LLP
as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Tax-Exempt will
be passed upon by Gordon Altman Butowsky Weitzen Shalov & Wein, New York, New
York. Such firm will rely on Lane Altman & Owens as to matters of
Massachusetts law.
AVAILABLE INFORMATION
Additional information about National Municipal and Tax-Exempt is
available, as applicable, in the following documents which are incorporated
herein by reference: (i) Tax-Exempt's Prospectus dated July 28, 1997,
attached to this Proxy Statement and Prospectus, which Prospectus forms a
part of Post-Effective Amendment No. 20 to Tax-Exempt's Registration
Statement on Form N-1A (File Nos. 2-66268; 811-2979); (ii) Tax-Exempt's
Annual Report for its fiscal year ended December 31, 1996 and its Semi-Annual
Report for the six months ended June 30, 1997, accompanying this Proxy
Statement and Prospectus; (iii) National Municipal's Prospectus dated
November 26, 1996, which Prospectus forms a part of Post-Effective Amendment
No. 3 to National Municipal's Registration Statement on Form N-1A (File Nos.
33-53015; 811-7163); and (iv) National Municipal's Annual Report for the
fiscal year ended September 30, 1996 and its Semi-Annual Report for the six
months ended March 31, 1997. The foregoing documents may be obtained without
charge by calling (212) 293-2550 or (800) 526-3143.
National Municipal and Tax-Exempt are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and in
accordance therewith, file reports and other information with the Commission.
Proxy material, reports and other information about National Municipal and
Tax-Exempt which are of public record can be inspected and copied at public
reference facilities maintained by the Commission at Room 1204, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and certain of its
regional offices, and copies of such materials can be obtained at prescribed
rates from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C.
20549.
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OTHER BUSINESS
Management of National Municipal knows of no business other than the
matters specified above which will be presented at the Meeting. Since matters
not known at the time of the solicitation may come before the Meeting, the
proxy as solicited confers discretionary authority with respect to such
matters as properly come before the Meeting, including any adjournment or
adjournments thereof, and it is the intention of the persons named as
attorneys-in-fact in the proxy to vote this proxy in accordance with their
judgment on such matters.
By Order of the Board of Trustees,
BARRY FINK,
Secretary
August 20, 1997
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EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made as of this
30th day of June, 1997, by and between DEAN WITTER TAX-EXEMPT SECURITIES
TRUST, a Massachusetts business trust ("Tax-Exempt") and DEAN WITTER NATIONAL
MUNICIPAL TRUST, a Massachusetts business trust ("National Municipal").
This Agreement is intended to be and is adopted as a "plan of
reorganization" within the meaning of Treas. Reg. 1.368-2(g), for a
reorganization under Section 368(a) (1) of the Internal Revenue Code of 1986,
as amended (the "Code"). The reorganization ("Reorganization") will consist
of the transfer to Tax-Exempt of substantially all of the assets of National
Municipal in exchange for the assumption by Tax-Exempt of all stated
liabilities of National Municipal and the issuance by Tax-Exempt of Class B
shares ("Tax-Exempt Shares"), to be distributed, after the Closing Date
hereinafter referred to, to the shareholders of National Municipal in
liquidation of National Municipal as provided herein, all upon the terms and
conditions hereinafter set forth in this Agreement.
In consideration of the premises and of the covenants and agreements
hereinafter set forth, the parties hereto covenant and agree as follows:
1. THE REORGANIZATION AND LIQUIDATION OF NATIONAL MUNICIPAL
1.1 Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, National Municipal
agrees to assign, deliver and otherwise transfer the National Municipal
Assets (as defined in paragraph 1.2) to Tax-Exempt and Tax-Exempt agrees in
exchange therefor to assume all of National Municipal's stated liabilities on
the Closing Date as set forth in paragraph 1.3(a) and to deliver to National
Municipal the number of Tax-Exempt Shares, including fractional Tax-Exempt
Shares, determined by dividing the value of the National Municipal Assets,
net of such stated liabilities, computed as of the Valuation Date (as defined
in paragraph 2.1) in the manner set forth in paragraph 2.1, by the net asset
value of a Tax-Exempt Share, computed at the time and date and in the manner
set forth in paragraph 2.2. Such transactions shall take place at the closing
provided for in paragraph 3.1 ("Closing").
1.2 (a) The "National Municipal Assets" shall consist of all property,
including without limitation, all cash (other than the "Cash Reserve" (as
defined in paragraph 1.3(b)), cash equivalents, securities and dividend and
interest receivables owned by National Municipal, and any deferred or prepaid
expenses shown as an asset on National Municipal's books on the Valuation
Date.
(b) On or prior to the Valuation Date, National Municipal will provide
Tax-Exempt with a list of all of National Municipal's assets to be assigned,
delivered and otherwise transferred to Tax-Exempt and of the stated
liabilities to be assumed by Tax-Exempt pursuant to this Agreement. National
Municipal reserves the right to sell any of the securities on such list but
will not, without the prior approval of Tax-Exempt, acquire any additional
securities other than securities of the type in which Tax-Exempt is permitted
to invest and in amounts agreed to in writing by Tax-Exempt. Tax-Exempt will,
within a reasonable time prior to the Valuation Date, furnish National
Municipal with a statement of Tax-Exempt's investment objectives, policies
and restrictions and a list of the securities, if any, on the list referred
to in
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the first sentence of this paragraph that do not conform to Tax-Exempt's
investment objective, policies and restrictions. In the event that National
Municipal holds any investments that Tax-Exempt is not permitted to hold,
National Municipal will dispose of such securities on or prior to the
Valuation Date. In addition, if it is determined that the portfolios of
National Municipal and Tax-Exempt, when aggregated, would contain investments
exceeding certain percentage limitations imposed upon Tax-Exempt with respect
to such investments, National Municipal if requested by Tax-Exempt will, on
or prior to the Valuation Date, dispose of and/or reinvest a sufficient
amount of such investments as may be necessary to avoid violating such
limitations as of the Closing Date (as defined in paragraph 3.1).
1.3 (a) National Municipal will endeavor to discharge all of its
liabilities and obligations on or prior to the Valuation Date. Tax-Exempt
will assume all stated liabilities, which includes, without limitation, all
expenses, costs, charges and reserves reflected on an unaudited Statement of
Assets and Liabilities of National Municipal prepared by the Treasurer of
National Municipal as of the Valuation Date in accordance with generally
accepted accounting principles consistently applied from the prior audited
period.
(b) On the Valuation Date, National Municipal may establish a cash
reserve, which shall not exceed 5% of National Municipal's net assets as of
the close of business on the Valuation Date ("Cash Reserve") to be retained
by National Municipal and used for the payment of its liabilities not
discharged prior to the Valuation Date and for the expenses of dissolution.
1.4 In order for National Municipal to comply with Section 852(a)(1) of
the Code and to avoid having any investment company taxable income or net
capital gain (as defined in Sections 852(b)(2) and 1222(11) of the Code,
respectively) in the short taxable year ending with its dissolution, National
Municipal will on or before the Valuation Date (a) declare a dividend in an
amount large enough so that it will have declared dividends of all of its
investment company taxable income and net capital gain, if any, for such
taxable year (determined without regard to any deduction for dividends paid)
and (b) distribute such dividend.
1.5 On the Closing Date or as soon as practicable thereafter, National
Municipal will distribute Tax-Exempt Shares received by National Municipal
pursuant to paragraph 1.1 pro rata to its shareholders of record determined
as of the close of business on the Valuation Date ("National Municipal
Shareholders"). Such distribution will be accomplished by an instruction,
signed by National Municipal's Secretary, to transfer Tax-Exempt Shares then
credited to National Municipal's account on the books of Tax-Exempt to open
accounts on the books of Tax-Exempt in the names of the National Municipal
Shareholders and representing the respective pro rata number of Tax-Exempt
Shares due such National Municipal Shareholders. All issued and outstanding
shares of National Municipal simultaneously will be canceled on National
Municipal's books; however, share certificates representing interests in
National Municipal will represent a number of Tax-Exempt Shares after the
Closing Date as determined in accordance with paragraph 2.3. Tax-Exempt will
issue certificates representing Tax-Exempt Shares in connection with such
exchange only upon the written request of a National Municipal Shareholder.
1.6 Ownership of Tax-Exempt Shares will be shown on the books of
Tax-Exempt's transfer agent. Tax-Exempt Shares will be issued in the manner
described in Tax-Exempt's current Prospectus and Statement of Additional
Information.
1.7 Any transfer taxes payable upon issuance of Tax-Exempt Shares in a
name other than the registered holder of Tax-Exempt Shares on National
Municipal's books as of the close of business on the
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Valuation Date shall, as a condition of such issuance and transfer, be paid
by the person to whom Tax-Exempt Shares are to be issued and transferred.
1.8 Any reporting responsibility of National Municipal is and shall remain
the responsibility of National Municipal up to and including the date on
which National Municipal is dissolved and deregistered pursuant to paragraph
1.9.
1.9 Within one year after the Closing Date, National Municipal shall pay
or make provision for the payment of all its liabilities and taxes, and
distribute to the shareholders of National Municipal as of the close of
business on the Valuation Date any remaining amount of the Cash Reserve (as
reduced by the estimated cost of distributing it to shareholders). National
Municipal shall be dissolved as a Massachusetts business trust and
deregistered as an investment company under the Investment Company Act of
1940, as amended ("1940 Act"), promptly following the making of all
distributions pursuant to paragraph 1.5.
1.10 Copies of all books and records maintained on behalf of National
Municipal in connection with its obligations under the 1940 Act, the Code,
state blue sky laws or otherwise in connection with this Agreement will
promptly after the Closing be delivered to officers of Tax-Exempt or their
designee and Tax-Exempt or its designee shall comply with applicable record
retention requirements to which National Municipal is subject under the 1940
Act.
2. VALUATION
2.1 The value of the National Municipal Assets shall be the value of such
assets computed as of 4:00 p.m. New York City time on the third day that the
New York Stock Exchange is open for business following the receipt of the
requisite approval by shareholders of National Municipal of this Agreement or
at such time on such earlier or later date after such approval as may be
mutually agreed upon in writing (such time and date being hereinafter called
the "Valuation Date"), using the valuation procedures set forth in
Tax-Exempt's then current Prospectus and Statement of Additional Information.
2.2 The net asset value of a Tax-Exempt Share shall be the net asset value
per share computed on the Valuation Date, using the valuation procedures set
forth in Tax-Exempt's then current Prospectus and Statement of Additional
Information.
2.3 The number of Tax-Exempt Shares (including fractional shares, if any)
to be issued hereunder shall be determined by dividing the value of the
National Municipal Assets, net of the liabilities of National Municipal
assumed by Tax-Exempt pursuant to paragraph 1.1, determined in accordance
with paragraph 2.1, by the net asset value of a Tax-Exempt Share determined
in accordance with paragraph 2.2.
2.4 All computations of value shall be made by Dean Witter Services
Company Inc. ("Services") in accordance with its regular practice in pricing
Tax-Exempt. Tax-Exempt shall cause Services to deliver a copy of its
valuation report at the Closing.
3. CLOSING AND CLOSING DATE
3.1 The Closing shall take place on the next business day following the
Valuation Date (the "Closing Date"). The Closing shall be held as of 9:00
a.m. Eastern time, or at such other time as the parties may agree. The
Closing shall be held in a location mutually agreeable to the parties hereto.
All acts taking place at the Closing shall be deemed to take place
simultaneously as of 9:00 a.m. Eastern time on the Closing Date unless
otherwise provided.
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3.2 Portfolio securities held by National Municipal and represented by a
certificate or other written instrument shall be presented by it or on its
behalf to The Bank of New York (the "Custodian"), as custodian for
Tax-Exempt, for examination no later than five business days preceding the
Valuation Date. Such portfolio securities (together with any cash or other
assets) shall be delivered by National Municipal to the Custodian for the
account of Tax-Exempt on or before the Closing Date in conformity with
applicable custody provisions under the 1940 Act and duly endorsed in proper
form for transfer in such condition as to constitute good delivery thereof in
accordance with the custom of brokers. The portfolio securities shall be
accompanied by all necessary federal and state stock transfer stamps or a
check for the appropriate purchase price of such stamps. Portfolio securities
and instruments deposited with a securities depository (as defined in Rule
17f-4 under the 1940 Act) shall be delivered on or before the Closing Date by
book-entry in accordance with customary practices of such depository and the
Custodian. The cash delivered shall be in the form of a Federal Funds wire,
payable to the order of "The Bank of New York, Custodian for Dean Witter
Tax-Exempt Securities Trust."
3.3 In the event that on the Valuation Date, (a) the New York Stock
Exchange shall be closed to trading or trading thereon shall be restricted or
(b) trading or the reporting of trading on such Exchange or elsewhere shall
be disrupted so that, in the judgment of both Tax-Exempt and National
Municipal, accurate appraisal of the value of the net assets of Tax-Exempt or
the National Municipal Assets is impracticable, the Valuation Date shall be
postponed until the first business day after the day when trading shall have
been fully resumed without restriction or disruption and reporting shall have
been restored.
3.4 If requested, National Municipal shall deliver to Tax-Exempt or its
designee (a) at the Closing, a list, certified by its Secretary, of the
names, addresses and taxpayer identification numbers of the National
Municipal Shareholders and the number and percentage ownership of outstanding
National Municipal shares owned by each such National Municipal Shareholder,
all as of the Valuation Date, and (b) as soon as practicable after the
Closing, all original documentation (including Internal Revenue Service
forms, certificates, certifications and correspondence) relating to the
National Municipal Shareholders' taxpayer identification numbers and their
liability for or exemption from back-up withholding. Tax-Exempt shall issue
and deliver to such Secretary a confirmation evidencing delivery of
Tax-Exempt Shares to be credited on the Closing Date to National Municipal or
provide evidence satisfactory to National Municipal that such Tax-Exempt
Shares have been credited to National Municipal's account on the books of
Tax-Exempt. At the Closing, each party shall deliver to the other such bills
of sale, checks, assignments, share certificates, if any, receipts or other
documents as such other party or its counsel may reasonably request.
4. COVENANTS OF TAX-EXEMPT AND NATIONAL MUNICIPAL
4.1 Except as otherwise expressly provided herein with respect to National
Municipal, Tax-Exempt and National Municipal each will operate its business
in the ordinary course between the date hereof and the Closing Date, it being
understood that such ordinary course of business will include customary
dividends and other distributions.
4.2 Tax-Exempt will prepare and file with the Securities and Exchange
Commission ("Commission") a registration statement on Form N-14 under the
Securities Act of 1933, as amended ("1933 Act"), relating to Tax-Exempt
Shares ("Registration Statement"). National Municipal will provide Tax-Exempt
with the Proxy Materials as described in paragraph 4.3 below, for inclusion
in the Registration Statement.
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National Municipal will further provide Tax-Exempt with such other
information and documents relating to Tax-Exempt as are reasonably necessary
for the preparation of the Registration Statement.
4.3 National Municipal will call a meeting of its shareholders to consider
and act upon this Agreement and to take all other action necessary to obtain
approval of the transactions contemplated herein. National Municipal will
prepare the notice of meeting, form of proxy and proxy statement
(collectively, "Proxy Materials") to be used in connection with such meeting;
provided that Tax-Exempt will furnish National Municipal with its currently
effective prospectus for inclusion in the Proxy Materials and with such other
information relating to Tax-Exempt as is reasonably necessary for the
preparation of the Proxy Materials.
4.4 National Municipal will assist Tax-Exempt in obtaining such
information as Tax-Exempt reasonably requests concerning the beneficial
ownership of National Municipal shares.
4.5 Subject to the provisions of this Agreement, Tax-Exempt and National
Municipal will each take, or cause to be taken, all action, and do or cause
to be done, all things reasonably necessary, proper or advisable to
consummate and make effective the transactions contemplated by this
Agreement.
4.6 National Municipal shall furnish or cause to be furnished to
Tax-Exempt within 30 days after the Closing Date a statement of National
Municipal's assets and liabilities as of the Closing Date, which statement
shall be certified by National Municipal's Treasurer and shall be in
accordance with generally accepted accounting principles consistently
applied. As promptly as practicable, but in any case within 60 days after the
Closing Date, National Municipal shall furnish Tax-Exempt, in such form as is
reasonably satisfactory to Tax-Exempt, a statement certified by National
Municipal's Treasurer of National Municipal's earnings and profits for
federal income tax purposes that will be carried over to Tax-Exempt pursuant
to Section 381 of the Code.
4.7 As soon after the Closing Date as is reasonably practicable, National
Municipal (a) shall prepare and file all federal and other tax returns and
reports of National Municipal required by law to be filed with respect to all
periods ending on or before the Closing Date but not theretofore filed and
(b) shall pay all federal and other taxes shown as due thereon and/or all
federal and other taxes that were unpaid as of the Closing Date, including
without limitation, all taxes for which the provision for payment was made as
of the Closing Date (as represented in paragraph 5.2(k)).
4.8 Tax-Exempt agrees to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act and the 1940 Act and to
make such filings required by the state Blue Sky and securities laws as it
may deem appropriate in order to continue its operations after the Closing
Date.
5. REPRESENTATIONS AND WARRANTIES
5.1 Tax-Exempt represents and warrants to National Municipal as follows:
(a) Tax-Exempt is a validly existing Massachusetts business trust with
full power to carry on its business as presently conducted;
(b) Tax-Exempt is a duly registered, open-end, management investment
company, and its registration with the Commission as an investment company
under the 1940 Act and the registration of its shares under the 1933 Act are
in full force and effect;
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(c) All of the issued and outstanding shares of Tax-Exempt have been
offered and sold in compliance in all material respects with applicable
registration requirements of the 1933 Act and state securities laws. Shares
of Tax-Exempt are registered in all jurisdictions in which they are required
to be registered under state securities laws and other laws, and said
registrations, including any periodic reports or supplemental filings, are
complete and current, all fees required to be paid have been paid, and
Tax-Exempt is not subject to any stop order and is fully qualified to sell
its shares in each state in which its shares have been registered;
(d) The current Prospectus and Statement of Additional Information of
Tax-Exempt conform in all material respects to the applicable requirements of
the 1933 Act and the 1940 Act and the regulations thereunder and do not
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading;
(e) Tax-Exempt is not in, and the execution, delivery and performance
of this Agreement will not result in a, material violation of any provision
of Tax-Exempt's Declaration of Trust or By-Laws or of any agreement,
indenture, instrument, contract, lease or other undertaking to which
Tax-Exempt is a party or by which it is bound;
(f) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or, to its
knowledge, threatened against Tax-Exempt or any of its properties or assets
which, if adversely determined, would materially and adversely affect its
financial condition or the conduct of its business; and Tax-Exempt knows of
no facts that might form the basis for the institution of such proceedings
and is not a party to or subject to the provisions of any order, decree or
judgment of any court or governmental body which materially and adversely
affects, or is reasonably likely to materially and adversely effect, its
business or its ability to consummate the transactions herein contemplated;
(g) The Statement of Assets and Liabilities, Statement of Operations,
Statement of Changes in Net Assets and Financial Highlights as of December
31, 1996, and for the year then ended, of Tax-Exempt certified by Price
Waterhouse LLP (copies of which have been furnished to National Municipal),
fairly present, in all materials respects, Tax-Exempt's financial condition
as of such date in accordance with generally accepted accounting principles,
and its results of such operations, changes in its net assets and financial
highlights for such period, and as of such date there were no known
liabilities of Tax-Exempt (contingent or otherwise) not disclosed therein
that would be required in accordance with generally accepted accounting
principles to be disclosed therein;
(h) All issued and outstanding Tax-Exempt Shares are, and at the
Closing Date will be, duly and validly issued and outstanding, fully paid and
nonassessable with no personal liability attaching to the ownership thereof,
except as set forth under the caption "Additional Information" in
Tax-Exempt's current Prospectus incorporated by reference in the Registration
Statement. Tax-Exempt does not have outstanding any options, warrants or
other rights to subscribe for or purchase any of its shares;
(i) The execution, delivery and performance of this Agreement have
been duly authorized by all necessary action on the part of Tax-Exempt, and
this Agreement constitutes a valid and binding obligation of Tax-Exempt
enforceable in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating to
or affecting creditors rights and to general equity principles. No other
consents, authorizations or approvals are necessary in connection with
Tax-Exempt's performance of this Agreement;
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(j) Tax-Exempt Shares to be issued and delivered to National
Municipal, for the account of the National Municipal Shareholders, pursuant
to the terms of this Agreement will at the Closing Date have been duly
authorized and, when so issued and delivered, will be duly and validly issued
Tax-Exempt Shares, and will be fully paid and non-assessable with no personal
liability attaching to the ownership thereof, except as set forth under the
caption "Additional Information" in Tax-Exempt's current Prospectus
incorporated by reference in the Registration Statement;
(k) All material Federal and other tax returns and reports of
Tax-Exempt required by law to be filed on or before the Closing Date have
been filed and are correct, and all Federal and other taxes shown as due or
required to be shown as due on said returns and reports have been paid or
provision has been made for the payment thereof, and to the best of
Tax-Exempt's knowledge, no such return is currently under audit and no
assessment has been asserted with respect to any such return;
(l) For each taxable year since its inception, Tax-Exempt has met the
requirements of Subchapter M of the Code for qualification and treatment as a
"regulated investment company" and neither the execution or delivery of nor
the performance of its obligations under this Agreement will adversely
affect, and no other events are reasonably likely to occur which will
adversely affect the ability of Tax-Exempt to continue to meet the
requirements of Subchapter M of the Code;
(m) Since December 31, 1996 there has been no change by Tax-Exempt in
accounting methods, principles, or practices, including those required by
generally accepted accounting principles;
(n) The information furnished or to be furnished by Tax-Exempt for use
in registration statements, proxy materials and other documents which may be
necessary in connection with the transactions contemplated hereby shall be
accurate and complete in all material respects and shall comply in all
material respects with Federal securities and other laws and regulations
applicable thereto; and
(o) The Proxy Materials to be included in the Registration Statement
(only insofar as they relate to Tax-Exempt) will, on the effective date of
the Registration Statement and on the Closing Date, not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not materially
misleading.
5.2 National Municipal represents and warrants to Tax-Exempt as follows:
(a) National Municipal is a validly existing Massachusetts business
trust with full power to carry on its business as presently conducted;
(b) National Municipal is a duly registered, open-end, management
investment company, and its registration with the Commission as an investment
company under the 1940 Act and the registration of its shares under the 1933
Act are in full force and effect;
(c) All of the issued and outstanding shares of beneficial interest of
National Municipal have been offered and sold in compliance in all material
respects with applicable requirements of the 1933 Act and state securities
laws. Shares of National Municipal are registered in all jurisdictions in
which they are required to be registered and said registrations, including
any periodic reports or supplemental filings, are complete and current, all
fees required to be paid have been paid, and National Municipal is not
subject to any stop order and is fully qualified to sell its shares in each
state in which its shares have been registered;
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(d) The current Prospectus and Statement of Additional Information of
National Municipal conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the regulations thereunder
and do not include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading;
(e) National Municipal is not, and the execution, delivery and
performance of this Agreement will not result, in a material violation of any
provision of National Municipal's Declaration of Trust or By-Laws or of any
agreement, indenture, instrument, contract, lease or other undertaking to
which National Municipal is a party or by which it is bound;
(f) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or, to its
knowledge, threatened against National Municipal or any of its properties or
assets which, if adversely determined, would materially and adversely affect
its financial condition or the conduct of its business; and National
Municipal knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which materially
and adversely affects, or is reasonably likely to materially and adversely
effect, its business or its ability to consummate the transactions herein
contemplated;
(g) The Statement of Assets and Liabilities, Statement of Operations,
Statement of Changes in Net Assets and Financial Highlights of National
Municipal as of September 30, 1996 and for the year then ended, certified by
Price Waterhouse LLP (copies of which have been or will be furnished to
Tax-Exempt) fairly present, in all material respects, National Municipal's
financial condition as of such date, and its results of operations, changes
in its net assets and financial highlights for such period in accordance with
generally accepted accounting principles, and as of such date there were no
known liabilities of National Municipal (contingent or otherwise) not
disclosed therein that would be required in accordance with generally
accepted accounting principles to be disclosed therein;
(h) National Municipal has no material contracts or other commitments
(other than this Agreement) that will be terminated with liability to it
prior to the Closing Date;
(i) All issued and outstanding shares of National Municipal are, and
at the Closing Date will be, duly and validly issued and outstanding, fully
paid and nonassessable with no personal liability attaching to the ownership
thereof, except as set forth under the caption "Additional Information" in
National Municipal's current Prospectus incorporated by reference in the
Registration Statement. National Municipal does not have outstanding any
options, warrants or other rights to subscribe for or purchase any of its
shares, nor is there outstanding any security convertible to any of its
shares. All such shares will, at the time of Closing, be held by the persons
and in the amounts set forth in the list of shareholders submitted to
Tax-Exempt pursuant to paragraph 3.4;
(j) The execution, delivery and performance of this Agreement will
have been duly authorized prior to the Closing Date by all necessary action
on the part of National Municipal, and subject to the approval of National
Municipal's shareholders, this Agreement constitutes a valid and binding
obligation of National Municipal, enforceable in accordance with its terms,
subject as to enforcement to bankruptcy, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors rights and to
general equity principles. No other consents, authorizations or approvals are
necessary in connection with National Municipal's performance of this
Agreement;
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(k) All material federal and other tax returns and reports of
National Municipal required by law to be filed on or before the Closing Date
shall have been filed and are correct and all Federal and other taxes shown
as due or required to be shown as due on said returns and reports have been
paid or provision has been made for the payment thereof, and to the best of
National Municipal's knowledge, no such return is currently under audit and
no assessment has been asserted with respect to any such return;
(l) For each taxable year since its inception, National Municipal has
met all the requirements of Subchapter M of the Code for qualification and
treatment as a "regulated investment company" and neither the execution or
delivery of nor the performance of its obligations under this Agreement will
adversely affect, and no other events are reasonably likely to occur which
will adversely affect the ability of National Municipal to continue to meet
the requirements of Subchapter M of the Code;
(m) At the Closing Date, National Municipal will have good and valid
title to the National Municipal Assets, subject to no liens (other than the
obligation, if any, to pay the purchase price of portfolio securities
purchased by National Municipal which have not settled prior to the Closing
Date), security interests or other encumbrances, and full right, power and
authority to assign, deliver and otherwise transfer such assets hereunder,
and upon delivery and payment for such assets, Tax-Exempt will acquire good
and marketable title thereto, subject to no restrictions on the full transfer
thereof, including any restrictions as might arise under the 1933 Act;
(n) On the effective date of the Registration Statement, at the time
of the meeting of National Municipal's shareholders and on the Closing Date,
the Proxy Materials (exclusive of the currently effective Tax-Exempt's
Prospectus contained therein) will (i) comply in all material respects with
the provisions of the 1933 Act, the Securities Exchange Act of 1934, as
amended ("1934 Act") and the 1940 Act and the regulations thereunder and (ii)
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading. Any other information furnished by
National Municipal for use in the Registration Statement or in any other
manner that may be necessary in connection with the transactions contemplated
hereby shall be accurate and complete and shall comply in all material
respects with applicable federal securities and other laws and regulations
thereunder;
(o) National Municipal will, on or prior to the Valuation Date,
declare one or more dividends or other distributions to shareholders that,
together with all previous dividends and other distributions to shareholders,
shall have the effect of distributing to the shareholders all of its
investment company taxable income and net capital gain, if any, through the
Valuation Date (computed without regard to any deduction for dividends paid);
(p) National Municipal has maintained or has caused to be maintained
on its behalf all books and accounts as required of a registered investment
company in compliance with the requirements of Section 31 of the 1940 Act and
the Rules thereunder; and
(q) National Municipal is not acquiring Tax-Exempt Shares to be issued
hereunder for the purpose of making any distribution thereof other than in
accordance with the terms of this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF NATIONAL MUNICIPAL
The obligations of National Municipal to consummate the transactions
provided for herein shall be subject, at its election, to the performance by
Tax-Exempt of all the obligations to be performed by it hereunder on or
before the Closing Date and, in addition thereto, the following conditions:
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6.1 All representations and warranties of Tax-Exempt contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
by this Agreement, as of the Closing Date with the same force and effect as
if made on and as of the Closing Date;
6.2 Tax-Exempt shall have delivered to National Municipal a certificate of
its President and Treasurer, in a form reasonably satisfactory to National
Municipal and dated as of the Closing Date, to the effect that the
representations and warranties of Tax-Exempt made in this Agreement are true
and correct at and as of the Closing Date, except as they may be affected by
the transactions contemplated by this Agreement, and as to such other matters
as National Municipal shall reasonably request;
6.3 National Municipal shall have received a favorable opinion from Gordon
Altman Butowsky Weitzen Shalov & Wein, counsel to Tax-Exempt, dated as of the
Closing Date, to the effect that:
(a) Tax-Exempt is a validly existing Massachusetts business trust, and
has the power to own all of its properties and assets and to carry on its
business as presently conducted (Massachusetts counsel may be relied upon
in delivering such opinion); (b) Tax-Exempt is a duly registered,
open-end, management investment company, and its registration with the
Commission as an investment company under the 1940 Act is in full force
and effect; (c) this Agreement has been duly authorized, executed and
delivered by Tax-Exempt and, assuming that the Registration Statement
complies with the 1933 Act, the 1934 Act and the 1940 Act and regulations
thereunder and assuming due authorization, execution and delivery of this
Agreement by National Municipal, is a valid and binding obligation of
Tax-Exempt enforceable against Tax-Exempt in accordance with its terms,
subject as to enforcement, to bankruptcy, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors rights and to
general equity principles; (d) Tax-Exempt Shares to be issued to National
Municipal Shareholders as provided by this Agreement are duly authorized
and upon such delivery will be validly issued and outstanding and fully
paid and non-assessable (except as set forth under the caption "Additional
Information" in Tax-Exempt's Prospectus), and no shareholder of Tax-Exempt
has any preemptive rights to subscription or purchase in respect thereof
(Massachusetts counsel may be relied upon in delivering such opinion); (e)
the execution and delivery of this Agreement did not, and the consummation
of the transactions contemplated hereby will not, violate Tax-Exempt's
Declaration of Trust or By-Laws; and (f) to the knowledge of such counsel,
no consent, approval, authorization or order of any court or governmental
authority of the United States or any state is required for the
consummation by Tax-Exempt of the transactions contemplated herein, except
such as have been obtained under the 1933 Act, the 1934 Act and the 1940
Act and such as may be required under state securities laws; and
6.4 As of the Closing Date, there shall have been no material change in
the investment objective, policies and restrictions nor any increase in the
investment management fees or annual fees payable pursuant to Tax-Exempt's
12b-1 plan of distribution from those described in Tax-Exempt's Prospectus
and Statement of Additional Information dated July 28, 1997.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF TAX-EXEMPT
The obligations of Tax-Exempt to complete the transactions provided for
herein shall be subject, at its election, to the performance by National
Municipal of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
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7.1 All representations and warranties of National Municipal contained in
this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force
and effect as if made on and as of the Closing Date;
7.2 National Municipal shall have delivered to Tax-Exempt at the Closing a
certificate of its President and its Treasurer, in form and substance
satisfactory to Tax-Exempt and dated as of the Closing Date, to the effect
that the representations and warranties of National Municipal made in this
Agreement are true and correct at and as of the Closing Date, except as they
may be affected by the transactions contemplated by this Agreement, and as to
such other matters as Tax-Exempt shall reasonably request;
7.3 National Municipal shall have delivered to Tax-Exempt a statement of
the National Municipal Assets and its liabilities, together with a list of
National Municipal's portfolio securities and other assets showing the
respective adjusted bases and holding periods thereof for income tax
purposes, as of the Closing Date, certified by the Treasurer of National
Municipal;
7.4 National Municipal shall have delivered to Tax-Exempt within three
business days after the Closing a letter from Price Waterhouse LLP dated as
of the Closing Date stating that (a) such firm has performed a limited review
of the federal and state income tax returns of National Municipal for each of
the last three taxable years and, based on such limited review, nothing came
to their attention that caused them to believe that such returns did not
properly reflect, in all material respects, the federal and state income tax
liabilities of National Municipal for the periods covered thereby, (b) for
the period from September 30, 1997 to and including the Closing Date, such
firm has performed a limited review (based on unaudited financial data) to
ascertain the amount of applicable federal, state and local taxes and has
determined that same either have been paid or reserves have been established
for payment of such taxes, and, based on such limited review, nothing came to
their attention that caused them to believe that the taxes paid or reserves
set aside for payment of such taxes were not adequate in all materials
respects for the satisfaction of all federal, state and local tax liabilities
for the period from September 30, 1997 to and including the Closing Date and
(c) based on such limited reviews, nothing came to their attention that
caused them to believe that National Municipal would not qualify as a
regulated investment company for federal income tax purposes for any such
year or period;
7.5 Tax-Exempt shall have received at the Closing a favorable opinion from
Gordon Altman Butowsky Weitzen Shalov & Wein, counsel to National Municipal,
dated as of the Closing Date to the effect that:
(a) National Municipal is a validly existing Massachusetts business trust
and has the power to own all of its properties and assets and to carry on
its business as presently conducted (Massachusetts counsel may be relied
upon in delivering such opinion); (b) National Municipal is a duly
registered, open-end, management investment company under the 1940 Act,
and its registration with the Commission as an investment company under
the 1940 Act is in full force and effect; (c) this Agreement has been duly
authorized, executed and delivered by National Municipal and, assuming
that the Registration Statement complies with the 1933 Act, the 1934 Act
and the 1940 Act and the regulations thereunder and assuming due
authorization, execution and delivery of this Agreement by Tax-Exempt, is
a valid and binding obligation of National Municipal enforceable against
National Municipal in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors rights and to general
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equity principles; (d) the execution and delivery of this Agreement did
not, and the consummation of the transactions contemplated hereby will
not, violate National Municipal's Declaration of Trust or By-Laws; and (e)
to the knowledge of such counsel, no consent, approval, authorization or
order of any court or governmental authority of the United States or any
state is required for the consummation by National Municipal of the
transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act and the 1940 Act and such as may be required
under state securities laws; and
7.6 On the Closing Date, the National Municipal Assets shall include no
assets that Tax-Exempt, by reason of limitations of the fund's Declaration of
Trust or otherwise, may not properly acquire.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF TAX-EXEMPT AND
NATIONAL MUNICIPAL
The obligations of National Municipal and Tax-Exempt hereunder are each
subject to the further conditions that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares
of National Municipal in accordance with the provisions of National
Municipal's Declaration of Trust, and certified copies of the resolutions
evidencing such approval shall have been delivered to Tax-Exempt;
8.2 On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with,
this Agreement or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and
permits of federal, state and local regulatory authorities (including those
of the Commission and of state Blue Sky and securities authorities, including
"no-action" positions of and exemptive orders from such federal and state
authorities) deemed necessary by Tax-Exempt or National Municipal to permit
consummation, in all material respects, of the transactions contemplated
herein shall have been obtained, except where failure to obtain any such
consent, order or permit would not involve risk of a material adverse effect
on the assets or properties of Tax-Exempt or National Municipal;
8.4 The Registration Statement shall have become effective under the 1933
Act, no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act;
8.5 National Municipal shall have declared and paid a dividend or
dividends and/or other distribution or distributions that, together with all
previous such dividends or distributions, shall have the effect of
distributing to the National Municipal Shareholders all of National
Municipal's investment company taxable income (computed without regard to any
deduction for dividends paid) and all of its net capital gain (after
reduction for any capital loss carry-forward and computed without regard to
any deduction for dividends paid) for all taxable years ending on or before
the Closing Date; and
8.6 The parties shall have received a favorable opinion of the law firm of
Gordon Altman Butowsky Weitzen Shalov & Wein (based on such representations
as such law firm shall reasonably request), addressed to Tax-Exempt and
National Municipal, which opinion may be relied upon by the shareholders of
National Municipal, substantially to the effect that, for federal income tax
purposes:
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(a) The transfer of substantially all of National Municipal's assets in
exchange for Tax-Exempt Shares and the assumption by Tax-Exempt of certain
stated liabilities of National Municipal followed by the distribution by
National Municipal of Tax-Exempt Shares to the National Municipal
Shareholders in exchange for their National Municipal shares will
constitute a "reorganization" within the meaning of Section 368(a)(1) of
the Code, and National Municipal and Tax-Exempt will each be a "party to a
reorganization" within the meaning of Section 368(b) of the Code;
(b) No gain or loss will be recognized by Tax-Exempt upon the receipt of
the assets of National Municipal solely in exchange for Tax-Exempt Shares
and the assumption by Tax-Exempt of the stated liabilities of National
Municipal;
(c) No gain or loss will be recognized by National Municipal upon the
transfer of the assets of National Municipal to Tax-Exempt in exchange for
Tax-Exempt Shares and the assumption by Tax-Exempt of the stated
liabilities or upon the distribution of Tax-Exempt Shares to the National
Municipal Shareholders in exchange for their National Municipal shares;
(d) No gain or loss will be recognized by the National Municipal
Shareholders upon the exchange of the National Municipal shares for
Tax-Exempt Shares;
(e) The aggregate tax basis for Tax-Exempt Shares received by each
National Municipal Shareholder pursuant to the reorganization will be the
same as the aggregate tax basis of the National Municipal Shares held by
each such National Municipal Shareholder immediately prior to the
Reorganization;
(f) The holding period of Tax-Exempt Shares to be received by each
National Municipal Shareholder will include the period during which the
National Municipal Shares surrendered in exchange therefor were held
(provided such National Municipal Shares were held as capital assets on
the date of the Reorganization);
(g) The tax basis of the assets of National Municipal acquired by
Tax-Exempt will be the same as the tax basis of such assets to National
Municipal immediately prior to the Reorganization; and
(h) The holding period of the assets of National Municipal in the hands
of Tax-Exempt will include the period during which those assets were held
by National Municipal.
Notwithstanding anything herein to the contrary, neither Tax-Exempt nor
National Municipal may waive the conditions set forth in this paragraph 8.6.
9. FEES AND EXPENSES
9.1 (a) Dean Witter InterCapital Inc. ("InterCapital"), the investment
manager to both National Municipal and Tax-Exempt, shall bear all expenses
incurred in connection with the carrying out of the provisions of this
Agreement, including legal, accounting, Commission registration fees and Blue
Sky expenses, printing, filing and proxy solicitation expenses and portfolio
transfer taxes (if any) incurred in connection with the consummation of the
transactions contemplated herein.
(b) In the event the transactions contemplated herein are not
consummated by reason of Tax-Exempt's or National Municipal's being either
unwilling or unable to go forward, the funds' only respective obligations
hereunder shall be to reimburse InterCapital for all reasonable out-of-pocket
fees and expenses incurred by InterCapital in connection with those
transactions.
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10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
herein, except that the representations, warranties and covenants of National
Municipal hereunder shall not survive the dissolution and complete
liquidation of National Municipal in accordance with Section 1.9.
11. TERMINATION
11.1 This Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time prior to the Closing:
(a) by the mutual written consent of National Municipal and Tax-Exempt;
(b) by either Tax-Exempt or National Municipal by notice to the other,
without liability to the terminating party on account of such termination
(providing the termination party is not otherwise in material default or
breach of this Agreement) if the Closing shall not have occurred on or
before January 31, 1998; or
(c) by either Tax-Exempt or National Municipal, in writing without
liability to the terminating party on account of such termination
(provided the terminating party is not otherwise in material default or
breach of this Agreement), if (i) the other party shall fail to perform in
any material respect its agreements contained herein required to be
performed on or prior to the Closing Date, (ii) the other party materially
breaches any of its representations, warranties or covenants contained
herein, (iii) the National Municipal shareholders fail to approve this
Agreement at any meeting called for such purpose at which a quorum was
present or (iv) any other condition herein expressed to be precedent to
the obligations of the terminating party has not been met and it
reasonably appears that it will not or cannot be met.
11.2 (a) Termination of this Agreement pursuant to paragraphs 11.1 (a) or
(b) shall terminate all obligations of the parties hereunder and there shall
be no liability for damages on the part of Tax-Exempt or National Municipal
or the trustees or officers of Tax-Exempt or National Municipal, to any other
party or its trustees or officers.
(b) Termination of this Agreement pursuant to paragraph 11.1 (c)
shall terminate all obligations of the parties hereunder and there shall be
no liability for damages on the part of Tax-Exempt or National Municipal or
the trustees or officers of Tax-Exempt or National Municipal, except that any
party in breach of this Agreement shall, upon demand, reimburse InterCapital
for all reasonable out-of-pocket fees and expenses incurred in connection
with the transactions contemplated by this Agreement, including legal,
accounting and filing fees.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the parties; provided, however,
that following the meeting of National Municipal's shareholders called by
National Municipal pursuant to paragraph 4.3, no such amendment
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may have the effect of changing the provisions for determining the number of
Tax-Exempt Shares to be issued to the National Municipal Shareholders under
this Agreement to the detriment of such National Municipal Shareholders
without their further approval.
13. MISCELLANEOUS
13.1 The article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by
any party without the written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or give
any person, firm or corporation, other than the parties hereto and their
respective successors and assigns, any rights or remedies under or by reason
of this Agreement.
13.5 The obligations and liabilities of Tax-Exempt hereunder are solely
those of Tax-Exempt. It is expressly agreed that no shareholder, nominee,
trustee, officer, agent, or employee of Tax-Exempt shall be personally liable
hereunder. The execution and delivery of this Agreement have been authorized
by the directors of Tax-Exempt and signed by authorized officers of
Tax-Exempt acting as such, and neither such authorization by such trustees
nor such execution and delivery by such officers shall be deemed to have been
made by any of them individually or to impose any liability on any of them
personally.
13.6 The obligations and liabilities of National Municipal hereunder are
solely those of National Municipal. lt is expressly agreed that no
shareholder, nominee, trustee, officer, agent, or employee of National
Municipal shall be personally liable hereunder. The execution and delivery of
this Agreement have been authorized by the trustees of National Municipal and
signed by authorized officers of National Municipal acting as such, and
neither such authorization by such trustees nor such execution and delivery
by such officers shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed by a duly authorized officer.
DEAN WITTER NATIONAL MUNICIPAL TRUST
BY: /s/ Charles A. Fiumefreddo
...................................
NAME: CHARLES A. FIUMEFREDDO
TITLE: PRESIDENT
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
By: /s/ Barry Fink
...................................
NAME: BARRY FINK
TITLE: VICE PRESIDENT
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<PAGE>
EXHIBIT B
PROSPECTUS
JULY 28, 1997
Dean Witter Tax-Exempt Securities Trust (the "Fund") is an open-end,
diversified management investment company, whose investment objective is to
provide a high level of current income exempt from federal income tax,
consistent with the preservation of capital. The Fund invests principally in
tax-exempt fixed-income securities which are rated in the three highest
categories by Moody's Investors Service, Inc. or Standard & Poor's
Corporation. (See "Investment Objective and Policies.")
The Fund offers four classes of shares (each, a "Class"), each with a
different combination of sales charges, ongoing fees and other features. The
different distribution arrangements permit an investor to choose the method
of purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of the Fund held prior to
July 28, 1997 have been designated Class D shares. (See "Purchase of Fund
Shares--Alternative Purchase Arrangements.")
This Prospectus sets forth concisely the information you should know before
investing in the Fund. It should be read and retained for future reference.
Additional information about the Fund is contained in the Statement of
Additional Information, dated July 28, 1997, which has been filed with the
Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone numbers listed on this page.
The Statement of Additional Information is incorporated herein by reference.
Dean Witter
Tax-Exempt Securities Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
TABLE OF CONTENTS
Prospectus Summary/ 2
Summary of Fund Expenses/ 4
Financial Highlights/ 6
The Fund and its Management/ 7
Investment Objective and Policies/ 7
Risk Considerations and Investment Practices/ 10
Investment Restrictions/ 12
Purchase of Fund Shares/ 13
Shareholder Services/ 23
Redemptions and Repurchases/ 26
Dividends, Distributions and Taxes/ 27
Performance Information/ 28
Additional Information/ 29
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and the shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
DEAN WITTER DISTRIBUTORS INC.
DISTRIBUTOR
<PAGE>
PROSPECTUS SUMMARY
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THE The Fund is organized as a Trust, commonly known as a
FUND Massachusetts business trust, and is an open-end,
diversified management investment company investing
principally in investment grade, tax-exempt fixed-income
securities (see page 7).
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SHARES Shares of beneficial interest with $0.01 par value (see
OFFERED page 29). The Fund offers four Classes of shares, each with
a different combination of sales charges, ongoing fees and
other features (see pages 13-22).
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MINIMUM The minimum initial investment for each Class is $1,000
PURCHASE ($100 if the account is opened through EasyInvest (Service
Mark) ). Class D shares are only available to persons
investing $5 million or more and to certain other limited
categories of investors. For the purpose of meeting the
minimum $5 million investment for Class D shares, and
subject to the $1,000 minimum initial investment for each
Class of the Fund, an investor's existing holdings of Class
A shares and shares of funds for which Dean Witter
InterCapital Inc. serves as investment manager ("Dean
Witter Funds") that are sold with a front-end sales charge,
and concurrent investments in Class D shares of the Fund
and other Dean Witter Funds that are multiple class funds,
will be aggregated. The minimum subsequent investment is
$100 (see page 13).
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INVESTMENT The investment objective of the Fund is to provide a high
OBJECTIVE level of current income exempt from federal income tax,
consistent with the preservation of capital (see page 7).
- -------------------------------------------------------------------------------
INVESTMENT Dean Witter InterCapital Inc. ("InterCapital"), the
MANAGER Investment Manager of the Fund, and its wholly-owned
subsidiary, Dean Witter Services Company Inc., serve in
various investment management, advisory, management and
administrative capacities to 100 investment companies and
other portfolios with assets of approximately $96.6 billion
at June 30, 1997 (see page 7).
- -------------------------------------------------------------------------------
MANAGEMENT FEE The monthly fee is at an annual rate of 1/2 of 1% of
average daily net assets, scaled down on assets over $500
million (see page 7).
- -------------------------------------------------------------------------------
DISTRIBUTOR AND Dean Witter Distributors Inc. (the "Distributor"). The Fund
DISTRIBUTION has adopted a distribution plan pursuant to Rule 12b-1
FEE under the Investment Company Act (the "12b-1 Plan") with
respect to the distribution fees paid by the Class A, Class
B and Class C shares of the Fund to the Distributor. The
entire 12b-1 fee payable by Class A and a portion of the
12b-1 fee payable by each of Class B and Class C equal to
0.15% of the average daily net assets of Class B and 0.25%
of the average daily net assets of Class C are currently
each characterized as a service fee within the meaning of
the National Association of Securities Dealers, Inc.
guidelines. The remaining portion of the 12b-1 fee, if any,
is characterized as an asset-based sales charge (see pages
13 and 21).
- -------------------------------------------------------------------------------
ALTERNATIVE Four classes of shares are offered:
PURCHASE
ARRANGEMENTS o Class A shares are offered with a front-end sales charge,
starting at 4.25% and reduced for larger purchases.
Investments of $1 million or more (and investments by
certain other limited categories of investors) are not
subject to any sales charge at the time of purchase but a
contingent deferred sales charge ("CDSC") of 1.0% may be
imposed on redemptions within one year of purchase. The
Fund is authorized to reimburse the Distributor for
specific expenses incurred in promoting the distribution of
the Fund's Class A shares and servicing shareholder
accounts pursuant to the Fund's 12b-1 Plan. Reimbursement
may in no event exceed an amount equal to payments at an
annual rate of 0.25% of average daily net assets of the
Class (see pages 13, 16 and 21).
2
<PAGE>
- -------------------------------------------------------------------------------
o Class B shares are offered without a front-end sales
charge, but will in most cases be subject to a CDSC (scaled
down from 5.0% to 1.0%) if redeemed within six years after
purchase. The CDSC will be imposed on any redemption of
shares if after such redemption the aggregate current value
of a Class B account with the Fund falls below the
aggregate amount of the investor's purchase payments made
during the six years preceding the redemption. Class B
shares are also subject to a 12b-1 fee assessed at the
annual rate of 0.60% of the average daily net assets of
Class B. Class B shares convert to Class A shares
approximately ten years after the date of the original
purchase (see pages 13, 18 and 21).
o Class C shares are offered without a front-end sales
charge, but will in most cases be subject to a CDSC of 1.0%
if redeemed within one year after purchase. The Fund is
authorized to reimburse the Distributor for specific
expenses incurred in promoting the distribution of the
Fund's Class C shares and servicing shareholder accounts
pursuant to the Fund's 12b-1 Plan. Reimbursement may in no
event exceed an amount equal to payments at an annual rate
of 0.70% of average daily net assets of the Class (see
pages 13, 20 and 21).
o Class D shares are offered only to investors meeting an
initial investment minimum of $5 million and to certain
other limited categories of investors. Class D shares are
offered without a front-end sales charge or CDSC and are
not subject to any 12b-1 fee (see pages 13, 20 and 21). All
shares of the Fund held prior to July 28, 1997 have been
designated Class D shares. Additional investments in Class
D shares by shareholders holding such shares may only be
made if those shareholders are otherwise eligible to
purchase Class D shares. However, shareholders holding such
shares will receive the benefit of the value of such shares
towards reduced sales charges on purchases of Class A
shares pursuant to the Fund's "Right of Accumulation" (see
page 17).
- -------------------------------------------------------------------------------
DIVIDENDS AND Dividends from net investment income are declared daily and
CAPITAL GAINS paid monthly; capital gains, if any, may be distributed
DISTRIBUTIONS annually or retained for reinvestment by the Fund.
Dividends and capital gains distributions paid on shares of
a Class are automatically reinvested in additional shares
of the same Class at net asset value unless the shareholder
elects to receive cash. Shares acquired by dividend and
distribution reinvestment will not be subject to any sales
charge or CDSC (see pages 23 and 27).
- -------------------------------------------------------------------------------
REDEMPTION Shares are redeemable by the shareholder at net asset value
less any applicable CDSC on Class A, Class B or Class C
shares. An account may be involuntarily redeemed if the
total value of the account is less than $100 or, if the
account was opened through EasyInvest (Service Mark), if
after twelve months the shareholder has invested less than
$1,000 in the account (see page 26).
- -------------------------------------------------------------------------------
RISKS The value of the Fund's portfolio securities, and therefore
the Fund's net asset value per share, may increase or
decrease due to various factors, principally changes in
prevailing interest rates and the ability of the issuers of
the Fund's portfolio securities to pay interest and
principal on such obligations. The Fund may purchase
when-issued and delayed delivery securities (see page 10).
The Fund may also invest in futures and options, which may
be considered speculative in nature and which may involve
greater risks than those customarily assumed by certain
other investment companies which do not invest in such
instruments (see pages 10-12).
- -------------------------------------------------------------------------------
The above is qualified in its entirety by the detailed information appearing
elsewhere in the Prospectus and in the Statement of Additional Information.
<PAGE>
SUMMARY OF FUND EXPENSES
- -----------------------------------------------------------------------------
The following table illustrates all expenses and fees that a shareholder
of the Fund will incur. The expenses and fees set forth in the table are
based on the expenses and fees for the fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
- --------------------------------
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price) ..................... 4.25%(1) None None None
Sales Charge Imposed on Dividend Reinvestments .... None None None None
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase price or
redemption proceeds)............................... None(2) 5.00%(3) 1.00%(4) None
Redemption Fees..................................... None None None None
Exchange Fee........................................ None None None None
Annual Fund Operating Expenses (as a percentage of
average net assets)
- -------------------
Management Fees .................................... 0.43% 0.43% 0.43% 0.43%
12b-1 Fees (5)(6)................................... 0.25% 0.60% 0.70% None
Other Expenses ..................................... 0.05% 0.05% 0.05% 0.05%
Total Fund Operating Expenses (7)................... 0.73% 1.08% 1.18% 0.48%
</TABLE>
- ------------
(1) Reduced for purchases of $25,000 and over (see "Purchase of Fund
Shares--Initial Sales Charge Alternative--Class A Shares").
(2) Investments that are not subject to any sales charge at the time of
purchase are subject to a CDSC of 1.00% that will be imposed on
redemptions made within one year after purchase, except for certain
specific circumstances (see "Purchase of Fund Shares--Initial Sales
Charge Alternative--Class A Shares").
(3) The CDSC is scaled down to 1.00% during the sixth year, reaching zero
thereafter.
(4) Only applicable to redemptions made within one year after purchase (see
"Purchase of Fund Shares--Level Load Alternative--Class C Shares").
(5) The 12b-1 fee is accrued daily and payable monthly. The entire 12b-1
fee payable by Class A and a portion of the 12b-1 fee payable by each
of Class B and Class C equal to 0.15% of the average daily net assets
of Class B and 0.25% of the average daily net assets of Class C are
currently each characterized as a service fee within the meaning of
National Association of Securities Dealers, Inc. ("NASD") guidelines
and are payments made for personal service and/or maintenance of
shareholder accounts. The remainder of the 12b-1 fee, if any, is an
asset-based sales charge, and is a distribution fee paid to the
Distributor to compensate it for the services provided and the expenses
borne by the Distributor and others in the distribution of the Fund's
shares (see "Purchase of Fund Shares--Plan of Distribution").
(6) Upon conversion of Class B shares to Class A shares, such shares will
be subject to the lower 12b-1 fee applicable to Class A shares. No
sales charge is imposed at the time of conversion of Class B shares to
Class A shares. Class C shares do not have a conversion feature and,
therefore, are subject to an ongoing 0.70% distribution fee (see
"Purchase of Fund Shares--Alternative Purchase Arrangements").
(7) There were no outstanding shares of Class A, Class B or Class C prior
to the date of this Prospectus. Accordingly, "Total Fund Operating
Expenses," as shown above with respect to those Classes, are based upon
the sum of 12b-1 Fees, Management Fees and estimated "Other Expenses."
4
<PAGE>
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXAMPLES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment
assuming (1) a 5% annual return and (2) redemption at the end
of each time period:
Class A ...................................................... $50 $65 $81 $129
Class B ...................................................... $61 $64 $80 $132
Class C....................................................... $22 $37 $65 $143
Class D ...................................................... $ 5 $15 $27 $ 60
You would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A ...................................................... $50 $65 $81 $129
Class B ...................................................... $11 $34 $60 $132
Class C ...................................................... $12 $37 $65 $143
Class D ...................................................... $ 5 $15 $27 $ 60
</TABLE>
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF EACH CLASS MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"The Fund and its Management," "Purchase of Fund Shares--Plan of
Distribution" and "Redemptions and Repurchases."
Long-term shareholders of Class B and Class C may pay more in sales
charges, including distribution fees, than the economic equivalent of the
maximum front-end sales charges permitted by the NASD.
5
<PAGE>
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------
The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by Price Waterhouse LLP,
independent accountants. The financial highlights should be read in
conjunction with the financial statements, the notes thereto and the
unqualified report of independent accountants, which are contained in the
Statement of Additional Information. Further information about the
performance of the Fund is contained in the Fund's Annual Report to
Shareholders, which may be obtained without charge upon request to the Fund.
All shares of the Fund held prior to July 28, 1997 have been designated Class
D shares.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period ...... $12.09 $11.01 $12.41 $11.88 $11.65
------ ------ ------ ------ ------
Net investment income .... 0.65 0.67 0.70 0.77 0.79
Net realized and
unrealized gain (loss) .. (0.24) 1.19 (1.37) 0.54 0.23
------ ------ ------ ------ ------
Total from investment
operations .............. 0.41 1.86 (0.67) 1.31 1.02
------ ------ ------ ------ ------
Less dividends and
distributions from:
Net investment income ... (0.65) (0.67) (0.70) (0.77) (0.79)
Net realized gain ........ (0.08) (0.11) (0.03) (0.01) --
------ ------ ------ ------ ------
Total dividends and
distributions ........... (0.73) (0.78) (0.73) (0.78) (0.79)
------ ------ ------ ------ ------
Net asset value,
end of period ............ $11.77 $12.09 $11.01 $12.41 $11.88
====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN+ 3.61% 17.37% (5.55)% 11.23% 9.09%
RATIOS TO AVERAGE NET
ASSETS:
Expenses .................. 0.48% 0.48% 0.47% 0.47% 0.49%
Net investment income ..... 5.52% 5.76% 6.02% 6.23% 6.74%
SUPPLEMENTAL DATA:
Net assets, end of period,
in millions ............. $1,190 $1,325 $1,295 $1,582 $1,323
Portfolio turnover rate .. 18% 21% 16% 13% 4%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1991 1990 1989 1988 1987
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period ...... $11.09 $11.28 $10.96 $10.45 $11.50
------ ------ ------ ------ ------
Net investment income .... 0.80 0.80 0.81 0.81 0.80
Net realized and
unrealized gain (loss) .. 0.56 (0.18) 0.32 0.51 (0.97)
------ ------ ------ ------ ------
Total from investment
operations .............. 1.36 0.62 1.13 1.32 (0.17)
------ ------ ------ ------ ------
Less dividends and
distributions from:
Net investment income ... (0.80) (0.81) (0.81) (0.81) (0.83)
Net realized gain ........ -- -- -- -- (0.05)
------ ------ ------ ------ ------
Total dividends and
distributions ........... (0.80) (0.81) (0.81) (0.81) (0.88)
------ ------ ------ ------ ------
Net asset value,
end of period ............ $11.65 $11.09 $11.28 $10.96 $10.45
====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN+ 12.71% 5.86% 10.61% 13.02% (1.44)%
<PAGE>
RATIOS TO AVERAGE NET
ASSETS:
Expenses .................. 0.51% 0.51% 0.51% 0.54% 0.52%
Net investment income ..... 7.05% 7.25% 7.31% 7.51% 7.42%
SUPPLEMENTAL DATA:
Net assets, end of period,
in millions ............. $1,145 $1,010 $1,033 $908 $896
Portfolio turnover rate .. 10% 19% 13% 17% 37%
</TABLE>
- ------------
+ Does not reflect the deduction of sales load. Calculated based on the net
asset value as of the last business day of the period.
6
<PAGE>
THE FUND AND ITS MANAGEMENT
- -----------------------------------------------------------------------------
Dean Witter Tax-Exempt Securities Trust (the "Fund") is an open-end,
diversified management investment company incorporated in Maryland on
December 13, 1979. The Fund reorganized as a trust of the type commonly known
as a "Massachusetts business trust" on April 30, 1987.
Dean Witter InterCapital Inc. ("InterCapital" or the "Investment
Manager"), whose address is Two World Trade Center, New York, New York 10048,
is the Fund's Investment Manager. The Investment Manager, which was
incorporated in July, 1992, is a wholly-owned subsidiary of Morgan Stanley,
Dean Witter, Discover & Co., a preeminent global financial services firm that
maintains leading market positions in each of its three primary
businesses--securities, asset management and credit services.
InterCapital and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to a total of 100 investment companies, thirty of
which are listed on the New York Stock Exchange, with combined total net
assets of approximately $93.1 billion as of June 30, 1997. The Investment
Manager also manages portfolios of pension plans, other institutions and
individuals which aggregated approximately $3.5 billion at such date.
The Fund has retained the Investment Manager to provide administrative
services, manage its business affairs and manage the investment of the Fund's
assets, including the placing of orders for the purchase and sale of
portfolio securities. InterCapital has retained Dean Witter Services Company
Inc. to perform the aforementioned administrative services for the Fund.
The Fund's Trustees review the various services provided by or under the
direction of the Investment Manager to ensure that the Fund's general
investment policies and programs are being properly carried out and that
administrative services are being provided to the Fund in a satisfactory
manner.
As full compensation for the services and facilities furnished to the Fund
and for expenses of the Fund assumed by the Investment Manager, the Fund pays
the Investment Manager monthly compensation calculated daily at an annual
rate of 0.50% of the daily net assets of the Fund up to $500 million, scaled
down at various asset levels to 0.325% on net assets over $1.25 billion. For
the fiscal year ended December 31, 1996, the Fund accrued total compensation
to the Investment Manager amounting to 0.43% of the Fund's average daily net
assets and the Fund's total expenses amounted to 0.48% of the Fund's average
daily net assets.
INVESTMENT OBJECTIVE AND POLICIES
- -----------------------------------------------------------------------------
The investment objective of the Fund is to provide a high level of current
income which is exempt from federal income tax, consistent with the
preservation of capital. There is no assurance that this objective will be
achieved. This objective is fundamental and may not be changed without
shareholder approval. The Fund seeks to achieve its investment objective by
investing its assets in accordance with the following policies:
1. At least 80% of the Fund's total assets will be invested in tax-exempt
securities, except as stated in paragraph (5) below. Tax-exempt securities
consist of Municipal Bonds and Municipal Notes ("Municipal Obligations") and
Municipal Commercial Paper.
2. At least 75% of the Fund's total assets will be invested in: (a)
Municipal Bonds which are rated at the time of purchase within the three
highest grades by Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's Corporation ("S&P"); (b) Municipal Notes which at the time of
7
<PAGE>
purchase are rated in the two highest grades by Moody's or S&P, or, if not
rated, have outstanding one or more issues of Municipal Bonds rated as set
forth in clause (a) of this paragraph; and (c) Municipal Commercial Paper
which at the time of purchase are rated P-1 by Moody's or A-1 by S&P.
3. Up to 25% of the Fund's total assets may be invested in tax-exempt
securities which are not rated by Moody's or S&P or, if rated, are not within
the rating categories of Moody's or S&P stated in paragraph (2) above.
4. In accordance with the current position of the staff of the Securities
and Exchange Commission, tax-exempt securities which are subject to the
federal alternative minimum tax for individual shareholders will not be
included in the 80% total described in paragraph 1 above. (See "Dividends,
Distributions and Taxes," below.) As such, the remaining 20% of the Fund's
total assets may be invested in tax-exempt securities subject to the
alternative minimum tax.
5. Inclusive of paragraph 4 above, up to 20% of the Fund's total assets
may be invested in taxable money market instruments under any one or more of
the following circumstances: (a) pending investment of proceeds of sale of
Fund shares or of portfolio securities; (b) pending settlement of purchases
of portfolio securities; and (c) to maintain liquidity for the purpose of
meeting anticipated redemptions. In addition, the Fund may temporarily invest
more than 20% of its total assets in taxable securities, or in tax-exempt
securities subject to the federal alternative minimum tax for individual
shareholders, to maintain a "defensive" posture when, in the opinion of the
Investment Manager, it is advisable to do so because of market conditions.
The types of taxable securities in which the Fund may temporarily invest are
limited to the following short-term fixed-income securities (maturing in one
year or less from the time of purchase): (i) obligations of the United States
Government, its agencies, instrumentalities or authorities; (ii) commercial
paper rated P-1 by Moody's or A-1 by S&P; (iii) certificates of deposit of
domestic banks with assets of $1 billion or more; and (iv) repurchase
agreements with respect to any of the foregoing portfolio securities.
Municipal Obligations are debt obligations of states, cities,
municipalities and municipal agencies which generally have maturities, at the
time of their issuance, of either one year or more (Bonds) or from six months
to three years (Notes). Municipal Commercial Paper refers to short-term
obligations of municipalities. Any Municipal Obligation which depends
directly or indirectly on the credit of the Federal Government shall be
considered to have a rating of Aaa/AAA. The Fund may purchase Municipal
Obligations which had originally been issued by the same issuer as two
separate series of the same issue with different interest rates, but which
are now linked together to form one series.
While the Fund may invest up to 25% of its total assets in Municipal
Obligations which are unrated or, if rated, are not within the three highest
Bond rating categories of Moody's or S&P or the two highest Note rating
categories of Moody's or S&P, the Fund does not intend to invest in Municipal
Bonds which are rated below either Baa by Moody's or BBB by S&P (the lowest
ratings considered investment grade) or, if not rated, are deemed by the
Investment Manager to be below investment grade, in amounts exceeding 5% of
its total assets. Investments in Municipal Bonds rated either Baa by Moody's
or BBB by S&P may have speculative characteristics and, therefore, changes in
economic conditions or other circumstances are more likely to weaken their
capacity to make principal and interest payments than would be the case with
investments in securities with higher credit ratings. Municipal Bonds rated
below investment grade may not currently be paying any interest and may have
extremely poor prospects of ever attaining any real investment standing.
The two principal classifications of Municipal Obligations and Commercial
Paper are "general obligation" and "revenue" obligations or commercial paper.
General obligation bonds, notes or commercial paper are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Issuers of general obligation bonds, notes or
commercial paper include a state, its counties, cities, towns and other
government
8
<PAGE>
units. Revenue bonds, notes or commercial paper are payable from the revenues
derived from a particular facility or class of facilities or, in some cases,
from specific revenue sources. Revenue bonds, notes or commercial paper are
issued for a wide variety of purposes, including the financing of electric,
gas, water and sewer systems and other public utilities; industrial
development and pollution control facilities; single and multi-family housing
units; public buildings and facilities; air and marine ports; transportation
facilities such as toll roads, bridges and tunnels; and health and
educational facilities such as hospitals and dormitories. They rely primarily
on user fees to pay debt service, although the principal revenue source is
often supplemented by additional security features which are intended to
enhance the creditworthiness of the issuer's obligations. In some cases,
particularly revenue bonds issued to finance housing and public buildings, a
direct or implied "moral obligation" of a governmental unit may be pledged to
the payment of debt service. In other cases, a special tax or other charge
may augment user fees.
Included within the revenue category are participations in lease
obligations or installment purchase contracts (hereinafter collectively
called "lease obligations") of municipalities. State and local governments
issue lease obligations to acquire equipment and facilities.
