<PAGE>
Filed Pursuant to Rule 497(b)
Registration File No.: 333-45704
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(800) 869-NEWS
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 23, 2001
TO THE SHAREHOLDERS OF MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III:
Notice is hereby given of a Special Meeting of the Shareholders of Morgan
Stanley Dean Witter Municipal Income Trust III ("MIT III"), to be held in the
Career Development Room, Sixty-First Floor, Two World Trade Center, New York,
New York 10048, at 9:00 A.M., New York time, on January 23, 2001, and any
adjournments thereof (the "Meeting"), for the following purposes:
1. To consider and vote upon an Agreement and Plan of Reorganization, dated
August 24, 2000 (the "Reorganization Agreement"), between MIT III and
Morgan Stanley Dean Witter Tax-Exempt Securities Trust ("Tax-Exempt"),
pursuant to which substantially all of the assets of MIT III would be
combined with those of Tax-Exempt and shareholders of MIT III would become
shareholders of Tax-Exempt receiving Class D shares of Tax-Exempt with a
value equal to the net asset value of their holdings in MIT III (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
October 26, 2000 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. Alternatively,
if you are eligible to vote telephonically by touchtone telephone or
electronically on the Internet (as discussed in the enclosed Proxy Statement)
you may do so in lieu of attending the Meeting in person. THE BOARD OF TRUSTEES
OF MIT III 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
November 9, 2000
--------------------------------------------------------------------------------
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. AS
DISCUSSED IN THE ENCLOSED PROXY STATEMENT, CERTAIN SHAREHOLDERS WILL BE ABLE
TO VOTE TELEPHONICALLY BY TOUCHTONE TELEPHONE OR ELECTRONICALLY ON THE
INTERNET BY FOLLOWING INSTRUCTIONS ON THEIR PROXY CARDS OR ON THE ENCLOSED
VOTING INFORMATION CARD.
--------------------------------------------------------------------------------
<PAGE>
MORGAN STANLEY DEAN WITTER
TAX-EXEMPT SECURITIES TRUST
TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
(800) 869-NEWS
ACQUISITION OF THE ASSETS OF
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
BY AND IN EXCHANGE FOR CLASS D SHARES OF
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
This Proxy Statement and Prospectus is being furnished to shareholders of
Morgan Stanley Dean Witter Municipal Income Trust III ("MIT III"), in
connection with an Agreement and Plan of Reorganization, dated August 24, 2000
(the "Reorganization Agreement"), pursuant to which substantially all the
assets of MIT III, a closed-end management investment company, will be combined
with those of Morgan Stanley Dean Witter Tax-Exempt Securities Trust
("Tax-Exempt"), an open-end management investment company, in exchange for
Class D shares of Tax-Exempt (the "Reorganization"). As a result of this
transaction, shareholders of MIT III will become shareholders of Tax-Exempt and
will receive Class D shares of Tax-Exempt with a value equal to the net asset
value of their holdings in MIT III. The terms and conditions of this
transaction are more fully described in this Proxy Statement and Prospectus and
in the Reorganization Agreement between MIT III and Tax-Exempt, attached hereto
as Exhibit A. The address of MIT III is that of Tax-Exempt set forth above.
This Proxy Statement also constitutes a Prospectus of Tax-Exempt, which is
dated November 8, 2000, 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 preservation of capital. The fund seeks to
achieve its objective by investing at least 80% of its assets in securities
that pay interest exempt from federal income taxes.
This Proxy Statement and Prospectus sets forth concisely information about
Tax-Exempt that shareholders of MIT III should know before voting on the
Reorganization Agreement. A copy of the Prospectus for Tax-Exempt dated
February 24, 2000, is attached as Exhibit B and incorporated herein by
reference. Also enclosed and incorporated herein by reference is Tax-Exempt's
Annual Report for the fiscal year ended December 31, 1999 and the succeeding
Semi-Annual Report for the six months ended June 30, 2000. A Statement of
Additional Information relating to the Reorganization, described in this Proxy
Statement and Prospectus (the "Additional Statement"), dated November 8, 2000,
has been filed with the Commission and is also incorporated herein by
reference. Also incorporated herein by reference is MIT III's Annual Report for
its fiscal year ended August 31, 2000. Such documents are available without
charge by calling (800) 869-NEWS (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 NOVEMBER 8, 2000.
<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 ................................................................................. 3
The Reorganization ..................................................................... 3
Fee Table .............................................................................. 4
Tax Consequences of the Reorganization ................................................. 6
Reasons for the Reorganization ......................................................... 6
Comparison of MIT III and Tax-Exempt ................................................... 6
PRINCIPAL RISK FACTORS ................................................................... 9
THE REORGANIZATION ....................................................................... 10
The Proposal ........................................................................... 10
The Board's Consideration .............................................................. 10
The Reorganization Agreement ........................................................... 11
Tax Aspects of the Reorganization ...................................................... 13
Description of Shares of Tax-Exempt and MIT III and the Organization of the Two Funds... 14
Capitalization Table (unaudited) ....................................................... 16
Appraisal Rights ....................................................................... 16
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS ........................... 16
Investment Objectives and Policies ..................................................... 16
Investment Restrictions ................................................................ 19
ADDITIONAL MATTERS REGARDING MIT III ..................................................... 22
History of Public Trading of MIT III's Shares .......................................... 22
Investment Advisor ..................................................................... 22
Portfolio Management ................................................................... 23
Expenses Borne by MIT III .............................................................. 23
ADDITIONAL INFORMATION ABOUT MIT III AND TAX-EXEMPT ...................................... 23
General ................................................................................ 23
Financial Information .................................................................. 24
Management ............................................................................. 24
Description of Securities and Shareholder Inquiries .................................... 24
Custodian and Transfer Agent and Dividend Paying Agent ................................. 24
Dividends, Distributions and Taxes ..................................................... 24
Purchases, Repurchases and Redemptions ................................................. 25
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE .............................................. 25
FINANCIAL STATEMENTS AND EXPERTS ......................................................... 25
LEGAL MATTERS ............................................................................ 25
AVAILABLE INFORMATION .................................................................... 25
OTHER BUSINESS ........................................................................... 26
Exhibit A - Agreement and Plan of Reorganization, dated August 24, 2000, by and between
MIT III and Tax-Exempt .................................................................. A-1
Exhibit B - Prospectus of Tax-Exempt dated February 24, 2000 ............................. B-1
Exhibit C -- Description of Dividend Reinvestment Plan of MIT III ........................ C-1
</TABLE>
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(800) 869-NEWS
--------------------
PROXY STATEMENT AND PROSPECTUS
--------------------
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 23, 2001
INTRODUCTION
GENERAL
This Proxy Statement and Prospectus is being furnished to the shareholders
of the Morgan Stanley Dean Witter Municipal Income Trust III ("MIT III"), a
closed-end diversified management investment company, in connection with the
solicitation by the Board of Trustees of MIT III (the "Board") of proxies to be
used at the Special Meeting of Shareholders of MIT III to be held in the Career
Development Room, Sixty-First Floor, Two World Trade Center, New York, New York
10048 at 9:00 A.M., New York time, on January 23, 2001, and any adjournments
thereof (the "Meeting"). It is expected that the mailing of this Proxy
Statement and Prospectus will be made on or about November 13, 2000.
At the Meeting, MIT III shareholders ("Shareholders") will consider and
vote upon an Agreement and Plan of Reorganization, dated August 24, 2000 (the
"Reorganization Agreement"), between MIT III and Morgan Stanley Dean Witter
Tax-Exempt Securities Trust ("Tax-Exempt") pursuant to which substantially all
of the assets of MIT III will be combined with those of Tax-Exempt in exchange
for Class D shares of Tax-Exempt. As a result of this transaction, Shareholders
will become shareholders of Tax-Exempt and will receive Class D shares of
Tax-Exempt equal to the net asset value of their holdings in MIT III on the
closing date of such transaction (the "Reorganization"). The Class D shares to
be issued by Tax-Exempt pursuant to the Reorganization (the "Tax-Exempt
Shares") will be issued at net asset value and will not be subject to any sales
charge. Further information relating to Tax-Exempt is set forth herein and in
Tax-Exempt's current Prospectus, dated February 24, 2000 ("Tax-Exempt's
Prospectus"), attached to this Proxy Statement and Prospectus and incorporated
herein by reference.
The information concerning MIT III contained herein has been supplied by
MIT III 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 October 26, 2000 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 5,798,356 shares of MIT III issued and outstanding. There are no MIT
III shares held by MIT III. Shareholders on 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.
1
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No persons were known to own of record or beneficially 5% or more of the
outstanding shares of MIT III as of the Record Date although from time to time,
the number of shares held in "street name" accounts of various securities
dealers for the benefit of their clients or in centralized securities
depositories may exceed 5% of the total outstanding shares of MIT III. As of
the Record Date, the trustees and officers of MIT III, as a group, owned less
than 1% of the outstanding shares of MIT III.
The following persons were known to own of record or beneficially 5% or
more of the outstanding shares of a Class of Tax-Exempt as of the Record Date:
Class A -- Mitteldorf Family TR, Harriet Mitteldorf TTEE, c/o Mike Tinkleru/A
10/30, 33 Beverly Ave., Lansdowne, PA 19050-2705 (22.6%). Class C -- Danilo F.
Piccinini & Lola Piccinini JT TEN, PO Box 5307, Incline Village, NV 89450-5307
(6.0%). 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. If a Shareholder executes
and returns a proxy but fails to indicate how the votes should be cast, the
proxy will be voted in favor of the Reorganization Agreement. The proxy may be
revoked at any time prior to the voting thereof by: (i) delivering written
notice of revocation to the Secretary of MIT III at Two World Trade Center, New
York, New York 10048; (ii) attending the Meeting and voting in person; or (iii)
completing and returning a new proxy (whether by mail or, as discussed below,
by touchtone telephone or the Internet) (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 to permit further solicitation of proxies. Any such adjournment
will require the affirmative vote of the holders of a majority of shares of MIT
III 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
The expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement and Prospectus, are expected to approximate
$98,000 and will be borne by MIT III. MIT III and Tax-Exempt will bear all of
their respective other expenses associated with the Reorganization. In addition
to the solicitation of proxies by mail, proxies may be solicited by officers of
MIT III, and officers and regular employees of Morgan Stanley Dean Witter
Advisors Inc. ("MSDW Advisors" or the "Investment Manager" or the "Investment
Advisor") and Morgan Stanley Dean Witter Trust FSB ("MSDW Trust"), an affiliate
of MSDW Advisors, personally or by mail, telephone, telegraph or otherwise,
without compensation therefor. In addition, MIT III
2
<PAGE>
may retain Mackenzie Partners, Inc. as proxy solicitor, at a cost to MIT III of
approximately $7,500 plus reimbursement of reasonable expenses. 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.
Shareholders whose shares are registered with MSDW Trust will be able to
vote their shares by touchtone telephone or by Internet by following the
instructions on the proxy card or on the Voting Information Card accompanying
this Proxy Statement and Prospectus. To vote by touchtone telephone,
Shareholders can call the toll-free number 1-800-690-6903. To vote by Internet,
Shareholders can access the websites www.msdwt.com or www.proxyvote.com.
Telephonic and Internet voting with MSDW Trust presently are not available to
Shareholders whose shares are held in street name.
In certain instances, MSDW Trust, an affiliate of MSDW Advisors, 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. MIT III has been advised by counsel
that these procedures are consistent with the requirements of applicable law.
Shareholders voting by telephone in this manner 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 set forth in the confirmation 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 or by touchtone telephone or the Internet as set forth
above. The last proxy vote received in time to be voted, whether by proxy card,
touchtone telephone or Internet, will be the vote that is counted and will
revoke all previous votes by the Shareholder.
VOTE REQUIRED
Approval of the Reorganization Agreement by the Shareholders requires the
affirmative vote of a majority (i.e., more than 50%) of the shares of MIT III
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, MIT III will continue in existence and the Board will
consider alternative actions.
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 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 MIT III, subject to stated liabilities, to Tax-Exempt in
exchange for the Tax-Exempt Shares. The aggregate net asset value of
3
<PAGE>
the Tax-Exempt Shares issued in the exchange will equal the aggregate value of
the net assets of MIT III received by Tax-Exempt. On or after the closing date
of the Reorganization, currently anticipated to be January 29, 2001, (the
"Closing Date"), MIT III will distribute the Tax-Exempt Shares received by MIT
III to Shareholders as of the Valuation Date (as defined below under "The
Reorganization Agreement") in complete liquidation of MIT III and MIT III will
thereafter be de-registered as an investment company under the Investment
Company Act of 1940 (the "1940 Act") and dissolved under Massachusetts law. 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 of MIT III transferred to Tax-Exempt.
Accordingly, as a result of the Reorganization, each Shareholder of MIT III
will become a holder of Class D shares of Tax-Exempt. Shareholders holding
their shares of MIT III in certificate form will be asked to surrender their
certificates in connection with the Reorganization. Shareholders who do not
surrender their certificates prior to the Closing Date will still receive their
shares of Tax-Exempt; however, such Shareholders will not be able to redeem,
transfer or exchange the Tax-Exempt Shares received until the old certificates
have been surrendered. 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 MIT III ("INDEPENDENT TRUSTEES"), AS THAT TERM IS DEFINED IN THE
INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE "1940 ACT"), HAS CONCLUDED THAT
THE REORGANIZATION IS IN THE BEST INTERESTS OF MIT III AND ITS SHAREHOLDERS AND
RECOMMENDS APPROVAL OF THE REORGANIZATION AGREEMENT.
FEE TABLE
MIT III and Tax-Exempt each pay a variety of expenses for management of
their assets, distribution of their shares (Tax-Exempt) and other services, and
those expenses are reflected in the net asset value per share of each fund.
Class D shares of Tax-Exempt do not pay distribution-related fees; however, the
other three Classes offered by Tax-Exempt pay fees for the distribution of
their shares. The following table briefly describes the fees and expenses that
a shareholder of MIT III and a Class D shareholder of Tax-Exempt may pay if
they buy and hold shares of each respective fund. These expenses are deducted
from each respective fund's assets and are based on expenses paid by MIT III
for its fiscal year ended August 31, 2000 and on expenses paid by Class D
shares of Tax-Exempt for its fiscal year ended December 31, 1999. The table
also sets forth pro forma fees for the surviving combined fund (Tax-Exempt)
reflecting what the fee schedule would have been on June 30, 2000, if the
Reorganization had been consummated twelve (12) months prior to that date and
assuming Class D fees and expenses.
4
<PAGE>
Shareholder Fees
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
TAX-EXEMPT TAX-EXEMPT
MIT III (CLASS D) (CLASS D)
--------- ------------ -----------
<S> <C> <C> <C>
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON PURCHASES
(AS A PERCENTAGE OF OFFERING PRICE) none(1) none none
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON REINVESTED
DIVIDENDS none none none
MAXIMUM CONTINGENT DEFERRED SALES CHARGE (LOAD) (AS A
PERCENTAGE OF THE LESSER OF ORIGINAL PURCHASE PRICE OR
REDEMPTION PROCEEDS) none none none
REDEMPTION FEES none(1) none none
EXCHANGE FEE none none none
</TABLE>
----------
(1) Purchases and sales of MIT III are made on the New York Stock Exchange or
otherwise through brokers and dealers and are generally subject to
brokerage commissions which vary. Customarily, such commissions may
depend upon the size of the transaction, the broker selected and other
factors.
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
TAX-EXEMPT TAX-EXEMPT
MIT III (CLASS D) (CLASS D)
--------------- -------------- -----------
<S> <C> <C> <C>
MANAGEMENT FEES 0.65%(2) 0.44% 0.44%
DISTRIBUTION AND SERVICE (12B-1) FEES none none none
OTHER EXPENSES 0.35% 0.07% 0.07%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.00% 0.51% 0.51%
</TABLE>
----------
(2) The Management Fees shown for MIT III reflect both the advisory and
administration fees paid by MIT III under its Investment Advisory
Agreement with MSDW Advisors and its Administration Agreement with Morgan
Stanley Dean Witter Services Company Inc., respectively. The combined
services provided to MIT III under these two agreements are comparable to
the services provided to Tax-Exempt under its Investment Management
Agreement with MSDW Advisors. For more information, please see "Synopsis
-- Comparison of MIT III and Tax-Exempt -- Investment Management and
Administration Fees."
EXAMPLE
To attempt to show the effect of these expenses on an investment over
time, the hypotheticals shown below have been created. The Example assumes that
an investor invests $10,000 in either MIT III or Class D shares of Tax-Exempt
or the new combined fund (Tax-Exempt), that the investment has a 5% return each
year and that the operating expenses for each fund remain the same (as set
forth in the chart above). Although a shareholder's actual costs may be higher
or lower, the tables below show a shareholder's costs at the end of each period
based on these assumptions.
5
<PAGE>
Expenses Over Time:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
MIT III ............................................. $102 $318 $552 $1,225
Tax-Exempt (Class D) ................................ $ 52 $164 $285 $ 640
Pro Forma Combined -- Tax-Exempt (Class D) .......... $ 52 $164 $285 $ 640
</TABLE>
The purpose of the foregoing fee table is to assist the investor or
shareholder in understanding the various costs and expenses that an investor or
shareholder in the fund will bear directly or indirectly. For a more complete
description of these costs and expenses, see "Comparison of MIT III and
Tax-Exempt -- Investment Management and Administration Fees, Other Significant
Fees, and Purchases, Exchanges and Redemptions" below.
TAX CONSEQUENCES OF THE REORGANIZATION
As a condition to the Reorganization, MIT III and Tax-Exempt, will receive
an opinion of Mayer, Brown & Platt 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 MIT III or the shareholders of MIT III
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.
REASONS FOR THE REORGANIZATION
MIT III is a closed-end fund that has traded on the New York Stock
Exchange ("NYSE") at a discount to net asset value for the past six years. For
more information, see "Additional Matters Regarding MIT III -- History of
Public Trading of MIT III's Shares" below. The Board of MIT III has, in the
past, considered a number of options in attempting to reduce or eliminate the
discount, including share repurchases and the use of tender offers. For a
number of years, the Board has authorized a share repurchase program to
repurchase shares of MIT III in the open-market in order to support the price
of the fund's shares. The Board has concluded that currently, the
Reorganization is an appropriate course for Shareholders of MIT III to realize
the net asset value of their shares as well as other benefits offered by the
Reorganization. For further information on the reasons for the Board's
decision, see "The Reorganization -- The Board's Consideration," set forth
below.
COMPARISON OF MIT III AND TAX-EXEMPT
INVESTMENT OBJECTIVES AND POLICIES. MIT III and Tax-Exempt have similar
investment objectives. As its investment objective, MIT III seeks to provide
current income exempt from federal income tax. Tax-Exempt has an investment
objective of seeking to provide a high level of current income exempt from
federal income tax, consistent with preservation of capital. The respective
investment objectives of MIT III and Tax-Exempt are fundamental and may not be
changed without respective shareholder approval.
Tax-Exempt seeks to achieve its investment objective by investing at least
80% of its total assets in securities that pay interest exempt from federal
income taxes, i.e., municipal obligations. Likewise, MIT III seeks to achieve
its investment objective by investing at least 80% of its net assets in
municipal obligations. Income dividend distributions of Tax-Exempt and MIT III,
to the extent derived from municipal obligations, are normally exempt from
federal income taxes, however, all, or a portion of, MIT III's investments in
municipal obligations may be subject to the alternative minimum tax for certain
investors. Under normal circumstances, Tax-Exempt has a 20% limit on
investments in municipal obligations subject to the alternative minimum tax.
6
<PAGE>
Other than as set forth above, the investment policies of MIT III and
Tax-Exempt are substantially similar; the principal differences between them
are described under "Comparison of Investment Objectives, Policies and
Restrictions" below.
