Filed Pursuant to Rule 497(c)
Registration No.: 2-67087
PROSPECTUS
FEBRUARY 22, 1994
Dean Witter Tax-Free Daily Income Trust (the "Fund") is a no-load,
open-end diversified management investment company whose investment objective
is to provide as high a level of daily income exempt from federal income tax as
is consistent with stability of principal and liquidity. The Fund has a Rule
12b-1 Plan of Distribution (see below). The Fund seeks to achieve its objective
by investing primarily in high quality tax-exempt securities with short-term
maturities, including Municipal Bonds, Municipal Notes and Municipal Commercial
Paper. (See "Investment Objective and Policies.")
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
In accordance with a Plan of Distribution with Dean Witter Distributors
Inc. pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund
is authorized to reimburse specific expenses incurred in promoting the
distribution of the Fund's shares. Reimbursement may in no event exceed an
amount equal to payments at the annual rate of 0.15% of the average daily net
assets of the Fund.
This Prospectus sets forth concisely the information you should know
before investing in the Fund. It should be read and retained for future
reference. Additional information about the Fund is contained in the Statement
of Additional Information, dated February 22, 1994, which has been filed with
the Securities and Exchange Commission, and which is available at no charge
upon request of the Fund at its address or at one of its telephone numbers
listed on this cover page. The Statement of Additional Information is
incorporated herein by reference.
Minimum initial investment..................... $5,000
Minimum additional investment.................. $100
For information on opening an account, registration of shares, and
other information relating to a specific account, call Dean Witter Trust
Company at 800-526-3143 (toll free).
<PAGE>
TABLE OF CONTENTS
Prospectus Summary/ 2
Summary of Fund Expenses/ 3
Financial Highlights/ 4
The Fund and its Management/ 4
Investment Objective and Policies/ 5
Investment Restrictions/ 8
Purchase of Fund Shares/ 8
Shareholder Services/ 10
Redemption of Fund Shares/ 12
Dividends, Distributions and Taxes/ 14
Additional Information/ 16
Financial Statements--December 31, 1993/ 17
Report of Independent Accountants/ 24
Dean Witter Tax-Free Daily Income Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550
For information about the Fund, call:
800-869-FUND (toll free)
In New York State at 212-392-2550
For dividend information only (when calling from outside New York State)
800-869-RATE (toll free).
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and the shares are not federally insured by the Federal
Deposit Insurance Corporation, Federal Reserve Board, or any other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
DEAN WITTER DISTRIBUTORS INC.
DISTRIBUTOR
<PAGE>
PROSPECTUS SUMMARY
===============================================================================
The Fund
The Fund is organized as a Trust, commonly known as a Massachusetts business
trust, and is an open-end diversified management investment company investing
principally in short-term securities which are exempt from federal income tax.
- -------------------------------------------------------------------------------
Shares Offered
Shares of beneficial interest with $0.01 par value (see page 16).
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Purchase
of Shares
Investment may be made:
By wire
By mail
Through Dean Witter Reynolds Inc. Account Executives or other Selected
Broker-Dealers
Purchases are at net asset value, without a sales charge. Minimum initial
investment: $5,000.
Subsequent investments: $100 or more through the Transfer Agent; $1,000 or more
through the account executive.
Orders for purchase of shares are effective on day of receipt of payment in
Federal funds if payment is received by the Fund's transfer agent before 12:00
noon New York time (see p. 8).
- -------------------------------------------------------------------------------
Investment
Objective
To provide as high a level of daily income exempt from federal income tax as is
consistent with stability of principal and liquidity (see p. 5).
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Investment
Policy
A diversified portfolio of tax-exempt fixed-income securities with short-term
maturities (see p. 5).
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<PAGE>
Investment
Manager
Dean Witter InterCapital Inc. ("InterCapital"), the Investment Manager of the
Fund, and its wholly-owned subsidiary, Dean Witter Services Company Inc., serve
in various investment management, advisory, management and administrative
capacities to eighty-one investment companies and other portfolios with assets
of approximately $71.2 billion at December 31, 1993 (see page 4). The monthly
fee is at an annual rate of 1/2 of 1% of average daily net assets, scaled down
on assets over $500 million (see p. 4-5).
- -------------------------------------------------------------------------------
Distributor and
Plan of
Distribution
Dean Witter Distributors Inc. (the "Distributor") is the Fund's Distributor.
The Fund is authorized to reimburse specific expenses incurred in promoting the
distribution of the Fund's shares pursuant to a Plan of Distribution pursuant
to Rule 12b-1 under the Investment Company Act of 1940. Reimbursement may in no
event exceed an amount equal to payments at the annual rate of .15 of 1% of
average daily net assets of the Fund (see p. 9).
- -------------------------------------------------------------------------------
Management
Fee
The monthly fee is at an annual rate of 1/2 of 1% of average daily net assets,
scaled down on assets over $500 million (see p. 4-5).
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Dividends
Declared and automatically reinvested daily in additional shares; cash payments
of dividends available monthly (see p. 14).
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Reports
Individual periodic account statements; annual and semi-annual Fund financial
statements.
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Redemption
of Shares
Shares are redeemable by the shareholder at net asset value without any charge
(see p. 12):
By check
By telephone or wire instructions, with proceeds wired or mailed to a
predesignated bank account
By mail
A shareholder's account is subject to possible involuntary redemption if its
value falls below $1,000 (see p. 13).
- -------------------------------------------------------------------------------
Risks
The Fund invests principally in high quality, short-term fixed income
securities issued or guaranteed by state and local governments which are
subject to minimal risk of loss of income and principal. However, the investor
is directed to the discussions concerning "variable rate obligations" and
"when-issued and delayed delivery securities" on p. 7 of the Prospectus and on
pages 10 and 11 of the Statement of Additional Information and the discussions
concerning "repurchase agreements" and "puts" on pages 11 and 12 of the
Statement of Additional Information, concerning any risks associated with such
portfolio securities and management techniques.
- -------------------------------------------------------------------------------
The above is qualified in its entirety by the detailed information appearing
elsewhere in the Prospectus and in the Statement of Additional Information.
2
<PAGE>
SUMMARY OF FUND EXPENSES
===============================================================================
The following table illustrates all expenses and fees that a
shareholder of the Fund will incur. The expenses and fees set forth in the
table are for the fiscal year ended December 31, 1993.
Shareholder Transaction Expenses
- --------------------------------
Maximum Sales Charge Imposed on Purchases................................ None
Maximum Sales Charge Imposed on Reinvested Dividends..................... None
Deferred Sales Charge.................................................... None
Redemption Fees.......................................................... None
Exchange Fee............................................................. None
Annual Fund Operating Expenses (as a Percentage of Average Net Assets)
- ---------------------------------------------------------------------
Management Fees.......................................................... 0.48%
12b-1 Fees*.............................................................. 0.10%
Other Expenses........................................................... 0.13%
Total Fund Operating Expenses............................................ 0.71%
- ------------
* The 12b-1 fee is characterized as a service fee within the meaning of
National Association of Securities Dealers, Inc., ("NASD") guidelines.
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
You would pay the following expenses
on a $1,000 investment, assuming
(1) 5% annual return and (2)
redemption at the end of each
time period: ....................... $7 $23 $40 $88
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF THE FUND MAY BE GREATER OR
LESS THAN THOSE SHOWN.
The purpose of this table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. For a more complete description of these costs and expenses, see
"The Fund and Its Management", "Purchase of Fund Shares--Plan of Distribution"
in this Prospectus.
3
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
==================================================================================================================================
The following ratios and per share data for a share of beneficial interest outstanding throughout each period have been
audited by Price Waterhouse, independent accountants. The financial highlights should be read in conjunction with the financial
statements, notes thereto and the unqualified report of the independent accountants which are contained in this Prospectus
commencing on page 17.
<CAPTION>
For the year ended December 31,
----------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987 1986 1985 1984
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period................ $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net investment
income................ 0.018 0.024 0.039 0.053 0.058 0.048 0.041 0.043 0.050 0.055
Less dividends
from net
investment
income................ (0.018) (0.024) (0.039) (0.053) (0.058) (0.048)
(0.041) (0.043) (0.050) (0.055)
------ ----- ------ ----- ------ ----- ------ ----- ----- -----
Net asset value,
end of period......... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL INVESTMENT
RETURN................. 1.85% 2.39% 4.02% 5.48% 5.96% 4.88% 4.18% 4.35% 5.09% 5.66%
RATIOS/SUPPLEMENTAL
DATA:
Net assets,
end of period
(in thousands)........ $567,687 $669,623 $823,046 $896,598 $873,112 $946,208 $835,239 $978,194 $608,510 $348,488
Ratio of expenses to
average net assets.... 0.71% 0.68% 0.68% 0.64% 0.61% 0.62% 0.62% 0.61% 0.68% 0.74%
Ratio of net invest-
ment income to
average net assets.... 1.83% 2.37% 3.95% 5.30% 5.82% 4.78% 4.09% 4.22% 4.95% 5.55%
See Notes to Financial Statements
</TABLE>
THE FUND AND ITS MANAGEMENT
===============================================================================
Dean Witter Tax-Free Daily Income Trust (the "Fund") is an open-end
diversified management investment company incorporated in Maryland on March 24,
1980. The Fund was reorganized as a trust of the type commonly known as a
"Massachusetts business trust" on April 30, 1987. Prior to February 19, 1993,
the Fund's name was Dean Witter/Sears Tax-Free Daily Income Trust.
Dean Witter InterCapital Inc., ("InterCapital" or the "Investment
Manager") whose address is Two World Trade Center, New York, New York 10048, is
the Fund's Investment Manager. The Investment Manager, which was incorporated
in July, 1992, is a wholly-owned subsidiary of Dean Witter, Discover & Co.
("DWDC"), a balanced financial services organization providing a broad range of
nationally marketed credit and investment products.
InterCapital and its wholly-owned subsidiary, Dean Witter Services
Company Inc., serve in various investment management, advisory, management and
administrative capacities to a total of eighty-one investment companies,
twenty-nine of which are listed on the New York Stock Exchange, with combined
total assets including this Fund of approximately $69.2 billion as of December
31, 1993. The Investment Manager also manages portfolios of pension plans,
other institutions and individuals which aggregated approximately $2.0 billion
at such date.
4
<PAGE>
The Fund has retained the Investment Manager to provide administrative
services, manage its business affairs and manage the investment of the Fund's
assets, including the placing of orders for the purchase and sale of portfolio
securities. InterCapital has retained Dean Witter Services Company Inc. to
perform the aforementioned administrative services for the Fund. The Fund's
Board of Trustees reviews the various services provided by or under the
direction of the Investment Manager to ensure that the Fund's general
investment policies and programs are being properly carried out and that
administrative services are being provided to the Fund in a satisfactory
manner.
As full compensation for the services and facilities furnished to the
Fund and for expenses of the Fund assumed by the Investment Manager, the Fund
pays the Investment Manager monthly compensation calculated daily at the annual
rate of 0.50% of the daily net assets of the Fund up to $500 million, scaled
down at various asset levels to 0.25% on assets over $3 billion. For the fiscal
year ended December 31, 1993, the Fund accrued total compensation to the
Investment Manager amounting to 0.48% of the Fund's average daily net assets
and the Fund's total expenses amounted to 0.71% of the Fund's average daily net
assets.
INVESTMENT OBJECTIVE AND POLICIES
==============================================================================
The investment objective of the Fund is to provide as high a level of
daily income exempt from federal income tax as is consistent with stability of
principal and liquidity. It is a fundamental policy of the Fund that at least
80% of its total assets will be invested in securities the interest on which is
exempt from federal income tax. This policy and the Fund's investment objective
may not be changed without a vote of a majority of the Fund's outstanding
voting securities, as defined in the Investment Company Act of 1940, as amended
(the "Act"). There is no assurance that the objective will be achieved.
The Fund seeks to achieve its investment objective by investing
primarily in high quality tax-exempt securities with short-term maturities as
follows: (i) Municipal Bonds, Municipal Notes and Municipal Commercial Paper
with remaining maturities of thirteen months or less which are rated at the
time of purchase in one of the two highest rating categories for debt
obligations by at least two nationally recognized statistical rating
organizations ("NRSROs") primarily Moody's Investors Service, Inc. ("Moody's")
or Standard and Poor's Corporation ("S&P"), or one NRSRO if the obligation is
rated by only one NRSRO. Unrated obligations may be purchased if they are
determined to be of comparable quality by the Fund's Board of Trustees.
Up to 20% of the Fund's total assets may be invested in tax-exempt
securities subject to the alternative minimum tax ("AMT") (tax-exempt
securities which are subject to the AMT will not be included in the 80% total
referred to above).
Inclusive of the 20% total referred to above, up to 20% of the Fund's
total assets may be invested in taxable securities. In addition, the Fund may
temporarily invest more than 20% of its total assets in taxable securities, or
in tax-exempt securities subject to the federal AMT for individual
shareholders, to maintain a "defensive" posture when, in the opinion of the
Investment Manager, it is advisable to do so because of market conditions. The
types of taxable securities in which the Fund may temporarily invest are
limited to the following short-term fixed-income securities (maturing in one
year or less from the time of purchase): (i) obligations of the United States
Government or its agencies, instrumentalities or authorities; (ii) commercial
paper rated P-1 by Moody's or A-1 by S&P; (iii) certificates of deposit of
domestic banks with assets of $1 billion or more; and (iv) repurchase
agreements with respect to any of the foregoing portfolio securities.
Municipal Bonds and Municipal Notes are debt obligations of a state,
its cities, municipalities and municipal agencies which generally have
maturities, at the time of their issuance, of either one year or more (Bonds)
or from six months to three years (Notes). Municipal Commercial Paper refers to
short-term obligations of municipalities which may be issued at a discount and
are sometimes referred to as Short-Term Discount Notes. Any Municipal Bond or
Municipal Note which depends directly or indirectly on the credit of the
5
<PAGE>
Federal Government, its agencies or instrumentalities shall be considered to
have a Moody's rating of Aaa.
The foregoing percentage and rating limitations apply at the time of
acquisition of a security based on the last previous determination of the
Fund's net asset value. Any subsequent change in any rating by a rating service
or change in percentages resulting from market fluctuations will not require
elimination of any security from the Fund's portfolio. However, in accordance
with procedures adopted by the Fund's Trustees pursuant to federal securities
regulations governing money market funds, if the Investment Manager becomes
aware that a portfolio security has received a new rating from an NRSRO that is
below the second highest rating, then unless the security is disposed of within
five days, the Investment Manager will perform a credit worthiness analysis of
any such downgraded securities, which analysis will be reported to the Trus
tees who will, in turn, determine whether the securities continue to present
minimal credit risks to the Fund.
The ratings assigned by NRSROs represent their opinions as to the
quality of the securities which they undertake to rate (see the Appendix to the
Statement of Additional Information). It should be emphasized, however, that
the ratings are general and not absolute standards of quality.
The two principal classifications of Municipal Bonds, Notes and
Commercial Paper are "general obligation" and "revenue" bonds, notes or
commercial paper. General obligation bonds, notes or commercial paper are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. Issuers of general obligation bonds, notes
or commercial paper include a state, its counties, cities, towns and other
governmental units. Revenue bonds, notes or commercial paper are payable from
the revenues derived from a particular facility or class of facilities or, in
some cases, from specific revenue sources. Revenue bonds, notes or commercial
paper are issued for a wide variety of purposes, including the financing of
electric, gas, water and sewer systems and other public utilities; industrial
development and pollution control facilities; single and multi-family housing
units; public buildings and facilities; air and marine ports, transportation
facilities such as toll roads, bridges and tunnels; and health and educational
facilities such as hospitals and dormitories. They rely primarily on user fees
to pay debt service, although the principal revenue source is often
supplemented by additional security features which are intended to enhance the
creditworthiness of the issuer's obligations. In some cases, particularly
revenue bonds issued to finance housing and public buildings, a direct or
implied "moral obligation" of a governmental unit may be pledged to the payment
of debt service. In other cases, a special tax or other charge may augment user
fees.
Included within the revenue bonds category are participations in lease
obligations or installment purchase contracts (hereinafter collectively called
"lease obligations") of municipalities. State and local governments issue lease
obligations to acquire equipment and facilities.
Lease obligations may have risks not normally associated with general
obligation or other revenue bonds. Leases and installment purchase or
conditional sale contracts (which may provide for title to the leased asset to
pass eventually to the issuer) have developed as a means for governmental
issuers to acquire property and equipment without the necessity of complying
with the constitutional and statutory requirements generally applicable for the
issuance of debt. Certain lease obligations contain "non-appropriation" clauses
that provide that the governmental issuer has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on an annual or other periodic
basis. Consequently, continued lease payments on those lease obligations
containing "non-appropriation" clauses are dependent on future legislative
actions. If such legislative actions do not occur, the holders of the lease
obligation may experience difficulty in exercising their rights, including
disposition of the property.
Lease obligations represent a relatively new type of financing that has
not yet developed the depth of marketability associated with more conventional
municipal obligations, and, as a result, certain of such lease obligations may
be considered illiquid securities. To determine whether or not the Fund will
consider such securities to be illiquid (the Fund may not invest
6
<PAGE>
more than ten percent of its net assets in illiquid securities), the Trustees
of the Fund have established guidelines to be utilized by the Fund in
determining the liquidity of a lease obligation. The factors to be considered
in making the determination include: 1) the frequency of trades and quoted
prices for the obligation; 2) the number of dealers willing to purchase or sell
the security and the number of other potential purchasers; 3) the willingness
of dealers to undertake to make a market in the security; and 4) the nature of
the marketplace trades, including, the time needed to dispose of the security,
the method of soliciting offers, and the mechanics of the transfer.
The Fund does not generally intend to invest more than 25% of its total
assets in securities of governmental units located in any one state, territory
or possession of the United States. The Fund may invest more than 25% of its
total assets in industrial development and pollution control bonds (two kinds
of tax- exempt Municipal Bonds) whether or not the users of facilities financed
by such bonds are in the same industry. In cases where such users are in the
same industry, there may be additional risk to the Fund in the event of an
economic downturn in such industry, which may result generally in a lowered
need for such facilities and a lowered ability of such users to pay for the use
of such facilities.
The high quality, short-term fixed income securities in which the Fund
principally invests are guar-anteed by state and local governments and are
subject to minimal risk of loss of income and principal.