Lease obligations may have risks not normally associated with general
obligation or other revenue bonds. Leases and installment purchase or
conditional sale contracts (which may provide for title to the leased asset
to pass eventually to the issuer) have developed as a means for governmental
issuers to acquire property and equipment without the necessity of complying
with the constitutional and statutory requirements generally applicable for
the issuance of debt. Certain lease obligations contain "non-appropriation"
clauses that provide that the governmental issuer has no obligation to make
future payments under the lease or contract unless money is appropriated for
such purpose by the appropriate legislative body on an annual or other
periodic basis. Consequently, continued lease payments on those lease
obligations containing "non-appropriation" clauses are dependent on future
legislative actions. If such legislative actions do not occur, the holders of
the lease obligation may experience difficulty in exercising their rights,
including disposition of the property.
Lease obligations represent a type of financing that may not have the
depth of marketability associated with more conventional municipal
obligations, and, as a result, certain of such lease obligations may be
considered illiquid securities. To determine whether or not the Fund will
consider such securities to be illiquid (the Fund may not invest more than
ten percent of its net assets in illiquid securities), the Trustees of the
Fund have established guidelines to be utilized by the Fund in determining
the liquidity of a lease obligation. The factors to be considered in making
the determination include: 1) the frequency of trades and quoted prices for
the obligation; 2) the number of dealers willing to purchase or sell the
security and the number of other potential purchasers; 3) the willingness of
dealers to undertake to make a market in the security; and 4) the nature of
the marketplace trades, including, the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of the transfer.
The interest rates payable on certain Municipal Bonds and Municipal Notes
are not fixed and may fluctuate based upon changes in market rates. Municipal
obligations of this type are called "variable rate" obligations. The interest
rate payable on a variable rate obligation is adjusted either at
predesignated periodic intervals or whenever there is a change in the market
rate of interest on which the interest rate payable is based.
The foregoing percentage and rating policies apply at the time of
acquisition of a security based on the last previous determination of the
Fund's net asset value. Any subsequent change in any rating by a rating
service or change in percentages resulting from market fluctuations or other
changes in the Fund's total assets will not require elimination of any
security from the Fund's portfolio until such time as the Investment Manager
determines that it is practicable to sell the security without undue market
or tax consequences to the Fund.
9
<PAGE>
The ratings assigned by Moody's and S&P represent their opinions as to the
quality of the securities which they undertake to rate (see the Appendix to
the Statement of Additional Information). It should be emphasized, however,
that the ratings are general and not absolute standards of quality.
When-Issued and Delayed Delivery Securities. The Fund may purchase
tax-exempt securities on a when-issued or delayed delivery basis; i.e.,
delivery and payment can take place a month or more after the date of the
transaction. These securities are subject to market fluctuation and no
interest accrues to the purchaser prior to settlement. At the time the Fund
makes the commitment to purchase such securities, it will record the
transaction and thereafter reflect the value, each day, of such securities in
determining its net asset value. An increase in the percentage of the Fund's
assets committed to the purchase of securities on a when-issued or delayed
delivery basis may increase the volatility of the Fund's net asset value.
Zero Coupon Securities. A portion of the fixed-income securities purchased
by the Fund may be zero coupon securities. Such securities are purchased at a
discount from their face amount, giving the purchaser the right to receive
their full value at maturity. The interest earned on such securities is,
implicitly, automatically compounded and paid out at maturity. While such
compounding at a constant rate eliminates the risk of receiving lower yields
upon reinvestment of interest if prevailing interest rates decline, the owner
of a zero coupon security will be unable to participate in higher yields upon
reinvestment of interest received on interest-paying securities if prevailing
interest rates rise.
A zero coupon security pays no interest to its holder during its life.
Therefore, to the extent the Fund invests in zero coupon securities, it will
not receive current cash available for distribution to shareholders. In
addition, zero coupon securities are subject to substantially greater price
fluctuations during periods of changing prevailing interest rates than are
comparable securities which pay interest on a current basis. Current federal
tax law requires that a holder (such as the Fund) of a zero coupon security
accrue a portion of the discount at which the security was purchased as
income each year even though the Fund receives no interest payments in cash
on the security during the year.
RISK CONSIDERATIONS AND INVESTMENT PRACTICES
The value of the Fund's portfolio securities and, therefore, the Fund's
net asset value per share, may increase or decrease due to various factors,
principally changes in prevailing interest rates and the ability of the
issuers of the Fund's portfolio securities to pay interest and principal on
such obligations on a timely basis. Generally, a rise in interest rates will
result in a decrease in the Fund's net asset value per share, while a drop in
interest rates will result in an increase in the Fund's net asset value per
share. The Fund's yield will also vary based on the yield of the Fund's
portfolio securities.
Futures Contracts and Options on Futures. The Fund may enter into
financial futures contracts ("futures contracts"), options on such futures
and municipal bond index futures contracts for hedging purposes. The Fund may
sell a futures contract or a call option thereon or purchase a put option on
such futures contract, if the Investment Manager anticipates interest rates
to rise, as a hedge against a decrease in the value of the Fund's portfolio
securities. If the Investment Manager anticipates that interest rates will
decline, the Fund may purchase a futures contract or a call option thereon or
sell a put option on such futures contract, to protect against an increase in
the price of the securities the Fund intends to purchase. These futures
contracts and related options thereon will be used only as a hedge against
anticipated interest rate changes. A futures contract sale creates an
obligation by the Fund, as seller, to deliver the specific type of instrument
called for in the contract at a specified future time for a specified price.
A futures contract purchase creates an obligation by the Fund, as purchaser,
to take delivery of the specific type of financial instrument at a specified
future time at a specified price. The specific securities delivered or taken,
respectively,
10
<PAGE>
at settlement date, would not be determined until or near that date. The
determination would be in accordance with the rules of the exchange on which
the futures contract sale or purchase was effected.
Although the terms of futures contracts specify actual delivery or receipt
of securities, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the securities.
Closing out of a futures contract is effected by entering into an offsetting
purchase or sale transaction.
Unlike a futures contract, which requires the parties to buy and sell a
security on a set date, an option on a futures contract entitles its holder
to decide on or before a future date whether to enter into such a contract (a
long position in the case of a call option and a short position in the case
of a put option). If the holder decides not to enter into the contract, the
premium paid for the option on the contract is lost. Since the value of the
option is fixed at the point of sale, there are not daily payments of cash to
reflect the change in the value of the underlying contract as there are by a
purchaser or seller of a futures contract. The value of the option does
change and is reflected in the net asset value of the Fund.
A risk in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities subject
to futures contracts may correlate imperfectly with the behavior of the cash
prices of the Fund's portfolio securities. The risk of imperfect correlation
may be increased by the fact that the Fund will invest in futures contracts
on taxable securities and there is no guarantee that the prices of taxable
securities will move in a similar manner to the prices of tax-exempt
securities. The correlation may be distorted by the fact that the futures
market is dominated by short-term traders seeking to profit from the
difference between a contract or security price objective and their cost of
borrowed funds. Such distortions are generally minor and would diminish as
the contract approached maturity.
Another risk is that the Fund's manager could be incorrect in its
expectations as to the direction or extent of various interest rate movements
or the time span within which the movements take place. For example, if the
Fund sold futures contracts for the sale of securities in anticipation of an
increase in interest rates, and then interest rates went down instead,
causing bond prices to rise, the Fund would lose money on the sale.
In addition to the risks that apply to all options transactions (see the
Statement of Additional Information for a description of the characteristics
of, and the risks of investing in, options on debt securities), there are
several special risks relating to options on futures; in particular, the
ability to establish and close out positions on options on futures will be
subject to the development and maintenance of a liquid secondary market. It
is not certain that this market will develop or be maintained.
Municipal Bond Index Futures. The Fund may utilize municipal bond index
futures contracts and options thereon for hedging purposes. The Fund's
strategies in employing such contracts will be similar to that discussed
above with respect to financial futures and options thereon. A municipal bond
index is a method of reflecting in a single number the market value of many
different municipal bonds and is designed to be representative of the
municipal bond market generally. The index fluctuates in response to changes
in the market values of the bonds included within the index. Unlike futures
contracts on particular financial instruments, transactions in futures on a
municipal bond index will be settled in cash, if held until the close of
trading in the contract. However, like any other futures contract, a position
in the contract may be closed out by purchase or sale of an offsetting
contract for the same delivery month prior to expiration of the contract.
The Fund may not enter into futures contracts or purchase related options
thereon if immediately thereafter the amount committed to margin plus the
amount paid for premiums for unexpired options on futures contracts exceeds
5% of the value of the Fund's total assets. The Fund may not purchase or sell
futures contracts or related options thereon if, immediately thereafter, more
than one-third of its net assets would be hedged.
11
<PAGE>
For a discussion of the risks of certain types of Municipal Obligations,
such as lease obligations, see above in "Investment Objective and Policies."
PORTFOLIO MANAGEMENT
The Fund is actively managed by the Investment Manager with a view to
achieving the Fund's investment objective. In determining which securities to
purchase for the Fund or hold in the Fund's portfolio, the Investment Manager
will rely on information from various sources, including research, analysis
and appraisals of brokers and dealers, including Dean Witter Reynolds Inc.
("DWR") and other broker-dealer affiliates of InterCapital, the views of
others regarding economic developments and interest rate trends, and the
Investment Manager's own analysis of factors it deems relevant. The Fund is
managed within InterCapital's Tax-Exempt Group, which manages forty
tax-exempt municipal funds and fund portfolios, with approximately $10.5
billion in assets as of June 30, 1997. James F. Willison, Senior Vice
President of InterCapital and Manager of InterCapital's Municipal Fixed
Income Group and Joseph R. Arcieri, Vice President of InterCapital and a
member of InterCapital's Municipal Fixed Income Group, have been the primary
portfolio co-managers of the Fund since its inception and February, 1997,
respectively, and have been portfolio managers at InterCapital for over five
years.
Securities are purchased and sold principally in response to the
Investment Manager's current evaluation of an issuer's ability to meet its
debt obligations in the future, and the Investment Manager's current
assessment of future changes in the levels of interest rates on tax-exempt
securities of varying maturities. Securities purchased by the Fund are,
generally, sold by dealers acting as principal for their own accounts.
Pursuant to an order of the Securities and Exchange Commission, the Fund may
effect principal transactions in certain money market instruments with DWR.
In addition, the Fund may incur brokerage commissions on transactions
conducted through DWR and other brokers and dealers that are affiliates of
InterCapital.
The portfolio trading engaged in by the Fund may result in its portfolio
turnover rate exceeding 100%. The Fund will incur underwriting discount costs
(on underwritten securities) commensurate with its portfolio turnover rate.
Additionally, see "Dividends, Distributions and Taxes" for a discussion of
the tax policy of the Fund. A more extensive discussion of the Fund's
portfolio brokerage policies is set forth in the Statement of Additional
Information.
Except as specifically noted, all investment objectives, policies and
practices discussed above are not fundamental policies of the Fund and, as
such, may be changed without shareholder approval.
INVESTMENT RESTRICTIONS
- -----------------------------------------------------------------------------
The investment restrictions listed below are among the restrictions which
have been adopted by the Fund as fundamental policies. Under the Investment
Company Act of 1940, as amended (the "Act"), a fundamental policy may not be
changed without the vote of a majority of the outstanding voting securities
of the Fund, as defined in the Act.
For purposes of the following restrictions: (a) an "issuer" of a security
is the entity whose assets and revenues are committed to the payment of
interest and principal on that particular security, provided that the
guarantee of a security will be considered a separate security, and provided
further that a guarantee of a security shall not be deemed to be a security
issued by the guarantor if the value of all securities issued or guaranteed
by the guarantor and owned by the Fund does not exceed 10% of the value of
the total assets of the Fund; (b) a "taxable security" is any security the
interest on which is subject to federal income tax; and (c) all percentage
limitations apply immediately after a purchase or initial investment, and any
subsequent change in any applicable percentage resulting from market
fluctuations or other changes in the Fund's total assets does not require
elimination of any security from the portfolio.
12
<PAGE>
The Fund may not:
1. Invest more than 5% of the value of its total assets in the securities
of any one issuer (other than obligations issued or guaranteed by the United
States Government, its agencies or instrumentalities).
2. Purchase more than 10% of all outstanding taxable debt securities or
any one issuer (other than obligations issued, or guaranteed as to principal
and interest, by the United States Government, its agencies or
instrumentalities).
3. Invest more than 25% of the value of its total assets in securities of
issuers in any one industry. This restriction does not apply to obligations
issued or guaranteed by the United States Government, its agencies or
instrumentalities or to cash equivalents (industrial development and
pollution control bonds are grouped into industries based upon the business
in which the issuers of such obligations are engaged).
4. Invest more than 5% of the value of its total assets in taxable
securities of issuers having a record, together with predecessors, of less
than three years of continuous operation. This restriction shall not apply to
any obligation of the United States Government, its agencies or
instrumentalities.
Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objective by investing all or substantially
all of its assets in another investment company having substantially the same
investment objective and policies as the Fund.
PURCHASE OF FUND SHARES
- -----------------------------------------------------------------------------
GENERAL
The Fund offers each class of its shares for sale to the public on a
continuous basis. Pursuant to a Distribution Agreement between the Fund and
Dean Witter Distributors Inc. (the "Distributor"), an affiliate of the
Investment Manager, shares of the Fund are distributed by the Distributor and
offered by DWR and other dealers who have entered into agreements with the
Distributor ("Selected Broker-Dealers"). The principal executive office of
the Distributor is located at Two World Trade Center, New York, New York
10048.
The Fund offers four classes of shares (each, a "Class"). Class A shares
are sold to investors with an initial sales charge that declines to zero for
larger purchases; however, Class A shares sold without an initial sales
charge are subject to a contingent deferred sales charge ("CDSC") of 1.0% if
redeemed within one year of purchase, except for certain specific
circumstances. Class B shares are sold without an initial sales charge but
are subject to a CDSC (scaled down from 5.0% to 1.0%) payable upon most
redemptions within six years after purchase. Class C shares are sold without
an initial sales charge but are subject to a CDSC of 1.0% on most redemptions
made within one year after purchase. Class D shares are sold without an
initial sales charge or CDSC and are available only to investors meeting an
initial investment minimum of $5 million, and to certain other limited
categories of investors. At the discretion of the Board of Trustees of the
Fund, Class A shares may be sold to categories of investors in addition to
those set forth in this prospectus at net asset value without a front-end
sales charge, and Class D shares may be sold to certain other categories of
investors, in each case as may be described in the then current prospectus of
the Fund. See "Alternative Purchase Arrange ments--Selecting a Particular
Class" for a discussion of factors to consider in selecting which Class of
shares to purchase.
The minimum initial purchase is $1,000 for each Class of shares, although
Class D shares are only available to persons investing $5 million or more and
to certain other limited categories of investors. For the purpose of meeting
the minimum $5 million initial investment for Class D shares, and subject to
the $1,000 minimum initial investment for each Class of the Fund, an
investor's existing holdings of Class A shares of the Fund and other Dean
Witter Funds that are multiple class funds
13
<PAGE>
("Dean Witter Multi-Class Funds") and shares of Dean Witter Funds sold with a
front-end sales charge ("FSC Funds") and concurrent investments in Class D
shares of the Fund and other Dean Witter Multi-Class Funds will be
aggregated. Subsequent purchases of $100 or more may be made by sending a
check, payable to Dean Witter Tax-Exempt Securities Trust, directly to Dean
Witter Trust Company (the "Transfer Agent") at P.O. Box 1040, Jersey City,
N.J. 07303 or by contacting an account executive of DWR or other Selected
Broker-Dealer. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A, Class B, Class C or Class D shares. If
no Class is specified, the Transfer Agent will not process the transaction
until the proper Class is identified. The minimum initial purchase in the
case of investments through EasyInvest (Service Mark), an automatic purchase
plan (see "Shareholder Services"), is $100, provided that the schedule of
automatic investments will result in investments totalling at least $1,000
within the first twelve months. In the case of purchases made pursuant to
systematic payroll deduction plans, the Fund, in its discretion, may accept
such purchases without regard to any minimum amounts which would otherwise be
required if the Fund has reason to believe that additional purchases will
increase the amount of the purchase of shares in all accounts under such
plans to at least $1,000. Certificates for shares purchased will not be
issued unless a request is made by the shareholder in writing to the Transfer
Agent.
Shares of the Fund are sold through the Distributor on a normal three
business day settlement basis; that is, payment generally is due on or before
the third business day (settlement date) after the order is placed with the
Distributor. Shares of the Fund purchased through the Distributor are
entitled to dividends beginning on the next business day following settlement
date. Since DWR and other Selected Broker-Dealers forward investors' funds on
settlement date, they will benefit from the temporary use of the funds where
payment is made prior thereto. Shares purchased through the Transfer Agent
are entitled to dividends beginning on the next business day following
receipt of an order. As noted above, orders placed directly with the Transfer
Agent must be accompanied by payment. Investors will be entitled to receive
capital gains distributions if their order is received by the close of
business on the day prior to the record date for such distributions. Sales
personnel of a Selected Broker-Dealer are compensated for selling shares of
the Fund by the Distributor or any of its affiliates and/or the Selected
Broker-Dealer. In addition, some sales personnel of the Selected
Broker-Dealer will receive various types of non-cash compensation as special
sales incentives, including trips, educational and/or business seminars and
merchandise. The Fund and/or the Distributor reserve the right to reject any
purchase order.
Analogous Dean Witter Funds. The Distributor and the Investment Manager
serve in the same capacities for Dean Witter National Municipal Trust, an
open-end investment company with investment objectives and policies similar
to those of the Fund. Shares of Dean Witter National Municipal Trust are
offered to the public at net asset value, with a CDSC assessed upon
redemptions within three years of purchase, as well as an annual Rule 12b-1
distribution fee. The Classes of the Fund and Dean Witter National Municipal
Trust have differing fees and expenses, which will affect performance.
Investors who would like to receive a prospectus for Dean Witter National
Municipal Trust should call the telephone numbers listed on the front cover
of this Prospectus, or may call their account executive for additional
information.
The Boards of Trustees of the Fund and of Dean Witter National Municipal
Trust have approved a reorganization plan whereby Dean Witter National
Municipal Trust would be merged into the Fund. This plan is subject to the
consent of the Dean Witter National Municipal Trust shareholders. If
approved, the Funds' assets would be combined and Dean Witter National
Municipal Trust shareholders would become shareholders of the Fund, receiving
Class B shares of the Fund equal to the value of their holdings in Dean
Witter National Municipal Trust. A proxy statement formally detailing the
proposal will be distributed to Dean Witter National Municipal Trust
shareholders in August 1997.
14
<PAGE>
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund offers several Classes of shares to investors designed to provide
them with the flexibility of selecting an investment best suited to their
needs. The general public is offered three Classes of shares: Class A shares,
Class B shares and Class C shares, which differ principally in terms of sales
charges and rate of expenses to which they are subject. A fourth Class of
shares, Class D shares, is offered only to limited categories of investors
(see "No Load Alternative--Class D Shares" below).
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund except that Class
A, Class B and Class C shares bear the expenses of the ongoing shareholder
service fees, Class B and Class C shares bear the expenses of the ongoing
distribution fees and Class A, Class B and Class C shares which are redeemed
subject to a CDSC bear the expense of the additional incremental distribution
costs resulting from the CDSC applicable to shares of those Classes. The
ongoing distribution fees that are imposed on Class A, Class B and Class C
shares will be imposed directly against those Classes and not against all
assets of the Fund and, accordingly, such charges against one Class will not
affect the net asset value of any other Class or have any impact on investors
choosing another sales charge option. See "Plan of Distribution" and
"Redemptions and Repurchases."
Set forth below is a summary of the differences between the Classes and
the factors an investor should consider when selecting a particular Class.
This summary is qualified in its entirety by detailed discussion of each
Class that follows this summary.
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.25%. The initial sales charge is reduced for certain
purchases. Investments of $1 million or more (and investments by certain
other limited categories of investors) are not subject to any sales charges
at the time of purchase but are subject to a CDSC of 1.0% on redemptions made
within one year after purchase, except for certain specific circumstances.
Class A shares are also subject to a 12b-1 fee of up to 0.25% of the average
daily net assets of the Class. See "Initial Sales Charge Alternative--Class A
Shares."
Class B Shares. Class B shares are offered at net asset value with no
initial sales charge but are subject to a CDSC (scaled down from 5.0% to
1.0%) if redeemed within six years of purchase. This CDSC may be waived for
certain redemptions. Class B shares are also subject to an annual 12b-1 fee
of 0.60% of the average daily net assets of Class B. The Class B shares'
distribution fee will cause that Class to have higher expenses and pay lower
dividends than Class A or Class D shares.
After approximately ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund, based on the relative net asset
values of the shares of the two Classes on the conversion date. In addition,
a certain portion of Class B shares that have been acquired through the
reinvestment of dividends and distributions will be converted at that time.
See "Contingent Deferred Sales Charge Alternative--Class B Shares."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge but are subject to a CDSC of 1.0% on redemptions made within one
year after purchase. This CDSC may be waived for certain redemptions. They
are subject to an annual 12b-1 fee of up to 0.70% of the average daily net
assets of the Class C shares. The Class C shares' distribution fee may cause
that Class to have higher expenses and pay lower dividends than Class A or
Class D shares. See "Level Load Alternative--Class C Shares."
Class D Shares. Class D shares are available only to limited categories of
investors (see "No Load Alternative--Class D Shares" below). Class D shares
are sold at net asset value with no initial sales charge or CDSC. They are
not subject to any 12b-1 fees. See "No Load Alternative--Class D Shares."
Selecting a Particular Class. In deciding which Class of Fund shares to
purchase, investors should consider the following factors, as well as any
other relevant facts and circumstances:
15
<PAGE>
The decision as to which Class of shares is more beneficial to an investor
depends on the amount and intended length of his or her investment. Investors
who prefer an initial sales charge alternative may elect to purchase Class A
shares. Investors qualifying for significantly reduced or, in the case of
purchases of $1 million or more, no initial sales charges may find Class A
shares particularly attractive because similar sales charge reductions are
not available with respect to Class B or Class C shares. Moreover, Class A
shares are subject to lower ongoing expenses than are Class B or Class C
shares over the term of the investment. As an alternative, Class B and Class
C shares are sold without any initial sales charge so the entire purchase
price is immediately invested in the Fund. Any investment return on these
additional investment amounts may partially or wholly offset the higher
annual expenses of these Classes. Because the Fund's future return cannot be
predicted, however, there can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, although Class C shares are subject to a significantly
lower CDSC upon redemptions, they do not, unlike Class B shares, convert into
Class A shares after approximately ten years, and, therefore, are subject to
an ongoing 12b-1 fee of 0.70% (rather than the 0.25% fee applicable to Class
A shares) for an indefinite period of time. Thus, Class B shares may be more
attractive than Class C shares to investors with longer term investment
outlooks. Other investors, however, may elect to purchase Class C shares if,
for example, they determine that they do not wish to be subject to a
front-end sales charge and they are uncertain as to the length of time they
intend to hold their shares.
For the purpose of meeting the $5 million minimum investment amount for
Class D shares, holdings of Class A shares in all Dean Witter Multi-Class
Funds, shares of FSC Funds and shares of Dean Witter Funds for which such
shares have been exchanged will be included together with the current
investment amount.
Sales personnel may receive different compensation for selling each Class
of shares. Investors should understand that the purpose of a CDSC is the same
as that of the initial sales charge in that the sales charges applicable to
each Class provide for the financing of the distribution of shares of that
Class.
Set forth below is a chart comparing the sales charge, 12b-1 fees and
conversion options applicable to each Class of shares:
<TABLE>
<CAPTION>
Conversion
Class Sales Charge 12b-1 Fee Feature
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
A Maximum 4.25% 0.25% No
initial sales charge
reduced for
purchases of
$25,000 and over;
shares sold without
an initial sales
charge generally
subject to a 1.0%
CDSC during first
year.
- -------------------------------------------------------------------------------
B Maximum 5.0% 0.60% B shares convert
CDSC during the first to A shares
year decreasing automatically
to 0 after six years after
approximately
ten years
- -------------------------------------------------------------------------------
C 1.0% CDSC during 0.70% No
first year
- -------------------------------------------------------------------------------
D None None No
- -------------------------------------------------------------------------------
</TABLE>
See "Purchase of Fund Shares" and "The Fund and its Management" for a
complete description of the sales charges and service and distribution fees
for each Class of shares and "Determination of Net Asset Value," "Dividends,
Distributions and Taxes" and "Shareholder Services--Exchange Privilege" for
other differences between the Classes of shares.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
Class A shares are sold at net asset value plus an initial sales charge.
In some cases, reduced sales charges may be available, as described below.
Investments of $1 million or more (and investments by certain other limited
categories of investors) are not subject to any sales charges at the time
16
<PAGE>
of purchase but are subject to a CDSC of 1.0% on redemptions made within one
year after purchase (calculated from the last day of the month in which the
shares were purchased), except for certain specific circumstances. The CDSC
will be assessed on an amount equal to the lesser of the current market value
or the cost of the shares being redeemed. The CDSC will not be imposed (i) in
the circumstances set forth below in the section "Contingent Deferred Sales
Charge Alternative--Class B Shares--CDSC Waivers," except that the references
to six years in the first paragraph of that section shall mean one year in
the case of Class A shares, and (ii) in the circumstances identified in the
section "Additional Net Asset Value Purchase Options" below. Class A shares
are also subject to an annual 12b-1 fee of up to 0.25% of the average daily
net assets of the Class.
The offering price of Class A shares will be the net asset value per share
next determined following receipt of an order (see "Determination of Net
Asset Value" below), plus a sales charge (expressed as a percentage of the
offering price) on a single transaction as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE
------------
PERCENTAGE OF APPROXIMATE
AMOUNT OF SINGLE PUBLIC OFFERING PERCENTAGE OF
TRANSACTION PRICE AMOUNT INVESTED
----------- ----- ---------------
<S> <C> <C>
Less than $25,000 .. 4.25% 4.44%
$25,000 but less
than $50,000 ...... 4.00% 4.17%
$50,000 but less
than $100,000 ..... 3.50% 3.63%
$100,000 but less
than $250,000 ..... 2.75% 2.83%
$250,000 but less
than $1 million .. 1.75% 1.78%
$1 million and over 0 0
</TABLE>
Upon notice to all Selected Broker-Dealers, the Distributor may reallow up
to the full applicable sales charge as shown in the above schedule during
periods specified in such notice. During periods when 90% or more of the
sales charge is reallowed, such Selected Broker-Dealers may be deemed to be
underwriters as that term is defined in the Securities Act of 1933.
The above schedule of sales charges is applicable to purchases in a single
transaction by, among others: (a) an individual; (b) an individual, his or
her spouse and their children under the age of 21 purchasing shares for his,
her or their own accounts; (c) a trustee or other fiduciary purchasing shares
for a single trust estate or a single fiduciary account; (d) a pension,
profit-sharing or other employee benefit plan qualified or non-qualified
under Section 401 of the Internal Revenue Code; (e) tax-exempt organizations
enumerated in Section 501(c)(3) or (13) of the Internal Revenue Code; (f)
employee benefit plans qualified under Section 401 of the Internal Revenue
Code of a single employer or of employers who are "affiliated persons" of
each other within the meaning of Section 2(a)(3)(c) of the Act; and for
investments in Individual Retirement Accounts of employees of a single
employer through Systematic Payroll Deduction plans; or (g) any other
organized group of persons, whether incorporated or not, provided the
organization has been in existence for at least six months and has some
purpose other than the purchase of redeemable securities of a registered
investment company at a discount.
Combined Purchase Privilege. Investors may have the benefit of reduced
sales charges in accordance with the above schedule by combining purchases of
Class A shares of the Fund in single transactions with the purchase of Class
A shares of other Dean Witter Multi-Class Funds and shares of FSC Funds. The
sales charge payable on the purchase of the Class A shares of the Fund, the
Class A shares of the other Dean Witter Multi-Class Funds and the shares of
the FSC Funds will be at their respective rates applicable to the total
amount of the combined concurrent purchases of such shares.
Right of Accumulation. The above persons and entities may benefit from a
reduction of the sales charges in accordance with the above schedule if the
cumulative net asset value of Class A shares purchased in a single
transaction, together with shares of the Fund and other Dean Witter Funds
previously purchased at a price including a front-end sales charge (including
shares of the Fund and other Dean Witter Funds acquired in exchange for those
shares, and including in each case shares
17
<PAGE>
acquired through reinvestment of dividends and distributions), which are held
at the time of such transaction, amounts to $25,000 or more. If such investor
has a cumulative net asset value of shares of FSC Funds and Class A and Class
D shares equal to at least $5 million, such investor is eligible to purchase
Class D shares subject to the $1,000 minimum initial investment requirement
of that Class of the Fund. See "No Load Alternative--Class D Shares" below.
The Distributor must be notified by DWR or a Selected Broker-Dealer or the
shareholder at the time a purchase order is placed that the purchase
qualifies for the reduced charge under the Right of Accumulation. Similar
notification must be made in writing by the dealer or shareholder when such
an order is placed by mail. The reduced sales charge will not be granted if:
(a) such notification is not furnished at the time of the order; or (b) a
review of the records of the Selected Broker-Dealer or the Transfer Agent
fails to confirm the investor's represented holdings.
Letter of Intent. The foregoing schedule of reduced sales charges will
also be available to investors who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of Class A shares
of the Fund from DWR or other Selected Broker-Dealers. The cost of Class A
shares of the Fund or shares of other Dean Witter Funds which were previously
purchased at a price including a front-end sales charge during the 90-day
period prior to the date of receipt by the Distributor of the Letter of
Intent, or of Class A shares of the Fund or shares of other Dean Witter Funds
acquired in exchange for shares of such funds purchased during such period at
a price including a front-end sales charge, which are still owned by the
shareholder, may also be included in determining the applicable reduction.
Additional Net Asset Value Purchase Options. In addition to investments of
$1 million or more, Class A shares also may be purchased at net asset value
by the following:
(1) trusts for which Dean Witter Trust Company ("DWTC") or Dean Witter
Trust FSB ("DWTFSB") (each of which is an affiliate of the Investment
Manager) provides discretionary trustee services;
(2) persons participating in a fee-based program approved by the
Distributor, pursuant to which such persons pay an asset based fee for
services in the nature of investment advisory or administrative services
(such investments are subject to all of the terms and conditions of such
programs, which may include termination fees and restrictions on
transferability of Fund shares);
(3) investors who are clients of a Dean Witter account executive who
joined Dean Witter from another investment firm within six months prior to
the date of purchase of Fund shares by such investors, if the shares are
being purchased with the proceeds from a redemption of shares of an open-end
proprietary mutual fund of the account executive's previous firm which
imposed either a front-end or deferred sales charge, provided such purchase
was made within sixty days after the redemption and the proceeds of the
redemption had been maintained in the interim in cash or a money market fund;
and
(4) other categories of investors, at the discretion of the Board, as
disclosed in the then current prospectus of the Fund.
No CDSC will be imposed on redemptions of shares purchased pursuant to
paragraphs (1), (2) or (3), above.
For further information concerning purchases of the Fund's shares, contact
DWR or another Selected Broker-Dealer or consult the Statement of Additional
Information.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Class B shares are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase
payment may be immediately invested in the Fund. A CDSC, however, will be
imposed on most Class B shares redeemed within six years after purchase. The
CDSC will be imposed on any redemption of shares
18
<PAGE>
if after such redemption the aggregate current value of a Class B account
with the Fund falls below the aggregate amount of the investor's purchase
payments for Class B shares made during the six years preceding the
redemption. In addition, Class B shares are subject to an annual 12b-1 fee of
0.60% of the average daily net assets of Class B.
Class B shares of the Fund which are held for six years or more after
purchase (calculated from the last day of the month in which the shares were
purchased) will not be subject to any CDSC upon redemption. Shares redeemed
earlier than six years after purchase may, however, be subject to a CDSC
which will be a percentage of the dollar amount of shares redeemed and will
be assessed on an amount equal to the lesser of the current market value or
the cost of the shares being redeemed. The size of this percentage will
depend upon how long the shares have been held, as set forth in the following
table:
<TABLE>
<CAPTION>
YEAR SINCE
PURCHASE CDSC AS A PERCENTAGE
PAYMENT MADE OF AMOUNT REDEEMED
------------ ------------------
<S> <C>
First...................... 5.0%
Second..................... 4.0%
Third...................... 3.0%
Fourth..................... 2.0%
Fifth...................... 2.0%
Sixth...................... 1.0%
Seventh and thereafter .... None
</TABLE>
CDSC Waivers. A CDSC will not be imposed on: (i) any amount which
represents an increase in value of shares purchased within the six years
preceding the redemption; (ii) the current net asset value of shares
purchased more than six years prior to the redemption; and (iii) the current
net asset value of shares purchased through reinvestment of dividends or
distributions and/or shares acquired in exchange for shares of FSC Funds or
of other Dean Witter Funds acquired in exchange for such shares. Moreover, in
determining whether a CDSC is applicable it will be assumed that amounts
described in (i), (ii) and (iii) above (in that order) are redeemed first.
In addition, the CDSC, if otherwise applicable, will be waived in the case
of:
(1) redemptions of shares held at the time a shareholder dies or becomes
disabled, only if the shares are: (A) registered either in the name of an
individual shareholder (not a trust), or in the names of such shareholder and
his or her spouse as joint tenants with right of survivorship; or (B) held
in a qualified corporate or self-employed retirement plan, Individual
Retirement Account ("IRA") or Custodial Account under Section 403(b)(7) of
the Internal Revenue Code ("403(b) Custodial Account"), provided in either
case that the redemption is requested within one year of the death or initial
determination of disability; and
(2) redemptions in connection with the following retirement plan
distributions: (A) lump-sum or other distributions from a qualified
corporate or self-employed retirement plan following retirement (or, in the
case of a "key employee" of a "top heavy" plan, following attainment of age
59 1/2); (B) distributions from an IRA or 403(b) Custodial Account following
attainment of age 59 1/2; or (C) a tax-free return of an excess contribution
to an IRA.
With reference to (1) above, for the purpose of determining disability,
the Distributor utilizes the definition of disability contained in Section
72(m)(7) of the Internal Revenue Code, which relates to the inability to
engage in gainful employment. With reference to (2) above, the term
"distribution" does not encompass a direct transfer of IRA, 403(b) Custodial
Account or retirement plan assets to a successor custodian or trustee. All
waivers will be granted only following receipt by the Distributor of
confirmation of the shareholder's entitlement.
Conversion to Class A Shares. Class B shares will convert automatically
to Class A shares, based on the relative net asset values of the shares of
the two Classes on the conversion date, which will be approximately ten (10)
years after the date of the original purchase. The ten year period is
calculated from the last day of the month in which the shares were purchased
or, in the case of Class B shares acquired through an exchange or a series of
exchanges, from the last day of the month in which the original Class B
shares were purchased. The con-
19
<PAGE>
version of shares will take place in the month following the tenth
anniversary of the purchase. There will also be converted at that time such
proportion of Class B shares acquired through automatic reinvestment of
dividends and distributions owned by the shareholder as the total number of
his or her Class B shares converting at the time bears to the total number of
outstanding Class B shares purchased and owned by the shareholder. In the
case of Class B shares previously exchanged for shares of an "Exchange Fund"
(see "Shareholder Services--Exchange Privilege"), the period of time the
shares were held in the Exchange Fund (calculated from the last day of the
month in which the Exchange Fund shares were acquired) is excluded from the
holding period for conversion. If those shares are subsequently re-exchanged
for Class B shares of a Dean Witter Multi-Class Fund, the holding period
resumes on the last day of the month in which Class B shares are reacquired.
If a shareholder has received share certificates for Class B shares, such
certificates must be delivered to the Transfer Agent at least one week prior
to the date for conversion. Class B shares evidenced by share certificates
that are not received by the Transfer Agent at least one week prior to any
conversion date will be converted into Class A shares on the next scheduled
conversion date after such certificates are received.
Effectiveness of the conversion feature is subject to the continuing
availability of a ruling of the Internal Revenue Service or an opinion of
counsel that (i) the conversion of shares does not constitute a taxable event
under the Internal Revenue Code, (ii) Class A shares received on conversion
will have a basis equal to the shareholder's basis in the converted Class B
shares immediately prior to the conversion, and (iii) Class A shares received
on conversion will have a holding period that includes the holding period of
the converted Class B shares. The conversion feature may be suspended if the
ruling or opinion is no longer available. In such event, Class B shares would
continue to be subject to Class B 12b-1 fees.
LEVEL LOAD ALTERNATIVE--CLASS C SHARES
Class C shares are sold at net asset value next determined without an
initial sales charge but are subject to a CDSC of 1.0% on most redemptions
made within one year after purchase (calculated from the last day of the
month in which the shares were purchased). The CDSC will be assessed on an
amount equal to the lesser of the current market value or the cost of the
shares being redeemed. The CDSC will not be imposed in the circumstances set
forth above in the section "Contingent Deferred Sales Charge
Alternative--Class B Shares--CDSC Waivers," except that the references to six
years in the first paragraph of that section shall mean one year in the case
of Class C shares. Class C shares are subject to an annual 12b-1 fee of up to
0.70% of the average daily net assets of the Class. Unlike Class B shares,
Class C shares have no conversion feature and, accordingly, an investor that
purchases Class C shares will be subject to 12b-1 fees applicable to Class C
shares for an indefinite period subject to annual approval by the Fund's
Board of Trustees and regulatory limitations.
NO LOAD ALTERNATIVE--CLASS D SHARES
Class D shares are offered without any sales charge on purchase or
redemption and without any 12b-1 fee. Class D shares are offered only to
investors meeting an initial investment minimum of $5 million and the
following categories of investors: (i) investors participating in the
InterCapital mutual fund asset allocation program pursuant to which such
persons pay an asset based fee; (ii) persons participating in a fee-based
program approved by the Distributor, pursuant to which such persons pay an
asset based fee for services in the nature of investment advisory or
administrative services (subject to all of the terms and conditions of such
programs, which may include termination fees and restrictions on
transferability of Fund shares); (iii) certain Unit Investment Trusts
sponsored by DWR; (iv) certain other open-end investment companies whose
shares are distributed by the Distributor; and (v) other categories of
investors, at the discretion of the Board, as disclosed in the then current
prospectus of the Fund. All shares of the Fund held prior to
20
<PAGE>
July 28, 1997 have been designated Class D shares. Additional investments in
Class D shares by shareholders holding such shares may only be made if those
shareholders are otherwise eligible to purchase Class D shares. However,
shareholders holding such shares will receive the benefit of the value of
such shares towards reduced sales charges on purchases of Class A shares
pursuant to the Fund's "Right of Accumulation" (see "Initial Sales Charge
Alternative--Class A Shares--Right of Accumulation"). Investors who require a
$5 million minimum initial investment to qualify to purchase Class D shares
may satisfy that requirement by investing that amount in a single transaction
in Class D shares of the Fund and other Dean Witter Multi-Class Funds,
subject to the $1,000 minimum initial investment required for that Class of
the Fund. In addition, for the purpose of meeting the $5 million minimum
investment amount, holdings of Class A shares in all Dean Witter Multi-Class
Funds, shares of FSC Funds and shares of Dean Witter Funds for which such
shares have been exchanged will be included together with the current
investment amount. If a shareholder redeems Class A shares and purchases
Class D shares, such redemption may be a taxable event.
PLAN OF DISTRIBUTION
Effective July 28, 1997, the Fund has adopted a Plan of Distribution
pursuant to Rule 12b-1 under the Act with respect to the distribution of
Class A, Class B and Class C shares of the Fund. In the case of Class A and
Class C shares, the Plan provides that the Fund will reimburse the
Distributor and others for the expenses of certain activities and services
incurred by them specifically on behalf of those shares. Reimbursements for
these expenses will be made in monthly payments by the Fund to the
Distributor, which will in no event exceed amounts equal to payments at the
annual rates of 0.25% and 0.70% of the average daily net assets of Class A
and Class C, respectively. In the case of Class B shares, the Plan provides
that the Fund will pay the Distributor a fee, which is accrued daily and paid
monthly, at the annual rate of 0.60% of the average daily net assets of Class
B. The fee is treated by the Fund as an expense in the year it is accrued. In
the case of Class A shares, the entire amount of the fee currently represents
a service fee within the meaning of the NASD guidelines. In the case of Class
B and Class C shares, a portion of the fee payable pursuant to the Plan,
equal to 0.15% and 0.25% of the average daily net assets of each of these
Classes, respectively, is currently characterized as a service fee. A service
fee is a payment made for personal service and/or the maintenance of
shareholder accounts.
Additional amounts paid under the Plan in the case of Class B and Class C
shares are paid to the Distributor for services provided and the expenses
borne by the Distributor and others in the distribution of the shares of
those Classes, including the payment of commissions for sales of the shares
of those Classes and incentive compensation to and expenses of DWR's account
executives and others who engage in or support distribution of shares or who
service shareholder accounts, including overhead and telephone expenses;
printing and distribution of prospectuses and reports used in connection with
the offering of the Fund's shares to other than current shareholders; and
preparation, printing and distribution of sales literature and advertising
materials. In addition, the Distributor may utilize fees paid pursuant to the
Plan in the case of Class B shares to compensate DWR and other Selected
Broker-Dealers for their opportunity costs in advancing such amounts, which
compensation would be in the form of a carrying charge on any unreimbursed
expenses.
In the case of Class B shares, at any given time, the expenses in
distributing Class B shares of the Fund may be in excess of the total of (i)
the payments made by the Fund pursuant to the Plan, and (ii) the proceeds of
CDSCs paid by investors upon the redemption of Class B shares. For example,
if $1 million in expenses in distributing Class B shares of the Fund had been
incurred and $750,000 had been received as described in (i) and (ii) above,
the excess expense would amount to $250,000. Because there is no requirement
under the Plan that the Distributor be reimbursed for all
21
<PAGE>
distribution expenses or any requirement that the Plan be continued from year
to year, such excess amount does not constitute a liability of the Fund.
Although there is no legal obligation for the Fund to pay expenses incurred
in excess of payments made to the Distributor under the Plan, and the
proceeds of CDSCs paid by investors upon redemption of shares, if for any
reason the Plan is terminated the Trustees will consider at that time the
manner in which to treat such expenses. Any cumulative expenses incurred, but
not yet recovered through distribution fees or CDSCs, may or may not be
recovered through future distribution fees or CDSCs.
In the case of Class A and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.70% of the average
daily net assets of Class A or Class C, respectively, will not be reimbursed
by the Fund through payments in any subsequent year, except that expenses
representing a gross sales commission credited to account executives at the
time of sale may be reimbursed in the subsequent calendar year. No interest
or other financing charges will be incurred on any Class A or Class C
distribution expenses incurred by the Distributor under the Plan or on any
unreimbursed expenses due to the Distributor pursuant to the Plan.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined once daily at 4:00 p.m., New
York time, on each day that the New York Stock Exchange is open (or, on days
when the New York Stock Exchange closes prior to 4:00 p.m., at such earlier
time), by taking the net assets of the Fund, dividing by the number of shares
outstanding and adjusting to the nearest cent. The assets belonging to the
Class A, Class B, Class C and Class D shares will be invested together in a
single portfolio. The net asset value of each Class, however, will be
determined separately by subtracting each Class's accrued expenses and
liabilities. The net asset value per share will not be determined on Good
Friday and on such other federal and non-federal holidays as are observed by
the New York Stock Exchange.
Portfolio securities (other than short-term taxable debt securities,
futures and options) are valued for the Fund by an outside independent
pricing service approved by the Fund's Trustees. The service may utilize a
computerized grid matrix of tax-exempt securities and evaluations by its
staff in determining what it believes is the fair value of the Fund's
portfolio securities. The Board believes that timely and reliable market
quotations are generally not readily available to the Fund for purposes of
valuing tax-exempt securities and that the valuations supplied by the pricing
services are more likely to approximate the fair value of such securities.
Short-term taxable debt securities with remaining maturities of sixty days
or less at time of purchase are valued at amortized cost, unless the Board
determines such does not reflect the securities' market value, in which case
these securities will be valued at their fair value as determined by the
Board of Trustees. Other taxable short-term debt securities with maturities
of more than sixty days will be valued on a mark to market basis until such
time as they reach a maturity of sixty days, whereupon they will be valued at
amortized cost using their value on the 61st day unless the Trustees
determine such does not reflect the securities' market value, in which case
these securities will be valued at their fair market value as determined by
the Board of Trustees. Listed options on debt securities are valued at the
latest sale price on the exchange on which they are listed unless no sales of
such options have taken place that day, in which case, they will be valued at
the mean between their closing bid and asked prices. Unlisted options on debt
securities are valued at the mean between their latest bid and asked price.
Futures are valued at the latest sale price on the commodities exchange on
which they trade unless the Board of Trustees determines that such price does
not reflect their fair value, in which case they will be valued at their fair
market value as determined by the Board of Trustees. All other securities and
other assets are valued at their fair value as determined in good faith under
procedures established by and under the supervision of the Board of Trustees.
22
<PAGE>
SHAREHOLDER SERVICES
- -----------------------------------------------------------------------------
Automatic Investment of Dividends and Distri-butions. All income dividends
and capital gains distributions are automatically paid in full and fractional
shares of the applicable Class of the Fund (or, if specified by the
shareholder, in shares of any other open-end Dean Witter Fund), unless the
shareholder requests that they be paid in cash. Shares so acquired are
acquired at net asset value and are not subject to the imposition of a
front-end sales charge or a CDSC (see "Redemptions and Repurchases"). Such
dividends and distributions will be paid, at the net asset value per share
(without sales charge), in shares of the applicable Class of the Fund (or in
cash if the shareholder so requests) on the monthly payment date, which will
be no later than the last business day of the month for which the dividend or
distribution is payable. Processing of dividend checks begins immediately
following the monthly payment date. Shareholders who have requested to
receive dividends in cash will normally receive their monthly dividend checks
during the first ten days of the following month.
Investment of Dividends and Distributions Received in Cash. Any
shareholder who receives a cash payment representing a dividend or capital
gains distribution may invest such dividend or distribution in shares of the
applicable Class at the net asset value per share next determined after
receipt by the Transfer Agent, by returning the check or the proceeds to the
Transfer Agent within thirty days after the payment date. Shares so acquired
are acquired at net asset value and are not subject to the imposition of a
front-end sales charge or a CDSC (see "Redemptions and Repurchases").
EasyInvest (Service Mark). Shareholders may subscribe to EasyInvest, an
automatic purchase plan which pro-vides for any amount from $100 to $5,000 to
be transferred automatically from a checking or savings account or following
redemption of shares of a Dean Witter money market fund, on a semi-monthly,
monthly or quarterly basis, to the Transfer Agent for investment in shares of
the Fund (see "Purchase of Fund Shares" and "Redemptions and
Repurchases--Involuntary Redemption").
Systematic Withdrawal Plan. A systematic withdrawal plan (the "Withdrawal
Plan") is available for shareholders who own or purchase shares of the Fund
having a minimum value of $10,000 based upon the then current net asset
value. The plan provides for monthly or quarterly (March, June, September,
December) checks in any dollar amount, not less than $25, or in any whole
percentage of the account balance, on an annualized basis. Any applicable
CDSC will be imposed on shares redeemed under the Withdrawal Plan (see
"Purchase of Fund Shares"). Therefore, any shareholder participating in the
Withdrawal Plan will have sufficient shares redeemed from his or her account
so that the proceeds (net of any applicable CDSC) to the shareholder will be
the designated monthly or quarterly amount. Withdrawal plan payments should
not be considered as dividends, yields or income. If periodic withdrawal plan
payments continuously exceed net investment income and net capital gains, the
shareholder's original investment will be correspondingly reduced and
ultimately exhausted. Each withdrawal constitutes a redemption of shares and
any gain or loss realized must be recognized for federal income tax purposes.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about any of
the above services.
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class of any
other Dean Witter Multi-Class Fund without the imposition of any exchange
fee. Shares may also be exchanged for shares of the following funds: Dean
Witter Short-Term U.S. Treasury Trust, Dean Witter Limited Term Municipal
Trust, Dean Witter Short-Term Bond Fund, Dean Witter Intermediate Term U.S.
Treasury Trust and five Dean Witter funds which are money market funds (the
"Exchange Funds"). Class A shares may also be exchanged for shares of Dean
Witter Multi-State Municipal Series Trust and Dean Witter
23
<PAGE>
Hawaii Municipal Trust, which are Dean Witter Funds sold with a front-end
sales charge ("FSC Funds"). Class B shares may also be exchanged for shares
of Dean Witter Global Short-Term Income Fund Inc., Dean Witter High Income
Securities and Dean Witter National Municipal Trust, which are Dean Witter
Funds offered with a CDSC ("CDSC Funds"). Exchanges may be made after the
shares of the Fund acquired by purchase (not by exchange or dividend
reinvestment) have been held for thirty days. There is no holding period for
exchanges of shares acquired by exchange or dividend reinvestment.
An exchange to another Dean Witter Multi-Class Fund, any FSC Fund, any
CDSC Fund or any Exchange Fund that is not a money market fund is on the
basis of the next calculated net asset value per share of each fund after the
exchange order is received. When exchanging into a money market fund from the
Fund, shares of the Fund are redeemed out of the Fund at their next
calculated net asset value and the proceeds of the redemption are used to
purchase shares of the money market fund at their net asset value determined
the following business day. Subsequent exchanges between any of the money
market funds and any of the Dean Witter Multi-Class Funds, FSC Funds or CDSC
Funds or any Exchange Fund that is not a money market fund can be effected on
the same basis.
No CDSC is imposed at the time of any exchange of shares, although any
applicable CDSC will be imposed upon ultimate redemption. During the period
of time the shareholder remains in an Exchange Fund (calculated from the last
day of the month in which the Exchange Fund shares were acquired), the
holding period (for the purpose of determining the rate of the CDSC) is
frozen. If those shares are subsequently re-exchanged for shares of a Dean
Witter Multi-Class Fund or shares of a CDSC Fund, the holding period
previously frozen when the first exchange was made resumes on the last day of
the month in which shares of a Dean Witter Multi-Class Fund or shares of a
CDSC Fund are reacquired. Thus, the CDSC is based upon the time (calculated
as described above) the shareholder was invested in shares of a Dean Witter
Multi-Class Fund or in shares of a CDSC Fund (see "Purchase of Fund Shares").
In the case of exchanges of Class A shares which are subject to a CDSC, the
holding period also includes the time (calculated as described above) the
shareholder was invested in shares of a FSC Fund. However, in the case of
shares exchanged into an Exchange Fund on or after April 23, 1990, upon a
redemption of shares which results in a CDSC being imposed, a credit (not to
exceed the amount of the CDSC) will be given in an amount equal to the
Exchange Fund 12b-1 distribution fees incurred on or after that date which
are attributable to those shares. (Exchange Fund 12b-1 distribution fees are
described in the prospectuses for those funds.) Class B shares of the Fund
acquired in exchange for Class B shares of another Dean Witter Multi-Class
Fund or shares of a CDSC Fund having a different CDSC schedule than that of
this Fund will be subject to the higher CDSC schedule, even if such shares
are subsequently re-exchanged for shares of the fund with the lower CDSC
schedule.
Additional Information Regarding Exchanges. Purchases and exchanges should
be made for investment purposes only. A pattern of frequent exchanges may be
deemed by the Investment Manager to be abusive and contrary to the best
interests of the Fund's other shareholders and, at the Investment Manager's
discretion, may be limited by the Fund's refusal to accept additional
purchases and/or exchanges from the investor. Although the Fund does not have
any specific definition of what constitutes a pattern of frequent exchanges,
and will consider all relevant factors in determining whether a particular
situation is abusive and contrary to the best interests of the Fund and its
other shareholders, investors shoud be aware that the Fund and each of the
other Dean Witter Funds may in their discretion limit or otherwise restrict
the number of times this Exchange Privilege may be exercised by any investor.
Any such restriction will be made by the Fund on a prospective basis only,
upon notice to the shareholder not later than ten days following such
shareholder's most recent exchange. Also, the
24
<PAGE>
Exchange Privilege may be terminated or revised at any time by the Fund
and/or any of such Dean Witter Funds for which shares of the Fund may be
exchanged, upon such notice as may be required by applicable regulatory
agencies. Shareholders maintaining margin accounts with DWR or another
Selected Broker-Dealer are referred to their account executive regarding
restrictions on exchange of shares of the Fund pledged in their margin
account.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain one and read it carefully before
investing. Exchanges are subject to the minimum investment requirement of
each Class of shares and other conditions imposed by each fund. In the case
of a shareholder holding a share certificate or certificates, no exchanges
may be made until all applicable share certificates have been received by the
Transfer Agent and deposited in the shareholder's account. An exchange will
be treated for federal income tax purposes as a redemption or repurchase of
shares, on which the shareholder may realize a capital gain or loss. However,
the ability to deduct capital losses on an exchange is limited in situations
where there is an exchange of shares within ninety days after the shares are
purchased. There are also limits on the deduction of losses after the payment
of exempt-interest dividends for shares held for less than six months (see
"Dividends, Distributions and Taxes"). The Exchange Privilege is only
available in states where an exchange may legally be made.
If DWR or another Selected Broker-Dealer is the current dealer of record
and its account numbers are part of the account information, shareholders may
initiate an exchange of shares of the Fund for shares of any of the Dean
Witter Funds (for which the Exchange Privilege is available) pursuant to this
Exchange Privilege by contacting their DWR or other Selected Broker-Dealer
account executive (no Exchange Privilege Authorization Form is required).
Other shareholders (and those shareholders who are clients of DWR or another
Selected Broker-Dealer but who wish to make exchanges directly by writing or
telephoning the Transfer Agent) must complete and forward to the Transfer
Agent an Exchange Privilege Authorization form, copies of which may be
obtained from the Transfer Agent, to initiate an exchange. If the
Authorization Form is used, exchanges may be made by contacting the Transfer
Agent at (800) 869-NEWS (toll-free). The Fund will employ reasonable
procedures to confirm that exchange instructions communicated over the
telephone are genuine. Such procedures may include requiring various forms of
personal identification such as name, mailing address, social security or
other tax identification number and DWR or other Selected Broker-Dealer
account number (if any). Telephone instructions may also be recorded. If such
procedures are not employed, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions.
Telephone exchange instructions will be accepted if received by the
Transfer Agent between 9:00 a.m. and 4:00 p.m. New York time, on any day the
New York Stock Exchange is open. Any shareholder wishing to make an exchange
who has previously filed an Exchange Privilege Authorization Form and who is
unable to reach the Fund by telephone should contact his or her DWR or other
Selected Broker-Dealer account executive, if appropriate, or make a written
exchange request (see "Redemptions and Repurchases"). Shareholders are
advised that during periods of drastic economic or market changes, it is
possible that the telephone exchange procedures may be difficult to
implement, although this has not been the case with the Dean Witter Funds in
the past.
For further information regarding the Exchange Privilege, shareholders
should contact their DWR or other Selected Broker-Dealer account executive or
the Transfer Agent.
25
<PAGE>
REDEMPTIONS AND REPURCHASES
- -----------------------------------------------------------------------------
Redemption. Shares of each Class of the Fund can be redeemed for cash at
any time at the net asset value per share next determined less the amount of
any applicable CDSC in the case of Class A, Class B or Class C shares (see
"Purchase of Fund Shares"). If shares are held in a shareholder's account
without a share certificate, a written request for redemption to the Fund's
Transfer Agent at P.O. Box 983, Jersey City, NJ 07303 is required. If
certificates are held by the shareholder, the shares may be redeemed by
surrendering the certificates with a written request for redemption, along
with any additional information required by the Transfer Agent.
Repurchase. DWR and other Selected Broker-Dealers are authorized to
repurchase shares represented by a share certificate which is delivered to
any of their offices. Shares held in a shareholder's account without a share
certificate may also be repurchased by DWR and other Selected Broker-Dealers
upon the telephonic request of the shareholder. The repurchase price is the
net asset value next determined (see "Purchase of Fund Shares") after such
repurchase order is received by DWR or other Selected Broker-Dealer reduced
by any applicable CDSC.
The CDSC, if any, will be the only fee imposed by the Fund, the
Distributor, DWR or other Selected Broker-Dealers. The offer by DWR and other
Selected Broker-Dealers to repurchase shares from shareholders may be
suspended by them at any time. In that event, shareholders may redeem their
shares through the Fund's Transfer Agent as set forth above under
"Redemption."
Payment for Shares Redeemed or Repurchased. Payment for shares presented
for repurchase or redemption will be made by check within seven days after
receipt by the Transfer Agent of the certificate and/or written request in
good order. Such payment may be postponed or the right of redemption
suspended at times when normal trading is not taking place on the New York
Stock Exchange. If the shares to be redeemed have recently been purchased by
check, payment of the redemption proceeds may be delayed for the minimum time
needed to verify that the check used for investment has been honored (not
more than fifteen days from the time of receipt of the check by the Transfer
Agent). Shareholders maintaining margin accounts with DWR or another Selected
Broker-Dealer are referred to their account executive regarding restrictions
on redemption of shares of the Fund pledged in the margin account.
Reinstatement Privilege. A shareholder who has had his or her share
redeemed or repurchased and has not previously exercised this reinstatement
privilege may, within 35 days after the date of the redemption or repurchase,
reinstate any portion or all of the proceeds of such redemption or repurchase
in shares of the Fund in the same Class from which such shares were redeemed
or repurchased, at their net asset value next determined after a
reinstatement request, together with the proceeds, is received by the
Transfer Agent and receive a pro rata credit for any CDSC paid in connection
with such redemption or repurchase.
Involuntary Redemption. The Fund reserves the right, on sixty days'
notice, to redeem at net asset value the shares of any shareholder whose
shares due to redemptions by the shareholder have a value of less than $100,
or such lesser amount as may be fixed by the Board of Trustees or, in the
case of an account opened through EasyInvest, if after twelve months the
shareholder has invested less than $1,000 in the account. However, before the
Fund redeems such shares and sends the proceeds to the shareholder, it will
notify the shareholder that the value of the shares is less than the
applicable amount and allow the shareholder sixty days to make an additional
investment in an amount which will increase the value of the account to at
least the applicable amount before the redemption is processed. No CDSC will
be imposed on any involuntary redemption.
26
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
- -----------------------------------------------------------------------------
Dividends and Distributions. The Fund declares dividends separately for
each Class from net investment income on each day the New York Stock Exchange
is open for business to shareholders of record as of the close of business
the preceding business day. The amount of such dividends may fluctuate from
day to day. Such dividends are paid monthly. The Fund intends to distribute
all of its net investment income on an annual basis.
The Fund will distribute at least once each year all net realized
short-term capital gains in excess of any realized net long-term capital
losses, if any. The Fund intends to distribute all of its realized net
long-term capital gains, if any, in excess of any realized net short-term
capital losses and any available net capital loss carryovers, at least once
per fiscal year, although it may elect to retain all or part of such gains
for reinvestment. Taxable capital gains may be generated by the sale of
portfolio securities and by transactions in options and futures contracts
engaged in by the Fund.
All dividends and any capital gains distributions will be paid in
additional Fund shares of the same Class and automatically credited to the
shareholder's account without issuance of a share certificate unless the
shareholder requests in writing that all dividends be paid in cash. Shares
acquired by dividend and distribution reinvestments will not be subject to
any front-end sales charge or CDSC. Class B shares acquired through dividend
and distribution reinvestments will become eligible for conversion to Class A
shares on a pro rata basis. Distributions paid on Class A and Class D shares
will be higher than for Class B and Class C shares because distribution fees
paid by Class B and Class C shares are higher. (See "Shareholder
Services--Automatic Investment of Dividends and Distributions.") Any
dividends declared in the last quarter of any calendar year which are paid in
the following calendar year prior to February 1 will be deemed received by
the shareholder in the prior calendar year.
Taxes. Because the Fund intends to distribute all of its net investment
income and capital gains to shareholders and intends to otherwise continue to
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code, it is not expected that the Fund will be required to pay any
federal income tax.
The Fund intends to qualify to pay "exempt-interest dividends" to its
shareholders by maintaining, as of the close of each quarter of its taxable
year, at least 50% of the value of its total assets in tax-exempt securities.
If the Fund satisfies such requirement, distributions from net investment
income to shareholders, whether taken in cash or reinvested in additional
shares, will be excludable from gross income for federal income tax purposes
to the extent net investment income is represented by interest on tax-exempt
securities. Exempt-interest dividends are included, however, in determining
what portion, if any, of a person's Social Security benefits are subject to
federal income tax. The Internal Revenue Code may subject interest received
on certain otherwise tax-exempt securities to an alternative minimum tax.
This alternative minimum tax may be incurred due to interest received on
certain "private activity bonds" (in general, bonds that benefit
non-government entities) issued after August 7, 1986 which, although
tax-exempt, are used for purposes other than those generally performed by
government units (e.g., bonds used for commercial or housing purposes).
Income received on such bonds is classified as a "tax preference item," under
the alternative minimum tax, for both individual and corporate investors. The
Fund anticipates that a portion of its investments will be made in such
"private activity bonds," with the result that a portion of the
exempt-interest dividends paid by the Fund will be an item of tax preference
to shareholders subject to the alternative minimum tax. In addition, certain
corporations which are subject to the alternative minimum tax may also have
to include exempt-interest dividends in calculating their alter-
27
<PAGE>
native minimum taxable income in situations where the "adjusted current
earnings" of the corporation exceeds its alternative minimum taxable income.
Under the Revenue Reconciliation Act of 1993, all or a portion of the
Fund's gain from the sale or redemption of tax-exempt obligations purchased
at a market discount after April 30, 1993 will be treated as ordinary income
rather than capital gain. This rule may increase the amount of ordinary
income dividends received by shareholders.
Within sixty days after the end of its fiscal year, the Fund will mail to
its shareholders a statement indicating the percentage of the dividend
distributions for such fiscal year which constitutes exempt-interest
dividends and the percentage, if any, that is taxable, and the percentage, if
any, of the exempt-interest dividends which constitutes an item of tax
preference.
Shareholders will normally be subject to federal income tax on dividends
paid from interest income derived from taxable securities and on
distributions of net short-term capital gains, if any. Distributions of
long-term capital gains, if any, are taxable as long-term capital gains,
regardless of how long the shareholder has held the Fund shares and
regardless of whether the distribution is received in additional shares or in
cash. To avoid being subject to a 31% federal backup withholding tax on
taxable dividends, capital gains distributions and proceeds of redemptions or
repurchases, shareholders' taxpayer identification numbers must be furnished
and certified as to accuracy.
Any loss on the sale or exchange of shares of the Fund which are held for
six months or less is disallowed to the extent of the amount of any
exempt-interest dividend paid with respect to such shares. Treasury
Regulations may provide for a reduction in such required holding periods. If
a shareholder receives a distribution that is taxed as a long-term capital
gain on shares held for six months or less and sells those shares at a loss,
the loss will be treated as a long-term capital loss.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of an investment company paying exempt-interest dividends, such as the
Fund, will not be deductible by the investor for federal income tax purposes.
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any
state or local taxing authority. Thus, shareholders of the Fund may be
subject to state and local taxes on exempt-interest dividends.
The Fund may at times make payments from sources other than income or net
capital gains. Payments from such sources will, in effect, represent a return
of a portion of each shareholder's investment. All, or a portion, of such
payments will not be taxable to shareholders.
Shareholders should consult their tax advisers as to the applicability of
the above to their own tax situation.
PERFORMANCE INFORMATION
- -----------------------------------------------------------------------------
From time to time the Fund may quote its "yield" and/or its "total return"
in advertisements and sales literature. These figures are computed separately
for Class A, Class B, Class C and Class D shares. Both the yield and the
total return of the Fund are based on historical earnings and are not
intended to indicate future performance. The yield of each Class of the Fund
is computed by dividing the Class's net investment income over a 30-day
period by an average value (using the average number of shares entitled to
receive dividends and the maximum offering price per share at the end of the
period), all in accordance with applicable regulatory requirements. Such
amount is compounded for six months and then annualized for a twelve-month
period to derive the Fund's yield for each Class. The Fund may also quote
tax-equivalent yield, which is calculated by determining the pre-tax yield
for each
28
<PAGE>
Class which, after being taxed at a stated rate, would be equivalent to the
yield determined as described above.
The "average annual total return" of the Fund refers to a figure
reflecting the average annualized percentage increase (or decrease) in the
value of an initial investment in a Class of the Fund of $1,000 over periods
of one, five and ten years. Average annual total return reflects all income
earned by the Fund, any appreciation or depreciation of the Fund's assets,
all expenses incurred by the applicable Class and all sales charges which
would be incurred by shareholders, for the stated periods. It also assumes
reinvestment of all dividends and distributions paid by the Fund.
In addition to the foregoing, the Fund may advertise its total return for
each Class over different periods of time by means of aggregate, average,
year-by-year or other types of total return figures. Such calculations may or
may not reflect the deduction of any sales charge which, if reflected, would
reduce the performance quoted. The Fund may also advertise the growth of
hypothetical investments of $10,000, $50,000 or $100,000 in each Class of
shares of the Fund. The Fund from time to time may also advertise its
performance relative to certain performance rankings and indexes compiled by
independent organizations (such as mutual fund performance rankings of Lipper
Analytical Services, Inc.).
Prior to July 28, 1997, the Fund offered only one Class of shares. Because
the distribution arrangement for Class A most closely resembles the
distribution arrangement applicable prior to the implementation of multiple
classes, historical performance information may be restated to reflect the
current maximum sales charge applicable to Class A. In addition, because all
shares of the Fund held prior to July 28, 1997 have been designated Class D
shares, the Fund's historical performance may also be restated to reflect the
absence of any sales charge in the case of Class D shares.