INVESTMENT MANAGEMENT AND ADMINISTRATION FEES. Pursuant to an Investment
Advisory Agreement, MIT III's investment adviser, MSDW Advisors, manages MIT
III's assets, including placing orders for the purchase and sale of portfolio
securities. MSDW Advisors obtains and evaluates such information and advice
relating to the economy, securities markets and securities as it deems
necessary or useful to manage the assets of MIT III in a manner consistent with
its objective and policies. As compensation for advisory services provided to
MIT III, MIT III pays MSDW Advisors an advisory fee, calculated weekly and
payable monthly, by applying the following annual rates to the fund's weekly
net assets: 0.40% to the portion of the fund's weekly net assets not exceeding
$250 million and 0.30% to the portion of the fund's weekly net assets exceeding
$250 million. Pursuant to an Administration Agreement, MIT III has retained
Morgan Stanley Dean Witter Services Company Inc. ("MSDW Services"), a wholly
owned subsidiary of MSDW Advisors, to serve as Administrator for MIT III. Under
that agreement, MSDW Services provides MIT III with certain administrative
and/or bookkeeping services. As compensation for such services, MIT III pays
MSDW Services a fee, calculated weekly and payable monthly, by applying the
following annual rates to the fund's weekly net assets: 0.25% to the portion of
the fund's weekly net assets not exceeding $250 million; 0.20% to the portion
of the fund's weekly net assets exceeding $250 million but not exceeding $500
million; 0.167% to the portion of the fund's weekly net assets exceeding $500
million but not exceeding $750 million; and 0.133% to the portion of the fund's
weekly net assets exceeding $750 million. The services provided to MIT III
under both the Investment Advisory Agreement and the Administration Agreement
are comparable to those provided by MSDW Advisors to Tax-Exempt under its
Investment Management Agreement with MSDW Advisors. Pursuant to that agreement,
Tax-Exempt pays MSDW Advisors, monthly compensation calculated daily by
applying the following annual rates to the average daily net assets of the
fund: 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 the daily net assets exceeding $1.25 billion. Each class of
shares of Tax-Exempt is subject to the same management fee rates.
MIT III is a closed-end investment company and therefore does not have a
distribution plan pursuant to Rule 12b-1 under the 1940 Act ("12b-1 Plan").
Tax-Exempt has adopted a 12b-1 Plan for the distribution of its shares,
however, there are no 12b-1 fees applicable to Tax-Exempt's Class D shares. For
information relating to the 12b-1 fees applicable to Tax-Exempt's Class A, B
and C shares, see the section entitled "Share Class Arrangements" in
Tax-Exempt's Prospectus, attached hereto.
OTHER SIGNIFICANT FEES. Both MIT III and Tax-Exempt pay additional fees in
connection with their operations, including legal, auditing, transfer agent,
trustees fees and custodial fees and, in the case of MIT III, listing fees for
the listing of its shares on the NYSE. See "Synopsis -- Fee Table" above for
the percentage of average net assets represented by such "Other Expenses."
PURCHASES, EXCHANGES AND REDEMPTIONS. Class D shares of Tax-Exempt are
currently offered at net asset value and such shares may be redeemed for cash
without redemption or other charge at the net asset value per share next
determined. Normally, Class D shares of Tax-Exempt are offered only to a
limited group of investors. Subsequent to the Reorganization, all MIT III
shares will be designated Class D shares of Tax-Exempt. However, additional
investments (except for reinvestment of distributions received on shares
acquired as a result of the Reorganization) in Class D shares of Tax-Exempt (or
in Class D shares of any other
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Morgan Stanley Dean Witter Fund) by Shareholders holding such shares may only
be made if those Shareholders are otherwise eligible to purchase Class D
shares. Class D shares acquired in the Reorganization may, however, be
exchanged for Class D shares of another Morgan Stanley Dean Witter Fund
pursuant to Class D's exchange privileges discussed below.
Tax-Exempt offers four classes of shares (Class A, Class B, Class C and
Class D) which differ principally in terms of sales charges, distribution and
service fees, and ongoing expenses. For further information relating to each of
the classes of Tax-Exempt's shares, see the section entitled "Share Class
Arrangements" in Tax-Exempt's Prospectus attached hereto.
Class D shares of Tax-Exempt that are held with a broker-dealer that has
entered into a selected dealer agreement with Tax-Exempt's distributor (or
shares held directly with Tax-Exempt's transfer agent) may be exchanged for
Class D shares of any other Morgan Stanley Dean Witter Fund that offers its
shares in more than one class, or any of Morgan Stanley Dean Witter Short-Term
U.S. Treasury Trust, Morgan Stanley Dean Witter North American Government
Income Trust, Morgan Stanley Dean Witter Limited Term Municipal Trust, Morgan
Stanley Dean Witter Short-Term Bond Fund and the five Morgan Stanley Dean
Witter Funds that are money market funds (the foregoing funds are collectively
referred to as the "Exchange Funds"), without the imposition of an exchange
fee. Exchange privileges will not be available to Shareholders who hold
Tax-Exempt shares with broker-dealers that have not entered into a selected
dealer agreement with Tax-Exempt's distributor.
Tax-Exempt shareholders may redeem their Tax-Exempt shares on any business
day at the net asset value of such shares. Tax-Exempt provides telephone
exchange privileges to its shareholders. For greater details relating to
exchange privileges applicable to Tax-Exempt, see the section entitled "How to
Exchange Shares" in Tax-Exempt's Prospectus.
Tax-Exempt may redeem involuntarily, at net asset value, most accounts
valued at less than $100. However, Tax-Exempt offers a reinstatement privilege
whereby a shareholder who has not previously exercised such privilege whose
shares have been redeemed or repurchased may, within thirty-five days after the
date of redemption or repurchase, reinstate any portion or all of the proceeds
thereof in shares of the same class from which such shares were redeemed or
repurchased.
Unlike Tax-Exempt, MIT III is a closed-end investment company and does not
redeem its shares or engage in the continuous offering of new shares in the
same manner as an open-end investment company and does not offer to exchange
its shares for shares of other investment companies. Shares of MIT III are only
purchased and sold on the NYSE.
DIVIDENDS. Tax-Exempt declares income dividends daily and pays dividends
from net investment income monthly; MIT III declares and pays dividends from
net investment income monthly. Tax-Exempt usually distributes net capital
gains, if any, in June and December and MIT III distributes all of its net
realized short-term and long-term capital gains at least once per year. Each,
however, may determine either to distribute or to retain all or part of any net
long-term capital gains in any year for reinvestment. With respect to
Tax-Exempt, dividends and capital gains distributions are automatically
reinvested in additional shares at net asset value unless the shareholder
elects to receive cash. All persons who become registered holders of MIT III
are automatically included in MIT III's automatic dividend reinvestment plan
unless they elect to receive distributions in cash. Under that plan,
Shareholders' dividends are automatically reinvested in shares of MIT III at
the then-current market price of such shares. For more information on MIT III's
dividend reinvestment plan, see Exhibit C to this Proxy Statement and
Prospectus. As discussed above, Tax-Exempt's and MIT III's income dividend
distributions to shareholders are generally exempt from federal income taxes.
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PRINCIPAL RISK FACTORS
The share price or net asset value of Tax-Exempt and the market price per
share of MIT III on the NYSE as well as MIT III's net asset value will
fluctuate with changes in the market value of their respective portfolio
securities. The market value of the funds' portfolio securities will increase
or decrease due to a variety of economic, market and political factors,
including changes in prevailing interest rates, which cannot be predicted. The
principal risks of an investment in either Tax-Exempt or MIT III are the risks
associated with their respective fixed-income securities which primarily
consist of municipal obligations. Fixed income securities are subject to two
types of risks: credit risk and interest rate risk.
Credit risk refers to the possibility that the issuer of a security will
be unable or unwilling to make interest payments and/or repay the principal on
its debt. In the case of certain municipal obligations known as revenue bonds,
the credit risk refers to the possibility that the user fees from a project or
specified revenue source are insufficient to meet interest and/or principal
payment obligations or the credit impairment of the user. Interest rate risk
refers to fluctuations in the value of a fixed-income security resulting from
changes in the general level of interest rates. When the general level of
interest rates goes up, the prices of most fixed-income securities go down.
When the general level of interest rates goes down, the prices of most
fixed-income securities go up.
MIT III may invest up to 35% of its assets in municipal obligations rated
below investment grade (i.e., junk bonds), and it may invest without limitation
in municipal obligations rated in the lowest investment grade category.
Tax-Exempt may invest in such lower rated obligations to a significantly
limited extent (e.g., the fund may only invest up to 5% of its assets in junk
bonds). Lower rated obligations are generally subject to increased credit and
interest rate risk and thus have speculative characteristics. As a result,
these securities are generally more volatile and less liquid than higher rated
securities.
Both Tax-Exempt and MIT III may invest a portion of their respective
assets in inverse floating rate municipal obligations which are obligations
that are typically created through a division of a fixed rate municipal
obligation into two separate instruments, a short-term obligation and a
long-term obligation. The interest rates on inverse floating rate municipal
obligations generally move in the reverse direction of market interest rates.
The interest rate on the short-term obligation is set at periodic auctions. The
interest rate on the long-term obligation is the rate the issuer would have
paid on the fixed-income obligation: (i) plus the difference between such fixed
rate and the rate on the short-term obligation, if the short-term rate is lower
than the fixed rate; or (ii) minus such difference if the interest rate on the
short-term obligation is higher than the fixed rate. Inverse floating rate
municipal obligations offer the potential for higher income than is available
from fixed rate obligations of comparable maturity and credit rating but they
also carry greater risks. In particular, the prices of inverse floating rate
municipal obligations are more volatile, i.e., they increase and decrease in
response to changes in interest rates to a greater extent than comparable fixed
rate obligations.
Certain of the municipal obligations that Tax-Exempt and MIT III may
invest in will be covered by insurance at the time of issuance or at a later
date. Such insurance covers the remaining term of the security. Insured
municipal obligations would generally be assigned a lower rating if the rating
were based primarily on the credit quality of the issuer without regard to the
insurance feature. If the claims-paying ability of the insurer were downgraded,
the ratings on the municipal obligations it insures may also be downgraded.
Both Tax-Exempt and MIT III may invest in municipal lease obligations
which are obligations issued by state and local agencies or authorities to
finance 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, in part,
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
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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 that 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
these legislative appropriations do not occur, holders of such municipal lease
obligations may experience difficulty exercising their rights, including
disposition of the property.
Both Tax-Exempt and MIT III may also invest in futures obligations which
are considered speculative in nature and involve certain risks.
The foregoing discussion is a summary of the principal risk factors of MIT
III and Tax-Exempt. For a more complete discussion of the risks of Tax-Exempt,
see "Principal Risks" and "Additional Risk Information" in Tax-Exempt's
Prospectus attached hereto and incorporated herein by reference.
THE REORGANIZATION
THE PROPOSAL
The Board of Trustees of MIT III, including the Independent Trustees,
having reviewed the financial position of MIT III, the ability of Shareholders
of MIT III to realize the net asset value of their shares and the prospects for
achieving economies of scale through the Reorganization and having determined
that the Reorganization is in the best interests of MIT III and its
Shareholders and that the interests of MIT III's Shareholders will not be
diluted as a result thereof, recommends approval of the Reorganization by
Shareholders of MIT III.
THE BOARD'S CONSIDERATION
At a meeting held on August 24, 2000, the Board, including all of the
Independent Trustees, unanimously approved the Reorganization Agreement and
determined to recommend that MIT III Shareholders approve the Reorganization
Agreement. In reaching this decision, the Board made an extensive inquiry into
a number of factors, particularly the elimination of the current market
discount of MIT III shares, the effect on Shareholders of "open-ending" MIT III
including, for example, the potential impact of redemptions on portfolio
management, and the comparative expense ratios of MIT III and the Class D
shares of Tax-Exempt. The Board also considered other factors, including, but
not limited to: comparable investment objectives, policies, restrictions and
portfolios of MIT III 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 MIT III and Tax-Exempt in connection with the
Reorganization.
In recommending the Reorganization to Shareholders, the Board of MIT III
considered that the Reorganization would have the following benefits to
Shareholders:
1. MIT III, since January of 1994, has generally traded at a discount to
its net asset value and is, as of the date of this Proxy Statement and
Prospectus, trading at a discount. The Reorganization at net asset value would
benefit the Shareholders of MIT III by immediately eliminating any such
discount. See "Additional Matters Regarding MIT III -- History of Public
Trading of MIT III's Shares" below.
2. Once the Reorganization is consummated, the expenses which would be
borne by Class D shareholders of the "combined fund" are expected to be
significantly lower on a percentage basis than the expenses per share of MIT
III. This is partially attributable to the fact that Tax-Exempt's investment
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management fee rate (0.44% of its net assets) was appreciably lower for its
last fiscal year than MIT III's combined advisory/administration fee rate
(0.65%) paid for its last fiscal year. (As noted earlier, MIT III pays separate
advisory and administration fees under two agreements for services comparable
to those provided under Tax-Exempt's single Investment Management Agreement.)
Furthermore, the rate of other expenses paid by Class D of the surviving
Tax-Exempt (0.07% of average daily net assets) for its last fiscal year was
lower than the rate of other expenses paid by MIT III (0.35% of average daily
net assets) for its last fiscal year. In addition, to the extent that the
Reorganization would result in Shareholders becoming shareholders of a combined
larger fund, further economies of scale could be achieved since various fixed
expenses (e.g., auditing and legal) can be spread over a larger number of
shares. The Board noted that the expense ratio for MIT III (1.00% for its
fiscal year ended August 31, 2000) was materially higher than the expense ratio
for Class D shares of Tax-Exempt (0.51% for its fiscal year ended December 31,
1999).
3. Shareholders of MIT III would have a continued participation in a
portfolio of municipal obligations normally exempt from federal income tax.
4. Shareholders would have the ability to exchange their Class D shares of
Tax-Exempt acquired as a result of the Reorganization into Class D shares of
any Morgan Stanley Dean Witter Multi-Class Fund without the imposition of any
sales charge or additional fees. The Board noted, however, that exchange
privileges will not be available to Shareholders who hold Tax-Exempt shares
with broker-dealers that have not entered into a selected dealer agreement with
Tax-Exempt's distributor. MIT III, being a closed-end fund, does not offer any
exchange privileges.
5. The Reorganization is intended to qualify as a tax-free reorganization
for federal income tax purposes, pursuant to which no gain or loss will be
recognized by MIT III 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 the
Independent Trustees 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 transaction will enable Tax-Exempt to acquire
investment securities which are consistent with Tax-Exempt's investment
objective, without the costs attendant to the purchase of such securities in
the market. Also, the addition of MIT III's assets to Tax-Exempt's portfolio
may result in a further reduction in Tax-Exempt's investment management fee
resulting from the addition of more assets at a lower breakpoint rate in the
management fee schedule and may result also in the economies of scale described
above. Finally, the Board considered that even if the benefits enumerated above
are not realized, the costs to the Fund are sufficiently minor to warrant
taking the opportunity to realize those benefits.
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) MIT III will transfer all
of its assets, including portfolio securities, cash (other than cash amounts
retained by MIT III 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
stated liabilities of MIT III, including all expenses, costs, charges and
reserves, as reflected on an unaudited statement of assets and liabilities of
MIT III prepared by the Treasurer of MIT III, as of the Valuation Date (as
defined below) in accordance with generally accepted accounting principles
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consistently applied from the prior audited period, and the delivery of the
Tax-Exempt Shares; (ii) such Tax-Exempt Shares would be distributed to
Shareholders on the Closing Date or as soon as practicable thereafter; (iii)
MIT III would be de-registered as an investment company under the 1940 Act;
(iv) MIT III would be dissolved as a Massachusetts business trust; and (v) the
outstanding shares of MIT III would be canceled.
The number of Tax-Exempt Shares to be delivered to MIT III will be
determined by dividing the aggregate net asset value of the shares of MIT III
acquired by Tax-Exempt by the net asset value per share of the Class D shares
of Tax-Exempt; these values will be calculated as of the close of business of
the New York Stock Exchange on the third business day following the receipt of
the requisite approval by Shareholders of the Reorganization Agreement or at
such other time as MIT III and Tax-Exempt may agree (the "Valuation Date"). As
an illustration, assume that on the Valuation Date, the shares of MIT III had
an aggregate net asset value (not including any Cash Reserve of MIT III) of
$100,000. If the net asset value per Class D share of Tax-Exempt were $10 per
share at the close of business on the Valuation Date, the number of Class D
shares of Tax-Exempt to be issued would be 10,000 ($100,000 (divided by)
$10). These 10,000 Class D shares of of Tax-Exempt would be distributed to the
former shareholders of MIT III. 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, MIT III 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. Each Shareholder will
receive Class D shares of Tax-Exempt that corresponds to the shares of MIT III
currently held by that Shareholder. 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 only upon
written request of a Shareholder and only for whole shares, with fractional
shares credited to the name of the Shareholder on the books of Tax-Exempt.
Shareholders who wish to receive certificates representing their Tax-Exempt
Shares must, after receipt of their confirmations, make a written request to
Tax-Exempt's transfer agent Morgan Stanley Dean Witter Trust FSB, Harborside
Financial Center, Jersey City, New Jersey 07311. Shareholders of MIT III
holding their shares in certificate form will be asked to surrender such
certificates in connection with the Reorganization. Shareholders who do not
surrender their certificates prior to the Closing Date will still receive their
shares of Tax-Exempt; however, such Shareholders will not be able to redeem,
transfer or exchange the Tax-Exempt Shares received until the old certificates
have been surrendered.
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 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 MIT III or Tax-Exempt. The Reorganization Agreement
may be amended in any mutually agreeable manner. All expenses of this
solicitation, including the cost of preparing and mailing this Proxy Statement
and Prospectus, will be borne, as set forth in this Proxy Statement and
Prospectus under "Expenses of Solicitation," by MIT III, which expenses are
expected to approximate $105,500. MIT III and Tax-Exempt will bear all of their
respective other expenses associated with the Reorganization.
The Reorganization Agreement may be terminated and the Reorganization
abandoned at any time, before or after approval by Shareholders or by mutual
consent of MIT III, 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 May 31, 2001, any
condition set forth in the Reorganization Agreement has not been fulfilled or
waived by the party entitled to its benefits.
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Under the Reorganization Agreement, within one year after the Closing
Date, MIT III 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 MIT III that received Tax-Exempt
Shares. MIT III shall be de-registered as an investment company under the 1940
Act, dissolved under Massachusetts law promptly following the distributions of
shares of Tax-Exempt to Shareholders of record of MIT III.
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 MIT III (at net asset value on the Valuation Date calculated after
subtracting any 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 MIT III recognizes net gain from
the sale of securities prior to the Closing Date, such gain, to the extent not
offset by capital loss carryforwards, will be distributed to Shareholders prior
to the Closing Date and will be taxable to Shareholders as capital gain.
Prior to the NYSE's suspension of trading of MIT III's shares, which is
currently expected to occur on the next business day after the Meeting
(assuming Shareholders of MIT III approve the Reorganization Agreement at the
Meeting), Shareholders will continue to be able to sell their shares of MIT III
on the NYSE at the market price of the shares on the NYSE when the sell order
is placed. Following the suspension of trading, Shareholders will no longer be
able to sell their MIT III shares on the NYSE. On or after the Closing Date,
however, Shareholders will be able to redeem their newly-issued shares of
Tax-Exempt.
TAX ASPECTS OF THE REORGANIZATION
At least one but not more than 20 business days prior to the Valuation
Date, MIT III 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 MIT III's investment company taxable income for all periods
since the inception of MIT III through and including the Valuation Date
(computed without regard to any dividends paid deduction), and all of MIT III'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").