PORTFOLIO MANAGEMENT
Although the Fund will generally acquire securities for investment with
the intent of holding them to maturity and will not seek profits through short-
term trading, the Fund may dispose of any security prior to its maturity to
meet redemption requests. Securities may also be sold when the Fund's
Investment Manager believes such dispositon to be advisable on the basis of a
revised evaluation of the issuer or based upon relevant market considerations.
There may be occasions when, as a result of maturities of portfolio securities
or sales of Fund shares, or in order to meet anticipated redemption requests,
the Fund may hold cash which is not earning income.
The Fund anticipates that the average weighted maturity of the
portfolio will be 90 days or less. The relatively short-term nature of the
Fund's portfolio is expected to result in a lower yield than portfolios
comprised of longer-term tax-exempt securities.
Variable Rate and Floating Rate Obligations. The interest rates payable
on certain Municipal Bonds and Municipal Notes are not fixed and may fluctuate
based upon changes in market rates. Municipal obligations of this type are
called "variable rate" or "floating rate" obligations. The interest rate
payable on a vari able 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.
When-Issued and Delayed Delivery Securities. The Fund may purchase tax-
exempt securities on a when-issued or delayed delivery basis; i.e., delivery
and payment can take place a month or more after the date of the transaction.
These securities are subject to market fluctuation and no interest accrues to
the purchaser prior to settlement. At the time the Fund makes the commitment to
purchase such securities, it will record the transaction and thereafter reflect
the value, each day, of such securities in determining its net asset value.
Brokerage Allocation. Brokerage commissions are not normally charged on
purchases and sales of short-term municipal obligations, but such transactions
may involve transaction costs in the form of spreads between bid and asked
prices. Pursuant to an order of the Securities and Exchange Commission, the
Fund may effect principal transactions in certain money market instruments with
DWR. In addition, the Fund may incur brokerage commissions on transactions
conducted through DWR.
7
<PAGE>
INVESTMENT RESTRICTIONS
===============================================================================
The investment restrictions listed below are among the restrictions
which have been adopted by the Fund as fundamental policies. Under the Act, a
fundamental policy may not be changed without the vote of a majority of the
outstanding voting securities of the Fund, as defined in the Act.
For purposes of the following restrictions: (a) an "issuer" of a
security is the entity whose assets and revenues are committed to the payment
of interest and principal on that particular security, provided that the
guarantee of a security will be considered a separate security and provided
further that a guarantee of a security shall not be deemed a security issued
by the guarantor if the value of all securities issued or guaranteed by the
guarantor and owned by the Fund does not exceed 10% of the value of the total
assets of the Fund; (b) a "taxable security" is any security the interest on
which is subject to federal income tax; and (c) all percentage limitations
apply immediately after a purchase or initial investment, and any subsequent
change in any applicable percentage resulting from market fluctuations does not
require elimination of any security from the portfolio.
The Fund may not:
1. Invest more than 5% of the value of its total assets in the
securities of any one issuer (other than obligations issued, or guaranteed by,
the United States Government, its agencies or instrumentalities).
2. Purchase more than 10% of all outstanding taxable debt securities of
any one issuer (other than debt securities issued, or guaranteed as to
principal and interest by, the United States Government, its agencies or
instrumentalities).
3. Invest more than 25% of the value of its total assets in taxable
securities of issuers in any one industry (industrial development and pollution
control bonds are grouped into industries based upon the business in which the
issuers of such obligations are engaged). This restriction does not apply to
obligations issued or guaranteed by the United States Government, its agencies
or instrumentalities or to cash equivalents.
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. Ths restriction shall not apply to any
obligation of the Unites States Government, its agencies or instrumentalities.
PURCHASE OF FUND SHARES
===============================================================================
The Fund offers its own shares for sale to the public on a continuous
basis, without a sales charge. Pursuant to a Distribution Agreement between the
Fund and Dean Witter Distributors Inc. ("the Distributor"), an affiliate of the
Investment Manager, shares of the Fund are distributed by the Distributor and
offered by DWR and other dealers who have entered into agreements with the
Distributor ("Selected Broker-Dealers"). The principal executive office of the
Distributor is located at Two World Trade Center, New York, New York 10048. The
offering price will be the net asset value next determined (see "Determination
of Net Asset Value" below) after receipt of a purchase order and acceptance by
the Fund's transfer agent, Dean Witter Trust Company (the "Transfer Agent") in
proper form and accompanied by payment in Federal Funds (i.e., monies of member
banks within the Federal Reserve System held on deposit at a Federal Reserve
Bank) available to the Fund for investment. Shares commence earning income on
the day following the date of purchase. Share certificates will not be issued
unless requested in writing by the shareholder.
To initiate purchase by mail or wire, a completed Investment
Application (contained in the Prospectus) must be sent to Dean Witter Trust
Company at P.O. Box 1040, Jersey City, N.J. 07303. Checks should be made
payable to the Dean Witter Tax-Free Daily Income Trust and sent to Dean Witter
Trust Company at the same address. Purchases by wire must be preceded by a call
to the Transfer Agent advising it of the purchase (see Investment Application
or the front cover of this Prospectus for instructions and telephone numbers)
and must be wired to The Bank of New York,
8
<PAGE>
for credit to the Account of Dean Witter Trust Company, Harborside Financial
Center, Plaza Two, Jersey City, New Jersey, Account No. 8900188413. Wire
purchase instructions must include the name of the Fund and the Shareholder's
account number. Purchases made by check are normally effective within two
business days for checks drawn on Federal Reserve System member banks, and
longer for most other checks. Wire purchases received by the Transfer Agent
prior to 12 noon New York time are normally effective that day and wire
purchases received after 12 noon New York time are normally effective the next
business day. Initial investments must be at least $5,000, although the Fund,
at its discretion, may accept initial investments of smaller amounts, not less
than $1,000. Subsequent investments must be $100 or more and may be made
through the Transfer Agent. The Fund reserves the right to reject any purchase
order.
Orders for the purchase of Fund shares placed by customers through DWR
or other Selected Broker-Dealers with payment in clearing house funds will be
transmitted to the Fund with payment in Federal Funds on the business day
following the day the order is placed by the customer with DWR or another
Selected Broker-Dealer. Investors desiring same day effectiveness should wire
Federal Funds directly to the Transfer Agent. An order procedure exists
pursuant to which customers can, upon request: (a) have the proceeds from the
sale of listed securities invested in shares of the Fund on the day following
the day the customer receives such proceeds in his or her DWR or other Selected
Broker-Dealer brokerage account; and (b) pay for the purchase of certain listed
securities by automatic liquidation of Fund shares owned by the customer. In
addition, there is an automatic purchase procedure whereby consenting DWR or
other Selected Broker-Dealer customers who are shareholders of the Fund will
have free cash credit balances in their DWR or other Selected Broker-Dealer
brokerage accounts as of the close of business (4:00 P.M., New York time) on
the last business day of each week (where such balances do not exceed $5,000)
automatically invested in shares of the Fund the next following business day.
Investors with free cash credit balances (i.e., immediately available funds) in
brokerage accounts at DWR or other Selected Broker-Dealers will not have any of
such funds invested in the Fund until the business day after the customer
places an order with DWR or other Selected Broker-Dealers to purchase shares of
the Fund and will not receive the daily dividend which would have been received
had such funds been invested in the Fund on the day the order was placed with
DWR or other Selected Broker-Dealers. Accordingly, DWR or other Selected
Broker-Dealers may have the use of such free credit balances during such
period.
PLAN OF DISTRIBUTION
The Fund has entered into a Plan of Distribution with the Distributor
pursuant to Rule 12b-1 under the Act whereby the expenses of certain activities
in connection with the distribution of Fund shares are reimbursed. The
principal activities and services which may be provided by DWR, its affiliates
or any other Selected Broker-Dealers under the Plan include: (1) compensation
to and expenses of, DWR's and other Selected Broker-Dealers' account executives
and other employees including overhead and telephone expenses; (2) sales
incentives and bonuses to sales representatives and to marketing personnel in
connection with promoting sales of the Fund's shares; (3) expenses incurred in
connection with promoting sales of the Fund's shares; (4) preparing and
distributing sales literature; and (5) providing advertising and promotional
activities, including direct mail solicitation and television, radio,
newspaper, magazine and other media advertisements. Reimbursements for these
services will be made in monthly payments by the Fund, which will in no event
exceed an amount equal to a payment at the annual rate of .15 of 1% of the
Fund's average daily net assets. For the fiscal year ended December 31, 1993,
the fee accrued was equal to payment at an annual rate of 0.10 of 1% of the
Fund's average daily net assets. Expenses incurred pursuant to the Plan in any
fiscal year will not be reimbursed by the Fund through payments accrued in any
subsequent fiscal year.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is determined as of the close
of trading (presently 4:00 p.m.
9
<PAGE>
New York time) on each day that the New York Stock Exchange is open by taking
the value of all assets of the Fund, subtracting its liabilities and dividing
by the number of shares outstanding. The net asset value per share will not be
determined on Good Friday and on such other federal and non-federal holidays as
are observed by the New York Stock Exchange.
The Fund utilizes the amortized cost method in valuing its portfolio
securities, which method involves valuing a security at its cost adjusted by a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument. The
purpose of this method of calculation is to facilitate the maintenance of a
constant net asset value per share of $1.00. How-ever, there can be no
assurance that the $1.00 net asset value will be maintained.
SHAREHOLDER SERVICES
===============================================================================
Systematic Cash Withdrawal. A systematic withdrawal plan is available
for shareholders who own or purchase shares of the Fund having a minimum value
of at least $5,000. The plan provides for monthly or quarterly (March, June,
September, December) checks in any dollar amount not less than $25 or in any
whole percentage of the account balance on an annualized basis. The shares will
be redeemed at their net asset value, determined at the shareholder's option,
on the tenth or twenty-fifth (or next business day) of the relevant month or
quarter and normally a check for the proceeds will be mailed by the Transfer
Agent, within five days after the date of redemption. A shareholder wishing to
make this election should do so on the Investment Application. The withdrawal
plan may be terminated at any time by the Fund.
EasyInvestTM. Shareholders may subscribe to EasyInvest, an automatic
purchase plan which provides for any amount from $100 to $5,000 to be
transferred automatically from a checking or savings account, on a semi-
monthly, monthly or quarterly basis, to the Transfer Agent for investment in
shares of the Fund. Shares purchased through EasyInvest will be added to the
shareholder's existing account at the net asset value calculated the next
business
day after the transfer of funds is effected.
EXCHANGE PRIVILEGE
An "Exchange Privilege," that is, the privilege of exchanging shares of
certain Dean Witter Funds for shares of the Fund, exists whereby shares of
various Dean Witter Funds which are open-end investment companies sold with
either a front-end (at time of purchase) sales charge ("FESC funds") or a
contingent deferred sales charge ("CDSC funds"), may be redeemed at their next
calculated net asset value and the proceeds of the redemption are used to
purchase shares of five money market funds and Dean Witter Short-Term U.S.
Treasury Trust, Dean Witter Limited Term Municipal Bond Trust and Dean Witter
Short-Term Bond Fund (the foregoing eight non-FESC or CDSC funds are
hereinafter collectively referred to in this Section as the "Exchange Funds").
When exchanging into a money market fund from an FESC fund or a CDSC fund,
shares of the FESC fund or the CDSC fund are redeemed at their next calculated
net asset value and exchanged for shares of the money market fund at their net
asset value determined the following business day. An exchange from an FESC
fund or a CDSC fund to an Exchange Fund that is not a money market fund is on
the basis of the next calculated net asset value per share of each fund after
the exchange order is received. Subsequently, shares of these Exchange Funds
received in an exchange for shares of an FESC fund (regardless of the type of
fund originally purchased) may be redeemed and exchanged for shares of the
Exchange Funds, FESC funds or CDSC funds (however, shares of CDSC funds,
including shares acquired in exchange for (i) shares of FESC funds or (ii)
shares of the Exchange Funds which were acquired in exchange for shares of FESC
funds may not be exchanged for shares of FESC funds). Additionally, shares of
the money market funds received in an exchange for shares of a CDSC fund
(regardless of the type of fund originally purchased) may be redeemed and
exchanged for shares of the Exchange Funds or CDSC funds. Ultimately, any
applicable contingent deferred sales charge ("CDSC")
10
<PAGE>
will have to be paid upon redemption of shares originally purchased from a CDSC
fund. (If shares of the Exchange Funds received in exchange for shares
originally purchased from a CDSC fund are exchanged for shares of another CDSC
fund having a different CDSC schedule than that of the CDSC fund from which the
Exchange Funds shares were acquired, the shares will be subject to the higher
CDSC schedule). During the period of time the shares originally purchased from
a CDSC fund remain in the Exchange Funds, the holding period (for the purpose
of determining the rate of the CDSC) is frozen so that the charge is based upon
the period of time the shareholder actually held shares of a CDSC fund.
However, in the case of shares exchanged into an Exchange Fund on or after
April 23, 1990, upon a redemption of shares which results in a CDSC being
imposed, a credit (not to exceed the amount of the CDSC) will be given in an
amount equal to the Exchange Fund 12b-1 distribution fees incurred on or after
that date which are attributable to those shares (see "Plan of Distribution").
Exchanges involving FESC funds or CDSC funds may be made after the shares of
the FESC fund or CDSC fund acquired by purchase (not by exchange or dividend
reinvestment) have been held for 30 days. There is no waiting period for
exchanges of shares acquired by exchange or dividend reinvestment.
Exchange Privilege accounts may also be maintained for shareholders of
the money market funds who acquired their shares in exchange for shares of
various TCW/DW Funds, a group of funds distributed by the Distributor for which
TCW Funds Management, Inc. serves as Adviser, under the terms and conditions
described in the Prospectus and Statement of Additional Information of each
TCW/DW Fund.
Purchases and exchanges should be made for investment purposes only. A
pattern of frequent exchanges may be deemed by the Investment Manager to be
abusive and contrary to the best interests of the Fund's other shareholders
and, at the Investment Manager's discretion, may be limited by the Fund's
refusal to accept additional purchases and/or exchanges from the investor.
Although the Fund does not have any specific definition of what constitutes a
pattern of frequent exchanges, and will consider all relevant factors in
determining whether a particular situation is abusive and contrary to the best
interests of the Fund and its other shareholders, investors should be aware
that the Fund and each of the other Dean Witter Funds may in their discretion
limit or otherwise restrict the number of times this Exchange Privilege may be
exercised by any investor. Any such restriction will be made by the Fund on a
prospective basis only, upon notice to the shareholder not later than ten days
following such share holder's most recent exchange.
The Exchange Privilege may be terminated or revised at any time by the
Fund and/or any of such Dean Witter Funds for which shares of the Fund may be
exchanged upon such notice as may be required by applicable regulatory
agencies. Shareholders main taining margin accounts with DWR or other Selected
Broker-Dealers are referred to their account executive regarding restrictions
on exchange of shares of the Fund pledged in their margin account.
The current prospectus for each fund describes its investment
objective(s) and policies, and shareholders should obtain one and read it
carefully before investing. Exchanges are subject to the minimum investment
requirement and any other conditions imposed by each fund. An exchange will be
treated for federal income tax purposes the same as a repurchase or redemption
of shares on which the shareholder has realized a capital gain or loss.
However, the ability to deduct capital losses on an exchange may be limited in
situations where there is an exchange of shares within ninety days after the
shares are purchased. The Exchange Privilege is only available in states where
an exchange may legally be made.
If DWR or another Selected Broker-Dealer is the current dealer of
record and its account numbers are part of the account information,
shareholders may initiate an exchange of shares of the Fund for shares of any
of the Dean Witter Funds (for which the Exchange Privilege is available)
pursuant to this Exchange Privilege by contacting their DWR or other Selected
Broker-Dealer account executive (no Exchange Privilege Authorization Form is
required). Other shareholders (and those who are DWR or other Selected Broker-
Dealer clients but who wish to make exchanges directly by writing or
telephoning the Transfer Agent) must complete and forward to the Transfer Agent
an
11
<PAGE>
Exchange Privilege Authorization Form, copies of which may be obtained from the
Transfer Agent, to initate an exchange. If the Authorization Form is used,
exchanges may be made in writing or by contacting the Transfer Agent at (800)
526-3143 (toll free). The Fund will employ reasonable procedures to confirm
that exchange instructions communicated over the telephone are genuine. Such
procedures may include requiring various forms of personal identification such
as name, mailing address, social security or other tax identification number
and DWR or other Selected Broker-Dealer account number (if any). Telephone
instructions may also be recorded. If such procedures are not employed, the
Fund may be liable for any losses due to unauthorized or fraudulent
instructions. Telephone exchange instructions will be accepted if received by
the Transfer Agent between 9:00 a.m. and 4:00 p.m. New York time, on any day
the New York Stock Exchange is open. Any shareholder wishing to make an
exchange who has previously filed an Exchange Privilege Authorization Form and
who is unable to reach the Fund by telephone should contact his or her DWR or
other Selected Broker-Dealer account executive, if appropriate, or make a
written exchange request. Shareholders are advised that during periods of
drastic economic or market changes, it is possible that the telephone exchange
procedures may be difficult to implement, although this has not been the
experience of this Fund and the other Dean Witter Funds in the past.
Additional information on the above is available from an account
executive of DWR or another Selected Broker-Dealer or from the Transfer Agent.
REDEMPTION OF FUND SHARES
===============================================================================
A shareholder may withdraw all or any of his or her investments at any
time, without penalty or charge, by redeeming shares through the Fund's
transfer agent, Dean Witter Trust Company, at the net asset value per share
next determined (see "Purchase of Fund Shares--Determination of Net Asset
Value") after the receipt of a redemption request meeting the applicable
requirements as follows (all of which are subject to the General Redemption
Requirements set forth below).
1. BY CHECK
The Transfer Agent will supply blank checks to any shareholder who has
requested them on an Investment Application. The shareholder may make checks
payable to the order of anyone in any amount not less than $500 (checks written
in amounts under $500 will not be honored by the Transfer Agent). Shareholders
must sign checks exactly as their shares are registered. If the account is a
joint account, the check may contain one signature unless the joint owners have
specifically specified on an Investment Application that all owners are
required to sign checks. Only shareholders having accounts in which no share
certificates have been issued will be permitted to redeem shares by check.
Shares will be redeemed at their net asset value next determined (see
"Purchase of Fund Shares--Determination of Net Asset Value") after receipt by
the Transfer Agent of a check which does not exceed the value of the account.