ADDITIONAL INFORMATION
- -----------------------------------------------------------------------------
Voting Rights. All shares of beneficial interest of the Fund are of $.01
par value and are equal as to earnings, assets and voting privileges except
that each Class will have exclusive voting privileges with respect to matters
relating to distribution expenses borne solely by such Class or any other
matter in which the interests of one Class differ from the interests of any
other Class. In addition, Class B shareholders will have the right to vote on
any proposed material increase in Class A's expenses, if such proposal is
submitted separately to Class A shareholders. Also, as discussed herein,
Class A, Class B and Class C bear the expenses related to the distribution of
their respective shares.
The Fund is not required to hold Annual Meetings of Shareholders and in
ordinary circumstances the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances the Trustees may be removed by action of the Trustees or by the
shareholders.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the
obligations of the Fund. However, the Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of the
Fund, requires that Fund obligations include such disclaimer, and provides
for indemnification and reimbursement of expenses out of the Fund's property
for any share holder held personally liable for the obligations of the Fund.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund itself
would be unable to meet its obligations. Given the above limitations on
shareholder personal liability and the nature of the Fund's assets and
operations, the possibility of the Fund's being unable to meet its
obligations is remote and, in the opinion of Massa-
29
<PAGE>
chusetts counsel to the Fund, the risk to Fund shareholders of personal
liability is remote.
Code of Ethics. Directors, officers and employees of InterCapital, Dean
Witter Services Company Inc. and the Distributor are subject to a strict Code
of Ethics adopted by those companies. The Code of Ethics is intended to
ensure that the interests of shareholders and other clients are placed ahead
of any personal interest, that no undue personal benefit is obtained from a
person's employment activities and that actual and potential conflicts of
interest are avoided. To achieve these goals and comply with regulatory
requirements, the Code of Ethics requires, among other things, that personal
securities transactions by employees of the companies be subject to an
advance clearance process to monitor that no Dean Witter Fund is engaged at
the same time in a purchase or sale of the same security. The Code of Ethics
bans the purchase of securities in an initial public offering, and also
prohibits engaging in futures and options transactions and profiting on
short-term trading (that is, a purchase within sixty days of a sale or a sale
within sixty days of a purchase) of a security. In addition, investment
personnel may not purchase or sell a security for their personal account
within thirty days before or after any transaction in any Dean Witter Fund
managed by them. Any violations of the Code of Ethics are subject to
sanctions, including reprimand, demotion or suspension or termination of
employment. The Code of Ethics comports with regulatory requirements and the
recommendations in the 1994 report by the Investment Company Institute
Advisory Group on Personal Investing.
Master/Feeder Conversion. The Fund reserves the right to seek to achieve
its investment objective by investing all of its investable assets in a
diversified, open-end management investment company having the same
investment objective and policies and substantially the same investment
restrictions as those applicable to the Fund.
Shareholder Inquiries. All inquiries regarding the Fund should be directed
to the Fund at the telephone numbers or address set forth on the front cover
of this Prospectus.
30
<PAGE>
THE DEAN WITTER FAMILY OF FUNDS
MONEY MARKET FUNDS
Dean Witter Liquid Asset Fund Inc.
Dean Witter Tax-Free Daily Income Trust
Dean Witter U.S. Government Money Market Trust
Dean Witter California Tax-Free Daily Income Trust
Dean Witter New York Municipal Money Market Trust
EQUITY FUNDS
Dean Witter American Value Fund
Dean Witter Natural Resource Development Securities Inc.
Dean Witter Dividend Growth Securities Inc.
Dean Witter Developing Growth Securities Trust
Dean Witter World Wide Investment Trust
Dean Witter Value-Added Market Series
Dean Witter Utilities Fund
Dean Witter Capital Growth Securities
Dean Witter European Growth Fund Inc.
Dean Witter Pacific Growth Fund Inc.
Dean Witter Precious Metals and Minerals Trust
Dean Witter Health Sciences Trust
Dean Witter Global Dividend Growth Securities
Dean Witter Global Utilities Fund
Dean Witter International SmallCap Fund
Dean Witter Mid-Cap Growth Fund
Dean Witter Balanced Growth Fund
Dean Witter Capital Appreciation Fund
Dean Witter Information Fund
Dean Witter Japan Fund
Dean Witter Income Builder Fund
Dean Witter Special Value Fund
Dean Witter Financial Services Trust
Dean Witter Market Leader Trust
ASSET ALLOCATION FUNDS
Dean Witter Strategist Fund
Dean Witter Global Asset Allocation Fund
ACTIVE ASSETS ACCOUNT PROGRAM
Active Assets Money Trust
Active Assets Tax-Free Trust
Active Assets California Tax-Free Trust
Active Assets Government Securities Trust
FIXED-INCOME FUNDS
Dean Witter High Yield Securities Inc.
Dean Witter Tax-Exempt Securities Trust
Dean Witter U.S. Government Securities Trust
Dean Witter Federal Securities Trust
Dean Witter Convertible Securities Trust
Dean Witter California Tax-Free Income Fund
Dean Witter New York Tax-Free Income Fund
Dean Witter World Wide Income Trust
Dean Witter Intermediate Income Securities
Dean Witter Global Short-Term Income Fund Inc.
Dean Witter Multi-State Municipal Series Trust
Dean Witter Short-Term U.S. Treasury Trust
Dean Witter Diversified Income Trust
Dean Witter Limited Term Municipal Trust
Dean Witter Short-Term Bond Fund
Dean Witter National Municipal Trust
Dean Witter High Income Securities
Dean Witter Balanced Income Fund
Dean Witter Hawaii Municipal Trust
Dean Witter Intermediate Term U.S. Treasury Trust
DEAN WITTER RETIREMENT SERIES
Liquid Asset Series
U.S. Government Money Market Series
U.S. Government Securities Series
Intermediate Income Securities Series
American Value Series
Capital Growth Series
Dividend Growth Series
Stategist Series
Utilities Series
Value-Added Market Series
Global Equity Series
<PAGE>
Dean Witter
Tax-Exempt Sscurities Trust
Two World Trade Center
New York, New York 10048
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
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
Joseph R. Arcieri
Vice President
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Dean Witter Trust Company
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
DEAN WITTER
TAX-EXEMPT
SECURITIES
TRUST
PROSPECTUS--JULY 28, 1997
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
LETTER TO THE SHAREHOLDERS December 31, 1996
Two World Trade Center, New York, New York 10048
DEAR SHAREHOLDER:
We are pleased to present the annual report on the operations of Dean Witter
Tax-Exempt Securities Trust for the year ended December 31, 1996.
After accelerating in the first half of 1996, domestic economic growth
moderated during the summer. Inflation remained under control despite full
employment and stronger growth in the fourth quarter. The need for a
tightening move by the Federal Reserve Board abated. Market confidence
improved under these conditions and fixed-income yields moved lower in the
second half of the year.
MUNICIPAL MARKET CONDITIONS
Long insured revenue bond yields rose from 5.40 percent in February to reach
6.15 percent in April and again in mid-June. Subsequently, demand for
municipal bonds improved and followed the trend of U.S. Treasury securities
to lower yields. By the end of December, insured bond yields stood at 5.60
percent. The yield curve pickup for extending maturities from 1 to 30 years
was 210 basis points.
The ratio of insured revenue bond yields to 30-year U.S. Treasury yields,
fell from 92 to 84 percent during the year. A declining ratio means that
municipal bond prices outperformed U.S. Treasury prices. The ratio's average
range for the past three years has been as low (rich) as 81 and as high
(cheap) as 92 percent. The relative improvement in municipals occurred when
flat-tax proposals failed to gain public support.
The municipal market achieved a balance between new-issue supply and maturing
securities in 1996. New-issue volume increased 14 percent to $183 billion.
Maturities and redemptions of older issues essentially matched underwriting
volume.
PERFORMANCE
Dean Witter Tax-Exempt Securities Trust's total return for the year ended
December 31, 1996 was 3.61 percent. The Fund's net asset value declined from
$12.09 to $11.77 per share. Tax-free dividends of $0.65 per share and taxable
long-term capital gains distributions of $0.08 per share were paid during the
period. Dividends from tax-exempt income gave the Fund a
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
LETTER TO THE SHAREHOLDERS, continued
positive total return. The trailing 30-day SEC yield and distribution yield
on December 31, 1996 were 4.69 percent and 5.22 percent, respectively.
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
GROWTH OF $10,000
DATE TOTAL LEHMAN IX LIPPER IX
==============================================================================
December 31, 1986 $ 9,600 $10,000 $10,000
==============================================================================
December 31, 1987 $ 9,462 $10,151 $ 9,932
==============================================================================
December 31, 1988 $10,693 $11,182 $11,090
==============================================================================
December 31, 1989 $11,828 $12,389 $12,195
==============================================================================
December 31, 1990 $12,520 $13,292 $12,926
==============================================================================
December 31, 1991 $14,111 $14,906 $14,483
==============================================================================
December 31, 1992 $15,394 $16,220 $15,772
- ------------------------------------------------------------------------------
December 31, 1993 $17,123 $18,212 $17,732
- ------------------------------------------------------------------------------
December 31, 1994 $16,172 $17,271 $16,661
- ------------------------------------------------------------------------------
December 31, 1995 $18,981 $20,286 $19,545
- ------------------------------------------------------------------------------
December 31, 1996 $19,667(3) $21,185 $20,190
==============================================================================
AVERAGE ANNUAL TOTAL RETURNS
1 YEAR 5 YEARS 10 YEARS
==========================================================
3.61(1) 6.86(1) 7.44(1)
----------------------------------------------------------
-0.53(2) 6.00(2) 7.00(2)
==========================================================
============================================================
Fund Lehman IX (4) Lipper IX (5)
------- ------- -------
============================================================
Past performance is not predictive of future returns.
- -----------------------------
(1) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable front-end sales charge (4%). See the Fund's current
prospectus for complete details on fees and sales charges.
(3) Closing value, assuming a complete redemption on December 31, 1996.
(4) The Lehman Brothers Municipal Bond Index tracks the performance of
municipal bonds with maturities of 2 years or more and a minimum credit
rating of Baa or BBB, as measured by Moody's Investors Service, Inc. or
Standard & Poor's Corp. The Index does not include any expenses, fees, or
charges. The Index is unmanaged and should not be considered an investment.
(5) The Lipper General Municipal Debt Funds Index is an equally-weighted
performance index of the largest qualifying funds (based on net assets) in
the Lipper General Municipal Debt Funds objective. The Index, which is
adjusted for capital gains distributions and income dividends, is unmanaged
and should not be considered an investment. There are currently 30 funds
represented in this index.
Since its inception on March 27, 1980, the Fund has provided shareholders
with an average annual total return of 9.67 percent. The accompanying chart
illustrates the performance of a $10,000 investment in the Fund for the 10
years ended December 31, 1996, versus the performance of a similar
hypothetical investment in the issues that comprise the Lehman Brothers
Municipal Bond Index, as well as the performance of the Lipper Analytical
Services, Inc. General Municipal Debt Funds Index.
PORTFOLIO STRUCTURE
The Fund's net assets of $1.2 billion were diversified among 13 long-term
sectors and 104 credits. Cash and short-term investments were increased to a
range of 5 to 10 percent during 1996 in response to market volatility.
Portfolio sales shifted to more market sensitive issues. The sales of
discount and current-coupon issues exceeded sales of defensive, higher-coupon
bonds with shorter calls. New purchases focused on securities with 15-to
25-year maturities rather than 20-to 30-year maturities. Modest discount or
premium bonds with shorter durations were favored.
During the year the average maturity of the portfolio moved from 20 years to
17 years. The portfolio's distribution of older, shorter-call issues and
newer issues with longer call dates provided an average of 7 years of call
protection. Bonds with shorter than average call protection had book yields
<PAGE>
in excess of 6 1/2 percent. The book yields of bonds with longer call
protection averaged less than 6 percent. The portfolio has continued to
maintain high-quality, with 70 percent of its long-term holdings rated double
"A" or better.
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
LETTER TO THE SHAREHOLDERS, continued
PORTFOLIO STRUCTURE, continued
(The chart below represents information which appears as a graphic in the
printed report)
The five largest sectors as of December 31, 1996 (% of net assets)
FIVE LARGEST SECTORS PERCENT
-------------------- --------
Transportation 13%
Electric 12%
General Obligation 11%
Refunded 10%
Water & Sewer 10%
All others 44%
Portfolio structure is subject to change
Also, a pie chart reflecting the credit ratings as of December 31, 1996
(% of Total Long-Term Portfolio)
CREDIT RATING PERCENT
------------- -------
Aaa or AAA 47%
Aa or AA 23%
A or A 18%
Baa or BBB 7%
Not Rated* 4%
Ba or BB 1%
As measured by Moody's Investors Service, Inc. or Standard & Poor's Corp.
* Not rated at time of purchase; deemed by investment manager to be
comparable to investment-grade securities.
Portfolio structure is subject to change
Also, a graph reflecting the call structure as of December 31, 1996
(% of Total Long-Term Portfolio)
YEARS BONDS CALLABLE PERCENT CALLABLE
-------------------- ----------------
1997 6%
1998 3%
1999 4%
2000 4%
2001 8%
2002 11%
2003 15%
2004 7%
2005 11%
2006 10%
2007-2011 13%
2012+ 8%
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
LETTER TO THE SHAREHOLDERS, continued
LOOKING AHEAD
With the collapse of flat-tax proposals, municipal bonds have improved
relative to U.S. Treasury securities. Tax-free bonds are currently near the
"rich" end of their average range versus Treasury yields. Under these
conditions, the Fund has accumulated an above average cash position and has
moved to shorter maturities. If municipals were to cheapen in the future, the
Fund would likely draw down some of its cash and extend maturities in seeking
opportunities to pick up income.
We appreciate your ongoing support of Dean Witter Tax-Exempt Securities Trust
and look forward to continuing to serve your investment needs.
Very truly yours,
/s/ Charles A. Fiumefreddo
CHARLES A. FIUMEFREDDO
Chairman of the Board
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TAX-EXEMPT MUNICIPAL BONDS (94.5%)
General Obligation (11.4%)
North Slope Borough, Alaska,
$ 5,000 Ser 1992 A Conv (MBIA) ......................................... 5.90 % 06/30/03 $ 5,358,450
15,000 Ser 1994 B (FSA) ............................................... 0.00 06/30/05 9,679,800
18,500 Ser 1995 A (MBIA) .............................................. 0.00 06/30/06 11,223,950
11,000 Ser 1996 B (MBIA) .............................................. 0.00 06/30/06 6,673,700
10,000 Ser 1996 B (MBIA) .............................................. 0.00 06/30/07 5,697,600
4,000 Connecticut, College Savings 1989 Ser A ........................ 0.00 07/01/08 2,209,080
Massachusetts,
20,000 Refg 1996 Ser A (AMBAC) ........................................ 6.00 11/01/10 21,480,800
10,000 Refg 1993 Ser A ................................................ 5.50 02/01/11 10,051,300
4,000 Clark County, Nevada, Transportation Ser 1992 A (AMBAC) ........ 6.50 06/01/17 4,518,640
New York City, New York,
10,000 1990 Ser D ..................................................... 6.00 08/01/07 10,077,700
10,000 1990 Ser D ..................................................... 6.00 08/01/08 10,053,900
10,000 Pennsylvania, First Ser 1995 (FGIC) ............................. 5.50 05/01/12 10,074,700
7,500 Shelby County, Tennessee, Refg 1995 Ser A ...................... 5.625 04/01/14 7,610,025
20,120 King County, Washington, Ltd Tax 1995 (MBIA) .................... 6.00 01/01/23 20,632,255
- ------------ --------------
155,120 135,341,900
- ------------ --------------
Educational Facilities Revenue (5.4%)
10,000 Indiana University, Student Fee Ser K (MBIA) .................... 5.875 08/01/20 10,089,600
7,000 Massachusetts Health & Educational Facilities Authority, Boston
University Ser 1991 (MBIA) ..................................... 6.66 10/01/31 7,524,650
15,000 New Hampshire Higher Educational & Health Facilities Authority,
Dartmouth College Ser 1993 ..................................... 5.375 06/01/23 14,239,800
2,000 New Jersey Development Authority, The Seeing Eye Inc 1991 ....... 7.30 04/01/11 2,100,380
New York State Dormitory Authority,
5,000 State University Ser 1989 B .................................... 0.00 05/15/02 3,879,350
20,000 State University Ser 1990 B .................................... 7.00 05/15/16 21,422,400
5,000 Vermont Educational & Health Buildings Financing Agency,
Middlebury College Ser 1996 .................................... 5.375 11/01/26 4,795,450
- ------------ --------------
64,000 64,051,630
- ------------ --------------
Electric Revenue (11.7%)
25,000 Salt River Project Agricultural Improvement & Power District,
Arizona, Refg 1993 Ser C ....................................... 5.50 01/01/10 25,702,250
10,000 Sacramento Municipal Utility District, California, Refg 1994 Ser
I (MBIA) ....................................................... 5.75 01/01/15 10,104,900
10,000 Municipal Electric Authority of Georgia, Fifth Crossover Ser .... 6.50 01/01/17 10,922,200
8,000 New York State Power Authority, General Purpose Ser CC .......... 5.25 01/01/18 7,581,200
15,000 Puerto Rico Electric Power Authority, Power Ser O ............... 0.00 07/01/17 4,599,750
15,000 South Carolina Public Service Authority, 1995 Refg Ser A
(AMBAC) ........................................................ 6.25 01/01/22 15,957,600
6,000 Austin, Texas, Combined Utilities Refg Ser 1993 A ............... 5.75 11/15/13 6,019,320
24,000 San Antonio, Texas, Electric & Gas Refg Ser 1994 C .............. 4.70 02/01/06 23,072,160
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
Intermountain Power Agency, Utah,
$10,000 Refg 1996 Ser D ................................................ 5.00 % 07/01/21 $ 9,069,600
10,000 Refg 1997 Ser B (MBIA)(WI) ..................................... 5.75 07/01/19 9,806,300
15,000 Washington Public Power System, Proj #2 Refg Ser 1994 A
(Secondary MBIA) ............................................... 6.00 07/01/07 16,061,850
- ------------ --------------
148,000 138,897,130
- ------------ --------------
Hospital Revenue (7.4%)
10,000 Birmingham-Carraway Special Care Facilities Financing
Authority, Alabama, Carraway Methodist Health Systems Ser 1995
A (Connie Lee) ................................................. 6.25 08/15/09 10,808,000
3,000 Baxter County, Arkansas, Baxter County Regional Hospital Inc
Impr & Refg Ser 1992 ........................................... 7.50 09/01/21 3,216,660
10,000 California Health Facilities Financing Authority, Kaiser
Permanente Ser 1985 ............................................ 5.55 08/15/25 9,544,900
1,500 Massachusetts Health & Educational Facilities Authority, Malden
Hospital - FHA Ins Mtge Ser A .................................. 5.00 08/01/16 1,343,580
Rochester, Minnesota,
5,000 Mayo Foundation/Mayo Medical Center Ser 1992 I ................. 5.75 11/15/21 4,999,600
3,700 Mayo Foundation/Mayo Medical Center Ser 1992 F ................. 6.25 11/15/21 3,870,274
10,000 Missouri Health & Educational Facilities Authority,
Barnes-Jewish Inc/Christian Health Services Ser 1993 A ......... 5.25 05/15/14 9,581,600
6,000 New York State Medical Care Facilities Finance Agency,
Presbyterian Hospital-FHA Ins Mtge 1984 Ser A Refg ............. 5.25 08/15/14 5,779,320
10,000 Charlotte-Mecklenburg County Hospital Authority, North Carolina,
Ser 1992 ....................................................... 6.00 01/01/22 10,136,700
5,000 University of North Carolina, Hospitals at Chapel Hill Ser 1996 . 5.00 02/15/29 4,486,600
4,000 Cuyahoga County, Ohio, The Cleveland Clinic Foundation Refg Ser
1988 A ......................................................... 8.00 12/01/15 4,156,680
5,000 North Central Texas Health Facilities Development Corporation,
University Medical Center Inc Ser 1997 (FSA) (WI) .............. 5.45 04/01/15 4,889,900
7,000 Fairfax County Industrial Development Authority, Virginia, Inova
Health System Foundation Refg Ser 1993 A ....................... 5.25 08/15/19 6,601,840
10,000 Fredericksburg Industrial Development Authority, Virginia,
Medicorp Health System Refg Ser 1996 (AMBAC) ................... 5.25 06/15/16 9,634,000
- ------------ --------------
90,200 89,049,654
- ------------ --------------
Industrial Development/Pollution Control Revenue (6.7%)
1,300 Jefferson County, Kentucky, Louisville Gas & Electric Co 1993
Ser B .......................................................... 5.625 08/15/19 1,289,223
1,450 Maryland Industrial Development Financing Authority, Medical
Waste Assocs LP 1989 Ser (AMT) ................................. 8.75 11/15/10 1,450,000
5,000 Becker, Minnesota, Northern States Power Co Ser A 1989 .......... 6.80 04/01/07 5,300,250
15,000 Claiborne County, Mississippi, Middle South Energy Inc Ser C ... 9.875 12/01/14 16,619,100
10,000 Clark County, Nevada, Nevada Power Co Ser 1992 A (AMT) (FGIC) ... 6.70 06/01/22 10,757,700
10,000 Washoe County, Nevada, Sierra Pacific Power Co Ser 1987 (AMBAC) . 6.30 12/01/14 10,585,600
5,000 Alliance Airport Authority, Texas, AMR Corp Ser 1990 (AMT) ...... 7.50 12/01/29 5,355,400
10,000 Dallas-Fort Worth International Airport Facility Improvement
Corporation, Texas, American Airlines Inc Ser 1995 ............. 6.00 11/01/14 9,923,400
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
$ 7,000 Matagorda County Navigation District #1, Texas, Central Power &
Light Co Collateralized Ser 1984 A ............................. 7.50 % 12/15/14 $ 7,718,830
10,000 Weston, Wisconsin, Wisconsin Public Service Corp Refg Ser 1993
A .............................................................. 6.90 02/01/13 10,991,400
- ------------ --------------
74,750 79,990,903
- ------------ --------------
Mortgage Revenue-Multi-Family (2.1%)
7,000 Michigan Housing Development Authority, Rental Ser A (Bifurcated
FSA) ........................................................... 6.50 04/01/23 7,253,050
9,000 New Jersey Housing & Mortgage Finance Agency, 1995 Ser A
(AMBAC) ........................................................ 6.05 11/01/20 9,179,190
New York City Housing Developement Corporation, New York,
4,514 Ruppert Proj-FHA Ins Sec 223F .................................. 6.50 11/15/18 4,637,092
4,371 Stevenson Commons Proj-FHA Ins Sec 223F ........................ 6.50 05/15/18 4,463,777
- ------------ --------------
24,885 25,533,109
- ------------ --------------
Mortgage Revenue-Single Family (6.7%)
10,000 Alaska Housing Finance Corporation, Governmental 1995 Ser A
(MBIA) ......................................................... 5.875 12/01/24 9,965,400
2,440 California Housing Finance Agency, Home Cap Apprec 1983 Ser B .. 0.00 08/01/15 381,372
12,100 Illinois Housing Development Authority, Residential 1991 Ser C
(AMT) .......................................................... 6.875 02/01/18 12,554,355
4,000 Missouri Housing Development Commission, Homeownership GNMA/FNMA
1996 Ser C (AMT) ............................................... 7.45 09/01/27 4,419,760
6,900 Nebraska Investment Finance Authority, GNMA-Backed 1990 Ser
(AMT) .......................................................... 7.631 09/10/30 7,305,306
4,010 North Carolina Housing Finance Agency, Ser Q (AMT) .............. 8.00 03/01/18 4,275,783
6,950 Ohio Housing Finance Agency, GNMA-Backed 1990 Ser A (AMT) ....... 6.903 03/01/31 7,285,824
10,000 Pennsylvania Housing Finance Agency, Ser 1991-31 (AMT) .......... 7.00 10/01/23 10,541,100
Tennessee Housing Development Agency,
4,000 Mortgage Finance 1993 Ser A .................................... 5.90 07/01/18 4,031,880
11,000 Mortgage Finance 1993 Ser A .................................... 5.95 07/01/28 11,065,560
7,600 Wisconsin Housing & Economic Development Authority, Home
Ownership 1991 Ser (AMT) ....................................... 7.097 10/25/22 7,965,864
- ------------ --------------
79,000 79,792,204
- ------------ --------------
Public Facilities Revenue (2.3%)
5,000 Palm Beach County, Florida, Criminal Justice Ser 1990 (FGIC) .... 6.00 06/01/13 5,092,200
10,000 Michigan Building Authority, 1993 Refg Ser I (AMBAC) ............ 5.30 10/01/16 9,494,500
6,000 Saint Louis Industrial Development Authority, Missouri, Kiel
Center Refg Ser 1992 (AMT) ..................................... 7.75 12/01/13 6,423,540
5,000 Ohio Building Authority, Correctional 1985 Ser C BIGS ........... 9.75 10/01/05 6,619,750
- ------------ --------------
26,000 27,629,990
- ------------ --------------
Resource Recovery Revenue (5.8%)
Connecticut Resources Recovery Authority,
9,000 American REF-FUEL Co of Southeastern Connecticut 1988 Ser A
(AMT) .......................................................... 8.00 11/15/15 9,720,540
4,950 Bridgeport RESCO Ser A ......................................... 7.625 01/01/09 5,107,707
7,000 Savannah Resource Recovery Development Authority, Georgia,
Savannah Energy Systems Co Ser 1992 ............................ 6.30 12/01/06 7,385,210
10,000 Northeast Maryland Waste Disposal Authority, Montgomery County
Ser 1993 A (AMT) ............................................... 6.30 07/01/16 10,197,500
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
$ 9,000 Mercer County Improvement Authority, New Jersey, Refg Ser A 1992
(AMT)(FGIC) .................................................... 6.70 % 04/01/13 $ 9,009,990
10,000 Hempstead Industrial Development Agency, New York, 1985 American
REF-FUEL Co of Hempstead ....................................... 7.40 12/01/10 10,250,000
6,000 New York State Environmental Facilities Corporation, Huntington
1989 Ser A (AMT) ............................................... 7.50 10/01/12 6,344,220
5,000 Onondaga County Resource Recovery Agency, New York, 1992 Ser
(AMT) .......................................................... 6.875 05/01/06 5,219,800
5,000 Fairfax County Economic Development Authority, Virginia, Ogden
Martin Systems of Fairfax Inc Ser 1988 A (AMT) ................. 7.75 02/01/11 5,387,800
- ------------ --------------
65,950 68,622,767
- ------------ --------------
Transportation Facilities Revenue (12.5%)
8,965 Mid-Bay Bridge Authority, Florida, Sr Lien Crossover Refg Ser
1993 A ......................................................... 6.00 10/01/13 8,954,601
Atlanta, Georgia,
5,000 Airport Refg Ser 1996 (AMBAC) ................................. 6.00 01/01/07 5,393,800
10,000 Airport Ser 1990 (AMT) ......................................... 6.25 01/01/21 10,281,300
8,100 Metropolitan Atlanta Rapid Transit Authority, Georgia, Sales Tax
Refg Ser K ..................................................... 7.25 07/01/10 8,574,822
5,000 Hawaii, Airports Second Ser 1991 (AMT) .......................... 7.00 07/01/18 5,365,450
Kentucky Turnpike Authority,
9,000 Economic Development Road Refg Ser 1995 (AMBAC) ................ 6.50 07/01/08 10,153,080
30,000 Resource Recovery Road Refg 1987 Ser A ........................ 5.00 07/01/08 29,232,300
11,000 New Jersey Highway Authority, Sr Parkway Refg 1992 Ser .......... 6.25 01/01/14 11,532,510
6,595 Albuquerque, New Mexico, Airport Refg Ser 1997 (AMT) (AMBAC)
(WI) ........................................................... 6.375 07/01/15 6,955,878
Ohio Turnpike Commission,
4,000 1994 Ser A .................................................... 5.75 02/15/24 3,988,800
20,000 1996 Ser A (MBIA) .............................................. 5.50 02/15/26 19,656,600
5,000 Pennsylvania Turnpike Commission, Ser L of 1991 (MBIA) .......... 6.00 06/01/15 5,141,500
10,000 Puerto Rico Highway & Transportation Authority, Refg Ser X ...... 5.50 07/01/15 9,931,200
10,000 Texas Turnpike Authority, Dallas North Tollway Refg Ser 1997
(FGIC) ......................................................... 5.25 01/01/23 9,550,000
4,000 Virginia Transportation Board, US Route 58 Corridor Ser 1993 B .. 5.625 05/15/13 4,008,960
- ------------ --------------
146,660 148,720,801
- ------------ --------------
Water & Sewer Revenue (9.7%)
10,000 Birmingham Water Works & Sewer Board, Alabama, Ser 1994 ......... 5.50 01/01/20 9,935,500
10,000 Phoenix Civic Improvement Corporation, Arizona, Jr Lien Water
Ser 1994 ....................................................... 5.45 07/01/19 9,734,700
10,000 California Department of Water Resources, Central Valley Refg
Ser L ......................................................... 5.50 12/01/23 9,766,200
10,000 East Bay Municipal Utility District, California, Water Refg Ser
1993 (MBIA) .................................................... 5.00 06/01/21 9,131,900
10,000 Los Angeles, California, Wastewater Ser 1994-A (MBIA) ........... 5.875 06/01/24 10,198,600
10,000 Dade County, Florida, Water & Sewer Ser 1995 (FGIC) ............. 5.50 10/01/25 9,814,900
5,000 Rockdale County Water & Sewerage Authority, Georgia, Ser 1996
(FSA) .......................................................... 5.00 07/01/22 4,659,400
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
Massachusetts Water Resources Authority,
$ 10,000 Refg 1992 Ser B ................................................ 5.50 % 11/01/15 $ 9,747,500
10,000 1993 Ser C ..................................................... 5.25 12/01/15 9,707,800
10,000 1996 Ser A (FGIC) .............................................. 5.50 11/01/21 9,826,400
4,000 Detroit, Michigan, Sewage Refg Ser 1993-A (FGIC) ................ 5.70 07/01/13 4,040,240
8,500 New York City Municipal Water Finance Authority, New York, 1994
Ser B ......................................................... 5.30 06/15/06 8,592,055
10,000 Philadelphia, Pennsylvania, Water & Wastewater Ser 1993 (FSA) ... 5.50 06/15/15 9,773,200
- ------------ --------------
117,500 114,928,395
- ------------ --------------
Other Revenue (2.4%)
3,500 Denver, Colorado, Excise Tax Ser 1985 A ......................... 5.00 11/01/08 3,414,320
New York Local Government Assistance Corporation,
5,000 Ser 1993 C Refg ................................................ 5.375 04/01/14 4,881,500
10,000 Ser 1994 A .................................................... 5.50 04/01/17 9,987,000
5,000 Ser 1995 A .................................................... 6.00 04/01/24 5,106,900
5,000 Houston, Texas, Sr Lien Hotel Occupancy Tax Refg Ser 1995 (FSA) . 5.50 07/01/11 5,011,000
- ------------ --------------
28,500 28,400,720
- ------------ --------------
Refunded (10.4%)
5,000 Central Coast Water Authority, California, Ser 1992 (AMBAC) ..... 6.60 10/01/02++ 5,647,550
9,000 Los Angeles Convention & Exhibition Center Authority,
California, Ser 1985 COPs ...................................... 9.00 12/01/05++ 11,869,290
6,000 Connecticut Health & Educational Facilities Authority, Yale-New
Haven Hospital Ser F (MBIA) .................................... 7.10 07/01/00++ 6,633,600
2,500 Mid-Bay Bridge Authority, Florida, Ser 1991 A (ETM) ............. 6.875 10/01/22 2,854,200
9,790 Metropolitan Pier & Exposition Authority, Illinois, McCormick
Place Ser 1992 A ............................................... 6.50 06/15/03++ 10,994,366
8,000 Massachusetts, 1994 Ser C (FGIC) ................................ 6.75 11/01/04++ 9,164,640
14,000 New York State Dormitory Authority, Suffolk County Judicial Ser
1986 (ETM) ..................................................... 7.375 07/01/16 16,952,460
25,000 Intermountain Power Agency, Utah, Refg 1985 Ser H (GAINS) ....... 0.00 + 07/01/03++ 24,159,500
5,000 Salt Lake City, Utah, IHC Hospital Inc Ser of 1983 (ETM) ........ 5.00 06/01/15 4,835,050
28,000 Fairfax County Industrial Development Authority, Virginia,
Fairfax Hospital System Inc/Inova Health Ser 1991 .............. 6.801 08/15/01++ 30,990,680
- ------------ --------------
112,290 124,101,336
- ------------ --------------
1,132,855 TOTAL TAX-EXEMPT MUNICIPAL BONDS
(Identified Cost $1,051,723,235) .................................................... 1,125,060,539
- ------------ --------------
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (6.1%)
9,700 Dade County Health Facilities Authority, Florida, Miami
Childrens Hospital Ser 1990 (Demand 01/02/97) ................. 5.05 * 09/01/20 9,700,000
13,900 Hapeville Development Authority, Georgia, Hapeville Hotel Ltd
Ser 1985 (Demand 01/02/97) ..................................... 5.00 * 11/01/15 13,900,000
8,700 University of Michigan, Hospital Ser 1995 A (Demand 01/02/97) ... 5.10 * 12/01/19 8,700,000
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
$ 18,900 Missouri Health & Educational Facilities Authority, Washington
University Ser 1996 D (Demand 01/02/97) ........................ 4.75*% 02/01/30 $18,900,000
9,000 North Central Texas Health Facilities Development Corporation,
University Medical Center Inc Ser 1987 ......................... 7.75 04/01/97++ 9,294,570
11,600 Kemmerer, Wyoming, Exxon Corp Ser 1984 (Demand 01/02/97) ........ 5.10* 11/01/14 11,600,000
- ------------ --------------
71,800 TOTAL SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS
- ------------
(Identified Cost $71,447,050) ........................................................ 72,094,570
--------------
$1,204,655 TOTAL INVESTMENTS (Identified Cost $1,123,170,285) (a) ................... 100.6% 1,197,155,109
============
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS ........................... (0.6) (7,121,119)
----------- --------------
NET ASSETS ............................................................... 100.0% $1,190,033,990
=========== ==============
</TABLE>
- ------------
AMT Alternative Minimum Tax.
BIGS Bond Income Growth Security.
COPs Certificates of Participation.
ETM Escrowed to Maturity.
GAINS Growth and Income Security.
WI Security purchased on a when issued basis.
+ Zero coupon; will convert to 10.00% on July 1, 2000.
++ Prerefunded to call date shown.
* Current coupon of variable rate security.
(a) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$77,142,347 and the aggregate gross unrealized depreciation is
$3,157,523, resulting in net unrealized appreciation of
$73,984,824.
Bond Insurance:
- ---------------
AMBAC AMBAC Indemnity Corporation.
Connie Lee Connie Lee Insurance Company.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Company.
MBIA Municipal Bond Investors Assurance Corporation.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996, continued
Geographic Summary of Investments
Based on Market Value as a Percent of Net Assets
December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Alabama 1.7%
Alaska 4.1
Arizona 3.0
Arkansas 0.3
California 5.6
Colorado 0.3
Connecticut 2.0
Florida 3.1
Georgia 5.1
Hawaii 0.4
Illinois 2.0
Indiana 0.8
Kentucky 3.4
Maryland 1.0%
Massachusetts 6.6
Michigan 2.5
Minnesota 1.2
Mississippi 1.4
Missouri 3.3
Nebraska 0.6
Nevada 2.2
New Hampshire 1.2
New Jersey 2.7
New Mexico 0.6
New York 11.4
North Carolina 1.6
Ohio 3.5%
Pennsylvania 3.0
Puerto Rico 1.2
South Carolina 1.3
Tennessee 1.9
Texas 6.8
Utah 4.0
Vermont 0.4
Virginia 4.7
Washington 3.1
Wisconsin 1.6
Wyoming 1.0
-----
Total 100.6%
=====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $1,123,170,285) ..................................... $1,197,155,109
Cash .................................................................. 887,063
Receivable for:
Interest ............................................................ 17,424,216
Shares of beneficial interest sold .................................. 244,066
Prepaid expenses and other assets ..................................... 27,394
--------------
TOTAL ASSETS ........................................................ 1,215,737,848
--------------
LIABILITIES:
Payable for:
Investments purchased ............................................... 20,777,892
Dividends and distributions ......................................... 3,724,283
Shares of beneficial interest repurchased ........................... 596,522
Investment management fee ........................................... 452,931
Accrued expenses ...................................................... 152,230
--------------
TOTAL LIABILITIES ................................................... 25,703,858
--------------
NET ASSETS:
Paid-in-capital ....................................................... 1,115,886,458
Net unrealized appreciation ........................................... 73,984,824
Accumulated undistributed net realized gain ........................... 162,708
--------------
NET ASSETS .......................................................... $1,190,033,990
==============
NET ASSET VALUE PER SHARE,
101,083,561 shares outstanding (unlimited shares authorized of $.01
par value) ........................................................... $ 11.77
==============
MAXIMUM OFFERING PRICE PER SHARE
(net asset value plus 4.17% of net asset value)* ..................... $ 12.26
==============
</TABLE>
- ------------
* On sales of $25,000 or more the offering price is reduced.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ........................ $ 74,093,062
--------------
EXPENSES
Investment management fee .............. 5,320,578
Transfer agent fees and expenses ...... 387,764
Shareholder reports and notices ....... 62,672
Custodian fees ......................... 52,615
Professional fees ...................... 52,404
Registration fees ...................... 46,458
Trustees' fees and expenses ............ 15,285
Other .................................. 30,574
--------------
TOTAL EXPENSES ....................... 5,968,350
LESS: EXPENSE OFFSET ................ (40,849)
--------------
NET EXPENSES ......................... 5,927,501
--------------
NET INVESTMENT INCOME ................ 68,165,561
--------------
NET REALIZED AND UNREALIZED GAIN
(LOSS):
Net realized gain ...................... 2,959,135
Net change in unrealized appreciation . (29,830,436)
--------------
NET LOSS ............................. (26,871,301)
--------------
NET INCREASE ........................... $ 41,294,260
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................. $ 68,165,561 $ 76,135,601
Net realized gain ..................................... 2,959,135 17,721,238
Net change in unrealized appreciation/depreciation ... (29,830,436) 117,785,387
-------------- --------------
NET INCREASE......................................... 41,294,260 211,642,226
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income ................................. (68,543,874) (75,983,289)
Net realized gain ..................................... (8,374,759) (12,426,304)
-------------- --------------
TOTAL ............................................... (76,918,633) (88,409,593)
-------------- --------------
Net decrease from transactions in shares of beneficial
interest ............................................. (99,650,138) (93,207,593)
-------------- --------------
NET INCREASE (DECREASE) ............................. (135,274,511) 30,025,040
NET ASSETS:
Beginning of period ................................... 1,325,308,501 1,295,283,461
-------------- --------------
END OF PERIOD
(Including undistributed net investment income of
$0 and $378,313, respectively) ...................... $1,190,033,990 $1,325,308,501
============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1996
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter Tax-Exempt Securities Trust (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Fund's investment objective is to provide
a high level of current income which is exempt from federal income tax,
consistent with the preservation of capital. The Fund was incorporated in
Maryland in 1979, commenced operations on March 27, 1980 and reorganized as a
Massachusetts business trust on April 30, 1987.
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 for the Fund
by an outside independent pricing service approved by the Trustees. The
pricing service has informed the Fund that in valuing the Fund's 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 Fund's 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 Fund 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 Fund'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 Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1996, continued
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 Dean Witter InterCapital
Inc. (the "Investment Manager"), the Fund pays the Investment Manager a
management fee, accrued daily and payable monthly, by applying the following
annual rates to the Fund's net assets determined as of the close of each
business day: 0.50% to the portion of daily net assets not exceeding $500
million; 0.425% to the portion of daily net assets exceeding $500 million but
not exceeding $750 million; 0.375% to the portion of daily net assets
exceeding $750 million but not exceeding $1 billion; 0.35% to the portion of
daily net assets exceeding $1 billion but not exceeding $1.25 billion; and
0.325% to the portion of daily net assets exceeding $1.25 billion.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund'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 Fund 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
Fund.
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 December 31, 1996
aggregated $215,642,138 and $383,666,566, respectively.
Dean Witter Trust Company, an affiliate of the Investment Manager, is the
Fund's transfer agent. At December 31, 1996, the Fund had transfer agent fees
and expenses payable of approximately $52,400.
The Fund has an unfunded noncontributory defined benefit pension plan
covering all independent Trustees of the Fund who will have served as
independent Trustees for at least five years at the time of
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1996, continued
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 December 31, 1996 included in Trustees' fees and expenses
in the Statement of Operations amounted to $837. At December 31, 1996, the
Fund had an accrued pension liability of $48,696 which is included in accrued
expenses in the Statement of Assets and Liabilities.
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Distributor has
informed the Fund that for the year ended December 31, 1996, it received
approximately $1,050,000 in commissions from the sale of the Fund's shares.
Such commissions are not an expense of the Fund; they are deducted from the
proceeds of the shares.
4. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Sold 3,179,464 $ 37,259,996 3,469,058 $ 40,446,608
Reinvestment of dividends and distributions 3,684,669 43,078,883 4,260,271 50,182,467
-------------- --------------- -------------- ---------------
6,864,133 80,338,879 7,729,329 90,629,075
Repurchased (15,389,992) (179,989,017) (15,722,604) (183,836,668)
-------------- --------------- -------------- ---------------
Net decrease (8,525,859) $ (99,650,138) (7,993,275) $ (93,207,593)
============== =============== ============== ===============
</TABLE>
5. FEDERAL INCOME TAX STATUS
Capital losses incurred after October 31 ("post-October" losses) within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $146,000 during fiscal 1996.
As of December 31, 1996, the Fund had temporary book/tax differences
primarily attributable to post-October losses.
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE
OPERATING PERFORMANCE:
Net asset value,
beginning of period ...... $12.09 $11.01 $12.41 $11.88 $11.65
-------- -------- --------- -------- --------
Net investment income .... 0.65 0.67 0.70 0.77 0.79
Net realized and
unrealized gain (loss) .. (0.24) 1.19 (1.37) 0.54 0.23
-------- -------- --------- -------- --------
Total from investment
operations .............. 0.41 1.86 (0.67) 1.31 1.02
-------- -------- --------- -------- --------
Less dividends and
distributions from:
Net investment income ... (0.65) (0.67) (0.70) (0.77) (0.79)
Net realized gain ........ (0.08) (0.11) (0.03) (0.01) --
-------- -------- --------- -------- --------
Total dividends and
distributions ........... (0.73) (0.78) (0.73) (0.78) (0.79)
-------- -------- --------- -------- --------
Net asset value,
end of period ............ $11.77 $12.09 $11.01 $12.41 $11.88
======== ======== ========= ======== ========
TOTAL INVESTMENT RETURN+ 3.61% 17.37% (5.55)% 11.23% 9.09%
RATIOS TO
AVERAGE NET ASSETS:
Expenses .................. 0.48% 0.48% 0.47% 0.47% 0.49%
Net investment income ..... 5.52% 5.76% 6.02% 6.23% 6.74%
SUPPLEMENTAL DATA:
Net assets, end of period,
in millions ............. $1,190 $1,325 $1,295 $1,582 $1,323
Portfolio turnover rate .. 18% 21% 16% 13% 4%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1991 1990 1989 1988 1987
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE
OPERATING PERFORMANCE:
Net asset value,
beginning of period ...... $11.09 $11.28 $10.96 $10.45 $11.50
-------- -------- -------- -------- ---------
Net investment income .... 0.80 0.80 0.81 0.81 0.80
Net realized and
unrealized gain (loss) .. 0.56 (0.18) 0.32 0.51 (0.97)
-------- -------- -------- -------- ---------
Total from investment
operations .............. 1.36 0.62 1.13 1.32 (0.17)
-------- -------- -------- -------- ---------
Less dividends and
distributions from:
Net investment income ... (0.80) (0.81) (0.81) (0.81) (0.83)
Net realized gain ........ -- -- -- -- (0.05)
-------- -------- -------- -------- ---------
Total dividends and
distributions ........... (0.80) (0.81) (0.81) (0.81) (0.88)
-------- -------- -------- -------- ---------
Net asset value,
end of period ............ $11.65 $11.09 $11.28 $10.96 $10.45
======== ======== ======== ======== =========
TOTAL INVESTMENT RETURN+ 12.71% 5.86% 10.61% 13.02% (1.44)%
RATIOS TO
AVERAGE NET ASSETS:
Expenses .................. 0.51% 0.51% 0.51% 0.54% 0.52%
Net investment income ..... 7.05% 7.25% 7.31% 7.51% 7.42%
SUPPLEMENTAL DATA:
Net assets, end of period,
in millions ............. $1,145 $1,010 $1,033 $908 $896
Portfolio turnover rate .. 10% 19% 13% 17% 37%
</TABLE>
- ------------
+ Does not reflect the deduction of sales load. Calculated based on the net
asset value as of the last business day of the period.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER TAX-EXEMPT SECURITIES TRUST
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 Dean Witter
Tax-Exempt Securities Trust (the "Fund") at December 31, 1996, 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 ten 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 Fund'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
December 31, 1996 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 10, 1997
1996 FEDERAL TAX NOTICE (unaudited)
- -------------------------------------------------------------------------------
During the year ended December 31, 1996, the Fund paid to the
shareholders $0.65 per share from net investment income. All of the
Fund's dividends from net investment income were exempt interest
dividends, excludable from gross income for Federal income tax
purposes. For the year ended December 31, 1996, the Fund paid to
shareholders $0.08 per share from long-term capital gains.
- -------------------------------------------------------------------------------
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST Two World Trade Center,
LETTER TO THE SHAREHOLDERS June 30, 1997 New York, New York 10048
DEAR SHAREHOLDER:
We are pleased to present the semiannual report on the operations of Dean
Witter Tax-Exempt Securities Trust for the six-month period ended June 30,
1997.
A consumer-led acceleration in economic activity in late 1996 carried into
the first quarter of 1997. This contributed to a rise in interest rates
between December 1996 and April 1997. On March 25, 1997, the Federal Reserve
Board raised the federal-funds rate 25 basis points to 5.50 percent in a
preemptive move against a possible increase in the rate of inflation. The
bond market recognized that additional rate hikes by the central bank were
possible, but began to rally when short-term interest rates remained
unchanged in May.
MUNICIPAL MARKET CONDITIONS
Municipal yields followed the trend of U.S. Treasury yields, but with less
volatility. Long-term insured revenue bond yields rose from 5.45 percent at
the end of November 1996 to a high of 5.85 percent in mid April 1997 before
declining to 5.50 percent in June.
[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.]
BOND YIELDS 1994-1997
<TABLE>
<CAPTION>
INSURED MUNICPAL
30-YEAR 30-YEAR REVENUE AS A
INSURED MUNICPAL U.S TREASURY PERCENTAGE OF
REVENUE YIELDS YIELDS U.S. TREASURY YIELDS
<S> <C> <C> <C>
Dec '93 5.45 6.35 0.8586
5.29 6.24 0.8481
5.64 6.66 0.8468
6.19 7.09 0.8728
6.24 7.31 0.8540
6.23 7.43 0.8387
Jun '94 6.31 7.61 0.8293
6.15 7.40 0.8314
6.17 7.45 0.8280
6.42 7.82 0.8212
6.66 7.97 0.8356
6.99 8.00 0.8738
Dec '94 6.65 7.88 0.8438
6.42 7.70 0.8340
6.12 7.44 0.8222
6.07 7.43 0.8167
6.05 7.34 0.8245
5.84 6.65 0.8784
Jun '95 6.00 6.62 0.9066
5.99 6.85 0.8750
5.98 6.65 0.8997
5.97 6.50 0.9184
5.79 6.33 0.9150
5.61 6.13 0.9151
Dec '95 5.49 5.95 0.9230
5.42 6.03 0.8989
5.55 6.47 0.8577
5.89 6.67 0.8835
5.94 6.91 0.8601
5.99 6.99 0.8571
Jun '96 5.86 6.87 0.8529
5.77 6.97 0.8278
5.82 7.12 0.8176
5.71 6.92 0.8248
5.60 6.64 0.8431
5.45 6.35 0.8583
Dec '96 5.56 6.64 0.8372
5.63 6.79 0.8293
5.53 6.80 0.8129
5.83 7.10 0.8216
5.74 6.96 0.8251
5.58 6.91 0.8081
Jun '97 5.49 6.78 0.8092
</TABLE>
Source: Bloomberg L.P.
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
LETTER TO THE SHAREHOLDERS June 30, 1997, 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.]
LARGEST SECTORS AS OF JUNE 30, 1997
(% OF NET ASSETS)
GENERAL OBLICATION 13%
TRANSPORTATION 13%
REFUNDED 12%
ELECTRIC 11%
SHORT-TERM 8%
WATER & SEWER 8%
HOSPITAL 7%
ALL OTHERS 19%
MORTGAGE 9%
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
CREDIT RATINGS AS OF JUNE 30, 1997
(% OF TOTAL LONG-TERM PORTFOLIO)
Aaa or AAA 54%
Aa or AA 19%
A or A 14%
Baa or BBB 8%
Ba or BB 2%
NR 3%
AS MEASURED BY MOODY'S INVESTORS SERVICE INC. OR STANDARD & POOR'S CORP.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
CALL STRUCTURE AS OF JUNE 30, 1997 WEIGHTED AVERAGE
(% OF TOTAL LONG-TERM PORTFOLIO) CALL PROTECTION: 7 YEARS
1997 4.7%
1998 4.1%
1999 3.9%
2000 4.4%
2001 9.2%
2002 10.4%
2003 14.8%
2004 5.9%
2005 10.2%
2006 9.7%
2007+ 22.7%
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
LETTER TO THE SHAREHOLDERS June 30, 1997, continued
The ratio of 30-year insured revenue bond yields to 30-year U.S. Treasury
yields declined from 86 percent at the end of November 1996 to 81 percent in
June 1997. A declining ratio means that municipals have outperformed
Treasuries, but have become relatively less attractive. The annual range of
the ratio has averaged between 80 percent and 92 percent over the past three
years.
Relative to last year, new-issue municipal volume was ahead only two percent
for the first six months of 1997. Estimated underwriting volume of $180
billion for the full year is expected to exceed bond maturities and
redemptions of $130 billion.
PERFORMANCE
Dean Witter Tax-Exempt Securities Trust's total return for the six-month
period ended June 30, 1997 was 2.79 percent. The Fund's net asset value
increased slightly from $11.77 to $11.78 per share. Tax-free dividends
totaling $0.32 per share and taxable capital gains distributions of $0.004
per share were paid during the period. Tax free dividends continued to be the
major component of total return. The Fund's net assets exceeded $1.1 billion.
PORTFOLIO STRUCTURE
The Fund's cash and short-term investment position during the first half of
1997 increased from 6 percent to 8 percent of net assets. Refunded bonds
added another 12 percent to the defensive position of the portfolio.
Portfolio sales involved market-sensitive discount and current-coupon issues.
The average maturity of the portfolio was 16 years. The distribution of bond
call dates produced an average call protection of 7 years.
Investments were diversified among 13 long-term sectors and 98 credits. The
portfolio has consistently maintained high quality, with over 70 percent of
its long-term holdings rated double "A" or better. Holdings in the electric
revenue sector reflect the portfolio's ability to respond to changing credit
conditions. With municipal electric utilities facing the increasingly
competitive pressures of deregulation, approximately 75 percent of the
electric credits are enhanced with bond insurance.
LOOKING AHEAD
Since the election-year collapse of flat-tax proposals, municipal bonds have
outperformed U.S. Treasury securities. Tax-free yields are currently somewhat
less attractive in their historical relationship with Treasury yields.
However, the long-term benefits of tax-exempt income remain intact and have
fostered demand for municipal bonds.
On June 30, 1997, the Fund's Board of Trustees approved a proposal to adopt a
multiple class share structure. Through this arrangement the Fund will offer
four classes of shares with various sales charges, ongoing fees and other
features. Existing shares were designated Class D. This conversion occurred
on July 28, 1997. A revised prospectus, which includes complete details
regarding this change, was mailed with your June 1997 statement.
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
LETTER TO THE SHAREHOLDERS June 30, 1997, continued
We appreciate your ongoing support of Dean Witter Tax-Exempt Securities Trust
and look forward to continuing to serve your investment needs.
Very truly yours,
/s/ Charles A. Fiumefreddo
CHARLES A. FIUMEFREDDO
Chairman of the Board
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
RESULTS OF SPECIAL MEETING (unaudited)
On May 21, 1997, a special meeting of the Fund's shareholders was held for
the purpose of voting on four separate matters, the results of which were as
follows:
(1) APPROVAL OF A NEW INVESTMENT MANAGEMENT AGREEMENT BETWEEN THE FUND AND
DEAN WITTER INTERCAPITAL INC. IN CONNECTION WITH THE MERGER OF MORGAN
STANLEY GROUP INC. WITH DEAN WITTER DISCOVER & CO.:
<TABLE>
<CAPTION>
<S> <C>
For ...... 59,538,943
Against .. 1,406,853
Abstain .. 4,117,748
</TABLE>
(2) ELECTION OF TRUSTEES:
<TABLE>
<CAPTION>
<S> <C>
Michael Bozic
For ................... 62,490,343
Withheld .............. 2,573,201
Charles A. Fiumefreddo
For ................... 62,515,027
Withheld .............. 2,548,517
Edwin J. Garn
For ................... 62,461,015
Withheld .............. 2,602,529
John R. Haire
For ................... 62,438,859
Withheld .............. 2,624,685
Wayne E. Hedien
For ................... 62,529,775
Withheld .............. 2,533,769
Dr. Manuel H. Johnson
For ................... 62,567,181
Withheld .............. 2,496,363
Michael E. Nugent
For ................... 62,561,434
Withheld .............. 2,502,110
Philip J. Purcell
For ................... 62,565,915
Withheld .............. 2,497,629
John L. Schroeder
For ................... 62,480,562
Withheld .............. 2,582,982
</TABLE>
(3) APPROVAL OF A NEW INVESTMENT POLICY WITH RESPECT TO INVESTMENTS IN
CERTAIN OTHER INVESTMENT COMPANIES:
<TABLE>
<CAPTION>
<S> <C>
For ..... 57,095,092
Against . 2,662,961
Abstain . 5,305,491
</TABLE>
(4) RATIFICATION OF PRICE WATERHOUSE LLP AS INDEPENDENT ACCOUNTANTS:
<TABLE>
<CAPTION>
<S> <C>
For ..... 61,658,268
Against . 529,660
Abstain . 2,875,616
</TABLE>
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TAX-EXEMPT MUNICIPAL BONDS (90.5%)
General Obligation (13.2%)
North Slope Borough, Alaska,
$ 5,000 Ser 1992 A Conv (MBIA) ......................................... 5.90 % 06/30/03 $ 5,329,349
15,000 Ser 1994 B (FSA) ............................................... 0.00 06/30/05 10,018,050
18,500 Ser 1995 A (MBIA) .............................................. 0.00 06/30/06 11,696,070
10,000 Ser 1996 B (MBIA) .............................................. 0.00 06/30/07 5,950,000
10,000 Ser 1996 B (MBIA) .............................................. 0.00 06/30/06 6,322,200
4,000 Connecticut, College Savings 1989 Ser A ......................... 0.00 07/01/08 2,271,400
Massachusetts,
20,000 Refg 1996 Ser A (AMBAC) ........................................ 6.00 11/01/10 21,583,600
8,000 Refg 1993 Ser A ................................................ 5.50 02/01/11 8,048,880
4,000 Clark County, Nevada, Transportation Ser 1992 A (AMBAC) ......... 6.50 06/01/17 4,527,400
New York City, New York,
10,000 1990 Ser D ..................................................... 6.00 08/01/07 10,122,200
10,000 1990 Ser D ..................................................... 6.00 08/01/08 10,104,500
15,000 North Carolina, 1997 Ser A ...................................... 5.20 03/01/16 14,857,500
10,000 Pennsylvania, First Ser 1995 (FGIC) ............................. 5.50 05/01/12 10,129,600
7,000 Shelby County, Tennessee, Refg 1995 Ser A ....................... 5.625 04/01/14 7,108,080
20,000 King County, Washington, Ltd Tax 1995 (MBIA) .................... 6.00 01/01/23 20,474,600
- ------------ --------------
166,500 148,543,429
- ------------ --------------
Educational Facilities Revenue (5.3%)
10,000 Indiana University, Student Fee Ser K (MBIA) .................... 5.875 08/01/20 10,101,700
7,000 Massachusetts Health & Educational Facilities Authority, Boston
University ....................................................
Ser 1991 (MBIA) ................................................ 6.66 10/01/31 7,527,170
15,000 New Hampshire Higher Educational & Health Facilities Authority,
Dartmouth College Ser 1993 ..................................... 5.375 06/01/23 14,343,300
2,000 New Jersey Development Authority, The Seeing Eye Inc 1991 ....... 7.30 04/01/11 2,112,260
New York State Dormitory Authority,
5,000 State University Ser 1989 B .................................... 0.00 05/15/02 3,964,000
20,000 State University Ser 1990 B .................................... 7.00 05/15/16 21,348,800
- ------------ --------------
59,000 59,397,230
- ------------ --------------
Electric Revenue (10.9%)
25,000 Salt River Project Agricultural Improvement & Power District,
Arizona, Refg 1993 Ser C (Secondary MBIA) ...................... 5.50 01/01/10 25,963,000
10,000 Sacramento Municipal Utility District, California, Refg 1994 Ser
L (MBIA) ....................................................... 5.75 01/01/15 10,181,500
10,000 Municipal Electric Authority of Georgia, Fifth Crossover Ser
(Secondary MBIA) ............................................... 6.50 01/01/17 11,303,400
5,000 New York State Power Authority, General Purpose Ser CC .......... 5.25 01/01/18 4,770,600
15,000 Puerto Rico Electric Power Authority, Power Ser O ............... 0.00 07/01/17 4,902,150
15,000 South Carolina Public Service Authority, 1995 Refg Ser A
(AMBAC) ........................................................ 6.25 01/01/22 15,900,750
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS June 30, 1997 (unaudited) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-----------------------------------------------------------------------------------------------------------------
$24,000 San Antonio, Texas, Electric & Gas Refg Ser 1994 C .............. 4.70 % 02/01/06 $ 23,322,480
10,000 Intermountain Power Agency, Utah, Refg 1997 Ser B (MBIA) ....... 5.75 07/01/19 10,000,000
15,000 Washington Public Power Supply System, Proj #2 Refg Ser 1994 A
(Secondary MBIA) ............................................... 6.00 07/01/07 16,120,500
- ------------ --------------
129,000 122,464,380
- ------------ --------------
Hospital Revenue (6.5%)
10,000 Birmingham-Carraway Special Care Facilities Financing
Authority, Alabama, Carraway Methodist Health
Ser 1995 A (Connie Lee) ........................................ 6.25 08/15/09 10,887,900
3,000 Baxter County, Arkansas, Baxter County Regional Hospital Inc
Impr & Refg Ser 1992 ........................................... 7.50 09/01/21 3,222,750
1,500 Massachusetts Health & Educational Facilities Authority, Malden
Hospital - FHA Ins Mtge Ser A .................................. 5.00 08/01/16 1,366,380
Rochester, Minnesota,
5,000 Mayo Foundation/Medical Center Ser 1992 I ...................... 5.75 11/15/21 5,008,550
3,700 Mayo Foundation/Medical Center Ser 1992 F ...................... 6.25 11/15/21 3,902,760
10,000 Missouri Health & Educational Facilities Authority,
Barnes-Jewish Inc/Christian Health Services Ser 1993 A ......... 5.25 05/15/14 9,802,100
6,000 New York State Medical Care Facilities Finance Agency,
Presbyterian Hospital-FHA Ins Mtge 1984 Ser A Refg ............ 5.25 08/15/14 5,744,760
10,000 Charlotte-Mecklenburg County Hospital Authority, North Carolina,
Ser 1992 ....................................................... 6.00 01/01/22 10,172,000
5,000 University of North Carolina, Hospitals at Chapel Hill Ser 1996 . 5.00 02/15/29 4,530,000
4,000 Cuyahoga County, Ohio, The Cleveland Clinic Foundation Refg Ser
1988 A ......................................................... 8.00 12/01/15 4,115,200
5,000 North Central Texas Health Facilities Development Corporation,
University Medical Center Inc Ser 1997 (FSA) ................... 5.45 04/01/15 4,920,250
10,000 Fredericksburg Industrial Development Authority, Virginia,
Medicorp Health Refg Ser 1996 (AMBAC) .......................... 5.25 06/15/16 9,605,400
- ------------ --------------
73,200 73,278,050
- ------------ --------------
Industrial Development/Pollution Control Revenue (6.3%)
1,450 Maryland Industrial Development Financing Authority, Medical
Waste Assocs LP 1989 Ser (AMT) ................................. 8.75 11/15/10 1,465,240
17,000 Claiborne County, Mississippi, Middle South Energy Inc Ser C .... 9.875 12/01/14 18,504,500
10,000 Clark County, Nevada, Nevada Power Co Ser 1992 A (AMT) (FGIC) ... 6.70 06/01/22 10,766,900
5,000 Washoe County, Nevada, Sierra Pacific Power Co Ser 1987 (AMBAC) . 6.30 12/01/14 5,381,600
5,000 Alliance Airport Authority, Texas, AMR Corp Ser 1990 (AMT) ...... 7.50 12/01/29 5,393,550
10,000 Dallas-Fort Worth International Airport Facility Improvement
Corporation, Texas, American Airlines Inc Ser 1995 ............. 6.00 11/01/14 10,089,500
7,000 Matagorda County Navigation District #1, Texas, Central Power &
Light Co Collateralized Ser 1984 A ............................. 7.50 12/15/14 7,662,620
10,000 Weston, Wisconsin, Wisconsin Public Service Corp Refg Ser 1993
A .............................................................. 6.90 02/01/13 11,047,900
- ------------ --------------
65,450 70,311,810
- ------------ --------------
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS June 30, 1997 (unaudited) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-----------------------------------------------------------------------------------------------------------------
Mortgage Revenue-Multi-Family (2.3%)
$ 7,000 Michigan Housing Development Authority, Rental Ser A (Bifurcated
FSA) ........................................................... 6.50 % 04/01/23 $ 7,265,020
9,000 New Jersey Housing & Mortgage Finance Agency, 1995 Ser A
(AMBAC) ........................................................ 6.05 11/01/20 9,199,890
New York City Housing Development Corporation, New York,
4,476 Ruppert Proj-FHA Ins Sec 223F .................................. 6.50 11/15/18 4,634,438
4,333 Stevenson Commons Proj-FHA Ins Sec 223F ....................... 6.50 05/15/18 4,459,101
- ------------ --------------
24,809 25,558,449
- ------------ --------------
Mortgage Revenue-Single Family (6.5%)
5,000 Alaska Housing Finance Corporation, Governmental 1995 Ser A
(MBIA) ......................................................... 5.875 12/01/24 4,996,349
2,440 California Housing Finance Agency, Home Cap Apprec 1983 Ser B ... 0.00 08/01/15 377,444
12,100 Illinois Housing Development Authority, Residential 1991 Ser C
(AMT) .......................................................... 6.875 02/01/18 12,594,406
3,975 Missouri Housing Development Commission, Homeownership GNMA-FNMA
1996 Ser C (AMT) .............................................. 7.45 09/01/27 4,395,873
6,000 Nebraska Investment Finance Authority, GNMA-Backed 1990 Ser
(AMT) .......................................................... 7.631 09/10/30 6,341,880
4,010 North Carolina Housing Finance Agency, Ser Q (AMT) .............. 8.00 03/01/18 4,269,367
6,400 Ohio Housing Finance Agency, GNMA-Backed 1990 Ser A (AMT) ....... 6.903 03/01/31 6,696,640
10,000 Pennsylvania Housing Finance Agency, Ser 1991-31 (AMT) .......... 7.00 10/01/23 10,481,400
Tennessee Housing Development Agency,
11,000 Mortgage Finance 1993 Ser A .................................... 5.95 07/01/28 11,069,520
4,000 Mortgage Finance 1993 Ser A .................................... 5.90 07/01/18 4,025,320
6,800 Wisconsin Housing & Economic Development Authority, Home
Ownership 1991 Ser (AMT) ....................................... 7.097 10/25/22 7,154,008
- ------------ --------------
71,725 72,402,207
- ------------ --------------
Public Facilities Revenue (2.0%)
5,000 Palm Beach County, Florida, Criminal Justice Ser 1990 (FGIC) .... 6.00 06/01/13 5,090,550
5,000 Michigan Building Authority, 1993 Refg Ser I (AMBAC) ............ 5.30 10/01/16 4,801,400
6,000 Saint Louis Industrial Development Authority, Missouri, Kiel
Center Refg Ser 1992 (AMT) ..................................... 7.75 12/01/13 6,439,740
5,000 Ohio Building Authority, Correctional 1985 Ser C BIGS ........... 9.75 10/01/05 6,593,200
- ------------ --------------
21,000 22,924,890
- ------------ --------------
Resource Recovery Revenue (3.8%)
Connecticut Resources Recovery Authority,
9,000 American REF-FUEL Co of Southeastern Connecticut 1988 Ser A ... 8.00 11/15/15 9,643,680
4,950 Bridgeport RESCO Ser A ......................................... 7.625 01/01/09 5,113,895
7,000 Savannah Resource Recovery Development Authority, Georgia,
Savannah Energy Systems Co Ser 1992 ............................ 6.30 12/01/06 7,397,390
10,000 Northeast Maryland Waste Disposal Authority, Montgomery County
Ser 1993 A (AMT) ............................................... 6.30 07/01/16 10,284,300
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS June 30, 1997 (unaudited) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-----------------------------------------------------------------------------------------------------------------
$ 5,000 Onondaga County Resource Recovery Agency, New York, 1992 Ser
(AMT) .......................................................... 6.875% 05/01/06 $ 5,248,400
5,000 Fairfax County Economic Development Authority, Virginia, Ogden
Martin Systems of Fairfax Inc Ser 1998 A (AMT) ................ 7.75 02/01/11 5,344,600
- ------------ --------------
40,950 43,032,265
- ------------ --------------
Transportation Facilities Revenue (12.8%)
8,965 Mid-Bay Bridge Authority, Florida, Sr Lien Crossover Refg Ser
1993 A ......................................................... 6.00 10/01/13 9,056,891
Atlanta, Georgia,
5,000 Airport Refg Ser 1996 (AMBAC) .................................. 6.00 01/01/07 5,409,900
10,000 Airport Ser 1990 (AMT) ......................................... 6.25 01/01/21 10,337,600
8,100 Metropolitan Atlanta Rapid Transit Authority, Georgia, Sales Tax
Refg Ser K ..................................................... 7.25 07/01/10 8,486,451
5,000 Hawaii, Airports Second Ser 1991 (AMT) .......................... 7.00 07/01/18 5,361,600
Kentucky Turnpike Authority,
9,000 Economic Development Road Refg Ser 1995 (AMBAC) ................ 6.50 07/01/08 10,148,130
30,000 Resource Recovery Road 1987 Ser A .............................. 5.00 07/01/08 29,650,201
11,000 New Jersey Highway Authority, Sr Parkway Refg 1992 Ser .......... 6.25 01/01/14 11,696,850
6,595 Albuquerque, New Mexico, Airport Refg Ser 1997 (AMT) (AMBAC) .... 6.375 07/01/15 6,992,876
20,000 Ohio Turnpike Commission, 1996 Ser A (MBIA) ..................... 5.50 02/15/26 19,715,000
5,000 Pennsylvania Turnpike Commission, Ser L of 1991 (MBIA) .......... 6.00 06/01/15 5,132,200
10,000 Puerto Rico Highway & Transportation Authority, Refg Ser X ...... 5.50 07/01/15 9,921,000
8,000 Texas Turnpike Authority, Dallas North Tollway Refg Ser 1997
(FGIC) ......................................................... 5.25 01/01/23 7,632,640
4,000 Virginia Transportation Board, US Route 58 Corridor Ser 1993 B .. 5.625 05/15/13 4,013,600
- ------------ --------------
140,660 143,554,939
- ------------ --------------
Water & Sewer Revenue (8.2%)
10,000 Birmingham Water Works & Sewer Board, Alabama, Ser 1994 ......... 5.50 01/01/20 9,785,400
10,000 Phoenix Civic Improvement Corporation, Arizona, Jr Lien Water
Ser 1994 ....................................................... 5.45 07/01/19 9,911,400
10,000 California Department of Water Resources, Central Valley Refg
Ser L .......................................................... 5.50 12/01/23 9,714,800
10,000 East Bay Municipal Utility District, California, Water Refg Ser
1993 (MBIA) .................................................... 5.00 06/01/21 9,115,900
10,000 Los Angeles, California, Wastewater Ser 1994-A (MBIA) ........... 5.875 06/01/24 10,169,400
Massachusetts Water Resources Authority,
10,000 Refg 1992 Ser B ................................................ 5.50 11/01/15 9,818,100
10,000 1993 Ser C ..................................................... 5.25 12/01/15 9,701,000
10,000 1996 Ser A (FGIC) .............................................. 5.50 11/01/21 9,802,100
4,000 Detroit, Michigan, Sewage Refg Ser 1993-A (FGIC) ................ 5.70 07/01/13 4,068,320
5,000 New York City Municipal Water Finance Authority, New York, 1994
Ser B .......................................................... 5.30 06/15/06 5,097,350
5,000 Philadelphia, Pennsylvania, Water & Wastewater Ser 1993 (FSA) ... 5.50 06/15/15 4,943,700
- ------------ --------------
94,000 92,127,470
- ------------ --------------
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS June 30, 1997 (unaudited) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-----------------------------------------------------------------------------------------------------------------
Other Revenue (1.0%)
$3,500 Denver, Colorado, Excise Tax Ser 1985 A ......................... 5.00 % 11/01/08 $3,449,180
5,000 New York Local Government Assistance Corporation, Ser 1994 A .... 5.50 04/01/17 5,011,500
3,000 Houston, Texas, Sr Lien Hotel Occupancy Tax Refg Ser 1995 (FSA) . 5.50 07/01/11 3,016,920
- ------------ --------------
11,500 11,477,600
- ------------ --------------
Refunded (11.7%)
5,000 Central Coast Water Authority, California, Ser 1992 (AMBAC) ..... 6.60 10/01/02++ 5,615,150
9,000 Los Angeles Convention and Exhibition Center Authority,
California, Ser 1985 COPs ...................................... 9.00 12/01/05++ 11,782,170
6,000 Connecticut Health & Educational Facilities Authority, Yale-New
Haven Hospital Ser F (MBIA) .................................... 7.10 07/01/00++ 6,570,600
2,500 Mid-Bay Bridge Authority, Florida, Ser 1991 A (ETM) ............. 6.875 10/01/22 2,906,400
9,790 Metropolitan Pier & Exposition Authority, Illinois, McCormick
Place Ser 1992 A ............................................... 6.50 06/15/03++ 10,926,032
8,000 Massachusetts, 1994 Ser C (FGIC) ................................ 6.75 11/01/04++ 9,090,640
14,000 New York State Dormitory Authority, Suffolk County Judicial Ser
1986 (ETM) ..................................................... 7.375 07/01/16 16,802,660
6,000 New York State Environmental Facilities Corporation, Huntington
1989 Ser A (AMT) ............................................... 7.50 10/01/99++ 6,446,280
25,000 Intermountain Power Agency, Utah, Refg 1985 Ser H GAINS ......... 0.00 + 07/01/03++ 24,980,750
5,000 Salt Lake City, Utah, IHC Hospital Inc Ser 1983 (ETM) ........... 5.00 06/01/15 4,806,350
28,000 Fairfax County Industrial Development Authority, Virginia,
Fairfax Hospital System Inc/Inova Health Ser 1991 .............. 6.801 08/29/01++ 30,983,680
- ------------ --------------
118,290 130,910,712
- ------------ --------------
1,016,084 TOTAL TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $944,228,954) ....................... 1,015,983,431
- ------------ --------------
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (7.8%)
17,800 Dade County Health Facilities Authority, Florida, Miami
Childrens Hospital Ser 1990 (Demand 07/01/97) .................. 4.20 * 09/01/20 17,800,000
11,000 East Baton Rouge Parish, Louisiana, Exxon Corp Ser 1989
(Demand 07/01/97) .............................................. 4.10 * 11/01/19 11,000,000
25,900 Missouri Health & Educational Facilities Authority, Washington
University Ser 1996 D (Demand 07/01/97) ........................ 4.10 * 02/01/30 25,900,000
23,100 Harris County Health Facilities Development Corporation, Texas,
Methodist Hospital Ser 1994 (Demand 07/01/97) .................. 4.15 * 12/01/25 23,100,000
9,410 Washington Health Care Facilities Authority, Fred Hutchinson
Cancer Center Ser 1996 (Demand 07/01/97) ....................... 4.10 * 01/01/23 9,410,000
- ------------ --------------
87,210 TOTAL SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (Identified Cost $87,210,000) ....... 87,210,000
- ------------ --------------
$1,103,294 TOTAL INVESTMENTS (Identified Cost $1,031,438,954) (a) ................... 98.3% 1,103,193,431
============
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES ........................... 1.7 18,761,803
------------ --------------
NET ASSETS ............................................................... 100.0% $1,121,955,234
============ ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS June 30, 1997 (unaudited) continued
- ------------
AMT Alternative Minimum Tax.