As a condition to the Reorganization, MIT III and Tax-Exempt will receive
an opinion of Mayer, Brown & Platt to the effect that, based on certain
assumptions, facts, the terms of the Reorganization Agreement and
representations set forth in the Reorganization Agreement or otherwise provided
by MIT III and Tax-Exempt (including a representation to the effect that
Tax-Exempt has no plan or intention to sell or otherwise dispose of more than
fifty percent of the assets of MIT III acquired in the Reorganization except
for dispositions made in the ordinary course of business):
1. The transfer of MIT III's assets in exchange for the Tax-Exempt Shares
and the assumption by Tax-Exempt of certain stated liabilities of MIT III
followed by the distribution by MIT III of the Tax-Exempt Shares to
Shareholders in exchange for their MIT III shares pursuant to and in accordance
with the terms of the Reorganization Agreement will constitute a
"reorganization" within the meaning of Section 368(a)(1)(C) of the Code, and
MIT III 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 MIT III solely in exchange for the Tax-Exempt Shares and the
assumption by Tax-Exempt of the stated liabilities of MIT III;
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3. No gain or loss will be recognized by MIT III upon the transfer of the
assets of MIT III 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 MIT III shares;
4. No gain or loss will be recognized by Shareholders upon the exchange of
the shares of MIT III 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 MIT III 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 of MIT III
surrendered in exchange therefor were held (provided such shares in MIT III
were held as capital assets on the date of the Reorganization);
7. The tax basis of the assets of MIT III acquired by Tax-Exempt will be
the same as the tax basis of such assets of MIT III immediately prior to the
Reorganization; and
8. The holding period of the assets of MIT III in the hands of Tax-Exempt
will include the period during which those assets were held by MIT III.
The advice of Counsel is not binding on the Internal Revenue Service or
the courts and neither MIT III nor Tax-Exempt has sought or will seek a ruling
with respect to the tax treatment of the Reorganization.
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.
DESCRIPTION OF SHARES OF TAX-EXEMPT AND MIT III AND THE ORGANIZATION OF THE TWO
FUNDS
Class D 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 stated
above, Class D shares of Tax-Exempt are not subject to any sales charge on
purchase or redemption or any 12b-1 fee.
Shares of MIT III (the only existing class of which is common) are
entitled to one vote for each share held and to vote for the election of
Trustees and on other matters submitted to meetings of shareholders. Shares of
MIT III have no pre-emptive or conversion rights and the shares, when issued,
are fully paid and non-assessable.
The shareholders of Tax-Exempt are entitled to a full vote for each full
share of beneficial interest held. Tax-Exempt is authorized to issue an
unlimited number of shares of beneficial interest. All shares of beneficial
interest of Tax-Exempt are of $0.01 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, Class A, Class B and Class C bear expenses related to the distribution of
their respective shares.
Tax-Exempt's Declaration of Trust permits the Trustees to authorize the
creation of additional series of shares (the proceeds of which would be
invested in separate, independently managed portfolios) and additional Classes
of shares within any series. The Trustees have not presently authorized any
such additional series or Classes of shares other than as set forth in
Tax-Exempt's Prospectus.
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Tax-Exempt is not required to hold annual meetings of shareholders and in
ordinary circumstances Tax-Exempt 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 Investment Company Act or the Declaration of
Trust. Under certain circumstances, the Trustees may be removed by the actions
of the Trustees. In addition, under certain circumstances, the shareholders may
call a meeting to remove the Trustees and Tax-Exempt is required to provide
assistance in communicating with shareholders about such a meeting. 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. MIT III, whose shares are listed on the NYSE, does hold annual
meetings as required by the rules of the NYSE.
Both Tax-Exempt and MIT III are entities of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of a
business trust may, under certain limited circumstances, be held personally
liable as partners for the obligations of Tax-Exempt or MIT III. However, the
Declaration of Trust of both funds contains an express disclaimer of
shareholder liability for acts or obligations of Tax-Exempt or MIT III,
requires that notice of such Tax-Exempt or MIT III obligations include such
disclaimer, and provides for indemnification out of the Tax-Exempt's or MIT
III's property for any shareholder held personally liable for the obligations
of Tax-Exempt or MIT III. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
Tax-Exempt or MIT III themselves would be unable to meet their obligations.
Given the above limitations on shareholder personal liability, and the nature
of Tax-Exempt's and MIT III's assets and operations, the possibility of
Tax-Exempt or MIT III being unable to meet their obligations is remote and
thus, in the opinion of Massachusetts counsel to Tax-Exempt and MIT III, the
risk to Tax-Exempt and MIT III shareholders of personal liability is remote.
MIT III presently has certain anti-takeover provisions in its Declaration
of Trust which could have the effect of limiting the ability of other entities
or persons to acquire control of MIT III, to cause it to engage in certain
transactions or to modify its structure. The Board of Trustees is divided into
three classes, each having a term of three years. Each year the term of one
class expires. This provision could delay for up to two years the replacement
of a majority of the Board of Trustees. In addition, the affirmative vote or
consent of the holders of 80% of the shares of MIT III (a greater vote than
that required by the 1940 Act and greater than the required vote applicable to
business corporations under state law) is required to authorize the conversion
of MIT III from a closed-end to an open-end investment company, or generally to
authorize any of the following transactions:
(i) merger or consolidation of MIT III with or into any other corporation;
(ii) issuance of any securities of MIT III to any person or entity for
cash;
(iii) sale, lease or exchange of all or any substantial part of the assets
of MIT III, to any entity or person (except assets having an aggregate
fair market value of less than $1,000,000);
(iv) sale, lease or exchange to MIT III, in exchange for securities of MIT
III, of any assets of any entity or person (except assets having an
aggregate fair market value of less than $1,000,000)
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of 5% or more of the outstanding shares of MIT
III. However, such 80% vote or consent will not be required with respect to the
foregoing transactions where the Board of Trustees under certain conditions
approves the transaction (as the Board has done with respect to the
Reorganization), in which case, with respect to (i) and (iii) above, a majority
shareholder vote or consent will be required, and, with respect to (ii) and
(iv) above, no shareholder vote or consent would be required. Furthermore, any
amendment to the provisions in the Declaration of Trust requiring an 80%
shareholder vote or consent for the foregoing transactions similarly requires
an 80% shareholder vote or consent.
15
<PAGE>
CAPITALIZATION TABLE (UNAUDITED)
The following table sets forth the capitalization of Tax-Exempt and MIT
III as of August 31, 2000 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>
MIT III ....................................... $ 55,954,103 5,798,353 $ 9.65
Tax-Exempt
(Class A) .................................... $ 18,257,997 1,596,984 $11.43
(Class B) .................................... $ 142,841,544 12,442,278 $11.48
(Class C) .................................... $ 11,157,397 973,960 $11.46
(Class D) .................................... $ 856,258,319 74,945,142 $11.43
Total Tax-Exempt (Class A-D) .................. $1,028,515,257 -- --
Combined Fund (pro forma) (Tax-Exempt after the
Reorganization)
(Class A) .................................... $ 18,257,997 1,596,984 $11.43
(Class B) .................................... $ 142,841,544 12,442,278 $11.48
(Class C) .................................... $ 11,157,397 973,960 $11.46
(Class D) .................................... $ 912,212,422 79,840,514 $11.43
Total Combined Fund (pro forma) (Tax-Exempt)
(Class A-D) .................................. $1,084,469,360 -- --
</TABLE>
APPRAISAL RIGHTS
Shareholders will have no appraisal rights in connection with the
Reorganization.
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES AND POLICIES
MIT III and Tax-Exempt have similar investment objectives. MIT III seeks
to provide current income exempt from federal income tax; Tax-Exempt seeks to
provide a high level of current income exempt from federal income tax
consistent with preservation of capital.
Tax-Exempt invests at least 80% of its total assets in securities that pay
interest exempt from federal income taxes, in accordance with its investment
objectives set forth above. Tax-Exempt invests at least 75% of its net assets
in (i) municipal bonds rated within the three highest grades by either Moody's
Investors Service ("Moody's"), Standard & Poor's Corporation ("S&P") or Fitch
IBCA, Inc. ("Fitch"); (ii) municipal notes rated within the two highest grades
by Moody's, S&P or Fitch, or, if not rated, have outstanding bonds within the
three highest grades by Moody's, S&P or Fitch; and (iii) municipal commercial
paper rated within the highest grade by such rating organizations. Tax-Exempt
may invest up to 25% of its assets in municipal obligations that are rated
below the limits stated above or are not rated by those rating agencies.
However, Tax-Exempt may only invest up to 5% of its assets in municipal
obligations rated below investment grade (Ba or BB or lower by Moody's or S&P),
commonly known as "junk bonds." Unrated securities may be purchased by
Tax-Exempt if such securities are judged by the Investment Manager to be of
comparable quality to the rated securities described above. Other than its
investment objectives, the foregoing investment policies of Tax-Exempt may be
changed without shareholder approval.
16
<PAGE>
MIT III invests at least 80% of its net assets in municipal obligations
and certain municipal obligations in which MIT III may invest without limit may
be subject to the alternative minimum tax. MIT III invests at least 65% of its
total assets in: (a) Municipal Bonds which are rated at the time of purchase
within the four highest grades (Baa or BBB or better) by Moody's or S&P; (b)
Municipal Notes which at the time of purchase are rated in the two highest
grades by Moody's or in the three highest grades by S&P, or, if not rated,
whose issuers have outstanding one or more issues of Municipal Bonds rated
within the four highest grades by Moody's or S&P; and (c) Municipal Commercial
Paper which at the time of purchase is rated within the highest grade by either
Moody's or S&P. MIT III may invest up to 35% of its assets in junk bonds and
unrated obligations. Thus, with respect to this portion of the portfolio, MIT
III may invest in instruments rated as low as C by Moody's or S&P. Securities
rated Ba or lower by Moody's or BB or lower by S&P are considered to be
speculative investments and are commonly known as junk bonds. A general
description of Moody's and S&P ratings of Municipal Bonds, Notes and Commercial
Paper is set forth in Tax-Exempt's "Statement of Additional Information."
MIT III may invest any amount of its assets in securities that pay
interest subject to the "alternative minimum tax" ("AMT") with the result that
some taxpayers may have to pay tax on income distributions from MIT III.
Tax-Exempt may only invest up to 20% of its assets in securities subject to the
AMT unless the fund has adopted a temporary defensive posture as set forth
below.
Both MIT III and Tax-Exempt may invest up to 20% of their respective
assets in taxable money market instruments.
Both MIT III and Tax-Exempt may take temporary "defensive" positions that
are inconsistent with each fund's principal investment strategies in attempting
to respond to adverse market conditions and during a temporary defensive period
each fund may invest more than 20% of its assets in investments, the income of
which may be subject to federal income taxes. In addition, during such a
defensive posture, Tax-Exempt may also invest any amount of its assets in
tax-exempt securities subject to the AMT.
The foregoing investment objective and policies of MIT III are fundamental
and may not be changed without the approval of MIT III shareholders.
MIT III may invest up to 10% of the value of its total assets, at the time
of purchase, in Municipal Obligations denominated and payable in foreign
currency, in an effort to increase the income of the fund. Such Obligations are
issued by municipalities in the United States when it is believed that
denomination in a foreign currency would be more attractive to potential
purchasers.
Both MIT III and Tax-Exempt may invest up to 10% of their respective
assets in inverse floating rate municipal obligations. The interest rates on
these obligations generally move in the reverse direction of market interest
rates. If market interest rates fall, the interest rates on the obligations
will increase and if market interest rates increase, the interest rates on the
obligations will fall.
Both MIT III and Tax-Exempt may purchase securities on a when-issued or
delayed delivery basis or, in the case of Tax-Exempt, may purchase or sell
securities on a forward commitment basis. When these 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 commitment. The
securities so purchased or sold are subject to market fluctuation and no
interest or dividends accrue to the purchaser prior to the settlement date. At
the time the Fund makes the commitment to purchase or sell securities on a
when-issued, delayed delivery or forward commitment basis, it will record the
transaction and thereafter reflect the value, each day, of such security
purchased, or if a sale, the proceeds to be received, in determining its net
asset value. At the time of delivery of the securities, their value may be more
or less than the purchase or sale price. An increase in the percentage of the
funds' assets committed to the purchase of securities on a when-issued, delayed
delivery or forward commitment basis (Tax-Exempt) may increase the volatility
of their respective net asset value.
17
<PAGE>
Both MIT III and Tax-Exempt may purchase variable rate or floating rate
municipal 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 to 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 of purchasing obligations with a demand
feature is that liquidity, and the ability to obtain repayment of the full
principal amount of an obligation prior to maturity, is enhanced.
Both MIT III and Tax-Exempt may enter into repurchase agreements subject
to certain procedures designed to minimize risks associated with such
investments. Repurchase agreements may be viewed as a type of secured lending
and typically involve the acquisition by a 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
serving as collateral at a specified price and at a fixed time in the future,
usually not more than seven days from the date of purchase. The collateral will
be marked-to-market daily to determine that the value of the collateral, as
specified in the agreement, does not decrease below the purchase price plus
accrued interest. If such decrease occurs, additional collateral will be
requested and, when received, added to the account to maintain full
collateralization. The fund will accrue interest from the institution until the
time when the repurchase is to occur. Although this 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. It is the
policy of MIT III and Tax-Exempt not to invest in repurchase agreements that do
not mature within seven days, if any such investments amount to more than 10%
of MIT III's total assets or amount to 10% of Tax-Exempt's net assets together
with any other illiquid assets held by Tax-Exempt.
Both MIT III and Tax-Exempt may lend their portfolio securities to
brokers, dealers and other financial institutions, provided that the loans are
callable at any time by the fund, and are at all times secured by cash or cash
equivalents, which are maintained in a segregated account pursuant to
applicable regulations and that are equal to at least 100% for Tax-Exempt and
102% for MIT III of the market value, determined daily, of the loaned
securities. The advantage of these loans is that the fund continues to receive
the income on the loaned securities while at the same time earning interest on
the cash amounts deposited as collateral, which will be invested in short-term
obligations. Tax-Exempt may not lend more than 25% of the value of its total
assets while MIT III may not lend more than 10% of the value of its total
assets. As with any extensions of credit, there are risks of delay in recovery
and, in some cases, even loss of rights in the collateral should the borrower
of the securities fail financially. However, these loans of portfolio
securities will only be made to firms deemed by either fund's management to be
creditworthy and when the income which can be earned from such loans justifies
the attendant risks. Upon termination of the loan, the borrower is required to
return the securities to the fund. Any gain or loss in the market price during
the loan period would inure to the fund.
Both MIT III and Tax-Exempt may purchase and sell financial futures
contracts and may purchase and write put and call options on such futures
contracts for the purpose of hedging its portfolio securities against changes
in prevailing interest rates. Both funds may invest in municipal bond index
futures. The funds may not purchase and sell 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 each fund's total assets. Both funds may
purchase or sell (write) options on debt securities as a means of achieving
additional return or hedging the value of their respective portfolios. The
funds will only write covered call or put options, or buy call or put options,
which are listed on national securities exchanges.
18
<PAGE>
The funds may not write covered options in an amount exceeding 20% of the value
of their respective total assets. The funds will not purchase options if, as a
result, the aggregate cost of all outstanding options exceeds 10% of the
respective fund's total assets.
Both MIT III and Tax-Exempt may invest in illiquid securities. MIT III may
invest up to 25% of its total assets in private placement obligations
customarily sold to institutional investors for which only a limited market may
exist at the time of purchase. However MIT may only invest up to 10% of its
total assets in restricted securities, that is, securities subject to
contractual restrictions on resale which may have an adverse effect on their
marketability and prompt disposition. Tax-Exempt may only invest in such
securities in an amount up to 10% of its net assets.
Both MIT III and Tax-Exempt may borrow money. MIT III may borrow money
from a bank for temporary or emergency purposes or for the repurchase of its
shares provided that immediately after such borrowing the amount borrowed does
not exceed 33 1/3% of the value of its total assets (including the amount
borrowed) less its liabilities (not including any borrowings but including the
fair market value at the time of computation of any other senior securities
then outstanding). Tax-Exempt 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).
Tax-Exempt may purchase securities on a when, as and if issued basis under
which the issuance of the security depends upon the occurrence of a subsequent
event, such as approval of a merger, corporate reorganization or debt
restructuring. The commitment for the purchase of any such security will not be
recognized in the portfolio of the fund until the Investment Manager determines
that issuance of the security is probable. At that time, the fund will record
the transaction and, in determining its net asset value, will reflect the value
of the security daily. The value of the fund's commitments to purchase the
securities of any one issuer, together with the value of all securities of such
issuer owned by the fund, may not exceed 5% of the value of the fund's total
assets at the time the initial commitment to purchase such securities is made.
An increase in the percentage of the fund's assets committed to the purchase of
securities on a "when, as and if issued" basis may increase the volatility of
its net asset value. The fund may also sell securities on a "when, as and if
issued" basis provided that the issuance of the security will result
automatically from the exchange or conversion of a security owned by the fund
at the time of sale.
Tax-Exempt may invest in zero coupon securities. Zero coupon 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. A
zero coupon security pays no interest to its holder during its life.
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 Tax-Exempt's policies, see "Principal Investment Strategies" and
"Additional Investment Strategy Information" in Tax-Exempt's Prospectus and
"Description of the Fund and Its Investments and Risks" in Tax-Exempt's
Statement of Additional Information.
INVESTMENT RESTRICTIONS
The investment restrictions adopted by MIT III and Tax-Exempt as
fundamental policies are substantially similar. MIT III's investment
restrictions and their similarities or differences with Tax-Exempt's investment
restrictions are summarized below. A full description of Tax-Exempt's
investment restrictions can be found under the caption "Description of the Fund
and Its Investments and Risks -- Fund Policies/Investment Restrictions" in
Tax-Exempt's Statement of Additional Information. A fundamental investment
restriction cannot be changed without the vote of the majority of the
outstanding voting securities of a fund, as defined in the 1940 Act.
19
<PAGE>
MIT III may not:
1. As to 75% of its total assets, invest more than 5% of the value of its
total assets in the securities of any one issuer, except that this limitation
shall not apply to obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities. Tax-Exempt has a similar
restriction but as to 100% of its total assets.
2. Purchase more than 10% of all outstanding taxable debt securities of
any one issuer (other than obligations issued, or guaranteed as to principal
and interest, by the United States Government, its agencies or
instrumentalities). Tax-Exempt has an identical restriction.
3. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry; provided, however, that such limitations shall not
be applicable to Municipal Obligations issued by governments or political
subdivisions of governments, and obligations issued or guaranteed by the United
States Government, its agencies or instrumentalities. In addition, the fund
reserves the right to invest 25% or more of its assets in any of the following
types of Municipal Obligations, provided that the percentage of the Trust's
total assets in private activity bonds in any one category does not exceed 25%
of the fund's total assets: health facility obligations, housing obligations,
single family mortgage revenue bonds, industrial revenue obligations (including
pollution control obligations), electric utility obligations, airport facility
revenue obligations, water and sewer obligations, university and college
revenue obligations, bridge authority and toll road obligations and resource
recovery obligations. Tax-Exempt has a similar restriction.
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.
Tax-Exempt has an identical restriction.
5. Invest in common stock. Tax-Exempt has an identical restriction.
6. 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 Investment
Adviser or Dean Witter Reynolds 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 issuer. Tax-Exempt has a substantially identical
restriction.
7. Purchase or sell real estate or interests therein, although it may
purchase securities secured by real estate or interests therein. Tax-Exempt has
an identical restriction.
8. Purchase or sell commodities except that the fund may purchase or sell
financial futures contracts and related options thereon. Tax-Exempt has a
substantially similar restriction.