Payment of the proceeds of a check will normally be made on the next business
day after receipt by the Transfer Agent of the check in proper form. Shares
purchased by check (including a government, certified or bank cashier's check)
are not normally available to cover redemption checks until fifteen days after
receipt of the check used for investment by the Transfer Agent. The Transfer
Agent will not honor a check in an amount exceeding the value of the account at
the time the check is presented for payment.
2. BY TELEPHONE OR WIRE INSTRUCTIONS WITH
PAYMENT TO PREDESIGNATED BANK ACCOUNT
A shareholder may redeem shares by telephoning or sending wire
instructions to the Transfer Agent. Payment will be made by the Transfer Agent
to the shareholder's bank account at any commercial bank designated by the
shareholder in an Investment Application, by wire if the amount is $1,000 or
more and the shareholder so requests, and otherwise by mail. Normally, the
Transfer Agent will transmit payment the next business day following receipt of
a request for redemption in proper form. Only shareholders having accounts in
which no share certificates have
12
<PAGE>
been issued will be permitted to redeem shares by wire instructions.
DWR and other participating Selected Broker-Dealers have informed the
Distributor and the Fund that, on behalf of and as agent for their customers
who are shareholders of the Fund, they will transmit to the Fund requests for
redemption of shares owned by their customers. In such cases, the Transfer
Agent will wire proceeds of redemptions to DWR's or another Selected Broker-
Dealer's bank account for credit to the shareholders' accounts the following
business day. DWR and other participating Selected Broker-Dealers have also
informed the Distributor and the Fund that they do not charge for this service.
Redemption instructions must include the share holder's name and
account number and be wired or called to the Transfer Agent:
--800-526-3143 (Toll Free)
--Telex No. 125076
3. BY MAIL
A shareholder may redeem shares by sending a letter to Dean Witter
Trust Company, P.O. Box 983, Jersey City, NJ 07303, requesting redemption and
surrendering share certificates if any have been issued.
Redemption proceeds will be mailed to the shareholder at his or her
registered address or mailed or wired to his or her predesignated bank account,
as he or she may request. Proceeds of redemption may also be sent to some other
person, as requested by the shareholder.
GENERAL REDEMPTION REQUIREMENTS
Written requests for redemption must be signed by the registered
shareholder. If the proceeds are to be paid to anyone other than the registered
shareholder or sent to any address other than the shareholder's registered
address or predesignated bank account, signatures must be guaranteed by an
eligible guarantor acceptable to the Transfer Agent (shareholders should
contact the Transfer Agent for a determination as to whether a particular
institution is an eligible guarantor), except in the case of redemption by
check. Additional documentation may be required where shares are held by a
corporation, partnership, trustee or executor. With regard to shares of the
Fund acquired pursuant to the Exchange Privilege, any applicable contingent
deferred sales charge will be imposed upon the redemption of such shares (see
"Purchase of Fund Shares--Exchange Privilege").
If shares to be redeemed are represented by a share certificate, the
request for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered share holder exactly as the account is
registered. Shareholders are advised, for their own protection, to send the
share certificate and asignment form in separate envelopes (if they are being
mailed and not hand delivered) to the Fund's Transfer Agent. Signatures must be
guaranteed by an eligible guarantor. Additional documentation may be required
where shares are held by a corporation, partnership, trustee or executor.
All requests for redemption, all share certificates and all share
assignments should be sent to Dean Witter Trust Company, P.O. Box 983, Jersey
City, NJ 07303.
Generally, the Fund will attempt to make payment for all redemptions
within one business day, but in no event later than seven days after receipt of
such redemption request in proper form. However, if the shares being redeemed
were purchased by check (including a certified or bank cashier's check),
payment may be delayed for the minimum time needed to verify that the check
used for investment has been honored (not more than fifteen days from the time
of investment of the check by the Transfer Agent). In addition, the Fund may
postpone redemptions at certain times when normal trading is not taking place
on the New York Stock Exchange.
The Fund reserves the right, on 60 days' notice, to redeem at their net
asset value the shares of any shareholder (other than shares held in an
Individual Retirement Account or custodial account under Section 403(b)(7) of
the Internal Revenue Code) whose shares due to redemptions by the shareholder
have a value of less than $1,000, or such lesser amount as may be fixed by the
Board of Trustees.
13
<PAGE>
AUTOMATIC REDEMPTION PROCEDURE
The Distributor has instituted an automatic redemption procedure which
it may utilize to satisfy amounts due it by the shareholder maintaining a
brokerage account with DWR or another Selected Broker-Dealer, as a result of
purchases of securities or other transactions in the shareholder's brokerage
account. Under this procedure, unless the shareholder elects not to participate
by so notifying DWR or another Selected Broker-Dealer, the shareholder's DWR or
another Selected Broker-Dealer brokerage account will be scanned each business
day prior to the close of business (4:00 P.M., New York time). After
application of any cash balances in the account, a sufficient number of Fund
shares may be redeemed at the close of business to satisfy any amounts for
which the shareholder is obligated to make payment to DWR or another Selected
Broker-Dealer. Redemptions will be effected on the business day preceding the
date the shareholder is obligated to make such payment, and DWR or another
Selected Broker-Dealer will receive the redemption proceeds on the day
following the redemption date. Shareholders will receive all dividends declared
and reinvested through the date of redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
===============================================================================
Dividends and Distributions. The Fund declares dividends, payable on
each day the New York Stock Exchange is open for business, of all of its daily
net investment income to shareholders of record as of the close of business the
preceding business day. Dividends from net short-term capital gains, if any,
will be paid periodically. Dividends from net long-term capital gains, if any,
will be paid annually. The amount of dividend may fluctuate from day to day and
may be omitted on some days if net realized losses on portfolio securities
exceed the Fund's net investment income. Dividends are declared and
automatically reinvested daily in additional full and fractional shares of the
Fund (rounded to the last 1/100 of a share) at the net asset value per share at
the close of business on that day. Any dividends declared in the last quarter
of any year which are paid in the following year prior to February 1 will be
deemed received by the shareholder in the prior year. Shareholders may instruct
the Transfer Agent (in writing) to have their dividends paid out monthly in
cash. For such shareholders, the shares reinvested and credited to their
account during the month will be redeemed as of the close of business on the
monthly payment date (which will be no later than the last business day of the
month) and the proceeds will be paid to them by check. Processing of dividend
checks begins immediately following the monthly payment date. Shareholders who
have requested to receive dividends in cash will normally receive their monthly
dividend check during the first ten days of the following month. Share
certificates for dividends or distributions will not be issued unless a
shareholder requests in writing that a certificate be issued for a specific
number of shares.
Taxes. Because the Fund intends to distribute substantially all of its
net investment income and net capital gains, if any, to shareholders, and
intends to otherwise comply with all the provisions of Subchapter M of the
Internal Revenue Code of 1986, as amended, to qualify as a regulated investment
company, it is not expected that the Fund will be required to pay any federal
income tax.
The Fund intends to qualify to pay "exempt-interest dividends" to its
shareholders by maintaining, as of the close of each quarter of its taxable
year, at least 50% of the value of its total assets in tax-exempt securities.
If the Fund satisfies such requirement, distributions from net investment
income to shareholders, whether taken in cash or reinvested in additional Fund
shares, will be excludable from gross income for federal income tax purposes to
the extent net interest income is represented by interest on tax-exempt
securities. Exempt-interest dividends are included, however, in determining
what portion, if any, of a person's Social Security benefits are subject to
federal income tax.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. This alternative minimum tax applies
to interest received on "private activity bonds" (in general, bonds that
benefit non-governmental entities) issued
14
<PAGE>
after August 7, 1986 which, although tax-exempt, are used for purposes other
than those generally performed by governmental units (e.g., bonds used for
commercial or housing purposes). Income received on such bonds is classified as
a "tax preference item", under the alternative minimum tax, for both individual
and corporate investors. A portion of the Fund's investments may be made in
such "private activity bonds," with the result that a portion of the exempt-
interest dividends paid by the Fund may be an item of tax preference to
shareholders subject to the alternative minimum tax. In addition, certain
corporations which are subject to the alternative minimum tax may have to
include a portion of exempt-interest dividends in calculating their alternative
minimum taxable income in situations where the "adjusted current earnings" of
the corporation exceeds its alternative minimum taxable income.
After the end of its calendar year, the shareholders will be sent a
statement indicating the percentage of the dividend distributions for such
taxable year which constitutes exempt-interest dividends and the percentage, if
any, that is taxable and the percentage, if any, of the exempt-interest
dividends which constitute an item of tax preference. This percentage should be
applied uniformly to any distributions made during the taxable year to
determine the proportion of dividends that is tax-exempt. The percentage may
differ from the percentage of tax-exempt dividend distributions for any
particular month.
Shareholders will be subject to federal income tax on dividends paid
from interest income derived from taxable securities and on distributions of
net short-term capital gains, if any. Such dividends and distributions are
taxable to the shareholder as ordinary income. Distributions of net long-term
capital gains, if any, are taxable as net long-term capital gains, regardless
of how long the shareholder has held the Fund's shares and regardless of
whether the distribution is received in additional shares or in cash. No
portion of such divi- dends or distributions will be eligible for the federal
dividends received deduction for corporations.
The exemption of interest income for federal income tax purposes does
not necessarily result in exemption under the income or other tax laws of any
state or local taxing authority. Thus, shareholders of the Fund may be subject
to state and local taxes on exempt-interest dividends.
The Fund advises its shareholders annually as to the federal income tax
status of distributions paid during each calendar year. To avoid being subject
to a 31% federal withholding tax on taxable dividends, capital gains
distributions and proceeds of redemptions, shareholders' taxpayer
identification numbers must be furnished and certified as to accuracy.
Shareholders should consult their tax advisers as to the applicability
of the above to their own tax situation.
CURRENT AND EFFECTIVE YIELD
From time to time the Fund advertises its "yield" and "effective
yield". Both yield figures are based on historical earnings and are not
intended to indicate future performance. The "yield" of the Fund refers to the
income generated by an investment in the Fund over a given seven-day period
(which period will be stated in the advertisement). This income is then
"annualized." That is, the amount of income generated by investment during that
seven-day period is assumed to be generated each seven-day period within a 365-
day period and is shown as a percentage of the investment. The "effective
yield" for a seven-day period is calculated similarly but, when annualized, the
income earned by an investment in the Fund is assumed to be reinvested each
week within a 365-day period. The "effective yield" will be slightly higher
than the "yield" because of the compounding effect of this assumed
reinvestment. The Fund may also quote tax-equivalent yield which is calculated
by determining the pre-tax yield which, after being taxed at a stated rate,
would be equivalent to the yield determined as described above.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in shares of the Fund.
15
<PAGE>
ADDITIONAL INFORMATION
==============================================================================
Voting Rights. All shares of beneficial interest of the Fund are of
$0.01 par value and are equal as to earnings, assets and voting privileges.
The Fund is not required to hold Annual Meetings of Shareholders and in
ordinary circumstances the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances, the Trustees may be removed by action of the Trustees or by the
shareholders.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for obligations of
the Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that notice
of such disclaimer be given in each instrument entered into or
executed by the Fund and provides for indemnification and reimbursement of
expenses out of the Fund's property for any shareholder held personally liable
for the obligations of the Fund. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Fund itself would be unable to meet its obligations. Given the
above limitations on shareholder personal liability and the nature of the
Fund's assets and operations, the possibility of the Fund being unable to meet
its obligations is remote and, in the opinion of Massachusetts counsel to the
Fund, the risk to Fund shareholders is remote.
Shareholder Inquiries. All inquiries regarding the Fund should be
directed to the Fund or the Transfer Agent at one of its telephone numbers or
at its address, as are set forth on the front cover of this Prospectus.
16
<PAGE>
DEAN WITTER TAX-FREE DAILY INCOME TRUST
FINANCIAL STATEMENTS
===============================================================================
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1993
===============================================================================
ASSETS:
Investments in securities, at value
(amortized cost $565,441,406).................................. $565,441,406
Receivable for:
Investments sold............................................... 5,008,986
Interest....................................................... 3,551,947
Shares of beneficial interest sold............................. 4,119
Prepaid expenses................................................ 46,876
------------
TOTAL ASSETS................................................. 574,053,334
------------
LIABILITIES:
Payable for shares of beneficial interest repurchased........... 5,628,063
Payable to bank................................................. 297,584
Investment management fee payable (Note 2) 251,583
Plan of distribution fee payable (Note 3)....................... 51,702
Accrued expenses (Note 4)....................................... 137,372
------------
TOTAL LIABILITIES............................................ 6,366,304
------------
NET ASSETS:
Paid in capital................................................. 567,704,503
Accumulated realized loss on investments--net................... (17,473)
------------
NET ASSETS................................................... $567,687,030
============
NET ASSET VALUE PER SHARE, 567,704,503
shares outstanding (unlimited shares
authorized of $.01 par value).................................. $1.00
=====
===============================================================================
STATEMENT OF OPERATIONS
For the year ended December 31, 1993
===============================================================================
INVESTMENT INCOME:
INTEREST INCOME................................................ $16,545,278
-----------
EXPENSES
Investment management fee (Note 2)............................ 3,143,839
Plan of distribution fee (Note 3)............................. 631,775
Transfer agent fees and expenses (Note 4)..................... 529,145
Registration fees............................................. 120,373
Professional fees............................................. 48,144
Custodian fees................................................ 46,860
Shareholder reports and notices............................... 46,816
Trustees' fees and expenses (Note 4).......................... 35,672
Other......................................................... 17,946
-----------
TOTAL EXPENSES.............................................. 4,620,570
-----------
INVESTMENT INCOME--NET..................................... 11,924,708
-----------
NET REALIZED GAIN ON INVESTMENTS
(Note 1):...................................................... 5,416
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................................. $11,930,124
===========
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
===============================================================================
For the For the
year ended year ended
December 31, 1993 December 31, 1992
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Investment income--net............... $ 11,924,708 $ 18,258,875
Realized gain on investments--net.... 5,416 41
------------ ------------
Net increase in net assets resulting
from operations.................... 11,930,124 18,258,916
Dividends to shareholders from
investment income--net............... (11,924,985) (18,259,233)
Transactions in shares of beneficial
interest--net decrease (Note 5)...... (101,941,025) (153,423,025)
------------ ------------
Total decrease...................... (101,935,886) (153,423,342)
NET ASSETS:
Beginning of period................... 669,622,916 823,046,258
------------ ------------
END OF PERIOD (including
undistributed net investment
income of -0- and $277,
respectively)....................... $567,687,030 $669,622,916
============ ============
See Notes to Financial Statements
17
<PAGE>
DEAN WITTER TAX-FREE DAILY INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
===============================================================================
1. ORGANIZATION AND ACCOUNTING POLICIES--Dean Witter Tax-Free Daily Income
Trust (the "Fund") is registered under the Investment Company Act of 1940, as
amended (the "Act"), as a diversified, open-end management investment company
and was originally incorporated in Maryland in 1980 and reorganized as a
Massachusetts business trust on April 30, 1987. The Fund commenced operations
on February 20, 1981. On February 19, 1993, the Fund changed its name from Dean
Witter/Sears Tax-Free Daily Income Trust to Dean Witter Tax-Free Daily Income
Trust.
The following is a summary of significant accounting policies:
A. Valuation of Investments--Portfolio securities are valued at
amortized cost, which approximates market value.
B. Accounting for Investments--Security transactions are accounted for
on the trade date (date the order to buy or sell is executed). In computing net
investment income, the Fund amortizes any premiums and original issue discounts
and accrues interest income daily on securities owned. Realized gains and
losses on security transactions are determined on the identified cost method.
C. Federal Income Tax Status--It is the Fund's policy to comply with
the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable and non-taxable
income to its shareholders. Accordingly, no federal income tax provision is
required.
D. Dividends and Distributions to Shareholders--Dividends and
distributions to shareholders are recorded by the Fund as of the close of the
Fund's business day.
2. INVESTMENT MANAGEMENT AGREEMENT--Pursuant to an Investment Management
Agreement (the "Agreement") with Dean Witter InterCapital Inc. (the "Investment
Manager"), the Fund pays its Investment Manager a management fee, calculated
daily and payable monthly, by applying the following annual rates to the net
assets of the Fund determined as of the close of each business day: 0.50% of
the portion of the daily net assets not exceeding $500 million; 0.425% of the
portion of the daily net assets exceeding $500 million but not exceeding $750
million; 0.375% of the portion of the daily net assets exceeding $750 million
but not exceeding $1 billion; 0.35% of the portion of the daily net assets
exceeding $1 billion but not exceeding $1.5 billion; 0.325% of the portion of
the daily net assets exceeding $1.5 billion but not exceeding $2 billion; 0.30%
of the portion of the daily net assets exceeding $2 billion but not exceeding
$2.5 billion; 0.275% of the portion of the daily net assets exceeding $2.5
billion but not exceeding $3 billion; and 0.25% of the portion of the daily net
assets exceeding $3 billion. Under the terms of the Agreement, in addition to
managing the Fund's investments, the Investment Manager maintains certain of
the Fund's books and records and furnishes office space and facilities,
equipment, clerical, bookkeeping and certain legal services, and pays the
salaries of all personnel, including officers of the Fund who are employees of
the Investment Manager. The Investment Manager also bears the cost of telephone
services, heat, light, power and other utilities provided to the Fund.
3. PLAN OF DISTRIBUTION--Shares of beneficial interest of the Fund are
distributed by Dean Witter Distributors Inc. (the "Distributor"), an affiliate
of the Investment Manager. The Fund has entered into a Plan of Distribution
(the "Plan"), pursuant to Rule 12b-1 under the Act, with the Distributor
whereby the Distributor finances certain activities in connection with the
distribution of shares of the Fund.
Under the Plan the Distributor bears the expense of all promotional and
distribution related activities on behalf of the Fund, except for expenses that
the Trustees determine to reimburse, as described below. The following
18
<PAGE>
DEAN WITTER TAX-FREE DAILY INCOME TRUST
NOTES TO FINANCIAL STATEMENTS (continued)
===============================================================================
activities and services may be provided by the Distributor under the Plan: (1)
compensation to sales representatives of the Distributor and other broker-
dealers; (2) sales incentives and bonuses to sales representatives and to
marketing personnel in connection with promoting sales of the Fund's shares;
(3) expenses incurred in connection with promoting sales of the Fund's shares;
(4) preparing and distributing sales literature; and (5) providing advertising
and promotional activities, including direct mail solicitation and television,
radio, newspaper, magazine and other media advertisements.