BIGS Bond Income Growth Security.
COPs Certificates of Participation.
ETM Escrowed to Maturity.
GAINS Growth and Income Security.
+ Zero coupon; will convert to 10.00% on July 1, 2000.
++ Prerefunded to call date shown.
++ Refunded to call date shown by forward delivery contract.
* 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
$73,554,611 and the aggregate gross unrealized depreciation is
$1,800,134, resulting in a net unrealized appreciation of
$71,754,477.
Bond Insurance:
- ---------------
AMBAC AMBAC Indemnity Corporation.
Connie Lee Connie Lee Insurance Company.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
Geographic Summary of Investments
Based on Market Value as a Percent of Net Assets
June 30, 1997
<TABLE>
<CAPTION>
<S> <C>
Alabama 1.8%
Alaska 4.0
Arizona 3.2
Arkansas 0.3
California 5.1
Colorado 0.3
Connecticut 2.1
Florida 3.1
Georgia 3.8
Hawaii 0.5
Illinois 2.1
Indiana 0.9
Kentucky 3.6
Louisiana 1.0%
Maryland 1.1
Massachusetts 6.9
Michigan 1.4
Minnesota 0.8
Mississippi 1.6
Missouri 4.1
Nebraska 0.6
Nevada 1.8
New Hampshire 1.3
New Jersey 2.1
New Mexico 0.6
New York 9.2
North Carolina 3.0%
Ohio 3.3
Pennsylvania 2.7
Puerto Rico 1.3
South Carolina 1.4
Tennessee 2.0
Texas 7.6
Utah 3.5
Virginia 4.5
Washington 4.1
Wisconsin 1.6
----
Total 98.3%
====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $1,031,438,954)............................ $1,103,193,431
Cash......................................................... 3,121,503
Receivable for:
Interest................................................... 15,966,001
Shares of beneficial interest sold......................... 1,024,875
Investment sold............................................ 27,921
Prepaid expenses and other assets............................ 58,886
--------------
TOTAL ASSETS............................................... 1,123,392,617
--------------
LIABILITIES:
Payable for:
Dividends to shareholders.................................. 665,159
Investment management fee.................................. 419,847
Shares of beneficial interest repurchased.................. 227,563
Accrued expenses ............................................ 124,814
--------------
TOTAL LIABILITIES.......................................... 1,437,383
--------------
NET ASSETS:
Paid-in-capital.............................................. 1,047,215,076
Net unrealized appreciation.................................. 71,754,477
Accumulated undistributed net investment income ............ 16,350
Accumulated undistributed net realized gain.................. 2,969,331
--------------
NET ASSETS................................................. $1,121,955,234
==============
NET ASSET VALUE PER SHARE,
95,208,514 shares outstanding (unlimited shares authorized
of $.01 par value).......................................... $11.78
======
MAXIMUM OFFERING PRICE PER SHARE
(net asset value plus 4.17% of net asset value)* ........... $12.27
======
</TABLE>
- ------------
* On sales of $25,000 or more the offering price is reduced.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the six months ended June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME......................... $33,641,367
-------------
EXPENSES
Investment management fee............... 2,484,801
Transfer agent fees and expenses ....... 188,661
Professional fees....................... 30,851
Shareholder reports and notices......... 29,077
Custodian fees.......................... 23,260
Registration fees....................... 21,662
Trustees' fees and expenses............. 7,978
Other................................... 17,116
-------------
TOTAL EXPENSES ....................... 2,803,406
LESS: EXPENSE OFFSET ................. (23,213)
-------------
NET EXPENSES.......................... 2,780,193
-------------
NET INVESTMENT INCOME................. 30,861,174
-------------
NET REALIZED AND UNREALIZED GAIN
(LOSS):
Net realized gain....................... 3,148,730
Net change in unrealized appreciation .. (2,230,347)
-------------
NET GAIN.............................. 918,383
-------------
NET INCREASE............................ $31,779,557
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 1997 DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
(unaudited)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................. $ 30,861,174 $ 68,165,561
Net realized gain...................................... 3,148,730 2,959,135
Net change in unrealized appreciation.................. (2,230,347) (29,830,436)
-------------- --------------
NET INCREASE ........................................ 31,779,557 41,294,260
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income.................................. (30,844,824) (68,543,874)
Net realized gain...................................... (342,107) (8,374,759)
-------------- --------------
TOTAL................................................ (31,186,931) (76,918,633)
-------------- --------------
Net decrease from transactions in shares of beneficial
interest.............................................. (68,671,382) (99,650,138)
-------------- --------------
NET DECREASE......................................... (68,078,756) (135,274,511)
NET ASSETS:
Beginning of period.................................... 1,190,033,990 1,325,308,501
-------------- --------------
END OF PERIOD
(Including undistributed net investment of income of
$16,350 and $0, respectively) ....................... $1,121,955,234 $1,190,033,990
============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS June 30, 1997 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter Tax-Exempt Securities Trust (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Fund's investment objective is to provide
a high level of current income which is exempt from federal income tax,
consistent with the preservation of capital. The Fund was incorporated in
Maryland in 1979, commenced operations on March 27, 1980 and reorganized as a
Massachusetts business trust on April 30, 1987.
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 for the Fund
by an outside independent pricing service approved by the Trustees. The
pricing service has informed the Fund that in valuing the Fund's 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 Fund's 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 Fund 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 Fund'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.
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS June 30, 1997 (unaudited) continued
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to its shareholders on the record 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.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with Dean Witter InterCapital
Inc. (the "Investment Manager"), the Fund pays the Investment Manager a
management fee, accrued daily and payable monthly, by applying the following
annual rates to the Fund's net assets determined as of the close of each
business day: 0.50% to the portion of daily net assets not exceeding $500
million; 0.425% to the portion of daily net assets exceeding $500 million but
not exceeding $750 million; 0.375% to the portion of daily net assets
exceeding $750 million but not exceeding $1 billion; 0.35% to the portion of
daily net assets exceeding $1 billion but not exceeding $1.25 billion; and
0.325% to the portion of daily net assets exceeding $1.25 billion.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund'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 Fund 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
Fund.
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 June 30, 1997
aggregated $53,278,800 and $175,094,891, respectively.
Dean Witter Trust Company, an affiliate of the Investment Manager, is the
Fund's transfer agent. At June 30, 1997, the Fund had transfer agent fees and
expenses payable of approximately $44,000.
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS June 30, 1997 (unaudited) continued
The Fund has an unfunded noncontributory defined benefit pension plan
covering all independent Trustees of the Fund who will have served as
independent Trustees for at least five years at the time of retirement.
Benefits under this plan are based on years of service and compensation
during the last five years of service. Aggregate pension costs for the six
months ended June 30, 1997 included in Trustees' fees and expenses in the
Statement of Operations amounted to $1,208. At June 30, 1997, the Fund had an
accrued pension liability of $47,549 which is included in accrued expenses in
the Statement of Assets and Liabilities.
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Distributor has
informed the Fund that for the six months ended June 30, 1997, it received
approximately $357,000 in commissions from the sale of the Fund's shares.
Such commissions are deducted from the proceeds of the Fund's shares and are
not an expense of the Fund.
4. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 1997 DECEMBER 31, 1996
----------------------------- ------------------------------
(UNAUDITED)
SHARES AMOUNT SHARES AMOUNT
------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Sold 1,273,577 $ 13,065,247 3,179,464 $ 37,259,996
Reinvestment of dividends and distributions 1,268,200 16,660,932 3,684,669 43,078,883
------------- --------------- -------------- ---------------
2,541,777 29,726,179 6,864,133 80,338,879
Repurchased (8,416,824) (98,397,561) (15,389,992) (179,989,017)
------------- --------------- -------------- ---------------
Net decrease (5,875,047) $(68,671,382) (8,525,859) $ (99,650,138)
============= =============== ============== ===============
</TABLE>
5. FEDERAL INCOME TAX STATUS
Capital losses incurred after October 31 ("post-October" losses) within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $146,000 during fiscal 1996.
As of December 31, 1996, the Fund had temporary book/tax differences
primarily attributable to post-October losses.
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS June 30, 1997 (unaudited) continued
6. SUBSEQUENT EVENTS
On June 30, 1997, the Fund's Board of Trustees approved a proposal to adopt a
multiple class share structure. Through this arrangement, the Fund will offer
four classes of shares with various sales charges, ongoing fees and other
features. This conversion occurred on July 28, 1997.
On June 30, 1997, the Board of Trustees of the Fund and of Dean Witter
National Municipal Trust ("National Municipal") approved a reorganization
plan whereby National Municipal would be merged into the Fund. This plan is
subject to the consent of National Municipal shareholders. If approved, the
assets of National Municipal would be combined with those of the Fund and
shareholders of National Municipal would become shareholders of the Fund,
receiving shares equal to the value of their holdings in National Municipal.
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED -----------------------------------------------------
JUNE 30, 1997 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ... $11.77 $12.09 $11.01 $12.41 $11.88 $11.65
--------------- ---------- ---------- ---------- ---------- ---------
Net investment income .................. 0.32 0.65 0.67 0.70 0.77 0.79
Net realized and unrealized gain
(loss)................................. 0.01 (0.24) 1.19 (1.37) 0.54 0.23
--------------- ---------- ---------- ---------- ---------- ---------
Total from investment operations ....... 0.33 0.41 1.86 (0.67) 1.31 1.02
--------------- ---------- ---------- ---------- ---------- ---------
Less dividends and distributions from:
Net investment income.................. (0.32) (0.65) (0.67) (0.70) (0.77) (0.79)
Net realized gain...................... --* (0.08) (0.11) (0.03) (0.01) --
--------------- ---------- ---------- ---------- ---------- ---------
Total dividends and distributions ...... (0.32) (0.73) (0.78) (0.73) (0.78) (0.79)
--------------- ---------- ---------- ---------- ---------- ---------
Net asset value, end of period.......... $11.78 $11.77 $12.09 $11.01 $12.41 $11.88
=============== ========== ========== ========== ========== =========
TOTAL INVESTMENT RETURN+ ............... 2.79%(1) 3.61% 17.37% (5.55)% 11.23% 9.09%
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ 0.49%(2) 0.48% 0.48% 0.47% 0.47% 0.49%
Net investment income................... 5.43%(2) 5.52% 5.76% 6.02% 6.23% 6.74%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions . $1,122 $1,190 $1,325 $1,295 $1,582 $1,323
Portfolio turnover rate................. 5%(1) 18% 21% 16% 13% 4%
</TABLE>
- ------------
* The Fund paid a capital gain distribution of $0.004.
+ Does not reflect the deduction of sales load. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
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
Joseph R. Arcieri
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Dean Witter Trust Company
Harborside Financial Center--
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048
The financial statements included herein have been taken from the records of
the Fund without examination by the independent accountants and accordingly
they do not express an opinion thereon.
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and trustees,
fees, expenses and other pertinent information, please see the prospectus of
the Fund.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective prospectus.
DEAN WITTER
TAX-EXEMPT
SECURITIES
TRUST
SEMIANNUAL REPORT
JUNE 30, 1997
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PART B
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relates to the shares of Dean
Witter Tax-Exempt Securities Trust ("Tax-Exempt") to be issued pursuant to an
Agreement and Plan of Reorganization, dated June 30, 1997, between Tax-Exempt
and Dean Witter National Municipal Trust ("National Municipal") in connection
with the acquisition by Tax-Exempt of substantially all of the assets,
subject to stated liabilities, of National Municipal. This Statement of
Additional Information does not constitute a prospectus. This Statement of
Additional Information does not include all information that a shareholder
should consider before voting on the proposals contained in the Proxy
Statement and Prospectus, and, therefore, should be read in conjunction with
the related Proxy Statement and Prospectus, dated August 20, 1997. A copy of
the Proxy Statement and Prospectus may be obtained without charge by mailing
a written request to Tax-Exempt at Two World Trade Center, New York, New York
10048 or by calling (212) 392-2550 or (800) 526-3143 (TOLL FREE). Please
retain this document for future reference.
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS AUGUST 20, 1997.
B-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INTRODUCTION................................ B-3
ADDITIONAL INFORMATION ABOUT TAX-EXEMPT .... B-3
FINANCIAL STATEMENTS........................ B-4
</TABLE>
B-2
<PAGE>
INTRODUCTION
This Statement of Additional Information is intended to supplement the
information provided in the Proxy Statement and Prospectus dated August 20,
1997 (the "Proxy Statement and Prospectus"). The Proxy Statement and
Prospectus has been sent to National Municipal shareholders in connection
with the solicitation of proxies by the Board of Trustees of National
Municipal to be voted at the Special Meeting of Shareholders of National
Municipal to be held on October 24, 1997. This Statement of Additional
Information incorporates by reference the Statement of Additional Information
of Tax-Exempt dated July 28, 1997 and the Statement of Additional Information
of National Municipal dated November 26, 1996.
ADDITIONAL INFORMATION ABOUT TAX-EXEMPT
INVESTMENT OBJECTIVES AND POLICIES
For additional information about Tax-Exempt's investment objectives and
policies, see "Investment Practices and Policies" and "Investment
Restrictions" in Tax-Exempt's Statement of Additional Information.
MANAGEMENT
For additional information about the Board of Directors, officers and
management personnel of Tax-Exempt, see "The Fund and Its Management" and
"Directors and Officers" in Tax-Exempt's Statement of Additional Information.
INVESTMENT ADVISORY AND OTHER SERVICES
For additional information about Tax-Exempt's investment manager, see "The
Fund and Its Management" in Tax-Exempt's Statement of Additional Information.
For additional information about Tax-Exempt's independent auditors, see
"Independent Accountants" in Tax-Exempt's Statement of Additional
Information. For additional information about other services provided to
Tax-Exempt see "Custodian and Transfer Agent" and "Shareholder Services" in
Tax-Exempt's Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE
For additional information about brokerage allocation practices, see
"Portfolio Transactions and Brokerage" in Tax-Exempt's Statement of
Additional Information.
DESCRIPTION OF FUND SHARES
For additional information about the voting rights and other
characteristics of the shares of Tax-Exempt, see "Description of Shares" in
Tax-Exempt's Statement of Additional Information.
PURCHASE, REDEMPTION AND PRICING OF SHARES
For additional information about the purchase and redemption of
Tax-Exempt's shares and the determination of net asset value, see "Purchase
of Fund Shares," "Redemptions and Repurchases," "Financial Statements --
December 31, 1996" and "Shareholder Services" in Tax-Exempt's Statement of
Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
For additional information about Tax-Exempt's policies regarding dividends
and distributions and tax matters affecting Tax-Exempt and its shareholders,
see "Dividends, Distributions and Taxes" and "Financial Statements --
December 31, 1996" in Tax-Exempt's Statement of Additional Information.
B-3
<PAGE>
DISTRIBUTION OF SHARES
For additional information about Tax-Exempt's distributor and the
distribution agreement between Tax-Exempt and its distributor, see "Purchase
of Fund Shares" in Tax-Exempt's Statement of Additional Information.
PERFORMANCE DATA
For additional information about Tax-Exempt's performance data, see
"Performance Information" in Tax-Exempt's Statement of Additional
Information.
FINANCIAL STATEMENTS
Tax-Exempt's most recent audited financial statements are set forth in
Tax-Exempt's Annual Report for the fiscal year ended December 31, 1996 and
Tax-Exempt's updated, unaudited financial statements are set forth in its
Semi-Annual Report for the six month period ended June 30, 1997. Copies of
both Reports accompany, and are incorporated by reference in, the Proxy
Statement and Prospectus. National Municipal's most recent audited financial
statements are set forth in National Municipal's Annual Report for its fiscal
year ended September 30, 1996, which is incorporated by reference in the
Proxy Statement and Prospectus. In addition, National Municipal's updated,
unaudited financial statements are set forth in its Semi-Annual Report for
the six month period ended March 31, 1997, which is incorporated by reference
to the Proxy Statement and Prospectus.
B-4
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION DEAN WITTER
JULY 28, 1997 TAX-EXEMPT
SECURITIES
TRUST
- -----------------------------------------------------------------------------
Dean Witter Tax-Exempt Securities Trust (the "Fund") is an open-end,
diversified management investment company whose investment objective is to
provide a high level of current income exempt from federal income tax,
consistent with the preservation of capital. The Fund invests principally in
tax-exempt fixed-income securities which are rated in the three highest
categories by Moody's Investors Service, Inc. or Standard & Poor's
Corporation. (See "Investment Practices and Policies.")
A Prospectus for the Fund dated July 28, 1997, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge from the Fund at its address or telephone numbers listed below
or from the Fund's Distributor, Dean Witter Distributors Inc., or from Dean
Witter Reynolds Inc. at any of its branch offices. This Statement of
Additional Information is not a Prospectus. It contains information in
addition to and more detailed than that set forth in the Prospectus. It is
intended to provide additional information regarding the activities and
operations of the Fund, and should be read in conjunction with the
Prospectus.
Dean Witter
Tax-Exempt Securities Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
<PAGE>
TABLE OF CONTENTS
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
The Fund and its Management............ 3
Trustees and Officers.................. 6
Investment Practices and Policies ..... 12
Investment Restrictions................ 18
Portfolio Transactions and Brokerage .. 19
The Distributor ....................... 20
Determination of Net Asset Value ..... 23
Purchase of Fund Shares................ 23
Shareholder Services................... 26
Redemptions and Repurchases............ 30
Dividends, Distributions and Taxes .... 31
Performance Information................ 32
Description of Shares of the Fund ..... 34
Custodian and Transfer Agent........... 34
Independent Accountants................ 35
Reports to Shareholders................ 35
Legal Counsel.......................... 36
Experts................................ 36
Registration Statement................. 36
Financial Statements--
December 31, 1996.................... 37
Report of Independent Accountants ..... 51
Appendix............................... 52
</TABLE>
2
<PAGE>
THE FUND AND ITS MANAGEMENT
- -----------------------------------------------------------------------------
THE FUND
The Fund was incorporated in the State of Maryland on December 31, 1979
under the name InterCapital Tax-Exempt Securities Inc. On March 17, 1983, the
Fund's shareholders approved a change in the Fund's name, effective March 21,
1983, to Dean Witter Tax-Exempt Securities Inc. On April 30, 1987 the Fund
reorganized as a Massachusetts business trust, with the name Dean Witter
Tax-Exempt Securities Trust.
THE INVESTMENT MANAGER
Dean Witter InterCapital Inc. (the "Investment Manager" or
"InterCapital"), whose address is Two World Trade Center, New York, New York
10048, is the Fund's Investment Manager. InterCapital is a wholly-owned
subsidiary of Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD"), a
Delaware corporation. In an internal reorganization which took place in
January, 1993, InterCapital assumed the investment advisory, administrative
and management activities previously performed by the InterCapital Division
of Dean Witter Reynolds Inc. ("DWR"), a broker-dealer affiliate of
InterCapital. (As hereinafter used in this Statement of Additional
Information, the terms "InterCapital" and "Investment Manager" refer to DWR's
InterCapital Division prior to the internal reorganization and to Dean Witter
InterCapital Inc. thereafter.) The daily management of the Fund and research
relating to the Fund's portfolio is conducted by or under the direction of
officers of the Fund and of the Investment Manager, subject to periodic
review by the Fund's Board of Trustees. Information as to these trustees and
officers is contained under the caption "Trustees and Officers."
InterCapital is the investment manager or investment adviser of the
following investment companies: Dean Witter Liquid Asset Fund Inc.,
InterCapital Income Securities Inc., InterCapital Insured Municipal Bond
Trust, InterCapital Quality Municipal Investment Trust, InterCapital Insured
Municipal Trust, InterCapital Quality Municipal Income Trust, InterCapital
Insured Municipal Income Trust, InterCapital California Insured Municipal
Income Trust, InterCapital Quality Municipal Securities, InterCapital
California Quality Municipal Securities, InterCapital New York Quality
Municipal Securities, InterCapital Insured Municipal Securities, InterCapital
California Insured Municipal Securities, Dean Witter High Yield Securities
Inc., Dean Witter Tax-Free Daily Income Trust, Dean Witter Developing Growth
Securities Trust, Dean Witter Tax-Exempt Securities Trust, Dean Witter
Natural Resource Development Securities Inc., Dean Witter Dividend Growth
Securities Inc., Dean Witter American Value Fund, Dean Witter U.S. Government
Money Market Trust, Dean Witter Variable Investment Series, Dean Witter World
Wide Investment Trust, Dean Witter Select Municipal Reinvestment Fund, Dean
Witter U.S. Government Securities Trust, Dean Witter California Tax-Free
Income Fund, Dean Witter New York Tax-Free Income Fund, Dean Witter
Convertible Securities Trust, Dean Witter Federal Securities Trust, Dean
Witter Value-Added Market Series, High Income Advantage Trust, High Income
Advantage Trust II, High Income Advantage Trust III, Dean Witter Government
Income Trust, Dean Witter Utilities Fund, Dean Witter California Tax-Free
Daily Income Trust, Dean Witter Strategist Fund, Dean Witter World Wide
Income Trust, Dean Witter Intermediate Income Securities, Dean Witter New
York Municipal Money Market Trust, Dean Witter Capital Growth Securities,
Dean Witter European Growth Fund Inc., Dean Witter Precious Metals and
Minerals Trust, Dean Witter Global Short-Term Income Fund Inc., Dean Witter
Pacific Growth Fund Inc., Dean Witter Multi-State Municipal Series Trust,
Dean Witter Short-Term U.S. Treasury Trust, Dean Witter Health Sciences
Trust, Dean Witter Retirement Series, Dean Witter Limited Term Municipal
Trust, Dean Witter Short-Term Bond Fund, Dean Witter Global Dividend Growth
Securities, Dean Witter Global Utilities Fund, Dean Witter National Municipal
Trust, Dean Witter High Income Securities, Dean Witter International Small
Cap Fund, Dean Witter Mid-Cap Growth Fund, Dean Witter Select Dimensions
Investment Series, Dean Witter Global Asset Allocation Fund, Dean Witter
Balanced Growth Fund, Dean Witter Balanced Income Fund, Dean Witter Hawaii
Municipal Trust, Dean Witter Capital Appreciation Fund, Dean Witter
Intermediate Term U.S. Treasury Trust, Dean Witter Japan Fund, Dean Witter
Income Builder Fund, Dean Witter Special Value Fund, Dean Witter Financial
Services Trust, Dean Witter Market Leader Trust, Dean Witter Information
Fund, Active Assets Money Trust, Active Assets Tax-Free Trust, Active Assets
California Tax-Free Trust, Active Assets Government Securities Trust,
Municipal Income Trust, Municipal Income Trust II, Municipal Income Trust
III, Municipal Income Opportunities Trust, Municipal Income Opportunities
Trust II, Municipal Income Opportunities
3
<PAGE>
Trust III, Prime Income Trust and Municipal Premium Income Trust. The
foregoing investment companies, together with the Fund, are collectively
referred to as the Dean Witter Funds.
In addition, Dean Witter Services Company Inc. ("DWSC"), a wholly-owned
subsidiary of InterCapital, serves as manager for the following companies for
which TCW Funds Management, Inc. is the investment adviser: TCW/DW Core
Equity Trust, TCW/DW North American Government Income Trust, TCW/DW Latin
American Growth Fund, TCW/DW Income and Growth Fund, TCW/DW Small Cap Growth
Fund, TCW/DW Balanced Fund, TCW/DW Total Return Trust, TCW/DW Mid-Cap Equity
Trust, TCW/DW Global Telecom Trust, TCW/DW Strategic Income Trust, TCW/DW
Emerging Market Opportunities Trust, TCW/DW Term Trust 2000, TCW/DW Term
Trust 2002 and TCW/DW Term Trust 2003 (the "TCW/DW Funds"). InterCapital also
serves as (i) administrator of The Black Rock Strategic Term Trust Inc., a
closed-end investment company; and (ii) sub-administrator of MassMutual
Participation Investors and Templeton Global Governments Income Trust,
closed-end investment companies.
Pursuant to an Investment Management Agreement (the "Agreement") with the
Investment Manager, the Fund has retained the Investment Manager to manage
the investment of the Fund's assets, including the placing of orders for the
purchase and sale of portfolio securities. The Investment Manager obtains and
evaluates such information and advice relating to the economy, securities
markets, and specific securities as it considers necessary or useful to
continuously manage the assets of the Fund in a manner consistent with its
investment objective and policies.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, such office space, facilities,
equipment, clerical help, bookkeeping and legal services as the Fund may
reasonably require in the conduct of its business, including the preparation
of prospectuses, proxy statements and reports required to be filed with
federal and state securities commissions (except insofar as the participation
or assistance of independent accountants and attorneys is, in the opinion of
the Investment Manager, necessary or desirable). In addition, the Investment
Manager pays the salaries of all personnel, including officers of the Fund,
who are employees of the Investment Manager. The Investment Manager also
bears the cost of telephone service, heat, light, power and other utilities
provided to the Fund.
Effective December 31, 1993, pursuant to a Services Agreement between
InterCapital and DWSC, DWSC began to provide the administrative services to
the Fund which were previously performed directly by InterCapital. On April
17, 1995, DWSC was reorganized in the State of Delaware, necessitating the
entry into a new Services Agreement by InterCapital and DWSC on that date.
The foregoing internal reorganizations did not result in any change in the
nature or scope of the administrative services being provided to the Fund or
any of the fees being paid by the Fund for the overall services being
performed under the terms of the existing Agreement.
Expenses not expressly assumed by the Investment Manager under the
Agreement or by the Distributor of the Fund's shares, Dean Witter
Distributors Inc. ("Distributors" or the "Distributor") (see "The
Distributor"), will be paid by the Fund. These expenses will be allocated
among the four classes of shares of the Fund (each, a "Class") pro rata based
on the net assets of the Fund attributable to each Class, except as described
below. The expenses borne by the Fund include, but are not limited to:
expenses of the Plan of Distribution pursuant to Rule 12b-1 (the "12b-1 fee")
(see "The Distributor"); charges and expenses of any registrar, custodian,
stock transfer and dividend disbursing agent; brokerage commissions; taxes;
engraving and printing share certificates; registration costs of the Fund and
its shares under federal and state securities laws; the cost and expense of
printing, including typesetting, and distributing Prospectuses and Statements
of Additional Information of the Fund and supplements thereto to the Fund's
shareholders; all expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing of proxy statements and reports to
shareholders; fees and travel expenses of Trustees or members of any advisory
board or committee who are not employees of the Investment Manager or any
corporate affiliate of the Investment Manager; all expenses incident to any
dividend, withdrawal or redemption options; charges and expenses of any
outside service used for pricing of the Fund's shares; fees and expenses of
legal counsel, including counsel to the Trustees who are not interested
persons of the Funds or of the Investment Manager (not including compensation
or
4
<PAGE>
expenses of attorneys who are employees of the Investment Manager) and
independent accountants; membership dues of industry associations; interest
on Fund borrowings; postage; insurance premiums on property or personnel
(including officers and Trustees) of the Fund which inure to its benefit;
extraordinary expenses (including, but not limited to, legal claims and
liabilities and litigation costs and any indemnification relating thereto);
and all other costs of the Fund's operation. The 12b-1 fees relating to a
particular Class will be allocated directly to that Class. In addition, other
expenses associated with a particular Class (except advisory or custodial
fees) may be allocated directly to that Class, provided that such expenses
are reasonably identified as specifically attributable to that Class and the
direct allocation to that Class is approved by the Trustees.
As full compensation for the services and facilities furnished to the Fund
and expenses of the Fund assumed by the Investment Manager, the Fund pays the
Investment Manager monthly compensation calculated daily by applying the
following annual rates to the net assets of the Fund determined as of the
close of each business day: 0.50% of the portion of the daily net assets not
exceeding $500 million; 0.425% of the portion of the daily net assets
exceeding $500 million but not exceeding $750 million; 0.375% of the portion
of the daily net assets exceeding $750 million but not exceeding $1 billion;
0.35% of the portion of the daily net assets exceeding $1 billion but not
exceeding $1.25 billion; and 0.325% of the portion of daily net assets
exceeding $1.25 billion. For the fiscal years ended December 31, 1994, 1995
and 1996, the Fund accrued to the Investment Manager total compensation of
$6,003,589, $5,608,466 and $5,320,578, respectively.
The Agreement provides that in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations thereunder,
the Investment Manager is not liable to the Fund or any of its investors for
any act or omission by the Investment Manager or for any losses sustained by
the Fund or its investors. The Agreement in no way restricts the Investment
Manager from acting as investment manager or adviser to others.
The Agreement was initially approved by the Board of Trustees on February
21, 1997 and by the shareholders of the Fund at a Special Meeting of
Shareholders held on May 21, 1997. The Agreement is substantially identical
to a prior investment management agreement which was initially approved by
the Board of Trustees on October 30, 1992 and by the shareholders of the Fund
at a Special Meeting of Shareholders held on January 12, 1993. The Agreement
took effect on May 31, 1997 upon the consummation of the merger of Dean
Witter, Discover & Co. with Morgan Stanley Group Inc. The Agreement may be
terminated at any time, without penalty, on thirty days notice, by the Board
of Trustees of the Fund, by the holders of a majority, as defined in the
Investment Company Act of 1940, as amended (the "Act"), of the outstanding
shares of the Fund, or by the Investment Manager. The Agreement will
automatically terminate in the event of its assignment (as defined in the
Act).
Under its terms, the Agreement has an initial term ending April 30, 1999
and will continue in effect from year to year thereafter, provided
continuance of the Agreement is approved at least annually by the vote of the
holders of a majority (as defined in the Act) of the outstanding shares of
the Fund, or by the Board of Trustees of the Fund; provided that in either
event such continuance is approved annually by the vote of a majority of the
Independent Trustees, which vote must be cast in person at a meeting called
for the purpose of voting on such approval.
The Fund has acknowledged that the name "Dean Witter" is a property right
of DWR. The Fund has agreed that DWR or its parent company may use or, at any
time, permit others to use, the name "Dean Witter." The Fund has also agreed
that in the event the Agreement is terminated, or if the affiliation between
InterCapital and its parent company is terminated, the Fund will eliminate
the name "Dean Witter" from its name if DWR or its parent company shall so
request.
5
<PAGE>
TRUSTEES AND OFFICERS
- -----------------------------------------------------------------------------
The Trustees and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with
InterCapital, and with the 83 Dean Witter Funds and the 14 TCW/DW Funds, are
shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- -------------------------------------------- ----------------------------------------------------------
<S> <C>
Michael Bozic (56) Chairman and Chief Executive Officer of Levitz Furniture
Trustee Corporation (since November, 1995); Director or Trustee of the
c/o Levitz Furniture Corporation Dean Witter Funds; formerly President and Chief Executive Officer
6111 Broken Sound Parkway, N.W. of Hills Department Stores (May, 1991-July, 1995); formerly
Boca Raton, Florida variously Chairman, Chief Executive Officer, President and Chief
Operating Officer (1987-1991) of the Sears Merchandise Group
of Sears, Roebuck and Co.; Director of Eaglemark Financial
Services, Inc., the United Negro College Fund and Weirton Steel
Corporation.
Charles A. Fiumefreddo* (64) Chairman, Chief Executive Officer and Director of InterCapital,
Trustee, Chairman, President and Chief Distributors and DWSC; Executive Vice President and Director
Executive Officer of DWR; Chairman, Director or Trustee, President and Chief
Two World Trade Center Executive Officer of the Dean Witter Funds; Chairman, Chief
New York, New York Executive Officer and Trustee of the TCW/DW Funds; Chairman
and Director of Dean Witter Trust Company ("DWTC"); Director
and/or officer of various MSDWD subsidiaries; formerly Executive
Vice President and Director of Dean Witter, Discover & Co. (until
February, 1993).
Edwin J. Garn (64) Director or Trustee of the Dean Witter Funds; formerly United
Trustee States Senator (R-Utah)(1974-1992) and Chairman, Senate Banking
c/o Huntsman Corporation Committee (1980-1986); formerly Mayor of Salt Lake City, Utah
500 Huntsman Way (1972-1974); formerly Astronaut, Space Shuttle Discovery (April
Salt Lake City, Utah 12-19, 1985); Vice Chairman, Huntsman Corporation (since January,
1993); Director of Franklin Quest (time management systems)
and John Alden Financial Corp. (health insurance); member of
the board of various civic and charitable organizations.
John R. Haire (72) Chairman of the Audit Committee and Chairman of the Committee
Trustee of the Independent Directors or Trustees and Director or Trustee
Two World Trade Center of the Dean Witter Funds; Chairman of the Audit Committee and
New York, New York Chairman of the Committee of the Independent Trustees and Trustee
of the TCW/DW Funds; formerly President, Council for Aid to
Education (1978-1989) and Chairman and Chief Executive Officer
of Anchor Corporation, an Investment Adviser (1964-1978);
Director of Washington National Corporation (insurance).
6
<PAGE>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- -------------------------------------------- ----------------------------------------------------------
Wayne E. Hedien** (63) Retired; Director or Trustee of the Dean Witter Funds (commencing
Trustee on September 1, 1997); Director of The PMI Group, Inc. (private
c/o Gordon Altman Butowsky mortgage insurance); Trustee and Vice Chairman of The Field
Weitzen Shalov & Wein Museum of Natural History; formerly associated with the Allstate
Counsel to the Independent Trustees Companies (1966-1994), most recently as Chairman of The Allstate
114 West 47th Street Corporation (March, 1993-December, 1994) and Chairman and Chief
New York, New York Executive Officer of its wholly-owned subsidiary, Allstate
Insurance Company (July, 1989-December, 1994); director of
various other business and charitable organizations.
Dr. Manuel H. Johnson (48) Senior Partner, Johnson Smick International, Inc., a consulting
Trustee firm; Co-Chairman and a founder of the Group of Seven Council
c/o Johnson Smick International, Inc. (G7C), an international economic commission; Director or Trustee
1133 Connecticut Avenue, N.W. of the Dean Witter Funds; Trustee of the TCW/DW Funds; Director
Washington, D.C. of NASDAQ (since June, 1995); Director of Greenwich Capital
Markets Inc. (broker-dealer); Trustee of the Financial Accounting
Foundation (oversight organization for the Financial Accounting
Standards Board); formerly Vice Chairman of the Board of Governors
of the Federal Reserve System (1986-1990) and Assistant Secretary
of the U.S. Treasury.
Michael E. Nugent (61) General Partner, Triumph Capital, L.P., a private investment
Trustee partnership; Director or Trustee of the Dean Witter Funds; Trustee
c/o Triumph Capital, L.P. of the TCW/DW Funds; formerly Vice President, Bankers Trust
237 Park Avenue Company and BT Capital Corporation (1984-1988); Director of
New York, New York various business organizations.
Philip J. Purcell* (53) Chairman of the Board of Directors and Chief Executive Officer
Trustee of MSDWD, DWR and Novus Credit Services Inc.; Director of
1585 Broadway InterCapital, DWSC and Distributors; Director or Trustee of
New York, New York the Dean Witter Funds; Director and/or officer of various MSDWD
subsidiaries.
John L. Schroeder (66) Retired; Director or Trustee of the Dean Witter Funds; Trustee
Trustee of the TCW/DW Funds; Director of Citizens Utilities Company;
c/o Gordon Altman Butowsky Formerly Executive Vice President and Chief Investment Officer
Weitzen Shalov & Wein of the Home Insurance Company (August, 1991-September, 1995).
Counsel to the Independent Trustees
114 West 47th Street
New York, NY
7
<PAGE>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- -------------------------------------------- ----------------------------------------------------------
Barry Fink (42) Senior Vice President (since March, 1997) and Secretary and
Vice President, Secretary General Counsel (since February, 1997) of InterCapital and DWSC;
and General Counsel Senior Vice President (since March, 1997) and Assistant Secretary
Two World Trade Center and Assistant General Counsel (since February, 1997) of
New York, New York Distributors; Assistant Secretary of DWR (since August, 1996);
Vice President, Secretary and General Counsel of the Dean Witter
Funds and the TCW/DW Funds (since February, 1997); previously
First Vice President (June, 1993-February, 1997), Vice President
(until June, 1993) and Assistant Secretary and Assistant General
Counsel of InterCapital and DWSC and Assistant Secretary of
the Dean Witter Funds and the TCW/DW Funds.
James F. Willison (53) Senior Vice President of InterCapital; Vice President of various
Vice President Dean Witter Funds.
Two World Trade Center
New York, New York
Joseph R. Arcieri (48) Vice President of InterCapital; Vice President of various Dean
Vice President Witter Funds.
Two World Trade Center
New York, New York
Thomas F. Caloia (51) First Vice President and Assistant Treasurer of InterCapital
Treasurer and DWSC; Treasurer of the Dean Witter Funds and the TCW/DW
Two World Trade Center Funds.
New York, New York
</TABLE>
- --------------
* Denotes Trustees who are "interested persons" of the Fund, as defined in
the Act.
** Mr. Hedien's term as Trustee will commence on September 1, 1997.
In addition, Robert M. Scanlan, President and Chief Operating Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWTC and
a Director of DWTC, Mitchell M. Merin, President and Chief Strategic Officer
of InterCapital and DWSC, Executive Vice President of Distributors and DWTC
and Director of DWTC, Executive Vice President and Director of DWR, and
Director of SPS Transaction Services, Inc. and various other MSDWD
subsidiaries, Robert S. Giambrone, Senior Vice President of InterCapital,
DWSC, Distributors and DWTC and a Director of DWTC, Joseph J. McAlinden,
Executive Vice President and Chief Investment Officer of InterCapital and a
Director of DWTC, Peter M. Avelar, and Jonathan R. Page, Senior Vice
Presidents of InterCapital, Katherine H. Stromberg and Gerard J. Lian, Vice
Presidents of InterCapital, are Vice Presidents of the Fund, and Marilyn K.
Cranney, First Vice President and Assistant General Counsel of InterCapital,
and DWSC, and Lou Anne D. McInnis, Carsten Otto and Ruth Rossi, Vice
Presidents and Assistant General Counsels of InterCapital and DWSC, and Frank
Bruttomesso, a Staff Attorney with InterCapital, are Assistant Secretaries of
the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees currently consists of eight (8) trustees; as noted
above, Mr. Hedien's term will commence on September 1, 1997. These same
individuals also serve as directors or trustees for all of the Dean Witter
Funds, and are referred to in this section as Trustees. As of the date of
this Statement of Additional Information, there are a total of 83 Dean Witter
Funds, comprised of 126 portfolios. As of June 30, 1997, the Dean Witter
Funds had total net assets of approximately $87.9 billion and more than six
million shareholders.
Six Trustees and Mr. Hedien (77% of the total number) have no affiliation
or business connection with InterCapital or any of its affiliated persons and
do not own any stock or other securities issued by
8
<PAGE>
InterCapital's parent company, MSDWD. These are the "disinterested" or
"independent" Trustees. The other two Trustees (the "management Trustees")
are affiliated with InterCapital. Four of the six independent Trustees are
also Independent Trustees of the TCW/DW Funds.
Law and regulation establish both general guidelines and specific duties
for the Independent Trustees. The Dean Witter Funds seek as Independent
Trustees individuals of distinction and experience in business and finance,
government service or academia; these are people whose advice and counsel are
in demand by others and for whom there is often competition. To accept a
position on the Funds' Boards, such individuals may reject other attractive
assignments because the Funds make substantial demands on their time. Indeed,
by serving on the Funds' Boards, certain Trustees who would otherwise be
qualified and in demand to serve on bank boards would be prohibited by law
from doing so.
All of the current Independent Trustees serve as members of the Audit
Committee and the Committee of the Independent Trustees. Three of them also
serve as members of the Derivatives Committee. During the calendar year ended
December 31, 1996, the three Committees held a combined total of sixteen
meetings. The Committees hold some meetings at InterCapital's offices and
some outside InterCapital. Management Trustees or officers do not attend
these meetings unless they are invited for purposes of furnishing information
or making a report.
The Committee of the Independent Trustees is charged with recommending to
the full Board approval of management, advisory and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing Fund performance; checking on the pricing of portfolio securities,
brokerage commissions, transfer agent costs and performance, and trading
among Funds in the same complex; and approving fidelity bond and related
insurance coverage and allocations, as well as other matters that arise from
time to time. The Independent Trustees are required to select and nominate
individuals to fill any Independent Trustee vacancy on the Board of any Fund
that has a Rule 12b-1 plan of distribution. Most of the Dean Witter Funds
have such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing
engagement; approving professional services provided by the independent
accountants and other accounting firms prior to the performance of such
services; reviewing the independence of the independent accountants;
considering the range of audit and non-audit fees; reviewing the adequacy of
the Fund's system of internal controls; and preparing and submitting
Committee meeting minutes to the full Board.
Finally, the Board of each Fund has formed a Derivatives Committee to
establish parameters for and oversee the activities of the Fund with respect
to derivative investments, if any, made by the Fund.
DUTIES OF CHAIRMAN OF COMMITTEE OF THE INDEPENDENT TRUSTEES AND AUDIT
COMMITTEE
The Chairman of the Committee of the Independent Trustees and the Audit
Committee maintains an office at the Funds' headquarters in New York. He is
responsible for keeping abreast of regulatory and industry developments and
the Funds' operations and management. He screens and/or prepares written
materials and identifies critical issues for the Independent Trustees to
consider, develops agendas for Committee meetings, determines the type and
amount of information that the Committees will need to form a judgment on
various issues, and arranges to have that information furnished to Committee
members. He also arranges for the services of independent experts and
consults with them in advance of meetings to help refine reports and to focus
on critical issues. Members of the Committees believe that the person who
serves as Chairman of both Committees and guides their efforts is pivotal to
the effective functioning of the Committees.
The Chairman of the Committees also maintains continuous contact with the
Funds' management, with independent counsel to the Independent Trustees and
with the Funds' independent auditors. He arranges for a series of special
meetings involving the annual review of investment advisory,
9
<PAGE>
management and other operating contracts of the Funds and, on behalf of the
Committees, conducts negotiations with the Investment Manager and other
service providers. In effect, the Chairman of the Committees serves as a
combination of chief executive and support staff of the Independent Trustees.
The Chairman of the Committee of the Independent Trustees and the Audit
Committee is not employed by any other organization and devotes his time
primarily to the services he performs as Committee Chairman and Independent
Trustee of the Dean Witter Funds and as an Independent Trustee and, since
July 1, 1996, as Chairman of the Committee of the Independent Trustees and
the Audit Committee of the TCW/DW Funds. The current Committee Chairman has
had more than 35 years experience as a senior executive in the investment
company industry.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL DEAN
WITTER FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the Dean Witter Funds avoids the
duplication of effort that would arise from having different groups of
individuals serving as Independent Trustees for each of the Funds or even of
sub-groups of Funds. They believe that having the same individuals serve as
Independent Trustees of all the Funds tends to increase their knowledge and
expertise regarding matters which affect the Fund complex generally and
enhances their ability to negotiate on behalf of each Fund with the Fund's
service providers. This arrangement also precludes the possibility of
separate groups of Independent Trustees arriving at conflicting decisions
regarding operations and management of the Funds and avoids the cost and
confusion that would likely ensue. Finally, having the same Independent
Trustees serve on all Fund Boards enhances the ability of each Fund to
obtain, at modest cost to each separate Fund, the services of Independent
Trustees, and a Chairman of their Committees, of the caliber, experience and
business acumen of the individuals who serve as Independent Trustees of the
Dean Witter Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Fund pays each Independent Trustee an annual fee of $1,000 plus a per
meeting fee of $50 for meetings of the Board of Trustees or committees of the
Board of Trustees attended by the Trustee (the Fund pays the Chairman of the
Audit Committee an annual fee of $750 and pays the Chairman of the Committee
of the Independent Trustees an additional annual fee of $1,200). The Fund
also reimburses such Trustees for travel and other out-of-pocket expenses
incurred by them in connection with attending such meetings. Trustees and
officers of the Fund who are or have been employed by the Investment Manager
or an affiliated company receive no compensation or expense reimbursement
from the Fund.
The following table illustrates the compensation paid to the Fund's
Independent Trustees by the Fund for the fiscal year ended December 31, 1996.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- --------------------------- -------------
<S> <C>
Michael Bozic .............. $1,800
Edwin J. Garn .............. 1,800
John R. Haire .............. 3,900
Dr. Manuel H. Johnson ..... 1,750
Michael E. Nugent .......... 1,800
John L. Schroeder........... 1,750
</TABLE>
10
<PAGE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1996 for
services to the 82 Dean Witter Funds and, in the case of Messrs. Haire,
Johnson, Nugent and Schroeder, the 14 TCW/DW Funds that were in operation at
December 31, 1996. With respect to Messrs. Haire, Johnson, Nugent and
Schroeder, the TCW/DW Funds are included solely because of a limited exchange
privilege between those Funds and five Dean Witter Money Market Funds.
CASH COMPENSATION FROM DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
FOR SERVICE AS
CHAIRMAN OF
COMMITTEES OF FOR SERVICE AS
INDEPENDENT CHAIRMAN OF TOTAL CASH
FOR SERVICE DIRECTORS/ COMMITTEES OF COMPENSATION
AS DIRECTOR OR FOR SERVICE AS TRUSTEES AND INDEPENDENT PAID
TRUSTEE AND TRUSTEE AND AUDIT TRUSTEES FOR SERVICES TO
COMMITTEE MEMBER COMMITTEE MEMBER COMMITTEES OF 82 AND AUDIT 82 DEAN WITTER
NAME OF OF 82 DEAN WITTER OF 14 TCW/DW DEAN WITTER COMMITTEES OF 14 FUNDS AND 14
INDEPENDENT TRUSTEE FUNDS FUNDS FUNDS TCW/DW FUNDS TCW/DW FUNDS
- ------------------- ----- ----- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Michael Bozic ......... $138,850 -- -- -- $138,850
Edwin J. Garn ......... 140,900 -- -- -- 140,900
John R. Haire ......... 106,400 $64,283 $195,450 $12,187 378,320
Dr. Manuel H. Johnson 137,100 66,483 -- -- 203,583
Michael E. Nugent .... 138,850 64,283 -- -- 203,133
John L. Schroeder...... 137,150 69,083 -- -- 206,233
</TABLE>
As of the date of this Statement of Additional Information, 57 of the Dean
Witter Funds, including the Fund, have adopted a retirement program under
which an Independent Trustee who retires after serving for at least five
years (or such lesser period as may be determined by the Board) as an
Independent Director or Trustee of any Dean Witter Fund that has adopted the
retirement program (each such Fund referred to as an "Adopting Fund" and each
such Trustee referred to as an "Eligible Trustee") is entitled to retirement
payments upon reaching the eligible retirement age (normally, after attaining
age 72). Annual payments are based upon length of service. Currently, upon
retirement, each Eligible Trustee is entitled to receive from the Adopting
Fund, commencing as of his or her retirement date and continuing for the
remainder of his or her life, an annual retirement benefit (the "Regular
Benefit") equal to 25.0% of his or her Eligible Compensation plus 0.4166666%
of such Eligible Compensation for each full month of service as an
Independent Director or Trustee of any Adopting Fund in excess of five years
up to a maximum of 50.0% after ten years of service. The foregoing
percentages may be changed by the Board. (1) "Eligible Compensation" is
one-fifth of the total compensation earned by such Eligible Trustee for
service to the Adopting Fund in the five year period prior to the date of the
Eligible Trustee's retirement. Benefits under the retirement program are not
secured or funded by the Adopting Funds.
- ------------
(1) An Eligible Trustee may elect alternate payments of his or her
retirement benefits based upon the combined life expectancy of such
Eligible Trustee and his or her spouse on the date of such Eligible
Trustee's retirement. The amount estimated to be payable under this
method, through the remainder of the later of the lives of such
Eligible Trustee and spouse, will be the actuarial equivalent of the
Regular Benefit. In addition, the Eligible Trustee may elect that the
surviving spouse's periodic payment of benefits will be equal to either
50% or 100% of the previous periodic amount, an election that,
respectively, increases or decreases the previous periodic amount so
that the resulting payments will be the actuarial equivalent of the
Regular Benefit.
11
<PAGE>
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the Fund for the fiscal year ended December
31, 1996 and by the 57 Dean Witter Funds (including the Fund) for the year
ended December 31, 1996, and the estimated retirement benefits for the Fund's
Independent Trustees, to commence upon their retirement, from the Fund as of
December 31, 1996 and from the 57 Dean Witter Funds as of December 31, 1996.
RETIREMENT BENEFITS FROM THE FUND AND ALL DEAN WITTER FUNDS
<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS
------------------------------- ESTIMATED ANNUAL
ESTIMATED RETIREMENT BENEFITS BENEFITS
CREDITED ACCRUED AS EXPENSES UPON RETIREMENT(2)
YEARS ESTIMATED --------------------- ------------------
OF SERVICE AT PERCENTAGE OF BY ALL FROM FROM ALL
RETIREMENT ELIGIBLE BY THE ADOPTING THE ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS
- --------------------------- --------------- --------------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic .............. 10 50.0% $ 338 $20,147 $ 850 $ 51,325
Edwin J. Garn .............. 10 50.0 473 27,772 850 51,325
John R. Haire .............. 10 50.0 (376)(3) 46,952 2,304 129,550
Dr. Manuel H. Johnson ..... 10 50.0 202 10,926 850 51,325
Michael E. Nugent .......... 10 50.0 338 19,217 850 51,325
John L. Schroeder........... 8 41.7 645 38,700 708 42,771
</TABLE>
- --------------
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1)
above.
(3) This number reflects the effect of the extension of Mr. Haire's term as
Trustee until June 1, 1998.
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's
officers and Trustees as a group was less than 1 percent of the Fund's shares
of beneficial interest outstanding.
INVESTMENT PRACTICES AND POLICIES
- -----------------------------------------------------------------------------
PORTFOLIO SECURITIES
The payment of principal and interest by issuers of certain Municipal
Bonds and Notes ("Municipal Obligations") purchased by the Fund may be
guaranteed by letters of credit or other credit facilities offered by banks
or other financial institutions. Such guarantees will be considered in
determining whether a Municipal Obligation meets the Fund's investment
quality requirements. In addition, some issues may contain provisions which
permit the Fund to demand from the issuer repayment of principal at some
specified period(s) prior to maturity.
Municipal Bonds. Municipal Bonds, as referred to in the Prospectus, are
debt obligations of a state, its cities, municipalities and municipal
agencies (all of which are generally referred to as "municipalities") which
generally have a maturity at the time of issuance of one year or more, and
the interest from which is, in the opinion of bond counsel, exempt from
federal income tax. They are issued to raise funds for various public
purposes, such as construction of a wide range of public facilities, to
refund outstanding obligations and to obtain funds for general operating
expenses or to loan to other public institutions and facilities. In addition,
certain types of industrial development bonds and pollution control bonds are
issued by or on behalf of public authorities to provide funding for various
privately operated facilities.
Municipal Notes. Municipal Notes are short-term obligations of
municipalities, generally with a maturity at the time of issuance ranging
from six months to three years, the interest from which is, in the opinion of
bond counsel, exempt from federal income tax. The principal types of
Municipal Notes include tax anticipation notes, bond anticipation notes,
revenue anticipation notes and project notes, although there are other types
of Municipal Notes in which the Fund may invest. Notes sold in anticipation
of collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuing municipality or agency. Project Notes are
issued by local agencies and are guaranteed by the United States Department
of Housing and Urban Development. Such notes are secured by the full faith
and credit of the United States Government. Project Notes are not currently
being issued.
12
<PAGE>
Municipal Commercial Paper. Municipal Commercial Paper refers to
short-term obligations of municipalities the interest from which is, in the
opinion of bond counsel, exempt from federal income tax, and which may be
issued at a discount and is sometimes referred to as Short-Term Discount
Notes. Municipal Commercial Paper is likely to be used to meet seasonal
working capital needs of a municipality or interim construction financing and
to be paid from general revenues of the municipality or refinanced with
long-term debt. In most cases, Municipal Commercial Paper is backed by
letters of credit, lending agreements, note repurchase agreements or other
credit facility agreements offered by banks or other institutions.
Obligations of issuers of Municipal Bonds, Municipal Notes and Municipal
Commercial Paper are subject to provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the
Federal Bankruptcy Act, and laws, if any, which may be enacted by Congress or
any state extending the time for payment of principal or interest, or both,
or imposing other constraints upon enforcement of such obligations or upon
municipalities to levy taxes. There is also the possibility that, as a result
of litigation or other conditions, the power or ability of any one or more
issuers to pay, when due, principal of and interest on its, or their,
Municipal Bonds, Municipal Notes and Municipal Commercial Paper may be
materially affected.
Special Investment Considerations. The percentage and rating policies in
the Prospectus apply at the time of acquisition of a security based upon the
last previous determination of the Fund's net asset value; any subsequent
change in any ratings by a rating service or change in percentages resulting
from market fluctuations or other changes in the amount of total assets will
not require elimination of any security from the Fund's portfolio until such
time as the Investment Manager determines that it is practicable to sell the
security without undue market or tax consequences to the Fund. Therefore, the
Fund may hold securities which have been downgraded to ratings of Ba or BB or
lower by Moody's or S&P. Such securities are considered to be speculative
investments.
Furthermore, the Fund does not have any minimum quality rating standard
for its downgraded or lower-rated investments. As such, the Fund may invest
in securities rated as low as Caa, Ca or C by Moody's or CCC, CC, C or CI by
S&P. Bonds rated Caa or Ca by Moody's may already be in default on payment of
interest or principal, while bonds rated C by Moody's, their lowest bond
rating, can be regarded as having extremely poor prospects of ever attaining
any real investment standing. Bonds rated CI by S&P, their lowest bond
rating, are no longer making interest payments.
Because of the special nature of securities which are rated below
investment grade by national credit rating agencies ("lower-rated
securities"), the Investment Manager must take account of certain special
considerations in assessing the risks associated with such investments. For
example, as the lower rated securities market is relatively new, its growth
has paralleled a long economic expansion and it has not weathered a recession
in its present size and form. Therefore, an economic downturn or increase in
interest rates is likely to have a negative effect on this market and on the
value of the lower rated securities held by the Fund, as well as on the
ability of the securities' issuers to repay principal and interest on their
borrowings.
The prices of lower rated securities have been found to be less sensitive
to changes in prevailing interest rates than higher rated investments, but
are likely to be more sensitive to adverse economic changes or individual
corporate developments. During an economic downturn or substantial period of
rising interest rates, highly leveraged issuers may experience financial
stress which would adversely affect their ability to service their principal
and interest payment obligations, to meet their projected business goals or
to obtain additional financing. If the issuer of a fixed-income security
owned by the Fund defaults, the Fund may incur additional expenses to seek
recovery. In addition, periods of economic uncertainty and change can be
expected to result in an increased volatility of market prices of lower rated
securities and a concomitant volatility in the net asset value of a share of
the Fund. Moreover, the market prices of certain of the Fund's portfolio
securities which are structured as zero coupon securities are affected to a
greater extent by interest rate changes and thereby tend to be more volatile
than securities which pay interest periodically and in cash (see "Dividends,
Distributions and Taxes" for a discussion of the tax ramifications of
investments in such securities).
The secondary market for lower rated securities may be less liquid than
the markets for higher quality securities and, as such, may have an adverse
effect on the market prices of certain securities.
13
<PAGE>
The limited liquidity of the market may also adversely affect the ability of
the Fund's Trustees to arrive at a fair value for certain lower rated
securities at certain times and should make it difficult for the Fund to sell
certain securities. In addition, new laws and potential new laws may have an
adverse effect upon the value of lower rated securities and a concomitant
negative impact upon the net asset value of a share of the Fund.
PORTFOLIO CHARACTERISTICS
Variable Rate Obligations. As stated in the Prospectus, the Fund may
invest in obligations of the type called "variable rate obligations."
The interest rate payable on a variable rate obligation is adjusted either
at predesignated periodic intervals or whenever there is a change in the
market rate of interest on which the interest rate payable is based. Other
features may include the right whereby the Fund may demand prepayment of the
principal amount of the obligation prior to its stated maturity (a "demand
feature") and the right of the issuer to prepay the principal amount prior to
maturity. The principal benefit of a variable rate obligation is that the
interest rate adjustment minimizes changes in the market value of the
obligation. The principal benefit to the Fund of purchasing obligations with
a demand feature is that liquidity, and the ability of the Fund to obtain
repayment of the full principal amount of the obligation prior to maturity,
is enhanced.
When-Issued and Delayed Delivery Securities. As stated in the Prospectus,
the Fund may purchase tax-exempt securities on a when-issued or delayed
delivery basis. When such transactions are negotiated, the price is fixed at
the time of the commitment, but delivery and payment can take place a month
or more after the date of the commitment. While the Fund will only purchase
securities on a when-issued or delayed delivery basis with the intention of
acquiring the securities, the Fund may sell the securities before the
settlement date, if it is deemed advisable. The securities so purchased or
sold are subject to market fluctuation and no interest accrues to the
purchaser during this period. At the time the Fund makes the commitment to
purchase a Municipal Obligation on a when-issued or delayed delivery basis,
it will record the transaction and thereafter reflect the value, each day, of
the Municipal Obligation in determining its net asset value. The Fund will
also establish a segregated account with its custodian bank in which it will
maintain cash, cash equivalents or other high quality Municipal Obligations
equal in value to commitments for such when-issued or delayed delivery
securities. The Fund does not believe that its net asset value or income will
be adversely affected by its purchase of Municipal Obligations on a
when-issued or delayed delivery basis. The Fund may sell securities on a
when-issued or delayed delivery basis provided that the Fund owns the
security at the time of the sale.
Repurchase Agreements. When cash may be available for only a few days, it
may be invested by the Fund in repurchase agreements until such time as it
may otherwise be invested or used for payments of obligations of the Fund.