9. Purchase oil, gas or other mineral leases, rights or royalty contracts,
or exploration or development programs. Tax-Exempt has a similar restriction.
10. Write, purchase or sell puts, calls, or combinations thereof, except
for options on futures contracts or options on debt securities. Tax-Exempt has
an identical restriction.
11. 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
thereafter not more than (i) 5% of the fund's total assets, taken at market
value, would be invested in any one such company and (ii) 10% of the fund's
total assets, taken at market value, would be invested in such securities.
Tax-Exempt has a similar restriction but it does not have an exception for
purchases of closed-end investment companies.
20
<PAGE>
12. Borrow money, except that the fund may borrow from a bank for
temporary or emergency purposes or for repurchase of its shares provided that
immediately after such borrowing the amount borrowed does not exceed 33 1/3% of
the value of its total assets (including the amount borrowed) less its
liabilities (not including any borrowings but including the fair market value
at the time of computation of any other senior securities which are outstanding
at the time). Tax-Exempt may only borrow for temporary or emergency purposes
and only in amounts not exceeding 5% of the value of its total assets (not
including the amount borrowed).
13. Pledge its assets or assign or otherwise encumber them except to
secure borrowings effected within the limitations set forth in Restriction 12.
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. Tax-Exempt
has an identical restriction.
14. 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. Tax-Exempt has an identical restriction.
15. 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; (b) by investment in repurchase agreements; and (c) by
lending its portfolio securities. Tax-Exempt has a substantially similar
restriction.
16. Make short sales of securities. Tax-Exempt has an identical
restriction.
17. Purchase securities on margin, except for such short-term loans as are
necessary for the clearance of purchases of portfolio securities. Tax-Exempt
has an identical restriction.
18. 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. Tax-Exempt has an identical restriction.
19. Invest for the purpose of exercising control or management of any
other issuer. Tax-Exempt has an identical restriction.
20. Invest over 10% of its total assets in restricted securites.
Tax-Exempt has no such fundamental investment restriction.
21
<PAGE>
ADDITIONAL MATTERS REGARDING MIT III
This section sets forth additional information about MIT III which is not
contained elsewhere in this Proxy Statement and Prospectus.
HISTORY OF PUBLIC TRADING OF MIT III'S SHARES
Shares of MIT III trade on the New York Stock Exchange under the symbol
"TFC". The following table shows the history of public trading of the shares of
beneficial interest of the Fund by quarter for the last two fiscal years. The
table sets forth the per share high market price and the per share low market
price on the NYSE for each completed fiscal quarter and the corresponding net
asset value for that market price as well as the discount (expressed as a
percentage of net asset value) represented by the difference between the market
price and its corresponding net asset value:
<TABLE>
<CAPTION>
MARKET NET ASSET PERCENTAGE MARKET NET ASSET PERCENTAGE
QUARTER ENDED PRICE-HIGH VALUE DISCOUNT PRICE-LOW VALUE DISCOUNT
--------------------- ------------ ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
August 31, 2000 $9.3750 $ 9.65 2.85% $7.6250 $ 9.29 17.92%
May 31, 2000 $7.8750 $ 9.42 16.40% $7.5625 $ 9.24 18.15%
February 29, 2000 $7.8125 $ 9.14 14.52% $7.4375 $ 9.27 19.77%
November 30, 1999 $7.9375 $ 9.38 15.38% $7.4375 $ 9.25 19.59%
August 31, 1999 $8.4375 $ 9.78 13.73% $7.8125 $ 9.45 17.33%
May 31, 1999 $8.8125 $ 9.97 11.61% $8.3125 $ 9.86 15.69%
February 28, 1999 $9.0000 $10.05 10.45% $8.7500 $10.03 12.76%
November 30, 1998 $9.3750 $10.14 7.54% $8.6875 $10.27 15.41%
</TABLE>
The MIT III shares generally have traded at a discount from net asset
value since January 21, 1994. On October 26, 2000, the shares traded at a
market price of $9.1875 with a net asset value of $9.59.
INVESTMENT ADVISOR
MIT III's investment adviser, MSDW Advisors, maintains its offices at Two
World Trade Center, New York, New York 10048. MSDW Advisors, which was
incorporated in July, 1992 under the name Dean Witter InterCapital Inc.,
changed its name to Morgan Stanley Dean Witter Advisors Inc. on June 22, 1998.
MSDW Advisors together with Morgan Stanley Dean Witter Services Company Inc.,
its wholly-owned subsidiary, had approximately $155 billion in assets under
managements as of September 30, 2000. MSDW Advisors is a wholly-owned
subsidiary of MSDW, a preeminent global financial services firm that maintains
leading market positions in each of its three primary businesses -- securities,
asset management and credit services. MSDW has its offices at 1585 Broadway,
New York, New York 10036.
The Principal Executive Officer and Directors of MSDW Advisors are
Mitchell M. Merin, President and Chief Executive Officer, Ronald E. Robison,
Executive Vice President and Chief Administrative Officer and Barry Fink,
Executive Vice President, Secretary and General Counsel. Messrs. Merin, Robison
and Fink also serve as officers of MIT III.
MSDW Advisors and its wholly-owned subsidiary, MSDW Services, serve in
various investment management, advisory, management and administrative
capacities to investment companies and pension plans and other institutional
and individual investors.
There are various lawsuits pending against MSDW involving material amounts
which, in the opinion of its management, will be resolved with no material
effect on the consolidated financial position of the company.
22
<PAGE>
PORTFOLIO MANAGEMENT
Since March 1993, James F. Willison has been the primary portfolio manager
of MIT III and has been the person primarily responsible for the day-to-day
portfolio management of MIT III's portfolio. Mr. Willison has been a portfolio
manager with MIT III's Investment Advisor for over five years.
EXPENSES BORNE BY MIT III
Under the Advisory Agreement, MIT III is obligated to bear all of the
costs and expenses of its operation, except those specifically assumed by the
Investment Advisor, including, without limitation: charges and expenses of any
registrar, custodian or depository appointed by MIT III for the safekeeping of
its cash, portfolio securities or commodities and other property, and any stock
transfer or dividend agent or agents appointed by MIT III; brokers' commissions
chargeable to MIT III in connection with portfolio securities transactions to
which the Trust is a party; all taxes, including securities or commodities
issuance and transfer taxes, and fees payable by the Trust to Federal, state or
other governmental agencies; costs and expenses of engraving or printing of
certificates representing shares of MIT III; all costs and expenses in
connection with registration and maintenance of registration of MIT III and of
its shares with the Securities and Exchange Commission and various states and
other jurisdictions (including filing fees and legal fees and disbursements of
counsel); the costs and expense of preparing, printing, including typesetting,
and distributing prospectuses for such purposes; all expenses of shareholders'
and Trustees' meetings and of preparing, printing and mailing 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 MIT III's
Administrator or Investment Advisor or any of their corporate affiliates; all
expenses incident to the payment of any dividend or distribution program;
charges and expenses of any outside pricing services; charges and expenses of
legal counsel, including counsel to the Independent Trustees of MIT III, and
independent accountants in connection with any matter relating to MIT III (not
including compensation or expenses of attorneys employed by the Administrator
or Investment Advisor); membership dues of industry associations; interest
payable on borrowings; fees and expenses incident to the listing of MIT III's
shares on any stock exchange; postage; insurance premiums on property or
personnel (including officers and Trustees) of MIT III which inure to its
benefit; extraordinary expenses (including, but not limited to legal claims,
liabilities, litigation costs and any indemnification related thereto); and all
other charges and costs of MIT III's operations unless otherwise explicitly
provided in the Advisory Agreement. MIT III is not responsible for expenses
assumed by the Administrator under the Administration Agreement.
ADDITIONAL INFORMATION ABOUT MIT III AND TAX-EXEMPT
GENERAL
MIT III was organized as a "Massachusetts business trust" under the laws
of the Commonwealth of Massachusetts on June 26, 1989 and commenced operations
as a closed-end registered investment company on October 5, 1989. For a
discussion of the organization and operation of Tax-Exempt, see "Fund
Management" and "Investment Objective" in Tax-Exempt's Prospectus.
The Board of Trustees of each of MIT III and Tax-Exempt oversees the
management of the Fund but does not itself manage the Fund. The Trustees review
various services provided by or under the direction of the Investment Manager
or Investment Advisor, as the case may be, to ensure that the Fund's general
investment policies and programs are properly carried out. The Trustees also
conduct their review to ensure that administrative services are provided to the
Fund in a satisfactory manner.
Under state law, the duties of the Trustees are generally characterized as
a duty of loyalty and a duty of care. The duty of loyalty requires a Trustee to
exercise his or her powers in the interest of each Fund and not
23
<PAGE>
the Trustee's own interest or the interest of another person or organization. A
Trustee satisfies his or her duty of care by acting in good faith with the care
of an ordinarily prudent person and in a manner the Trustee reasonably believes
to be in the best interest of each Fund and its shareholders.
FINANCIAL INFORMATION
For certain financial information about Tax-Exempt, see "Financial
Highlights" and "Past Performance" in Tax-Exempt's Prospectus, and for certain
financial information about MIT III, see MIT III's Annual Report for its fiscal
year ended August 31, 2000.
MANAGEMENT
For information about the respective Board of Trustees, Investment
Manager, and the Distributor of Tax-Exempt, see "Fund Management" in
Tax-Exempt's Prospectus and "Investment Management and Other Services" in
Tax-Exempt's Statement of Additional Information and, with respect to MIT III,
see "Additional Matters Regarding MIT III" above.
DESCRIPTION OF SECURITIES AND SHAREHOLDER INQUIRIES
For a description of the nature and most significant attributes of shares
of MIT III and Tax-Exempt, and information regarding shareholder inquiries, see
the discussion herein under "The Reorganization -- Description of Shares of
Tax-Exempt and MIT III" and "Available Information" as well as "Capital Stock
and Other Securities" in Tax-Exempt's Statement of Additional Information.
CUSTODIAN AND TRANSFER AGENT AND DIVIDEND PAYING AGENT
Morgan Stanley Dean Witter Trust FSB is the Transfer Agent for each of MIT
III's and Tax-Exempt's shares and the Dividend Disbursing Agent for payment of
dividends and distributions on their respective shares. The principal business
address of the Transfer Agent is Harborside Financial Center, Plaza Two, Jersey
City, NJ 07311. The Bank of New York, 100 Church Street, New York, NY 10007 is
the Custodian of the assets of both MIT III and Tax-Exempt.
DIVIDENDS, DISTRIBUTIONS AND TAXES
MIT III and Tax-Exempt are each qualified as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986 and each
generally distributes sufficient income and gains so that it will not pay
corporate income tax on its earnings. Income dividend distributions made by MIT
III or Tax-Exempt are exempt from federal income taxes, to the extent they are
derived from municipal obligations. Income derived from other portfolio
securities may be subject to federal, state and/or local taxes. Additionally,
income derived from some municipal securities are subject to the federal
"alternative minimum tax" and although interest on these securities is
generally exempt from federal income tax, some shareholders who have many
deductions or exemptions nevertheless may have to pay tax on the income.
Capital gain distributions are normally subject to federal income tax when they
are paid. Any short-term capital gain distributions are taxable to shareholders
as ordinary income. Any long-term capital gain distributions are taxable to
shareholders as long-term capital gains, no matter how long a shareholder has
owned shares in MIT III or Tax-Exempt. After the end of each calendar year, MIT
III and Tax-Exempt shareholders are sent a statement showing the taxable
distributions paid to them in the previous year. The statement provides
information on their dividends and capital gains for tax purposes.
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For a further discussion of Tax-Exempt's and MIT III's policies with
respect to dividends, distributions and taxes, see "Distributions" and "Tax
Consequences" in Tax-Exempt's Prospectus as well as the discussion herein under
"Synopsis -- Purchases, Exchanges and Redemptions" with respect to both
Tax-Exempt and MIT III.
PURCHASES, REPURCHASES AND REDEMPTIONS
For a discussion of how Tax-Exempt's shares may be purchased, repurchased
and redeemed, see "How to Buy Shares," "How to Exchange Shares" and "How to
Sell Shares" in Tax-Exempt's Prospectus.
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, 1999
and its Semi-Annual Report for the six month period ended June 30, 2000, each
accompanying this Proxy Statement and Prospectus. For a discussion of the
performance of MIT III, see MIT III's Annual Report for its fiscal year ended
August 31, 2000.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of Tax-Exempt, for the year ended December 31,
1999, have been audited by PricewaterhouseCoopers LLP, independent accountants
and the financial statements of MIT III, for the year ended August 31, 2000,
have been audited by Deloitte & Touche LLP, independent accountants, and 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. These financial statements have been incorporated by
reference in reliance upon such reports given upon the authority of
PricewaterhouseCoopers LLP and Deloitte & Touche LLP, respectively, as experts
in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Tax-Exempt will
be passed upon by Mayer, Brown & Platt, New York, New York. Such firm will rely
on Massachusetts counsel as to matters of Massachusetts law.
AVAILABLE INFORMATION
Additional information about MIT III and Tax-Exempt is available, as
applicable, in the following documents which are incorporated herein by
reference: (i) Tax-Exempt's Prospectus dated February 24, 2000, attached to
this Proxy Statement and Prospectus, which Prospectus forms a part of
Post-Effective Amendment No. 23 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, 1999, and its succeeding Semi-Annual Report for
the six months ended June 30, 2000, accompanying this Proxy Statement and
Prospectus; and (iii) MIT III's Annual Report for its fiscal year ended August
31, 2000. The foregoing documents may be obtained without charge by calling
(800) 869-NEWS (toll-free).
MIT III 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 MIT III 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, NW, 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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The shares of beneficial interest of MIT III are listed on the NYSE and,
in accordance with the requirements of the NYSE, MIT III files proxy materials,
reports and other information with the NYSE. These materials can be inspected
at the New York Stock Exchange located at 11 Wall Street, New York, NY 10005 or
by telephoning the NYSE at (212) 656-3000.
OTHER BUSINESS
Management of MIT III 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
November 9, 2000
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EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made as of this
24th day of August, 2000, by and between MORGAN STANLEY DEAN WITTER TAX-EXEMPT
SECURITIES TRUST, a Massachusetts business trust ("Tax-Exempt") and MORGAN
STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III, a Massachusetts business trust
("MIT III").
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 MIT III in
exchange for the assumption by Tax-Exempt of all stated liabilities of MIT III
and the issuance by Tax-Exempt of Class D shares of beneficial interest, par
value $0.01 per share (the "Tax-Exempt Shares"), to be distributed, after the
Closing Date hereinafter referred to, to the shareholders of MIT III in
liquidation of MIT III 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 MIT III
1.1 Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, MIT III agrees to
assign, deliver and otherwise transfer the MIT III Assets (as defined in
paragraph 1.2) to Tax-Exempt and Tax-Exempt agrees in exchange therefor to
assume all of MIT III stated liabilities on the Closing Date as set forth in
paragraph 1.3(a) and to deliver to MIT III the number of Tax-Exempt Shares,
including fractional Tax-Exempt Shares, determined in the manner set forth in
paragraph 2.3. Such transactions shall take place at the closing provided for
in paragraph 3.1 ("Closing").
1.2 (a) The "MIT III 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 MIT III, and any deferred or prepaid expenses shown as an
asset on MIT III's books on the Valuation Date.
(b) On or prior to the Valuation Date, MIT III will provide Tax-Exempt
with a list of all of MIT III 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. MIT III 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 MIT III 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 the first sentence of this paragraph that do not conform to
Tax-Exempt's investment objective, policies and restrictions. In the event that
MIT III holds any investments that Tax-Exempt is not permitted to hold, MIT III
will dispose of such securities on or prior to the Valuation Date. In addition,
if it is determined that the portfolios of MIT III and Tax-Exempt, when
aggregated, would contain investments exceeding certain percentage limitations
imposed upon Tax-Exempt with respect to such investments, MIT III 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).
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1.3 (a) MIT III 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 MIT III prepared by the Treasurer of MIT III, as of the
Valuation Date in accordance with generally accepted accounting principles
consistently applied from the prior audited period.
(b) On the Valuation Date, MIT III may establish a cash reserve, which
shall not exceed 5% of MIT III's net assets as of the close of business on the
Valuation Date ("Cash Reserve") to be retained by MIT III 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 MIT III 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, MIT III 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, MIT III will
distribute Tax-Exempt Shares received by MIT III pursuant to paragraph 1.1 pro
rata to its shareholders of record determined as of the close of business on
the Valuation Date ("MIT III Shareholders"). Each MIT III Shareholder will
receive Class D shares of Tax-Exempt. Such distribution will be accomplished by
an instruction, signed by the Secretary of MIT III, to transfer Tax-Exempt
Shares then credited to MIT III's account on the books of Tax-Exempt to open
accounts on the books of Tax-Exempt in the names of the MIT III Shareholders
and representing the respective pro rata number of Tax-Exempt Shares due such
MIT III Shareholders. All issued and outstanding shares of MIT III
simultaneously will be canceled on MIT III's books; however, share certificates
representing interests in MIT III 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 MIT III 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 MIT III's books
as of the close of business on the 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 MIT III is and shall remain the
responsibility of MIT III up to and including the date on which MIT III is
dissolved pursuant to paragraph 1.9.
1.9 Within one year after the Closing Date, MIT III shall pay or make
provision for the payment of all its liabilities and taxes, and distribute to
the shareholders of MIT III 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). If and to the extent that any trust, escrow
account, or other similar entity continues after the close of such one-year
period in connection either with making provision for payment of liabilities or
taxes or with distributions to shareholders of MIT III, such entity shall
either (i) qualify as a liquidating trust under Section 7701 of the Code (and
applicable Treasury Regulations thereunder) or other entity which does not
constitute a continuation of MIT III for federal income tax purposes, or (ii)
be subject to a waiver under Section
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368(a)(2)(G)(ii) of the complete distribution requirement of Section
368(a)(2)(G)(i) of the Code. MIT III shall be dissolved under Massachusetts
law, promptly following the making of all distributions pursuant to paragraph
1.5 (and, in any event, within one year after the Closing Date).
1.10 Copies of all books and records maintained on behalf of MIT III in
connection with its obligations under the Investment Company Act of 1940, as
amended (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 MIT III is
subject under the 1940 Act.
2. VALUATION
2.1 The value of the MIT III Assets shall be the value of such assets
computed as of 4:00 p.m. on the New York Stock Exchange on the third business
day following the receipt of the requisite approval by shareholders of MIT III
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 MIT III's initial registration statement on Form N-2 dated September
27, 1989 which procedures are similar to the valuation procedures 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, with respect to each class, by
dividing the aggregate net asset value of MIT III shares (determined in
accordance with paragraph 2.1) by the net asset value per share of Class D
shares of Tax-Exempt (determined in accordance with paragraph 2.2). For
purposes of this paragraph, the aggregate net asset value of the shares of MIT
III shall not include the amount of the Cash Reserve.
2.4 All computations of value shall be made by Morgan Stanley Dean Witter
Services Company Inc. ("MSDW Services") in accordance with its regular practice
in pricing Tax-Exempt. Tax-Exempt shall cause MSDW 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 on January 29, 2001, or at such other time as the parties may
agree. The Closing shall be held at Two World Trade Center, New York, New York,
at the principal offices of MIT III and Tax-Exempt. 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.