The Fund is authorized to reimburse the Distributor for specific
expenses the Distributor incurs or plans to incur in promoting the distribution
of the Fund's shares. The amount of each monthly reimbursement payment may in
no event exceed an amount equal to a payment at the annual rate of .15 of 1% of
the Fund's average daily net assets during the month. For the year ended
December 31, 1993, the distribution fee established by the Trustees and accrued
was at the average annual rate of .10 of 1%.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES--The cost of
purchases and the proceeds from sales/maturities of portfolio securities for
the year ended December 31, 1993 aggregated $1,113,398,116 and $1,216,992,955,
respectively.
On April 1, 1991, the Fund established an unfunded noncontributory
defined benefit pension plan covering all independent Trustees of the Fund who
will have served as an independent Trustee for at least five years at the time
of retirement. Benefits under this plan are based on years of service and
compensation during the last five years of service. Aggregate pension cost for
the year ended December 31, 1993, included in Trustees' fees and expenses in
the Statement of Operations, amounted to $12,232. At December 31, 1993, the
Fund had an accrued pension liability of $39,299, which is included in accrued
expenses in the Statement of Assets and Liabilities.
Dean Witter Trust Company ("DWTC"), an affiliate of the Investment
Manager and the Distributor, is the Fund's transfer agent. During the year
ended December 31, 1993 the Fund incurred transfer agent fees and expenses of
$529,145 with DWTC, of which $49,953 was payable at December 31, 1993.
5. FEDERAL INCOME TAX STATUS--During the year ended December 31, 1993 the Fund
utilized approximately $5,400 of its net capital loss carryovers. At December
31, 1993 the Fund had a net capital loss carryover of approximately $17,500 of
which $5,800 will be available through December 31, 1995 and $11,700 will be
available through December 31, 1999, to the extent provided by regulations. To
the extent that these carryover losses are used to offset future capital gains,
it is probable that the gains so offset will not be distributed to shareholders
since any such distributions may be taxable to shareholders as ordinary income.
6. SHARES OF BENEFICIAL INTEREST--Transactions in shares of beneficial
interest, at $1.00 per share, were as follows:
For the year ended, For the year ended
December 31, 1993 December 31, 1992
---------------- ----------------
Shares sold..................... 1,430,859,924 1,453,319,220
Shares issued in reinvestment
of dividends................... 11,924,985 18,259,233
-------------- --------------
1,442,784,909 1,471,578,453
Shares repurchased.............. (1,544,725,934) (1,625,001,478)
-------------- --------------
Net decrease in shares
outstanding..................... (101,941,025) (153,423,025)
============== ==============
7. SELECTED PER SHARE DATA AND RATIOS--See the "Financial Highlights" table on
page 4 of this Prospectus.
19
<PAGE>
<TABLE>
DEAN WITTER TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS December 31, 1993
==================================================================================================================================
<CAPTION>
Principal
Amount (in Current
thousands) Yield Value
- ---------- ----- -----
<C> <S> <C> <C>
SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS* (75.0%)
CALIFORNIA
$ 5,000 Los Angeles County Metropolitan Transportation Authority, Prop C Sales
Tax Refg Ser 1993-A (MBIA Insured) 2.90% due 1/6/94............................ 2.90 % $ 5,000,000
COLORADO
10,000 Arapahoe County, Highway E-470 Ser 1986 E, 2.85% due 2/28/94.................... 2.85 10,000,000
10,000 Colorado Health Facilities Authority, Kaiser Permanente Ser 1985,
2.75% due 2/1/94............................................................... 2.75 10,000,000
CONNECTICUT
10,000 Connecticut Housing Finance Authority, 1992 Ser G Subser G-1,
2.65% due 5/16/94.............................................................. 2.65 10,000,000
DISTRICT OF COLUMBIA
5,000 District of Columbia, The American University Ser 1985, 3.05% due 1/5/94........ 3.05 5,000,000
FLORIDA
18,800 Dade County Industrial Development Authority, Dolphins Stadium Ser 1985 A,
3.15% due 1/4/94............................................................... 3.15 18,800,000
7,000 Orlando Utilities Commission, Water & Electric Ser 1991 BANs, 2.95% due 1/6/94.. 2.95 7,000,000
10,000 Putnam County Development Authority, Seminole Electric Co-op Inc Ser 1984 D
(NRU-CFC Gtd), 2.25% due 6/15/94............................................... 2.25 10,000,000
5,000 Volusia County Health Facilities Authority, Pooled Ser 1985 (FGIC Insured),
3.50% due 1/5/94............................................................... 3.50 5,000,000
GEORGIA
3,717 Georgia Municipal Association, Pool Ser 1990 COPs (MBIA Insured)
2.95% due 1/6/94............................................................... 2.95 3,716,950
15,807 Variable Rate Trust Certificates XI, Holding: Metropolitan Atlanta Rapid Transit
Authority, Sales Tax Refg Ser F (Prerefunded) et al, 3.25% due 1/6/94.......... 3.25 15,807,000
HAWAII
Hawaii Department of Budget & Finance,
6,200 Ewa Plain Water, 3.10% due 10/1/94............................................. 3.10 6,204,498
10,000 Kaiser Permanente Semiannual Tender Ser 1984 B, 2.70% due 3/1/94............... 2.70 10,000,000
IDAHO
10,000 Idaho Health Facilities Authority, Pooled Ser 1985, 3.60% due 1/4/94............ 3.60 10,000,000
ILLINOIS
10,000 Illinois Educational Facilities Authority, Northwestern University Ser 1988,
3.15% due 1/5/94............................................................... 3.15 10,000,000
Illinois Health Care Facilities Authority,
5,000 Lutheran General Health Care System Ser 1985 B, 2.60% due 1/3/94............... 2.60 5,000,000
9,700 Resurrection Health Care System Ser 1993, 4.50% due 1/3/94..................... 4.50 9,700,000
10,000 Revolving Fund Ser 1985 B, 2.90% due 1/5/94.................................... 2.90 10,000,000
10,000 Oak Forest, Homewood South Suburban Mayors & Managers Assn Ser 1989,
3.50% due 1/5/94..................... 3.50 10,000,000
INDIANA
3,400 Indiana Hospital Equipment Financing Authority, Ser 1985 (MBIA Insured),
3.25% due 1/5/94..................... 3.25 3,400,000
20
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS December 31, 1993 (continued)
==================================================================================================================================
<CAPTION>
Principal
Amount (in Current
thousands) Yield Value
- ---------- ----- -----
<C> <S> <C> <C>
KENTUCKY
Clark County, East Kentucky Power Co-op Inc (NRU-CFC Gtd),
$ 7,175 Ser 1984 J-1, 2.60% due 4/15/94................................................ 2.60 % $ 7,175,000
5,000 Ser 1984 J-2, 2.60% due 4/15/94................................................ 2.60 5,000,000
9,600 Mason County, East Kentucky Power Co-op Inc Ser 1984 (NRU-CFC Gtd),
3.00% due 1/5/94............................................................... 3.00 9,600,000
MARYLAND
5,000 Howard County, Ser 1993 BANs, 3.10% due 1/5/94.................................. 3.10 5,000,000
11,700 Montgomery County, Cons Ser 1992 B BANs, 3.10% due 1/5/94....................... 3.10 11,700,000
MASSACHUSETTS
6,000 Massachusetts Health & Educational Facilities Authority, Harvard University
Ser 1985 I, 2.85% due 1/6/94................................................... 2.85 6,000,000
MICHIGAN
6,000 Delta County Economic Development Corporation, Mead-Escanaba Paper Co
1985 Ser E, 4.75% due 1/3/94................................................... 4.75 6,000,000
MISSOURI
6,000 Missouri Environmental Improvement & Energy Resources Authority,
Noranda Aluminum Inc Ser 1982, 3.35% due 1/5/94................................ 3.35 6,000,000
Missouri Health & Educational Facilities Authority,
10,000 Sisters of Mercy Health System, St Louis Inc Ser 1989 A, 2.85% due 1/6/94...... 2.85 10,000,000
9,500 St Anthony's Medical Center Ser 1989 C, 3.55% due 1/4/94....................... 3.55 9,500,000
NEBRASKA
7,600 Nebraska Higher Education Loan Program Inc, 1985 Ser A (MBIA Insured),
3.10% due 1/5/94............................................................... 3.10 7,600,000
NEW JERSEY
4,000 Gloucester County, Mobil Oil Refining Corp Ser 1993 A, 2.80% due 1/5/94......... 2.80 4,000,000
NEW YORK
2,000 New York Local Goverment Assistance Corporation, 1993 Ser A,
2.70% due 1/5/94............................................................... 2.70 2,000,000
5,000 New York State Power Authority, Tender Notes, 2.70% due 3/1/94.................. 2.70 5,000,000
NORTH CAROLINA
North Carolina Medical Care Commission,
10,000 Baptist Hospital Project Ser 1992 B, 2.85% due 1/6/94.......................... 2.85 10,000,000
5,000 Duke University Hospital Ser 1985 B, 2.95% due 1/6/94.......................... 2.95 5,000,000
OHIO
5,000 Columbus, Sewer Ser 1986 B, 2.95% due 1/6/94.................................... 2.95 5,000,000
2,350 The Ohio State University, General Receipts Ser 1992 B, 2.95% due 1/6/94........ 2.95 2,350,000
OKLAHOMA
5,000 Oklahoma Water Resources Board, State Loan Program Ser 1992, 2.90% due 4/1/94... 2.90 5,000,000
PENNSYLVANIA
10,000 Emmaus General Authority, Local Govt Ser 1989 F, 3.45% due 1/5/94............... 3.45 10,000,000
5,000 Washington County Authority, Pittsburgh Eye & Ear Hospital Ser 1985 B-1
Subser C, 3.05% due 1/6/94..................................................... 3.05 5,000,000
21
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS December 31, 1993 (continued)
==================================================================================================================================
<CAPTION>
Principal
Amount (in Current
thousands) Yield Value
- ---------- ----- -----
<C> <S> <C> <C>
RHODE ISLAND
$ 5,000 Rhode Island Industrial Facilities Corporation, Handy & Harman Electrical
Materials Corp Ser 1984, 2.754% due 1/6/94..................................... 2.754% $ 5,000,000
SOUTH CAROLINA
6,000 York County, Saluda River Electric Co-op Inc Ser 1984 E-1 (NRU-CFC Gtd),
2.75% due 2/15/94.............................................................. 2.75 6,000,000
TENNESSEE
10,000 Tennessee, Ser 1993 B BANs, 3.10% due 1/5/94.................................... 3.10 10,000,000
TEXAS
4,000 Bexar County, Bexar Airforce Village II Ser 1985 B, 3.125% due 1/6/94........... 3.125 4,000,000
6,550 Gulf Coast Industrial Development Authority, Amoco Oil Co Ser 1985,
2.60% due 6/1/94............................................................... 2.60 6,550,000
14,200 Harris County Health Facilities Development Corporation, Memorial Hospital
Ser 1984, 3.25% due 1/5/94..................................................... 3.25 14,200,000
10,000 Lower Neches Valley Authority, Chevron USA Inc Ser 1987, 2.70% due 2/15/94...... 2.70 10,000,000
10,700 Texas Health Facilities Development Corporation, North Texas Pooled
Ser 1985 A, 3.50% due 1/5/94................................................... 3.50 10,700,000
UTAH
12,500 Intermountain Power Agency, Ser 1985 E, 2.55% due 3/15/94....................... 2.55 12,500,000
VERMONT
5,290 Vermont Educational & Health Buildings Financing Agency, Middlebury College
Ser 1988 A, 2.80% due 11/1/94.................................................. 2.80 5,290,000
WASHINGTON
5,700 Seattle, Municipal Light & Power Ser 1993, 3.00% due 1/5/94..................... 3.00 5,700,000
WEST VIRGINIA
9,475 Kanawha County Building Commission, Charleston Area Medical Center
Refg 1989 Ser B, 3.20% due 1/5/94.............................................. 3.20 9,475,000
5,000 Pleasants County Commission, American Cyanamid Co Ser 1985,
3.40% due 1/5/94............................................................... 3.40 5,000,000
WISCONSIN
10,000 Wisconsin Health Facilities Authority, Franciscan Health Care Inc
Ser 1985 A-1, 3.35% due 1/5/94................................................. 3.35 10,000,000
-----------
TOTAL SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS
(AMORTIZED COST $425,968,448).................................................. 425,968,448
-----------
22
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS December 31, 1993 (continued)
==================================================================================================================================
<CAPTION>
Principal
Amount (in Current
thousands) Yield Value
- ---------- ----- -----
<C> <S> <C> <C>
TAX-EXEMPT COMMERCIAL PAPER (7.6%)
FLORIDA
$ 6,000 Sunshine State Governmental Financing Commission, Ser 1986,
2.55% due 2/24/94.............................................................. 2.55 % $ 6,000,000
LOUISIANA
12,000 St James Parish, Texaco Inc Ser 1988 A, 2.60% due 2/17/94....................... 2.60 12,000,000
TENNESSEE
Metropolitan Government of Nashville & Davidson County Health &
Education Board,
5,000 Baptist Hospital Inc Ser 1992, 2.45% due 2/22/94............................... 2.45 5,000,000
10,000 Baptist Hospital Inc Ser 1992, 2.50% due 2/25/94............................... 2.50 10,000,000
TEXAS
10,000 Texas Public Finance Authority, Ser 1993 A, 2.60% due 2/23/94................... 2.60 10,000,000
-----------
TOTAL TAX-EXEMPT COMMERCIAL PAPER
(AMORTIZED COST $43,000,000)................................................... 43,000,000
-----------
SHORT--TERM MUNICIPAL NOTES (17.0%)
CALIFORNIA
20,000 Alameda County, 1993-1994 TRANs, dtd 7/8/93 3.25% due 7/29/94................... 2.75 20,055,661
30,000 California School Cash Reserve Program Authority, 1993 Pool Ser A,
dtd 7/2/93 3.40% due 7/5/94.................................................... 2.90 30,073,749
10,000 California Statewide Communities Development Authority, 1993
Pool Ser A, dtd 7/1/93 3.25% due 6/30/94...................................... 2.80 10,021,560
6,000 Los Angeles County School & Community College Districts, 1993-1994
Ser A Pooled TRANs COPs, dtd 7/1/93 3.25% due 6/30/94.......................... 2.85 6,011,483
IDAHO
8,000 Idaho, Series 1993 TANs, dtd 7/01/93 3.00% due 6/30/94.......................... 2.60 8,015,349
IOWA
6,000 Iowa, Ser 1993 A TRANs, dtd 7/19/93 3.25% due 6/30/94........................... 2.92 6,009,489
OKLAHOMA
10,000 Oklahoma Political Subdivision Cash Management Trust 1, 1993 Ser COPs,
dtd 7/14/93 3.35% due 6/30/94.................................................. 2.95 10,019,179
RHODE ISLAND
6,250 Rhode Island & Providence Plantations, TANs,
dtd 7/1/93 3.25% due 6/30/94................................................... 2.70 6,266,488
------------
TOTAL SHORT-TERM MUNICIPAL NOTES
(AMORTIZED COST $96,472,958)................................................... 96,472,958
------------
TOTAL INVESTMENTS (AMORTIZED COST $565,441,406) (A)............................. 99.6% 565,441,406
OTHER ASSETS IN EXCESS OF LIABILITIES........................................... 0.4 2,245,624
------ ------------
NET ASSETS...................................................................... 100.0% $567,687,030
------ ------------
------ ------------
<FN>
- --------------
* Due date reflects next rate change.
(a) Cost is the same for federal income tax purposes.
See Notes to Financial Statements
23
</TABLE>
<PAGE>
DEAN WITTER TAX-FREE DAILY INCOME TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
===============================================================================
To the Shareholders and Trustees of Dean Witter Tax-Free Daily Income Trust
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights (appearing in the "Financial
Highlights" table on page 4 of this Prospectus) present fairly, in all material
respects, the financial position of Dean Witter Tax-Free Daily Income Trust
(the "Fund") at December 31, 1993, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the ten years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities owned at December 31, 1993 by correspondence with the custodian and
a broker, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
1177 Avenue of the Americas
New York, New York 10036
February 8, 1994
- -------------------------------------------------------------------------------
1993 FEDERAL TAX NOTICE (unaudited)
During the year ended December 31, 1993 the Fund paid to shareholders $0.018354
per share from net investment income. All of the Fund's dividends were exempt
interest dividends, excludable from gross income for Federal income tax
purposes.
- -------------------------------------------------------------------------------
24
<PAGE>
THE DEAN WITTER FAMILY OF FUNDS
MONEY MARKET FUNDS
Dean Witter Liquid Asset Fund Inc.
Dean Witter Tax-Free Daily Income Trust
Dean Witter New York Municipal Money Market Trust
Dean Witter California Tax-Free Daily Income Trust
Dean Witter U.S. Government Money Market Trust
EQUITY FUNDS
Dean Witter American Value Fund
Dean Witter Natural Resource Development Securities Inc.
Dean Witter Dividend Growth Securities Inc.
Dean Witter Developing Growth Securities Trust
Dean Witter World Wide Investment Trust
Dean Witter Equity Income Trust
Dean Witter Value-Added Market Series
Dean Witter Utilities Fund
Dean Witter Precious Metals and Minerals Trust
Dean Witter Capital Growth Securities
Dean Witter European Growth Fund Inc.
Dean Witter Pacific Growth Fund Inc.
Dean Witter Health Sciences Trust
Dean Witter Global Dividend Growth Securities
FIXED-INCOME FUNDS
Dean Witter High Yield Securities Inc.
Dean Witter Tax-Exempt Securities Trust
Dean Witter U.S. Government Securities Trust
Dean Witter California Tax-Free Income Fund
Dean Witter New York Tax-Free Income Fund
Dean Witter Convertible Securities Trust
Dean Witter Federal Securities Trust
Dean Witter World Wide Income Trust
Dean Witter Intermediate Income Securities
Dean Witter Global Short-Term Income Fund Inc.