These agreements, which may be viewed as a type of secured lending by the
Fund, typically involve the acquisition by the Fund of debt securities from a
selling financial institution such as a bank, savings and loan association or
broker-dealer. The agreement provides that the Fund will sell back to the
institution, and that the institution will repurchase, the underlying
security ("collateral"), which is held by the Fund's Custodian, at a
specified price and at a fixed time in the future, usually not more than
seven days from the date of purchase. The Fund will receive interest from the
institution until the time when the repurchase is to occur. Although such
date is deemed by the Fund to be the maturity date of a repurchase agreement,
the maturities of securities subject to repurchase agreements are not subject
to any limits and may exceed one year. While repurchase agreements involve
certain risks not associated with direct investments in debt securities, the
Fund follows procedures designed to minimize such risks. These procedures
include effecting repurchase transactions only with large, well-capitalized
and well-established financial institutions, whose financial condition will
be continually monitored by the Investment Manager. In addition, the value of
the collateral underlying the repurchase agreement will always be a least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. In the event of a default or bankruptcy by a selling
financial institution, the Fund will seek to liquidate such collateral.
However, the exercising of the Fund's right to liquidate such collateral
could involve certain costs or delays and, to the extent that proceeds from
any sale upon a default of the obligation to repurchase were less than the
repurchase price, the Fund could suffer a loss. It is the current policy of
the Fund not to invest in repurchase agreements that do not mature within
seven days if any such investment, together with any other illiquid assets
held by the Fund, amounts to more than 10% of its total assets. The Fund's
investments in repurchase
14
<PAGE>
agreements may at times be substantial when, in the view of the Investment
Manager, liquidity or other considerations warrant. However, the Fund did not
enter into any repurchase agreements during its fiscal year ended December
31, 1996 and it has no intention of entering into any such agreements in the
foreseeable future.
FUTURES CONTRACTS AND OPTIONS ON FUTURES
As discussed in the Prospectus, the Fund may invest in financial futures
contracts ("futures contracts") and related options thereon. These futures
contracts and related options thereon will be used only as a hedge against
anticipated interest rate changes. A futures contract sale creates an
obligation by the Fund, as seller, to deliver the specific type of instrument
called for in the contract at a specified future time for a specified price.
A futures contract purchase would create an obligation by the Fund, as
purchaser, to take delivery of the specific type of financial instrument at a
specified future time at a specified price. The specific securities delivered
or taken, respectively, at settlement date, would not be determined until on
or near that date. The determination would be in accordance with the rules of
the exchange on which the futures contract sale or purchase was effected.
Although the terms of futures contracts specify actual delivery or receipt
of securities, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the securities.
Closing out of a futures contract is usually effected by entering into an
offsetting transaction. An offsetting transaction for a futures contract sale
is effected by the Fund entering into a futures contract purchase for the
same aggregate amount of the specific type of financial instrument at the
same delivery date. If the price in the sale exceeds the price in the
offsetting purchase, the Fund is immediately paid the difference and thus
realizes a gain. If the offsetting purchase price exceeds the sale price, the
Fund pays the difference and realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the Fund entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price the
Fund realizes a gain, and if the offsetting sale price is less than the
purchase price the Fund realizes a loss.
Unlike a futures contract, which requires the parties to buy and sell a
security on a set date, an option on a futures contract entitles its holder
to decide on or before a future date whether to enter into such a contract (a
long position in the case of a call option and a short position in the case
of a put option). If the holder decides not to enter into the contract, the
premium paid for the contract is lost. Since the value of the option is fixed
at the point of sale, there are no daily payments of cash to reflect the
change in the value of the underlying contract, as discussed below for
futures contracts. The value of the option changes is reflected in the net
asset value of the Fund.
The Fund is required to maintain margin deposits with brokerage firms
through which it effects futures contracts and options thereon. The initial
margin requirements vary according to the type of the underlying security. In
addition, due to current industry practice, daily variations in gains and
losses on open contracts are required to be reflected in cash in the form of
variation margin payments. The Fund may be required to make additional margin
payments during the term of the contract.
Currently, futures contracts can be purchased on debt securities such as
U.S. Treasury Bills and Bonds, U.S. Treasury Notes with maturities between 6
1/2 and 10 years, Certificates of the Government National Mortgage
Association, Bank Certificates of Deposit and on a municipal bond index (see
below). The Fund may invest in interest rate futures contracts covering these
types of financial instruments as well as in new types of contracts that
become available in the future.
Financial futures contracts are traded in an auction environment on the
floors of several Exchanges--principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. Each Exchange
guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the Exchange membership
which is also responsible for handling daily accounting of deposits or
withdrawals of margin.
A risk in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities subject
to futures contracts may correlate imperfectly with the behavior of the cash
prices of the Fund's portfolio securities. The correlation may be distorted
by the fact that the futures market is dominated by short-term traders
seeking to profit from the difference between a contract or
15
<PAGE>
security price objective and their cost of borrowed funds. This would reduce
the value of futures contracts for hedging purposes over a short time period.
The correlation may be further distorted since the futures contracts that are
being used to hedge are not based on municipal obligations.
Another risk is that the Fund's Investment Manager could be incorrect in
its expectations as to the direction or extent of various interest rate
movements or the time span within which the movements take place. For
example, if the Fund sold futures contracts for the sale of securities in
anticipation of an increase in interest rates, and then interest rates went
down instead, causing bond prices to rise, the Fund would lose money on the
sale.
Put and call options on financial futures have characteristics similar to
Exchange traded options. For a further description of options, see below and
the Prospectus.
In addition to the risks associated in investing in options on securities,
there are particular risks associated with investing in options on futures.
In particular, the ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid
secondary market. It is not certain that such a market will develop.
The Fund may not enter into futures contracts or related options theron
if, immediately thereafter, the amount committed to margin plus the amount
paid for option premiums exceeds 5% of the value of the Fund's total assets.
In instances involving the purchase of futures contracts by the Fund, an
amount equal to the market value of the futures contract will be deposited in
a segregated account of cash and cash equivalents to collateralize the
position and thereby ensure that the use of such futures is unleveraged. The
Fund may not purchase or sell futures contracts or related options if,
immediately thereafter, more than one-third of its net assets would be
hedged.
Municipal Bond Index Futures--The Fund may utilize municipal bond index
futures contracts and options thereon for hedging purposes. The Fund's
strategies in employing such contracts will be similar to that discussed
above with respect to financial futures and options thereon. A municipal bond
index is a method of reflecting in a single number the market value of many
different municipal bonds and is designed to be representative of the
municipal bond market generally. The index fluctuates in response to changes
in the market values of the bonds included within the index. Unlike futures
contracts on particular financial instruments, futures contracts on a
municipal bond index will be settled in cash if held until the close of
trading in the contract. However, as in any other futures contract, a
position in the contract may be closed out by purchase or sale of an
offsetting contract for the same delivery month prior to expiration of the
contract.
Options--The Fund may purchase or sell (write) options on debt securities
as a means of achieving additional return or hedging the value of the Fund's
portfolio. The Fund will only buy options listed on national securities
exchanges. The Fund will not purchase options if, as a result, the aggregate
cost of all outstanding options exceeds 10% of the Fund's total assets.
Presently there are no options on tax-exempt securities traded on national
securities exchanges and until such time as they become available, the Fund
will not invest in options on debt securities.
A call option is a contract that gives the holder of the option the right
to buy from the writer of the call option, in return for a premium, the
security underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option has the
obligation, upon exercise of the option, to deliver the underlying security
upon payment of the exercise price during the option period. A put option is
a contract that gives the holder of the option the right to sell to the
writer, in return for a premium, the underlying security at a specified price
during the term of the option. The writer of the put has the obligation to
buy the underlying security upon exercise, at the exercise price during the
option period.
The Fund will only write covered call or covered put options listed on
national exchanges. The Fund may not write covered options in an amount
exceeding 20% of the value of its total assets. A call option is "covered" if
the Fund owns the underlying security covered by the call or has an absolute
and immediate right to acquire that security or futures contract without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the Fund
holds a call on the same security or futures contract as the call written,
where the exercise price of the call held is (i)
16
<PAGE>
equal to or less than the exercise price of the call written or (ii) greater
than the exercise price of the call written if the difference is maintained
by the Fund in cash, Treasury bills or other liquid portfolio securities in a
segregated account with its custodian. A put option is "covered" if the Fund
maintains cash, Treasury bills or other high grade short-term obligations
with a value equal to the exercise price in a segregated account with its
custodian, or else holds a put on the same security or futures contract as
the put written where the exercise price of the put held is equal to or
greater than the exercise price of the put written.
If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing
an option of the same series as the option previously written. However, once
the Fund has been assigned an exercise notice, the Fund will be unable to
effect a closing purchase transaction. Similarly, if the Fund is the holder
of an option, it may liquidate its position by effecting a closing sale
transaction. This is accomplished by selling an option of the same series as
the option previously purchased. There can be no assurance that either a
closing purchase or sale transaction can be effected when the Fund so
desires.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than
the premium received from writing the option or is less than the premium paid
to purchase the option. Since call option prices generally reflect increases
in the price of the underlying security, any loss resulting from the purchase
of a call option may also be wholly or partially offset by unrealized
appreciation of the underlying security. If a put option written by the Fund
is exercised, the Fund may incur a loss equal to the difference between the
exercise price of the option and the sum of the sale price of the underlying
security plus the premiums received from the sale of the option. Other
principal factors affecting the market value of a put or a call option
include supply and demand, interest rates, the current market price and price
volatility of the underlying security and the time remaining until the
expiration date.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although the Fund will
generally purchase or write only those options for which there appears to be
an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option. In such event, it
might not be possible to effect closing transactions in particular options,
so that the Fund would have to exercise its options in order to realize any
profit and would incur brokerage commissions upon the exercise of call
options and upon the subsequent disposition of underlying securities for the
exercise of put options. If the Fund as a covered call option writer is
unable to effect a closing purchase transaction in a secondary market, it
will not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise.
PORTFOLIO MANAGEMENT
The Fund may engage in short-term trading consistent with its investment
objective. Securities may be sold in anticipation of a market decline (a rise
in interest rates) or purchased in anticipation of a market rise (a decline
in interest rates). In addition, a security may be sold and another security
of comparable equality purchased at approximately the same time to take
advantage of what the Investment Manager believes to be a temporary disparity
in the normal yield relationship between the two securities. These yield
disparities may occur for reasons not directly related to the investment
quality of particular issues or the general movement of interest rates, such
as changes in the overall demand for, or supply of, various types of
tax-exempt securities.
In general, purchases and sales may also be made to restructure the
portfolio in terms of average maturity, quality, coupon yield, or
diversification for any one or more of the following purposes: (a) to
increase income, (b) to improve portfolio quality, (c) to minimize capital
depreciation, (d) to realize gains or losses, or for such other reasons as
the Investment Manager deems relevant in light of economic and market
conditions.
The Fund may invest in obligations customarily sold to institutional
investors in private transactions with the issuers thereof and up to 5% of
its total assets in securities for which a bona fide market does not exist at
the time of purchase. With respect to any securities as to which a bona fide
market does not exist, the Fund may be unable to dispose of such securities
promptly at reasonable prices.
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The Fund does not generally intend to invest more than 25% of its total
assets in securities of any one governmental unit or in the securities of
governmental units located in any one state, territory or possession of the
United States. Subject to investment restriction number 3 disclosed in the
Prospectus under the Section "Investment Restrictions," the Fund may invest
more than 25% of its total assets in industrial development and pollution
control bonds (two kinds of tax-exempt Municipal Bonds).
INVESTMENT RESTRICTIONS
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In addition to the investment restrictions enumerated in the Prospectus,
the investment restrictions listed below have been adopted by the Fund as
fundamental policies, which may not be changed without the vote of a majority
of the outstanding voting securities of the Fund, as defined in the Act. Such
a majority is defined as the lesser of (a) 67% of the shares present at a
meeting of shareholders, if the holders of more than 50% of the outstanding
shares of the Fund are present or represented by proxy, or (b) more than 50%
of the outstanding shares of the Fund. For purposes of the following
restrictions: (a) an "issuer" of a security is the entity whose assets and
revenues are committed to the payment of interest and principal on that
particular security, provided that the guarantee of a security will be
considered a separate security, and provided further that a guarantee of a
security shall not be deemed to be a security issued by the guarantor if the
value of all securities issued or guaranteed by the guarantor and owned by
the Fund does not exceed 10% of the value of the total assets of the Fund;
(b) a "taxable security" is any security the interest on which is subject to
federal income tax; and (c) all percentage limitations apply immediately
after a purchase or initial investment, and any subsequent change in any
applicable percentage resulting from market fluctuations or other changes in
the amount of total or net assets does not require elimination of any
security from the portfolio.
The Fund may not:
1. Invest in common stock.
2. Invest in securities of any issuer if, to the knowledge of the Fund,
any officer or trustee/director of the Fund or of the Investment Manager
owns more than 1/2 of 1% of the outstanding securities of such issuer, and
such officers and trustees/directors who own more than 1/2 of 1% own in the
aggregate more than 5% of the outstanding securities of such issuer.
3. Purchase or sell real estate or interests therein, although it may
purchase securities secured by real estate or interests therein.
4. Purchase or sell commodities except that the Fund may purchase or
sell financial futures contracts and related options thereon.
5. Purchase oil, gas or other mineral leases, rights or royalty
contracts, or exploration or development programs.
6. Write, purchase or sell puts, calls, or combinations thereof, except
for options on futures contracts or options on debt securities.
7. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
8. Borrow money, except that the Fund may borrow from a bank for
temporary or emergency purposes in amounts not exceeding 5% (taken at the
lower of cost or current value) of the value of its total assets (not
including the amount borrowed).
9. Pledge its assets or assign or otherwise encumber them except to
secure borrowing effected within the limitations set forth in Restriction
8. However, for the purpose of this restriction, collateral arrangements
with respect to the writing of options and collateral arrangements with
respect to initial margin for futures are not deemed to be pledges of
assets.
10. Issue senior securities as defined in the Act, except insofar as
the Fund may be deemed to have issued a senior security by reason of: (a)
entering into any repurchase agreement; (b) purchasing any securities on a
when-issued or delayed delivery basis; (c) purchasing or selling any
financial futures contracts; (d) borrowing money in accordance with
restrictions described above; or (e) lending portfolio securities.
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11. Make loans of money or securities, except: (a) by the purchase of
debt obligations in which the Fund may invest consistent with its
investment objective and policies; and (b) by investment in repurchase
agreements.
12. Make short sales of securities.
13. Purchase securities on margin, except for such short-term loans as
are necessary for the clearance of purchases of portfolio securities.
14. Engage in the underwriting of securities, except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security.
15. Invest for the purpose of exercising control or management of any
other issuer.
Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objective by investing all or substantially
all of its assets in another investment company having substantially the same
investment objective and policies as the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
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Subject to the general supervision of the Board of Trustees, the
Investment Manager is responsible for decisions to buy and sell securities
and futures contracts for the Fund, the selection of brokers and dealers to
effect the transactions, and the negotiation of brokerage commissions, if
any. The Fund expects that the primary market for the securities in which it
intends to invest will generally be the over-the-counter market. Securities
are generally traded in the over-the-counter market on an "net" basis with
dealers acting as principal for their own account without charging a stated
commission, although the price of the security usually includes a profit to
the dealer. Options and futures transactions will usually be effected through
a broker and a commission will be charged. The Fund also expects that
securities will be purchased at times in underwritten offerings, where the
price includes a fixed amount of compensation, generally referred to as the
underwriter's concession or discount. On occasion, the Fund may also purchase
certain money market instruments directly from an issuer, in which case no
commissions or discounts are paid. During the fiscal years ended December 31,
1994, 1995 and 1996, the Fund paid no brokerage commissions.
The Investment Manager currently serves as investment manager to a number
of clients, including other investment companies, and may in the future act
as investment manager or adviser to others. It is the practice of the
Investment Manager to cause purchase and sale transactions to be allocated
among the Fund and others whose assets it manages in such manner as it deems
equitable. In making such allocations among the Fund and other client
accounts, various factors may be considered including the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the Fund and other client
accounts. In the case of certain initial and secondary public offerings, the
Investment Manager may utilize a pro rata allocation process based on the
size of the Dean Witter Funds involved and the number of shares available
from the public offering.
The policy of the Fund regarding purchases and sales of securities and
futures contracts for its portfolio is that primary consideration will be
given to obtaining the most favorable prices and efficient execution of
transactions. Consistent with this policy, when securities transactions are
effected on a stock exchange, the Fund's policy is to pay commissions which
are considered fair and reasonable without necessarily determining that the
lowest possible commissions are paid in all circumstances. The Fund believes
that a requirement always to seek the lowest commission cost could impede
effective portfolio management and preclude the Fund and the Investment
Manager from obtaining a high quality of brokerage and research services. In
seeking to determine the reasonableness of brokerage commissions paid in any
transaction, the Investment Manager relies upon its experience and knowledge
regarding commissions generally charged by various brokers and on its
judgment in evaluating the brokerage and research services received from the
broker effecting the transaction. Such determinations are necessarily
subjective and imprecise, as in most cases an exact dollar value for those
services is not ascertainable.
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<PAGE>
In seeking to implement the Fund's policies, the Investment Manager
effects transactions with those brokers and dealers who the Investment
Manager believes provide the most favorable prices and who are capable of
providing efficient executions. If the Investment Manager believes such price
and execution are obtainable from more than one broker or dealer, it may give
consideration to placing portfolio transactions with those brokers and
dealers who also furnish research and other services to the Fund or the
Investment Manager. Such services may include, but are not limited to, any
one or more of the following: information as to the availability of
securities for purchase or sale; statistical or factual information or
opinions pertaining to investment; wire services; and appraisals or
evaluations of portfolio securities.
The information and services received by the Investment Manager from
brokers and dealers may be of benefit to the Investment Manager in the
management of accounts of some of its other clients and may not in all cases
benefit the Fund directly. While the receipt of such information and services
is useful in varying degrees and would generally reduce the amount of
research or services otherwise performed by the Investment Manager and thus
reduce its expenses, it is of indeterminable value and the management fee
paid to the Investment Manager is not reduced by any amount that may be
attributable to the value of such services.
Pursuant to an order of the Securities and Exchange Commission, the Fund
may effect principal transactions in certain money market instruments with
DWR. The Fund will limit its transactions with DWR to U.S. Government and
Government Agency Securities, Bank Money Instruments (i.e., Certificates of
Deposit and Bankers' Acceptances) and Commercial Paper (not including
Tax-Exempt Municipal Paper). Such transactions will be effected with DWR only
when the price available from DWR is better than that available from other
dealers. During the fiscal years ended December 31, 1994, 1995 and 1996, the
Fund did not effect any principal transactions with DWR.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may
be effected through DWR and other affiliated brokers and dealers. In order
for an affiliated broker or dealer to effect portfolio transactions for the
Fund, the commissions, fees or other remuneration received by the affiliated
broker or dealer must be reasonable and fair compared to the commissions,
fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities being purchased or sold
on an exchange during a comparable period of time. This standard would allow
the affiliated broker or dealer to receive no more than the remuneration
which would be expected to be received by an unaffiliated broker in a
commensurate arm's-length transaction. Furthermore, the Trustees of the Fund,
including a majority of the Trustees who are not "interested" Trustees, have
adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to an affiliated broker or
dealer are consistent with the foregoing standard. The Fund did not effect
any securities transactions through any affiliated brokers or dealers during
its fiscal years ended December 31, 1994, 1995 and 1996.
THE DISTRIBUTOR
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As discussed in the Prospectus, shares of the Fund are distributed by Dean
Witter Distributors Inc. (the "Distributor"). The Distributor has entered
into a selected dealer agreement with DWR, which through its own sales
organization sells shares of the Fund. In addition, the Distributor may enter
into selected dealer agreements with other selected broker-dealers. The
Distributor, a Delaware corporation, is a wholly-owned subsidiary of MSDWD.
The Trustees of the Fund, including a majority of the Trustees who are not,
and were not at the time they voted, interested persons of the Fund, as
defined in the Act (the "Independent Trustees"), approved, at their meeting
held on June 30, 1997, the current Distribution Agreement appointing the
Distributor as exclusive distributor of the Fund's shares and providing for
the Distributor to bear distribution expenses not borne by the Fund. By its
terms, the Distribution Agreement has an initial term ending April 30, 1998
and will remain in effect from year to year thereafter if approved by the
Board.
The Distributor bears all expenses it may incur in providing services
under the Distribution Agreement. Such expenses include the payment of
commissions for sales of the Fund's shares and incentive compensation to
account executives. The Distributor also pays certain expenses in connection
with the distribution of the Fund's shares, including the costs of preparing,
printing and distributing advertising or promotional materials, and the costs
of printing and distributing prospectuses and
20
<PAGE>
supplements thereto used in connection with the offering and sale of the
Fund's shares. The Fund bears the costs of initial typesetting, printing and
distribution of prospectuses and supplements thereto to shareholders. The
Fund also bears the costs of registering the Fund and its shares under
federal securities laws and pays filing fees in accordance with state
securities laws. The Fund and the Distributor have agreed to indemnify each
other against certain liabilities, including liabilities under the Securities
Act of 1933, as amended. Under the Distribution Agreement, the Distributor
uses its best efforts in rendering services to the Fund, but in the absence
of willful misfeasance, bad faith, gross negligence or reckless disregard of
its obligations, the Distributor is not liable to the Fund or any of its
shareholders for any error of judgment or mistake of law or for any act or
omission or for losses sustained by the Fund or its shareholders.
PLAN OF DISTRIBUTION
Effective July 28, 1997, the Fund has adopted a Plan of Distribution
pursuant to Rule 12b-1 under the Act (the "Plan") pursuant to which each
Class, other than Class D, pays the Distributor compensation accrued daily
and payable monthly at the following annual rates: 0.25%, 0.60% and 0.70% of
the average daily net assets of Class A, Class B and Class C, respectively.
The Distributor also receives the proceeds of front-end sales charges and of
contingent deferred sales charges imposed on certain redemptions of shares,
which are separate and apart from payments made pursuant to the Plan (see
"Purchase of Fund Shares" in the Prospectus). The Distributor has informed
the Fund that it and/or DWR received front-end sales charges on sales of the
Fund's shares in the approximate amounts of $2,276,000, $972,000 and
$1,050,000 for the fiscal years ended December 31, 1994, 1995 and 1996,
respectively.
The Distributor has informed the Fund that the entire fee payable by Class
A and a portion of the fees payable by each of Class B and Class C each year
pursuant to the Plan equal to 0.15% of the average daily net assets of Class
B and 0.25% of the average daily net assets of Class C are currently each
characterized as a "service fee" under the Rules of the Association of the
National Association of Securities Dealers, Inc. (of which the Distributor is
a member). The "service fee" is a payment made for personal service and/or
the maintenance of shareholder accounts. The remaining portion of the Plan
fees payable by a Class, if any, is characterized as an "asset-based sales
charge" as such is defined by the aforementioned Rules of the Association.
The Plan was adopted by a majority vote of the Board of Trustees,
including all of the Trustees of the Fund who are not "interested persons" of
the Fund (as defined in the Act) and who have no direct or indirect financial
interest in the operation of the Plan (the "Independent 12b-1 Trustees"),
cast in person at a meeting called for the purpose of voting on the Plan, on
June 30, 1997.
Under its terms, the Plan has an initial term ending April 30, 1998 and
will continue from year to year thereafter, provided such continuance is
approved annually by a vote of the Trustees in the manner described above.
Under the Plan and as required by Rule 12b-1, the Trustees receive and
review promptly after the end of each calendar quarter a written report
provided by the Distributor of the amounts expended under the Plan and the
purpose for which such expenditures were made.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method the Fund offers four
Classes of shares, each with a different distribution arrangement as set
forth in the Prospectus.
With respect to Class A shares, DWR compensates its account executives by
paying them, from proceeds of the front-end sales charge, commissions for the
sale of Class A shares, currently a gross sales credit of up to 4.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.15% of the current value
of the respective accounts for which they are the account executives or
dealers of record in all cases. On orders of $1 million or more (for which no
sales charge was paid), the Investment Manager compensates DWR's account
executives by paying them, from its own funds, a gross sales credit of 1.0%
of the amount sold.
With respect to Class B shares, DWR compensates its account executives by
paying them, from its own funds, commissions for the sale of Class B shares,
currently a gross sales credit of up to 4.0% of the amount sold and an annual
residual commission, currently a residual of up to 0.15% of the current value
of the respective accounts for which they are the account executives of
record.
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<PAGE>
With respect to Class C shares, DWR compensates its account executives by
paying them, from its own funds, commissions for the sale of Class C shares,
currently a gross sales credit of up to 1.0% of the amount sold and an annual
residual commission, currently a residual of up to 0.70% of the current value
of the respective accounts for which they are the account executives of
record.
With respect to Class D shares other than shares held by participants in
the InterCapital mutual fund asset allocation program, the Investment Manager
compensates DWR's account executives by paying them, from its own funds,
commissions for the sale of Class D shares, currently a gross sales credit of
up to 1.0% of the amount sold. There is a chargeback of 100% of the amount
paid if the Class D shares are redeemed in the first year and a chargeback of
50% of the amount paid if the Class D shares are redeemed in the second year
after purchase. The Investment Manager also compensates DWR's account
executives by paying them, from its own funds, an annual residual commission,
currently a residual of up to 0.10% of the current value of the respective
accounts for which they are the account executives of record (not including
accounts of participants in the InterCapital mutual fund asset allocation
program).
The gross sales credit is a charge which reflects commissions paid by DWR
to its account executives and DWR's Fund-associated distribution-related
expenses, including sales compensation, and overhead and other branch office
distribution-related expenses including (a) the expenses of operating DWR's
branch offices in connection with the sale of Fund shares, including lease
costs, the salaries and employee benefits of operations and sales support
personnel, utility costs, communications costs and the costs of stationery
and supplies, (b) the costs of client sales seminars, (c) travel expenses of
mutual fund sales coordinators to promote the sale of Fund shares and (d)
other expenses relating to branch promotion of Fund sales. The distribution
fee that the Distributor receives from the Fund under the Plan, in effect,
offsets distribution expenses incurred under the Plan on behalf of the Fund
and, in the case of Class B shares, opportunity costs, such as the gross
sales credit and an assumed interest charge thereon ("carrying charge"). In
the Distributor's reporting of the distribution expenses to the Fund, in the
case of Class B shares, such assumed interest (computed at the "broker's call
rate") has been calculated on the gross credit as it is reduced by amounts
received by the Distributor under the Plan and any contingent deferred sales
charges received by the Distributor upon redemption of shares of the Fund. No
other interest charge is included as a distribution expense in the
Distributor's calculation of its distribution costs for this purpose. The
broker's call rate is the interest rate charged to securities brokers on
loans secured by exchange-listed securities.
The Fund is authorized to reimburse expenses incurred or to be incurred in
promoting the distribution of the Fund's Class A and Class C shares and in
servicing shareholder accounts. Reimbursement will be made through payments
at the end of each month. The amount of each monthly payment may in no event
exceed an amount equal to a payment at the annual rate of 0.25%, in the case
of Class A, and 0.70%, in the case of Class C, of the average net assets of
the respective Class during the month. No interest or other financing
charges, if any, incurred on any distribution expenses on behalf of Class A
and Class C will be reimbursable under the Plan. With respect to Class A, in
the case of all expenses other than expenses representing the service fee,
and, with respect to Class C, in the case of all expenses other than expenses
representing a gross sales credit or a residual to account executives, such
amounts shall be determined at the beginning of each calendar quarter by the
Trustees, including, a majority of the Independent 12b-1 Trustees. Expenses
representing the service fee (for Class A) or a gross sales credit or a
residual to account executives (for Class C) may be reimbursed without prior
determination. In the event that the Distributor proposes that monies shall
be reimbursed for other than such expenses, then in making quarterly
determinations of the amounts that may be reimbursed by the Fund, the
Distributor will provide and the Trustees will review a quarterly budget of
projected distribution expenses to be incurred on behalf of the Fund,
together with a report explaining the purposes and anticipated benefits of
incurring such expenses. The Trustees will determine which particular
expenses, and the portions thereof, that may be borne by the Fund, and in
making such a determination shall consider the scope of the Distributor's
commitment to promoting the distribution of the Fund's Class A and Class C
shares.
At any given time, the expenses of distributing shares of the Fund may be
more or less than the total of (i) the payments made by the Fund pursuant to
the Plan and (ii) the proceeds of contingent deferred sales charges paid by
investors upon redemption of shares. Because there is no requirement under
the
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<PAGE>
Plan that the Distributor be reimbursed for all distribution expenses with
respect to Class B shares or any requirement that the Plan be continued from
year to year, this excess amount does not constitute a liability of the Fund.
Although there is no legal obligation for the Fund to pay expenses incurred
in excess of payments made to the Distributor under the Plan and the proceeds
of contingent deferred sales charges paid by investors upon redemption of
shares, if for any reason the Plan is terminated, the Trustees will consider
at that time the manner in which to treat such expenses. Any cumulative
expenses incurred, but not yet recovered through distribution fees or
contingent deferred sales charges, may or may not be recovered through future
distribution fees or contingent deferred sales charges.
No interested person of the Fund nor any Trustee of the Fund who is not an
interested person of the Fund, as defined in the Act, has any direct
financial interest in the operation of the Plan except to the extent that the
Distributor, InterCapital, DWR, DWSC or certain of their employees may be
deemed to have such an interest as a result of benefits derived from the
successful operation of the Plan or as a result of receiving a portion of the
amounts expended thereunder by the Fund.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of
the affected Class or Classes of the Fund, and all material amendments to the
Plan must also be approved by the Trustees in the manner described above. The
Plan may be terminated at any time, without payment of any penalty, by vote
of a majority of the Independent 12b-1 Trustees or by a vote of a majority of
the outstanding voting securities of the Fund (as defined in the Act) on not
more than thirty days' written notice to any other party to the Plan. So long
as the Plan is in effect, the election and nomination of Independent 12b-1
Trustees shall be committed to the discretion of the Independent 12b-1
Trustees.
DETERMINATION OF NET ASSET VALUE
- -----------------------------------------------------------------------------
As discussed in the Prospectus, the net asset value per share for each
Class of shares of the Fund is determined once daily at 4:00 p.m., New York
time (or, on days when the New York Stock Exchange closes prior to 4 p.m., at
such earlier time), on each day that the New York Stock Exchange is open. The
New York Stock Exchange currently observes the following holidays: New Year's
Day; Presidents' Day; Good Friday; Memorial Day; Independence Day; Labor Day;
Thanksgiving Day; and Christmas Day.
Portfolio securities (other than short-term debt securities and futures
and options) are valued for the Fund by an outside independent pricing
service approved by the Board of Trustees. The pricing service has informed
the Fund that in valuing the Fund's portfolio securities it uses both a
computerized grid 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 Fund's 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. The Board
of Trustees believes that timely and reliable market quotations are generally
not readily available to the Fund for purposes of valuing tax-exempt
securities and that the valuations supplied by the pricing service, using the
procedures outlined above and subject to periodic review, are more likely to
approximate the fair value of such securities. The Investment Manager will
periodically review and evaluate the procedures, methods and quality of
services provided by the pricing service then being used by the Fund and may,
from time to time, recommend to the Board of Trustees the use of other
pricing services or discontinuance of the use of any pricing service in whole
or part. The Board may determine to approve such recommendation or take other
provisions for pricing of the Fund's portfolio securities.
PURCHASE OF FUND SHARES
- -----------------------------------------------------------------------------
As discussed in the Prospectus, the Fund offers four Classes of shares as
follows:
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
Class A shares are sold to investors with an initial sales charge that
declines to zero for larger purchases; however, Class A shares sold without
an initial sales charge are subject to a contingent deferred sales charge
("CDSC") of 1.0% if redeemed within one year of purchase, except in the
circumstances discussed in the Prospectus.
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<PAGE>
Right of Accumulation. As discussed in the Prospectus, investors may
combine the current value of shares purchased in separate transactions for
purposes of benefitting from the reduced sales charges available for
purchases of shares of the Fund totalling at least $25,000 in net asset
value. For example, if any person or entity who qualifies for this privilege
holds Class A shares of the Fund and/or other Dean Witter Funds that are
multiple class funds ("Dean Witter Multi-Class Funds") or shares of other
Dean Witter Funds sold with a front-end sales charge purchased at a price
including a front-end sales charge having a current value of $5,000, and
purchases $20,000 of additional shares of the Fund, the sales charge
applicable to the $20,000 purchase would be 4.0% of the offering price.
The Distributor must be notified by the selected broker-dealer or the
shareholder at the time a purchase order is placed that the purchase
qualifies for the reduced charge under the Right of Accumulation. Similar
notification must be made in writing by the selected broker-dealer or
shareholder when such an order is placed by mail. The reduced sales charge
will not be granted if: (a) such notification is not furnished at the time of
the order; or (b) a review of the records of the Distributor or Dean Witter
Trust Company (the "Transfer Agent") fails to confirm the investor's
represented holdings.
Letter of Intent. As discussed in the Prospectus, reduced sales charges
are available to investors who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of Class A shares
of the Fund from the Distributor or from a single Selected Broker-Dealer.
A Letter of Intent permits an investor to establish a total investment
goal to be achieved by any number of purchases over a thirteen-month period.
Each purchase of Class A shares made during the period will receive the
reduced sales commission applicable to the amount represented by the goal, as
if it were a single purchase. A number of shares equal in value to 5% of the
dollar amount of the Letter of Intent will be held in escrow by the Transfer
Agent, in the name of the shareholder. The initial purchase under a Letter of
Intent must be equal to at least 5% of the stated investment goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the investor is required to
pay the difference between the sales charge otherwise applicable to the
purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the
Distributor is authorized by the shareholder to liquidate a sufficient number
of his or her escrowed shares to obtain such difference.
If the goal is exceeded and purchases pass the next sales charge level,
the sales charge on the entire amount of the purchase that results in passing
that level and on subsequent purchases will be subject to further reduced
sales charges in the same manner as set forth above under "Right of
Accumulation," but there will be no retroactive reduction of sales charges on
previous purchases. For the purpose of determining whether the investor is
entitled to a further reduced sales charge applicable to purchases at or
above a sales charge level which exceeds the stated goal of a Letter of
Intent, the cumulative current net asset value of any shares owned by the
investor in any other Dean Witter Funds held by the shareholder which were
previously purchased at a price including a front-end sales charge (including
shares of the Fund and other Dean Witter Funds acquired in exchange for those
shares, and including in each case shares acquired through reinvestment of
dividends and distributions) will be added to the cost or net asset value of
shares of the Fund owned by the investor. However, shares of "Exchange Funds"
(see "Shareholder Services--Exchange Privilege") and the purchase of shares
of other Dean Witter Funds will not be included in determining whether the
stated goal of a Letter of Intent has been reached.
At any time while a Letter of Intent is in effect, a shareholder may, by
written notice to the Distributor, increase the amount of the stated goal. In
that event, only shares purchased during the previous 90-day period and still
owned by the shareholder will be included in the new sales charge reduction.
The 5% escrow and minimum purchase requirements will be applicable to the new
stated goal. Investors electing to purchase shares of the Fund pursuant to a
Letter of Intent should carefully read such Letter of Intent.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Class B shares are sold without an initial sales charge but are subject to
a CDSC payable upon most redemptions within six years after purchase. As
stated in the Prospectus, a CDSC will be imposed on any redemption by an
investor if after such redemption the current value of the investor's Class B
shares of
24
<PAGE>
the Fund is less than the dollar amount of all payments by the shareholder
for the purchase of Class B shares during the preceding six years. However,
no CDSC will be imposed to the extent that the net asset value of the shares
redeemed does not exceed: (a) the current net asset value of shares purchased
more than six years prior to the redemption, plus (b) the current net asset
value of shares purchased through reinvestment of dividends or distributions
of the Fund or another Dean Witter Fund (see "Shareholder Services--Targeted
Dividends"), plus (c) the current net asset value of shares acquired in
exchange for (i) shares of Dean Witter front-end sales charge funds, or (ii)
shares of other Dean Witter Funds for which shares of front-end sales charge
funds have been exchanged (see "Shareholder Services--Exchange Privilege"),
plus (d) increases in the net asset value of the investor's shares above the
total amount of payments for the purchase of Fund shares made during the
preceding six years. The CDSC will be paid to the Distributor.
In determining the applicability of the CDSC to each redemption, the
amount which represents an increase in the net asset value of the investor's
shares above the amount of the total payments for the purchase of shares
within the last six years will be redeemed first. In the event the redemption
amount exceeds such increase in value, the next portion of the amount
redeemed will be the amount which represents the net asset value of the
investor's shares purchased more than six years prior to the redemption
and/or shares purchased through reinvestment of dividends or distributions
and/or shares acquired in exchange for shares of Dean Witter front-end sales
charge funds, or for shares of other Dean Witter funds for which shares of
front-end sales charge funds have been exchanged. A portion of the amount
redeemed which exceeds an amount which represents both such increase in value
and the value of shares purchased more than six years prior to the redemption
and/or shares purchased through reinvestment of dividends or distributions
and/or shares acquired in the above-described exchanges will be subject to a
CDSC.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Class B shares of the Fund until
the time of redemption of such shares. For purposes of determining the number
of years from the time of any payment for the purchase of shares, all
payments made during a month will be aggregated and deemed to have been made
on the last day of the month. The following table sets forth the rates of the
CDSC applicable to Class B shares of the Fund:
<TABLE>
<CAPTION>
YEAR SINCE
PURCHASE CDSC AS A PERCENTAGE
PAYMENT MADE OF AMOUNT REDEEMED
------------ ------------------
<S> <C>
First ...................... 5.0%
Second ..................... 4.0%
Third ...................... 3.0%
Fourth ..................... 2.0%
Fifth ...................... 2.0%
Sixth ...................... 1.0%
Seventh and thereafter .... None
</TABLE>
In determining the rate of the CDSC, it will be assumed that a redemption
is made of shares held by the investor for the longest period of time within
the applicable six-year period. This will result in any such CDSC being
imposed at the lowest possible rate. The CDSC will be imposed, in accordance
with the table shown above, on any redemptions within six years of purchase
which are in excess of these amounts and which redemptions do not qualify for
waiver of the CDSC, as described in the Prospectus.
LEVEL LOAD ALTERNATIVE--CLASS C SHARES
Class C shares are sold without a sales charge but are subject to a CDSC
of 1.0% on most redemptions made within one year after purchase, except in
the circumstances discussed in the Prospectus.
NO LOAD ALTERNATIVE--CLASS D SHARES
Class D shares are offered without any sales charge on purchase or
redemption. Class D shares are offered only to those persons meeting the
qualifications set forth in the Prospectus.
25
<PAGE>
SHAREHOLDER SERVICES
- -----------------------------------------------------------------------------
Upon the purchase of shares of the Fund, a Shareholder Investment Account
is opened for the investor on the books of the Fund and maintained by the
Transfer Agent. This is an open account in which shares owned by the investor
are credited by the Transfer Agent in lieu of issuance of a share
certificate. If a share certificate is desired, it must be requested in
writing for each transaction. Certificates are issued only for full shares
and may be redeposited in the account at any time. There is no charge to the
investor for issuance of a certificate. Whenever a shareholder instituted
transaction takes place in the Shareholder Investment Account, the
shareholder will be mailed a confirmation of the transaction from the Fund or
DWR or other selected broker-dealer.
Automatic Investment of Dividends and Distributions. As stated in the
Prospectus, all income dividends and capital gains distributions are
automatically paid in full and fractional shares of the applicable Class of
the Fund, unless the shareholder requests that they be paid in cash. Each
purchase of shares of the Fund is made upon the condition that the Transfer
Agent is thereby automatically appointed as agent of the investor to receive
all dividends and capital gains distributions on shares owned by the
investor. Such dividends and distributions will be paid, at the net asset
value per share, in shares of the applicable Class of the Fund (or in cash if
the shareholder so requests) as of the close of business on the monthly
payment date, as stated in the Prospectus. At any time an investor may
request the Transfer Agent, in writing, to have subsequent dividends and/or
capital gains distributions paid to him or her in cash rather than shares. To
assure sufficient time to process the change, such request should be received
by the Transfer Agent at least five business days prior to the payment date
of the dividend or the record date of the distribution. In the case of
recently purchased shares for which registration instructions have not been
received on the record date, cash payments will be made to DWR or other
selected broker-dealer, and will be forwarded to the shareholder, upon the
receipt of proper instructions.
Targeted Dividends. (Service Mark) In states where it is legally
permissible, shareholders may also have all income dividends and capital
gains distributions automatically invested in shares of any Class of an
open-end Dean Witter Fund other than Dean Witter Tax-Exempt Securities Trust
or in another Class of Dean Witter Tax-Exempt Securities Trust. Such
investment will be made as described above for automatic investment in shares
of the applicable Class of the Fund, at the net asset value per share of the
selected Dean Witter Fund as of the close of business on the payment date of
the dividend or distribution and will begin to earn dividends, if any, in the
selected Dean Witter Fund the next business day. To participate in the
Targeted Dividends program, shareholders should contact their DWR or other
selected broker-dealer account executive or the Transfer Agent. Shareholders
of the Fund must be shareholders of the selected Class of the Dean Witter
Fund targeted to receive investments from dividends at the time they enter
the Targeted Dividends program. Investors should review the prospectus of the
targeted Dean Witter Fund before entering the program.
EasyInvest. (Service Mark) Shareholders may subscribe to EasyInvest, an
automatic purchase plan which provides for any amount from $100 to $5,000 to
be transferred automatically from a checking or savings account or following
redemption of shares of a Dean Witter money market fund, on a semi-monthly,
monthly or quarterly basis, to the Transfer Agent for investment in shares of
the Fund. Shares purchased through EasyInvest will be added to the
shareholder's existing account at the net asset value calculated the same
business day the transfer of funds is effected. For further information or to
subscribe to EasyInvest, shareholders should contact their DWR or other
selected broker-dealer account executive or the Transfer Agent.
Investment of Dividends or Distributions Received in Cash. Any shareholder
who receives a cash payment representing a dividend or capital gains
distribution may invest such dividend or distribution in shares of the
applicable Class at net asset value, without the imposition of a CDSC upon
redemption, by returning the check or the proceeds to the Transfer Agent
within thirty days after the payment date. If the shareholder returns the
proceeds of a dividend or distribution, such funds must be accompanied by a
signed statement indicating that the proceeds constitute a dividend or
distribution to be invested. Such investment will be made at the net asset
value per share next determined after receipt of the proceeds by the Transfer
Agent.
26
<PAGE>
Systematic Withdrawal Plan. As discussed in the Prospectus, a systematic
withdrawal plan (the "Withdrawal Plan") is available for shareholders who own
or purchase shares of the Fund having a minimum value of $10,000 based upon
their current net asset value. The plan provides for monthly or quarterly
(March, June, September and December) checks in any dollar amount, not less
than $25, or in any whole percentage of the account balance, on an annualized
basis. Any applicable CDSC will be imposed on shares redeemed under the
Withdrawal Plan (see "Purchase of Fund Shares"). Therefore, any shareholder
participating in the Withdrawal Plan will have sufficient shares redeemed
from his or her account so that the proceeds (net of any applicable CDSC) to
the shareholder will be the designated monthly or quarterly amount.
The Transfer Agent acts as agent for the shareholder in tendering to the
Fund for redemption sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment designated in the application. The
shares will be redeemed at their net asset value determined on the tenth or
twenty-fifth day (or next following business day) of the relevant month or
quarter and normally a check for the proceeds will be mailed by the Transfer
Agent, or amounts credited to a shareholder's DWR or other selected
broker-dealer brokerage account, within five days after the date of
redemption. The Withdrawal Plan may be terminated at any time by the Fund.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net
investment income and net capital gains, the shareholder's original
investment will be correspondingly reduced and ultimately exhausted.
Each withdrawal constitutes a redemption of shares and any gain or loss
realized must be recognized for federal income tax purposes. Although the
shareholder may make additional investments of $2,500 or more under the
Withdrawal Plan, withdrawals made concurrently with purchases of additional
shares may be inadvisable because of sales charges which may be applicable to
purchases or redemptions of shares (see "Purchase of Fund Shares").
Any shareholder who wishes to have payments under the Withdrawal Plan made
to a third party or sent to an address other than the one listed on the
account must send complete written instructions to the Transfer Agent to
enroll in the Withdrawal Plan. The shareholder's signature on such
instructions must be guaranteed by an eligible guarantor acceptable to the
Transfer Agent (shareholders should contact the Transfer Agent for a
determination as to whether a particular institution is such an eligible
guarantor). A shareholder may, at any time, change the amount and interval of
withdrawal payments and the address to which checks are mailed by written
notification to the Transfer Agent. In addition, the party and/or the address
to which checks are mailed may be changed by written notification to the
Transfer Agent, with signature guarantees required in the manner described
above. The shareholder may also terminate the Withdrawal Plan at any time by
written notice to the Transfer Agent. In the event of such termination, the
account will be continued as a regular shareholder investment account. The
shareholder may also redeem all or part of the shares held in the Withdrawal
Plan account (see "Redemptions and Repurchases" in the Prospectus) at any
time.
Direct Investments through Transfer Agent. As discussed in the Prospectus,
shareholders may make additional investments in any Class of shares of the
Fund for which they qualify at any time by sending a check in any amount, not
less than $100, payable to Dean Witter Tax-Exempt Securities Trust, and
indicating the selected Class, directly to the Fund's Transfer Agent. In the
case of Class A shares, after deduction of any applicable sales charge, the
balance will be applied to the purchase of Fund shares, and, in the case of
shares of the other Classes, the entire amount will be applied to the
purchase of Fund shares, at the net asset value per share next computed after
receipt of the check or purchase payment by the Transfer Agent. The shares so
purchased will be credited to the investor's account.
EXCHANGE PRIVILEGE
As discussed in the Prospectus, the Fund makes available to its
shareholders an Exchange Privilege whereby shareholders of each Class of
shares of the Fund may exchange their shares for shares of the same Class of
shares of any other Dean Witter Multi-Class Fund without the imposition of
any exchange fee. Shares may also be exchanged for shares of any of the
following funds: Dean Witter Short-Term U.S. Treasury Trust, Dean Witter
Limited Term Municipal Trust, Dean Witter Short-Term Bond
27
<PAGE>
Fund, Dean Witter Intermediate Term U.S. Treasury Trust and five Dean Witter
Funds which are money market funds (the foregoing nine funds are hereinafter
referred to as the "Exchange Funds"). Class A shares may also be exchanged
for shares of Dean Witter Multi-State Municipal Series Trust and Dean Witter
Hawaii Municipal Trust, which are Dean Witter Funds sold with a front-end
sales charge ("FSC Funds"). Class B shares may also be exchanged for shares
of Dean Witter Global Short-Term Income Fund Inc., Dean Witter High Income
Securities and Dean Witter National Municipal Trust, which are Dean Witter
Funds offered with a CDSC ("CDSC Funds"). Exchanges may be made after the
shares of the Fund acquired by purchase (not by exchange or dividend
reinvestment) have been held for thirty days. There is no waiting period for
exchanges of shares acquired by exchange or dividend reinvestment. An
exchange will be treated for federal income tax purposes the same as a
repurchase or redemption of shares, on which the shareholder may realize a
capital gain or loss.
Any new account established through the Exchange Privilege will have the
same registration and cash dividend or dividend reinvestment plan as the
present account, unless the Transfer Agent receives written notification to
the contrary. For telephone exchanges, the exact registration of the existing
account and the account number must be provided.
Any shares held in certificate form cannot be exchanged but must be
forwarded to the Transfer Agent and deposited into the shareholder's account
before being eligible for exchange. (Certificates mailed in for deposit
should not be endorsed.)
As described below, and in the Prospectus under the caption "Purchase of
Fund Shares," a CDSC may be imposed upon a redemption, depending on a number
of factors, including the number of years from the time of purchase until the
time of redemption or exchange ("holding period"). When shares of a Dean
Witter Multi-Class Fund or any CDSC Fund are exchanged for shares of an
Exchange Fund, the exchange is executed at no charge to the shareholder,
without the imposition of the CDSC at the time of the exchange. During the
period of time the shareholder remains in the Exchange Fund (calculated from
the last day of the month in which the Exchange Fund shares were acquired),
the holding period or "year since purchase payment made" is frozen. When
shares are redeemed out of the Exchange Fund, they will be subject to a CDSC
which would be based upon the period of time the shareholder held shares in a
Dean Witter Multi-Class Fund or in a CDSC Fund. However, in the case of
shares exchanged into an Exchange Fund on or after April 23, 1990, upon a
redemption of shares which results in a CDSC being imposed, a credit (not to
exceed the amount of the CDSC) will be given in an amount equal to the
Exchange Fund 12b-1 distribution fees incurred on or after that date which
are attributable to those shares. Shareholders acquiring shares of an
Exchange Fund pursuant to this exchange privilege may exchange those shares
back into a Dean Witter Multi-Class Fund or a CDSC Fund from the Exchange
Fund, with no CDSC being imposed on such exchange. The holding period
previously frozen when shares were first exchanged for shares of the Exchange
Fund resumes on the last day of the month in which shares of a Dean Witter
Multi-Class Fund or of a CDSC Fund are reacquired. A CDSC is imposed only
upon an ultimate redemption, based upon the time (calculated as described
above) the shareholder was invested in a Dean Witter Multi-Class Fund or in a
CDSC Fund. In the case of exchanges of Class A shares which are subject to a
CDSC, the holding period also includes the time (calculated as described
above) the shareholder was invested in a FSC Fund.
When shares initially purchased in a Dean Witter Multi-Class Fund or in a
CDSC Fund are exchanged for shares of a Dean Witter Multi-Class Fund, shares
of a CDSC Fund, shares of a FSC Fund, or shares of an Exchange Fund, the date
of purchase of the shares of the fund exchanged into, for purposes of the
CDSC upon redemption, will be the last day of the month in which the shares
being exchanged were originally purchased. In allocating the purchase
payments between funds for purposes of the CDSC, the amount which represents
the current net asset value of shares at the time of the exchange which were
(i) purchased more than one, three or six years (depending on the CDSC
schedule applicable to the shares) prior to the exchange, (ii) originally
acquired through reinvestment of dividends or distributions and (iii)
acquired in exchange for shares of FSC Funds, or for shares of other Dean
Witter Funds for which shares of FSC Funds have been exchanged (all such
shares called "Free Shares"), will be exchanged first. After an exchange, all
dividends earned on shares in an Exchange Fund will be considered Free
Shares. If the exchanged amount exceeds the value of such Free Shares, an
exchange is made, on a block-by-block basis, of non-Free Shares held for the
longest period of time (except that, with respect to Class B shares, if
shares held for identical periods of time but subject to different CDSC
28
<PAGE>
schedules are held in the same Exchange Privilege account, the shares of that
block that are subject to a lower CDSC rate will be exchanged prior to the
shares of that block that are subject to a higher CDSC rate). Shares equal to
any appreciation in the value of non-Free Shares exchanged will be treated as
Free Shares, and the amount of the purchase payments for the non-Free Shares
of the fund exchanged into will be equal to the lesser of (a) the purchase
payments for, or (b) the current net asset value of, the exchanged non-Free
Shares. If an exchange between funds would result in exchange of only part of
a particular block of non-Free Shares, then shares equal to any appreciation
in the value of the block (up to the amount of the exchange) will be treated
as Free Shares and exchanged first, and the purchase payment for that block
will be allocated on a pro rata basis between the non-Free Shares of that
block to be retained and the non-Free Shares to be exchanged. The prorated
amount of such purchase payment attributable to the retained non-Free Shares
will remain as the purchase payment for such shares, and the amount of
purchase payment for the exchanged non-Free Shares will be equal to the
lesser of (a) the prorated amount of the purchase payment for, or (b) the
current net asset value of, those exchanged non-Free Shares. Based upon the
procedures described in the Prospectus under the caption "Purchase of Fund
Shares," any applicable CDSC will be imposed upon the ultimate redemption of
shares of any fund, regardless of the number of exchanges since those shares
were originally purchased.
With respect to the redemption or repurchase of shares of the Fund, the
application of proceeds to the purchase of new shares in the Fund or any
other of the funds and the general administration of the Exchange Privilege,
the Transfer Agent acts as agent for the Distributor and for the
shareholder's selected broker-dealer, if any, in the performance of such
functions. With respect to exchanges, redemptions or repurchases, the
Transfer Agent shall be liable for its own negligence and not for the default
or negligence of its correspondents or for losses in transit. The Fund shall
not be liable for any default or negligence of the Transfer Agent, the
Distributor or any selected broker-dealer.
The Distributor and any selected broker-dealer have authorized and
appointed the Transfer Agent to act as their agent in connection with the
application of proceeds of any redemption of Fund shares to the purchase of
shares of any other fund and the general administration of the Exchange
Privilege. No commission or discounts will be paid to the Distributor or any
selected broker-dealer for any transactions pursuant to this Exchange
Privilege.
Exchanges are subject to the minimum investment requirement and any other
conditions imposed by each fund. (The minimum initial investment for the
Exchange Privilege account of each Class is $5,000 for Dean Witter Liquid
Asset Fund Inc., Dean Witter Tax-Free Daily Income Trust, Dean Witter New
York Municipal Money Market Trust and Dean Witter California Tax-Free Daily
Income Trust, although those funds may, at their discretion, accept initial
investments of as low as $1,000. The minimum initial investment for the
Exchange Privilege account of each Class is $10,000 for Dean Witter
Short-Term U.S. Treasury Trust, although that fund may, at its discretion,
accept initial investments of as low as $5,000. The minimum initial
investment for the Exchange Privilege account of each Class is $5,000 for
Dean Witter Special Value Fund. The minimum initial investment for the
Exchange Privilege account of each Class of all other Dean Witter Funds for
which the Exchange Privilege is available is $1,000.) Upon exchange into an
Exchange Fund, the shares of that fund will be held in a special Exchange
Privilege Account separately from accounts of those shareholders who haved
acquired their shares directly from that fund. As a result, certain services
normally available to shareholders of those funds, including the check
writing feature, will not be available for funds held in that account.
The Fund and each of the other Dean Witter Funds may limit the number of
times this Exchange Privilege may be exercised by any investor within a
specified period of time. Also, the Exchange Privilege may be terminated or
revised at any time by the Fund and/or any of the Dean Witter Funds for which
shares of the Fund have been exchanged, upon such notice as may be required
by applicable regulatory agencies (presently sixty days' prior written notice
for termination or material revision), provided that six months' prior
written notice of termination will be given to the shareholders who hold
shares of Exchange Funds, pursuant to the Exchange Privilege and provided
further that the Exchange Privilege may be terminated or materially revised
without notice at times (a) when the New York Stock Exchange is closed for
other than customary weekends and holidays, (b) when trading on that Exchange
is restricted, (c) when an emergency exists as a result of which disposal by
the Fund of securities owned by it is not
29
<PAGE>
reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, (d) during any other period
when the Securities and Exchange Commission by order so permits (provided
that applicable rules and regulations of the Securities and Exchange
Commission shall govern as to whether the conditions prescribed in (b) or (c)
exist), or (e) if the Fund would be unable to invest amounts effectively in
accordance with its investment objective(s), policies and restrictions.
For further information regarding the Exchange Privilege, shareholders
should contact their DWR or other selected broker-dealer account executive or
the Transfer Agent.
REDEMPTIONS AND REPURCHASES
- -----------------------------------------------------------------------------
Redemption. As stated in the Prospectus, shares of each Class of the Fund
can be redeemed for cash at any time at the net asset value per share next
determined; however, such redemption proceeds will be reduced by the amount
of any applicable CDSC. If shares are held in a shareholder's account without
a share certificate, a written request for redemption to the Fund's Transfer
Agent at P.O. Box 983, Jersey City, NJ 07303 is required. If certificates are
held by the shareholder, the shares may be redeemed by surrendering the
certificates with a written request for redemption. The share certificate, or
an accompanying stock power, and the request for redemption, must be signed
by the shareholder or shareholders exactly as the shares are registered. Each
request for redemption, whether or not accompanied by a share certificate,
must be sent to the Fund's Transfer Agent, which will redeem the shares at
their net asset value next computed (see "Purchase of Fund Shares" in the
Prospectus) after it receives the request, and certificate, if any, in good
order. Any redemption request received after such computation will be
redeemed at the next determined net asset value.
Whether certificates are held by the shareholder or shares are held in a
shareholder's account, if the proceeds are to be paid to any person other
than the record owner, or if the proceeds are to be paid to a corporation
(other than the Distributor or a selected broker-dealer for the account of
the shareholder), partnership, trust or fiduciary, or sent to the shareholder
at an address other than the registered address, signatures must be
guaranteed by an eligible guarantor acceptable to the Transfer Agent
(shareholders should contact the Transfer Agent for a determination as to
whether a particular institution is such an eligible guarantor). A stock
power may be obtained from any dealer or commercial bank. The Fund may change
the signature guarantee requirements from time to time upon notice to
shareholders, which may be by means of a new prospectus.
Repurchase. As stated in the Prospectus, DWR and other selected
broker-dealers are authorized to repurchase shares represented by a share
certificate which is delivered to any of their offices. Shares held in a
shareholder's account without a share certificate may also be repurchased by
DWR and other selected broker-dealers upon the telephonic request of the
shareholder. The repurchase price is the net asset value next computed after
such purchase order is received by DWR or other selected broker-dealer
reduced by any applicable CDSC.
Payment for Shares Redeemed or Repurchased. As discussed in the
Prospectus, payment for shares of any Class presented for repurchase or
redemption will be made by check within seven days after receipt by the
Transfer Agent of the certificate and/or written request in good order. The
term good order means that the share certificate, if any, and request for
redemption are properly signed, accompanied by any documentation required by
the Transfer Agent, and bear signature guarantees when required by the Fund
or the Transfer Agent. Such payment may be postponed or the right of
redemption suspended at times (a) when the New York Stock Exchange is closed
for other than customary weekends and holidays, (b) when trading on that
Exchange is restricted, (c) when an emergency exists as a result of which
disposal by the Fund of securities owned by it is not reasonably practicable
or it is not reasonably practicable for the Fund fairly to determine the
value of its net assets, or (d) during any other period when the Securities
and Exchange Commission by order so permits; provided that applicable rules
and regulations of the Securities and Exchange Commission shall govern as to
whether the conditions prescribed in (b) or (c) exist. If the shares to be
redeemed have recently been purchased by check (including a certified or bank
cashier's check), payment of redemption proceeds may be delayed for the
minimum time needed to verify that the check used for investment has
30
<PAGE>
been honored (not more than fifteen days from the time of receipt of the
check by the Transfer Agent). Shareholders maintaining margin accounts with
DWR or another selected broker-dealer are referred to their account executive
regarding restrictions on redemption of shares of the Fund pledged in the
margin account.
Transfers of Shares. In the event a shareholder requests a transfer of any
shares to a new registration, such shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the CDSC or free of such charge (and with regard to the
length of time shares subject to the charge have been held), any transfer
involving less than all the shares in an account will be made on a pro rata
basis (that is, by transferring shares in the same proportion that the
transferred shares bear to the total shares in the account immediately prior
to the transfer). The transferred shares will continue to be subject to any
applicable CDSC as if they had not been so transferred.
Reinstatement Privilege. As described in the Prospectus, a shareholder who
has had his or her shares redeemed or repurchased and has not previously
exercised this reinstatement privilege may, within 35 days after the date of
the redemption or repurchase, reinstate any portion or all of the proceeds of
such redemption or repurchase in shares of the Fund in the same Class at the
net asset value next determined after a reinstatement request, together with
such proceeds, is received by the Transfer Agent.
Exercise of the reinstatement privilege will not affect the federal income
tax treatment of any gain or loss realized upon the redemption or repurchase,
except that if the redemption or repurchase resulted in a loss and
reinstatement is made in shares of the Fund, some or all of the loss,
depending on the amount reinstated, will not be allowed as a deduction for
federal income tax purposes but will be applied to adjust the cost basis of
the shares acquired upon reinstatement.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- -----------------------------------------------------------------------------
Each shareholder will receive at least a quarterly summary of his or her
account, including information as to reinvested dividends and capital gains
distributions. Share certificates for dividends or distributions will not be
issued unless a shareholder requests in writing that a certificate be issued
for a specific number of shares.
In computing net investment income, the Fund will amortize any premiums
and original issue discounts on securities owned, if applicable. Capital
gains or losses realized upon sale or maturity of such securities will be
based on their amortized cost.
Gains or losses on the sales of securities by the Fund will be long-term
capital gains or losses if the securities have been held by the Fund for more
than twelve months. Gains or losses on the sale of securities held for twelve
months or less will be short-term capital gains or losses.
The Fund has qualified and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code. If so
qualified, the Fund will not be subject to federal income tax on its net
investment income and capital gains, if any, realized during any fiscal year
to the extent that it distributes such income and capital gains to its
shareholders.
With respect to the Fund's investments in zero coupon bonds, the Fund
accrues income prior to any actual cash payments by their issuers. In order
to continue to comply with Subchapter M of the Internal Revenue Code and
remain able to forego payment of federal income tax on its income and capital
gains, the Fund must distribute all of its net investment income, including
income accrued from zero coupon bonds. As such, the Fund may be required to
dispose of some of its portfolio securities under disadvantageous
circumstances to generate the cash required for distribution.
As discussed in the Prospectus, the Fund intends to qualify to pay
"exempt-interest dividends" to its shareholders by maintaining, as of the
close of each of its taxable years, at least 50% of the value of its assets
in tax-exempt securities. An exempt-interest dividend is that part of the
dividend distributions made by the Fund which consists of interest received
by the Fund on tax-exempt securities upon which the shareholder incurs no
federal income taxes. Exempt-interest dividends are included however, in
determining what portion, if any, of a person's Social Security benefits are
subject to federal income tax.
31
<PAGE>
As also discussed in the Prospectus, the Fund intends to invest a portion
of its assets in certain "private activity bonds" issued after August 7,
1986. As a result, a portion of the exempt-interest dividends paid by the
Fund will be an item of tax preference to shareholders subject to the
alternative minimum tax. Certain corporations which are subject to the
alternative minimum tax may also have to include exempt-interest dividends in
calculating their alternative minimum taxable income in situations where the
"adjusted current earnings" of the corporation exceeds its alternative
minimum taxable income.
Within sixty days after the end of its fiscal year, the Fund will mail to
shareholders a statement indicating the percentage of the dividend
distributions for each fiscal year which constitutes exempt-interest
dividends, the percentage, if any, that is taxable, and the percentage, if
any, of the exempt-interest dividends which constitutes an item of tax
preference, and to what extent the taxable portion is long-term capital gain,
short-term capital gain or ordinary income. This percentage should be applied
uniformly to all monthly distributions made during the fiscal year to
determine the proportion of dividends that is tax-exempt. The percentage may
differ from the percentage of tax-exempt dividend distributions for any
particular month.
Shareholders will be subject to federal income tax on dividends paid from
interest income derived from taxable securities and on distributions of net
short-term capital gains. Such dividends and distributions are taxable to the
shareholder as ordinary dividend income regardless of whether the shareholder
receives such distributions in additional shares or in cash. Distributions of
long-term capital gains, if any, are taxable as long-term capital gains,
regardless of how long the shareholder has held the Fund shares and
regardless of whether the distribution is received in additional shares or in
cash. Since the Fund's income is expected to be derived entirely from
interest rather than dividends, it is anticipated that no portion of such
dividend distributions will be eligible for the federal dividends received
deduction available to corporations.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of the Fund is not deductible. Furthermore, entities or persons who
are "substantial users" (or related persons) of facilities financed by
industrial development bonds should consult their tax advisers before
purchasing shares of the Fund. "Substantial user" is defined generally by
Income Tax Regulation 1.103-11(b) as including a "non-exempt person" who
regularly uses in a trade or business a part of a facility financed from the
proceeds of industrial development bonds.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities. Similar proposals may be introduced in the
future. If such a proposal were enacted, the availability of municipal
securities for investment by the Fund could be affected. In that event, the
Fund would re-evaluate its investment objective and policies.
Any dividends or capital gains distributions received by a shareholder
from any investment company will have the effect of reducing the net asset
value of the shareholder's shares in that fund by the exact amount of the
dividend or capital gains distribution. Furthermore, capital gains
distributions are, and some portion of the dividends may be, subject to
income tax. If the net asset value of the shares should be reduced below a
shareholder's cost as a result of the payment of taxable dividends or the
distribution of capital gains, such payment or distribution would be in part
a return of capital but nonetheless taxable to the shareholder. Therefore, an
investor should consider the tax implications of purchasing Fund shares
immediately prior to a distribution record date.
Shareholders should consult their tax advisers regarding specific
questions as to state or local taxes.
PERFORMANCE INFORMATION
- -----------------------------------------------------------------------------
As discussed in the Prospectus, from time to time the Fund may quote its
"yield" and/or its "total return" in advertisements and sales literature.
These figures are computed separately for Class A, Class B, Class C and Class
D shares. Prior to July 28, 1997, the Fund offered only one Class of shares.
Because the distribution arrangement for Class A most closely resembles the
distribution arrangement
32
<PAGE>
applicable prior to the implementation of multiple classes (i.e., Class A is
sold with a front-end sales charge), historical performance information has
been restated to reflect the actual maximum sales charge applicable to Class
A (i.e., 4.25%) as compared to the 4.0% sales charge in effect prior to July
28, 1997. In addition, because all shares of the Fund held prior to July 28,
1997 have been designated Class D shares, the Fund's historical performance
has also been restated to reflect the absence of any sales charge in the case
of Class D shares. In addition, Class A shares are now subject to an ongoing
12b-1 fee which is not reflected in the restated performance for that Class
and would further reduce the performance quoted below. Following the restated
performance information is the actual performance of the Fund as of its last
fiscal year (prior to the implementation of multiple classes) without taking
into effect the new fee and sales charge structure.