3.2 Portfolio securities held by MIT III 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 MIT III 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
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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 Morgan Stanley
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 MIT III, accurate
appraisal of the value of the net assets of Tax-Exempt or the MIT III 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, MIT III 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 MIT III Shareholders and the number and
percentage ownership of outstanding MIT III shares owned by each such MIT III
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 MIT III
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 Massachusetts Series or provide evidence
satisfactory to MIT III that such Tax-Exempt Shares have been credited to MIT
III'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 MIT III
4.1 Except as otherwise expressly provided herein with respect to MIT III,
Tax-Exempt and MIT III 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"). MIT III will provide Tax-Exempt with the Proxy
Materials as described in paragraph 4.3 below, for inclusion in the
Registration Statement. MIT III will further provide Tax-Exempt with such other
information and documents relating to MIT III as are reasonably necessary for
the preparation of the Registration Statement.
4.3 MIT III 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. MIT III 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
MIT III 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 MIT III will assist Tax-Exempt in obtaining such information as
Tax-Exempt reasonably requests concerning the beneficial ownership of MIT III
shares.
4.5 Subject to the provisions of this Agreement, Tax-Exempt and MIT III
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.
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4.6 MIT III shall furnish or cause to be furnished to Tax-Exempt within 30
days after the Closing Date a statement of MIT III's assets and liabilities as
of the Closing Date, which statement shall be certified by MIT III'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, MIT III shall furnish Tax-Exempt, in such form as
is reasonably satisfactory to Tax-Exempt, a statement certified by MIT III's
Treasurer of earnings and profits of MIT III 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, MIT III
(a) shall prepare and file all Federal and other tax returns and reports of MIT
III 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 MIT III 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;
(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
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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 for the year
ended December 31, 1999, of Tax-Exempt audited by PricewaterhouseCoopers
LLP (copies of which have been furnished to MIT III), fairly present, in
all material 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 "Capital Stock and Other
Securities" in Tax-Exempt's current Statement of Additional Information
incorporated by reference in the Statement of Additional Information to 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;
(j) Tax-Exempt Shares to be issued and delivered to MIT III, for the
account of the MIT III 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
"Capital Stock and Other Securities" in Tax-Exempt's current Statement of
Additional Information incorporated by reference in the Statement of
Additional Information to 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, 1999 there has been no change by Tax-Exempt in
accounting methods, principles, or practices, including those required by
generally accepted accounting principles;
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(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 MIT III represents and warrants to Tax-Exempt as follows:
(a) MIT III is a series of a validly existing Massachusetts business
trust with full power to carry on its business as presently conducted;
(b) MIT III is a duly registered, closed-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) All of the issued and outstanding shares of beneficial interest of
MIT III have been offered and sold in compliance in all material respects
with applicable requirements of the 1933 Act and state securities laws.
Shares of MIT III 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 MIT III 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 Registration Statement of MIT III on Form N-2 conformed in all
material respects to the applicable requirements of the 1933 Act and the
1940 Act and the regulations thereunder and did 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) MIT III is not, and the execution, delivery and performance of
this Agreement will not result, in a material violation of any provision of
MIT III's Declaration of Trust or By-Laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which MIT III 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 MIT III 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 MIT III 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 MIT III for
the year ended August 31, 2000, audited by Deloitte & Touche LLP (copies of
which have been or will be furnished to Tax-Exempt) fairly present, in all
material respects, MIT III'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 MIT III
(contingent or otherwise) not disclosed therein that would be required in
accordance with generally accepted accounting principles to be disclosed
therein;
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(h) MIT III 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 MIT III 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 "The Reorganization --
Description of Shares of Tax-Exempt and MIT III and the Organization of the
Two Funds" in this Proxy Statement and Prospectus. MIT III 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 MIT III, and subject to the approval of MIT III's
shareholders, this Agreement constitutes a valid and binding obligation of
MIT III, 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 MIT III's performance of this Agreement;
(k) All material Federal and other tax returns and reports of MIT III
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 MIT
III'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, MIT III, 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 MIT III to continue to meet the
requirements of Subchapter M of the Code;
(m) At the Closing Date, MIT III will have good and valid title to the
MIT III Assets, subject to no liens (other than the obligation, if any, to
pay the purchase price of portfolio securities purchased by MIT III 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 MIT III's shareholders and on the Closing Date, the Proxy
Materials (exclusive of the currently effective Tax-Exempt 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 MIT III 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) MIT III 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
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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) MIT III 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) MIT III 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 MIT III
The obligations of MIT III 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:
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 MIT III, a certificate of its
President and Treasurer, in a form reasonably satisfactory to MIT III 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 MIT III shall reasonably
request;
6.3 MIT III shall have received a favorable opinion from Mayer, Brown &
Platt, 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 MIT
III, 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 MIT III Shareholders as provided by this
Agreement are duly authorized and upon such delivery will be validly
issued, fully paid and non-assessable (except as set forth under the
caption "Capital Stock and Other Securities" in Tax-Exempt's Statement of
Additional Information), 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 (Massachusetts counsel may be relied upon
in delivering such opinion); and (f) to the knowledge of such counsel, no
consent, approval, authorization
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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 from those described in Tax-Exempt's Prospectus
dated February 24, 2000 and Statement of Additional Information dated February
24, 2000.
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 MIT III of all
the obligations to be performed by it hereunder on or before the Closing Date
and, in addition thereto, the following conditions:
7.1 All representations and warranties of MIT III 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 MIT III 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 MIT III 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 MIT III shall have delivered to Tax-Exempt a statement of the MIT III
Assets and its liabilities, together with a list of MIT III'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 MIT III;
7.4 MIT III shall have delivered to Tax-Exempt within three business days
after the Closing a letter from PricewaterhouseCoopers LLP with respect to
taxable years ended August 31, 1998 and 1999, and a letter from Deloitte &
Touche LLP for taxable year ended August 31, 2000, each dated as of the Closing
Date stating that (a) such respective firm has performed a limited review of
the Federal and state income tax returns of MIT III for each of the respective
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 MIT III for the periods covered thereby, (b) for the period from August 31,
2000 to and including the Closing Date, Deloitte & Touche LLP 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 material respects for the satisfaction of all
Federal, state and local tax liabilities for the period from August 31, 2000 to
and including the Closing Date and (c) based on such limited reviews, nothing
came to their attention that caused them to believe that MIT III 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
Mayer, Brown & Platt, counsel to MIT III, dated as of the Closing Date to the
effect that:
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(a) MIT III 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) MIT III is a duly registered, closed-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 MIT III 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 MIT III,
enforceable against MIT III, 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) the execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, violate
MIT III's Declaration of Trust or By-Laws (Massachusetts counsel may be
relied upon in delivering such opinion); 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 MIT III 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 MIT III 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 MIT III
The obligations of MIT III 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
MIT III in accordance with the provisions of MIT III'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 MIT III 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 MIT III;
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 MIT III 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 MIT
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<PAGE>
III Shareholders all of MIT III'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 the opinion of the law firm of Mayer,
Brown & Platt (based on such representations as such law firm shall reasonably
request), addressed to Tax-Exempt and MIT III, which opinion may be relied upon
by the shareholders of MIT III, substantially to the effect that, for Federal
income tax purposes:
(a) The transfer of MIT III's assets in exchange for Tax-Exempt Shares
and the assumption by Tax-Exempt of certain stated liabilities of MIT III
followed by the distribution by MIT III of Tax-Exempt Shares to the MIT III
Shareholders in exchange for their MIT III shares pursuant to and in
accordance with the terms of the Reorganization Agreement will constitute a
"reorganization" within the meaning of Section 368(a)(1)(C) of the Code,
and MIT III 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 MIT III solely in exchange for Tax-Exempt Shares and the
assumption by Tax-Exempt of the stated liabilities of MIT III;
(c) No gain or loss will be recognized by MIT III upon the transfer of
the assets of MIT III 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 MIT III Shareholders in exchange
for their MIT III shares;
(d) No gain or loss will be recognized by the MIT III Shareholders
upon the exchange of the MIT III shares for Tax-Exempt Shares;
(e) The aggregate tax basis for Tax-Exempt Shares received by each MIT
III Shareholder pursuant to the reorganization will be the same as the
aggregate tax basis of the MIT III Shares held by each such MIT III
Shareholder immediately prior to the Reorganization;
(f) The holding period of Tax-Exempt Shares to be received by each MIT
III Shareholder will include the period during which the MIT III Shares
surrendered in exchange therefor were held (provided such MIT III Shares
were held as capital assets on the date of the Reorganization);
(g) The tax basis of the assets of MIT III acquired by Tax-Exempt will
be the same as the tax basis of such assets to MIT III immediately prior to
the Reorganization; and
(h) The holding period of the assets of MIT III in the hands of
Tax-Exempt will include the period during which those assets were held by
MIT III.
Notwithstanding anything herein to the contrary, neither Tax-Exempt nor
MIT III may waive the conditions set forth in this paragraph 8.6.
9. FEES AND EXPENSES
9.1 (a) Tax-Exempt shall bear its expenses incurred in connection with the
entering into, and carrying out of, the provisions of this Agreement, including
legal, accounting, Commission registration fees and Blue Sky expenses. MIT III
shall bear, as set forth in the Proxy Statement and Prospectus contained in the
Registration Statement, its expenses incurred in connection with the entering
into and carrying out of the provisions of this Agreement, including legal and
accounting fees, printing, filing and proxy solicitation expenses incurred in
connection with the consummation of the transactions contemplated herein. MIT
III shall
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<PAGE>
bear any other expenses in connection with the provisions of this Agreement
including certain other legal and accounting fees 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 MIT III being either unwilling or unable to go forward (other than
by reason of the nonfulfillment or failure of any condition to MIT III's
obligations specified in this Agreement), MIT III's only obligation hereunder
shall be to reimburse Tax-Exempt for all reasonable out-of-pocket fees and
expenses incurred by Tax-Exempt in connection with those transactions.
(c) In the event the transactions contemplated herein are not consummated
by reason of Tax-Exempt being either unwilling or unable to go forward (other
than by reason of the nonfulfillment or failure of any condition to
Tax-Exempt's obligations specified in this Agreement), Tax-Exempt's only
obligation hereunder shall be to reimburse MIT III for all reasonable
out-of-pocket fees and expenses incurred by MIT III in connection with those
transactions.
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 MIT III
hereunder shall not survive the dissolution and complete liquidation of MIT III
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 MIT III and Tax-Exempt;
(b) by either Tax-Exempt or MIT III by notice to the other, without
liability to the terminating party on account of such termination
(providing the terminating party is not otherwise in material default or
breach of this Agreement) if the Closing shall not have occurred on or
before May 31, 2001; or
(c) by either Tax-Exempt or MIT III 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
MIT III 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 MIT III, or the trustees
or officers of Tax-Exempt or MIT III, 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 MIT III, or the trustees
or officers of Tax-Exempt or MIT III, except that any party in breach of
this Agreement
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<PAGE>
shall, upon demand, reimburse the non-breaching party 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.
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 trustees 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 MIT III hereunder are solely those
of MIT III. It is expressly agreed that no shareholder, nominee, trustee,
officer, agent, or employee of MIT III shall be personally liable hereunder.
The execution and delivery of this Agreement have been authorized by the
trustees of MIT III and signed by authorized officers of MIT III 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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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed by a duly authorized officer.
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
By: /s/ CHARLES A. FIUMEFREDDO
----------------------------------------------
Name: Charles A. Fiumefreddo
Title: Chairman
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
By: /s/ BARRY FINK
----------------------------------------------
Name: Barry Fink
Title: Vice President
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<PAGE>
EXHIBIT B
PROSPECTUS - FEBRUARY 24, 2000
Morgan Stanley Dean Witter
--------------------------------------------------------------------------------
TAX-EXEMPT SECURITIES TRUST
[GRAPHIC OMITTED]
A MUTUAL FUND THAT SEEKS TO PROVIDE A HIGH LEVEL OF CURRENT INCOME EXEMPT FROM
FEDERAL INCOME TAX, CONSISTENT WITH THE PRESERVATION OF CAPITAL
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
CONTENTS
The Fund Investment Objective .......................... 1
Principal Investment Strategies ............... 1
Principal Risks ............................... 2
Past Performance .............................. 4
Fees and Expenses ............................. 6
Additional Investment Strategy Information .... 7
Additional Risk Information ................... 8
Fund Management ............................... 9
Shareholder Information Pricing Fund Shares ........................... 10
How to Buy Shares ............................. 10
How to Exchange Shares ........................ 12
How to Sell Shares ............................ 14
Distributions ................................. 16
Tax Consequences .............................. 16
Share Class Arrangements ...................... 18
Financial Highlights ............................................... 25
Our Family of Funds .................................. Inside Back Cover
This Prospectus contains important information about the Fund.
Please read it carefully and keep it for future reference.
<PAGE>
THE FUND
[GRAPHIC OMITTED]
INVESTMENT OBJECTIVE
--------------------
Morgan Stanley Dean Witter Tax-Exempt Securities Trust (the "Fund") seeks to
provide a high level of current income exempt from federal income tax,
consistent with the preservation of capital.
[GRAPHIC OMITTED]
PRINCIPAL INVESTMENT STRATEGIES
-------------------------------
(sidebar)
INCOME
An investment objective having the goal of selecting securities to pay out
income rather than rise in price.
(end sidebar)
The Fund will normally invest at least 80% of its total assets in securities
that pay interest exempt from federal income taxes. The Fund's "Investment
Manager," Morgan Stanley Dean Witter Advisors Inc., generally invests the Fund's
assets in municipal obligations. Municipal obligations are bonds, notes or
short-term commercial paper issued by state governments, local governments, and
their respective agencies. At least 75% of these municipal obligations will have
the following ratings at the time of purchase:
o municipal bonds -- within the three highest grades by
Moody's Investors Service Inc.
("Moody's"), Standard & Poor's
Corporation ("S&P"), or Fitch IBCA,
Inc. ("Fitch");
o municipal notes -- within the two highest grades or, if
not rated, have outstanding bonds
within the three highest grades by
Moody's, S&P or Fitch; and
o municipal commercial paper -- within the highest grade by
Moody's, S&P or Fitch.
The Fund may invest up to 25% of its assets in municipal obligations that are
rated below the limits stated above or are not rated by those rating agencies.
However, the Fund may only invest up to 5% of its assets in municipal
obligations rated below investment grade or, if unrated, of comparable quality
as determined by the Investment Manager (commonly known as "junk bonds").
The Fund may invest up to 10% of its assets in inverse floating rate municipal
obligations. The interest rates on these obligations generally move in the
reverse direction of market interest rates. If market interest rates fall, the
interest rate on the obligations will increase and if market interest rates
increase, the interest rate on the obligations will fall.
The Fund may invest up to 20% of its assets in taxable money market instruments
or securities that pay interest income subject to the "alternative minimum tax,"
and some
1
<PAGE>
taxpayers may have to pay tax on a Fund distribution of this income. The Fund
therefore may not be a suitable investment for these investors. See the "Tax
Consequences" section for more details.
Municipal bonds, notes and commercial paper are commonly classified as either
"general obligation" or "revenue." General obligation bonds, notes, and
commercial paper are secured by the issuer's faith and credit including its
taxing power, for payment of principal and interest. Revenue bonds, notes and
commercial paper, however, are generally payable from a specific source of
income. They are issued to fund a wide variety of public and private projects in
sectors such as transportation, education and industrial development. Included
within the revenue category are participations in lease obligations. The Fund's
municipal obligation investments may include zero coupon securities, which are
purchased at a discount and accrue interest, but make no interest payments until
maturity.
In pursuing the Fund's investment objective, the Investment Manager has
considerable leeway in deciding which investments it buys, holds or sells on a
day-to-day basis -- and which investment strategies it uses. For example, the
Investment Manager in its discretion may determine to use some permitted
investment strategies while not using others.
[GRAPHIC OMITTED]
PRINCIPAL RISKS
---------------
There is no assurance that the Fund will achieve its investment objective. The
Fund's share price and yield will fluctuate with changes in the market value of
the Fund's portfolio securities. When you sell Fund shares, they may be worth
less than what you paid for them and, accordingly, you can lose money investing
in this Fund.
Credit and Interest Rate Risks. Municipal obligations, like other debt
securities, are subject to two types of risks: credit risk and interest rate
risk.
Credit risk refers to the possibility that the issuer of a security will be
unable to make interest payments and/or repay the principal on its debt. In the
case of revenue bonds, notes or commercial paper, for example, the credit risk
is the possibility that the user fees from a project or other specified revenue
sources are insufficient to meet interest and/or principal payment obligations.
The issuers of private activity bonds, used to finance projects in sectors such
as industrial development and pollution control, also may be negatively impacted
by the general credit of the user of the project.
Interest rate risk refers to fluctuations in the value of a fixed-income
security resulting from changes in the general level of interest rates. When the
general level of interest rates goes up, the prices of most fixed-income
securities go down. When the general level of interest rates goes down, the
prices of most fixed-income securities go up. Zero coupon securities are
typically subject to greater price fluctuations than comparable
2
<PAGE>
securities that pay current interest. As a general illustration of the
relationship between fixed-income securities and interest rates, the following
table shows how interest rates affect bond prices.
HOW INTEREST RATES AFFECT BOND PRICES
PRICE PER $1,000 OF A MUNICIPAL BOND
----------------------------------------
IF INTEREST RATES:
INCREASE* DECREASE**
----------------------------------------
YEARS TO
MATURITY BOND MATURITY COUPON 1% 2% 1% 2%
--------------------------------------------------------------------------------
1 2000 3.95% $990 $981 $1,010 $1,020
--------------------------------------------------------------------------------
5 2004 4.70% $957 $916 $1,045 $1,093
--------------------------------------------------------------------------------
10 2009 5.05% $926 $858 $1,082 $1,171
--------------------------------------------------------------------------------
20 2019 5.80% $892 $799 $1,128 $1,278
--------------------------------------------------------------------------------
30 2029 5.95% $875 $773 $1,155 $1,350
--------------------------------------------------------------------------------
Source: Municipal Market Data (a division of Thomson Financial Municipal Group);
"Aaa" yield curve as of 12/31/99. The table is not representative of price
changes for inverse floating rate municipal obligations which typically respond
to changes in interest rates to a greater extent than comparable obligations. In
addition, the table is an illustration and does not represent expected yields or
share price changes of any Morgan Stanley Dean Witter mutual fund.
* Assumes no effect from market discount calculation.
**Assumes bonds are non-callable.
The Fund is not limited as to the maturities of the municipal obligations in
which it may invest. Thus, a rise in the general level of interest rates may
cause the price of the Fund's portfolio securities to fall substantially.
Inverse Floating Rate Municipal Obligations. The inverse floating rate municipal
obligations in which the Fund may invest are typically created through a
division of a fixed rate municipal obligation into two separate instruments, a
short-term obligation and a long-term obligation. The interest rate on the
short-term obligation is set at periodic auctions. The interest rate on the
long-term obligation is the rate the issuer would have paid on the fixed income
obligation: (i) plus the difference between such fixed rate and the rate on the
short-term obligation, if the short-term rate is lower than the fixed rate; or
(ii) minus such difference if the interest rate on the short-term obligation is
higher than the fixed rate. Inverse floating rate municipal obligations offer
the potential for higher income than is available from fixed rate obligations of
comparable maturity and credit rating. They also carry greater risks. In
particular, the prices of inverse floating rate municipal obligations are more
volatile, i.e., they increase and decrease in response to changes in interest
rates to a greater extent than comparable fixed rate obligations.
3
<PAGE>
Other Risks. The performance of the Fund also will depend on whether the
Investment Manager is successful in pursuing the Fund's investment strategy. The
Fund is also subject to other risks from its permissible investments including
the risks associated with its lease obligations investments. For more
information about these risks, see the "Additional Risk Information" section.
Shares of the Fund are not bank deposits and are not guaranteed or insured by
the FDIC or any other government agency.
4
<PAGE>
[GRAPHIC OMITTED]
PAST PERFORMANCE
----------------
The bar chart and table below provide some indication of the risks of investing
in the Fund. The Fund's past performance does not indicate how the Fund will
perform in the future.