Dean Witter Multi-State Municipal Series Trust
Dean Witter Premier Income Trust
Dean Witter Short-Term U.S. Treasury Trust
Dean Witter Diversified Income Trust
Dean Witter Limited Term Municipal Trust
Dean Witter Short-Term Bond Trust
DEAN WITTER RETIREMENT SERIES
Liquid Asset Series
U.S. Government Money Market Series
U.S. Government Securities Series
Intermediate Income Securities Series
American Value Series
Capital Growth Series
Dividend Growth Series
Strategist Series
Utilities Series
Value-Added Market Series
Global Equity Series
ASSET ALLOCATION FUNDS
Dean Witter Managed Assets Trust
Dean Witter Strategist Fund
ACTIVE ASSETS ACCOUNT PROGRAM
Active Assets Money Trust
Active Assets Tax-Free Trust
Active Assets California Tax-Free Trust
Active Assets Government Securities Trust
<PAGE>
Dean Witter
Tax-Free Daily Income Trust
Two World Trade Center
New York, New York 10048
TRUSTEES
Jack F. Bennett
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. John E. Jeuck
Dr. Manuel H. Johnson
Paul Kolton
Michael E. Nugent
Edward R. Telling
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Sheldon Curtis
Vice President, Secretary and
General Counsel
Katherine H. Stromberg
Vice President
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
110 Washington Street
New York, New York 10286
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Dean Witter Trust Company
Harborside Financial Center,
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
DEAN WITTER
TAX-FREE DAILY
INCOME TRUST
LOGO
PROSPECTUS
FEBRUARY 22, 1994
<PAGE>
|2|1|0|-|_|_|_|_|_|_|_|_|_|
for office use only
Dean Witter
Tax-Free Daily (LOGO)
Income Trust
APPLICATION
DEAN WITTER TAX-FREE DAILY INCOME TRUST
Send to: Dean Witter Trust Company (the "Transfer Agent"),
P.O. Box 1040, Jersey City, NJ 07303
===============================================================================
INSTRUCTIONS For assistance in completing this application, telephone Dean
Witter Trust Company at (800) 526-3143 (Toll Free).
===============================================================================
TO REGISTER
SHARES
(please print)
1. |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
First Name Last Name
- -- As joint tenants,
use line 1 & 2
2. |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
First Name Last Name
(Joint tenants with rights of survivorship unless otherwise specified)
Social Security Number |_|_|_|_|_|_|_|_|_|
- -- As custodian
for a minor,
use lines 1 & 3
3. |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Minor's Name
Under the _______________________________ Uniform Gifts to Minors Act
State of Residence of Minor
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Minor's Social Security Number
- -- In the name of a
corporation,
trust,
partnership
or other
institutional
investors,
use line 4
4. |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Name of Corporation, Trust (including trustee name(s)) or Other Organization
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
If Trust, Date of Trust Instrument: _______________________
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Tax Identification Number
===============================================================================
ADDRESS |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
City State Zip Code
<PAGE>
===============================================================================
TO PURCHASE
SHARES:
Minimum Initial
Investment:
$5,000
| | CHECK (enclosed) $_______________ (Make Payable to Dean Witter Tax-Free
Daily Income Trust)
| | WIRE* On _______________ MF*______________________________
(Date) (Control number, this transaction)
__________________________________________________________________
Name of Bank Branch
__________________________________________________________________
Address
__________________________________________________________________
Telephone Number
* For an initial investment made by wiring funds, obtain a control number by
calling: (800) 526-3143 (Toll Free)
Your bank should wire to:
Bank of New York for credit to account of Dean Witter Trust Company
Account Number: 8900188413
Re: Dean Witter Tax-Free Daily Income Trust
Account Of: _________________________________________________________
(Investor's Account as Registered at the Transfer Agent)
Control or Account Number: __________________________________________
(Assigned by Telephone)
===============================================================================
OPTIONAL SERVICES
===============================================================================
NOTE: If you are a current shareholder of Dean Witter Tax-Free Daily Income
Trust, please indicate your fund account number here.
|2|1|0|-|_|_|_|_|_|_|_|_|_|
===============================================================================
DIVIDENDS All dividends will be reinvested daily in additional shares, unless
the following option is selected:
| | Pay income dividends by check at the end of each month.
===============================================================================
WRITE YOUR
OWN
CHECK
| | Send an initial supply of checks.
FOR JOINT ACCOUNTS:
| | Check this box if all owners are required to sign checks.
<PAGE>
===============================================================================
SYSTEMATIC
WITHDRAWAL
PLAN
Minimum
Account Value:
$5,000
| | Systematic Withdrawal Plan ($25 minimum)
| | $____________ | | Monthly or | | Quarterly
| | 10th or | | 25th of Month/Quarter
| | Pay shareholder(s) at address of record.
| | Pay to the following: (If this payment option is selected a signature
guarantee is required)
| | Percentage of balance (annualized basis)
_______% | | Monthly | | Quarterly
| | 10th or | | 25th of Month/Quarter
____________________________________________________________
Name
____________________________________________________________
Address
____________________________________________________________
City State Zip Code
===============================================================================
PAYMENT TO
PREDESIGNATED
BANK ACCOUNT
Bank Account must be in same
name as shares are registered
Minimum Amount:
$1,000
| | Dean Witter Trust Company is hereby authorized to honor telephonic or other
instructions, without signature guarantee, from any person for the
redemption of any or all shares of Dean Witter Tax-Free Daily Income Trust
held in my (our) account provided that proceeds are transmitted only to the
following bank account. (Absent its own negligence, neither Dean Witter
Tax-Free Daily Income Trust nor Dean Witter Trust Company (the "Transfer
Agent") shall be liable for any redemption caused by unauthorized
instruction(s)):
___________________________________________ ______________________________
NAME & BANK ACCOUNT NUMBER BANK'S ROUTING TRANSMIT CODE
(ASK YOUR BANK)
____________________________________________________________
NAME OF BANK
____________________________________________________________
ADDRESS OF BANK
(___)_______________________________________________________
TELEPHONE NUMBER OF BANK
<PAGE>
===============================================================================
SIGNATURE AUTHORIZATION
===============================================================================
FOR ALL ACCOUNTS
NOTE: RETAIN A COPY OF THIS DOCUMENT FOR YOUR RECORDS. ANY MODIFICATION OF THE
INFORMATION BELOW WILL REQUIRE AN AMENDMENT TO THIS FORM. THIS DOCUMENT IS IN
FULL FORCE AND EFFECT UNTIL ANOTHER DULY EXECUTED FORM IS
RECEIVEED BY THE TRANSFER AGENT.
The "Transfer Agent" is hereby authorized to act as agent for the registered
owner of shares of Dean Witter Tax-Free Daily Income Trust (the "Fund") in
effecting redemptions of shares and is authorized to recognize the signature(s)
below in payment of funds resulting from such redemptions on behalf of the
registered owners of such shares. The Transfer Agent shall be liable only for
its own negligence and not for default or negligence of its correspondents, or
for losses in transit. The Fund shall not be liable for any default or
negligence of the Transfer Agent.
I (we) certify to my (our) legal capacity, or the capacity of the investor
named above, to invest in and redeem shares of, and I (we) acknowledge receipt
of a current prospectus of Dean Witter Tax-Free Daily Income Trust and (we)
further certify my (our) authority to sign and act for and on behalf of the
investor.
Under penalties of perjury, I certify (1) that the number shown on this form is
my correct taxpayer identification number and (2) that I am not subject to
backup withholding either because I have not been notified that I am subject to
backup withholding as a result of a failure to report all interest or
dividends, or the Internal Revenue Service has notified me that I am no longer
subject to backup withholding. (Note: You must cross out item (2) above if you
have been notified by IRS that you are currently subject to backup withholding
because of underreporting interest or dividends on your tax return.)
For Individual, Joint and Custodial Accounts for Minors,
Check Applicable Box:
| | I am a United States Citizen. | | I am not a United States Citizen.
SIGNATURE(S) (IF JOINT TENANTS, ALL MUST SIGN)
Name(s) must be signed exactly
the same as shown on
lines 1 to 4 on the reverse
side of this application
_____________________________________________________________
| | |
|______________________________|______________________________|
| | |
|______________________________|______________________________|
SIGNED THIS ____________ DAY OF ___________________________19__.
FOR CORPORATIONS, TRUSTS, PARTNERSHIPS AND OTHER ORGANIZATIONS
The following named persons are currently officers|trustees|general
partners|other authorized signatories of the Registered Owner, and any ____* of
them ("Authorized Person(s)") is|are currently authorized under the applicable
governing document to act with full power to sell, assign or transfer
securities of the Fund for the Registered Owner and to execute and deliver any
instrument necessary to effectuate the authority hereby conferred:
In addition, complete
Section A or B below.
NAME/TITLE SIGNATURE
_____________________________________________________________
| | |
|______________________________|______________________________|
| | |
|______________________________|______________________________|
| | |
|______________________________|______________________________|
SIGNED THIS ____________ DAY OF ___________________________19__.
The Transfer Agent may, without inquiry, act only upon the instruction of ANY
PERSON(S) purporting to be (an) Authorized Person(s) as named in the
Certification Form last received by the Transfer Agent. The Transfer Agent and
the Fund shall not be liable for any claims, expenses (including legal fees) or
losses resulting from the Transfer Agent having acted upon any instruction
reasonably believed genuine.
__________________________________________________________________________
*INSERT A NUMBER. UNLESS OTHERWISE INDICATED, THE TRANSFER AGENT MAY HONOR
INSTRUCTIONS OF ANY ONE OF THE PERSONS NAMED ABOVE.
<PAGE>
===============================================================================
SECTION (A)
CORPORATIONS AND
INCORPORATED
ASSOCIATIONS ONLY.
SIGN ABOVE AND
COMPLETE THIS
SECTION
NOTE: EITHER A SIGNATURE GUARANTEE OR CORPORATE SEAL IS REQUIRED.
I, ______________________________, Secretary of the Registered Owner, do hereby
certify that at a meeting on _______________ at which a quorum was present
throughout, the Board of Directors of the corporation|the officers of the
association duly adopted a resolution, which is in full force and effect and in
accordance with the Registered Owner's charter and by-laws, which resolution
did the following: (1) empowered the above-named Authorized Person(s) to effect
securities transactions for the Registered Owner on the terms described above;
(2) authorized the Secretary to certify, from time to time, the names and
titles of the officers of the Registered Owner and to notify the Transfer Agent
when changes in office occur; and (3) authorized the Secretary to certify that
such a resolution has been duly adopted and will remain in full force and
effect until the Transfer Agent receives a duly executed amendment to the
Certification Form.
SIGNATURE
GUARANTEE**
(or Corporate Seal)
Witness my hand on behalf of the corporation|association this ___________ day
of _______________, 19__.
___________________________________________________________________
Secretary**
The undersigned officer (other than the Secretary) hereby certifies that the
foregoing instrument has been signed by the Secretary of the
corporation|association.
SIGNATURE GUARANTEE**
(or Corporate Seal)
___________________________________________________________________
Certifying Officer of the Corporation or Incorporated Association**
===============================================================================
SECTION (B)
ALL OTHER
INSTITUTIONAL
INVESTORS
SIGNATURE
GUARANTEE**
SIGN ABOVE AND
COMPLETE THIS
SECTION
NOTE: A SIGNATURE GUARANTEE IS REQUIRED.
___________________________________________________________________
Certifying
Trustee(s)/General Partner(s)/Other(s)**
___________________________________________________________________
Certifying
Trustee(s)/General Partner(s)/Other(s)**
_______________________________________________________________________________
**SIGNATURE(S) MUST BE GUARANTEED BY AN ELIBIGLE GUARANTOR
<PAGE>
===============================================================================
DEALER
(if any)
Completion by dealer
only
Above signature(s) guaranteed. Prospectus has been delivered by undersigned to
above-named applicant(s).
___________________________ _________________________________________________
Firm Name Office Number-Account Number at Dealer-A/E Number
___________________________ _________________________________________________
Address Account Executive's Last Name
___________________________ _________________________________________________
City, State, Zip Code Branch Office
* 1994 Dean Witter Distributors Inc.
<PAGE>
DEAN WITTER
TAX-FREE DAILY
INCOME TRUST
LOGO
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 22, 1994
===============================================================================
Dean Witter Tax-Free Daily Income Trust (the "Fund") is an open-end
diversified management investment company whose investment objective is to
provide as high a level of daily income exempt from federal income tax as is
consistent with stability of principal and liquidity. The Fund seeks to achieve
its objective by investing primarily in high quality tax-exempt securities with
short-term maturities, including Municipal Bonds, Municipal Notes and Municipal
Commercial Paper. (See "Investment Practices and Policies".)
The Fund is authorized to reimburse specific expenses incurred in promoting
the distribution of the Fund's shares pursuant to a Plan of Distribution
pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "Act").
Reimbursement may in no event exceed an amount equal to payments at the annual
rate of 0.15% of the average daily net assets of the Fund.
A Prospectus for the Fund dated February 22, 1994, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge by request of the Fund at its address or at the phone number
listed below. This Statement of Additional Information contains information in
addition to and more detailed than that set forth in the Prospectus. It is
intended to provide additional information regarding the activities and
operations of the Fund, and should be read in conjunction with the Prospectus.
Dean Witter Tax-Free Daily Income Trust
Two World Trade Center
New York, New York 10048
(800) 869-FUND (toll free)
<PAGE>
TABLE OF CONTENTS
===============================================================================
The Fund and its Management....................................... 3
Trustees and Officers............................................. 6
Investment Practices and Policies................................. 9
Investment Restrictions........................................... 12
Portfolio Transactions and Brokerage.............................. 13
Purchase of Fund Shares........................................... 15
How Net Asset Value is Determined................................. 20
Redemption of Fund Shares......................................... 23
Dividends, Distributions and Taxes................................ 24
Shares of the Fund................................................ 26
Custodian and Transfer Agent...................................... 27
Reports to Shareholders........................................... 27
Independent Accountants........................................... 27
Legal Counsel..................................................... 27
Experts........................................................... 27
Registration Statement............................................ 27
Financial Statements.............................................. 28
Appendix.......................................................... 29
2
<PAGE>
THE FUND AND ITS MANAGEMENT
===============================================================================
THE FUND
The Fund was incorporated in the state of Maryland on March 24, 1980 under
the name InterCapital Reserve Cash Management Inc. From May 19, 1980 to August
15, 1980, the Fund was engaged in operations as a publicly held, open-end
investment company of the type commonly known as a money market fund. On August
15, 1980, the Fund terminated its operations as a money market fund in response
to changes in regulations promulgated by the Federal Reserve Board. At that
time, substantially all of the Fund's assets were transferred to lnterCapital
Liquid Asset Fund Inc., another money market fund, as part of an offer of
exchange made to the Fund's shareholders. On October 13, 1980 the Fund's sole
remaining shareholder, Dean Witter Reynolds InterCapital Inc. ("InterCapital"),
approved a change in the Fund's name to lnterCapital Tax-Free Daily Income Fund
Inc. and an amendment to the Fund's investment objective and fundamental
investment policies to those set forth in the Prospectus and this Statement of
Additional Information. The Fund offered its shares for sale to the public,
commencing on February 20, 1981. On March 21, 1983 the Fund's name was changed
to Dean Witter/Sears Tax-Free Daily Income Fund Inc. On April 30, 1987, the
Fund reorganized as a Massachusetts business trust with the name Dean
Witter/Sears Tax-Free Daily Income Trust. On February 19, 1993, the Fund's name
was changed to its current name, Dean Witter Tax-Free Daily Income Trust.
THE INVESTMENT MANAGER
Dean Witter InterCapital Inc., a Delaware corporation (the "Investment
Manager" or "InterCapital"), whose address is Two World Trade Center, New York,
New York 10048, is the Fund's Investment Manager. InterCapital is a wholly-
owned subsidiary of Dean Witter, Discover & Co. ("DWDC"), a Delaware
corporation. In an internal reorganization which took place in January, 1993,
InterCapital assumed the investment advisory, administrative and management
activities previously performed by the InterCapital Division of Dean Witter
Reynolds Inc. ("DWR"), a broker-dealer affiliate of InterCapital. (As
hereinafter used in this Statement of Additional Information, the terms
"InterCapital" and "Investment Manager" refer to DWR's InterCapital Division
prior to the internal reorganization and to Dean Witter InterCapital Inc.
thereafter.) The daily management of the Fund and research relating to the
Fund's portfolio is conducted by or under the direction of officers of the Fund
and of the Investment Manager, subject to review of investments by the Fund's
Board of Trustees. In addition, Trustees of the Fund provide guidance on
economic factors and interest rate trends. Information as to these Trustees and
Officers is contained under the caption "Trustees and Officers."
The Investment Manager is also the investment manager or advisor of the
following investment companies: Dean Witter Liquid Asset Fund Inc.,
InterCapital Income Securities Inc., Dean Witter High Yield Securities Inc.,
Dean Witter Tax-Exempt Securities Trust, Dean Witter Developing Growth
Securities Trust, Dean Witter American Value Fund (formerly Dean Witter
Industry-Valued Securities Inc.), Dean Witter Dividend Growth Securities Inc.,
Dean Witter Natural Resource Development Securities Inc., Dean Witter U.S.
Government Money Market Trust, Dean Witter Variable Investment Series, Dean
Witter World Wide Investment Trust, Dean Witter Select Municipal Reinvestment
Fund, Dean Witter U.S. Government Securities Trust, Dean Witter California Tax-
Free Income Fund, Dean Witter Equity Income Trust, Dean Witter New York Tax-
Free Income Fund, Dean Witter Convertible Securities Trust, Dean Witter Federal
Securities Trust, Dean Witter Value-Added Market Series, High Income Advantage
Trust, High Income Advantage Trust II, High Income Advantage Trust III, Dean
Witter Government Income Trust, InterCapital Insured Municipal Bond Trust,
InterCapital Quality Municipal Investment Trust, InterCapital Insured Municipal
Trust, InterCapital Quality Municipal Income Trust, InterCapital Insured
Municipal Income Trust, InterCapital California Insured Municipal Income Trust,
Dean Witter California Tax-Free Daily Income Trust, Dean Witter Utilities Fund,
Dean Witter Managed Assets Trust, Dean Witter Strategist Fund, Dean Witter
World Wide Income Trust, Dean Witter Intermediate Income Securities, Dean
Witter Capital Growth Securities, Dean Witter European Growth Fund Inc., Dean
Witter Pacific Growth Fund Inc., Dean Witter New York Municipal Money Market
Trust, Dean Witter Precious Metals and Minerals Trust, Dean Witter Global
Short-Term Income Fund Inc., Dean Witter Multi-State Municipal Series Trust,
Dean Witter Premier Income Trust, Dean Witter Short-Term U.S. Treasury Trust,
Dean
3
<PAGE>
Witter Diversified Income Trust, Dean Witter Health Sciences Trust, Dean Witter
Retirement Series, InterCapital Quality Municipal Securities, InterCapital
California Quality Municipal Securities, InterCapital New York Quality
Municipal Securities, Dean Witter Global Dividend Growth Securities, Dean
Witter Limited Term Municipal Trust, Dean Witter Short-Term Bond Fund,
InterCapital Quality Municipal Investment Trust, InterCapital Insured Municipal
Securities, InterCapital Insured California Municipal Securities, Active Assets
Money Trust, Active Assets Tax-Free Trust, Active Assets California Tax-Free
Trust, and Active Assets Government Securities Trust, Municipal Income Trust,
Municipal Income Trust II, Municipal Income Trust III, Municipal Income
Opportunities Trust, Municipal Income Opportunities Trust II, Municipal Income
Opportunities Trust III, Municipal Premium Income Trust and Prime Income Trust.