Yield is calculated for any 30-day period as follows: the amount of
interest income for each security in the Fund's portfolio is determined as
described below; the total for the entire portfolio constitutes the Fund's
gross income for the period. Expenses accrued during the period are
subtracted to arrive at "net investment income" of each Class. The resulting
amount is divided by the product of the maximum offering price per share on
the last day of the period (reduced by any undeclared earned income per share
that is expected to be declared shortly after the end of the period)
multiplied by the average number of shares of the applicable Class
outstanding during the period that were entitled to dividends. This amount is
added to 1 and raised to the sixth power. 1 is then subtracted from the
result and the difference is multiplied by 2 to arrive at the annualized
yield.
To determine interest income from debt obligations, a yield-to-maturity,
expressed as a percentage, is determined for obligations held at the
beginning of the period, based on the current market value of the security
plus accrued interest, generally as of the end of the month preceding the
30-day period, or, for obligations purchased during the period, based on the
cost of the security (including accrued interest). The yield-to-maturity is
multiplied by the market value (plus accrued interest) for each security and
the result is divided by 360 and multiplied by 30 days or the number of days
the security was held during the period, if less. Modifications are made for
determining yield-to-maturity on certain tax-exempt securities. For the
30-day period ended December 31, 1996, the Fund's restated yield for the
Class A and Class D shares, calculated pursuant to the formula described
above, was 4.68% and 4.89%, respectively.
The Fund may also quote a "tax-equivalent yield" for each Class determined
by dividing the tax-exempt portion of quoted yield by 1 minus the stated
income tax rate and adding the result to the portion of the yield that is not
tax-exempt. The Fund's restated tax-equivalent yield for the Class A and
Class D shares, based upon a Federal personal income tax bracket of 39.60%
(the highest current individual marginal tax rate), for the 30-day period
ended December 31, 1996 was 7.75% and 8.10%, respectively, based upon the
yield quoted above.
The Fund's "average annual total return" represents an annualization of
the Fund's total return over a particular period and is computed by finding
the annual percentage rate which will result in the ending redeemable value
of a hypothetical $1,000 investment made at the beginning of a one, five or
ten year period, or for the period from the date of commencement of the
Fund's operations, if shorter than any of the foregoing. The ending
redeemable value is reduced by any CDSC at the end of the one, five or ten
year or other period. For the purpose of this calculation, it is assumed that
all dividends and distributions are reinvested. The formula for computing the
average annual total return involves a percentage obtained by dividing the
ending redeemable value by the amount of the initial investment, taking a
root of the quotient (where the root is equivalent to the number of years in
the period) and subtracting 1 from the result. The restated average annual
total returns of the Class A and Class D shares of the Fund for the year
ended December 31, 1996 were -0.79% and 3.61%, respectively; for the five
years ended December 31, 1996 were 5.94% and 6.86%, respectively; and for the
ten years ended December 31, 1996 were 6.97% and 7.44%, respectively.
In addition to the foregoing, the Fund may advertise its total return for
each Class over different periods of time by means of aggregate, average,
year-by-year or other types of total return figures. Such calculation may or
may not reflect the imposition of the maximum front-end sales charge for
Class A or the deduction of the CDSC for each of Class B and Class C which,
if reflected, would reduce the performance quoted. For example, the average
annual total return of the Fund may be calculated in the
33
<PAGE>
manner described in the preceding paragraph, but without the deduction for
any applicable sales charge. Based on this calculation, the Fund's average
annual total return for Class A shares for the year ended December 31, 1996
was 3.61%, the average annual total return for the five years ended December
31, 1996 was 6.86% and the average annual total return for the ten years
ended December 31, 1996 was 7.44%. Because the Class D shares are not subject
to any sales charge, the Fund would only advertise average annual total
return as calculated in the previous paragraph.
In addition, the Fund may compute its aggregate total return for each
Class for specified periods by determining the aggregate percentage rate
which will result in the ending value of a hypothetical $1,000 investment
made at the beginning of the period. For the purpose of this calculation, it
is assumed that all dividends and distributions are reinvested. The formula
for computing aggregate total return involves a percentage obtained by
dividing the ending value (without reduction for any sales charge) by the
initial $1,000 investment and subtracting 1 from the result. Based on the
foregoing calculation, the Fund's restated total return for both Class A and
Class D shares for the year ended December 31, 1996 was 3.61%; the restated
total return for the five years ended December 31, 1996 was 39.37%; and the
restated total return for the ten years ended December 31, 1996 was 104.87%.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in each Class of shares of the Fund by adding 1
to the Fund's aggregate total return to date (expressed as a decimal and
without taking into account the effect of any applicable CDSC) and
multiplying by $9,575, $48,250 and $97,250 in the case of Class A
(investments of $10,000, $50,000 and $100,000 adjusted for the initial sales
charge) or by $10,000, $50,000 and $100,000 in the case of each of Class B,
Class C and Class D, as the case may be. Investments of $10,000, $50,000 and
$100,000, adjusted for the aforementioned sales charges, in Class A and Class
D of the Fund at inception (March 27, 1980) would have grown to $45,017,
$226,847 and $457,221, respectively, in the case of Class A, and $47,015,
$235,075 and $470,150, respectively, in the case of Class D, at December 31,
1996.
For the 30-day period ended December 31, 1996, the Fund's actual yield,
calculated pursuant to the formula described above, was 4.69%. The Fund's
tax-equivalent yield, calculated pursuant to the formula described above, for
the 30-day period ended December 31, 1996 was 7.76% based on the yield quoted
in the previous sentence. The average annual total returns of the Fund,
calculated pursuant to the formula described above, for the year ended
December 31, 1996, for the five years ended December 31, 1996, and for the
ten years ended December 31, 1996 were -0.53%, 6.00% and 7.00%, respectively.
The average annual total returns of the Fund calculated without the deduction
for any applicable sales charge for the year ended December 31, 1996, for the
five years ended December 31, 1996, and for the ten years ended December 31,
1996, were 3.61%, 6.86% and 7.44%, respectively. The Fund's aggregate total
return, calculated pursuant to the formula described above, for the year
ended December 31, 1996 was 3.61%, the total return for the five years ended
December 31, 1996 was 39.37% and the total return for the ten years ended
December 31, 1996 was 104.87%. Investments of $10,000, $50,000 and $100,000,
adjusted for the sales charges in effect at such time (4.0%, 3.25% or 2.75%,
respectively), in the Fund at inception (March 27, 1980) would have grown to
$45,134, $227,435 and $457,221, respectively, at December 31, 1996.
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent
organizations.
DESCRIPTION OF SHARES OF THE FUND
- -----------------------------------------------------------------------------
The Shareholders of the Fund are entitled to a full vote for each full
share held. All of the Trustees have been elected by the shareholders of the
Fund, most recently at a Special Meeting of Shareholders held on May 21,
1997. On that date, Wayne E. Hedien was also elected as a Trustee of the
Fund, with his term to commence on September 1, 1997. The Trustees themselves
have the power to alter the number and the terms of office of the Trustees
(as provided for in the Declaration of Trust), and they may at any time
lengthen or shorten their own terms or make their terms of unlimited duration
and appoint their own successors, provided that always at least a majority of
the Trustees has been elected by the shareholders of the Fund. Under certain
circumstances the Trustees may be removed by action of the
34
<PAGE>
Trustees. The shareholders also have the right under certain circumstances to
remove the Trustees. The voting rights of shareholders are not cumulative, so
that holders of more than 50 percent of the shares voting can, if they
choose, elect all Trustees being selected, while the holders of the remaining
shares would be unable to elect any Trustees.
The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares (the managed portfolios) and additional classes
of shares within any series (which would be used to distinguish among the
rights of different categories of shareholders, as might be required by
future regulations or other unforeseen circumstances). The Trustees have not
presently authorized any such additional series or classes of shares other
than as set forth in the Prospectus.
The Declaration of Trust further provides that no Trustee, officer,
employee or agent of the Fund is liable to the Fund or to a shareholder, nor
is any Trustee, officer, employee or agent liable to any third persons in
connection with the affairs of the Fund, except as such liability may arise
from his/her or its own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his duties. It also provides that all third persons
shall look solely to the Fund property for satisfaction of claims arising in
connection with the affairs of the Fund. With the exceptions stated above,
the Declaration of Trust provides that a Trustee, officer, employee or agent
is entitled to be indemnified against all liability in connection with the
affairs of the Fund.
The Fund is authorized to issue an unlimited number of shares of
beneficial interest. The Fund shall be of unlimited duration subject to the
provisions in the Declaration of Trust concerning termination by action of
the shareholders or the Trustees.
CUSTODIAN AND TRANSFER AGENT
- -----------------------------------------------------------------------------
The Bank of New York, 90 Washington Street, New York, New York 10286 is
the Custodian of the Fund's assets. The Custodian has no part in deciding the
Fund's investment policies or which securities are to be purchased or sold
for the Fund's portfolio. Any of the Fund's cash balances with the Custodian
in excess of $100,000 are unprotected by Federal deposit insurance. Such
balances may, at times, be substantial.
Dean Witter Trust Company, Harborside Financial Center, Plaza Two, Jersey
City, New Jersey 07311 is the Transfer Agent of the Fund's shares and
Dividend Disbursing Agent for payment of dividends and distributions on Fund
shares and Agent for shareholders under various investment plans described
herein. Dean Witter Trust Company is an affiliate of Dean Witter InterCapital
Inc., the Fund's Investment Manager, and Dean Witter Distributors Inc., the
Fund's Distributor. As Transfer Agent and Dividend Disbursing Agent, Dean
Witter Trust Company's responsibilities include maintaining shareholder
accounts, disbursing cash dividends and reinvesting dividends, processing
account registration changes, handling purchase and redemption transactions,
mailing prospectuses and reports, mailing and tabulating proxies, processing
share certificate transactions, and maintaining shareholder records and
lists. For these services Dean Witter Trust Company receives a per
shareholder account fee from the Fund.
INDEPENDENT ACCOUNTANTS
- -----------------------------------------------------------------------------
Price Waterhouse LLP serves as the independent accountants of the Fund.
The independent accountants are responsible for auditing the annual financial
statements of the Fund.
REPORTS TO SHAREHOLDERS
- -----------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports
showing the Fund's portfolio and other information. An annual report,
containing financial statements audited by independent accountants, will be
sent to shareholders each year.
35
<PAGE>
The Fund's fiscal year is the calendar year. The financial statements of
the Fund must be audited at least once a year by independent accountants
whose selection is made annually by the Fund's Board of Trustees.
LEGAL COUNSEL
- -----------------------------------------------------------------------------
Barry Fink, Esq., who is an officer and the General Counsel of the
Investment Manager, is an officer and the General Counsel of the Fund.
EXPERTS
- -----------------------------------------------------------------------------
The annual financial statements of the Fund for the year ended December
31, 1996, which are included in this Statement of Additional Information and
incorporated by reference in the Prospectus, have been so included and
incorporated in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
REGISTRATION STATEMENT
- -----------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
36
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TAX-EXEMPT MUNICIPAL BONDS (94.5%)
General Obligation (11.4%)
North Slope Borough, Alaska,
$ 5,000 Ser 1992 A Conv (MBIA) ......................................... 5.90 % 06/30/03 $ 5,358,450
15,000 Ser 1994 B (FSA) ............................................... 0.00 06/30/05 9,679,800
18,500 Ser 1995 A (MBIA) .............................................. 0.00 06/30/06 11,223,950
11,000 Ser 1996 B (MBIA) .............................................. 0.00 06/30/06 6,673,700
10,000 Ser 1996 B (MBIA) .............................................. 0.00 06/30/07 5,697,600
4,000 Connecticut, College Savings 1989 Ser A ........................ 0.00 07/01/08 2,209,080
Massachusetts,
20,000 Refg 1996 Ser A (AMBAC) ........................................ 6.00 11/01/10 21,480,800
10,000 Refg 1993 Ser A ................................................ 5.50 02/01/11 10,051,300
4,000 Clark County, Nevada, Transportation Ser 1992 A (AMBAC) ........ 6.50 06/01/17 4,518,640
New York City, New York,
10,000 1990 Ser D ..................................................... 6.00 08/01/07 10,077,700
10,000 1990 Ser D ..................................................... 6.00 08/01/08 10,053,900
10,000 Pennsylvania, First Ser 1995 (FGIC) ............................. 5.50 05/01/12 10,074,700
7,500 Shelby County, Tennessee, Refg 1995 Ser A ...................... 5.625 04/01/14 7,610,025
20,120 King County, Washington, Ltd Tax 1995 (MBIA) .................... 6.00 01/01/23 20,632,255
- ------------ --------------
155,120 135,341,900
- ------------ --------------
Educational Facilities Revenue (5.4%)
10,000 Indiana University, Student Fee Ser K (MBIA) .................... 5.875 08/01/20 10,089,600
7,000 Massachusetts Health & Educational Facilities Authority, Boston
University Ser 1991 (MBIA) ..................................... 6.66 10/01/31 7,524,650
15,000 New Hampshire Higher Educational & Health Facilities Authority,
Dartmouth College Ser 1993 ..................................... 5.375 06/01/23 14,239,800
2,000 New Jersey Development Authority, The Seeing Eye Inc 1991 ....... 7.30 04/01/11 2,100,380
New York State Dormitory Authority,
5,000 State University Ser 1989 B .................................... 0.00 05/15/02 3,879,350
20,000 State University Ser 1990 B .................................... 7.00 05/15/16 21,422,400
5,000 Vermont Educational & Health Buildings Financing Agency,
Middlebury College Ser 1996 .................................... 5.375 11/01/26 4,795,450
- ------------ --------------
64,000 64,051,630
- ------------ --------------
Electric Revenue (11.7%)
25,000 Salt River Project Agricultural Improvement & Power District,
Arizona, Refg 1993 Ser C ....................................... 5.50 01/01/10 25,702,250
10,000 Sacramento Municipal Utility District, California, Refg 1994 Ser
I (MBIA) ....................................................... 5.75 01/01/15 10,104,900
10,000 Municipal Electric Authority of Georgia, Fifth Crossover Ser .... 6.50 01/01/17 10,922,200
8,000 New York State Power Authority, General Purpose Ser CC .......... 5.25 01/01/18 7,581,200
15,000 Puerto Rico Electric Power Authority, Power Ser O ............... 0.00 07/01/17 4,599,750
15,000 South Carolina Public Service Authority, 1995 Refg Ser A
(AMBAC) ........................................................ 6.25 01/01/22 15,957,600
6,000 Austin, Texas, Combined Utilities Refg Ser 1993 A ............... 5.75 11/15/13 6,019,320
24,000 San Antonio, Texas, Electric & Gas Refg Ser 1994 C .............. 4.70 02/01/06 23,072,160
SEE NOTES TO FINANCIAL STATEMENTS
37
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
Intermountain Power Agency, Utah,
$10,000 Refg 1996 Ser D ................................................ 5.00 % 07/01/21 $ 9,069,600
10,000 Refg 1997 Ser B (MBIA)(WI) ..................................... 5.75 07/01/19 9,806,300
15,000 Washington Public Power System, Proj #2 Refg Ser 1994 A
(Secondary MBIA) ............................................... 6.00 07/01/07 16,061,850
- ------------ --------------
148,000 138,897,130
- ------------ --------------
Hospital Revenue (7.4%)
10,000 Birmingham-Carraway Special Care Facilities Financing
Authority, Alabama, Carraway Methodist Health Systems Ser 1995
A (Connie Lee) ................................................. 6.25 08/15/09 10,808,000
3,000 Baxter County, Arkansas, Baxter County Regional Hospital Inc
Impr & Refg Ser 1992 ........................................... 7.50 09/01/21 3,216,660
10,000 California Health Facilities Financing Authority, Kaiser
Permanente Ser 1985 ............................................ 5.55 08/15/25 9,544,900
1,500 Massachusetts Health & Educational Facilities Authority, Malden
Hospital - FHA Ins Mtge Ser A .................................. 5.00 08/01/16 1,343,580
Rochester, Minnesota,
5,000 Mayo Foundation/Mayo Medical Center Ser 1992 I ................. 5.75 11/15/21 4,999,600
3,700 Mayo Foundation/Mayo Medical Center Ser 1992 F ................. 6.25 11/15/21 3,870,274
10,000 Missouri Health & Educational Facilities Authority,
Barnes-Jewish Inc/Christian Health Services Ser 1993 A ......... 5.25 05/15/14 9,581,600
6,000 New York State Medical Care Facilities Finance Agency,
Presbyterian Hospital-FHA Ins Mtge 1984 Ser A Refg ............. 5.25 08/15/14 5,779,320
10,000 Charlotte-Mecklenburg County Hospital Authority, North Carolina,
Ser 1992 ....................................................... 6.00 01/01/22 10,136,700
5,000 University of North Carolina, Hospitals at Chapel Hill Ser 1996 . 5.00 02/15/29 4,486,600
4,000 Cuyahoga County, Ohio, The Cleveland Clinic Foundation Refg Ser
1988 A ......................................................... 8.00 12/01/15 4,156,680
5,000 North Central Texas Health Facilities Development Corporation,
University Medical Center Inc Ser 1997 (FSA)(WI) ............... 5.45 04/01/15 4,889,900
7,000 Fairfax County Industrial Development Authority, Virginia, Inova
Health System Foundation Refg Ser 1993 A ....................... 5.25 08/15/19 6,601,840
10,000 Fredericksburg Industrial Development Authority, Virginia,
Medicorp Health System Refg Ser 1996 (AMBAC) ................... 5.25 06/15/16 9,634,000
- ------------ --------------
90,200 89,049,654
- ------------ --------------
Industrial Development/Pollution Control Revenue (6.7%)
1,300 Jefferson County, Kentucky, Louisville Gas & Electric Co 1993
Ser B .......................................................... 5.625 08/15/19 1,289,223
1,450 Maryland Industrial Development Financing Authority, Medical
Waste Assocs LP 1989 Ser (AMT) ................................. 8.75 11/15/10 1,450,000
5,000 Becker, Minnesota, Northern States Power Co Ser A 1989 .......... 6.80 04/01/07 5,300,250
15,000 Claiborne County, Mississippi, Middle South Energy Inc Ser C ... 9.875 12/01/14 16,619,100
10,000 Clark County, Nevada, Nevada Power Co Ser 1992 A (AMT) (FGIC) ... 6.70 06/01/22 10,757,700
10,000 Washoe County, Nevada, Sierra Pacific Power Co Ser 1987 (AMBAC) . 6.30 12/01/14 10,585,600
5,000 Alliance Airport Authority, Texas, AMR Corp Ser 1990 (AMT) ...... 7.50 12/01/29 5,355,400
10,000 Dallas-Fort Worth International Airport Facility Improvement
Corporation, Texas, American Airlines Inc Ser 1995 ............. 6.00 11/01/14 9,923,400
SEE NOTES TO FINANCIAL STATEMENTS
38
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
$ 7,000 Matagorda County Navigation District #1, Texas, Central Power &
Light Co Collateralized Ser 1984 A ............................. 7.50 % 12/15/14 $ 7,718,830
10,000 Weston, Wisconsin, Wisconsin Public Service Corp Refg Ser 1993
A .............................................................. 6.90 02/01/13 10,991,400
- ------------ --------------
74,750 79,990,903
- ------------ --------------
Mortgage Revenue-Multi-Family (2.1%)
7,000 Michigan Housing Development Authority, Rental Ser A (Bifurcated
FSA) ........................................................... 6.50 04/01/23 7,253,050
9,000 New Jersey Housing & Mortgage Finance Agency, 1995 Ser A
(AMBAC) ........................................................ 6.05 11/01/20 9,179,190
New York City Housing Developement Corporation, New York,
4,514 Ruppert Proj-FHA Ins Sec 223F .................................. 6.50 11/15/18 4,637,092
4,371 Stevenson Commons Proj-FHA Ins Sec 223F ........................ 6.50 05/15/18 4,463,777
- ------------ --------------
24,885 25,533,109
- ------------ --------------
Mortgage Revenue-Single Family (6.7%)
10,000 Alaska Housing Finance Corporation, Governmental 1995 Ser A
(MBIA) ......................................................... 5.875 12/01/24 9,965,400
2,440 California Housing Finance Agency, Home Cap Apprec 1983 Ser B .. 0.00 08/01/15 381,372
12,100 Illinois Housing Development Authority, Residential 1991 Ser C
(AMT) .......................................................... 6.875 02/01/18 12,554,355
4,000 Missouri Housing Development Commission, Homeownership GNMA/FNMA
1996 Ser C (AMT) ............................................... 7.45 09/01/27 4,419,760
6,900 Nebraska Investment Finance Authority, GNMA-Backed 1990 Ser
(AMT) .......................................................... 7.631 09/10/30 7,305,306
4,010 North Carolina Housing Finance Agency, Ser Q (AMT) .............. 8.00 03/01/18 4,275,783
6,950 Ohio Housing Finance Agency, GNMA-Backed 1990 Ser A (AMT) ....... 6.903 03/01/31 7,285,824
10,000 Pennsylvania Housing Finance Agency, Ser 1991-31 (AMT) .......... 7.00 10/01/23 10,541,100
Tennessee Housing Development Agency,
4,000 Mortgage Finance 1993 Ser A .................................... 5.90 07/01/18 4,031,880
11,000 Mortgage Finance 1993 Ser A .................................... 5.95 07/01/28 11,065,560
7,600 Wisconsin Housing & Economic Development Authority, Home
Ownership 1991 Ser (AMT) ....................................... 7.097 10/25/22 7,965,864
- ------------ --------------
79,000 79,792,204
- ------------ --------------
Public Facilities Revenue (2.3%)
5,000 Palm Beach County, Florida, Criminal Justice Ser 1990 (FGIC) .... 6.00 06/01/13 5,092,200
10,000 Michigan Building Authority, 1993 Refg Ser I (AMBAC) ............ 5.30 10/01/16 9,494,500
6,000 Saint Louis Industrial Development Authority, Missouri, Kiel
Center Refg Ser 1992 (AMT) ..................................... 7.75 12/01/13 6,423,540
5,000 Ohio Building Authority, Correctional 1985 Ser C BIGS ........... 9.75 10/01/05 6,619,750
- ------------ --------------
26,000 27,629,990
- ------------ --------------
Resource Recovery Revenue (5.8%)
Connecticut Resources Recovery Authority,
9,000 American REF-FUEL Co of Southeastern Connecticut 1988 Ser A
(AMT) .......................................................... 8.00 11/15/15 9,720,540
4,950 Bridgeport RESCO Ser A ......................................... 7.625 01/01/09 5,107,707
7,000 Savannah Resource Recovery Development Authority, Georgia,
Savannah Energy Systems Co Ser 1992 ............................ 6.30 12/01/06 7,385,210
10,000 Northeast Maryland Waste Disposal Authority, Montgomery County
Ser 1993 A (AMT) ............................................... 6.30 07/01/16 10,197,500
SEE NOTES TO FINANCIAL STATEMENTS
39
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
$ 9,000 Mercer County Improvement Authority, New Jersey, Refg Ser A 1992
(AMT)(FGIC) .................................................... 6.70 % 04/01/13 $ 9,009,990
10,000 Hempstead Industrial Development Agency, New York, 1985 American
REF-FUEL Co of Hempstead ....................................... 7.40 12/01/10 10,250,000
6,000 New York State Environmental Facilities Corporation, Huntington
1989 Ser A (AMT) ............................................... 7.50 10/01/12 6,344,220
5,000 Onondaga County Resource Recovery Agency, New York, 1992 Ser
(AMT) .......................................................... 6.875 05/01/06 5,219,800
5,000 Fairfax County Economic Development Authority, Virginia, Ogden
Martin Systems of Fairfax Inc Ser 1988 A (AMT) ................. 7.75 02/01/11 5,387,800
- ------------ --------------
65,950 68,622,767
- ------------ --------------
Transportation Facilities Revenue (12.5%)
8,965 Mid-Bay Bridge Authority, Florida, Sr Lien Crossover Refg Ser
1993 A ......................................................... 6.00 10/01/13 8,954,601
Atlanta, Georgia,
5,000 Airport Refg Ser 1996 (AMBAC) ................................. 6.00 01/01/07 5,393,800
10,000 Airport Ser 1990 (AMT) ......................................... 6.25 01/01/21 10,281,300
8,100 Metropolitan Atlanta Rapid Transit Authority, Georgia, Sales Tax
Refg Ser K ..................................................... 7.25 07/01/10 8,574,822
5,000 Hawaii, Airports Second Ser 1991 (AMT) .......................... 7.00 07/01/18 5,365,450
Kentucky Turnpike Authority,
9,000 Economic Development Road Refg Ser 1995 (AMBAC) ................ 6.50 07/01/08 10,153,080
30,000 Resource Recovery Road Refg 1987 Ser A ........................ 5.00 07/01/08 29,232,300
11,000 New Jersey Highway Authority, Sr Parkway Refg 1992 Ser .......... 6.25 01/01/14 11,532,510
6,595 Albuquerque, New Mexico, Airport Refg Ser 1997 (AMT)(AMBAC)
(WI) ........................................................... 6.375 07/01/15 6,955,878
Ohio Turnpike Commission,
4,000 1994 Ser A .................................................... 5.75 02/15/24 3,988,800
20,000 1996 Ser A (MBIA) .............................................. 5.50 02/15/26 19,656,600
5,000 Pennsylvania Turnpike Commission, Ser L of 1991 (MBIA) .......... 6.00 06/01/15 5,141,500
10,000 Puerto Rico Highway & Transportation Authority, Refg Ser X ...... 5.50 07/01/15 9,931,200
10,000 Texas Turnpike Authority, Dallas North Tollway Refg Ser 1997
(FGIC) ......................................................... 5.25 01/01/23 9,550,000
4,000 Virginia Transportation Board, US Route 58 Corridor Ser 1993 B .. 5.625 05/15/13 4,008,960
- ------------ --------------
146,660 148,720,801
- ------------ --------------
Water & Sewer Revenue (9.7%)
10,000 Birmingham Water Works & Sewer Board, Alabama, Ser 1994 ......... 5.50 01/01/20 9,935,500
10,000 Phoenix Civic Improvement Corporation, Arizona, Jr Lien Water
Ser 1994 ....................................................... 5.45 07/01/19 9,734,700
10,000 California Department of Water Resources, Central Valley Refg
Ser L ......................................................... 5.50 12/01/23 9,766,200
10,000 East Bay Municipal Utility District, California, Water Refg Ser
1993 (MBIA) .................................................... 5.00 06/01/21 9,131,900
10,000 Los Angeles, California, Wastewater Ser 1994-A (MBIA) ........... 5.875 06/01/24 10,198,600
10,000 Dade County, Florida, Water & Sewer Ser 1995 (FGIC) ............. 5.50 10/01/25 9,814,900
5,000 Rockdale County Water & Sewerage Authority, Georgia, Ser 1996
(FSA) .......................................................... 5.00 07/01/22 4,659,400
SEE NOTES TO FINANCIAL STATEMENTS
40
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
Massachusetts Water Resources Authority,
$ 10,000 Refg 1992 Ser B ................................................ 5.50 % 11/01/15 $ 9,747,500
10,000 1993 Ser C ..................................................... 5.25 12/01/15 9,707,800
10,000 1996 Ser A (FGIC) .............................................. 5.50 11/01/21 9,826,400
4,000 Detroit, Michigan, Sewage Refg Ser 1993-A (FGIC) ................ 5.70 07/01/13 4,040,240
8,500 New York City Municipal Water Finance Authority, New York, 1994
Ser B ......................................................... 5.30 06/15/06 8,592,055
10,000 Philadelphia, Pennsylvania, Water & Wastewater Ser 1993 (FSA) ... 5.50 06/15/15 9,773,200
- ------------ --------------
117,500 114,928,395
- ------------ --------------
Other Revenue (2.4%)
3,500 Denver, Colorado, Excise Tax Ser 1985 A ......................... 5.00 11/01/08 3,414,320
New York Local Government Assistance Corporation,
5,000 Ser 1993 C Refg ................................................ 5.375 04/01/14 4,881,500
10,000 Ser 1994 A .................................................... 5.50 04/01/17 9,987,000
5,000 Ser 1995 A .................................................... 6.00 04/01/24 5,106,900
5,000 Houston, Texas, Sr Lien Hotel Occupancy Tax Refg Ser 1995 (FSA) . 5.50 07/01/11 5,011,000
- ------------ --------------
28,500 28,400,720
- ------------ --------------
Refunded (10.4%)
5,000 Central Coast Water Authority, California, Ser 1992 (AMBAC) ..... 6.60 10/01/02++ 5,647,550
9,000 Los Angeles Convention & Exhibition Center Authority,
California, Ser 1985 COPs ...................................... 9.00 12/01/05++ 11,869,290
6,000 Connecticut Health & Educational Facilities Authority, Yale-New
Haven Hospital Ser F (MBIA) .................................... 7.10 07/01/00++ 6,633,600
2,500 Mid-Bay Bridge Authority, Florida, Ser 1991 A (ETM) ............. 6.875 10/01/22 2,854,200
9,790 Metropolitan Pier & Exposition Authority, Illinois, McCormick
Place Ser 1992 A ............................................... 6.50 06/15/03++ 10,994,366
8,000 Massachusetts, 1994 Ser C (FGIC) ................................ 6.75 11/01/04++ 9,164,640
14,000 New York State Dormitory Authority, Suffolk County Judicial Ser
1986 (ETM) ..................................................... 7.375 07/01/16 16,952,460
25,000 Intermountain Power Agency, Utah, Refg 1985 Ser H (GAINS) ....... 0.00 + 07/01/03++ 24,159,500
5,000 Salt Lake City, Utah, IHC Hospital Inc Ser of 1983 (ETM) ........ 5.00 06/01/15 4,835,050
28,000 Fairfax County Industrial Development Authority, Virginia,
Fairfax Hospital System Inc/Inova Health Ser 1991 .............. 6.801 08/15/01++ 30,990,680
- ------------ --------------
112,290 124,101,336
- ------------ --------------
1,132,855 TOTAL TAX-EXEMPT MUNICIPAL BONDS
(Identified Cost $1,051,723,235) .................................................... 1,125,060,539
- ------------ --------------
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (6.1%)
9,700 Dade County Health Facilities Authority, Florida, Miami
Childrens Hospital Ser 1990 (Demand 01/02/97) ................. 5.05 * 09/01/20 9,700,000
13,900 Hapeville Development Authority, Georgia, Hapeville Hotel Ltd
Ser 1985 (Demand 01/02/97) ..................................... 5.00 * 11/01/15 13,900,000
8,700 University of Michigan, Hospital Ser 1995 A (Demand 01/02/97) ... 5.10 * 12/01/19 8,700,000
SEE NOTES TO FINANCIAL STATEMENTS
41
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
$ 18,900 Missouri Health & Educational Facilities Authority, Washington
University Ser 1996 D (Demand 01/02/97) ........................ 4.75*% 02/01/30 $18,900,000
9,000 North Central Texas Health Facilities Development Corporation,
University Medical Center Inc Ser 1987 ......................... 7.75 04/01/97++ 9,294,570
11,600 Kemmerer, Wyoming, Exxon Corp Ser 1984 (Demand 01/02/97) ........ 5.10* 11/01/14 11,600,000
- ------------ --------------
71,800 TOTAL SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS
- ------------
(Identified Cost $71,447,050) ........................................................ 72,094,570
--------------
$1,204,655 TOTAL INVESTMENTS (Identified Cost $1,123,170,285) (a) ................... 100.6% 1,197,155,109
============
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS ........................... (0.6) (7,121,119)
----------- --------------
NET ASSETS ............................................................... 100.0% $1,190,033,990
=========== ==============
</TABLE>
- ------------
AMT Alternative Minimum Tax.
BIGS Bond Income Growth Security.
COPs Certificates of Participation.
ETM Escrowed to Maturity.
GAINS Growth and Income Security.
WI Security purchased on a when issued basis.
+ Zero coupon; will convert to 10.00% on July 1, 2000.
++ Prerefunded to call date shown.
* Current coupon of variable rate security.
(a) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$77,142,347 and the aggregate gross unrealized depreciation is
$3,157,523, resulting in net unrealized appreciation of
$73,984,824.
Bond Insurance:
- ---------------
AMBAC AMBAC Indemnity Corporation.
Connie Lee Connie Lee Insurance Company.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Company.
MBIA Municipal Bond Investors Assurance Corporation.
SEE NOTES TO FINANCIAL STATEMENTS
42
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996, continued
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Alabama 1.7%
Alaska 4.1
Arizona 3.0
Arkansas 0.3
California 5.6
Colorado 0.3
Connecticut 2.0
Florida 3.1
Georgia 5.1
Hawaii 0.4
Illinois 2.0
Indiana 0.8
Kentucky 3.4
Maryland 1.0%
Massachusetts 6.6
Michigan 2.5
Minnesota 1.2
Mississippi 1.4
Missouri 3.3
Nebraska 0.6
Nevada 2.2
New Hampshire 1.2
New Jersey 2.7
New Mexico 0.6
New York 11.4
North Carolina 1.6
Ohio 3.5%
Pennsylvania 3.0
Puerto Rico 1.2
South Carolina 1.3
Tennessee 1.9
Texas 6.8
Utah 4.0
Vermont 0.4
Virginia 4.7
Washington 3.1
Wisconsin 1.6
Wyoming 1.0
-----
Total 100.6%
=====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
43
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $1,123,170,285) ..................................... $1,197,155,109
Cash .................................................................. 887,063
Receivable for:
Interest ............................................................ 17,424,216
Shares of beneficial interest sold .................................. 244,066
Prepaid expenses and other assets ..................................... 27,394
--------------
TOTAL ASSETS ........................................................ 1,215,737,848
--------------
LIABILITIES:
Payable for:
Investments purchased ............................................... 20,777,892
Dividends and distributions ......................................... 3,724,283
Shares of beneficial interest repurchased ........................... 596,522
Investment management fee ........................................... 452,931
Accrued expenses ...................................................... 152,230
--------------
TOTAL LIABILITIES ................................................... 25,703,858
--------------
NET ASSETS:
Paid-in-capital ....................................................... 1,115,886,458
Net unrealized appreciation ........................................... 73,984,824
Accumulated undistributed net realized gain ........................... 162,708
--------------
NET ASSETS .......................................................... $1,190,033,990
==============
NET ASSET VALUE PER SHARE,
101,083,561 shares outstanding (unlimited shares authorized of $.01
par value) ........................................................... $ 11.77
==============
MAXIMUM OFFERING PRICE PER SHARE
(net asset value plus 4.17% of net asset value)* ..................... $ 12.26
==============
</TABLE>
- ------------
* On sales of $25,000 or more the offering price is reduced.
SEE NOTES TO FINANCIAL STATEMENTS
44
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ........................ $ 74,093,062
------------
EXPENSES
Investment management fee .............. 5,320,578
Transfer agent fees and expenses ...... 387,764
Shareholder reports and notices ....... 62,672
Custodian fees ......................... 52,615
Professional fees ...................... 52,404
Registration fees ...................... 46,458
Trustees' fees and expenses ............ 15,285
Other .................................. 30,574
------------
TOTAL EXPENSES ....................... 5,968,350
LESS: EXPENSE OFFSET ................ (40,849)
------------
NET EXPENSES ......................... 5,927,501
------------
NET INVESTMENT INCOME ................ 68,165,561
------------
NET REALIZED AND UNREALIZED GAIN
(LOSS):
Net realized gain ...................... 2,959,135
Net change in unrealized appreciation . (29,830,436)
------------
NET LOSS ............................. (26,871,301)
------------
NET INCREASE ........................... $ 41,294,260
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
45
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................. $ 68,165,561 $ 76,135,601
Net realized gain ..................................... 2,959,135 17,721,238
Net change in unrealized appreciation/depreciation ... (29,830,436) 117,785,387
-------------- --------------
NET INCREASE......................................... 41,294,260 211,642,226
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income ................................. (68,543,874) (75,983,289)
Net realized gain ..................................... (8,374,759) (12,426,304)
-------------- --------------
TOTAL ............................................... (76,918,633) (88,409,593)
-------------- --------------
Net decrease from transactions in shares of beneficial
interest ............................................. (99,650,138) (93,207,593)
-------------- --------------
NET INCREASE (DECREASE) ............................. (135,274,511) 30,025,040
NET ASSETS:
Beginning of period ................................... 1,325,308,501 1,295,283,461
-------------- --------------
END OF PERIOD
(Including undistributed net investment income of
$0 and $378,313, respectively) ...................... $1,190,033,990 $1,325,308,501
============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
46
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1996
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter Tax-Exempt Securities Trust (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Fund's investment objective is to provide
a high level of current income which is exempt from federal income tax,
consistent with the preservation of capital. The Fund was incorporated in
Maryland in 1979, commenced operations on March 27, 1980 and reorganized as a
Massachusetts business trust on April 30, 1987.
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 for the Fund
by an outside independent pricing service approved by the Trustees. The
pricing service has informed the Fund that in valuing the Fund's 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 Fund's 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 Fund 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 Fund'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 Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income
47
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1996, continued
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 Dean Witter InterCapital
Inc. (the "Investment Manager"), the Fund pays the Investment Manager a
management fee, accrued daily and payable monthly, by applying the following
annual rates to the Fund's net assets determined as of the close of each
business day: 0.50% to the portion of daily net assets not exceeding $500
million; 0.425% to the portion of daily net assets exceeding $500 million but
not exceeding $750 million; 0.375% to the portion of daily net assets
exceeding $750 million but not exceeding $1 billion; 0.35% to the portion of
daily net assets exceeding $1 billion but not exceeding $1.25 billion; and
0.325% to the portion of daily net assets exceeding $1.25 billion.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund'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 Fund 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
Fund.
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 December 31, 1996
aggregated $215,642,138 and $383,666,566, respectively.
Dean Witter Trust Company, an affiliate of the Investment Manager, is the
Fund's transfer agent. At December 31, 1996, the Fund had transfer agent fees
and expenses payable of approximately $52,400.
The Fund has an unfunded noncontributory defined benefit pension plan
covering all independent Trustees of the Fund who will have served as
independent Trustees for at least five years at the time of
48
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1996, continued
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 December 31, 1996 included in Trustees' fees and expenses
in the Statement of Operations amounted to $837. At December 31, 1996, the
Fund had an accrued pension liability of $48,696 which is included in accrued
expenses in the Statement of Assets and Liabilities.
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Distributor has
informed the Fund that for the year ended December 31, 1996, it received
approximately $1,050,000 in commissions from the sale of the Fund's shares.
Such commissions are not an expense of the Fund; they are deducted from the
proceeds of the shares.
4. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Sold 3,179,464 $ 37,259,996 3,469,058 $ 40,446,608
Reinvestment of dividends and distributions 3,684,669 43,078,883 4,260,271 50,182,467
-------------- --------------- -------------- ---------------
6,864,133 80,338,879 7,729,329 90,629,075
Repurchased (15,389,992) (179,989,017) (15,722,604) (183,836,668)
-------------- --------------- -------------- ---------------
Net decrease (8,525,859) $ (99,650,138) (7,993,275) $ (93,207,593)
============== =============== ============== ===============
</TABLE>
5. FEDERAL INCOME TAX STATUS
Capital losses incurred after October 31 ("post-October" losses) within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $146,000 during fiscal 1996.
As of December 31, 1996, the Fund had temporary book/tax differences
primarily attributable to post-October losses.
49
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE
OPERATING PERFORMANCE:
Net asset value,
beginning of period ...... $12.09 $11.01 $12.41 $11.88 $11.65
-------- -------- --------- -------- --------
Net investment income .... 0.65 0.67 0.70 0.77 0.79
Net realized and
unrealized gain (loss) .. (0.24) 1.19 (1.37) 0.54 0.23
-------- -------- --------- -------- --------
Total from investment
operations .............. 0.41 1.86 (0.67) 1.31 1.02
-------- -------- --------- -------- --------
Less dividends and
distributions from:
Net investment income ... (0.65) (0.67) (0.70) (0.77) (0.79)
Net realized gain ........ (0.08) (0.11) (0.03) (0.01) --
-------- -------- --------- -------- --------
Total dividends and
distributions ........... (0.73) (0.78) (0.73) (0.78) (0.79)
-------- -------- --------- -------- --------
Net asset value,
end of period ............ $11.77 $12.09 $11.01 $12.41 $11.88
======== ======== ========= ======== ========
TOTAL INVESTMENT RETURN+ 3.61% 17.37% (5.55)% 11.23% 9.09%
RATIOS TO
AVERAGE NET ASSETS:
Expenses .................. 0.48% 0.48% 0.47% 0.47% 0.49%
Net investment income ..... 5.52% 5.76% 6.02% 6.23% 6.74%
SUPPLEMENTAL DATA:
Net assets, end of period,
in millions ............. $1,190 $1,325 $1,295 $1,582 $1,323
Portfolio turnover rate .. 18% 21% 16% 13% 4%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1991 1990 1989 1988 1987
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE
OPERATING PERFORMANCE:
Net asset value,
beginning of period ...... $11.09 $11.28 $10.96 $10.45 $11.50
-------- -------- -------- -------- ---------
Net investment income .... 0.80 0.80 0.81 0.81 0.80
Net realized and
unrealized gain (loss) .. 0.56 (0.18) 0.32 0.51 (0.97)
-------- -------- -------- -------- ---------
Total from investment
operations .............. 1.36 0.62 1.13 1.32 (0.17)
-------- -------- -------- -------- ---------
Less dividends and
distributions from:
Net investment income ... (0.80) (0.81) (0.81) (0.81) (0.83)
Net realized gain ........ -- -- -- -- (0.05)
-------- -------- -------- -------- ---------
Total dividends and
distributions ........... (0.80) (0.81) (0.81) (0.81) (0.88)
-------- -------- -------- -------- ---------
Net asset value,
end of period ............ $11.65 $11.09 $11.28 $10.96 $10.45
======== ======== ======== ======== =========
TOTAL INVESTMENT RETURN+ 12.71% 5.86% 10.61% 13.02% (1.44)%
RATIOS TO
AVERAGE NET ASSETS:
Expenses .................. 0.51% 0.51% 0.51% 0.54% 0.52%
Net investment income ..... 7.05% 7.25% 7.31% 7.51% 7.42%
SUPPLEMENTAL DATA:
Net assets, end of period,
in millions ............. $1,145 $1,010 $1,033 $908 $896
Portfolio turnover rate .. 10% 19% 13% 17% 37%
</TABLE>
- ------------
+ Does not reflect the deduction of sales load. Calculated based on the net
asset value as of the last business day of the period.
SEE NOTES TO FINANCIAL STATEMENTS
50
<PAGE>
DEAN WITTER TAX-EXEMPT SECURITIES TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER TAX-EXEMPT SECURITIES TRUST
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 Dean Witter
Tax-Exempt Securities Trust (the "Fund") at December 31, 1996, 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 ten 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 Fund'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
December 31, 1996 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 10, 1997
- -----------------------------------------------------------------------------
1996 FEDERAL TAX NOTICE (unaudited)
During the year ended December 31, 1996, the Fund paid to the
shareholders $0.65 per share from net investment income. All of the
Fund's dividends from net investment income were exempt interest
dividends, excludable from gross income for Federal income tax
purposes. For the year ended December 31, 1996, the Fund paid to
shareholders $0.08 per share from long-term capital gains.
- -----------------------------------------------------------------------------
<PAGE>
APPENDIX
RATINGS OF INVESTMENTS
- -----------------------------------------------------------------------------
Moody's Investors Service Inc. ("Moody's")
MUNICIPAL BOND RATINGS
<TABLE>
<CAPTION>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may
be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper
medium grade obligations. Factors giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations; i.e., they are neither highly protected
nor poorly secured. Interest payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as
well.
Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as
well assured. Often the protection of interest and principal payments may be very moderate, and therefore
not well safeguarded during both good and bad times in the future. Uncertainty of position characterizes
bonds in this class.
B Bonds which are rated B generally lack characteristics of a desirable investment. Assurance of interest
and principal payments or of maintenance of other terms of the contract over any long period of time may
be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements
of danger with respect to principal or interest.
Ca Bonds which are rated Ca present obligations which are speculative in a high degree. Such issues are often
in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
</TABLE>
Conditional Rating: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These bonds are secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience,
(c) rentals which begin when facilities are completed or (d) payments to
which some other limiting condition attaches. Parenthetical rating denotes
probable credit stature upon completion of construction or elimination of
basis of condition.
52
<PAGE>
Rating Refinements: Moody's may apply numerical modifiers, 1, 2, and 3 in
each generic rating classification from Aa though B in its municipal bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and a modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
MUNICIPAL NOTE RATINGS
Moody's ratings for state and municipal note and other short-term loans
are designated Moody's Investment Grade (MIG). MIG 1 denotes best quality and
means there is present strong protection from established cash flows,
superior liquidity support or demonstrated broad-based access to the market
for refinancing. MIG 2 denotes high quality and means that margins of
protection are ample although not as large as in MIG 1. MIG 3 denotes
favorable quality and means that all security elements are accounted for but
that the undeniable strength of the previous grades, MIG 1 and MIG 2, is
lacking. MIG 4 denotes adequate quality and means that the protection
commonly regarded as required of an investment security is present and that
while the notes are not distinctly or predominantly speculative, there is
specific risk.
VARIABLE RATE DEMAND OBLIGATIONS
A short-term rating, in addition to the Bond or MIG ratings, designated
VMIG may also be assigned to an issue having a demand feature. The assignment
of the VMIG symbol reflects such characteristics as payment upon periodic
demand rather than fixed maturity dates and payment relying on external
liquidity. The VMIG rating criteria are identical to the MIG criteria
discussed above.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess
of nine months. These ratings apply to Municipal Commercial Paper as well as
taxable Commercial Paper. Moody's employs the following three designations,
all judged to be investment grade, to indicate the relative repayment
capacity of rated issuers: Prime-1, Prime-2, Prime-3.
Issuers rated Prime-1 have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 have a strong capacity for
repayment of short-term promissory obligations; and Issuers rated Prime-3
have an acceptable capacity for repayment of short-term promissory
obligations. Issuers rated Not Prime do not fall within any of the Prime
rating categories.
STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S")
MUNICIPAL BOND RATINGS
A Standard & Poor's municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers
or lessees.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. The
ratings are based, in varying degrees, on the following considerations: (1)
likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and
(3) protection afforded by, and relative position of the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with any rating
and may, on occasion,rely on unaudited financial information. The ratings may
be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other reasons.
53
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the highest-rated
issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal although they are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it
normally eibits adequate protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than
for debt in higher-rated categories.
Bonds rated AAA, AA, A and BBB are considered investment grade bonds.
BB Debt rated "BB" has less near-term vulnerability to default than other speculative grade debt. However, it
faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which
would lead to inadequate capacity or willingness to pay interest and repay principal.
B Debt rated "B" has a greater vulnerability to default but presently has the capacity to meet interest payments
and principal repayments. Adverse business, financial or economic conditions would likely impair capacity
or willingness to pay interest and repay principal.
CCC Debt rated "CCC" has a current identifiable vulnerability to default, and is dependent upon favorable business,
financial and economic conditions to meet timely payments of interest and repayments of principal. In the
event of adverse business, financial or economic conditions, it is not likely to have the capacity to pay
interest and repay principal.
CC The rating "CC" is typically applied to debt subordinated to senior debt which is assigned an actual or implied
"CCC" rating.
C The rating "C" is typically applied to debt subordinated to senior debt which is assigned an actual or implied
"CCC-" debt rating.
Cl The rating "Cl" is reserved for income bonds on which no interest is being paid.
D Debt rated "D" is in payment default. The 'D' rating category is used when interest payments or principal
payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The 'D' rating also will be used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
NR Indicates that no rating has been requested, that there is insufficient information on which to base a rating
or that Standard & Poor's does not rate a particular type of obligation as a matter of policy.
Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded as having predominantly speculative characteristics
with respect to capacity to pay interest and repay principal. "BB" indicates the least degree of speculation
and "C" the highest degree of speculation. While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse conditions.
Plus (+) or minus(-): The ratings from "AA" to "CCC" may be modified by the addition of a plus or minus sign
to show relative standing within the major ratings categories.
54
<PAGE>
The foregoing ratings are sometimes followed by a "p" which indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project being financed by the bonds being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood or risk of default upon failure of such completion.
</TABLE>
MUNICIPAL NOTE RATINGS
Commencing on July 27, 1984, Standard & Poor's instituted a new rating
category with respect to certain municipal note issues with a maturity of
less than three years. The new note ratings denote the following:
SP-1 denotes a very strong or strong capacity to pay principal and
interest. Issues determined to possess overwhelming safety characteristics
are given a plus (+) designation (SP-1+).
SP-2 denotes a satisfactory capacity to pay principal and interest.
SP-3 denotes a speculative capacity to pay principal and interest.
COMMERCIAL PAPER RATINGS
Standard and Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. The commercial paper rating is not a recommendation to
purchase or sell a security. The ratings are based upon current information
furnished by the issuer or obtained by S&P from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in or unavailability of such information. Ratings are graded into
group categories, ranging from "A" for the highest quality obligations to "D"
for the lowest. Ratings are applicable to both taxable and tax-exempt
commercial paper. The categories are as follows:
Issues assigned A ratings are regarded as having the greatest capacity
for timely payment. Issues in this category are further refined with the
designation 1, 2 and 3 to indicate the relative degree of safety.
A-1 indicates that the degree of safety regarding timely payments is very
strong.
A-2 indicates capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as overwhelming
as for issues designated "A-1".
A-3 indicates a satisfactory capacity for timely payment. Obligations
carrying this designation are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the
higher designations.
55
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION DEAN WITTER
NOVEMBER 26, 1996 NATIONAL
MUNICIPAL
TRUST
- -----------------------------------------------------------------------------
Dean Witter National Municipal Trust (the "Fund") is an open-end
diversified management investment company whose investment objective is to
provide a high level of current income exempt from federal income tax,
consistent with the preservation of capital. The Fund invests principally in
tax-exempt fixed-income securities which are rated in the three highest
categories by Moody's Investors Service, Inc. or Standard & Poor's
Corporation. (See "Investment Practices and Policies.")
A Prospectus for the Fund dated November 26, 1996, which provides the
basic information you should know before investing in the Fund, may be
obtained without charge from the Fund at its address or telephone numbers
listed below or from the Fund's Distributor, Dean Witter Distributors Inc.,
or from Dean Witter Reynolds Inc. at any of its branch offices. This
Statement of Additional Information is not a Prospectus. It contains
information in addition to and more detailed than that set forth in the
Prospectus. It is intended to provide additional information regarding the
activities and operations of the Fund, and should be read in conjunction with
the Prospectus.
Dean Witter
National Municipal Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
<PAGE>
TABLE OF CONTENTS
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
The Fund and its Management.............. 3
Trustees and Officers.................... 6
Investment Practices and Policies ....... 11
Investment Restrictions.................. 17
Portfolio Transactions and Brokerage .... 19
The Distributor ......................... 20
Determination of Net Asset Value ....... 23
Shareholder Services..................... 24
Redemptions and Repurchases.............. 28
Dividends, Distributions and Taxes ...... 31
Performance Information.................. 32
Description of Shares ................... 33
Custodian and Transfer Agent ............ 34
Independent Accountants.................. 34
Reports to Shareholders.................. 35
Legal Counsel............................ 35
Experts ................................. 35
Registration Statement................... 35
Financial Statements--September 30,
1996.................................... 36
Report of Independent Accountants ....... 47
Appendix................................. 48
</TABLE>
2
<PAGE>
THE FUND AND ITS MANAGEMENT
- -----------------------------------------------------------------------------
THE FUND
The Fund was organized as a Massachusetts business trust on March 29,
1994.
THE INVESTMENT MANAGER
Dean Witter InterCapital Inc. (the "Investment Manager" or
"InterCapital"), whose address is Two World Trade Center, New York, New York
10048, is the Fund's Investment Manager. InterCapital is a wholly-owned
subsidiary of Dean Witter, Discover & Co. ("DWDC"), a Delaware corporation.
In an internal reorganization which took place in January, 1993, InterCapital
assumed the investment advisory, administrative and management activities
previously performed by the InterCapital Division of Dean Witter Reynolds
Inc. ("DWR"), a broker-dealer affiliate of InterCapital. (As hereinafter used
in this Statement of Additional Information, the terms "InterCapital" and
"Investment Manager" refer to DWR's InterCapital Division prior to the
internal reorganization and to Dean Witter InterCapital Inc. thereafter.) The
daily management of the Fund and research relating to the Fund's portfolio is
conducted by or under the direction of officers of the Fund and of the
Investment Manager, subject to periodic review by the Fund's Board of
Trustees. In addition, Trustees of the Fund provide guidance on economic
factors and interest rate trends. Information as to these trustees and
officers is contained under the caption "Trustees and Officers."
InterCapital is also the investment manager or investment adviser of the
following investment companies: Dean Witter Liquid Asset Fund Inc.,
InterCapital Income Securities Inc., Dean Witter High Yield Securities Inc.,
Dean Witter Tax-Free Daily Income Trust, Dean Witter Developing Growth
Securities Trust, Dean Witter American Value Fund, Dean Witter Dividend
Growth Securities Inc., Dean Witter Natural Resource Development Securities
Inc., Dean Witter U.S. Government Money Market Trust, Dean Witter California
Tax-Free Income Fund, Dean Witter Variable Investment Series, Dean Witter
World Wide Investment Trust, Dean Witter Select Municipal Reinvestment Fund,
Dean Witter U.S. Government Securities Trust, Dean Witter New York Tax-Free
Income Fund, Dean Witter Convertible Securities Trust, Dean Witter Federal
Securities Trust, Dean Witter Value-Added Market Series, High Income
Advantage Trust, High Income Advantage Trust II, High Income Advantage Trust
III, Dean Witter Government Income Trust, Dean Witter California Tax-Free
Daily Income Trust, Dean Witter Utilities Fund, Dean Witter Strategist Fund,
Dean Witter World Wide Income Trust, Dean Witter Intermediate Income
Securities, Dean Witter Capital Growth Securities, Dean Witter European
Growth Fund Inc., Dean Witter Pacific Growth Fund Inc., Dean Witter Precious
Metals and Minerals Trust, Dean Witter Global Short-Term Income Fund Inc.,
Dean Witter Multi-State Municipal Series Trust, Dean Witter New York
Municipal Money Market Trust, InterCapital Quality Municipal Investment
Trust, Dean Witter Premier Income Trust, Dean Witter Short-Term U.S. Treasury
Trust, InterCapital Insured Municipal Bond Trust, InterCapital Insured
Municipal Trust, InterCapital Quality Municipal Income Trust, Dean Witter
Diversified Income Trust, Dean Witter Health Sciences Trust, Dean Witter
Retirement Series, InterCapital Quality Municipal Securities, InterCapital
California Quality Municipal Securities, InterCapital New York Quality
Municipal Securities, Dean Witter Global Dividend Growth Securities, Dean
Witter Global Utilities Fund, Dean Witter High Income Securities, Dean Witter
Limited Term Municipal Trust, Dean Witter Short-Term Bond Fund, Dean Witter
International SmallCap Fund, Dean Witter Mid-Cap Growth Fund, Dean Witter
Select Dimensions Investment Series, Dean Witter Balanced Growth Fund, Dean
Witter Balanced Income Fund, Dean Witter Hawaii Municipal Trust, Dean Witter
Capital Appreciation Fund, Dean Witter Intermediate Term U.S. Treasury Trust,
Dean Witter Information Fund, Dean Witter Japan Fund, Dean Witter Income
Builder Fund, Dean Witter Special Value Fund, InterCapital Insured Municipal
Securities, InterCapital Insured California Municipal Securities,
InterCapital Insured Municipal Income Trust, InterCapital California Insured
Municipal Income Trust, Active Assets Money Trust, Active Assets California
Tax-Free Trust, Active Assets Tax-Free Trust, Active Assets Government
Securities Trust, Municipal Income Trust, Municipal Income Trust II,
Municipal Income Trust III, Municipal Income Opportunities Trust, Municipal
Income Opportunities Trust II, Municipal Income Opportunities Trust III,
Municipal Premium Income Trust and Prime Income Trust. The foregoing
investment companies, together with the Fund, are collectively referred to as
the Dean Witter Funds.
3
<PAGE>
In addition, Dean Witter Services Company Inc. ("DWSC"), a wholly-owned
subsidiary of InterCapital, serves as manager for the following companies for
which TCW Funds Management, Inc. is the investment adviser: TCW/DW Core
Equity Trust, TCW/DW North American Government Income Trust, TCW/DW Latin
American Growth Fund, TCW/DW Income and Growth Fund, TCW/DW Small Cap Growth
Fund, TCW/DW Balanced Fund, TCW/DW Total Return Trust, TCW/DW Mid-Cap Equity
Trust, TCW/DW Global Telecom Trust, TCW/DW Strategic Income Trust, TCW/DW
Term Trust 2000, TCW/DW Term Trust 2002, TCW/DW Term Trust 2003 and TCW/DW
Emerging Markets Opportunities Trust (the "TCW/DW Funds"). InterCapital also
serves as: (i) sub-adviser to Templeton Global Opportunities Trust, an
open-end investment company; (ii) administrator of The BlackRock Strategic
Term Trust Inc., a closed-end investment company; and (iii) sub-administrator
of MassMutual Participation Investors and Templeton Global Governments Income
Trust, closed-end investment companies.
Pursuant to an Investment Management Agreement (the "Agreement") with the
Investment Manager, the Fund has retained the Investment Manager to manage
the investment of the Fund's assets, including the placing of orders for the
purchase and sale of portfolio securities. The Investment Manager obtains and
evaluates such information and advice relating to the economy, securities
markets, and specific securities as it considers necessary or useful to
continuously manage the assets of the Fund in a manner consistent with its
investment objective and policies.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, such office space, facilities,
equipment, clerical help, bookkeeping and legal services as the Fund may
reasonably require in the conduct of its business, including the preparation
of prospectuses, proxy statements and reports required to be filed with
federal and state securities commissions (except insofar as the participation
or assistance of independent accountants and attorneys is, in the opinion of
the Investment Manager, necessary or desirable). In addition, the Investment
Manager pays the salaries of all personnel, including officers of the Fund,
who are employees of the Investment Manager. The Investment Manager also
bears the cost of telephone service, heat, light, power and other utilities
provided to the Fund. The Investment Manager has retained DWSC to perform its
administrative services under the Agreement.
Expenses not expressly assumed by the Investment Manager under the
Agreement or by the Distributor of the Fund's shares, Dean Witter
Distributors Inc. ("Distributors" or the "Distributor") (see "The
Distributor"), will be paid by the Fund. The expenses borne by the Fund
include, but are not limited to: charges and expenses of any registrar,
custodian, stock transfer and dividend disbursing agent; brokerage
commissions; taxes; engraving and printing share certificates; registration
costs of the Fund and its shares under federal and state securities laws; the
cost and expense of printing, including typesetting, and distributing
Prospectuses and Statements of Additional Information of the Fund and
supplements thereto to the Fund's shareholders; all expenses of shareholders'
and Trustees' meetings and of preparing, printing and mailing of proxy
statements and reports to shareholders; fees and travel expenses of Trustees
or members of any advisory board or committee who are not employees of the
Investment Manager or any corporate affiliate of the Investment Manager; all
expenses incident to any dividend, withdrawal or redemption options; charges
and expenses of any outside service used for pricing of the Fund's shares;
fees and expenses of legal counsel, including counsel to the Trustees who are
not interested persons of the Funds or of the Investment Manager (not
including compensation or expenses of attorneys who are employees of the
Investment Manager) and independent accountants; membership dues of industry
associations; interest on Fund borrowings; postage; insurance premiums on
property or personnel (including officers and trustees) of the Fund which
inure to its benefit; extraordinary expenses (including, but not limited to,
legal claims and liabilities and litigation costs and any indemnification
relating thereto); and all other costs of the Fund's operation. As full
compensation for the services and facilities furnished to the Fund and
expenses of the Fund assumed by the Investment Manager, the Fund pays the
Investment Manager monthly compensation calculated daily at the annual rate
of 0.35% of the daily net assets of the Fund. The Investment Manager had
undertaken from June 2, 1994 (commencement of operations) to assume all
expenses (except for brokerage and 12b-1 fees) and to waive the compensation
provided for in its Management Agreement until December 31, 1995. The
4
<PAGE>
Investment Manager has undertaken from January 1, 1996 through June 30, 1997
to continue to waive management fees and to continue to assume expenses
(except for brokerage and 12b-1 fees) to the extent they exceed, on an
annualized basis, 0.50% of the Fund's daily net assets. During the fiscal
period June 2, 1994 through September 30, 1994 and during the fiscal year
ended September 30, 1995, the fees payable ($21,252 and $158,216,
respectively) under the Agreement were waived by the Investment Manager
pursuant to the undertaking described above covering these periods. During
the fiscal year ended September 30, 1996, the management fees payable under
the Agreement amounted to $269,889 of which $117,136 was waived by the
Investment Manager pursuant to the undertakings described above.
The Investment Manager has paid the organizational expenses of the Fund,
in the amount of approximately $148,000, incurred prior to the offering of
the Fund's shares. The Fund has reimbursed the Investment Manager for such
expenses exclusive of any amounts assumed by the Investment Manager. The Fund
has deferred and is amortizing the reimbursed expenses on the straight line
method over a period not to exceed five years from the date of commencement
of the Fund's operations.
The Agreement provides that in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations thereunder,
the Investment Manager is not liable to the Fund or any of its investors for
any act or omission by the Investment Manager or for any losses sustained by
the Fund or its investors. The Agreement in no way restricts the Investment
Manager from acting as investment manager or adviser to others.
The Agreement was initially approved by the Trustees on May 10, 1994 and
by InterCapital as the sole Shareholder on May 10, 1994. The Agreement may be
terminated at any time, without penalty, on thirty days' notice, by the Board
of Trustees of the Fund, by the holders of a majority, as defined in the
Investment Company Act of 1940, as amended (the "Act"), of the outstanding
shares of the Fund, or by the Investment Manager. The Agreement will
automatically terminate in the event of its assignment (as defined in the
Act).
Under its terms, the Agreement had an initial term ending April 30, 1995,
and will continue from year to year thereafter, provided continuance of the
Agreement is approved at least annually by the vote of the holders of a
majority (as defined in the Act) of the outstanding shares of the Fund, or by
the Board of Trustees of the Fund; provided that in either event such
continuance is approved annually by the vote of a majority of the Independent
Trustees of the Fund who are not parties to the Agreement or "interested
persons" (as defined in the Act) of any such party (the "Independent
Trustees"), which vote must be cast in person at a meeting called for the
purpose of voting on such approval. At its meeting held on April 17, 1996,
the Fund's Board of Trustees, including all of the Independent Trustees,
approved the most recent continuation of the Agreement until April 30, 1997.
The Fund has acknowledged that the name "Dean Witter" is a property right
of DWR. The Fund has agreed that DWR or its parent company may use or, at any
time, permit others to use, the name "Dean Witter". The Fund has also agreed
that in the event the investment management contract between the Investment
Manager and the Fund is terminated, or if the affiliation between
InterCapital and its parent company is terminated, the Fund will eliminate
the name "Dean Witter" from its name if DWR or its parent company shall so
request.
5
<PAGE>
TRUSTEES AND OFFICERS
- -----------------------------------------------------------------------------
The Trustees and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with
InterCapital, and with the 82 Dean Witter Funds and the 14 TCW/DW Funds, are
shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ---------------------------------------------- --------------------------------------------------------
<S> <C>
Michael Bozic (55) Chairman and Chief Executive Officer of Levitz Furniture
Trustee Corporation (since November, 1995); Director or Trustee of
c/o Levitz Furniture Corporation the Dean Witter Funds; formerly President and Chief Executive
6111 Broken Sound Parkway, N.W. Officer of Hills Department Stores (May, 1991-July, 1995);
Boca Raton, Florida formerly variously Chairman, Chief Executive Officer,
President and Chief Operating Officer (1987- 1991) of the
Sears Merchandise Group of Sears, Roebuck and Co.; Director
of Eaglemark Financial Services Inc., the United Negro College
Fund and Weirton Steel Corporation.
Charles A. Fiumefreddo* (63) Chairman, Chief Executive Officer and Director of InterCapital,
Chairman of the Board, President and Chief Distributors and DWSC; Executive Vice President and Director
Executive Officer and Trustee of DWR; Chairman, Director or Trustee, President and Chief
Two World Trade Center Executive Officer of the Dean Witter Funds; Chairman, Chief
New York, New York Executive Officer and Trustee of the TCW/DW Funds; Chairman
and Director of Dean Witter Trust Company ("DWTC"); Director
and/or officer of various DWDC subsidiaries; formerly Executive
Vice President and Director of DWDC (until February, 1993).
Edwin J. Garn (64) Director or Trustee of the Dean Witter Funds; formerly United
Trustee States Senator (R-Utah)(1974-1992) and Chairman, Senate
c/o Huntsman Chemical Corporation Banking Committee (1980-1986); formerly Mayor of Salt Lake
500 Huntsman Way City, Utah (1971-1974); formerly Astronaut, Space Shuttle
Salt Lake City, Utah Discovery (April 12-19, 1985); Vice Chairman, Huntsman Chemical
Corporation (since January, 1993); Director of Franklin Quest
(time management systems) and John Alden Financial Corp.;
member of the board of various civic and charitable
organizations.