(sidebar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Fund's Class D shares has varied
from year to year over the past 10 calendar years.
(end sidebar)
[GRAPHIC OMITTED]
ANNUAL TOTAL RETURNS--CALENDAR YEARS
YEAR PERCENTAGE
1990 5.86%
1991 12.71%
1992 9.09%
1993 11.23%
1994 -5.55%
1995 17.37%
1996 3.61%
1997 8.73%
1998 6.11%
1999 -2.71%
The bar chart reflects the performance of Class D shares. All shares held prior
to the Fund adopting its Multi-Class Structure on July 28, 1997 were designated
Class D Shares. Prior to that date, shares were subject to a front-end sales
charge, which is not reflected in the bar chart. The performance of the other
Classes will differ because the Classes have different ongoing fees.
(sidebar)
AVERAGE ANNUAL TOTAL RETURNS
This table compares the Fund's average annual returns with those of a broad
measure of market performance over time. The Fund's returns include the maximum
applicable sales charge for each Class and assume you sold your shares at the
end of each period.
(end sidebar)
During the periods shown in the bar chart, the highest return for a calendar
quarter was 6.89% (quarter ended March 31, 1995) and the lowest return for a
calendar quarter was -5.50% (quarter ended March 31, 1994).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 1999)
--------------------------------------------------------------------------------
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
--------------------------------------------------------------------------------
Class A(1) -6.95% 5.27% 5.73%
--------------------------------------------------------------------------------
Class B(2) -7.86% -- --
--------------------------------------------------------------------------------
Class C(2) -4.29% -- --
--------------------------------------------------------------------------------
Class D(3) -2.71% 6.42% 6.44%
--------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index(4) -2.06% 6.91% 6.89%
--------------------------------------------------------------------------------
(1) Prior to July 28, 1997 the Fund offered only one class of shares. Because
the distribution arrangement for Class A most closely resembled the
distribution arrangement 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 4.00%
sales charge in effect prior to July 28, 1997. In addition, Class A shares
are now subject to an ongoing 12b-1 fee which is reflected in the restated
performance for that class.
(2) Classes B and C commenced operations on July 28, 1997.
(3) Because all shares of the Fund held prior to July 28, 1997 were designated
Class D shares, the Fund's historical performance has been restated to
reflect the absence of any sales charge.
(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 Investor Service, Inc. or Standard & Poor's
Corp. The Index does not include any expenses, fees, or changes. The Index
is unmanaged and should not be considered an investment.
5
<PAGE>
[GRAPHIC OMITTED]
FEES AND EXPENSES
-----------------
The table below briefly describes the fees and expenses that you may pay if you
buy and hold shares of the Fund. The Fund offers four Classes of shares: Classes
A, B, C and D. Each Class has a different combination of fees, expenses and
other features. The Fund does not charge account or exchange fees. See the
"Share Class Arrangements" section for further fee and expense information.
(sidebar)
SHAREHOLDER FEES
These fees are paid directly from your investment.
(end sidebar)
(sidebar)
ANNUAL FUND OPERATING EXPENSES
These expenses are deducted from the Fund's assets and are based on expenses
paid for the fiscal year ended December 31, 1999.
(end sidebar)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 4.25%(1) None None None
------------------------------------------------------------------------------------------------------
Maximum deferred sales charge (load) (as a
percentage based on the lesser of the offering
price or net asset value at redemption) None(2) 5.00%(3) 1.00%(4) None
------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
------------------------------------------------------------------------------------------------------
Management fee 0.44% 0.44% 0.44% 0.44%
------------------------------------------------------------------------------------------------------
Distribution and service (12b-1) fees 0.13% 0.60% 0.70% None
------------------------------------------------------------------------------------------------------
Other expenses 0.07% 0.07% 0.07% 0.07%
------------------------------------------------------------------------------------------------------
Total annual Fund operating expenses 0.64% 1.11% 1.21% 0.51%
------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reduced for purchases of $25,000 and over.
(2) Investments that are not subject to any sales charge at the time of
purchase are subject to a contingent deferred sales charge ("CDSC") of
1.00% that will be imposed if you sell your shares within one year after
purchase, except for certain specific circumstances.
(3) The CDSC is scaled down to 1.00% during the sixth year, reaching zero
thereafter. See "Share Class Arrangements" for a complete discussion of the
CDSC.
(4) Only applicable if you sell your shares within one year after purchase.
6
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund, your investment has a
5% return each year, and the Fund's operating expenses remain the same. Although
your actual costs may be higher or lower, the tables below show your costs at
the end of each period based on these assumptions depending upon whether or not
you sell (redeem) your shares at the end of each period.
<TABLE>
<CAPTION>
IF YOU SOLD YOUR SHARES: IF YOU HELD YOUR SHARES:
------------------------------------------------ ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------------ ---------------------------------------------
CLASS A $488 $621 $767 $1,189 $488 $621 $767 $1,189
------------------------------------------------ ---------------------------------------------
CLASS B $613 $653 $812 $1,352 $113 $353 $612 $1,352
------------------------------------------------ ---------------------------------------------
CLASS C $223 $384 $665 $1,466 $123 $384 $665 $1,466
------------------------------------------------ ---------------------------------------------
CLASS D $52 $164 $285 $640 $52 $164 $285 $640
------------------------------------------------ ---------------------------------------------
</TABLE>
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.
[GRAPHIC OMITTED]
ADDITIONAL INVESTMENT STRATEGY INFORMATION
------------------------------------------
This section provides additional information relating to the Fund's principal
strategies.
Lease Obligations. Included within the revenue bonds category are participations
in lease obligations or installment purchase contracts of municipalities.
Generally, state and local agencies or authorities issue lease obligations to
acquire equipment and facilities for public and private purposes.
Defensive Investing. The Fund may take temporary "defensive" positions in
attempting to respond to adverse market conditions. The Fund may invest any
amount of its assets in taxable securities, or in tax-exempt securities subject
to the federal alternative minimum tax for individual shareholders when the
Investment Manager believes it is advisable to do so. Although taking a
defensive posture is designed to protect the Fund from an anticipated market
downturn, it could have the effect of reducing the Fund's ability to provide
tax-exempt income. When the Fund takes a defensive position, it may not achieve
its investment objective.
The percentage limitations relating to the composition of the Fund's portfolio
apply at the time the Fund acquires an investment and refer to the Fund's net
assets, unless otherwise noted. Subsequent percentage changes that result from
market fluctuations
7
<PAGE>
will not require the Fund to sell any portfolio security. The Fund may change
its principal investment strategies without shareholder approval; however, you
would be notified of any changes.
[GRAPHIC OMITTED]
ADDITIONAL RISK INFORMATION
---------------------------
This section provides additional information relating to the principal risks of
investing in the Fund.
Bond Insurance Risk. Many of the municipal obligations the Fund invests in will
be covered by insurance at the time of issuance or at a later date. Such
insurance covers the remaining term of the security. Insured municipal
obligations would generally be assigned a lower rating if the rating were based
primarily on the credit quality of the issuer without regard to the insurance
feature. If the claims-paying ability of the insurer were downgraded, the
ratings on the municipal obligations it insures may also be downgraded.
Lease Obligations. 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, in part, 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 that 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 these legislative actions do not occur, the holders of
the lease obligation may experience difficulty in exercising their rights,
including disposition of the property.
8
<PAGE>
[GRAPHIC OMITTED]
FUND MANAGEMENT
----------------
(sidebar)
MORGAN STANLEY DEAN WITTER ADVISORS INC.
The Investment Manager is widely recognized as a leader in the mutual fund
industry and together with Morgan Stanley Dean Witter Services Company Inc.,
its wholly-owned subsidiary, had approximately $145 billion in assets under
management as of January 31, 2000.
(end sidebar)
The Fund has retained the Investment Manager -- Morgan Stanley Dean Witter
Advisors Inc. -- to provide administrative services, manage its business affairs
and invest its assets, including the placing of orders for the purchase and sale
of portfolio securities. The Investment Manager is a wholly-owned subsidiary of
Morgan Stanley Dean Witter & 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. Its main business office is
located at Two World Trade Center, New York, NY 10048.
The Fund's portfolio is managed within the Investment Manager's Tax-Exempt
Group. James F. Willison, Senior Vice President and Director of the Tax-Exempt
Fixed-Income Group of the Investment Manager has been a primary portfolio
manager of the Fund since its inception. Joseph R. Arcieri, Senior Vice
President of the Investment Manager, has been a primary portfolio manager of the
Fund since February 1997. Mr. Willison and Mr. Arcieri have been portfolio
managers with the Investment Manager for over five years.
The Fund pays the Investment Manager a monthly management fee as full
compensation for the services and facilities furnished to the Fund, and for Fund
expenses assumed by the Investment Manager. The fee is based on the Fund's
average daily net assets. For the fiscal year ended December 31, 1999, the Fund
accrued total compensation to the Investment Manager amounting to 0.44% of the
Fund's average daily net assets.
9
<PAGE>
SHAREHOLDER INFORMATION
[GRAPHIC OMITTED]
PRICING FUND SHARES
-------------------
The price of Fund shares (excluding sales charges), called "net asset value," is
based on the value of the Fund's portfolio securities. While the assets of each
Class are invested in a single portfolio of securities, the net asset value of
each Class will differ because the Classes have different ongoing distribution
fees.
The net asset value per share of the Fund is determined once daily at 4:00 p.m.
Eastern 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). Shares will not be priced on days that the New York Stock Exchange is
closed.
The Fund's portfolio securities (except for short-term taxable debt securities
and certain other investments) are valued by an outside independent pricing
service. The service uses a computerized grid matrix of tax-exempt securities
and its evaluations in determining what it believes is the fair value of the
portfolio securities. The Fund's Board of Trustees believes that timely and
reliable market quotations are generally not readily available to the Fund to
value tax-exempt securities and the valuations that the pricing service supplies
are more likely to approximate the fair value of the securities.
An exception to the Fund's general pricing policy concerns its short-term debt
securities. Debt securities with remaining maturities of sixty days or less at
the time of purchase are valued at amortized cost. However, if the cost does not
reflect the securities' market value, these securities will be valued at their
fair value.
[GRAPHIC OMITTED]
HOW TO BUY SHARES
-----------------
(sidebar)
CONTACTING A FINANCIAL ADVISOR
If you are new to the Morgan Stanley Dean Witter Family of Funds and would like
to contact a Financial Advisor, call (877) 937-MSDW (toll-free) for the
telephone number of the Morgan Stanley Dean Witter office nearest you. You may
also access our office locator on our Internet site at:
www.msdw.com/individual/funds
(end sidebar)
You may open a new account to buy Fund shares or buy additional Fund shares for
an existing account by contacting your Morgan Stanley Dean Witter Financial
Advisor. Your Financial Advisor or other authorized financial representative
will assist you, step-by-step, with the procedures to invest in the Fund. You
may also purchase shares directly by calling the Fund's transfer agent and
requesting an application.
Because every investor has different immediate financial needs and long-term
investment goals, the Fund offers investors four Classes of shares: Classes A,
B, C and D. Class D shares are only offered to a limited group of investors.
Each Class of shares offers a distinct structure of sales charges, distribution
and service fees, and other features that are designed to address a variety of
needs. Your Financial Advisor or other authorized financial representative can
help you decide which Class may be most appropriate for you. When purchasing
Fund shares, you must specify which Class of shares you wish to purchase.
10
<PAGE>
When you buy Fund shares, the shares are purchased at the next share price
calculated (less any applicable front-end sales charge for Class A shares) after
we receive your purchase order. Your payment is due on the third business day
after you place your purchase order. We reserve the right to reject any order
for the purchase of Fund shares.
(sidebar)
EASYINVEST(SM)
A purchase plan that allows you to transfer money automatically from your
checking or savings account or from a Money Market Fund on a semi-monthly,
monthly or quarterly basis. Contact your Morgan Stanley Dean Witter Financial
Advisor for further information about this service.
(end sidebar)
MINIMUM INVESTMENT AMOUNTS
-------------------------------------------------------------
MINIMUM INVESTMENT
--------------------------
INVESTMENT OPTIONS INITIAL ADDITIONAL
-------------------------------------------------------------
Regular Accounts $1,000 $100
-------------------------------------------------------------
EasyInvest(SM)
(Automatically from your
checking or savings account
or Money Market Fund) $100* $100*
-------------------------------------------------------------
* Provided your schedule of investments totals $1,000 in twelve months.
There is no minimum investment amount if you purchase Fund shares through: (1)
the Investment Manager's mutual fund asset allocation plan, (2) a program,
approved by the Fund's distributor, in which you pay an asset-based fee for
advisory, administrative and/or brokerage services, or (3) employer-sponsored
employee benefit plan accounts.
Investment Options for Certain Institutional and Other Investors/Class D Shares.
To be eligible to purchase Class D shares, you must qualify under one of the
investor categories specified in the "Share Class Arrangements" section of this
Prospectus.
Subsequent Investments Sent Directly to the Fund. In addition to buying
additional Fund shares for an existing account by contacting your Morgan Stanley
Dean Witter Financial Advisor, you may send a check directly to the Fund. To buy
additional shares in this manner:
o Write a "letter of instruction" to the Fund specifying the name(s) on the
account, the account number, the social security or tax identification number,
the Class of shares you wish to purchase and the investment amount (which
would include any applicable front-end sales charge). The letter must be
signed by the account owner(s).
o Make out a check for the total amount payable to: Morgan Stanley Dean Witter
Tax-Exempt Securities Trust.
o Mail the letter and check to Morgan Stanley Dean Witter Trust FSB at P.O. Box
1040, Jersey City, NJ 07303.
11
<PAGE>
[GRAPHIC OMITTED]
HOW TO EXCHANGE SHARES
----------------------
Permissible Fund Exchanges. You may exchange shares of any Class of the Fund for
the same Class of any other continuously offered Multi-Class Fund, or for shares
of a No-Load Fund, a Money Market Fund, North American Government Income Trust
or Short-Term U.S. Treasury Trust, without the imposition of an exchange fee.
See the inside back cover of this prospectus for each Morgan Stanley Dean Witter
Fund's designation as a Multi-Class Fund, No-Load Fund or Money Market Fund. If
a Morgan Stanley Dean Witter Fund is not listed, consult the inside back cover
of that Fund's prospectus for its designation. For purposes of exchanges, shares
of FSC Funds (subject to a front-end sales charge) are treated as Class A shares
of a Multi-Class Fund.
Exchanges may be made after shares of the Fund acquired by purchase have been
held for thirty days. There is no waiting period for exchanges of shares
acquired by exchange or dividend reinvestment. The current prospectus for each
fund describes its investment objective(s), policies and investment minimums,
and should be read before investment. Since exchanges are available only into
continuously offered Morgan Stanley Dean Witter Funds, exchanges are not
available into any new Morgan Stanley Dean Witter Fund during its initial
offering period, or when shares of a particular Morgan Stanley Dean Witter Fund
are not being offered for purchase.
Exchange Procedures. You can process an exchange by contacting your Morgan
Stanley Dean Witter Financial Advisor or other authorized financial
representative. Otherwise, you must forward an exchange privilege authorization
form to the Fund's transfer agent -- Morgan Stanley Dean Witter Trust FSB -- and
then write the transfer agent or call (800) 869-NEWS to place an exchange order.
You can obtain an exchange privilege authorization form by contacting your
Financial Advisor or other authorized financial representative, or by calling
(800) 869-NEWS. If you hold share certificates, no exchanges may be processed
until we have received all applicable share certificates.
An exchange to any Morgan Stanley Dean Witter Fund (except a Money Market Fund)
is made on the basis of the next calculated net asset values of the Funds
involved after the exchange instructions are accepted. When exchanging into a
Money Market Fund, the Fund's shares are sold at their next calculated net asset
value and the Money Market Fund's shares are purchased at their net asset value
on the following business day.
The Fund may terminate or revise the exchange privilege upon required notice.
The check writing privilege is not available for Money Market Fund shares you
acquire in an exchange.
Telephone Exchanges. For your protection when calling Morgan Stanley Dean Witter
Trust FSB, we will employ reasonable procedures to confirm that exchange
instructions communicated over the telephone are genuine. These procedures may
include
12
<PAGE>
requiring various forms of personal identification such as name, mailing
address, social security or other tax identification number. Telephone
instructions also may be recorded.
Telephone instructions will be accepted if received by the Fund's transfer agent
between 9:00 a.m. and 4:00 p.m. Eastern time on any day the New York Stock
Exchange is open for business. 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 Fund in the past.
Margin Accounts. If you have pledged your Fund shares in a margin account,
contact your Morgan Stanley Dean Witter Financial Advisor or other authorized
financial representative regarding restrictions on the exchange of such shares.
Tax Considerations of Exchanges. If you exchange shares of the Fund for shares
of another Morgan Stanley Dean Witter Fund there are important tax
considerations. For tax purposes, the exchange out of the Fund is considered a
sale of Fund shares -- and the exchange into the other Fund is considered a
purchase. As a result, you may realize a capital gain or loss.
You should review the "Tax Consequences" section and consult your own tax
professional about the tax consequences of an exchange.
Limitations on Exchanges. Certain patterns of exchanges may result in the Fund
limiting or prohibiting, at its discretion, additional purchases and/or
exchanges. Determinations in this regard may be made based on the frequency or
dollar amount of previous exchanges. The Fund will notify you in advance of
limiting your exchange privileges.
CDSC Calculations on Exchanges. See the "Share Class Arrangements" section of
this Prospectus for a further discussion of how applicable contingent deferred
sales charges (CDSCs) are calculated for shares of one Morgan Stanley Dean
Witter Fund that are exchanged for shares of another.
For further information regarding exchange privileges, you should contact your
Morgan Stanley Dean Witter Financial Advisor or call (800) 869-NEWS.
13
<PAGE>
[GRAPHIC OMITTED]
HOW TO SELL SHARES
------------------
You can sell some or all of your Fund shares at any time. If you sell Class A,
Class B or Class C shares, your net sale proceeds are reduced by the amount of
any applicable CDSC. Your shares will be sold at the next price calculated after
we receive your order to sell as described below.
OPTIONS PROCEDURES
--------------------------------------------------------------------------------
Contact Your To sell your shares, simply call your Morgan Stanley
Financial Advisor Dean Witter Financial Advisor or other authorized
[GRAPHIC OMITTED] financial representative.
---------------------------------------------------------
Payment will be sent to the address to which the account
is registered or deposited in your brokerage account.
--------------------------------------------------------------------------------
By Letter You can also sell your shares by writing a
[GRAPHIC OMITTED] "letter of instruction" that includes:
o your account number;
o the dollar amount or the number of shares you wish to
sell;
o the Class of shares you wish to sell; and
o the signature of each owner as it appears on the
account.
---------------------------------------------------------
If you are requesting payment to anyone other than the
registered owner(s) or that payment be sent to any
address other than the address of the registered
owner(s) or pre-designated bank account, you will need a
signature guarantee. You can obtain a signature
guarantee from an eligible guarantor acceptable to
Morgan Stanley Dean Witter Trust FSB. (You should
contact Morgan Stanley Dean Witter Trust FSB at (800)
869-NEWS for a determination as to whether a particular
institution is an eligible guarantor.) A notary public
cannot provide a signature guarantee. Additional
documentation may be required for shares held by a
corporation, partnership, trustee or executor.
---------------------------------------------------------
Mail the letter to Morgan Stanley Dean Witter Trust FSB
at P.O. Box 983, Jersey City, NJ 07303. If you hold
share certificates, you must return the certificates,
along with the letter and any required additional
documentation.
---------------------------------------------------------
A check will be mailed to the name(s) and address in
which the account is registered, or otherwise according
to your instructions.