The foregoing investment companies, together with the Fund, are collectively
referred to as the Dean Witter Funds. In addition, Dean Witter Services
Company, Inc. ("DWSC"), a wholly-owned subsidiary of InterCapital, serves as
manager for the following companies for which TCW Funds Management, Inc. is the
investment adviser: TCW/DW Core Equity Trust, TCW/DW North American Government
Income Trust, TCW/DW Latin American Growth Fund, TCW/DW Income and Growth Fund,
TCW/DW Small Cap Growth Fund, TCW/DW Balanced Fund, TCW/DW Term Trust 2000,
TCW/DW Term Trust 2002 and TCW/DW Term Trust 2003 (the "TCW/DW Funds").
InterCapital also serves as: (i) sub-adviser to Templeton Global Opportunites
Trust, an open-end investment company; (ii) administrator of The BlackRock
Strategic Term Trust Inc., a closed-end investment company; and (iii) sub-
administrator of MassMutual Participation Investors and Templeton Global
Governments Income Trust, closed-end investment companies.
The Investment Manager also serves as an investment adviser for Dean Witter
World Wide Investment Fund, an investment company organized under the laws of
Luxembourg, shares of which are not available for purchase in the United States
or by American citizens outside the United States.
Pursuant to an Investment Management Agreement (the "Agreement") with the
Investment Manager, the Fund has retained the Investment Manager to manage the
investment of the Fund's assets, including the placing of orders for the
purchase and sale of portfolio securities. The Investment Manager obtains and
evaluates such information and advice relating to the economy, securities
markets, and specific securities as it considers necessary or useful to
continuously manage the assets of the Fund in a manner consistent with its
investment objective and policies.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, such office space, facilities,
equipment, clerical help, bookkeeping and certain legal services as the Fund
may reasonably require in the conduct of its business, including the
preparation of prospectuses, proxy statements and reports required to be filed
with federal and state securities commissions (except insofar as the
participation or assistance of independent accountants and attorneys is, in the
opinion of the Investment Manager, necessary or desirable). In addition, the
Investment Manager pays the salaries of all personnel, including officers of
the Fund, who are employees of the Investment Manager. The Investment Manager
also bears the cost of telephone service, heat, light, power and other
utilities provided to the Fund.
Effective December 31, 1993, pursuant to a Services Agreement between
InterCapital and DWSC, DWSC began to provide the administrative services to the
Fund which were previously performed directly by InterCapital. The foregoing
internal reorganization did not result in any change in the nature or scope of
the administrative services being provided to the Fund or any of the fees being
paid by the Fund for the overall services being performed under the terms of
the existing Management Agreement.
Expenses not expressly assumed by the Investment Manager under the Agreement
will be paid by the Fund. The expenses borne by the Fund include, but are not
limited to: the distribution fee under the Plan pursuant to Rule 12b-1 (see
"Purchase of Fund Shares"); charges and expenses of any registrar, custodian
and stock transfer and dividend disbursing agent; brokerage commissions; taxes;
engraving and printing of share certificates, registration costs of the Fund
and its shares under federal and state securities laws; the cost and expense of
printing, including typesetting, and distributing prospectuses of
4
<PAGE>
the Fund and supplements thereto to the Fund's shareholders; all expenses of
shareholders' and Trus tees meetings and of printing, including typesetting,
and mailing of proxy statements and reports to shareholders; fees and travel
expenses of trustees or members of any advisory board or committee who are not
employees of the Investment Manager or any corporate affiliate of the
Investment Manager; all expenses incident to any dividend, withdrawal or
redemption options; charges and expenses of any outside service used for
pricing of the Fund's shares; fees and expenses of legal counsel, including
counsel to the Trustees who are not interested persons of the Fund or of the
Investment Manager (not including compensation or expenses of attorneys who are
employees of the Investment Manager) and independent accountants; membership
dues of Industry associations; interest on Fund borrowings; postage; insurance
premiums on property or personnel (including officers and Trustees) of the Fund
which inure to its benefit; extraordinary expenses (including, but not limited
to, legal claims and liabilities and litigation costs and any indemnification
relating thereto); and all other costs of the Fund's operation.
As full compensation for the services and facilities furnished to the Fund
and expenses of the Fund assumed by the Investment Manager, the Fund pays the
Investment Manager monthly compensation calculated daily by applying the
following annual rates to the net assets of the Fund, determined as of the
close of each business day: 0.50% of the portion of the daily net assets not
exceeding $500 million; 0.425% of the portion of the daily net assets exceeding
$500 million but not exceeding $750 million; 0.375% of the portion of the daily
net assets exceeding $750 million but not exceeding $1 billion; 0.35% of the
portion of the daily net assets exceeding $1 billion but not exceeding $1.5
billion; 0.325% of the portion of the daily net assets exceeding $1.5 billion
but not exceeding $2 billion; 0.30% of the portion of the daily net assets
exceeding $2 billion but not exceeding $2.5 billion; 0.275% of the portion of
the daily net assets exceeding $2.5 billion but not exceeding $3 billion; and
0.25% of the portion of the daily net assets exceeding $3 billion. For the
fiscal years ended December 31, 1991, December 31, 1992 and December 31, 1993,
the Fund accrued to the Investment Manager total compensation of $4,140,119,
$3,637,722 and $3,143,839, respectively.
Pursuant to the Agreement, total operating expenses of the Fund are subject
to applicable limitations under rules and regulations of states where the Fund
is authorized to sell its shares. Therefore, operating expenses are effectively
subject to the most restrictive of such limitations as the same may be amended
from time to time. Presently, the most restrictive limitation is as follows:
If, in any fiscal year, the Fund's total operating expenses, including the
investment management fee and the compensation paid to the Investment Manager
pursuant to the Plan and Agreement of Distribution described below, and
exclusive of taxes, interest, brokerage fees and extraordinary expenses (to the
extent permited by applicable state securities laws and regulations), exceed 2
1/2% of the first $30,000,000 of the average daily net assets, 2% of the next
$70,000,000 of average daily net assets and 1 1/2% of any excess over
$100,000,000, the Investment Manager will reimburse the Fund for the amount of
such excess. Such amount, if any, will be calculated daily and credited on a
monthly basis. During the fiscal years ended December 31, 1991, 1992 and 1993,
the Fund's expenses did not exceed such expense limitation.
The Agreement provides that in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations thereunder, the
Investment Manager is not liable to the Fund or any of its investors for any
act or omission by the Investment Manager or for any losses sustained by the
Fund or its investors. The Agreement in no way restricts the Investment Manager
from acting as investment manager or adviser to others.
The Agreement was initially approved by the Trustees on October 22, 1992 and
by the shareholders on January 12, 1993. The Agreement is substantially
identical to two prior investment management agreements; one which was
initially approved by the Board of Trustees on April 15, 1987 and by the
shareholders, in connection with the reorganization of the Fund as a
Massachusetts business trust, on April 21, 1987 and the other which was
initially approved in 1983 and which was in effect up to the reorganization of
the Fund in 1987 as a Massachusetts business trust. The Agreement may be
terminated at any time, without penalty, on thirty days' notice, by the Board
of Trustees of the Fund, by the holders of a majority, as defined in the
Investment Company Act of 1940, as amended (the "Act"), of the outstanding
shares of the Fund, or by the Investment Manager. The Agreement will
automatically ter-
5
<PAGE>
minate in the event of its assignment (as defined in the Act). The Agreement
took effect on June 30, 1993, upon the spin-off by Sears, Roebuck and Co. of
its remaining shares of DWDC. The Agreement may be terminated at any time,
without penalty, on thirty days' notice, by the Board of Trustees of the Fund,
by the holders of a majority, as defined in the Investment Company Act of 1940,
as amended (the "Act"), of the outstanding shares of the Fund, or by the
Investment Manager. The Agreement will automatically terminate in the event of
its assignment (as defined in the Act).
Under its terms, the Agreement continues in effect until April 30, 1994, and
will continue from year to year thereafter, provided continuance of the
Agreement is approved at least annually by the vote of the holders of a
majority (as defined in the Act) of the outstanding shares of the Fund, or by
the Board of Trustees of the Fund; provided that in either event such
continuance is approved annually by the vote of a majority of the Trustees of
the Fund who are not parties to the Agreement or "interested persons" (as
defined in the Act) of any such party (the "Independent Trustees"), which vote
must be cast in person at a meeting called for the purpose of voting on such
approval.
The Fund has acknowledged that the name "Dean Witter" is a property right of
DWR. The Fund has agreed that the Investment Manager or its parent company may
use or at any time, permit others to use, the name "Dean Witter". The Fund has
also agreed that in the event the investment management contract between
InterCapital and the Fund is terminated, or if the affiliation between
InterCapital and its parent is terminated, the Fund will eliminate the name
"Dean Witter" from its name if DWR or its parent shall so request.
TRUSTEES AND OFFICERS
===============================================================================
The Trustees and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with
InterCapital, and with the Dean Witter Funds and the TCW/DW Funds, are shown
below.
NAME, POSITION WITH FUND PRINCIPAL OCCUPATIONS DURING
AND ADDRESS LAST FIVE YEARS
- ------------------------ ------------------------------------
Jack F. Bennett Retired; Director or Trustee of the
Trustee Dean Witter Funds; formerly Senior Vice
141 Taconic Road President and Director of Exxon
Greenwich, Connecticut Corporation (1975-January 31, 1989) and
Under Secretary of the U.S. Treasury
for Monetary Affairs (1974-1975);
Director of Philips Electronics, N.V.,
Tandem Computers Inc. and Massachusetts
Mutual Life Insurance Co.; director or
trustee of various not-for-profit and
business organizations.
Charles A. Fiumefreddo* Chairman, Chief Executive Officer and
Chairman of the Board, President, Director of InterCapital,
Chief Executive Officer and Trustee Distributors, and DWSC; Executive
Two World Trade Center Vice President and Director of DWR;
New York, New York Chairman of the Board, Director or
Trustee, President and Chief Executive
Officer of the Dean Witter Funds;
Chairman, Chief Executive Officer and
Trustee of the TCW/DW Funds; Chairman
and Director of Dean Witter Trust
Company; Director and/or officer of
various DWDC subsidiaries; formerly
Executive Vice President and Director
of DWDC (until February 1993).
6
<PAGE>
NAME, POSITION WITH FUND PRINCIPAL OCCUPATIONS DURING
AND ADDRESS LAST FIVE YEARS
- ------------------------ ------------------------------------
Edwin J. Garn Director or Trustee of the Dean
Trustee Witter Funds; formerly United
2000 Eagle Gate Tower States Senator (R-Utah) (1974-
Salt Lake City, Utah 1992) and Chairman, Senate Banking
Committee (1980-1986); formerly Mayor
of Salt Lake City, Utah (1971-1974);
formerly Astronaut, Space Shuttle
Discovery (April 12-19, 1985); Vice
Chairman, Huntsman Chemical Corporation
(since January, 1993); Member of the
board of various civic and charitable
organizations.
John R. Haire Chairman of the Audit Committee and
Trustee Chairman of the Committee of the
439 East 51st Street Independent Directors or Trustees
New York, New York and Director or Trustee of the
Dean Witter Funds; Trustee of the
TCW/DW Funds; formerly President,
Council for Aid to Education (1978-
October 1989) and formerly Chairman and
Chief Executive Officer of Anchor
Corporation, an Investment Adviser
(1964-1978); Director of Washington
National Corporation (insurance) and
Bowne & Co., Inc. (printing).
Dr. John E. Jeuck Retired; Director or Trustee of the
Trustee Dean Witter Funds; formerly Robert
70 East Cedar Street Law Professor of Business
Chicago, Illinois Administration, Graduate School
of Business, University of Chicago;
Business Consultant.
Dr. Manuel H. Johnson Senior Partner, Johnson Smick
Trustee International, Inc., a consulting
7521 Old Dominion Drive firm; Koch Professor of
MacLean, Virginia International Economics and
Director of the Center for Global
Market Studies at George Mason
University (since September, 1990);
Director or Trustee of the Dean Witter
Funds; Trustee of the TCW/DW Funds; Co-
Chairman and a founder of the Group of
Seven Council (G7C), an international
economic commission (since September,
1990); Director of Greenwich Capital
Markets Inc. (broker-dealer); formerly
Vice Chairman of the Board of Governors
of the Federal Reserve System
(February, 1986-August, 1990) and
Assistant Secretary of the U.S.
Treasury (1982-1986).
Paul Kolton Director or Trustee of the Dean
Trustee Witter Funds; Chairman of the Audit
9 Hunting Ridge Road Committee and Chairman of the
Stamford, Connecticut Committee of the Independent
Trustees and Trustee of the TCW/DW
Funds; formerly Chairman of the
Financial Accounting Standards Advisory
Council and Chairman and Chief
Executive Officer of the American Stock
Exchange; Director of UCC Investors
Holding Inc. (Uniroyal Chemical Company
Inc.); director and or trustee of
various business and not-for-profit
organizations.
7
<PAGE>
NAME, POSITION WITH FUND PRINCIPAL OCCUPATIONS DURING
AND ADDRESS LAST FIVE YEARS
- ------------------------ ------------------------------------
Michael E. Nugent General Partner, Triumph Capital,
Trustee L.P., a private investment
237 Park Avenue partnership (since April, 1988);
New York, New York Director or Trustee of the Dean
Witter Funds; Trustee of the TCW/DW
Funds; formerly Vice President, Bankers
Trust Company and BT Capital
Corporation (September, 1984-March,
1988); Director of various business
organizations.
Edward R. Telling* Retired; Director or Trustee of the
Trustee Dean Witter Funds; formerly Chairman
Sears Tower of the Board, Director and Chief
Chicago, Illinois Executive Officer (until December
31, 1985) and President (from January,
1981-March, 1982 and from February,
1984-August, 1984) of Sears, Roebuck
and Co.; formerly Director of Sears,
Roebuck and Co.
Sheldon Curtis Senior Vice President, Secretary and
Vice President, Secretary and General Counsel of InterCapital;
General Counsel Senior Vice President and Secretary
Two World Trade Center of Dean Witter Trust Company and
New York, New York DWSC; Senior Vice President,
Assistant Secretary and Assistant
General Counsel of Distributor;
Assistant Secretary of DWR; and Vice
President, Secretary and General
Counsel of the Dean Witter Funds and
the TCW/DW Funds.
Katherine H. Stromberg Vice President of InterCapital; Vice
Vice President President of various Dean Witter
Two World Trade Center Funds, formerly, Vice President of
New York, New York Kidder Peabody Asset Management
(from September, 1985-October, 1991).
Thomas F. Caloia First Vice President (since May,
Treasurer 1991) and Assistant Treasurer
Two World Trade Center (since January, 1993) of
New York, New York InterCapital; First Vice
President and Assistant Treasurer of
DWSC; and Treasurer of the Dean Witter
Funds and the TCW/DW Funds.
- ------------
* "Interested persons", as defined in the Act.
In addition, Robert M. Scanlan, President and Chief Operating Officer of
InterCapital, David A. Hughey, Executive Vice President of InterCapital, and
Peter M. Avelar, Joseph Arcieri and Jonathan R. Page, Senior Vice Presidents of
InterCapital, are Vice Presidents of the Fund and Barry Fink, First Vice
President and Assistant General Counsel of InterCapital and Marilyn K. Cranney,
Lawrence S. Lafer, LouAnne D. McInnis and Ruth Rossi, Vice Presidents and
Assistant General Counsels of InterCapital, are Assistant Secretaries of the
Fund.
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The Fund pays each trustee who is not an employee of the Investment Manager
or an affiliated company an annual fee of $1,200 ($1,600 prior to December 31,
1993) plus $50 for each meeting of the Board of Trustees, the Audit Committee
or the Committee of the Independent Trustees attended by the Trustee in person
(the Fund pays the Chairman of the Audit Committee an additional annual fee of
$1,000 ($1,200 prior to December 31, 1993), inclusive of the Committee meeting
fee and pays the Chairman of the Committee of Independent Trus tees an
additional annual fee of $2,400). The Fund also reimburses such trustees for
travel and other out-of-pocket expenses incurred by them in connection with
attending such meetings. Trustees and officers of the Fund who are employed by
the Investment Manager or an affiliated company thereof receive no compensation
or expense reimbursement from the Fund. For the fiscal year ended December 31,
1993, the Fund accrued a total of $35,672 for Trustees' fees and expenses and
benefits under the retirement program. The Fund has adopted a retirement
program under which an independent Trustee who is not an "interested person" of
the Fund and who retires after a minimum required period of service would be
entitled to retirement payments upon reaching the eligible retirement date
(normally, after attaining age 72) based upon length of service and computed as
a percentage of one-fifth of the total compensation earned by such Trustee for
service to the Fund in the five-year period prior to the date of the Trustee's
retirement. No independent Trustee has retired since the adoption of the
program and no payments by the Fund have been made under it. As of the date of
this Statement of Additional Information, the aggregate shares of the Fund
owned by the Fund's officers and trustees as a group was less than 1% of the
Fund's shares outstanding.