John R. Haire (71) Chairman of the Audit Committee and Chairman of the Committee
Trustee of the Independent Directors or Trustees and Director or Trustee
Two World Trade Center of the Dean Witter Funds; Chairman of the Audit Committee
New York, New York and Chairman of the Committee of the Independent Trustees
and Trustee of the TCW/DW Funds; formerly President, Council
for Aid to Education (1978-1989) and Chairman and Chief Executive
Officer of Anchor Corporation, an Investment Adviser
(1964-1978); Director of Washington National Corporation
(insurance).
6
<PAGE>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ---------------------------------------------- --------------------------------------------------------
Dr. Manuel H. Johnson (47) Senior Partner, Johnson Smick International, Inc., a consulting
Trustee firm; Koch Professor of International Economics and Director
c/o Johnson Smick International, Inc. of the Center for Global Market Studies at George Mason
1133 Connecticut Avenue, N.W. University; Co-Chairman and a founder of the Group of Seven
Washington, DC Council (G7C), an international economic commission (since
September, 1990); Director or Trustee of the Dean Witter Funds;
Trustee of the TCW/DW Funds; Director of NASDAQ (since June,
1995); Director of Greenwich Capital Markets Inc.
(broker-dealer); formerly Vice Chairman of the Board of
Governors of the Federal Reserve System (1986- 1990) and
Assistant Secretary of the U.S. Treasury (1982-1986).
Michael E. Nugent (60) General Partner, Triumph Capital, LP., a private investment
Trustee partnership; Director or Trustee of the Dean Witter Funds;
c/o Triumph Capital, LP Trustee of the TCW/DW Funds; formerly Vice President, Bankers
237 Park Avenue Trust Company and BT Capital Corporation (1984-1988); Director
New York, New York of various business organizations.
Philip J. Purcell* (53) Chairman of the Board of Directors and Chief Executive Officer
Trustee of DWDC, DWR and Novus Credit Services Inc.; Director of
Two World Trade Center InterCapital, DWSC and Distributors; Director or Trustee of
New York, New York the Dean Witter Funds; Director and/or officer of various
DWDC subsidiaries.
John L. Schroeder (66) Retired; Director or Trustee of the Dean Witter Funds; Director
Trustee of Citizens Utilities Company; formerly Executive Vice
c/o Gordon Altman Butowsky President and Chief Investment Officer of the Home Insurance
Weitzen Shalov & Wein Company (August, 1991-September, 1995); and Chairman and Chief
Counsel to the Independent Trustees Investment Officer of Axe-Houghton Management and the
114 West 47th Street Axe-Houghton Funds (1983-1991).
New York, New York
Sheldon Curtis (64) Senior Vice President, Secretary and General Counsel of
Vice President, Secretary InterCapital and DWSC; Senior Vice President and Secretary
and General Counsel of DWTC; Senior Vice President, Assistant Secretary and
Two World Trade Center Assistant General Counsel of Distributors; Assistant Secretary
New York, New York of DWR; Vice President, Secretary and General Counsel of the
Dean Witter Funds and the TCW/DW Funds.
James F. Willison (53) Senior Vice President of InterCapital; Vice President of various
Vice President Dean Witter Funds.
Two World Trade Center
New York, New York
Thomas F. Caloia (50) First Vice President and Assistant Treasurer of InterCapital
Treasurer and DWSC; Treasurer of the Dean Witter Funds and the TCW/DW
Two World Trade Center Funds.
New York, New York
</TABLE>
- ------------
* Denotes Trustees who are "interested persons" of the Fund, as defined in
the Act.
7
<PAGE>
In addition, Robert M. Scanlan, President and Chief Operating Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWTC and
Director of DWTC, Robert S. Giambrone, Senior Vice President of InterCapital,
DWSC and Distributors and DWTC and Director of DWTC, Joseph J. McAlinden,
Executive Vice President and Chief Investment Officer of InterCapital and
Director of DWTC, and Peter M. Avelar and Jonathan R. Page, Senior Vice
Presidents of InterCapital, are Vice Presidents of the Fund, and Marilyn K.
Cranney and Barry Fink, First Vice Presidents and Assistant General Counsels
of InterCapital and DWSC, and Lou Anne D. McInnis and Ruth Rossi, Vice
Presidents and Assistant General Counsels of InterCapital and DWSC, and
Carsten Otto and Frank Bruttomesso, Staff Attorneys with InterCapital and
DWSC, are Assistant Secretaries of the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees consists of eight (8) trustees. These same
individuals also serve as directors or trustees for all of the Dean Witter
Funds, and are referred to in this section as Trustees. As of the date of
this Statement of Additional Information, there are a total of 82 Dean Witter
Funds, comprised of 122 portfolios. As of October 31, 1996, the Dean Witter
Funds had total net assets of approximately $79.4 billion and more than five
million shareholders.
Six Trustees (75% of the total number) have no affiliation or business
connection with InterCapital or any of its affiliated persons and do not own
any stock or other securities issued by InterCapital's parent company, DWDC.
These are the "disinterested" or "independent" Trustees. The other two
Trustees (the "management Trustees") are affiliated with InterCapital. Four
of the six independent Trustees are also Independent Trustees of the TCW/DW
Funds.
Law and regulation establish both general guidelines and specific duties
for the Independent Trustees. The Dean Witter Funds seek as Independent
Trustees individuals of distinction and experience in business and finance,
government service or academia; these are people whose advice and counsel are
in demand by others and for whom there is often competition. To accept a
position on the Funds' Boards, such individuals may reject other attractive
assignments because the Funds make substantial demands on their time. Indeed,
by serving on the Funds' Boards, certain Trustees who would otherwise be
qualified and in demand to serve on bank boards would be prohibited by law
from doing so.
All of the Independent Trustees serve as members of the Audit Committee
and the Committee of the Independent Trustees. Three of them also serve as
members of the Derivatives Committee. During the calendar year ended December
31, 1995, the three Committees held a combined total of fifteen meetings. The
Committees hold some meetings at InterCapital's offices and some outside
InterCapital. Management Trustees or officers do not attend these meetings
unless they are invited for purposes of furnishing information or making a
report.
The Committee of the Independent Trustees is charged with recommending to
the full Board approval of management, advisory and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing Fund performance; checking on the pricing of portfolio securities,
brokerage commissions, transfer agent costs and performance, and trading
among Funds in the same complex; and approving fidelity bond and related
insurance coverage and allocations, as well as other matters that arise from
time to time. The Independent Trustees are required to select and nominate
individuals to fill any Independent Trustee vacancy on the Board of any Fund
that has a Rule 12b-1 plan of distribution. Most of the Dean Witter Funds
have such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing
engagement; approving professional services provided by the independent
accountants and other accounting firms prior to the performance of such
services; reviewing the independence of the independent accountants;
considering the range of audit and non-audit fees; reviewing the adequacy of
the Fund's system of internal controls; and preparing and submitting
Committee meeting minutes to the full Board.
8
<PAGE>
Finally, the Board of each Fund has formed a Derivatives Committee to
establish parameters for and oversee the activities of the Fund with respect
to derivative investments, if any, made by the Fund.
DUTIES OF CHAIRMAN OF COMMITTEE OF THE INDEPENDENT TRUSTEES AND AUDIT
COMMITTEE
The Chairman of the Committee of the Independent Trustees and the Audit
Committee maintains an office at the Funds' headquarters in New York. He is
responsible for keeping abreast of regulatory and industry developments and
the Funds' operations and management. He screens and/or prepares written
materials and identifies critical issues for the Independent Trustees to
consider, develops agendas for Committee meetings, determines the type and
amount of information that the Committees will need to form a judgment on
various issues, and arranges to have that information furnished to Committee
members. He also arranges for the services of independent experts and
consults with them in advance of meetings to help refine reports and to focus
on critical issues. Members of the Committees believe that the person who
serves as Chairman of both Committees and guides their efforts is pivotal to
the effective functioning of the Committees.
The Chairman of the Committees also maintains continuous contact with the
Funds' management, with independent counsel to the Independent Trustees and
with the Funds' independent auditors. He arranges for a series of special
meetings involving the annual review of investment advisory, management and
other operating contracts of the Funds and, on behalf of the Committees,
conducts negotiations with the Investment Manager and other service
providers. In effect, the Chairman of the Committees serves as a combination
of chief executive and support staff of the Independent Trustees.
The Chairman of the Committee of the Independent Trustees and the Audit
Committee is not employed by any other organization and devotes his time
primarily to the services he performs as Committee Chairman and Independent
Trustee of the Dean Witter Funds and as an Independent Trustee and, since
July 1, 1996, as Chairman of the Committee of the Independent Trustees and
the Audit Committee of the TCW/DW Funds. The current Committee Chairman has
had more than 35 years experience as a senior executive in the investment
company industry.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL DEAN
WITTER FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the Dean Witter Funds avoids the
duplication of effort that would arise from having different groups of
individuals serving as Independent Trustees for each of the Funds or even of
sub-groups of Funds. They believe that having the same individuals serve as
Independent Trustees of all the Funds tends to increase their knowledge and
expertise regarding matters which affect the Fund complex generally and
enhances their ability to negotiate on behalf of each Fund with the Fund's
service providers. This arrangement also precludes the possibility of
separate groups of Independent Trustees arriving at conflicting decisions
regarding operations and management of the Funds and avoids the cost and
confusion that would likely ensue. Finally, having the same Independent
Trustees serve on all Fund Boards enhances the ability of each Fund to
obtain, at modest cost to each separate Fund, the services of Independent
Trustees, and a Chairman of their Committees, of the caliber, experience and
business acumen of the individuals who serve as Independent Trustees of the
Dean Witter Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Fund pays each Independent Trustee an annual fee of $1,000 plus a per
meeting fee of $50 for meetings of the Board of Trustees or committees of the
Board of Trustees attended by the Trustee (the Fund pays the Chairman of the
Audit Committee an annual fee of $750 and pays the Chairman of the Committee
of the Independent Trustees an additional annual fee of $1,200). The Fund
also reimburses such Trustees for travel and other out-of-pocket expenses
incurred by them in connection with attending such meetings. Trustees and
officers of the Fund who are or have been employed by the Investment Manager
or an affiliated company receive no compensation or expense reimbursement
from the Fund.
At such time as the Fund has paid fees to the Independent Trustees for a
full fiscal year, and assuming that during such fiscal year the Fund holds
the same number of Board and committee
9
<PAGE>
meetings as were held by the other Dean Witter Funds during the calendar year
ended December 31, 1995, it is estimated that the compensation paid to each
Independent Trustee during such fiscal year will be the amount shown in the
following table:
FUND COMPENSATION (ESTIMATED)
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- --------------------------- -------------
<S> <C>
Michael Bozic ............. $2,000
Edwin J. Garn ............. 2,000
John R. Haire ............. 3,950
Dr. Manuel H. Johnson .... 2,000
Michael E. Nugent.......... 2,000
John L. Schroeder.......... 2,000
</TABLE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1995 for
services to the 79 Dean Witter Funds and, in the case of Messrs. Haire,
Johnson, Nugent and Schroeder, the 11 TCW/DW Funds that were in operation at
December 31, 1995. With respect to Messrs. Haire, Johnson, Nugent and
Schroeder, the TCW/DW Funds are included solely because of a limited exchange
privilege between those Funds and five Dean Witter Money Market Funds. Mr.
Schroeder was elected as a Trustee of the TCW/DW Funds on April 20, 1995.
COMPENSATION FROM DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
FOR SERVICE AS
CHAIRMAN OF TOTAL
FOR SERVICE COMMITTEES OF COMPENSATION
AS DIRECTOR OR FOR SERVICE AS INDEPENDENT PAID
TRUSTEE AND TRUSTEE AND DIRECTORS/ FOR SERVICES TO
COMMITTEE MEMBER COMMITTEE MEMBER TRUSTEES AND 79 DEAN WITTER
OF 79 DEAN WITTER OF 11 TCW/DW AUDIT FUNDS AND 11
NAME OF INDEPENDENT TRUSTEE FUNDS FUNDS COMMITTEES TCW/DW FUNDS
- --------------------------- ----------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Michael Bozic ............. $126,050 -- -- $126,050
Edwin J. Garn ............. 136,450 -- -- 136,450
John R. Haire ............. 98,450 $82,038 $217,350(1) 397,838
Dr. Manuel H. Johnson .... 136,450 82,038 -- 218,488
Michael E. Nugent ......... 124,200 75,038 -- 199,238
John L. Schroeder.......... 136,450 46,964 -- 183,414
</TABLE>
- --------------
(1) For the 79 Dean Witter Funds in operation at December 31, 1995. As
noted above, on July 1, 1996, Mr. Haire became Chairman of the
Committee of the Independent Trustees and the Audit Committee of the
TCW/DW Funds in addition to continuing to serve in such positions for
the Dean Witter Funds.
As of the date of this Statement of Additional Information, 57 of the Dean
Witter Funds, not including the Fund, have adopted a retirement program under
which an Independent Trustee who retires after serving for at least five
years (or such lesser period as may be determined by the Board) as an
Independent Director or Trustee of any Dean Witter Fund that has adopted the
retirement program (each such Fund referred to as an "Adopting Fund" and each
such Trustee referred to as an "Eligible Trustee") is entitled to retirement
payments upon reaching the eligible retirement age (normally, after attaining
age 72). Annual payments are based upon length of service. Currently, upon
retirement, each Eligible Trustee is entitled to receive from the Adopting
Fund, commencing as of his or her retirement date and continuing for the
remainder of his or her life, an annual retirement benefit (the "Regular
Benefit") equal to 25.0% of his or her Eligible Compensation plus 0.4166666%
of such Eligible Compensation for each full month of service as an
Independent Director or Trustee of any Adopting Fund in excess of five years
up to a
10
<PAGE>
maximum of 50.0% after ten years of service. The foregoing percentages may be
changed by the Board.(2) "Eligible Compensation" is one-fifth of the total
compensation earned by such Eligible Trustee for service to the Adopting Fund
in the five year period prior to the date of the Eligible Trustee's
retirement. Benefits under the retirement program are not secured or funded
by the Adopting Funds.
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the 57 Dean Witter Funds (not including the
Fund) as of December 31, 1995, and the estimated retirement benefits for the
Fund's Independent Trustees from the 57 Dean Witter Funds as of December 31,
1995.
RETIREMENT BENEFITS FROM ALL DEAN WITTER FUNDS
<TABLE>
<CAPTION>
ESTIMATED
RETIREMENT ANNUAL
ESTIMATED BENEFITS BENEFITS
CREDITED ACCRUED AS UPON
YEARS ESTIMATED EXPENSES RETIREMENT
OF SERVICE AT PERCENTAGE OF BY ALL FROM ALL
RETIREMENT ELIGIBLE ADOPTING ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUNDS FUNDS (3)
- --------------------------- ------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Michael Bozic ............. 10 50.0% $ 26,359 $ 51,550
Edwin J. Garn ............. 10 50.0 41,901 51,550
John R. Haire ............. 10 50.0 261,763 130,404
Dr. Manuel H. Johnson .... 10 50.0 16,748 51,550
Michael E. Nugent ......... 10 50.0 30,370 51,550
John L. Schroeder.......... 8 41.7 51,812 42,958
</TABLE>
- --------------
(2) An Eligible Trustee may elect alternate payments of his or her
retirement benefits based upon the combined life expectancy of such
Eligible Trustee and his or her spouse on the date of such Eligible
Trustee's retirement. The amount estimated to be payable under this
method, through the remainder of the later of the lives of such
Eligible Trustee and spouse, will be the actuarial equivalent of the
Regular Benefit. In addition, the Eligible Trustee may elect that the
surviving spouse's periodic payment of benefits will be equal to either
50% or 100% of the previous periodic amount, an election that,
respectively, increases or decreases the previous periodic amount so
that the resulting payments will be the actuarial equivalent of the
Regular Benefit.
(3) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (2)
above.
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's
officers and Trustees as a group was less than 1 percent of the Fund's shares
of beneficial interest outstanding.
INVESTMENT PRACTICES AND POLICIES
- -----------------------------------------------------------------------------
PORTFOLIO SECURITIES
The payment of principal and interest by issuers of certain Municipal
Bonds and Notes ("Municipal Obligations") purchased by the Fund may be
guaranteed by letters of credit or other credit facilities offered by banks
or other financial institutions. Such guarantees will be considered in
determining whether a Municipal Obligation meets the Fund's investment
quality requirements. In addition, some issues may contain provisions which
permit the Fund to demand from the issuer repayment of principal at some
specified period(s) prior to maturity.
Municipal Bonds. Municipal Bonds, as referred to in the Prospectus, are
debt obligations of a state, its cities, municipalities and municipal
agencies (all of which are generally referred to as "municipalities") which
generally have a maturity at the time of issuance of one year or more, and
the interest from which is, in the opinion of bond counsel, exempt from
federal income tax. They are issued to raise funds for various public
purposes, such as construction of a wide range of public facilities, to
refund outstanding obligations and to obtain funds for general operating
expenses or to loan to other public institutions and facilities. In addition,
certain types of industrial development bonds and pollution control bonds are
issued by or on behalf of public authorities to provide funding for various
privately operated facilities.
11
<PAGE>
Municipal Notes. Municipal Notes are short-term obligations of
municipalities, generally with a maturity at the time of issuance ranging
from six months to three years, the interest from which is, in the opinion of
bond counsel, exempt from federal income tax. The principal types of
Municipal Notes include tax anticipation notes, bond anticipation notes,
revenue anticipation notes and project notes, although there are other types
of Municipal Notes in which the Fund may invest. Notes sold in anticipation
of collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuing municipality or agency. Project Notes are
issued by local agencies and are guaranteed by the United States Department
of Housing and Urban Development. Such notes are secured by the full faith
and credit of the United States Government. Project Notes are not currently
being issued.
Municipal Commercial Paper. Municipal Commercial Paper refers to
short-term obligations of municipalities the interest from which is, in the
opinion of bond counsel, exempt from federal income tax, and which may be
issued at a discount and is sometimes referred to as Short-Term Discount
Notes. Municipal Commercial Paper is likely to be used to meet seasonal
working capital needs of a municipality or interim construction financing and
to be paid from general revenues of the municipality or refinanced with
long-term debt. In most cases, Municipal Commercial Paper is backed by
letters of credit, lending agreements, note repurchase agreements or other
credit facility agreements offered by banks or other institutions.
Obligations of issuers of Municipal Bonds, Municipal Notes and Municipal
Commercial Paper are subject to provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the
Federal Bankruptcy Act, and laws, if any, which may be enacted by Congress or
any state extending the time for payment of principal or interest, or both,
or imposing other constraints upon enforcement of such obligations or upon
municipalities to levy taxes. There is also the possibility that, as a result
of litigation or other conditions, the power or ability of any one or more
issuers to pay, when due, principal of and interest on its, or their,
Municipal Bonds, Municipal Notes and Municipal Commercial Paper may be
materially affected.
Special Investment Considerations. The percentage and rating policies in
the Prospectus apply at the time of acquisition of a security based upon the
last previous determination of the Fund's net asset value; any subsequent
change in any ratings by a rating service or change in percentages resulting
from market fluctuations or other changes in the amount of total assets will
not require elimination of any security from the Fund's portfolio until such
time as the Investment Manager determines that it is practicable to sell the
security without undue market or tax consequences to the Fund. Therefore, the
Fund may hold securities which have been downgraded to ratings of Ba or BB or
lower by Moody's or S&P. Such securities are considered to be speculative
investments. However, the Fund does not intend to invest in Municipal
Obligations which are rated below either Baa by Moody's or BBB by S&P (the
lowest ratings considered investment grade) or, if not rated, are deemed by
the Investment Manager to be below investment grade, in amounts exceeding 5%
of its net assets. Any subsequent change in any rating of any security below
investment grade which causes the Fund to be invested in such securities in
an amount exceeding 5% of its net assets will result in the elimination of
that security from the Fund's portfolio as soon as practicable without
adverse market or tax consequences to the Fund.
Furthermore, the Fund does not have any minimum quality rating standard
for its downgraded or lower-rated investments. As such, the Fund may invest
in securities rated as low as Caa, Ca or C by Moody's or CCC, CC, C, CI or D
by S&P. Bonds rated Caa or Ca by Moody's may already be in default on payment
of interest or principal, while bonds rated C by Moody's, their lowest bond
rating, can be regarded as having extremely poor prospects of ever attaining
any real investment standing. Bonds rated CI or D by S&P, their lowest bond
rating, are no longer making interest payments or are in default.
Because of the special nature of securities which are rated below
investment grade by national credit rating agencies ("lower-rated
securities"), the Investment Manager must take account of certain special
considerations in assessing the risks associated with such investments. For
example, as the lower rated securities market is relatively new, its growth
has paralleled a long economic expansion and it has not weathered a recession
in its present size and form. Therefore, an economic downturn or increase in
interest rates is likely to have a negative effect on this market and on the
value of the lower rated securities held by the Fund, as well as on the
ability of the securities' issuers to repay principal and interest on their
borrowings.
12
<PAGE>
The prices of lower rated securities have been found to be less sensitive
to changes in prevailing interest rates than higher rated investments, but
are likely to be more sensitive to adverse economic changes or individual
corporate developments. During an economic downturn or substantial period of
rising interest rates, highly leveraged issuers may experience financial
stress which would adversely affect their ability to service their principal
and interest payment obligations, to meet their projected business goals or
to obtain additional financing. If the issuer of a fixed-income security
owned by the Fund defaults, the Fund may incur additional expenses to seek
recovery. In addition, periods of economic uncertainty and change can be
expected to result in an increased volatility of market prices of lower rated
securities and a concomitant volatility in the net asset value of a share of
the Fund. Moreover, the market prices of certain of the Fund's portfolio
securities which are structured as zero coupon securities are affected to a
greater extent by interest rate changes and thereby tend to be more volatile
than securities which pay interest periodically and in cash (see "Dividends,
Distributions and Taxes" for a discussion of the tax ramifications of
investments in such securities).
The secondary market for lower rated securities may be less liquid than
the markets for higher quality securities and, as such, may have an adverse
effect on the market prices of certain securities. The limited liquidity of
the market may also adversely affect the ability of the Fund's Trustees to
arrive at a fair value for certain lower rated securities at certain times
and should make it difficult for the Fund to sell certain securities.
New laws and proposed new laws may have a potentially negative impact on
the market for lower rated securities. For example, recent legislation
requires federally-insured savings and loan associations to divest their
investments in lower rated securities. This legislation and other proposed
legislation may have an adverse effect upon the value of lower rated
securities and a concomitant negative impact upon the net asset value of a
share of the Fund.
PORTFOLIO CHARACTERISTICS
Variable Rate Obligations. As stated in the Prospectus, the Fund may
invest in obligations of the type called "variable rate obligations".
The interest rate payable on a variable rate obligation is adjusted either
at predesignated periodic intervals or whenever there is a change in the
market rate of interest on which the interest rate payable is based. Other
features may include the right whereby the Fund may demand prepayment of the
principal amount of the obligation prior to its stated maturity (a "demand
feature") and the right of the issuer to prepay the principal amount prior to
maturity. The principal benefit of a variable rate obligation is that the
interest rate adjustment minimizes changes in the market value of the
obligation. The principal benefit to the Fund of purchasing obligations with
a demand feature is that liquidity, and the ability of the Fund to obtain
repayment of the full principal amount of the obligation prior to maturity,
is enhanced.
When-Issued and Delayed Delivery Securities. As stated in the Prospectus,
the Fund may purchase tax-exempt securities on a when-issued or delayed
delivery basis. When such transactions are negotiated, the price is fixed at
the time of the commitment, but delivery and payment can take place a month
or more after the date of the commitment. While the Fund will only purchase
securities on a when-issued or delayed delivery basis with the intention of
acquiring the securities, the Fund may sell the securities before the
settlement date, if it is deemed advisable. The securities so purchased or
sold are subject to market fluctuation and no interest accrues to the
purchaser during this period. At the time the Fund makes the commitment to
purchase a Municipal Obligation on a when-issued or delayed delivery basis,
it will record the transaction and thereafter reflect the value, each day, of
the Municipal Obligation in determining its net asset value. The Fund will
also establish a segregated account with its custodian bank in which it will
maintain cash, cash equivalents or other liquid portfolio securities equal in
value to commitments for such when-issued or delayed delivery securities. The
Fund does not believe that its net asset value or income will be adversely
affected by its purchase of Municipal Obligations on a when-issued or delayed
delivery basis. The Fund may sell securities on a when-issued or delayed
delivery basis provided that the Fund owns the security at the time of the
sale. During the fiscal year ended September 30, 1996, the Fund's investments
in when-issued and delayed delivery securities did not exceed 5% of the
Fund's total assets.
13
<PAGE>
Repurchase Agreements. When cash may be available for only a few days, it
may be invested by the Fund in repurchase agreements until such time as it
may otherwise be invested or used for payments of obligations of the Fund.
These agreements, which may be viewed as a type of secured lending by the
Fund, typically involve the acquisition by the Fund of debt securities from a
selling financial institution such as a bank, savings and loan association or
broker-dealer. The agreement provides that the Fund will sell back to the
institution, and that the institution will repurchase, the underlying
security ("collateral"), which is held by the Fund's Custodian, at a
specified price and at a fixed time in the future, usually not more than
seven days from the date of purchase. The Fund will receive interest from the
institution until the time when the repurchase is to occur. Although such
date is deemed by the Fund to be the maturity date of a repurchase agreement,
the maturities of securities subject to repurchase agreements are not subject
to any limits and may exceed one year. While repurchase agreements involve
certain risks not associated with direct investments in debt securities, the
Fund follows procedures designed to minimize such risks. These procedures
include effecting repurchase transactions only with large, well-capitalized
and well-established financial institutions, whose financial condition will
be continually monitored by the Investment Manager. In addition, the value of
the collateral underlying the repurchase agreement will always be a least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. In the event of a default or bankruptcy by a selling
financial institution, the Fund will seek to liquidate such collateral.
However, the exercising of the Fund's right to liquidate such collateral
could involve certain costs or delays and, to the extent that proceeds from
any sale upon a default of the obligation to repurchase were less than the
repurchase price, the Fund could suffer a loss. It is the current policy of
the Fund not to invest in repurchase agreements that do not mature within
seven days if any such investment, together with any other illiquid assets
held by the Fund, amounts to more than 15% of its net assets. The Fund's
investments in repurchase agreements may at times be substantial when, in the
view of the Investment Manager, liquidity or other considerations warrant.
FUTURES CONTRACTS AND OPTIONS ON FUTURES
As discussed in the Prospectus, the Fund may invest in financial futures
contracts ("futures contracts") and related options thereon. These futures
contracts and related options thereon will be used only as a hedge against
anticipated interest rate changes. A futures contract sale creates an
obligation by the Fund, as seller, to deliver the specific type of instrument
called for in the contract at a specified future time for a specified price.
A futures contract purchase would create an obligation by the Fund, as
purchaser, to take delivery of the specific type of financial instrument at a
specified future time at a specified price. The specific securities delivered
or taken, respectively, at settlement date, would not be determined until on
or near that date. The determination would be in accordance with the rules of
the exchange on which the futures contract sale or purchase was effected.
Although the terms of futures contracts specify actual delivery or receipt
of securities, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the securities.
Closing out of a futures contract is usually effected by entering into an
offsetting transaction. An offsetting transaction for a futures contract sale
is effected by the Fund entering into a futures contract purchase for the
same aggregate amount of the specific type of financial instrument at the
same delivery date. If the price in the sale exceeds the price in the
offsetting purchase, the Fund is immediately paid the difference and thus
realizes a gain. If the offsetting purchase price exceeds the sale price, the
Fund pays the difference and realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the Fund entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price the
Fund realizes a gain, and if the offsetting sale price is less than the
purchase price the Fund realizes a loss.
Unlike a futures contract, which requires the parties to buy and sell a
security on a set date, an option on a futures contract entitles its holder
to decide on or before a future date whether to enter into such a contract (a
long position in the case of a call option and a short position in the case
of a put option). If the holder decides not to enter into the contract, the
premium paid for the contract is lost. Since
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<PAGE>
the value of the option is fixed at the point of sale, there are no daily
payments of cash to reflect the change in the value of the underlying
contract, as discussed below for futures contracts. The value of the option
changes is reflected in the net asset value of the Fund.
The Fund is required to maintain margin deposits with brokerage firms
through which it effects futures contracts and options thereon. The initial
margin requirements vary according to the type of the underlying security. In
addition, due to current industry practice, daily variations in gains and
losses on open contracts are required to be reflected in cash in the form of
variation margin payments. The Fund may be required to make additional margin
payments during the term of the contract.
Currently, futures contracts can be purchased on debt securities such as
U.S. Treasury Bills and Bonds, U.S. Treasury Notes with maturities between 6
1/2 and 10 years, Certificates of the Government National Mortgage
Association, Bank Certificates of Deposit and on a municipal bond index (see
below). The Fund may invest in interest rate futures contracts covering these
types of financial instruments as well as in new types of contracts that
become available in the future.
Financial futures contracts are traded in an auction environment on the
floors of several Exchanges--principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. Each Exchange
guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the Exchange membership
which is also responsible for handling daily accounting of deposits or
withdrawals of margin.
A risk in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities subject
to futures contracts may correlate imperfectly with the behavior of the cash
prices of the Fund's portfolio securities. The correlation may be distorted
by the fact that the futures market is dominated by short-term traders
seeking to profit from the difference between a contract or security price
objective and their cost of borrowed funds. This would reduce the value of
futures contracts for hedging purposes over a short time period. The
correlation may be further distorted since the futures contracts that are
being used to hedge are not based on municipal obligations.
Another risk is that the Fund's Investment Manager could be incorrect in
its expectations as to the direction or extent of various interest rate
movements or the time span within which the movements take place. For
example, if the Fund sold futures contracts for the sale of securities in
anticipation of an increase in interest rates, and then interest rates went
down instead, causing bond prices to rise, the Fund would lose money on the
sale.
Put and call options on financial futures have characteristics similar to
Exchange traded options. For a further description of options, see below and
the Prospectus.
In addition to the risks associated in investing in options on securities,
there are particular risks associated with investing in options on futures.
In particular, the ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid
secondary market. It is not certain that such a market will develop.
In order to assure that the Fund is entering into transactions in futures
contracts for hedging purposes as such is defined by the Commodity Futures
Trading Commission either: 1) a substantial majority (i.e., approximately
75%) of all anticipatory hedge transactions (transactions in which the Fund
does not own at the time of the transaction, but expects to acquire, the
securities underlying the relevant futures contract) involving the purchase
of futures contracts will be completed by the purchase of securities which
are the subject of the hedge or 2) the underlying value of all long positions
in futures contracts will not exceed the total value of a) all short-term
debt obligations held by the Fund; b) cash held by the Fund; c) cash proceeds
due to the Fund on investments within thirty days; d) the margin deposited on
the contracts; and e) any unrealized appreciation in the value of the
contracts.
The Fund may not enter into futures contracts or related options thereon
if, immediately thereafter, the amount committed to margin plus the amount
paid for option premiums exceeds 5% of the value of the Fund's total assets.
In instances involving the purchase of futures contracts by the Fund, an
amount equal to the market value of the futures contract will be deposited in
a segregated account of cash and
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<PAGE>
cash equivalents to collateralize the position and thereby ensure that the
use of such futures is unleveraged. The Fund may not purchase or sell futures
contracts or related options if, immediately thereafter, more than one-third
of its net assets would be hedged.
Municipal Bond Index Futures--The Fund may utilize municipal bond index
futures contracts and options thereon for hedging purposes. The Fund's
strategies in employing such contracts will be similar to that discussed
above with respect to financial futures and options thereon. A municipal bond
index is a method of reflecting in a single number the market value of many
different municipal bonds and is designed to be representative of the
municipal bond market generally. The index fluctuates in response to changes
in the market values of the bonds included within the index. Unlike futures
contracts on particular financial instruments, futures contracts on a
municipal bond index will be settled in cash if held until the close of
trading in the contract. However, as in any other futures contract, a
position in the contract may be closed out by purchase or sale of an
offsetting contract for the same delivery month prior to expiration of the
contract.
Options--The Fund may purchase or sell (write) options on debt securities
as a means of achieving additional return or hedging the value of the Fund's
portfolio. The Fund will only buy options listed on national securities
exchanges. The Fund will not purchase options if, as a result, the aggregate
cost of all outstanding options exceeds 10% of the Fund's total assets.
Presently there are no options on tax-exempt securities traded on national
securities exchanges and until such time as they become available, the Fund
will not invest in options on debt securities.
A call option is a contract that gives the holder of the option the right
to buy from the writer of the call option, in return for a premium, the
security underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option has the
obligation, upon exercise of the option, to deliver the underlying security
upon payment of the exercise price during the option period. A put option is
a contract that gives the holder of the option the right to sell to the
writer, in return for a premium, the underlying security at a specified price
during the term of the option. The writer of the put has the obligation to
buy the underlying security upon exercise, at the exercise price during the
option period.
The Fund will only write covered call or covered put options listed on
national exchanges. The Fund may not write covered options in an amount
exceeding 20% of the value of its total assets. A call option is "covered" if
the Fund owns the underlying security covered by the call or has an absolute
and immediate right to acquire that security or futures contract without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the Fund
holds a call on the same security or futures contract as the call written,
where the exercise price of the call held is (i) equal to or less than the
exercise price of the call written or (ii) greater than the exercise price of
the call written if the difference is maintained by the Fund in cash,
Treasury bills or other liquid portfolio securities in a segregated account
with its custodian. A put option is "covered" if the Fund maintains cash,
Treasury bills or other liquid portfolio securities with a value equal to the
exercise price in a segregated account with its custodian, or else holds a
put on the same security or futures contract as the put written where the
exercise price of the put held is equal to or greater than the exercise price
of the put written.
If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing
an option of the same series as the option previously written. However, once
the Fund has been assigned an exercise notice, the Fund will be unable to
effect a closing purchase transaction. Similarly, if the Fund is the holder
of an option, it may liquidate its position by effecting a closing sale
transaction. This is accomplished by selling an option of the same series as
the option previously purchased. There can be no assurance that either a
closing purchase or sale transaction can be effected when the Fund so
desires.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than
the premium
16
<PAGE>
received from writing the option or is less than the premium paid to purchase
the option. Since call option prices generally reflect increases in the price
of the underlying security, any loss resulting from the purchase of a call
option may also be wholly or partially offset by unrealized appreciation of
the underlying security. If a put option written by the Fund is exercised,
the Fund may incur a loss equal to the difference between the exercise price
of the option and the sum of the sale price of the underlying security plus
the premiums received from the sale of the option. Other principal factors
affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price and price volatility of the
underlying security and the time remaining until the expiration date.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although the Fund will
generally purchase or write only those options for which there appears to be
an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option. In such event, it
might not be possible to effect closing transactions in particular options,
so that the Fund would have to exercise its options in order to realize any
profit and would incur brokerage commissions upon the exercise of call
options and upon the subsequent disposition of underlying securities for the
exercise of put options. If the Fund as a covered call option writer is
unable to effect a closing purchase transaction in a secondary market, it
will not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise.
PORTFOLIO MANAGEMENT
The Fund may engage in short-term trading consistent with its investment
objective. Securities may be sold in anticipation of a market decline (a rise
in interest rates) or purchased in anticipation of a market rise (a decline
in interest rates). In addition, a security may be sold and another security
of comparable quality purchased at approximately the same time to take
advantage of what the Investment Manager believes to be a temporary disparity
in the normal yield relationship between the two securities. These yield
disparities may occur for reasons not directly related to the investment
quality of particular issues or the general movement of interest rates, such
as changes in the overall demand for, or supply of, various types of
tax-exempt securities.
In general, purchases and sales may also be made to restructure the
portfolio in terms of average maturity, quality, coupon yield, or
diversification for any one or more of the following purposes: (a) to
increase income, (b) to improve portfolio quality, (c) to minimize capital
depreciation, (d) to realize gains or losses, or for such other reasons as
the Investment Manager deems relevant in light of economic and market
conditions.
The Fund may invest in obligations customarily sold to institutional
investors in private transactions with the issuers thereof and up to 5% of
its total assets in securities for which a bona fide market does not exist at
the time of purchase. With respect to any securities as to which a bona fide
market does not exist, the Fund may be unable to dispose of such securities
promptly at reasonable prices.
The Fund does not generally intend to invest more than 25% of its total
assets in securities of any one governmental unit or in the securities of
governmental units located in any one state, territory or possession of the
United States. Subject to investment restriction number 3 disclosed in the
Prospectus under the Section "Investment Restrictions," the Fund may invest
more than 25% of its total assets in industrial development and pollution
control bonds (two kinds of tax-exempt Municipal Bonds).
INVESTMENT RESTRICTIONS
- -----------------------------------------------------------------------------
In addition to the investment restrictions enumerated in the Prospectus,
the investment restrictions listed below have been adopted by the Fund as
fundamental policies, which may not be changed without the vote of a majority
of the outstanding voting securities of the Fund, as defined in the Act. Such
a majority is defined as the lesser of (a) 67% of the shares present at a
meeting of shareholders, if the holders of more than 50% of the outstanding
shares of the Fund are present or represented by proxy, or (b) more than 50%
of the outstanding shares of the Fund. For purposes of the following
restrictions: (a) an "issuer" of a security is the entity whose assets and
revenues are committed to the payment of
17
<PAGE>
interest and principal on that particular security; (b) a "taxable security"
is any security the interest on which is subject to federal income tax; and
(c) all percentage limitations apply immediately after a purchase or initial
investment, and any subsequent change in any applicable percentage resulting
from market fluctuations or other changes in the amount of total or net
assets does not require elimination of any security from the portfolio.
The Fund may not:
1. Purchase or sell real estate or interests therein, although it may
purchase securities secured by real estate or interests therein. This shall
not prohibit the Trust from purchasing, holding and selling real estate
acquired as a result of the ownership of such securities.
2. Purchase or sell commodities except that the Fund may purchase or
sell financial futures contracts and related options thereon.
3. Purchase oil, gas or other mineral leases, rights or royalty
contracts, or exploration or development programs.
4. Write, purchase or sell puts, calls, or combinations thereof, except
for options on futures contracts or options on debt securities.
5. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
6. Borrow money, except that the Fund may borrow from a bank for
temporary or emergency purposes in amounts not exceeding 5% (taken at the
lower of cost or current value) of the value of its total assets (not
including the amount borrowed).
7. Pledge its assets or assign or otherwise encumber them except to
secure borrowing effected within the limitations set forth in Restriction
6. However, for the purpose of this restriction, collateral arrangements
with respect to the writing of options and collateral arrangements with
respect to initial margin for futures are not deemed to be pledges of
assets.
8. Issue senior securities as defined in the Act, except insofar as the
Fund may be deemed to have issued a senior security by reason of: (a)
entering into any repurchase agreement; (b) purchasing any securities on a
when-issued or delayed delivery basis; (c) purchasing or selling any
financial futures contracts; (d) borrowing money in accordance with
restrictions described above; or (e) lending portfolio securities.
9. Make loans of money or securities, except: (a) by the purchase of
debt obligations in which the Fund may invest consistent with its
investment objective and policies; and (b) by investment in repurchase
agreements.
10. Make short sales of securities.
11. Purchase securities on margin, except for such short-term loans as
are necessary for the clearance of purchases of portfolio securities.
12. Engage in the underwriting of securities, except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security.
13. Invest for the purpose of exercising control or management of any
other issuer.
In addition, as a nonfundamental policy, the Fund may not (i) invest in
securities of any issuer if, to the knowledge of the Fund, any officer or
trustee of the Fund or any officer or director of the Manager or the Adviser
owns more than 1/2 of 1% of the outstanding securities of such issuer, and
such officers, trustees and directors who own more than 1/2 of 1% own in the
aggregate more than 5% of the outstanding securities of such issuers; or (ii)
purchase securities of other investment companies, except in connection with
a merger, consolidation, reorganization or acquisition of assets or by
purchase in the open market of securities of closed-end investment companies
where no underwriter's or dealer's commission or profit, other than customary
broker's commissions, is involved and only if immediately
18
<PAGE>
thereafter not more than (a) 5% of the Fund's total assets, taken at market
value, would be invested in any one such company, (b) 10% of the Fund's total
assets, taken at market value, would be invested in such securities and (c)
3% of any one such company's voting securities would be owned by the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
- -----------------------------------------------------------------------------
Subject to the general supervision of the Board of Trustees, the
Investment Manager is responsible for decisions to buy and sell securities
and futures contracts for the Fund, the selection of brokers and dealers to
effect the transactions, and the negotiation of brokerage commissions, if
any. The Fund expects that the primary market for the securities in which it
intends to invest will generally be the over-the-counter market. Securities
are generally traded in the over-the-counter market on a "net" basis with
dealers acting as principal for their own account without charging a stated
commission, although the price of the security usually includes a profit to
the dealer. Options and futures transactions will usually be effected through
a broker and a commission will be charged. The Fund also expects that
securities will be purchased at times in underwritten offerings, where the
price includes a fixed amount of compensation, generally referred to as the
underwriter's concession or discount. On occasion, the Fund may also purchase
certain money market instruments directly from an issuer, in which case no
commissions or discounts are paid. During the fiscal period June 2, 1994
through September 30, 1994 and during the fiscal years ended September 30,
1995 and September 30, 1996, the Fund paid no brokerage commissions.
The Investment Manager currently serves as investment manager to a number
of clients, including other investment companies, and may in the future act
as investment manager or adviser to others. It is the practice of the
Investment Manager to cause purchase and sale transactions to be allocated
among the Fund and others whose assets it manages in such manner as it deems
equitable. In making such allocations among the Fund and other client
accounts, various factors are considered including the respective investment
objectives, the relative size of portfolio holdings of the same or comparable
securities, the availability of cash for investment, the size of investment
commitments generally held and the opinions of the persons responsible for
managing the portfolios of the Fund and other client accounts. In the case of
certain initial and secondary public offerings, the Investment Manager may
utilize a pro-rata allocation process based on the size of the Dean Witter
Funds involved and the number of shares available from the public offering.
The policy of the Fund regarding purchases and sales of securities and
futures contracts for its portfolio is that primary consideration will be
given to obtaining the most favorable prices and efficient execution of
transactions. Consistent with this policy, when securities transactions are
effected on a stock exchange, the Fund's policy is to pay commissions which
are considered fair and reasonable without necessarily determining that the
lowest possible commissions are paid in all circumstances. The Fund believes
that a requirement always to seek the lowest commission cost could impede
effective portfolio management and preclude the Fund and the Investment
Manager from obtaining a high quality of brokerage and research services. In
seeking to determine the reasonableness of brokerage commissions paid in any
transaction, the Investment Manager relies upon its experience and knowledge
regarding commissions generally charged by various brokers and on its
judgment in evaluating the brokerage and research services received from the
broker effecting the transaction. Such determinations are necessarily
subjective and imprecise, as in most cases an exact dollar value for those
services is not ascertainable.
In seeking to implement the Fund's policies, the Investment Manager
effects transactions with those brokers and dealers who the Investment
Manager believes provide the most favorable prices and who are capable of
providing efficient executions. If the Investment Manager believes such price
and execution are obtainable from more than one broker or dealer, it may give
consideration to placing portfolio transactions with those brokers and
dealers who also furnish research and other services to the Fund or the
Investment Manager. Such services may include, but are not limited to, any
one or more of the following: information as to the availability of
securities for purchase or sale; statistical or factual information or
opinions pertaining to investment; wire services; and appraisals or
evaluations of portfolio securities.
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<PAGE>
The information and services received by the Investment Manager from
brokers and dealers may be of benefit to the Investment Manager in the
management of accounts of some of its other clients and may not in all cases
benefit the Fund directly. While the receipt of such information and services
is useful in varying degrees and would generally reduce the amount of
research or services otherwise performed by the Investment Manager and thus
reduce its expenses, it is of indeterminable value and the management fee
paid to the Investment Manager is not reduced by any amount that may be
attributable to the value of such services.
Pursuant to an order of the Securities and Exchange Commission, the Fund
may effect principal transactions in certain money market instruments with
DWR. The Fund will limit its transactions with DWR to U.S. Government and
Government Agency Securities, Bank Money Instruments (i.e., Certificates of
Deposit and Bankers' Acceptances) and Commercial Paper (not including
Tax-Exempt Municipal Paper). Such transactions will be effected with DWR only
when the price available from DWR is better than that available from other
dealers.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may
be effected through DWR. In order for DWR to effect portfolio transactions
for the Fund, the commissions, fees or other remuneration received by DWR
must be reasonable and fair compared to the commissions, fees or other
remuneration paid to other brokers in connection with comparable transactions
involving similar securities being purchased or sold on an exchange during a
comparable period of time. This standard would allow DWR to receive no more
than the remuneration which would be expected to be received by an
unaffiliated broker in a commensurate arm's-length transaction. Furthermore,
the Trustees of the Fund, including a majority of the Trustees who are not
"interested" Trustees, have adopted procedures which are reasonably designed
to provide that any commissions, fees or other remuneration paid to DWR are
consistent with the foregoing standard. The Fund did not effect any
securities transactions with or through DWR or any other selected
broker-dealer affiliated with the Fund or its Investment Manager during the
fiscal year ended September 30, 1996.
THE DISTRIBUTOR
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As discussed in the Prospectus, shares of the Fund are distributed by Dean
Witter Distributors Inc. (the "Distributor"). The Distributor has entered
into a selected dealer agreement with DWR, which through its own sales
organization sells shares of the Fund. In addition, the Distributor may enter
into selected dealer agreements with other selected broker-dealers. The
Distributor, a Delaware corporation, is an indirect wholly-owned subsidiary
of DWDC. The Trustees of the Fund, including a majority of the Trustees who
are not, and were not at the time they voted, interested persons of the Fund,
as defined in the Act (the "Independent Trustees"), approved, at their
meeting held on May 10, 1994, the current Distribution Agreement appointing
the Distributor as exclusive distributor of the Fund's shares and providing
for the Distributor to bear distribution expenses not borne by the Fund. By
its terms, the Distribution Agreement had an initial term ending April 30,
1995, and provides that it will remain in effect from year to year thereafter
if approved by the Board. At its meeting held on April 17, 1996, the Board of
Trustees, including all of the Independent Trustees, approved the
continuation of the Distribution Agreement until April 30, 1997.
The Distributor bears all expenses incurred in providing services under
the Distribution Agreement. Such expenses include the payment of commissions
for sales of the Fund's shares and incentive compensation to account
executives. The Distributor also pays certain expenses in connection with the
distribution of the Fund's shares, including the costs of preparing, printing
and distributing advertising or promotional materials, and the costs of
printing and distributing prospectuses and supplements thereto used in
connection with the offering and sale of the Fund's shares. The Fund bears
the costs of initial typesetting, printing and distribution of prospectuses
and supplements thereto to shareholders. The Fund also bears the costs of
registering the Fund and its shares under federal and state securities laws.
The Fund and the Distributor have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. Under the Distribution Agreement, the Distributor uses its best
efforts in rendering services to the Fund, but in the absense of willful
misfeasance, bad faith,
20
<PAGE>
gross negligence or reckless disregard of its obligations, the Distributor is
not liable to the fund or any of its shareholders for any error of judgment
or mistake of law or for any act or omission or for any losses sustained by
the Fund or its shareholders.
PLAN OF DISTRIBUTION
To compensate the Distributor for the services provided and for the
expenses borne by the Distributor or any selected dealer under the
Distribution Agreement, the Fund has adopted a Plan of Distribution pursuant
to Rule 12b-1 under the Act (the "Plan") pursuant to which the Fund pays the
Distributor compensation accrued daily and payable monthly at the annual rate
of 0.60% of the lesser of: (a) the average daily aggregate gross sales of the
Fund's shares since the inception of the Fund (not including reinvestments of
dividends or capital gains distributions), less the average daily aggregate
net asset value of the Fund's shares redeemed since the Fund's inception upon
which a contingent deferred sales charge has been imposed or upon which such
charge has been waived; or (b) the Fund's average daily net assets. The
Distributor also receives the proceeds of contingent deferred sales charges
imposed on certain redemptions of shares, which are separate and apart from
payments made pursuant to the Plan (see "Redemption and Repurchases--
Contingent Deferred Sales Charge" in the Prospectus). The Distributor has
informed the Fund that it and/or DWR received approximately $4,100, $144,389
and $175,876, respectively, in contingent deferred sales charges for the
fiscal period June 2, 1994 through September 30, 1994 and for the fiscal years
ended September 30, 1995 and September 30, 1996.
The Distributor has informed the Fund that an amount of the fees payable
by the Fund each year pursuant to the Plan of Distribution equal to 0.15% of
the Fund's average daily net assets is characterized as a "service fee" under
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (of which the Distributor is a member). Such fee is a payment made for
personal service and/or the maintenance of shareholder accounts. The
remaining portion of the Plan of Distribution fee payments made by the Fund
is characterized as an "asset-based sales charge" as such is defined by the
aforementioned Rules of Fair Practice. At their meeting held on October 26,
1995, the Trustees of the Fund, including all of the Independent 12b-1
Trustees, approved an amendment to the Plan to permit payments to be made
under the Plan with respect to certain distribution expenses incurred in
connection with the distribution of shares, including personal services to
shareholders with respect to holdings of such shares, of an investment
company whose assets are acquired by the Fund in a tax-free reorganization.
The Plan was adopted by a vote of the Trustees of the Fund on May 10,
1994, at a meeting of the Trustees called for the purpose of voting on such
Plan. The vote included the vote of a majority of the Trustees of the Fund
who are not "interested persons" of the Fund (as defined in the Act) and who
have no direct or indirect financial interest in the operation of the Plan
(the "Independent 12b-1 Trustees"). In making their decision to adopt the
Plan, the Trustees requested from the Distributor and received such
information as they deemed necessary to make an informed determination as to
whether or not adoption of the Plan was in the best interests of the
shareholders of the Fund. After due consideration of the information
received, the Trustees, including the independent 12b-1 Trustees, determined
that adoption of the Plan would benefit the shareholders of the Fund.
InterCapital, as sole shareholder of the Fund, approved the Plan on May 10,
1994, whereupon the Plan went into effect.
Under its terms, the Plan had an initial term ending April 30, 1995 and
will remain in effect from year to year thereafter, provided such continuance
is approved annually by a vote of the Trustees in the manner described above.
Under the Plan and as required by Rule 12b-1, the Trustees will receive and
review promptly after the end of each fiscal quarter a written report
provided by the Distributor of the amounts expended by the Distributor under
the Plan and the purpose for which such expenditures were made. At its
meeting held on April 17, 1996, the Board of Trustees, including all of the
Independent Trustees, approved the continuation of the Plan until April 30,
1997. Prior to approving the continuation of the Plan, the Board requested
and received from the Distributor and reviewed all the information which it
deemed necessary to arrive at an informed determination. In making their
determination to continue the Plan, the Trustees considered: (1) the Fund's
experience under the Plan and whether such experience
21
<PAGE>
indicates that the Plan is operating as anticipated; (2) the benefits the
Fund had obtained, was obtaining and would be likely to obtain under the
Plan; and (3) what services had been provided and were continuing to be
provided under the Plan by the Distributor, DWR and other selected
broker-dealers to the Fund and its shareholders. Based upon their review, the
Trustees of the Fund, including each of the Independent 12b-1 Trustees,
determined that continuation of the Plan would be in the best interest of the
Fund and would have a reasonable likelihood of continuing to benefit the Fund
and its shareholders. This determination was based upon the conclusion of the
Trustees that the Plan provides an effective means of stimulating sales of
shares of the Fund and of reducing or avoiding net redemptions and the
potentially adverse effects that may occur therefrom. In the Trustee's
quarterly review of the Plan, they will consider its continued
appropriateness and the level of compensation provided therein.
Under the Plan and as required by Rule 12b-1, the Trustees receive and
review promptly after the end of each fiscal quarter a written report
provided by the Distributor of the amounts expended by the Distributor under
the Plan and the purpose for which such expenditures were made. The Fund
accrued amounts payable to the Distributor under the Plan, during the fiscal
year ended September 30, 1996, of $452,823. This amount is equal to 0.59% of
the Fund's average daily net assets for the fiscal year and was calculated
pursuant to clause (a) of the compensation formula under the Plan. This
amount is treated by the Fund as an expense in the year it is accrued.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method shares of the Fund are
sold without a sales load being deducted at the time of purchase, so that the
full amount of an investor's purchase payment will be invested in shares
without any deduction for sales charges. Shares of the Fund may be subject to
a contingent deferred sales charge, payable to the Distributor, if redeemed
during the three years after their purchase. DWR compensates its account
executives by paying them, from its own funds, commissions for the sale of
the Fund's shares, currently a gross sales credit of up to 3% of the amount
sold and an annual residual commission of up to .15 of 1% of the current
value of the amount sold. The gross sales credit is a charge which reflects
commissions paid by DWR to its account executives and DWR's Fund associated
distribution-related expenses, including sales compensation, and overhead and
other branch office distribution-related expenses including: (a) the expenses
of operating DWR's branch offices in connection with the sale of Fund shares,
including lease costs, the salaries and employee benefits of operations and
sales support personnel, utility costs, communications costs and the costs of
stationery and supplies; (b) the costs of client sales seminars; (c) travel
expenses of mutual fund sales coordinators to promote the sale of Fund
shares; and (d) other expenses relating to branch promotion of Fund share
sales. The distribution fee that the Distributor receives from the Fund under
the Plan, in effect, offsets distribution expenses incurred under the Plan on
behalf of the Fund and its opportunity costs, such as the gross sales credit
and an assumed interest charge thereon ("carrying charge"). In the
Distributor's reporting of the distribution expenses to the Fund, such
assumed interest (computed at the "broker's call rate") has been calculated
on the gross sales credit as it is reduced by amounts received by the
Distributor under the Plan and any contingent deferred sales charges received
by the Distributor upon redemption of shares of the Fund. No other interest
charge is included as a distribution expense in the Distributor's calculation
of its distribution costs for this purpose. The broker's call rate is the
interest rate charged to securities brokers on loans secured by
exchange-listed securities.
The Fund paid 100% of the $452,823 accrued under the Plan for the fiscal
year ended September 30, 1996 to the Distributor. The Distributor and DWR
estimate that they have spent, pursuant to the Plan, $3,273,255 on behalf of
the Fund since the inception of the Fund. It is estimated that this amount
was spent in approximately the following ways: (i) 24.42%
($799,414)--advertising and promotional expenses; (ii) 5.00%
($163,737)--printing of prospectuses for distribution to other than current
shareholders; and (iii) 70.58% ($2,310,104)--other expenses, including the
gross sales credit and the carrying charge, of which 5.10% ($117,707)
represents carrying charges, 37.77% ($872,574) represents commission credits
to DWR branch offices for payments of commissions to account executives and
57.13% ($1,319,823) represents overhead and other branch office
distribution-related expenses.
At any given time, the expenses of distributing shares of the Fund may be
more or less than the total of (i) the payments made by the Fund pursuant to
the Plan and (ii) the proceeds of contingent deferred
22
<PAGE>
sales charges paid by investors upon redemption of shares. The Distributor
has advised the Fund that such excess amount, including the carrying charge
designed to approximate the opportunity costs incurred by DWR which arise
from it having advanced monies without having received the amount of any
sales charges imposed at the time of sale of the Fund's shares, totalled
$2,185,656 as of September 30, 1996. Because there is no requirement under
the Plan that the Distributor be reimbursed for all its expenses or any
requirement that the Plan be continued from year to year, this excess amount
does not constitute a liability of the Fund. Although there is no legal
obligation for the Fund to pay expenses incurred in excess of payments made
to the Distributor under the Plan and the proceeds of contingent deferred
sales charges paid by investors upon redemption of shares, if for any reason
the Plan is terminated, the Trustees will consider at that time the manner in
which to treat such expenses. Any cumulative expenses incurred but not yet
recovered through distribution fees or contingent deferred sales charges, may
or may not be recovered through future distribution fees or contingent
deferred sales charges.
No interested person of the Fund, nor any Trustee of the Fund who is not
an interested person of the Fund, as defined in the Act, has any direct or
indirect financial interest in the operation of the Plan except to the extent
that the Distributor, InterCapital, DWR or certain of their employees may be
deemed to have such an interest as a result of benefits derived from the
successful operation of the Plan or as a result of receiving a portion of the
amounts expended thereunder by the Fund.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval of the shareholders of
the Fund, and all material amendments of the Plan must also be approved by
the Trustees in the manner described above. The Plan may be terminated at any
time, without payment of any penalty, by vote of a majority of the
Independent 12b-1 Trustees or by a vote of a majority of the outstanding
voting securities of the Fund (as defined in the Act) on not more than thirty
days' written notice to any other party to the Plan. So long as the Plan is
in effect, the election and nomination of Independent Trustees shall be
committed to the discretion of the Independent Trustees.
DETERMINATION OF NET ASSET VALUE
- -----------------------------------------------------------------------------
As stated in the Prospectus, short-term securities with remaining
maturities of sixty days or less at the time of purchase are valued at
amortized cost, unless the Trustees determine such does not reflect the
securities' market value, in which case these securities will be valued at
their fair value as determined by the Trustees. Other short-term debt
securities will be valued on a mark-to-market basis until such time as they
reach a remaining maturity of sixty days, whereupon they will be valued at
amortized cost using their value on the 61st day unless the Trustees
determine such does not reflect the securities' market value, in which case
these securities will be valued at their fair market value as determined by
the Trustees. All other securities and other assets are valued at their fair
value as determined in good faith under procedures established by and under
the supervision of the Trustees.
The net asset value per share of the Fund is determined once daily at 4:00
p.m., New York time (or, on days when the New York Stock Exchange closes
prior to 4:00 p.m., at such earlier time), on each day that the New York
Stock Exchange is open by taking the value of all assets of the Fund,
subtracting its liabilities, dividing by the number of shares outstanding and
adjusting to the nearest cent. The New York Stock Exchange currently observes
the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas
Day.
Portfolio securities (other than short-term debt securities and futures
and options) are valued for the Fund by an outside independent pricing
service approved by the Board of Trustees. The pricing service has informed
the Fund that in valuing the Fund's portfolio securities it uses both a
computerized grid 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 Fund's 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. The Board
of
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Trustees believes that timely and reliable market quotations are generally
not readily available to the Fund for purposes of valuing tax-exempt
securities and that the valuations supplied by the pricing service, using the
procedures outlined above and subject to periodic review, are more likely to
approximate the fair value of such securities. The Investment Manager will
periodically review and evaluate the procedures, methods and quality of
services provided by the pricing service then being used by the Fund and may,
from time to time, recommend to the Board of Trustees the use of other
pricing services or discontinuance of the use of any pricing service in whole
or part. The Board may determine to approve such recommendation or take other
provisions for pricing of the Fund's portfolio securities.
SHAREHOLDER SERVICES
- -----------------------------------------------------------------------------
Upon the purchase of shares of the Fund, a Shareholder Investment Account
is opened for the investor on the books of the Fund, maintained by the Fund's
Transfer Agent, Dean Witter Trust Company (the "Transfer Agent"). This is an
open account in which shares owned by the investor are credited by the
Transfer Agent in lieu of issuance of a share certificate. If a share
certificate is desired, it must be requested in writing for each transaction.
Certificates are issued only for full shares and may be redeposited in the
account at any time. There is no charge to the investor for issuance of a
certificate. Whenever a shareholder instituted transaction takes place in the
Shareholder Investment Account, the shareholder will be mailed a confirmation
of the transaction from the Fund or DWR or other selected broker-dealer.
Automatic Investment of Dividends and Distributions. As stated in the
Prospectus, all income dividends and capital gains distributions are
automatically paid in full and fractional shares of the Fund, unless the
shareholder requests that they be paid in cash. Each purchase of shares of
the Fund is made upon the condition that the Transfer Agent is thereby
automatically appointed as agent of the investor to receive all dividends and
capital gains distributions on shares owned by the investor. Such dividends
and distributions will be paid, at the net asset value per share, in shares
of the Fund (or in cash if the shareholder so requests) on the monthly
payment date, which will be no later than the last business day of the month
for which the dividend or distribution is payable. Processing of dividend
checks begins immediately following the monthly payment date. Shareholders
who have requested to receive dividends in cash will normally receive their
monthly dividend check during the first ten days of the following month. At
any time an investor may request the Transfer Agent, in writing, to have
subsequent dividends and/or capital gains distributions paid to him or her in
cash rather than shares. To assure sufficient time to process the change,
such request should be received by the Transfer Agent at least five business
days prior to the record date of the dividend or distribution. In the case of
recently purchased shares for which registration instructions have not been
received on the record date, cash payments will be made to DWR or other
selected broker-dealer, and will be forwarded to the shareholder, upon the
receipt of proper instructions.
Targeted Dividends. (Service Mark) In states where it is legally
permissible, shareholders may also have all income dividends and capital
gains distributions automatically invested in shares of an open-end Dean
Witter Fund other than Dean Witter National Municipal Trust. Such investment
will be made as described above for automatic investment in shares of the
Fund, at the net asset value per share of the selected Dean Witter Fund as of
the close of business on the Fund's payment date of the dividend or
distribution and will begin to earn dividends, if any, in the selected Dean
Witter Fund the next business day. To participate in the Targeted Dividends
program, shareholders should contact their DWR or other selected
broker-dealer account executive or the Transfer Agent. Shareholders of the
Fund must be shareholders of the Dean Witter Fund targeted to receive
investments from dividends at the time they enter the Targeted Dividends
program. Investors should review the prospectus of the targeted Dean Witter
Fund before entering the program.
EasyInvest. (Service Mark) Shareholders may subscribe to EasyInvest, an
automatic purchase plan which provides for any amount from $100 to $5,000 to
be transferred automatically from a checking or savings account, on a
semi-monthly, monthly or quarterly basis, to the Transfer Agent for
investment in shares of the Fund. Shares purchased through EasyInvest will be
added to the shareholder's existing account
24
<PAGE>
at the net asset value calculated the same business day the transfer of funds
is effected. For further information or to subscribe to EasyInvest,
shareholders should contact their DWR or other selected broker-dealer account
executive or the Transfer Agent.
Investment of Dividends or Distributions Received in Cash. Any shareholder
who receives a cash payment representing a dividend or capital gains
distribution may invest such dividend or distribution at the net asset value
next determined by returning the check or the proceeds to the Transfer Agent
within thirty days after the payment date. If the shareholder returns the
proceeds of a dividend or distribution, such funds must be accompanied by a
signed statement indicating that the proceeds constitute a dividend or
distribution to be invested. Such investment will be made at the net asset
value per share next determined after receipt of the proceeds by the Transfer
Agent.
Direct Investments through Transfer Agent. A shareholder may make
additional investments in Fund shares at any time by sending a check in any
amount, not less than $100, payable to Dean Witter National Municipal Trust,
directly to the Fund's Transfer Agent. Such amounts will be applied to the
purchase of Fund shares at the net asset value per share next determined
after receipt of the check or purchase payment by the Transfer Agent. The
shares so purchased will be credited to the investor's account.
Systematic Withdrawal Plan. As discussed in the Prospectus, a withdrawal
plan (the "Withdrawal Plan") is available for shareholders who own or
purchase shares of the Fund having a minimum value of $10,000 based upon
their current net asset value. The Withdrawal Plan provides for monthly or
quarterly (March, June, September and December) checks in any dollar amount,
not less than $25, or in any whole percentage of the account balance, on an
annualized basis. Any applicable contingent deferred sales charge will be
imposed on shares redeemed under the Withdrawal Plan (see "Redemptions and
Repurchases--Contingent Deferred Sales Charge" in the Prospectus). Therefore,
any shareholder participating in the Withdrawal Plan will have sufficient
shares redeemed from his or her account so that the proceeds (net of any
applicable contingent deferred sales charge) to the shareholder will be the
designated monthly or quarterly amount.
Dividends and capital gains distributions on shares held under the
Withdrawal Plan will be invested in additional full and fractional shares at
net asset value. Shares will be credited to an open account for the investor
by the Transfer Agent; no share certificates will be issued. A shareholder is
entitled to a share certificate upon written request to the Transfer Agent,
although in that event the shareholder's Withdrawal Plan will be terminated.
The Transfer Agent acts as agent for the shareholder in tendering to the
Fund for redemption sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment designated in the application. The
shares will be redeemed at their net asset value determined on the tenth or
twenty-fifth day (or next following business day) of the relevant month or
quarter and normally a check for the proceeds will be mailed by the Transfer
Agent within five days after the date of redemption. The Systematic
Withdrawal Plan may be terminated at any time by the Transfer Agent.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net
investment income and net capital gains, the shareholder's original
investment will be correspondingly reduced and ultimately exhausted.
Each withdrawal constitutes a redemption of shares and any gain or loss
realized must be recognized for federal income tax purposes. Although the
shareholder may make additional investments of $2,500 or more under the
Withdrawal Plan, withdrawals made concurrently with purchases of additional
shares may be inadvisable because of the contingent deferred sales charge
applicable to the redemption of shares purchased during the preceding six
years (see "Redemptions and Repurchases--Contingent Deferred Sales Charge").