--------------------------------------------------------------------------------
Systematic If your investment in all of the Morgan Stanley Dean
Withdrawal Plan Witter Family of Funds has a total Withdrawal Plan
[GRAPHIC OMITTED] market value of at least $10,000, you may elect to
withdraw amounts of $25 or more, or in any whole
percentage of a Fund's balance (provided the amount is
at least $25), on a monthly, quarterly, semi-annual or
annual basis, from any Fund with a balance of at least
$1,000. Each time you add a Fund to the plan, you must
meet the plan requirements.
---------------------------------------------------------
Amounts withdrawn are subject to any applicable CDSC. A
CDSC may be waived under certain circumstances. See the
Class B waiver categories listed in the "Share Class
Arrangements" section of this Prospectus.
---------------------------------------------------------
To sign up for the Systematic Withdrawal Plan, contact
your Morgan Stanley Dean Witter Financial Advisor or
call (800) 869-NEWS. You may terminate or suspend your
plan at any time. Please remember that withdrawals from
the plan are sales of shares, not Fund "distributions,"
and ultimately may exhaust your account balance. The
Fund may terminate or revise the plan at any time.
--------------------------------------------------------------------------------
14
<PAGE>
Payment for Sold Shares. After we receive your complete instructions to sell as
described above, a check will be mailed to you within seven days, although we
will attempt to make payment within one business day. Payment may also be sent
to your brokerage account.
Payment may be postponed or the right to sell your shares suspended, under
unusual circumstances. If you request to sell shares that were recently
purchased by check, your sale will not be effected until it has been verified
that the check has been honored.
Reinstatement Privilege. If you sell Fund shares and have not previously
exercised the reinstatement privilege, you may, within 35 days after the date of
sale, invest any portion of the proceeds in the same Class of Fund shares at
their net asset value and receive a pro rata credit for any CDSC paid in
connection with the sale.
Involuntary Sales. The Fund reserves the right, on sixty days' notice, to sell
the shares of any shareholder (other than shares held in an IRA or 403(b)
Custodial Account) whose shares, due to sales by the shareholder, have a value
below $100, or in the case of an account opened through EasyInvest(SM), if after
12 months the shareholder has invested less than $1,000 in the account.
However, before the Fund sells your shares in this manner, we will notify you
and allow you sixty days to make an additional investment in an amount that will
increase the value of your account to at least the required amount before the
sale is processed. No CDSC will be imposed on any involuntary sale.
Margin Accounts. If you have pledged your Fund shares in a margin account,
contact your Morgan Stanley Dean Witter Financial Advisor or other authorized
financial representative regarding restrictions on the sale of such shares.
15
<PAGE>
[GRAPHIC OMITTED]
DISTRIBUTIONS
-------------
(sidebar)
TARGETED DIVIDENDS(SM)
You may select to have your Fund distributions automatically invested in other
Classes of Fund shares or Classes of another Morgan Stanley Dean Witter Fund
that you own. Contact your Morgan Stanley Dean Witter Financial Advisor for
further information about this service.
(end sidebar)
The Fund passes substantially all of its earnings from income and capital gains
along to its investors as "distributions." The Fund earns interest from
fixed-income investments. These amounts are passed along to Fund shareholders as
"income dividend distributions." The Fund realizes capital gains whenever it
sells securities for a higher price than it paid for them. These amounts may be
passed along as "capital gain distributions."
The Fund declares income dividends separately for each Class. Distributions paid
on Class A and Class D shares usually will be higher than for Class B and Class
C because distribution fees that Class B and Class C pay are higher. Normally,
income dividends are declared on each day the New York Stock Exchange is open
for business, and are distributed to shareholders monthly. Capital gains, if
any, are usually distributed in June and December. The Fund, however, may retain
and reinvest any long-term capital gains. The Fund may at times make payments
from sources other than income or capital gains that represent a return of a
portion of your investment.
Distributions are reinvested automatically in additional shares of the same
Class and automatically credited to your account, unless you request in writing
that all distributions be paid in cash. If you elect the cash option, processing
of your dividend checks begins immediately following the monthly payment date,
and the Fund will mail a monthly dividend check to you normally during the first
seven days of the following month. No interest will accrue on uncashed checks.
If you wish to change how your distributions are paid, your request should be
received by the Fund's transfer agent, Morgan Stanley Dean Witter Trust FSB, at
least five business days prior to the record date of the distributions.
[GRAPHIC OMITTED]
TAX CONSEQUENCES
----------------
As with any investment, you should consider how your Fund investment will be
taxed. The tax information in this Prospectus is provided as general
information. You should consult your own tax professional about the tax
consequences of an investment in the Fund.
You need to be aware of the possible tax consequences when:
o The Fund makes distributions; and
o You sell Fund shares, including an exchange to another Morgan Stanley Dean
Witter Fund.
16
<PAGE>
Taxes on Distributions. Your income dividend distributions are normally exempt
from federal income taxes -- to the extent they are derived from municipal
obligations. Income derived from other portfolio securities may be subject to
federal, state and/or local income taxes.
Income derived from some municipal securities is subject to the federal
"alternative minimum tax." Certain tax-exempt securities whose proceeds are used
to finance private, for-profit organizations are subject to this special tax
system that ensures that individuals pay at least some federal taxes. Although
interest on these securities is generally exempt from federal income tax, some
taxpayers who have many tax deductions or exemptions nevertheless may have to
pay tax on the income.
If you borrow money to purchase shares of the Fund, the interest on the borrowed
money is generally not deductible for personal income tax purposes.
If the Fund makes any capital gain distributions, those distributions will
normally be subject to federal income tax when they are paid, whether you take
them in cash or reinvest them in the Fund shares. Any long-term capital gain
distributions are taxable to you as long-term capital gains, no matter how long
you have owned shares in the Fund.
The Fund may derive gains in part from municipal obligations the Fund purchased
below their principal or face values. All, or a portion, of these gains may be
taxable to you as ordinary income rather than capital gains.
Taxes on Sales. Your sale of Fund shares normally is subject to federal and
state income tax and may result in a taxable gain or loss to you. A sale also
may be subject to local income tax. Your exchange of Fund shares for shares of
another Morgan Stanley Dean Witter Fund is treated for tax purposes like a sale
of your original shares and a purchase of your new shares. Thus, the exchange
may, like a sale, result in a taxable gain or loss to you and will give you a
new tax basis for your new shares.
When you open your Fund account, you should provide your social security or tax
identification number on your investment application. By providing this
information, you will avoid being subject to a federal backup withholding tax of
31% on taxable distributions and redemption proceeds. Any withheld amount would
be sent to the IRS as an advance tax payment.
17
<PAGE>
[GRAPHIC OMITTED]
SHARE CLASS ARRANGEMENTS
------------------------
The Fund offers several Classes of shares having different distribution
arrangements designed to provide you with different purchase options according
to your investment needs. Your Morgan Stanley Dean Witter Financial Advisor or
other authorized financial representative can help you decide which Class may be
appropriate for you.
The general public is offered three Classes: Class A shares, Class B shares and
Class C shares, which differ principally in terms of sales charges and ongoing
expenses. A fourth Class, Class D shares, is offered only to a limited category
of investors. Shares that you acquire through reinvested distributions will not
be subject to any front-end sales charge or CDSC -- contingent deferred sales
charge. Sales personnel may receive different compensation for selling each
Class of shares. The sales charges applicable to each Class provide for the
distribution financing of shares of that Class.
The chart below compares the sales charge and maximum annual 12b-1 fee
applicable to each Class:
MAXIMUM
CLASS SALES CHARGE ANNUAL 12B-1 FEE
--------------------------------------------------------------------------------
A Maximum 4.25% initial sales charge reduced for
purchases of $25,000 or more; shares sold
without an initial sales charge are generally
subject to a 1.0% CDSC during the first year 0.25%
--------------------------------------------------------------------------------
B Maximum 5.0% CDSC during the first year
decreasing to 0% after six years 0.60%
--------------------------------------------------------------------------------
C 1.0% CDSC during the first year 0.70%
--------------------------------------------------------------------------------
D None None
--------------------------------------------------------------------------------
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 purchases of
$25,000 or more according to the schedule below. Investments of $1 million or
more are not subject to an initial sales charge, but are generally subject to a
contingent deferred sales charge, or CDSC, of 1.0% on sales made within one year
after the last day of the month of purchase. The CDSC will be assessed in the
same manner and with the same CDSC waivers as with Class B shares. Class A
shares are also subject to a distribution (12b-1) fee of up to 0.25% of the
average daily net assets of the Class.
18
<PAGE>
The offering price of Class A shares includes a sales charge (expressed as a
percentage of the offering price) on a single transaction as shown in the
following table:
(sidebar)
FRONT-END SALES CHARGE OR FSC
An initial sales charge you pay when purchasing Class A shares that is based on
a percentage of the offering price. The percentage declines based upon the
dollar value of Class A shares you purchase. We offer three ways to reduce your
Class A sales charges -- the Combined Purchase Privilege, Right of Accumulation
and Letter of Intent.
(end sidebar)
<TABLE>
<CAPTION>
FRONT-END SALES CHARGE
-----------------------------------------------
AMOUNT OF PERCENTAGE OF APPROXIMATE PERCENTAGE
SINGLE TRANSACTION PUBLIC OFFERING PRICE OF NET 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>
The reduced sales charge schedule is applicable to purchases of Class A shares
in a single transaction by:
o A single account (including an individual, trust or fiduciary account).
o Family member accounts (limited to husband, wife and children under the age of
21).
o Pension, profit sharing or other employee benefit plans of companies and their
affiliates.
o Tax-exempt organizations.
o Groups organized for a purpose other than to buy mutual fund shares.
Combined Purchase Privilege. You also will have the benefit of reduced sales
charges by combining purchases of Class A shares of the Fund in a single
transaction with purchases of Class A shares of other Multi-Class Funds and
shares of FSC Funds.
Right of Accumulation. You also may benefit from a reduction of sales charges if
the cumulative net asset value of Class A shares of the Fund purchased in a
single transaction, together with shares of other Funds you currently own which
were previously purchased at a price including a front-end sales charge
(including shares acquired through reinvestment of distributions), amounts to
$25,000 or more. Also, if you have a cumulative net asset value of all your
Class A and Class D shares equal to at least $5 million (or $25 million for
certain employee benefit plans), you are eligible to purchase Class D shares of
any Fund subject to the Fund's minimum initial investment requirement.
19
<PAGE>
You must notify your Morgan Stanley Dean Witter Financial Advisor or other
authorized financial representative (or Morgan Stanley Dean Witter Trust FSB if
you purchase directly through the Fund), 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 when an order is
placed by mail. The reduced sales charge will not be granted if: (i)
notification is not furnished at the time of the order; or (ii) a review of the
records of Dean Witter Reynolds or other authorized dealer of Fund shares or the
Fund's transfer agent does not confirm your represented holdings.
Letter of Intent. The schedule of reduced sales charges for larger purchases
also will be available to you if you enter into a written "letter of intent." A
letter of intent provides for the purchase of Class A shares of the Fund or
other Multi-Class Funds or shares of FSC Funds within a thirteen-month period.
The initial purchase under a letter of intent must be at least 5% of the stated
investment goal. To determine the applicable sales charge reduction, you may
also include: (1) the cost of shares of other Morgan Stanley Dean Witter Funds
which were previously purchased at a price including a front-end sales charge
during the 90-day period prior to the distributor receiving the letter of
intent, and (2) the cost of shares of other Funds you currently own acquired in
exchange for shares of Funds purchased during that period at a price including a
front-end sales charge. You can obtain a letter of intent by contacting your
Morgan Stanley Dean Witter Financial Advisor or other authorized financial
representative, or by calling (800) 869-NEWS. If you do not achieve the stated
investment goal within the thirteen-month period, you are required to pay the
difference between the sales charges otherwise applicable and sales charges
actually paid, which may be deducted from your investment.
Other Sales Charge Waivers. In addition to investments of $1 million or more,
your purchase of Class A shares is not subject to a front-end sales charge (or a
CDSC upon sale) if your account qualifies under one of the following categories:
o A trust for which Morgan Stanley Dean Witter Trust FSB provides discretionary
trustee services.
o Persons participating in a fee-based investment program (subject to all of its
terms and conditions, including termination fees, mandatory sale or transfer
restrictions on termination) approved by the Fund's distributor pursuant to
which they pay an asset-based fee for investment advisory, administrative and/
or brokerage services.
o A client of a Morgan Stanley Dean Witter Financial Advisor who joined us from
another investment firm within six months prior to the date of purchase of
Fund shares, and you used the proceeds from the sale of shares of a
proprietary mutual fund of that Financial Advisor's previous firm that imposed
either a front-end or deferred sales charge to purchase Class A shares,
provided that: (1) you sold the shares not more than 60 days prior to the
purchase of fund shares, and (2) the sale proceeds were maintained in the
interim in cash or a money market fund.
20
<PAGE>
o Current or retired Directors/Trustees of the Morgan Stanley Dean Witter Funds,
such persons' spouses and children under the age of 21, and trust accounts for
which any of such persons is a beneficiary.
o Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries, such persons' spouses and children
under the age of 21, and trust accounts for which any of such persons is a
beneficiary.
CLASS B SHARES Class B shares are offered at net asset value with no initial
sales charge but are subject to a contingent deferred sales charge, or CDSC, as
set forth in the table below. For the purpose of calculating the CDSC, shares
are deemed to have been purchased on the last day of the month during which they
were purchased.
(sidebar)
CONTINGENT DEFERRED SALES CHARGE OR CDSC
A fee you pay when you sell shares of certain Morgan Stanley Dean Witter Funds
purchased without an initial sales charge. This fee declines the longer you hold
your shares as set forth in the table.
(end sidebar)
CDSC AS A PERCENTAGE OF
YEAR SINCE PURCHASE PAYMENT MADE AMOUNT REDEEMED
----------------------------------------------------------------------
First 5.0%
----------------------------------------------------------------------
Second 4.0%
----------------------------------------------------------------------
Third 3.0%
----------------------------------------------------------------------
Fourth 2.0%
----------------------------------------------------------------------
Fifth 2.0%
----------------------------------------------------------------------
Sixth 1.0%
----------------------------------------------------------------------
Seventh and thereafter None
----------------------------------------------------------------------
Each time you place an order to sell or exchange shares, shares with no CDSC
will be sold or exchanged first, then shares with the lowest CDSC will be sold
or exchanged next. For any shares subject to a CDSC, the CDSC will be assessed
on an amount equal to the lesser of the current market value or the cost of the
shares being sold. A lower CDSC schedule applies in most cases to shares of the
Fund acquired in connection with the reorganization of Dean Witter National
Municipal Trust and the Fund on November 7, 1997.
CDSC Waivers. A CDSC, if otherwise applicable, will be waived in the case of:
o Sales of shares held at the time you die or become disabled (within the
definition in Section 72(m)(7) of the Internal Revenue Code which relates to
the ability to engage in gainful employment), if the shares are:
(i) registered either in your name (not a trust) or in the names of you and
your spouse as joint tenants with right of survivorship; or (ii) held in a
qualified corporate or self-employed retirement plan, IRA or 403(b) Custodial
Account, provided in either case that the sale is requested within one year of
your death or initial determination of disability.
o Sales in connection with the following retirement plan "distributions:" (i)
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
21
<PAGE>
heavy" plan, following attainment of age 59 1/2); (ii) distributions from an
IRA or 403(b) Custodial Account following attainment of age 59 1/2; or (iii) a
tax-free return of an excess IRA contribution (a "distribution" does not include
a direct transfer of IRA, 403(b) Custodial Account or retirement plan assets to
a successor custodian or trustee).
o Sales of shares in connection with the Systematic Withdrawal Plan of up
to 12% annually of the value of each Fund from which plan sales are
made. The percentage is determined on the date you establish the
Systematic Withdrawal Plan and based on the next calculated share price.
You may have this CDSC waiver applied in amounts up to 1% per month, 3%
per quarter, 6% semi-annually or 12% annually. Shares with no CDSC will
be sold first, followed by those with the lowest CDSC. As such, the
waiver benefit will be reduced by the amount of your shares that are not
subject to a CDSC. If you suspend your participation in the plan, you
may later resume plan payments without requiring a new determination of
the account value for the 12% CDSC waiver.
o Sales of shares if you simultaneously invest the proceeds in the
Investment Manager's mutual fund asset allocation program, pursuant
to which investors pay an asset-based fee. Any shares you acquire
in connection with the Investment Manager's mutual fund asset
allocation program are subject to all of the terms and conditions
of that program, including termination fees, mandatory sale or
transfer restrictions on termination.
All waivers will be granted only following the Fund's distributor receiving
confirmation of your entitlement. If you believe you are eligible for a CDSC
waiver, please contact your Financial Advisor or call (800) 869-NEWS.
Distribution Fee. Class B shares are also subject to an annual 12b-1 fee of
0.60% of the average daily net assets of Class B.
Conversion Feature. After ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund with no initial sales charge. The
ten year period runs 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, from
the last day of the month in which the original Class B shares were purchased;
the shares will convert to Class A shares based on their relative net asset
values in the month following the ten year period. At the same time, an equal
proportion of Class B shares acquired through automatically reinvested
distributions will convert to Class A shares on the same basis. (Class B shares
held before May 1, 1997, however, will convert to Class A shares in May 2007.)
Currently, the Class B share conversion is not a taxable event; the conversion
feature may be cancelled if it is deemed a taxable event in the future by the
Internal Revenue Service.
22
<PAGE>
If you exchange your Class B shares for shares of a Money Market Fund, a No-Load
Fund, North American Government Income Trust or Short-Term U.S. Treasury Trust,
the holding period for conversion is frozen as of the last day of the month of
the exchange and resumes on the last day of the month you exchange back into
Class B shares.
Exchanging Shares Subject to a CDSC. There are special considerations when you
exchange Fund shares that are subject to a CDSC. When determining the length of
time you held the shares and the corresponding CDSC rate, any period (starting
at the end of the month) during which you held shares of a fund that does not
charge a CDSC will not be counted. Thus, in effect the "holding period" for
purposes of calculating the CDSC is frozen upon exchanging into a fund that does
not charge a CDSC.
For example, if you held Class B shares of the Fund for one year, exchanged to
Class B of another Morgan Stanley Dean Witter Multi-Class Fund for another year,
then sold your shares, a CDSC rate of 4% would be imposed on the shares based on
a two year holding period -- one year for each Fund. However, if you had
exchanged the shares of the Fund for a Money Market Fund (which does not charge
a CDSC) instead of the Multi-Class Fund, then sold your shares, a CDSC rate of
5% would be imposed on the shares based on a one year holding period. The one
year in the Money Market Fund would not be counted. Nevertheless, if shares
subject to a CDSC are exchanged for a Fund that does not charge a CDSC, you will
receive a credit when you sell the shares equal to the distribution (12b-1)
fees, if any, you paid on those shares while in that Fund up to the amount of
any applicable CDSC.
In addition, shares that are exchanged into or from a Morgan Stanley Dean Witter
Fund subject to a higher CDSC rate will be subject to the higher rate, even if
the shares are re-exchanged into a Fund with a lower CDSC rate.
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 sales made within one year after the
last day of the month of purchase. The CDSC will be assessed in the same manner
and with the same CDSC waivers as with Class B shares.
Distribution Fee. Class C shares are subject to an annual distribution (12b-1)
fee of up to 0.70% of the average daily net assets of that Class. 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. Unlike Class B shares, Class C
shares have no conversion feature and, accordingly, an investor that purchases
Class C shares may be subject to distribution (12b-1) fees applicable to Class C
shares for an indefinite period.