INVESTMENT PRACTICES AND POLICIES
===============================================================================
Municipal Bonds. Municipal Bonds, as referred to in the Prospectus, are debt
obligations of states, cities, municipalities and municipal agencies (all of
which are generally referred to as "municipalities") which generally have a
maturity at the time of their issuance of one year or more. They are issued to
raise funds for various public purposes, such as construction of a wide range
of public facilities, to refund outstanding obligations and to obtain funds for
general operating expenses or to loan to other public institutions and
facilities. In addition, certain types of industrial development bonds and
pollution control bonds are issued by or on behalf of public authorities to
provide funding for various privately operated facilities.
Municipal Notes. Municipal Notes are short-term obligations of
municipalities, generally with a maturity, at the time of issuance, ranging
from six months to three years the interest from which is, in the opinion of
bond counsel, exempt from federal income tax. The principal types of Municipal
Notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes and project notes, although there are other types of
Municipal Notes in which the Fund may invest. Notes sold in anticipation of
collection of taxes, a bond sale, or receipt of other revenues are usually
general obligations of the issuing municipality or agency. Project Notes are
issued by local agencies and are guaranteed by the United States Department of
Housing and Urban Development. Such notes are secured by the full faith and
credit of the United States. Project notes are not currently being issued.
Municipal Commercial Paper. Municipal Commercial Paper refers to short-term
obligations of municipalities the interest from which is, in the opinion of
bond counsel, exempt from federal income tax, and which may be issued at
discount and are sometimes referred to as Short-Term Discount Notes. They are
likely to be used to meet seasonal working capital needs of a municipality or
interim construction financing and to be paid from general revenues of the
municipality or refinanced with long-term debt. In most cases, Municipal
Commercial Paper is backed by letters of credit, lending agreements, note
repurchase agreements or other credit facility agreements offered by banks or
other institutions.
The two principal classifications of Municipal Bonds, Municipal Notes and
Municipal Commercial Paper are "general obligation" and "revenue" bonds, notes
or commercial paper. General obligation bonds, notes and commercial paper are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. Issuers of general obligation bonds, notes
and commercial paper include states, counties, cities, towns and other
governmental units. Revenue bonds, notes
9
<PAGE>
and commercial paper are payable from the revenues derived from a particular
facility or class of facilities and, in some cases, from specific revenue
sources. Revenue bonds, notes and commercial paper are issued for a wide
variety of purposes, including the financing of electric, gas, water and sewer
systems and other public utilities; industrial development and pollution
control facilities; single and multi-family housing units; public buildings and
facilities; air and marine ports; transportation facilities such as toll roads,
bridges and tunnels; and health and educational facilities such as hospitals
and dormitories. They rely primarily on user fees to pay debt service, although
the principal revenue source is often supplemented by additional security
features which are intended to enhance the creditworthiness of the issuer's
obligations. In some cases, particularly in the instance of revenue bonds
issued to finance housing and public buildings, a direct or implied "moral
obligation" of a governmental unit may be pledged to the payment of debt
service. In other cases, a special tax or other charge may augment user fees.
Obligations of issuers of Municipal Bonds, Municipal Notes and Municipal
Commercial Paper are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, which may be enacted by Congress or state
legislatures to extend the time for payment of principal or interest, or both,
or to impose other constraints upon enforcement of such obligations or upon
municipalities to levy taxes. There is also the possiblity that, as a result of
litigation or other conditions, the power or ability of any one or more issuer
to pay, when due, principal of and interest on its, or their, Municipal Bonds,
Municipal Notes and Municipal Commercial Paper may be materially affected.
PORTFOLIO MANAGEMENT
Variable Rate and Floating Rate Obligations. As stated in the Prospectus, the
Fund may invest in Municipal Bonds and Municipal Notes ("Municipal
Obligations") of the type called variable rate and floating rate obligations.
The interest rate payable on a variable rate obligation is adjusted either at
predesignated periodic intervals and, on a floating rate obligation, whenever
there is a change in the market rate of interest on which the interest rate
payable is based. Other features may include the right whereby the Fund may
demand prepayment of the principal amount of the obligation prior to its stated
maturity (a "demand feature") and the right of the issuer to prepay the
principal amount prior to maturity. The principal benefit of a variable rate
obligation is that the interest rate adjustment minimizes changes in the market
value of the obligation. As a result, the purchase of variable rate and
floating rate obligations could enhance the ability of the Fund to maintain a
stable net asset value per share (see "How Net Asset Value is Determined") and
to sell obligations prior to maturity at a price approximately the full
principal amount of the obligations. The principal benefit to the Fund of
purchasing obligations with a demand feature is that liquidity, and the ability
of the Fund to obtain repayment of the full principal amount of an obligation
prior to maturity, is enhanced. The payment of principal and interest by
issuers of certain obligations purchased by the Fund may be guaranteed by
letters of credit or other credit facilities offered by banks or other
financial institutions. Such guarantees will be considered in determining
whether an obligation meets the Fund's investment quality requirements.
When-Issued and Delayed Delivery Securities. As stated in the Prospectus, the
Fund may purchase tax-exempt securities on a when-issued or delayed delivery
basis. When such transactions are negotiated, the price is fixed at the time of
commitment, but delivery and payment can take place a month or more after the
date of the commitment. While the Fund will only purchase securities on a when-
issued or delayed delivery basis with the intention of acquiring the
securities, the Fund may sell the securities before the settlement date, if it
is deemed advisable. The securities so purchased or sold are subject to market
fluctuation and no interest accrues to the purchaser during this period. At the
time the Fund makes the commitment to purchase a Municipal Obligation on a
when-issued or delayed delivery basis, it will record the transaction and
thereafter reflect the value, each day, of the Municipal Obligation in
determining its net asset value. The Fund will also establish a segregated
account with its custodian bank in which it will maintain cash, cash
equivalents or other Municipal Obligations equal in value to commitments for
such when-issued or delayed delivery securities. The Fund does not believe that
its net asset value or income will be adversely affected by its purchase of
Municipal Obligations on a when-issued or delayed delivery basis. The Fund's
investments in securities on a when-issued, delayed delivery basis did not
amount to more than 5% of the Fund's total assets at any time during the fiscal
year ended December 31, 1993.
10
<PAGE>
Repurchase Agreements. When cash may be available for only a few days, it may
be invested by the Fund in repurchase agreements until such time as it may
otherwise be invested or used for payments of obligations of the Fund. These
agreements, which may be viewed as a type of secured lending by the Fund,
typically involve the acquisition by the Fund of debt securities from a selling
financial institution such as a bank, savings and loan association or broker-
dealer. The agreement provides that the Fund will sell back to the institution,
and that the institution will repurchase, the underlying security
("collateral"), which is held by the Fund's Custodian, at a specified price and
at a fixed time in the future, which is usually not more than seven days from
the date of purchase. The Fund will accrue interest from the institution until
the time when the repurchase is to occur. Although such date is deemed by the
Fund to be the maturity date of a repurchase agreement, the maturities of
securities subject to repurchase agreements are not subject to any limits and
may exceed one year.
While the repurchase agreements involve certain risks not associated with
direct investments in debt securities, the Fund follows procedures designed to
minimize such risks. These procedures include effecting repurchase transactions
only with large, well capitalized and well established financial institutions,
whose financial condition will be continually monitored by the Investment
Manager. In addition, the value of the collateral underlying the repurchase
agreement will always be at least equal to the repurchase price, including any
accrued interest earned on the repurchase agreement. Such collateral will
consist of Government Securities or "Eligible Securities" (as described below
under the caption "How Net Asset Value is Determined") rated by a nationally
recognized statistical rating organization (an "NRSRO") whose ratings qualify
the collateral security as an Eligible Security. In the event of a default or
bankruptcy by a selling financial institution, the Fund will seek to liquidate
such collateral. However, the exercise of the Fund's right to liquidate such
collateral could involve certain costs or delays and, to the extent that
proceeds from any sale upon a default of the obligation to repurchase were less
than the repurchase price, the Fund could suffer a loss. It is the current
policy of the Fund not to invest in repurchase agreements that do not mature
within seven days if any such investment, together with any other liquid asset
held by the Fund, amount to more than 10% of its total assets. The Fund's
investments in repurchase agreements may, at times, be substantial when, in the
view of the Investment Manager, liquidity or other considerations warrant.
However, during the fiscal year ended December 31, 1993, the Fund did not enter
into any repurchase agreements and the Fund does not intend to enter into any
repurchase agreements during the foreseeable future.
Put Options. The Fund may purchase securities together with the right to
resell them to the seller at an agreed upon price or yield within a specified
period prior to the maturity date of such securities. Such a right to resell is
commonly known as a "put," and the aggregate price which the Fund pays for
securities with puts may be higher than the price which otherwise would be paid
for the securities. Consistent with the Fund's investment objectives and
subject to the supervision of the Board of Trustees, the primary purpose of
this practice is to permit the Fund to be fully invested in securities the
interest on which is exempt from Federal income tax while preserving the
necessary flexibility and liquidity to purchase securities on a when-issued
basis, or to meet unusually large redemptions and to purchase at a later date
securities other than those subject to the put. The Fund's policy is,
generally, to exercise the puts on their expiration date, when the exercise
price is higher than the current market price for the related securities. Puts
may be exercised prior to the expiration date in order to fund obligations to
purchase other securities or to meet redemption requests. These obligations may
arise during the periods in which proceeds from sales of Fund shares and from
recent sales of portfolio securities are insufficient to meet such obligations
or when the funds available are otherwise allocated for investment. In
addition, puts may be exercised prior to their expiration date in the event the
Investment Manager revises its evaluation of the creditworthiness of the issuer
of the underlying security. In determining whether to exercise puts prior to
their expiration date and in selecting which puts to exercise in such
circumstances, the Investment Manager considers, among other things, the amount
of cash available to the Fund, the expiration dates of the available puts, any
future commitments for securities purchases, the yield, quality and maturity
dates of the underlying securities, alternative investment opportunities and
the desirability of retaining the underlying securities in the Fund's
portfolio.
The Fund values securities which are subject to puts at their amortized cost
and values the put, apart from the security, at zero. Thus, the cost of the put
will be carried on the Fund's books as an un-
11
<PAGE>
realized loss from the date of acquisition and will be reflected in realized
gain or loss when the put is exercised or expires. Since the value of the put
is dependent on the ability of the put writer to meet its obligation to
repurchase, the Fund's policy is to enter into put transactions only with
municipal securities dealers who are approved by the Fund's Board of Trustees.
Each dealer will be approved on its own merits and it is the Fund's general
policy to enter into put transactions only with those dealers which are
determined to present minimal credit risks. In connection with such
determination, the Board of Trustees will review, among other things, the
ratings, if available, of equity and debt securities of such municipal
securities dealers, their reputations in the municipal securities markets, the
net worth of such dealers and their efficiency in consummating transactions.
Bank dealers normally will be members of the Federal Reserve System, and other
dealers will be members of the National Association of Securities Dealers, Inc.
or members of a national securities exchange. The Board has directed the
Investment Manager not to enter into put transactions with, and to exercise
outstanding puts of, any municipal securities dealer which, in the judgment of
the Investment Manager, ceases at any time to present a minimal credit risk. In
the event that a dealer should default on its obligation to repurchase an
underlying security, the Fund is unable to predict whether all or any portion
of any loss sustained could be subsequently recovered from such dealer. During
the fiscal year ended December 31, 1993, the Fund did not purchase any put
options and it has no intention to purchase such securities during the
foreseeable future.
It is the position of the staff of the Securities and Exchange Commission
that certain provisions of the Act may be deemed to prohibit the Fund from
purchasing puts from broker-dealers without an exemptive order. Until such an
order is obtained, the Fund will purchase puts only from commercial banks.
There is no assurance such an order, if applied for, will be obtained. The
duration of puts, which will not exceed 60 days, will not be a factor in
determining the weighted average maturity of the Fund's portfolio securities.
In the Revenue Ruling 82-144, the Internal Revenue Service stated that, under
certain circumstances, a purchaser of tax-exempt obligations which are subject
to puts will be considered the owner of the obligations for Federal income tax
purposes. In connection therewith, the Fund has received an opinion of counsel
to the effect that interest on Municipal Obligations subject to puts will be
tax-exempt to the Fund.
INVESTMENT RESTRICTIONS
===============================================================================
In addition to the investment restrictions enumerated in the Prospectus, the
investment restrictions listed below have been adopted by the Fund as
fundamental policies, except as otherwise indicated. Under the Act, a
fundamental policy may not be changed without the vote of the holders of a
majority of the outstanding voting securities of the Fund, as defined in the
Act. Such a majority is defined in the Act as the lesser of (a) 67% or more of
the shares present at a Meeting of Shareholders of the Fund, if the holders of
more than 50% of the outstanding shares of the Fund are present or represented
by proxy at the meeting, or (b) more than 50% of the outstanding shares of the
Fund. For purposes of the following restrictions and those recited in the
Prospectus: (a) an "issuer" of a security is the entity whose assets and
revenues are committed to the payment of interest and principal on that
particular security, provided that the guarantee of a security will be
considered a separate security, and provided further that a guarantee of a
security shall not be deemed to be a security issued by the guarantor if the
value of all securities issued or guaranteed by the guarantor and owned by the
Fund does not exceed 10% of the value of the total assets of the Fund; (b) a
"taxable security" is any security the interest on which is subject to federal
income tax; and (c) all percentage limitations apply immediately after a
purchase or initial investment, and any subsequent change in any applicable
percentage resulting from market fluctuations or other changes in total or net
assets does not require elimination of any security from the portfolio.
The Fund may not:
1. Invest in common stock.
2. Invest in securities of any issuer if, to the knowledge of the Fund, any
officer or trustee of the Fund or any officer or director of the Investment
Manager owns more than 1/2 of 1% of the outstand-
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<PAGE>
ing 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.
3. Purchase or sell real estate or interests therein, although it may
purchase securities secured by real estate or interests therein.
4. Purchase or sell commodities or commodity futures contracts.
5. Purchase oil, gas or other mineral leases, rights or royalty contracts,
or exploration or development programs.
6. Write, purchase or sell puts, calls, or combinations thereof except that
it may acquire rights to resell Municipal Obligations at an agreed upon price
and at or within an agreed upon time.
7. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
8. Borrow money, except that the Fund may borrow from a bank for temporary
or emergency purposes in amounts not exceeding 5% (taken at the lower of cost
or current value) of the value of its total assets (not including the amount
borrowed).
9. Pledge its assets or assign or otherwise encumber them except to secure
borrowings effected within the limitations set forth in restriction (8). To
meet the requirements of regulations in certain states, the Fund, as a matter
of operating policy but not as fundamental policy, will limit any pledge of its
assets to 10% of its net assets so long as shares of the Fund are being sold in
those states.
10. Issue senior securities as defined in the Act except insofar as the Fund
may be deemed to have issued a senior security by reason of: (a) entering into
any repurchase agreement; (b) purchasing any securities on a when-issued or
delayed delivery basis; or (c) borrowing money in accordance with restrictions
described above.
11. Make loans of money or securities, except: (a) by the purchase of debt
obligations in which the Fund may invest consistent with its investment
objective and policies; and (b) by investment in repurchase agreements.
12. Make short sales of securities.
13. Purchase securities on margin, except for such short-term loans as are
necessary for the clearance of purchases of portfolio securities.
14. Engage in the underwriting of securities, except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in disposing of a
portfolio security.
15. Invest for the purpose of exercising control or management of any other
issuer.
PORTFOLIO TRANSACTIONS AND BROKERAGE
===============================================================================
Subject to the general supervision of the Board of Trustees, the Investment
Manager is responsible for decisions to buy and sell securities for the Fund,
the selection of brokers and dealers to effect the transactions, and the
negotiation of brokerage commissions, if any. The Fund expects that the primary
market for the securities in which it intends to invest will generally be the
over-the-counter market. Securities are generally traded in the over-the-
counter market on a "net" basis with dealers acting as principal for their own
accounts without a stated commission, although the price of the security
usually includes a profit to the dealer. The Fund also expects that securities
will be purchased at times in underwritten offerings where the price includes a
fixed amount of compensation, generally referred to as the underwriter's
concession or discount. On occasion the Fund may also purchase certain money
market instruments directly from an issuer, in which case no commissions or
discounts are paid. The Fund has never paid any brokerage commissions.
The Investment Manager currently serves as investment manager to a number of
clients, including other investment companies, and may in the future act as
investment manager or adviser to others. It is
13
<PAGE>
the practice of the Investment Manager to cause purchase and sale transactions
to be allocated among the Fund and others whose assets it manages in such
manner as it deems equitable. In making such allocations among the Fund and
other client accounts, the main factors considered are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the Fund and other client accounts.
The policy of the Fund, regarding purchases and sale of securities for its
portfolio, is that primary consideration be given to obtaining the most
favorable prices and efficient execution of transactions. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid
in all circumstances. The Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Investment Manager from obtaining a high quality of
brokerage and research services. In seeking to determine the reasonableness of
brokerage commissions paid in any transaction, the Investment Manager relies
upon its experience and knowledge regarding commissions generally charged by
various brokers and on its judgment in evaluating the brokerage and research
services received from the broker effecting the transaction. Such
determinations are necessarily subjective and imprecise, as in most cases an
exact dollar value for those services in not ascertainable.
In seeking to implement the Fund's policies, the Investment Manager effects
transactions with those brokers and dealers who the Investment Manager believes
provide the most favorable prices and are capable of providing efficient
executions. If the Investment Manager believes such price and execution are
obtainable from more than one broker or dealer, it may give consideration to
placing portfolio transactions with those brokers and dealers who also furnish
research and other services to the Fund or the Investment Manager. Such
services may include, but are not limited to, any one or more of the following:
information as to the availability of securities for purchase or sale;
statistical or factual information or opinions pertaining to investment; wire
services; and appraisals or evaluations of portfolio securities.
The information and services received by the Investment Manager from brokers
and dealers may be of benefit to the Investment Manager in the management of
accounts of some of its other clients and may not in all cases benefit the Fund
directly. While the receipt of such information and services is useful in
varying degrees and would generally reduce the amount of research or services
otherwise performed by the Investment Manager and thereby reduce its expenses,
it is of indeterminable value and the Fund does not reduce the management fee
it pays to the Investment Management by any amount that may be attributable to
the value of such services.