Any shareholder who wishes to have payments under the Withdrawal Plan made
to a third party or sent to an address other than the one listed on the
account must send complete written instructions to the Transfer Agent to
enroll in the Withdrawal Plan. The shareholder's signature on such
instructions must be guaranteed by an eligible guarantor acceptable to the
Transfer Agent (shareholders should
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<PAGE>
contact the Transfer Agent for a determination as to whether a particular
institution is such an eligible guarantor). A shareholder may, at any time,
change the amount and interval of withdrawal payments and the address to
which checks are mailed by written notification to the Transfer Agent. In
addition, the party and/or the address to which checks are mailed may be
changed by written notification to the Transfer Agent, with signature
guarantees required in the manner described above. The shareholder may also
terminate the Systematic Withdrawal Plan at any time by written notice to the
Transfer Agent. In the event of such termination, the account will be
continued as a Shareholder Investment Account. The shareholder may also
redeem all or part of the shares held in the Withdrawal Plan Account (see
"Redemptions and Repurchases" in the Prospectus) at any time.
EXCHANGE PRIVILEGE
As discussed in the Prospectus, the Fund makes available to its
shareholders an Exchange Privilege whereby shareholders of the Fund may
exchange their shares for shares of other Dean Witter Funds sold with a
contingent deferred sales charge ("CDSC funds"), for shares of Dean Witter
Short-Term Bond Fund, Dean Witter Short-Term U.S. Treasury Trust, Dean Witter
Limited Term Municipal Trust, Dean Witter Balanced Income Fund, Dean Witter
Balanced Growth Fund, Dean Witter Intermediate Term U.S. Treasury Trust and
for shares of five Dean Witter Funds which are money market funds (the
foregoing eleven non-CDSC funds are hereinafter referred to as the "Exchange
Funds"). Exchanges may be made after the shares of the Fund acquired by
purchase (not by exchange or dividend reinvestment) have been held for thirty
days. There is no waiting period for exchanges of shares acquired by exchange
or dividend reinvestment. An exchange will be treated for federal income tax
purposes the same as a repurchase or redemption of shares, on which the
shareholder may realize a capital gain or loss.
Any new account established through the Exchange Privilege will have the
same registration and cash dividend or dividend reinvestment plan as the
present account, unless the Transfer Agent receives written notification to
the contrary. For telephone exchanges, the exact registration of the existing
account and the account number must be provided.
Any shares held in certificate form cannot be exchanged but must be
forwarded to the Transfer Agent and deposited into the shareholder's account
before being eligible for exchange. (Certificates mailed in for deposit
should not be endorsed).
As described below, and in the Prospectus under the captions "Exchange
Privilege" and "Contingent Deferred Sales Charge", a contingent deferred
sales charge ("CDSC") may be imposed upon a redemption, depending on a number
of factors, including the number of years from the time of purchase until the
time of redemption or exchange ("holding period"). When shares of the Fund or
any other CDSC fund are exchanged for shares of an Exchange Fund, without the
imposition of the CDSC at the time of the exchange. During the period of time
the shareholder remains in the Exchange Fund (calculated from the last day of
the month in which the Exchange Fund shares were acquired) the holding period
or "year since purchase payment made" is frozen. When shares are redeemed out
of an Exchange Fund, they will be subject to a CDSC which would be based upon
the period of time the shareholder held shares in a CDSC fund. However, in
the case of shares exchanged for shares of an Exchange Fund, upon a
redemption of shares which results in a CDSC being imposed, a credit (not to
exceed the amount of the CDSC) will be given in an amount equal to the
Exchange Fund 12b-1 distribution fees which are attributable to those shares.
Shareholders acquiring shares of an Exchange Fund pursuant to this exchange
privilege may exchange those shares back into a CDSC fund from the Exchange
Fund, with no CDSC being imposed on such exchange. The holding period
previously frozen when shares were first exchanged for shares of the Exchange
Fund resumes on the date shares of a CDSC fund are reacquired. Thus, a CDSC
is imposed only upon an ultimate redemption, based upon the time (calculated
as described above) the shareholder was invested in a CDSC fund.
If shares of the Fund are exchanged for shares of another CDSC fund having
a CDSC which is imposed at a higher rate or is subject to a different time
schedule than the CDSC imposed upon a redemption of a share of the Fund, the
higher CDSC will be imposed upon redemption of shares of the fund exchanged
into. Likewise, if shares of another CDSC fund are exchanged for shares of
the Fund,
26
<PAGE>
upon redemption of shares of the Fund, a CDSC will be imposed in accordance
with the CDSC schedule applicable to the fund with the higher CDSC. Moreover,
if shares of the Fund are exchanged for shares of another CDSC fund with a
different CDSC schedule imposing a higher CDSC and are subsequently exchanged
again for shares of the Fund, the higher CDSC will still apply upon ultimate
redemption of shares of the Fund.
In addition, shares of the Fund may be acquired in exchange for shares of
Dean Witter Funds sold with a front-end sales charge ("front-end sales charge
funds"), but shares of the Fund, however acquired, may not be exchanged for
shares of front-end sales charge funds. Shares of a CDSC fund acquired in
exchange for shares of a front-end sales charge fund (or in exchange for
shares of other Dean Witter Funds for which shares of a front-end sales
charge fund have been exchanged) are not subject to any CDSC upon their
redemption.
When shares initially purchased in a CDSC fund are exchanged for shares of
another CDSC fund, or for shares of an Exchange Fund, the date of purchase of
the shares of the fund exchanged into, for purposes of the CDSC upon
redemption, will be the last day of the month in which the shares being
exchanged were originally purchased. In allocating the purchase payments
between funds for purposes of the CDSC, the amount which represents the
current net asset value of shares at the time of the exchange which were (i)
purchased more than three or six years (depending on the CDSC schedule
applicable to the shares) prior to the exchange, (ii) originally acquired
through reinvestment of dividends or distributions (of the Fund or another
Dean Witter Fund) and (iii) acquired in exchange for shares of front-end
sales charge funds, or for shares of other Dean Witter Funds for which shares
of front-end sales charge funds have been exchanged (all such shares called
"Free Shares"), will be exchanged first. Shares of Dean Witter Strategist
Fund acquired prior to November 8, 1989, shares of Dean Witter American Value
Fund acquired prior to April 30, 1984, and shares of Dean Witter Dividend
Growth Securities Inc. and Dean Witter Natural Resource Development
Securities Inc. acquired prior to July 2, 1984, are also considered Free
Shares and will be the first Free Shares to be exchanged. After an exchange,
all dividends earned on shares in an Exchange Fund will be considered Free
Shares. If the exchanged amount exceeds the value of such Free Shares, an
exchange is made, on a block-by-block basis, of non-Free Shares held for the
longest period of time (except that if shares held for identical periods of
time but subject to different CDSC schedules are held in a block in the same
Exchange Privilege account, the shares of that block that are subject to a
lower CDSC rate will be exchanged prior to the shares of that block that are
subject to a higher CDSC rate). Shares equal to any appreciation in the value
of non-Free Shares exchanged will be treated as Free Shares, and the amount
of the purchase payments for the non-Free Shares of the fund exchanged into
will be equal to the lesser of (a) the purchase payments for, or (b) the
current net asset value of, the exchanged non-Free Shares. If an exchange
between funds would result in exchange of only part of a particular block of
non-Free Shares, then shares equal to any appreciation in the value of the
block (up to the amount of the exchange) will be treated as Free Shares and
exchanged first, and the purchase payment for that block will be allocated on
a pro rata basis between the non-Free Shares of that block to be retained and
the non-Free Shares to be exchanged. The prorated amount of such purchase
payment attributable to the retained non-Free Shares will remain as the
purchase payment for such shares, and the amount of purchase payment for the
exchanged non-Free Shares will be equal to the lesser of (a) the prorated
amount of the purchase payment for, or (b) the current net asset value of,
those exchanged non-Free Shares. Based upon the procedures described in the
Prospectus under the caption "Contingent Deferred Sales Charge", any
applicable CDSC will be imposed upon the ultimate redemption of shares of any
fund, regardless of the number of exchanges since those shares were
originally purchased.
With respect to the repurchase of shares of the Fund, the application of
proceeds to the purchase of new shares in the Fund or any other of the funds
and the general administration of the Exchange Privilege, the Transfer Agent
acts as agent for the Distributor and for the shareholder's selected
broker-dealer, if any, in the performance of such functions.
With respect to exchanges, redemptions or repurchases, the Transfer Agent
shall be liable for its own negligence and not for the default or negligence
of its correspondents or for losses in transit. The Fund shall not be liable
for any default or negligence of the Transfer Agent, the Distributor or any
selected broker-dealer.
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<PAGE>
The Distributor and any selected broker-dealer have authorized and
appointed the Transfer Agent to act as their agent in connection with the
application of proceeds of any redemption of Fund shares to the purchase of
shares of any other fund and the general administration of the Exchange
Privilege. No commission or discounts will be paid to the Distributor or any
selected broker-dealer for any transactions pursuant to this Exchange
Privilege.
Exchanges are subject to the minimum investment requirement and any other
conditions imposed by each fund. (The minimum initial investment is $5,000
for Dean Witter Liquid Asset Fund Inc., Dean Witter Tax-Free Daily Income
Trust, Dean Witter New York Municipal Money Market Trust and Dean Witter
California Tax-Free Daily Income Trust although those funds may, at their
discretion, accept initial investments of as low as $1,000. The minimum
initial investment for Dean Witter Short-Term U.S. Treasury Trust is $10,000
although that fund may, at its discretion, accept initial investments of as
low as $5,000. The minimum initial investment is $5,000 for Dean Witter
Special Value Fund. The minimum initial investment for all other Dean Witter
Funds for which the Exchange Privilege is available is $1,000.) Upon exchange
into an Exchange Fund, the shares of that fund will be held in a special
Exchange Privilege Account separately from accounts of those shareholders who
have acquired their shares directly from that fund. As a result, certain
services normally available to shareholders of Exchange Funds, including the
check writing feature, will not be available for funds held in that account.
The Fund and each of the other Dean Witter Funds may limit the number of
times this Exchange Privilege may be exercised by any investor within a
specified period of time. Also, the Exchange Privilege may be terminated or
revised at any time by the Fund and/or any of the Dean Witter Funds for which
shares of the Fund have been exchanged, upon such notice as may be required
by applicable regulatory agencies (presently sixty days prior written notice
for termination or material revision), provided that six months prior written
notice of termination will be given to the shareholders who hold shares of
Exchange Funds, pursuant to the Exchange Privilege and provided further that
the Exchange Privilege may be terminated or materially revised without notice
at times (a) when the New York Stock Exchange is closed for other than
customary weekends and holidays, (b) when trading on that Exchange is
restricted, (c) when an emergency exists as a result of which disposal by the
Fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets, (d) during any other period when the Securities and Exchange
Commission by order so permits (provided that applicable rules and
regulations of the Securities and Exchange Commission shall govern as to
whether the conditions prescribed in (b) or (c) exist), or (e) if the Fund
would be unable to invest amounts effectively in accordance with its
investment objective(s), policies and restrictions.
For further information regarding the Exchange Privilege, shareholders
should contact their DWR or other selected broker-dealer account executive or
the Transfer Agent.
REDEMPTIONS AND REPURCHASES
- -----------------------------------------------------------------------------
Redemption. As stated in the Prospectus, shares of the Fund can be
redeemed for cash at any time at the net asset value per share next
determined; however, such redemption proceeds may be reduced by the amount of
any applicable contingent deferred sales charges (see below). If shares are
held in a shareholder's account without a share certificate, a written
request for redemption to the Fund's Transfer Agent at P.O. Box 983, Jersey
City, NJ 07303 is required. If certificates are held by the shareholder, the
shares may be redeemed by surrendering the certificates with a written
request for redemption. The share certificate, or an accompanying stock
power, and the request for redemption, must be signed by the shareholder or
shareholders exactly as the shares are registered. Each request for
redemption, whether or not accompanied by a share certificate, must be sent
to the Fund's Transfer Agent, which will redeem the shares at their net asset
value next computed (see "Purchase of Fund Shares" in the Prospectus) after
it receives the request, and certificate, if any, in good order. Any
redemption request received after such computation will be redeemed at the
next determined net asset value. The term "good order" means that the share
certificate, if any, and request for redemption are properly signed,
accompanied by any documentation required by the Transfer Agent, and bear
signature guarantees when required by the Fund or the Transfer Agent. If
redemption is requested by a
28
<PAGE>
corporation, partnership, trust or fiduciary, the Transfer Agent may require
that written evidence of authority acceptable to the Transfer Agent be
submitted before such request is accepted.
Whether certificates are held by the shareholder or shares are held in a
shareholder's account, if the proceeds are to be paid to any person other
than the record owner, or if the proceeds are to be paid to a corporation
(other than the Distributor or a selected broker-dealer for the account of
the shareholder), partnership, trust or fiduciary, or sent to the shareholder
at an address other than the registered address, signatures must be
guaranteed by an eligible guarantor acceptable to the Transfer Agent
(shareholders should contact the Transfer Agent for a determination as to
whether a particular institution is such an eligible guarantor). A stock
power may be obtained from any dealer or commercial bank. The Fund may change
the signature guarantee requirements from time to time upon notice to
shareholders, which may be by means of a revised prospectus.
Contingent Deferred Sales Charge. As stated in the Prospectus, a
contingent deferred sales charge ("CDSC") will be imposed on any redemption
by an investor if after such redemption the current value of the investor's
shares of the Fund is less than the dollar amount of all payments by the
shareholder for the purchase of Fund shares during the preceding three years.
However, no CDSC will be imposed to the extent that the net asset value of
the shares redeemed does not exceed: (a) the current net asset value of
shares purchased more than three years prior to the redemption, plus (b) the
current net asset value of shares purchased through reinvestment of dividends
or distributions of the Fund or another Dean Witter Fund (see "Shareholder
Services--Targeted Dividends"), plus (c) the current net asset value of
shares acquired in exchange for (i) shares of Dean Witter front-end sales
charge funds, or (ii) shares of other Dean Witter Funds for which shares of
front-end sales charge funds have been exchanged (see "Shareholder
Services--Exchange Privilege"), plus (d) increases in the net asset value of
the investor's shares above the total amount of payments for the purchase of
Fund shares made during the preceding three years. The CDSC will be paid to
the Distributor. In addition, no CDSC will be imposed on redemptions of
shares which were purchased by certain Unit Investment Trusts (on which a
sales charge has been paid) or which are attributable to reinvestment of
dividends or distributions from, or the proceeds of, such Unit Investment
Trusts.
In determining the applicability of the CDSC to each redemption, the
amount which represents an increase in the net asset value of the investor's
shares above the amount of the total payments for the purchase of shares
within the last three years will be redeemed first. In the event the
redemption amount exceeds such increase in value, the next portion of the
amount redeemed will be the amount which represents the net asset value of
the investor's shares purchased more than three years prior to the redemption
and/or shares purchased through reinvestment of dividends or distributions
and/or shares acquired in exchange for shares of Dean Witter front-end sales
charge funds, or for shares of other Dean Witter funds for which shares of
front-end sales charge funds have been exchanged. A portion of the amount
redeemed which exceeds an amount which represents both such increase in value
and the value of shares purchased more than three years prior to the
redemption and/or shares purchased through reinvestment of dividends or
distributions and/or shares acquired in the above-described exchanges will be
subject to a CDSC.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Fund shares until the time of
redemption of such shares. For purposes of determining the number of years
from the time of any payment for the purchase of shares, all payments made
during a month will be aggregated and deemed to have been made on the last
day of the month. The following table sets forth the rates of the CDSC:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR SINCE SALES CHARGE AS A
PURCHASE PERCENTAGE OF
PAYMENT MADE AMOUNT REDEEMED
------------ ---------------
<S> <C>
First..................... 3.0%
Second.................... 2.0%
Third..................... 1.0%
Fourth and thereafter .... None
</TABLE>
29
<PAGE>
In determining the rate of the CDSC, it will be assumed that a redemption
is made of shares held by the investor for the longest period of time within
the applicable three year period. This will result in any such CDSC being
imposed at the lowest possible rate. Accordingly, shareholders may redeem,
without incurring any CDSC, amounts equal to any net increase in the value of
their shares above the amount of their purchase payments made within the past
three years and amounts equal to the current value of shares purchased more
than three years prior to the redemption and shares purchased through
reinvestment of dividends or distributions or acquired in exchange for shares
of Dean Witter front-end sales charge funds, or for shares of other Dean
Witter Funds for which shares of front-end sales charge funds have been
exchanged. The CDSC will be imposed in accordance with the table shown above,
on any redemptions within three years of purchase which are in excess of
these amounts and which redemptions are not (a) requested within one year of
death or initial determination of disability of a shareholder, or (b) made
pursuant to certain taxable distributions from retirement plans or retirement
accounts, as described in the Prospectus.
Payment for Shares Redeemed or Repurchased. As discussed in the
Prospectus, payment for shares presented for repurchase or redemption will be
made by check within seven days after receipt by the Transfer Agent of the
certificate and/or written request in good order. The term good order means
that the share certificate, if any, and request for redemption are properly
signed, accompanied by any documentation required by the Transfer Agent, and
bear signature guarantees when required by the Fund or the Transfer Agent.
Such payment may be postponed or the right of redemption suspended at times
(a) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (b) when trading on that Exchange is restricted, (c)
when an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
(d) during any other period when the Securities and Exchange Commission by
order so permits; provided that applicable rules and regulations of the
Securities and Exchange Commission shall govern as to whether the conditions
prescribed in (b) or (c) exist. If the shares to be redeemed have recently
been purchased by check (including a certified or bank cashier's check),
payment of redemption proceeds may be delayed for the minimum time needed to
verify that the check used for investment has been honored (not more than
fifteen days from the time of investment of the proceeds of the check by the
Transfer Agent). Shareholders maintaining margin accounts with DWR or another
selected broker-dealer are referred to their account executive regarding
restrictions on redemption of shares of the Fund pledged in the margin
account.
Transfers of Shares. In the event a shareholder requests a transfer of any
shares to a new registration, such shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the contingent deferred sales charge or free of such charge
(and with regard to the length of time shares subject to the charge have been
held), any transfer involving less than all of the shares in an account will
be made on a pro-rata basis (that is, by transferring shares in the same
proportion that the transferred shares bear to the total shares in the
account immediately prior to the transfer). The transferred shares will
continue to be subject to any applicable contingent deferred sales charge as
if they had not been so transferred.
Reinstatement Privilege. As described in the Prospectus, a shareholder who
has had his or her shares redeemed or repurchased and has not previously
exercised this reinstatement privilege may, within 30 days after the date of
the redemption or repurchase, reinstate any portion or all of the proceeds of
such redemption or repurchase in shares of the Fund at the net asset value
next determined after a reinstatement request, together with such proceeds,
is received by the Transfer Agent.
Exercise of the reinstatement privilege will not affect the federal income
tax treatment of any gain or loss realized upon the redemption or repurchase,
except that if the redemption or repurchase resulted in a loss and
reinstatement is made in shares of the Fund, some or all of the loss,
depending on the amount reinstated, will not be allowed as a deduction for
federal income tax purposes but will be applied to adjust the cost basis of
the shares acquired upon reinstatement.
Involuntary Redemption. As described in the Prospectus, due to the
relatively high cost of handling small investments, the Fund reserves the
right to redeem, at net asset value, the shares of any
30
<PAGE>
shareholder whose shares have a value of less than $100, or such lesser
amount as may be fixed by the Board of Trustees. However, before the Fund
redeems such shares and sends the proceeds to the shareholder, it will notify
the shareholder that the value of the shares is less than $100 and allow him
or her sixty days to make an additional investment in an amount which will
increase the value of his or her account to $100 or more before the
redemption is processed.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- -----------------------------------------------------------------------------
Each shareholder will receive at least a quarterly summary of his or her
account, including information as to reinvested dividends and capital gains
distributions. Share certificates for dividends or distributions will not be
issued unless a shareholder requests in writing that a certificate be issued
for a specific number of shares.
In computing net investment income, the Fund will amortize any premiums
and original issue discounts on securities owned, if applicable. Capital
gains or losses realized upon sale or maturity of such securities will be
based on their amortized cost.
Gains or losses on the sales of securities by the Fund will be long-term
capital gains or losses if the securities have been held by the Fund for more
than twelve months. Gains or losses on the sale of securities held for twelve
months or less will be short-term capital gains or losses.
The Fund has qualified and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code. If so
qualified, the Fund will not be subject to federal income tax on its net
investment income and capital gains, if any, realized during any fiscal year
to the extent that it distributes such income and capital gains to its
shareholders.
With respect to the Fund's investments in zero coupon bonds, the Fund
accrues income prior to any actual cash payments by their issuers. In order
to continue to comply with Subchapter M of the Internal Revenue Code and
remain able to forego payment of federal income tax on its income and capital
gains, the Fund must distribute all of its net investment income, including
income accrued from zero coupon bonds. As such, the Fund may be required to
dispose of some of its portfolio securities under disadvantageous
circumstances to generate the cash required for distribution.
As discussed in the Prospectus, the Fund intends to qualify to pay
"exempt-interest dividends" to its shareholders by maintaining, as of the
close of each of its taxable years, at least 50% of the value of its assets
in tax-exempt securities. An exempt-interest dividend is that part of the
dividend distributions made by the Fund which consists of interest received
by the Fund on tax-exempt securities upon which the shareholder incurs no
federal income taxes. Exempt-interest dividends are included, however, in
determining what portion, if any, of a person's Social Security benefits are
subject to federal income tax.
As also discussed in the Prospectus, the Fund intends to invest a portion
of its assets in certain "private activity bonds" issued after August 7,
1986. As a result, a portion of the exempt-interest dividends paid by the
Fund will be an item of tax preference to shareholders subject to the
alternative minimum tax. Certain corporations which are subject to the
alternative minimum tax may also have to include exempt-interest dividends in
calculating their alternative minimum taxable income in situations where the
"adjusted current earnings" of the corporation exceeds its alternative
minimum taxable income.
Within sixty days after the end of its fiscal year, the Fund will mail to
shareholders a statement indicating the percentage of the dividend
distributions for each fiscal year which constitutes exempt-interest
dividends, the percentage, if any, that is taxable, and the percentage, if
any, of the exempt-interest dividends which constitutes an item of tax
preference, and to what extent the taxable portion is long-term capital gain,
short-term capital gain or ordinary income. This percentage should be applied
uniformly to all monthly distributions made during the fiscal year to
determine the proportion of dividends that is tax-exempt. The percentage may
differ from the percentage of tax-exempt dividend distributions for any
particular month.
Shareholders will be subject to federal income tax on dividends paid from
interest income derived from taxable securities and on distributions of net
short-term capital gains. Such dividends and
31
<PAGE>
distributions are taxable to the shareholder as ordinary dividend income
regardless of whether the shareholder receives such distributions in
additional shares or in cash. Distributions of long-term capital gains, if
any, are taxable as long-term capital gains, regardless of how long the
shareholder has held the Fund shares and regardless of whether the
distribution is received in additional shares or in cash. Since the Fund's
income is expected to be derived entirely from interest rather than
dividends, it is anticipated that no portion of such dividend distributions
will be eligible for the federal dividends received deduction available to
corporations.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of the Fund is not deductible. Furthermore, entities or persons who
are "substantial users" (or related persons) of facilities financed by
industrial development bonds should consult their tax advisers before
purchasing shares of the Fund. "Substantial user" is defined generally by
Income Tax Regulation 1.103-11(b) as including a "non-exempt person" who
regularly uses in a trade or business a part of a facility financed from the
proceeds of industrial development bonds.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities. Similar proposals may be introduced in the
future. If such a proposal were enacted, the availability of municipal
securities for investment by the Fund could be affected. In that event, the
Fund would re-evaluate its investment objective and policies.
Any dividends or capital gains distributions received by a shareholder
from any investment company will have the effect of reducing the net asset
value of the shareholder's shares in that fund by the exact amount of the
dividend or capital gains distribution. Furthermore, capital gains
distributions are, and some portion of the dividends may be, subject to
income tax. If the net asset value of the shares should be reduced below a
shareholder's cost as a result of the payment of taxable dividends or the
distribution of capital gains, such payment or distribution would be in part
a return of capital but nonetheless taxable to the shareholder. Therefore, an
investor should consider the tax implications of purchasing Fund shares
immediately prior to a distribution record date.
Shareholders should consult their tax advisers regarding specific
questions as to state or local taxes.
PERFORMANCE INFORMATION
- -----------------------------------------------------------------------------
As discussed in the Prospectus, from time to time the Fund may quote its
"yield" and/or its "total return" in advertisements and sales literature.
Yield is calculated for any 30-day period as follows: the amount of interest
income for each security in the Fund's portfolio is determined as described
below; the total for the entire portfolio constitutes the Fund's gross income
for the period. Expenses accrued during the period are subtracted to arrive
at "net investment income". The resulting amount is divided by the product of
the maximum offering price per share on the last day of the period (reduced
by any undeclared earned income per share that is expected to be declared
shortly after the end of the period) multiplied by the average number of Fund
shares outstanding during the period that were entitled to dividends. This
amount is added to 1 and raised to the sixth power. 1 is then subtracted from
the result and the difference is multiplied by 2 to arrive at the annualized
yield.
To determine interest income from debt obligations, a yield-to-maturity,
expressed as a percentage, is determined for obligations held at the
beginning of the period, based on the current market value of the security
plus accrued interest, generally as of the end of the month preceding the
30-day period, or, for obligations purchased during the period, based on the
cost of the security (including accrued interest). The yield-to-maturity is
multiplied by the market value (plus accrued interest) for each security and
the result is divided by 360 and multiplied by 30 days or the number of days
the security was held during the period, if less. Modifications are made for
determining yield-to-maturity on certain tax-exempt securities. For the
30-day period ended September 30, 1996, the Fund's yield, calculated pursuant
to the formula described above was 4.50%. During this period, InterCapital
waived its management fee and assumed certain expenses of the Fund. Had the
Fund borne these expenses and paid the management fee for the period, the
yield for the 30-day period would have been 4.38%.
32
<PAGE>
The Fund may also quote a "tax-equivalent yield" determined by dividing
the tax-exempt portion of quoted yield by 1 minus the stated income tax rate
and adding the result to the portion of the yield that is not tax-exempt. The
Fund's tax-equivalent yield, based upon a Federal personal income tax bracket
of 39.6% for the 30-day period ended September 30, 1996 was 7.45% based upon
the yield calculated above. Without the waiver of the management fee or the
assumption of certain expenses, the Fund's tax-equivalent yield for the
period would have been 7.25%.
The Fund's "average annual total return" represents an annualization of
the Fund's total return over a particular period and is computed by finding
the annual percentage rate which will result in the ending redeemable value
of a hypothetical $1,000 investment made at the beginning of a one, five or
ten year period, or for the period from the date of commencement of the
Fund's operations, if shorter than any of the foregoing. The ending
redeemable value is reduced by any contingent deferred sales charge at the
end of the one, five or ten year or other period. For the purpose of this
calculation, it is assumed that all dividends and distributions are
reinvested. The formula for computing the average annual total return
involves a percentage obtained by dividing the ending redeemable value by the
amount of the initial investment, taking a root of the quotient (where the
root is equivalent to the number of years in the period) and subtracting 1
from the result. The average annual total return of the Fund for the fiscal
year ended September 30, 1996 and for the period June 2, 1994 (commencement
of operations) through September 30, 1996 was 2.94% and 6.40%, respectively.
During this period, InterCapital waived its management fee and assumed
certain expenses of the Fund. Had the Fund borne these expenses and paid
these fees for the fiscal year ended September 30, 1996 and during the stated
period, the average annual total return for the period would have been 2.73%
and 6.09% respectively.
In addition to the foregoing, the Fund may advertise its total return over
different periods of time by means of aggregate, average, year-by-year or
other types of total return figures. Such calculation may or may not reflect
the deduction of the contingent deferred sales charge which, if reflected,
would reduce the performance quoted. For example, the average annual total
return of the Fund may be calculated in the manner described in the preceding
paragraph, but without the deduction for any applicable contingent deferred
sales charge. Based on this calculation, the Fund's average annual total
return for the fiscal year ended September 30, 1996 and for the period June
2, 1994 (commencement of operations) through September 30, 1996 was 5.94% and
6.80%, respectively.
In addition, the Fund may compute its aggregate total return for specified
periods by determining the aggregate percentage rate which will result in the
ending value of a hypothetical $1,000 investment made at the beginning of the
period. For the purpose of this calculation, it is assumed that all dividends
and distributions are reinvested. The formula for computing aggregate total
return involves a percentage obtained by dividing the ending value (without
reduction for any contingent deferred sales charge) by the initial $1,000
investment and subtracting 1 from the result. Based on the foregoing
calculation, the Fund's total return for the fiscal year ended September 30,
1996 and for the period June 2, 1994 (commencement of operations) through
September 30, 1996 was 5.94% and 16.56%, respectively.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in shares of the Fund by adding 1 to the Fund's
aggregate total return to date (expressed as a decimal and without taking
into account the effect of any applicable contingent deferred sales charge)
and multiplying by $10,000, $50,000 or $100,000 as the case may be.
Investments of $10,000, $50,000 and $100,000 in the Fund since inception
would have grown to $11,656, $58,280, and $116,560, respectively, at
September 30, 1996.
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent
organizations.
DESCRIPTION OF SHARES
- -----------------------------------------------------------------------------
The Shareholders of the Fund are entitled to a full vote for each full
share of beneficial interest held. The Fund is authorized to issue an
unlimited number of shares of beneficial interest. The Trustees themselves
have the power to alter the number and the terms of office of the Trustees
(as provided for
33
<PAGE>
in the Declaration of Trust), and they may at any time lengthen or shorten
their own terms or make their terms of unlimited duration and appoint their
own successors, provided that always at least a majority of the Trustees has
been elected by the shareholders of the Fund. Under certain circumstances the
Trustees may be removed by action of the Trustees. The shareholders also have
the right under certain circumstances to remove the Trustees. The voting
rights of shareholders are not cumulative, so that holders of more than 50
percent of the shares voting can, if they choose, elect all Trustees being
selected, while the holders of the remaining shares would be unable to elect
any Trustees.
The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares (the managed portfolios) and additional classes
of shares within any series (which would be used to distinguish among the
rights of different categories of shareholders, as might be required by
future regulations or other unforeseen circumstances). The Trustees have not
presently authorized any such additional series or classes of shares.
The Declaration of Trust further provides that no Trustee, officer,
employee or agent of the Fund is liable to the Fund or to a shareholder, nor
is any Trustee, officer, employee or agent liable to any third persons in
connection with the affairs of the Fund, except as such liability may arise
from his/her or its own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his duties. It also provides that all third persons
shall look solely to the Fund property for satisfaction of claims arising in
connection with the affairs of the Fund. With the exceptions stated above,
the Declaration of Trust provides that a Trustee, officer, employee or agent
is entitled to be indemnified against all liability in connection with the
affairs of the Fund.
The Fund shall be of unlimited duration subject to the provisions in the
Declaration of Trust concerning termination by action of the shareholders or
the Trustees.
CUSTODIAN AND TRANSFER AGENT
- -----------------------------------------------------------------------------
The Bank of New York, 90 Washington Street, New York, New York 10286, is
the Custodian of the Fund's assets. The Custodian has no part in deciding the
Fund's investment policies or which securities are to be purchased or sold
for the Fund's portfolio. Any of the Fund's cash balances with the Custodian
in excess of $100,000 are unprotected by Federal deposit insurance. Such
balances may, at times, be substantial.
Dean Witter Trust Company, Harborside Financial Center, Plaza Two, Jersey
City, New Jersey 07311 is the Transfer Agent of the Fund's shares and
Dividend Disbursing Agent for payment of dividends and distributions on Fund
shares and Agent for shareholders under various investment plans described
herein. Dean Witter Trust Company is an affiliate of Dean Witter InterCapital
Inc., the Fund's Investment Manager, and Dean Witter Distributors Inc., the
Fund's Distributor. As Transfer Agent and Dividend Disbursing Agent, Dean
Witter Trust Company's responsibilities include maintaining shareholder
accounts, including providing subaccounting and recordkeeping services for
certain retirement accounts; disbursing cash dividends and reinvesting
dividends; processing account registration changes; handling purchase and
redemption transactions; mailing prospectuses and reports; mailing and
tabulating proxies; processing share certificate transactions; and
maintaining shareholder records and lists. For these services Dean Witter
Trust Company receives a per shareholder account fee from the Fund.
INDEPENDENT ACCOUNTANTS
- -----------------------------------------------------------------------------
Price Waterhouse LLP serves as the independent accountants of the Fund.
The independent accountants are responsible for auditing the annual financial
statements of the Fund.
34
<PAGE>
REPORTS TO SHAREHOLDERS
- -----------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports
showing the Fund's portfolio and other information. An annual report,
containing financial statements audited by independent accountants, will be
sent to shareholders each year.
The Fund's fiscal year is September 30. The financial statements of the
Fund must be audited at least once a year by independent accountants whose
selection is made annually by the Fund's Board of Trustees.
LEGAL COUNSEL
- -----------------------------------------------------------------------------
Sheldon Curtis, Esq., who is an officer and the General Counsel of the
Investment Manager, is an officer and the General Counsel of the Fund.
EXPERTS
- -----------------------------------------------------------------------------
The annual financial statements of the Fund for the year ended September
30, 1996, included in this Statement of Additional Information and
incorporated by reference in the Prospectus, have been so included and
incorporated in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
REGISTRATION STATEMENT
- -----------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
35
<PAGE>
DEAN WITTER NATIONAL MUNICIPAL TRUST
PORTFOLIO OF INVESTMENTS September 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (92.4%)
General Obligation (21.4%)
North Slope Borough, Alaska,
$3,000 Ser 1994 B (FSA) ............................................... 0.00 % 06/30/05 $1,872,480
3,925 Ser 1996 B (MBIA) .............................................. 0.00 06/30/06 2,299,422
1,000 Santa Margarita/Dana Point Authority, California, Impr Dists #3,
3A, 4 & 4A 1994 Ser B Refg (MBIA) .............................. 5.75 08/01/20 992,220
1,000 Atlanta, Georgia, Public Impr Ser 1994 A ........................ 6.125 12/01/23 1,027,700
1,500 Hawaii, 1995 Ser C J ............................................ 6.25 01/01/15 1,563,570
2,000 Chicago, Illinois, Refg Ser 1995 B (FGIC) ....................... 5.125 01/01/25 1,818,480
1,000 Chicago Park District, Illinois, Ser 1995 ....................... 6.60 11/15/14 1,068,440
1,000 Chelsea, Massachusetts, School Act of 1948 (AMBAC) .............. 6.50 06/15/12 1,082,430
1,000 Massachusetts, 1994 Ser C (FGIC) ................................ 6.75 11/01/12 1,099,470
1,500 New York City, New York, 1995 Ser D (MBIA) ...................... 6.20 02/01/07 1,621,140
1,000 Delaware City School District, Ohio, Constr & Impr dtd 08/15/95
(FGIC) ......................................................... 5.75 12/01/20 997,320
2,000 Washington, 1994 Ser A ......................................... 5.80 09/01/08 2,055,300
- ----------- ------------
19,925 17,497,972
- ----------- ------------
Educational Facilities Revenue (5.1%)
1,000 California Educational Facilities Authority, Claremont Colleges
Ser 1992 ....................................................... 6.375 05/01/22 1,031,730
500 Atlanta Urban Residential Finance Authority, Georgia, Morehouse
College Refg Ser 1995 (MBIA) ................................... 5.75 12/01/14 505,295
2,000 New Jersey Economic Development Authority, Educational Testing
Service Ser 1995 (MBIA) ........................................ 6.125 05/15/15 2,073,340
500 New York State Dormitory Authority, City University 1994 3rd
Resolution Ser 1 (AMBAC) ....................................... 6.30 07/01/24 524,060
- ----------- ------------
4,000 4,134,425
- ----------- ------------
Electric Revenue (5.3%)
1,500 Puerto Rico Electric Power Authority, Power Ser X ............... 6.00 07/01/15 1,508,100
1,000 Austin, Texas, Combined Utilities Refg Ser 1994 (FGIC) .......... 6.25 05/15/16 1,052,010
2,000 Intermountain Power Agency, Utah, Refg 1996 Ser D ............... 5.00 07/01/21 1,786,140
- ----------- ------------
4,500 4,346,250
- ----------- ------------
Hospital Revenue (13.7%)
1,465 Birmingham-Carraway Special Care Facilities Financing
Authority, Alabama, Carraway Methodist Health Ser 1995-A
(Connie Lee) ................................................... 6.25 08/15/09 1,547,274
500 Rancho Mirage Joint Powers Financing Authority, California,
Eisenhower Memorial Hospital COPs .............................. 7.00 03/01/22 538,740
2,000 Orange County Health Facilities Authority, Florida, Adventist
Health/Sunbelt Obligated Group Ser 1995 (AMBAC) ................ 5.25 11/15/20 1,867,780
1,000 Maryland Health & Higher Educational Facilities Authority,
Kernan Hospital Ser 1994 (Connie Lee) .......................... 6.10 07/01/24 1,009,390
1,300 New Hampshire Higher Educational & Health Facilities Authority,
St Joseph Hospital Ser 1994 (Connie Lee) ....................... 6.35 01/01/07 1,369,368
SEE NOTES TO FINANCIAL STATEMENTS
36
<PAGE>
DEAN WITTER NATIONAL MUNICIPAL TRUST
PORTFOLIO OF INVESTMENTS September 30, 1996, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------
$2,000 University of North Carolina, Hospitals at Chapel Hill Ser 1996 5.25 % 02/15/19 $1,874,860
3,000 Jackson, Tennessee, Jackson-Madison County General Hospital
Refg & Impr Ser 1995 (AMBAC) ................................... 5.625 04/01/15 2,960,970
- ----------- ------------
11,265 11,168,382
- ----------- ------------
Industrial Development/Pollution Control Revenue (4.5%)
1,500 Hawaii Department of Budget & Finance, Hawaiian Electric Co
Ser 1995 A (AMT)(MBIA) ......................................... 6.60 01/01/25 1,604,775
2,000 New York State Energy Research & Development Authority,
New York State Electric & Gas Corp 1987 Ser A (AMT)(MBIA) ...... 6.15 07/01/26 2,024,880
- ----------- ------------
3,500 3,629,655
- ----------- ------------
Mortgage Revenue-Multi-Family (1.9%)
500 Honolulu, Hawaii, Waipahu Towers GNMA Collateralized 1995 Ser A
(AMT) .......................................................... 6.90 06/20/35 527,055
1,000 Massachusetts Housing Finance Agency, Rental 1994 Ser A
(AMT)(AMBAC) ................................................... 6.65 07/01/19 1,032,440
- ----------- ------------
1,500 1,559,495
- ----------- ------------
Mortgage Revenue-Single Family (4.8%)
2,000 Alaska Housing Finance Corporation, Governmental 1995 Ser A
(MBIA) ......................................................... 5.875 12/01/24 1,982,120
1,000 Tennessee Housing Development Agency, Finance 1994 Ser B (AMT) .. 6.55 07/01/19 1,025,210
900 Utah Housing Finance Agency, Federally Insured/Guaranteed Loans
1994 Issue E (AMT) ............................................. 6.50 07/01/26 921,411
- ----------- ------------
3,900 3,928,741
- ----------- ------------
Public Facilities Revenue (3.7%)
North City West School Facilities Financing Authority,
California,
1,000 Community Facs Dist #1 Special Tax Ser 1995 B (FSA) ............ 5.75 09/01/15 996,520
2,000 Community Facs Dist #1 Special Tax Ser 1995 B (FSA) ............ 6.00 09/01/19 2,025,380
- ----------- ------------
3,000 3,021,900
- ----------- ------------
Transportation Facilities Revenue (14.3%)
2,000 Dade County, Florida, Seaport Refg Ser 1996 (MBIA) .............. 5.125 10/01/16 1,870,580
1,000 Lee County, Florida, Ser 1995 (MBIA) ............................ 5.75 10/01/22 998,660
850 Regional Transportation Authority, Illinois, Ser 1994 A ......... 6.25 06/01/15 890,740
1,000 Kentucky Turnpike Authority, Economic Development Road
Revitalization Refg Ser 1995 (AMBAC) ........................... 5.625 07/01/15 1,000,300
2,500 Maine Turnpike Authority, Ser 1994 (MBIA) ....................... 6.00 07/01/18 2,549,625
1,000 New York State Thruway, Authority General 1995 Ser C (FGIC) ..... 6.00 01/01/25 1,015,190
1,500 Port Authority of New York & New Jersey, Cons One Hundredth Ser
Second Installment + ........................................... 5.75 12/15/20 1,486,305
2,000 Texas Turnpike Authority, Dallas North Tollway Refg Ser (FGIC) .. 5.25 01/01/23 1,875,440
- ----------- ------------
11,850 11,686,840
- ----------- ------------
SEE NOTES TO FINANCIAL STATEMENTS
37
<PAGE>
DEAN WITTER NATIONAL MUNICIPAL TRUST
PORTFOLIO OF INVESTMENTS September 30, 1996, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------
Water & Sewer Revenue (11.8%)
$1,000 Birmingham Waterworks & Sewer Board, Alabama, Ser 1993-A ....... 6.00 % 01/01/20 $1,016,800
1,000 Castaic Lake Water Agency, California, Refg Ser 1994 A COPs
(MBIA) ......................................................... 6.00 08/01/18 1,013,240
1,000 Dade County, Florida, Water & Sewer Ser 1995 (FGIC) ............ 5.50 10/01/15 980,380
1,000 Chicago, Illinois, Wastewater Ser 1994 (MBIA) ................... 6.375 01/01/24 1,052,550
2,000 Massachusetts Water Resources Authority, 1992 Ser A ............. 6.50 07/15/07 2,205,520
2,000 Asheville, North Carolina, Water Ser 1996 (FGIC)(WI) ............ 5.70 08/01/25 1,988,620
1,250 Philadelphia, Pennsylvania, Water & Wastewater Ser 1995 (MBIA) .. 6.25 08/01/11 1,346,763
- ----------- ------------
9,250 9,603,873
- ----------- ------------
Other Revenue (3.8%)
2,000 Mashantucket (Western) Pequot Tribe, Connecticut, Special 1996
Ser A (a)(WI) ................................................. 6.50 09/01/05 2,044,620
1,000 New Jersey Economic Development Authority, Market Transition Sr
Lien Ser 1994 A (MBIA) ......................................... 5.875 07/01/11 1,022,610
- ----------- ------------
3,000 3,067,230
- ----------- ------------
Refunded (2.1%)
500 Glendale Industrial Development Authority, Arizona, Thunderbird
- The American Graduate School of International Management Ser
1994 (Connie Lee) .............................................. 7.125 07/01/05++ 576,230
1,000 Essex County Improvement Authority, New Jersey, County Jail &
Youth House Ser 1994 (AMBAC) ................................... 6.90 12/01/04++ 1,146,700
- ----------- ------------
1,500 1,722,930
- ----------- ------------
77,190 TOTAL MUNICIPAL BONDS (Identified Cost $72,847,380) ................................. 75,367,693
- ----------- ------------
SHORT-TERM MUNICIPAL OBLIGATIONS (10.5%)
3,100 Valdez, Alaska, Marine Terminal Exxon Pipeline Co 1993 Ser C
(Demand 10/01/96) .............................................. 3.70 * 12/01/33 3,100,000
2,600 Philadelphia Hospitals & Higher Education Facilities Authority,
Pennsylvania, Children's Hospital of Philadelphia 1996 Ser A
(Demand 10/01/96) .............................................. 4.00 * 03/01/27 2,600,000
2,900 Metropolitan Nashville Airport Authority, Tennessee, American
Airlines Inc Refg Ser 1995 A (Demand 10/01/96) ................. 3.90 * 10/01/12 2,900,000
- ----------- ------------
8,600 TOTAL SHORT-TERM MUNICIPAL OBLIGATIONS (Identified Cost $8,600,000) ................. 8,600,000
- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
$85,790 TOTAL INVESTMENTS (Identified Cost $81,447,380) (b) ......................... 102.9% 83,967,693
=========
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS .............................. (2.9) (2,351,488)
-------- -------------
NET ASSETS .................................................................. 100.0% $81,616,205
======== =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
38
<PAGE>
DEAN WITTER NATIONAL MUNICIPAL TRUST
PORTFOLIO OF INVESTMENTS September 30, 1996, continued
- ------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
WI Security purchased on a when issued basis.
+ Joint exemption in New York and New Jersey.
++ Prerefunded to call date shown.
* Current coupon of variable rate security.
(a) Resale is restricted to qualified institutional investors.
(b) Cost is the same for federal income tax purposes.
Bond Insurance:
- ---------------
AMBAC AMBAC Indemnity Corporation.
Connie Lee Connie Lee Insurance Company.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
Geographic Summary of Investments
Based on Market Value as a Percent of Net Assets
September 30, 1996
<TABLE>
<CAPTION>
<S> <C>
Alabama.......... 3.1%
Alaska........... 11.3
Arizona.......... 0.7
California....... 8.1
Connecticut...... 2.5
Florida.......... 7.0
Georgia.......... 1.9
Hawaii........... 4.5%
Illinois......... 5.8
Kentucky......... 1.2
Maine............ 3.1
Maryland......... 1.2
Massachusetts ... 6.6
New Hampshire ... 1.7
New Jersey....... 7.0%
New York......... 8.2
North Carolina .. 4.8
Ohio............. 1.2
Pennsylvania..... 5.2
Puerto Rico...... 1.8
Tennessee........ 8.4
Texas............ 3.6%
Utah ............ 3.3
Washington....... 2.5
Joint
Exemptions...... (1.8)
-----
Total............ 102.9%
=====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
39
<PAGE>
DEAN WITTER NATIONAL MUNICIPAL TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $81,447,380).............. $83,967,693
Cash........................................ 350,356
Receivable for:
Interest.................................. 1,126,539
Shares of beneficial interest sold ....... 241,456
Deferred organizational expenses............ 78,955
Receivable from affiliate................... 10,951
Prepaid expenses............................ 19,323
-------------
TOTAL ASSETS.............................. 85,795,273
-------------
LIABILITIES:
Payable for:
Investments purchased..................... 4,032,643
Plan of distribution fee.................. 40,917
Dividends to shareholders................. 39,805
Investment management fee................. 15,286
Shares of beneficial interest
repurchased................................ 2,118
Accrued expenses ........................... 48,299
-------------
TOTAL LIABILITIES......................... 4,179,068
-------------
NET ASSETS:
Paid-in-capital............................. 79,147,068
Net unrealized appreciation ................ 2,520,313
Accumulated undistributed net investment
income..................................... 2,992
Accumulated net realized loss............... (54,168)
-------------
NET ASSETS................................ $81,616,205
=============
NET ASSET VALUE PER SHARE,
7,772,649 shares outstanding (unlimited
shares authorized of $.01 par value) ...... $ 10.50
=============
</TABLE>
STATEMENT OF OPERATIONS
For the year ended September 30, 1996
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ........................ $4,386,918
------------
EXPENSES
Plan of distribution fee................ 452,823
Investment management fee............... 269,889
Professional fees ...................... 49,943
Shareholder reports and notices ........ 33,248
Transfer agent fees and expenses ....... 32,563
Organizational expenses ................ 28,158
Registration fees ...................... 26,027
Trustees' fees and expenses............. 10,808
Custodian fees.......................... 4,197
Other................................... 11,603
------------
TOTAL EXPENSES BEFORE EXPENSE OFFSET
AND AMOUNTS REIMBURSED/WAIVED......... 919,259
LESS: AMOUNTS REIMBURSED/WAIVED ...... (165,054)
LESS: EXPENSE OFFSET ................. (4,149)
------------
TOTAL EXPENSES AFTER EXPENSE OFFSET
AND AMOUNTS REIMBURSED/WAIVED......... 750,056
------------
NET INVESTMENT INCOME................. 3,636,862
------------
NET REALIZED AND UNREALIZED GAIN
(LOSS):
Net realized loss ...................... (54,168)
Net change in unrealized appreciation .. 432,258
------------
NET GAIN.............................. 378,090
------------
NET INCREASE............................ $4,014,952
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
40
<PAGE>
DEAN WITTER NATIONAL MUNICIPAL TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................. $ 3,636,862 $ 2,229,414
Net realized gain (loss)............................... (54,168) 776
Net change in unrealized appreciation/depreciation .... 432,258 2,452,914
----------- -----------
NET INCREASE......................................... 4,014,952 4,683,104
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income.................................. (3,642,942) (2,220,342)
Net realized gain...................................... (776) --
----------- -----------
TOTAL................................................ (3,643,718) (2,220,342)
Net increase from transactions in shares of beneficial
interest.............................................. 16,969,296 31,953,161
----------- -----------
TOTAL INCREASE....................................... 17,340,530 34,415,923
NET ASSETS:
Beginning of period.................................... 64,275,675 29,859,752
----------- -----------
END OF PERIOD
(Including undistributed net investment income of
$2,992 and $9,072, respectively)..................... $81,616,205 $64,275,675
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
41
<PAGE>
DEAN WITTER NATIONAL MUNICIPAL TRUST
NOTES TO FINANCIAL STATEMENTS September 30, 1996
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter National Municipal Trust (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is to
provide a high level of current income which is exempt from federal income
tax, consistent with the preservation of capital. The Fund was organized as a
Massachusetts business trust on March 29, 1994 and commenced operations on
June 2, 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 Fund 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. Discounts are accreted and premiums are amortized over the life of
the respective securities. Interest income is accrued daily.
C. FEDERAL INCOME TAX STATUS -- It is the Fund'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 Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income
42
<PAGE>
DEAN WITTER NATIONAL MUNICIPAL TRUST
NOTES TO FINANCIAL STATEMENTS September 30, 1996, continued
and net realized capital gains are determined in accordance with federal
income tax regulations which may differ from generally accepted accounting
principles. These "book/tax" differences are either considered temporary or
permanent in nature. To the extent these differences are permanent in nature,
such amounts are reclassified within the capital accounts based on their
federal tax-basis treatment; temporary differences do not require
reclassification. Dividends and distributions which exceed net investment
income and net realized capital gains for financial reporting purposes but
not for tax purposes are reported as dividends in excess of net investment
income or distributions in excess of net realized capital gains. To the
extent they exceed net investment income and net realized capital gains for
tax purposes, they are reported as distributions of paid-in-capital.
E. ORGANIZATIONAL EXPENSES -- Dean Witter InterCapital Inc. (the "Investment
Manager") paid the organizational expenses of the Fund in the amount of
$148,017 which were reimbursed exclusive of $46,853 which was absorbed by the
Investment Manager. Such expenses have been deferred and are being amortized
on 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 Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.35% to the Fund's net assets determined as of the close of
each business day.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund'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 Fund 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 Fund.
The Investment Manager had undertaken to assume all expenses (except for the
plan of distribution fee and brokerage fees) and waive the compensation
provided for in the Agreement until December 31, 1995. For the period January
1, 1996 through June 30, 1997, the Investment Manager will continue to waive
the management fee and reimburse expenses (except for the plan of distribution
fee and brokerage fees) to the extent they exceed 0.50% of daily net assets. At
September 30, 1996, included in the Statement of Assets and Liabilities, is a
receivable from the Investment Manager which represents expense reimbursements
due to the Fund.
43
<PAGE>
DEAN WITTER NATIONAL MUNICIPAL TRUST
NOTES TO FINANCIAL STATEMENTS September 30, 1996, continued
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Fund has adopted
a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act
pursuant to which the Fund pays the Distributor compensation, accrued daily
and payable monthly, at an annual rate of 0.60% of the lesser of: (a) the
average daily aggregate gross sales of the Fund's shares since the Fund's
inception (not including reinvestment of dividend or capital gains
distributions) less the average daily aggregate net asset value of the Fund's
shares redeemed since the Fund's inception upon which a contingent deferred
sales charge has been imposed or upon which such charge has been waived; or
(b) the Fund's average daily net assets. Amounts paid under the Plan are paid
to the Distributor to compensate it for the services provided and the
expenses borne by it and others in the distribution of the Fund's shares,
including the payment of commissions for sales of the Fund's shares and
incentive compensation to, and expenses of, account executives of Dean Witter
Reynolds Inc., an affiliate of the Investment Manager and Distributor, and
other employees and selected broker-dealers who engage in or support
distribution of the Fund's shares or who service shareholder accounts,
including overhead and telephone expenses, printing and distribution of
prospectuses and reports used in connection with the offering of the Fund's
shares to other than current shareholders and preparation, printing and
distribution of sales literature and advertising materials. In addition, the
Distributor may be compensated under the Plan for its opportunity costs in
advancing such amounts, which compensation would be in the form of a carrying
charge on any unreimbursed expenses incurred by the Distributor.
Provided that the Plan continues in effect, any cumulative expenses incurred
but not yet recovered may be recovered through future distribution fees from
the Fund and contingent deferred sales charges from the Fund's shareholders.
Although there is no legal obligation for the Fund to pay expenses incurred
in excess of payments made to the Distributor under the Plan and the proceeds
of contingent deferred sales charges paid by investors upon redemption of
shares, if for any reason the Plan is terminated, the Trustees will consider
at that time the manner in which to treat such expenses. The Distributor has
advised the Fund that such excess amounts, including carrying charges,
totaled $2,185,656 at September 30, 1996.
The Distributor has informed the Fund that for the year ended September 30,
1996, it received approx-imately $176,000 in contingent deferred sales
charges from certain redemptions of the Fund's shares.
44
<PAGE>
DEAN WITTER NATIONAL MUNICIPAL TRUST
NOTES TO FINANCIAL STATEMENTS September 30, 1996, continued
4. 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 September 30, 1996
aggregated $25,614,487 and $9,690,374, respectively.
Dean Witter Trust Company, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At September 30, 1996, the Fund
had transfer agent fees and expenses payable of approximately $2,900.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Sold 2,938,811 $ 31,065,314 4,055,681 $ 40,945,963
Reinvestment of dividends 198,921 2,094,383 129,694 1,316,413
------------- -------------- ------------- --------------
3,137,732 33,159,697 4,185,375 42,262,376
Repurchased (1,548,482) (16,190,401) (1,026,786) (10,309,215)
------------- -------------- ------------- --------------
Net increase 1,589,250 $ 16,969,296 3,158,589 $ 31,953,161
============= ============== ============= ==============
</TABLE>
6. FEDERAL INCOME TAX STATUS
Capital losses incurred after October 31 ("post-October losses") within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $54,000 during fiscal 1996.
45
<PAGE>
DEAN WITTER NATIONAL MUNICIPAL TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JUNE 2, 1994*
ENDED ENDED THROUGH
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........ $10.39 $ 9.87 $10.00
------ ------ ------
Net investment income........................ 0.50 0.50 0.09
Net realized and unrealized gain (loss) ..... 0.11 0.52 (0.13)
------ ------ ------
Total from investment operations............. 0.61 1.02 (0.04)
Less dividends from net investment income ... (0.50) (0.50) (0.09)
------ ------ ------
Net asset value, end of period............... $10.50 $10.39 $ 9.87
====== ====== ======
TOTAL INVESTMENT RETURN+..................... 5.94% 10.54% (0.46)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses..................................... 0.97%(5) 0.60%(4) 0.60 %(2)(3)
Net investment income........................ 4.72%(5) 4.93%(4) 3.07 %(2)(3)
SUPPLEMENTAL DATA:
Net asset value, end of period, in
thousands .................................. $81,616 $64,276 $29,860
Portfolio turnover rate...................... 13% 2% -- ++%
</TABLE>
- ------------
* Commencement of operations.
+ Does not reflect the deduction of sales charge. Calculated based on
the net asset value as of the last business day of the period.
++ Less than 0.5%.
(1) Not annualized.
(2) Annualized.
(3) If the Fund had borne all expenses that were assumed or waived by the
Investment Manager, the above annualized expense and net investment
income ratios would have been 2.08% and 1.59%, respectively.
(4) If the Fund had borne all expenses that were assumed or waived by the
Investment Manager, the above annualized expense and net investment
income ratios would have been 1.34% (which includes 0.01% gross up for
custody cash credits) and 4.20%, respectively.
(5) If the Fund had borne all expenses that were reimbursed or waived by
the Investment Manager, the above annualized expense and net
investment income ratios would have been 1.19% (which includes 0.01%
gross up for custody cash credits) and 4.50%, respectively.
SEE NOTES TO FINANCIAL STATEMENTS
46
<PAGE>
DEAN WITTER NATIONAL MUNICIPAL TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER NATIONAL MUNICIPAL TRUST
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 Dean Witter
National Municipal Trust (the "Fund") at September 30, 1996, 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 two years in the period then ended and for the period June 2,
1994 (commencement of operations) through September 30, 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 Fund'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
September 30, 1996 by correspondence with the custodian and brokers, provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
November 8, 1996
- -----------------------------------------------------------------------------
1996 FEDERAL TAX NOTICE (unaudited)
During the year ended September 30, 1996, the Fund paid to shareholders
$0.50 per share from net investment income. All of the Fund's dividends
from net investment income were exempt interest dividends, excludable
from gross income for Federal income tax purposes.
- -----------------------------------------------------------------------------
<PAGE>
APPENDIX
RATINGS OF INVESTMENTS
- -----------------------------------------------------------------------------
Moody's Investors Service Inc. ("Moody's")
MUNICIPAL BOND RATINGS
<TABLE>
<CAPTION>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations; i.e., they are neither highly protected
nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative characteristics as well.
Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be very moderate, and therefore not well
safeguarded during both good and bad times in the future. Uncertainty of position characterizes bonds in this
class.
B Bonds which are rated B generally lack characteristics of a desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements
of danger with respect to principal or interest.
Ca Bonds which are rated Ca present obligations which are speculative in a high degree. Such issues are often
in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
</TABLE>
Conditional Rating: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These bonds are secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience,
(c) rentals which begin when facilities are completed or (d) payments to
which some other limiting condition attaches. Parenthetical rating denotes
probable credit stature upon completion of construction or elimination of
basis of condition.
48
<PAGE>
Rating Refinements: Moody's may apply numerical modifiers, 1, 2, and 3 in
each generic rating classification from Aa though B in its municipal bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and a modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
MUNICIPAL NOTE RATINGS
Moody's ratings for state and municipal note and other short-term loans
are designated Moody's Investment Grade (MIG). MIG 1 denotes best quality and
means there is present strong protection from established cash flows,
superior liquidity support or demonstrated broad-based access to the market
for refinancing. MIG 2 denotes high quality and means that margins of
protection are ample although not as large as in MIG 1. MIG 3 denotes
favorable quality and means that all security elements are accounted for but
that the undeniable strength of the previous grades, MIG 1 and MIG 2, is
lacking. MIG 4 denotes adequate quality and means that the protection
commonly regarded as required of an investment security is present and that
while the notes are not distinctly or predominantly speculative, there is
specific risk.
VARIABLE RATE DEMAND OBLIGATIONS
A short-term rating, in addition to the Bond or MIG ratings, designated
VMIG may also be assigned to an issue having a demand feature. The assignment
of the VMIG symbol reflects such characteristics as payment upon periodic
demand rather than fixed maturity dates and payment relying on external
liquidity. The VMIG rating criteria are identical to the MIG criteria
discussed above.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess
of nine months. These ratings apply to Municipal Commercial Paper as well as
taxable Commercial Paper. Moody's employs the following three designations,
all judged to be investment grade, to indicate the relative repayment
capacity of rated issuers: Prime-1, Prime-2, Prime-3.
Issuers rated Prime-1 have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 have a strong capacity for
repayment of short-term promissory obligations; and Issuers rated Prime-3
have an acceptable capacity for repayment of short-term promissory
obligations. Issuers rated Not Prime do not fall within any of the Prime
rating categories.
STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S")
MUNICIPAL BOND RATINGS
A Standard & Poor's municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers
or lessees.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. The
ratings are based, in varying degrees, on the following considerations: (1)
likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and
(3) protection afforded by, and relative position of the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with any rating
and may, on occasion, rely on unaudited financial information. The ratings
may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other reasons.
49
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the highest-rated
issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal although they are somewhat more
susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas
it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category
than for debt in higher-rated categories.
Bonds rated AAA, AA, A and BBB are considered investment grade bonds.
BB Debt rated "BB" has less near-term vulnerability to default than other speculative grade debt. However,
it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions
which would lead to inadequate capacity or willingness to pay interest and repay principal.
B Debt rated "B" has a greater vulnerability to default but presently has the capacity to meet interest payments
and principal repayments. Adverse business, financial or economic conditions would likely impair capacity
or willingness to pay interest and repay principal.
CCC Debt rated "CCC" has a current identifiable vulnerability to default, and is dependent upon favorable business,
financial and economic conditions to meet timely payments of interest and repayments of principal. In the
event of adverse business, financial or economic conditions, it is not likely to have the capacity to pay
interest and repay principal.
CC The rating "CC" is typically applied to debt subordinated to senior debt which is assigned an actual or
implied "CCC" rating.
C The rating "C" is typically applied to debt subordinated to senior debt which is assigned an actual or
implied "CCC-'' debt rating.
Cl The rating "Cl" is reserved for income bonds on which no interest is being paid.
D Debt rated "D" is in payment default. The 'D' rating category is used when interest payments or principal
payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The 'D' rating also will be used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
NR Indicates that no rating has been requested, that there is insufficient information on which to base a
rating or that Standard & Poor's does not rate a particular type of obligation as a matter of policy.
Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded as having predominantly speculative characteristics
with respect to capacity to pay interest and repay principal. "BB" indicates the least degree of speculation
and "C" the highest degree of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions.
Plus (+) or minus(-): The ratings from "AA" to "CCC" may be modified by the addition of a plus or minus
sign to show relative standing within the major ratings categories.
The foregoing ratings are sometimes followed by a "p" which indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being financed by the bonds being rated
and indicates that payment of debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing credit quality subsequent
to completion of the project, makes no comment on the likelihood or risk of default upon failure of such
completion.
</TABLE>
50
<PAGE>
MUNICIPAL NOTE RATINGS
Commencing on July 27, 1984, Standard & Poor's instituted a new rating
category with respect to certain municipal note issues with a maturity of
less than three years. The new note ratings denote the following:
SP-1 denotes a very strong or strong capacity to pay principal and
interest. Issues determined to possess overwhelming safety characteristics
are given a plus (+) designation (SP-1+).
SP-2 denotes a satisfactory capacity to pay principal and interest.
SP-3 denotes a speculative capacity to pay principal and interest.
COMMERCIAL PAPER RATINGS
Standard and Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. The commercial paper rating is not a recommendation to
purchase or sell a security. The ratings are based upon current information
furnished by the issuer or obtained by S&P from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in or unavailability of such information. Ratings are graded into
group categories, ranging from "A" for the highest quality obligations to "D"
for the lowest. Ratings are applicable to both taxable and tax-exempt
commercial paper. The categories are as follows:
Issues assigned A ratings are regarded as having the greatest capacity
for timely payment. Issues in this category are further refined with the
designation 1, 2 and 3 to indicate the relative degree of safety.
A-1 indicates that the degree of safety regarding timely payments is
very strong.
A-2 indicates capacity for timely payment on issues with this
designation is strong. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1".
A-3 indicates a satisfactory capacity for timely payment. Obligations
carrying this designation are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the
higher designations.
51
<PAGE>
DEAN WITTER NATIONAL MUNICIPAL TRUST
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER 24, 1997
The undersigned shareholder of Dean Witter National Municipal Trust does
hereby appoint BARRY FINK, ROBERT M. SCANLAN, and JOSEPH McALINDEN and each
of them, as attorneys-in-fact and proxies of the undersigned, each with the
full power of substitution, to attend the Special Meeting of Shareholders of
Dean Witter National Municipal Trust to be held on October 24, 1997, at the
Conference Room, 44th Floor, Two World Trade Center, New York, New York at
9:00 A.M., New York time, and at all adjournments thereof and to vote the
shares held in the name of the undersigned on the record date for said
meeting for the Proposal specified on the reverse side hereof. Said
attorneys-in-fact shall vote in accordance with their best judgment as to any
other matter.
(Continued on reverse side)
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" THE PROPOSAL SET FORTH ON THE REVERSE HEREOF AND AS RECOMMENDED
BY THE BOARD OF TRUSTEES.
IMPORTANT--THIS PROXY MUST BE SIGNED AND DATED ON THE REVERSE SIDE.
<PAGE>
[X] PLEASE MARK BOXES
IN BLACK OR BLUE INK
The Proposal:
FOR AGAINST ABSTAIN
Approval of the Agreement and Plan of [ ] [ ] [ ]
Reorganization, dated as of June 30, 1997,
pursuant to which substantially all of the assets of Dean Witter National
Municipal Trust would be combined with those of Dean Witter Tax-Exempt
Securities Trust and shareholders of Dean Witter National Municipal Trust
would become shareholders of Dean Witter Tax-Exempt Securities Trust receiving
Class B shares of Dean Witter Tax-Exempt Securities Trust with a value equal
to the value of their holdings in Dean Witter National Municipal Trust.
Please sign personally. If the shares are registered in more than one name,
each joint owner or each fiduciary should sign personally. Only authorized
officers should sign for corporations.
Date
-----------------------------------
Please make sure to sign and date this
Proxy using black or blue ink.
----------------------------------------
----------------------------------------
Shareholder sign in the box above
----------------------------------------
----------------------------------------
Co-Owner (if any) sign in the box above
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PLEASE DETACH AT PERFORATION
DEAN WITTER NATIONAL MUNICIPAL TRUST
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IMPORTANT
PLEASE SEND IN YOUR PROXY.........TODAY!
YOU ARE URGED TO DATE AND SIGN THE ATTACHED PROXY AND RETURN IT PROMPTLY IN
THE ENCLOSED ENVELOPE. THIS WILL HELP SAVE THE EXPENSE OF FOLLOW-UP LETTERS TO
SHAREHOLDERS WHO HAVE NOT RESPONDED.
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