23
<PAGE>
CLASS D SHARES Class D shares are offered without any sales charge on purchases
or sales and without any distribution (12b-1) fee. Class D shares are offered
only to investors meeting an initial investment minimum of $5 million and the
following investor categories:
o Investors participating in the Investment Manager's mutual fund asset
allocation program (subject to all of its terms and conditions, including
termination fees, mandatory sale or transfer restrictions on termination)
pursuant to which they pay an asset-based fee.
o Persons participating in a fee-based investment program (subject to all of its
terms and conditions, including termination fees, mandatory sale or transfer
restrictions on termination) approved by the Fund's distributor pursuant to
which they pay an asset-based fee for investment advisory, administrative and/
or brokerage services.
o Certain unit investment trusts sponsored by Dean Witter Reynolds.
o Certain other open-end investment companies whose shares are distributed by
the Fund's distributor.
o Investors who were shareholders of the Dean Witter Retirement Series on
September 11, 1998 for additional purchases for their former Dean Witter
Retirement Series accounts.
Meeting Class D Eligibility Minimums. To meet the $5 million initial investment
to qualify to purchase Class D shares you may combine: (1) purchases in a single
transaction of Class D shares of the Fund and other Morgan Stanley Dean Witter
Multi-Class Funds and/or (2) previous purchases of Class A and Class D shares of
Multi-Class Funds and shares of FSC Funds you currently own, along with shares
of Morgan Stanley Dean Witter Funds you currently own that you acquired in
exchange for those shares.
NO SALES CHARGES FOR REINVESTED CASH DISTRIBUTIONS If you receive a cash payment
representing an income dividend or capital gain and you reinvest that amount in
the applicable Class of shares by returning the check within 30 days of the
payment date, the purchased shares would not be subject to an initial sales
charge or CDSC.
PLAN OF DISTRIBUTION (RULE 12B-1 FEES) The Fund has adopted a Plan of
Distribution in accordance with Rule 12b-1 under the Investment Company Act of
1940 with respect to the distribution of Class A, Class B and Class C shares.
The Plan allows the Fund to pay distribution fees for the sale and distribution
of these shares. It also allows the Fund to pay for services to shareholders of
Class A, Class B and Class C shares. Because these fees are paid out of the
Fund's assets on an ongoing basis, over time these fees will increase the cost
of your investment in these Classes and may cost you more than paying other
types of sales charges.
24
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 fiscal years of the Fund. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate an investor would have earned or lost
on an investment in the Fund (assuming reinvestment of all dividends and
distributions).
This information has been audited by PricewaterhouseCoopers LLP, independent
accountants, whose report, along with the Fund's financial statements, is
included in the annual report, which is available upon request.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FOR THE JULY 28, 1997*
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS A
-----------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA:
-----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.02 $12.09 $12.00
-----------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.58 0.59 0.25
Net realized and unrealized gain (loss) (0.91) 0.10 0.14
------ ------ ------
Total income (loss) from investment operations (0.33) 0.69 0.39
-----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.58) (0.59) (0.25)
Net realized gain (0.03) (0.17) (0.05)
------ ------ ------
Total dividends and distributions (0.61) (0.76) (0.30)
-----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.08 $12.02 $12.09
-----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (2.82)% 5.86% 3.31%(1)
-----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
-----------------------------------------------------------------------------------------------------------------------------
Expenses 0.64%(4)(5) 0.74%(4)(5) 0.76%(2)(3)
-----------------------------------------------------------------------------------------------------------------------------
Net investment income 4.98%(5) 4.88%(5) 4.96%(2)
-----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
-----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $17,198 $15,041 $3,857
-----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 13% 15% 16%
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.02%.
(4) Does not reflect the effect of expense offset of 0.01%.
(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.
25
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FOR THE JULY 28, 1997*
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS B
-----------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA:
-----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.07 $12.14 $12.00
-----------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.53 0.55 0.23
Net realized and unrealized gain (loss) (0.91) 0.10 0.19
------ ------ ------
Total income (loss) from investment operations (0.38) 0.65 0.42
-----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.53) (0.55) (0.23)
Net realized gain (0.03) (0.17) (0.05)
------ ------ ------
Total dividends and distributions (0.56) (0.72) (0.28)
-----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.13 $12.07 $12.14
-----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (3.25)% 5.47% 3.57%(1)
-----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
-----------------------------------------------------------------------------------------------------------------------------
Expenses 1.11%(4)(5) 1.10%(4)(5) 1.14%(2)(3)
-----------------------------------------------------------------------------------------------------------------------------
Net investment income 4.51%(5) 4.52%(5) 4.87%(2)
-----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
-----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $139,786 $132,303 $95,573
-----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 13% 15% 16%
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.02%.
(4) Does not reflect the effect of expense offset of 0.01%.
(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.
26
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FOR THE JULY 28, 1997*
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS C
-----------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA:
-----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.04 $12.11 $12.00
-----------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.51 0.53 0.23
Net realized and unrealized gain (loss) (0.91) 0.10 0.16
------ ------ ------
Total income (loss) from investment operations (0.40) 0.63 0.39
-----------------------------------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.51) (0.53) (0.23)
Net realized gain (0.03) (0.17) (0.05)
------ ------ ------
Total dividends and distributions (0.54) (0.70) (0.28)
Net asset value, end of period $11.10 $12.04 $12.11
-----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (3.37)% 5.36% 3.28%(1)
-----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
-----------------------------------------------------------------------------------------------------------------------
Expenses 1.21%(4)(5) 1.20%(4)(5) 1.20%(2)(3)
-----------------------------------------------------------------------------------------------------------------------
Net investment income 4.41%(5) 4.34%(5) 4.41%(2)
-----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
-----------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $10,025 $7,599 $2,953
-----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 13% 15% 16%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.02%.
(4) Does not reflect the effect of expense offset of 0.01%.
(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.
27
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1999 1998* 1997* 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS D
-----------------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA:
-----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.01 $12.08 $11.77 $12.09 $11.01
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.59 0.62 0.63 0.65 0.67
Net realized and unrealized gain (loss) (0.91) 0.10 0.36 (0.24) 1.19
------ ------ ------ ------ ------
Total income (loss) from investment operations (0.32) 0.72 0.99 0.41 1.86
-----------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.59) (0.62) (0.63) (0.65) (0.67)
Net realized gain (0.03) (0.17) (0.05) (0.08) (0.11)
------ ------ ------ ------ ------
Total dividends and distributions (0.62) (0.79) (0.68) (0.73) (0.78)
-----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.07 $12.01 $12.08 $11.77 $ 12.09
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ (2.71)% 6.11% 8.73% 3.61% 17.37%
-----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
-----------------------------------------------------------------------------------------------------------------------------------
Expenses 0.51%(1)(2) 0.50%(1)(2) 0.49% 0.48% 0.48%
-----------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.11%(2) 5.12%(2) 5.34% 5.52% 5.76%
-----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
-----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $853,216 $1,023,246 $1,096,998 $1,190,034 $1,325,308
-----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 13% 15% 16% 18% 21%
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Prior to July 28, 1997, the Fund issued one class of shares. All shares
of the Fund held prior to that date have been designated Class D shares.
+ Calculated based on the net asset value as of the last business day of
the period.
(1) Does not reflect the effect of expense offset of 0.01%.
(2) Reflects overall Fund ratios for investment income and non-class specific
expenses.
28
<PAGE>
MORGAN STANLEY DEAN WITTER
FAMILY OF FUNDS
The Morgan Stanley Dean Witter Family of Funds offers investors a wide range of
investment choices. Come on in and meet the family!
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GROWTH FUNDS
GROWTH FUNDS
Aggressive Equity Fund
American Opportunities Fund
Capital Growth Securities
Developing Growth Securities
Growth Fund
Market Leader Trust
Mid-Cap Equity Trust
Next Generation Trust
Small Cap Growth Fund
Special Value Fund
21st Century Trend Fund
THEME FUNDS
Financial Services Trust
Health Sciences Trust
Information Fund
Natural Resource Development Securities
GLOBAL/INTERNATIONAL FUNDS
Competitive Edge Fund -- "Best Ideas" Portfolio
European Growth Fund
Fund of Funds -- International Portfolio
International Fund
International SmallCap Fund
Japan Fund
Latin American Growth Fund
Pacific Growth Fund
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GROWTH & INCOME FUNDS
Balanced Growth Fund
Balanced Income Fund
Convertible Securities Trust
Dividend Growth Securities
Equity Fund
Fund of Funds -- Domestic Portfolio
Income Builder Fund
Mid-Cap Dividend Growth Securities
S&P 500 Index Fund
S&P 500 Select Fund
Strategist Fund
Total Market Index Fund
Total Return Trust
Value Fund
Value-Added Market Series/Equity Portfolio
THEME FUNDS
Real Estate Fund
Utilities Fund
GLOBAL FUNDS
Global Dividend Growth Securities
Global Utilities Fund
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INCOME FUNDS
GOVERNMENT INCOME FUNDS
Federal Securities Trust
Short-Term U.S. Treasury Trust
U.S. Government Securities Trust
DIVERSIFIED INCOME FUNDS
Diversified Income Trust
CORPORATE INCOME FUNDS
High Yield Securities
Intermediate Income Securities
Short-Term Bond Fund(NL)
GLOBAL INCOME FUNDS
North American Government Income Trust
World Wide Income Trust
TAX-FREE INCOME FUNDS
California Tax-Free Income Fund
Hawaii Municipal Trust(FSC)
Limited Term Municipal Trust(NL)
Multi-State Municipal Series Trust(FSC)
New York Tax-Free Income Fund
Tax-Exempt Securities Trust
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MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
Liquid Asset Fund(MM)
U.S. Government Money Market Trust(MM)
TAX-FREE MONEY MARKET FUNDS
California Tax-Free Daily Income Trust(MM)
New York Municipal Money Market Trust(MM)
Tax-Free Daily Income Trust(MM)
There may be funds created after this Prospectus was published. Please consult
the inside back cover of a new Fund's Prospectus for its designation, e.g.,
Multi-Class Fund or Money Market Fund.
Unless otherwise noted, each listed Morgan Stanley Dean Witter Fund, except for
North American Government Income Trust and Short-Term U.S. Treasury Trust, is a
Multi-Class Fund. A Multi-Class Fund is a mutual fund offering multiple Classes
of shares. The other types of Funds are: NL -- No-Load (Mutual) Fund; MM --
Money Market Fund; FSC -- A mutual fund sold with a front-end sales charge and
a distribution (12b-1) fee.
<PAGE>
PROSPECTUS - FEBRUARY 24, 2000
Additional information about the Fund's investments is available in the Fund's
Annual and Semi-Annual Reports to Shareholders. In the Fund's Annual Report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. The
Fund's Statement of Additional Information also provides additional information
about the Fund. The Statement of Additional Information is incorporated herein
by reference (legally is part of this Prospectus). For a free copy of any of
these documents, to request other information about the Fund, or to make
shareholder inquiries, please call:
(800) 869-NEWS
You also may obtain information about the Fund by calling your Morgan Stanley
Dean Witter Financial Advisor or by visiting our Internet site at:
WWW.MSDW.COM/INDIVIDUAL/FUNDS
Information about the Fund (including the Statement of Additional Information)
can be viewed and copied at the Securities and Exchange Commission's Public
Reference Room in Washington, DC. Information about the Reference Room's
operations may be obtained by calling the SEC at (202) 942-8090. Reports and
other information about the Fund are available on the EDGAR Database on the
SEC's Internet site (www.sec.gov), and copies of this information may be
obtained, after paying a duplicating fee, by electronic request at the
following e-mail address: [email protected], or by writing the Public
Reference Section of the SEC, Washington, DC 20549-0102.
TICKER SYMBOLS:
Class A: TAXAX Class C: TAXCX
Class B: TAXBX Class D: TAXDX
(THE FUND'S INVESTMENT COMPANY ACT FILE NO. IS 811-2979)
Morgan Stanley Dean Witter
TAX-EXEMPT SECURITIES TRUST
[GRAPHIC OMITTED]
A MUTUAL FUND THAT SEEKS TO
PROVIDE A HIGH LEVEL OF CURRENT
INCOME EXEMPT FROM FEDERAL
INCOME TAX, CONSISTENT WITH
THE PRESERVATION OF CAPITAL
<PAGE>
EXHIBIT C
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
TERMS & PROVISIONS OF THE
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Dividend Reinvestment Plan
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(A) Shareholders of the Trust (except brokers, and nominees of banks and
financial institutions) may participate in the Dividend Reinvestment Plan ("the
Plan") and will be deemed to have appointed Morgan Stanley Dean Witter Trust
FSB, Harborside Financial Center, Plaza Two, Jersey City, New Jersey 07311 (the
"Transfer Agent") as their Transfer Agent to act on their behalf under the
Plan. Under the Plan, dividends and distributions ("distributions") will be
reinvested in additional Shares of the Trust. The Plan will continue in effect
for each shareholder as to all future distributions until terminated.
(B) The payment date for distributions will generally be approximately two
weeks after the record date.
(C) Whenever the Trust declares a dividend or other distribution, it will pay
the amount thereof to the Transfer Agent on behalf of shareholders under the
Plan in cash which the Transfer Agent will forward to the Plan agent to buy
Shares in the open market for the participants' accounts. Market price for the
purpose of the Plan will be the market price of the Shares on a national
securities exchange or, in the event the Shares are not listed on a securities
exchange at the time, market price will be the asked price, or the mean of the
asked prices if more than one is available, of the Shares in the
over-the-counter market.
(D) The cost of full and fractional Shares acquired for each shareholder's
account in connection with a particular distribution shall be determined by the
average cost per share of the Shares acquired by the Transfer Agent in
connection with that distribution. Shareholders will receive a confirmation
showing the average cost of Shares acquired as soon as practicable after the
Transfer Agent has received the Shares purchased by the Plan agent. The
Transfer Agent may mingle the cash in a shareholder's account with similar
funds of other shareholders of the Trust for whom it acts as Transfer Agent
under the Plan.
(E) As used herein, the term "market price" means the closing price of the
Trust's Shares on a national securities exchange plus expected brokerage
commissions.
(F) There is no service charge by the Transfer Agent to shareholders who
participate in the Plan. However, the Trust reserves the right to amend the Plan
in the future to include a service charge. Each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Plan agent's open
market purchases in connection with the reinvestment of dividends or capital
gains distributions.
(G) The Transfer Agent will maintain the shareholder's account, hold the
additional Shares acquired through the Plan in safekeeping and furnish him or
her with written confirmation of all transactions in the account. Upon written
request to the Transfer Agent signed by the shareholder, a certificate for all
full Shares in a shareholder's account will be sent to the shareholder, but the
shareholder will continue to be a participant in the Plan unless he requests
termination.
(H) Shareholders may terminate their participation in the Plan at any time and
elect to receive distributions in cash by notifying the Transfer Agent in
writing. Such notification must be received prior to the record date of any
distribution. There will be no charge or other penalty for such termination.
Upon termination, the Transfer Agent will send the shareholder a share
certificate for the number of full Shares in his or her account and a check for
the market value of any fractional Share unless otherwise instructed by the
shareholder.
(I) Brokers and nominees of banks and financial institutions are advised to
contact the Transfer Agent in the event any beneficial owners of the Shares
held in their names desire to participate in the Plan.
(J) Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan, or
change the Transfer Agent. Any material change in the Plan will be applied to
any distribution paid subsequent to notice thereof sent to participants in the
Plan at least thirty days before the record date for such distribution. The
Transfer Agent is to be liable only for wilful misconduct or negligence in
acting as Transfer Agent under the Plan.
(K) For more information, please contact the Transfer Agent at the address
above.
(L) Capital gains and income are realized on distributions reinvested pursuant
to the Plan even though cash is not received.
C-1
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 23, 2001
The undersigned shareholder of Morgan Stanley Dean Witter Municipal Income
Trust III, does hereby appoint Barry Fink, Ronald E. Robison and Joseph J.
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 Morgan Stanley Dean Witter Municipal Income Trust
III to be held on January 23, 2001, in the Career Development Room, Sixty-First
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 IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES. 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>
--------------------------------------------------------------------------------
PLEASE MARK VOTES AS
IN THE EXAMPLE USING
BLACK OR BLUE INK [X]
TO VOTE BY MAIL, PLEASE COMPLETE AND RETURN THIS CARD
YOU ALSO MAY VOTE A PROXY BY TOUCH-TONE PHONE OR BY INTERNET
(SEE ENCLOSED VOTING INFORMATION CARD FOR FURTHER INSTRUCTIONS)
TO VOTE A PROXY BY PHONE, call Toll-Free: 1-800-690-6903
TO VOTE A PROXY BY INTERNET, visit our Website(s): WWW.MSDWT.COM or
WWW.PROXYVOTE.COM
FOR AGAINST ABSTAIN
The Proposal: [ ] [ ] [ ]
Approval of the Agreement and Plan of
Reorganization, dated as of August 24, 2000, pursuant to which substantially
all of the assets of Morgan Stanley Dean Witter Municipal Income Trust III
would be combined with those of Morgan Stanley Dean Witter Tax-Exempt
Securities Trust and shareholders of Morgan Stanley Dean Witter Municipal
Income Trust III would become shareholders of Morgan Stanley Dean Witter
Tax-Exempt Securities Trust receiving Class D shares in Morgan Stanley Dean
Witter Tax-Exempt Securities Trust with a value equal to the net asset value of
their holdings in Morgan Stanley Dean Witter Municipal Income Trust III.
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.
Please make sure to sign and date this Proxy using black or blue ink.
Date
-----------------------------------------------------------------
-----------------------------------------------------------------
Shareholder sign in the box above
-----------------------------------------------------------------
Co-Owner (if any) sign in the box above
--------------------------------------------------------------------------------
PLEASE FOLD AND DETACH AT PERFORATION ALONG DOTTED LINES
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
--------------------------------------------------------------------------------
IMPORTANT
USE ONE OF THE THREE EASY WAYS TO VOTE YOUR PROXY
1. BY MAIL. PLEASE DATE, SIGN AND RETURN THE ABOVE PROXY CARD IN THE ENCLOSED
POSTAGE PAID ENVELOPE.
2. BY INTERNET. HAVE YOUR PROXY CARD AT HAND. GO TO THE "VOTE YOUR PROXY HERE"
LINK ON THE WEBSITE WWW.MSDWT.COM OR WWW.PROXYVOTE.COM. ENTER YOUR 12
DIGIT CONTROL NUMBER LOCATED ON THE PROXY CARD AND FOLLOW THE SIMPLE
INSTRUCTIONS.
3. BY TELEPHONE. HAVE YOUR PROXY CARD AT HAND. CALL 1-800-690-6903 ON A
TOUCH-TONE PHONE. ENTER YOUR 12-DIGIT CONTROL NUMBER LOCATED ON THE PROXY
CARD AND FOLLOW THE SIMPLE RECORDED INSTRUCTIONS.
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00129
<PAGE>
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MORGAN STANLEY DEAN WITTER FUNDS
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OFFERS TWO NEW WAYS TO VOTE YOUR PROXY
24 HOURS A DAY, 7 DAYS A WEEK
You can now vote your proxy in a matter of minutes with the ease and
convenience of the Internet or the telephone. You may still vote by mail.
But remember, if you are voting by Internet or telephone, do not mail the
proxy.
TO VOTE BY INTERNET:
1. Read the enclosed Proxy Statement and have your Proxy Card available.
2. Go to the "Proxy Voting" link on www.msdwt.com or to website
www.proxyvote.com.
3. Enter the 12-digit Control Number found on your Proxy Card.
4. Follow the simple instructions.
TO VOTE BY TELEPHONE:
1. Read the enclosed Proxy Statement and have your Proxy Card available.
2. Call toll-free 1-800-690-6903.
3. Enter the 12-digit Control Number found on your Proxy Card.
4. Follow the simple recorded instructions.
Your Proxy Vote is Important!
Thank You for Submitting Your Proxy.
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