Pursuant to an order of the Securities and Exchange Commission, the Fund may
effect principal transactions in certain money market instruments with DWR. The
Fund will limit its transactions with DWR to U.S. Government and Government
Agency Securities, Bank Money Instruments (i.e. Certificates of Deposit and
Bankers' Acceptances) and Commercial Paper (not including Tax-Exempt Municipal
Paper). Such transactions will be effected with DWR only when the price
available from DWR is better than that available from other dealers. During the
fiscal years ended December 31, 1991, 1992 and 1993, the Fund did not effect
any principal transaction with DWR.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may
be effected through DWR. In order for DWR to effect portfolio transactions for
the Fund, the commissions, fees or other remuneration received by DWR must be
reasonable and fair compared to the commission, fees or other remuneration paid
to other brokers in connection with comparable transactions involving similar
securities being purchased or sold on an exchange during a comparable period of
time. This standard would allow DWR to receive no more than the remuneration
which would be expected to be received by an unaffiliated broker in a
commensurate arm's-length transaction. Furthermore, the Trustees of the Fund,
including a majority of the Trustees who are not "interested" Trustees (as
defined in the Act), have adopted procedures which are reasonably designed to
provide that any commissions, fees or other remuneration paid to DWR are
consistent with the foregoing standard. During the fiscal years ended December
31, 1991, December 31, 1992 and December 31, 1993, the Fund paid no brokerage
commissions to DWR.
14
<PAGE>
Subject to the principle of obtaining best price and execution, the
Investment Manager may consider a broker-dealer's sales of shares of the Fund
as a factor in selecting from among those broker-dealers qualified to provide
comparable prices and execution on the Fund's portfolio transactions. The Fund
does not, however, require a broker-dealer to sell shares of the Fund in order
for it to be considered to execute portfolio transactions, and will not enter
into any arrangement whereby a specific amount or percentage of the Fund's
transactions will be directed to a broker which sells shares of the Fund to
customers. The Board of Trustees reviews, periodically, the allocation of
brokerage orders to monitor the operation of these policies.
Portfolio turnover rate is defined as the lesser of the value of the
securities purchased or securities sold, excluding all securities whose
maturities at time of acquisition were one year or less, divided by the average
monthly value of such securities owned during the year. Because the Fund's
portfolio consists of municipal obligations maturing within one year, the Fund
is unable to predict its turnover rate as so defined. However, because of the
short-term nature of the Fund's portfolio securities, it is anticipated that
the number of purchases and sales of maturities of such securities will be
substantial. Brokerage commissions are not normally charged on purchases and
sales of short-term municipal obligations, but such transactions may involve
transaction costs in the form of spreads between bid and asked prices.
PURCHASE OF FUND SHARES
===============================================================================
As discussed in the Prospectus, the Fund offers its shares for sale to the
public on a continuous basis, without a sales charge. Pursuant to a
Distribution Agreement between the Fund and Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager and a wholly-owned
subsidiary of DWDC, shares of the Fund are distributed by the Distributor and
through certain selected dealers who have entered into agreements with the
Distributor ("Selected Broker-Dealer") at an offering price equal to the net
asset value per share next determined following receipt of an effective
purchase order (accompanied by Federal Funds). Dealers in the securities
markets in which the Fund will invest usually require immediate payment in
federal funds. Since the payment by a Fund shareholder for his or her other
shares cannot be invested until it is converted into and available to the Fund
in federal funds, the Fund requires such payments to be so available before a
share purchase order can be considered effective.
The Board of Trustee of the Fund, including a majority of the Trustees who
are not and were not at the time of their vote "Interested persons" (as defined
in the Act) of either party to the Distribution Agreement (the "Independent
Trustees"), approved, at its meeting held on October 30, 1992, the current
Distribution Agreement appointing the Distributor exclusive distributor of the
Fund's shares and providing for the Distributor to bear distribution expenses
not borne by the Fund. The Distribution Agreement took effect on June 30, 1993
upon the spin-off by Sears Roebuck and Co. of its remaining shares of DWDC. By
its terms, the Distribution Agreement has an initial term ending April 30,
1994, and provides that it will remain in effect from year to year thereafter
if approved by the Board.
SHAREHOLDER INVESTMENT ACCOUNT
===============================================================================
Upon the purchase of shares of the Fund, a Shareholder Investment Account is
opened for the investor on the books of the Fund, maintained by the Fund's
Transfer Agent, Dean Witter Trust Company (the "Transfer Agent"). This is an
open account in which shares owned by the investor are credited by the Transfer
Agent in lieu of issuance of a share certificate. If a share certificate is
desired, it must be requested in writing for each transaction. Certificates are
issued only for full shares and may be redeposited in the account at any time.
There is no charge to the investor for issuance of a certificate. Whenever a
shareholder instituted transaction takes place in the Shareholder Investment
Account directly through the Transfer Agent, the shareholder will be mailed a
written confirmation of such transaction.
Direct Investments Through Transfer Agent. A shareholder may make additional
investments in Fund shares at any time through the Shareholder Investment
Account by sending a check payable to Dean Witter Tax-Free Daily Income Trust
in any amount, not less than $100, directly to the Transfer Agent. The shares
so purchased will be credited to the Shareholder Investment Account.
Account Statements. All purchases of Fund shares will be credited to the
shareholder in a Shareholder Investment Account maintained for the shareholder
by the Transfer Agent in full and fractional shares of the Fund (rounded to the
nearest 1/100 of a share with the exception of purchases made through
reinvestment of dividends). A statement of the account will be mailed to the
shareholder after each shareholder instituted purchase or redemption
transaction effected through the Transfer Agent. A quarterly statement of the
account is sent to all shareholders. Share certificates will not be issued
unless
15
<PAGE>
requested in writing by the shareholder. No certificates will be issued for
fractional shares or to shareholders who have elected the checking account or
predesignated bank account methods of withdrawing cash from their accounts.
The Fund reserves the right to reject any order for the purchase of its
shares. In addition, the offering of Fund shares may be suspended at any time
and resumed at any time thereafter.
EXCHANGE PRIVILEGE
As discussed in the Prospectus under the caption "Exchange Privilege", an
Exchange Privilege exists whereby investors who have purchased shares of any of
the Dean Witter Funds sold with either a front-end sales charge ("FESC funds")
or a contingent deferred sales charge ("CDSC funds") will be permitted, after
the shares of the fund acquired by purchase (not by exchange or dividend
reinvestment) have been held for 30 days, to redeem all or part of their shares
in that fund, have the proceeds invested in shares of the Fund, Dean Witter
Liquid Asset Fund Inc., Dean Witter U.S. Government Money Market Trust, Dean
Witter New York Municipal Money Market Trust, or Dean Witter California Tax-
Free Daily Income Trust whose shares are sold without a sales charge (these
five funds called "money market funds") or Dean Witter Short-Term U.S. Treasury
Trust, Dean Witter Limited Term Municipal Trust and Dean Witter Short-Term Bond
Fund (the foregoing eight non-FESC or CDSC funds are hereinafter collectively
referred to in this Section as the "Exchange Funds"). There is no waiting
period for shares acquired by exchange or dividend reinvestment. Subsequently,
shares of the Exchange Funds received in an exchange for shares of an FESC fund
(regardless of the type of fund originally purchased) may be redeemed and
exchanged for shares of the other Exchange Funds, FESC funds or CDSC funds
(however, shares of CDSC funds, including shares acquired in exchange for (i)
shares of FESC funds or (ii) shares of the Exchange Funds which were acquired
in exchange for shares of FESC funds, may not be exchanged for shares of FESC
funds). Additionally, shares of an Exchange Fund received in an exchange for
shares of a CDSC fund (regardless of the type of fund originally purchased) may
be redeemed and exchanged for shares of the other Exchange Funds, or CDSC
funds. Ultimately, any applicable contingent deferred sales charge will have to
be paid upon redemption of shares originally purchased from a CDSC fund. An
exchange will be treated for federal income tax purposes the same as a
repurchase or redemption of shares, on which the shareholder may realize a
capital gain or loss.
Any new account established through the Exchange Privilege will have the
same registration and cash dividend or dividend reinvestment plan as the
present account, unless the Transfer Agent receives written notification to the
contrary. For telephone exchanges, the exact registration of the existing
account and the account number must be provided.
Any shares held in certificate form cannot be exchanged but must be
forwarded to the Transfer Agent and deposited into the shareholder's account
before being eligible for exchange. (Certificates mailed in for deposit should
not be endorsed.)
When shares of any CDSC fund are exchanged for shares of the Fund or any
other Exchange Fund, the exchange is executed at no charge to the shareholder,
without the imposition of the contingent deferred sales charge ("CDSC") at the
time of the exchange. During the period of time the shareholder remains in the
Exchange Fund (calculated from the last day of the month in which the money
market fund shares or the Exchange Fund, the holding period or "year since
purchase payment made" is frozen. When shares are redeemed out of the Exchange
Fund, they will be subject to a CDSC which would be based upon the period of
time the shareholder actually held shares in a CDSC fund. However, in the case
of shares of a CDSC fund exchanged into an Exchange Fund on or after April 23,
1990, upon redemption of shares which results in a CDSC being imposed, a credit
(not to exceed the amount of the CDSC) will be given in an amount equal to the
Exchange Fund 12b-1 distribution fees incurred on or after that date which are
attributable to those shares. Shareholders acquiring shares of an Exchange Fund
pursuant to this Exchange Privilege may exchange those shares back into a CDSC
fund from the Exchange Fund with no CDSC being imposed on such exchange. The
holding period previously frozen when shares were first exchanged for shares of
an Exchange Fund resumes on the last day of the month in which shares of a CDSC
fund are reacquired. A CDSC is imposed only upon an ultimate redemption, based
upon the time (calculated as described above) the shareholder was invested in a
CDSC fund. Shares of a CDSC fund acquired in exchange for shares of an FESC
fund (or in exchange for shares of other Dean Witter Funds for which shares of
a FESC fund have been exchanged) are not subject to any CDSC upon their
redemption.
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<PAGE>
When shares initially purchased in a CDSC fund are exchanged for shares of
another CDSC fund or for shares of an Exchange Fund, the date of purchase of
the shares of the fund exchanged into, for purposes of the CDSC upon
redemption, will be the last day of the month in which the shares being
exchanged were originally purchased. In allocating the purchase payments
between funds for purposes of the CDSC, the amount which represents the current
net asset value of shares at the time of the exchange which were (i) purchased
more than three or six years (depending on the CDSC schedule applicable to the
shares) prior to the exchange, (ii) originally acquired through reinvestment of
dividends or distributions and (iii) acquired in exchange for shares of FESC
funds, or for shares of other Dean Witter Funds for which shares of FESC funds
have been exchanged (all such shares called "Free Shares"), will be exchanged
first. Shares of Dean Witter American Value Fund acquired prior to April 30,
1984, shares of Dean Witter Dividend Growth Securities Inc. and Dean Witter
Natural Resource Development Securities Inc. acquired prior to July 2, 1984,
and shares of Dean Witter Strategist Fund acquired prior to November 8, 1989,
are also considered Free Shares and will be the first Free Shares to be
exchanged. After an exchange, all dividends earned on shares in the Exchange
Fund will be considered Free Shares. If the exchanged amount exceeds the value
of such Free Shares, an exchange is made, on a block-by-block basis, of non-
Free Shares held for the longest period of time (except that if shares held for
identical periods of time but subject to different CDSC schedules are held in
the same Exchange Privilege account, the shares of that block that are subject
to a lower CDSC rate will be exchanged prior to the shares of that block that
are subject to a higher CDSC rate). Shares equal to any appreciation in the
value of non-Free Shares exchanged will be treated as Free Shares, and the
amount of the purchase payments for the non-Free Shares of the fund exchanged
into will be equal to the lesser of (a) the purchase payments for, or (b) the
current net asset value of, the exchanged non-Free Shares. If an exchange
between funds would result in exchange of only part of a particular block of
non-Free Shares, then shares equal to any appreciation in the value of the
block (up to the amount of the exchange) will be treated as Free Shares and
exchanged first, and the purchase payment for that block will be allocated on a
pro rata basis between the non-Free Shares of that block to be retained and the
non-Free Shares to be exchanged. The prorated amount of such purchase payment
attributable to the retained non-Free Shares will remain as the purchase
payment for such shares, and the amount of purchase payment for the exchanged
non-Free Shares will be equal to the lesser of (a) the prorated amount of the
purchase payment for, or (b) the current net asset value of, those exchanged
non-Free Shares. Based upon the exchange procedures described in the CDSC fund
Prospectus under the caption "Contingent Deferred Sales Charge", any applicable
CDSC will be imposed upon the ultimate redemption of shares of any fund,
regardless of the number of exchanges since those shares were originally
purchased.
The Transfer Agent acts as agent for shareholders of the Fund in effecting
redemption of Fund shares and in applying the proceeds to the purchase of other
fund shares. In the absence of negligence on its part, neither the Transfer
Agent nor the Fund shall be liable for any redemption of Fund shares caused by
unauthorized telephone instructions. Accordingly, in such event, the investor
shall bear the risk of loss. The staff of the Securities and Exchange
Commission is currently considering the propriety of such a policy.
With respect to the redemption or repurchase of shares of the Fund, the
application of proceeds to the purchase of new shares in the Fund or any other
of the funds and the general administration of the Exchange Privilege, the
Transfer Agent acts as agent for DWR and for the shareholder's Selected Broker-
Dealer, if any, in the performance of such functions. With respect to
exchanges, redemptions or repurchases, the Transfer Agent shall be liable for
its own negligence and not for the default or negligence of its correspondents
or for losses in transit. The Fund shall not be liable for any default or
negligence of the Transfer Agent, DWR or any Selected Broker-Dealer.
Exchange Privilege accounts may also be maintained for shareholders of the
money market funds who acquired their shares in exchange for shares of various
TCW/DW Funds, a group of funds distributed by the Distributor for which TCW
Funds Management, Inc. serves as Adviser, under the terms and conditions
described in the Prospectus and Statement of Additional Information of each
TCW/DW Fund.
DWR and any Selected Broker-Dealer have authorized and appointed the
Transfer Agent to act as their agent in connection with the application of
proceeds of any redemption of Fund shares to the pur-
17
<PAGE>
chase of the shares of any other fund and the general administration of the
Exchange Privilege. No commission or discounts will be paid to DWR or any
Selected Broker-Dealer for any transactions pursuant to this Exchange
Privilege.
Shares of the Fund acquired pursuant to the Exchange Privilege will be held
by the Fund's transfer agent in an Exchange Privilege Account distinct from any
account of the same shareholder who may have acquired shares of the Fund
directly. A shareholder of the Fund will not be permitted to make additional
investments in such Exchange Privilege Account except through the exchange of
additional shares of the fund in which the shareholder had initially invested,
and the proceeds of any shares redeemed from such Account may not thereafter be
placed back into that Account. If such a shareholder desires to make any
additional investments in the Fund, a separate account will be maintained for
receipt of such investments. The Fund will have additional costs for account
maintenance if a shareholder has more than one account with the Fund.
The Fund also maintains Exchange Privilege Accounts for shareholders who
acquired their shares of the Fund pursuant to exchange privileges offered by
other investment companies with which the Investment Manager is not affiliated.
The Fund also expects to make available such exchange privilege accounts to
other investment companies that may hereafter be managed by the Investment
Manager.
Exchanges are subject to the minimum investment requirement and any other
conditions imposed by each fund. (The minimum initial investment is $10,000 for
Dean Witter Short-Term U.S. Treasury Trust (although that fund may, in its
discretion, accept initial purchases of as low as $5,000) and $5,000 for the
Fund, Dean Witter/Sears Liquid Asset Fund Inc., Dean Witter California Tax-Free
Daily Income Trust and Dean Witter New York Municipal Money Market Trust,
although those funds may, at their discretion, accept initial investments of as
low as $1,000. The minimum initial investment for all other Dean Witter Funds
for which the Exchange Privilege is available is $1,000.) Upon exchange into an
Exchange Fund, the shares of that fund will be held in a special Exchange
Privilege Account separately from accounts of those shareholders who have
acquired their shares directly from that fund. As a result, certain services
normally available to shareholders of money market funds, including the check
writing feature, will not be available for funds held in that account.
The Fund and each of the other Dean Witter Funds may limit the number of
times this Exchange Privilege may be exercised by any investor within a
specified period of time. Also, the Exchange Privilege may be terminated or
revised at any time by any of the Dean Witter Funds, upon such notice as may be
required by applicable regulatory agencies (presently sixty days' prior written
notice for termination or material revision), provided that six months' prior
written notice of termination will be given to the shareholders who hold shares
of an Exchange Fund pursuant to this Exchange Privilege, and provided further
that the Exchange Privilege may be terminated or materially revised at times
(a) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (b) when trading on the Exchange is restricted, (c) when
an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, (d) during any
other period when the Securities and Exchange Commission by order so permits
(provided that applicable rules and regulations of the Securities and Exchange
Commission shall govern as to whether the conditions prescribed in (b) or (c)
exist), or (e) if the Fund would be unable to invest amounts effectively in
accordance with its investment objective(s), policies and restrictions.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain a copy and examine it carefully
before investing. An exchange will be treated for federal income tax purposes
the same as a repurchase or redemption of shares, on which the shareholder may
realize a capital gain or loss. However, the ability to deduct capital losses
on an exchange may be limited in situations where there is an exchange of
shares within ninety days after the shares are purchased. The Exchange
Privilege is only available in states where an exchange may legally be made.
For further information regarding the Exchange Privilege, shareholders should
contact their DWR or other Selected Broker-Dealer account executive or the
Transfer Agent.
18
<PAGE>
PLAN OF DISTRIBUTION
In accordance with a Plan of Distribution pursuant to Rule 12b-1 under the
Act between the Fund and Dean Witter Distributors Inc. (the "Distributor"), the
Distributor provides certain services in connection with the promotion of sales
of Fund shares. (The "Plan" refers to the Plan and Agreement of Distribution
prior to the reorganization and to the Plan of Distribution after the
reorganization.) The Plan was initially approved by the Board of Trustees on
April 15, 1987 and by the Fund's shareholders on April 20, 1987. The Plan is
substantially identical to the agreement of distribution adopted by the Fund in
1983 and which was in effect until the reorganization of the Fund in 1987 as a
Massachusetts business trust. The vote of the Trustees included a majority of
the Trustees who are not and were not at the time of their voting interested
persons of the Fund and who have and had at the time of their votes no direct
or indirect financial interest in the operation of the Plan (the "Independent
Trus tees"), cast in person at a meeting called for the purpose of voting on
such Plan.
The Plan provides that the Distributor bears the expense of all promotional
and distribution related activities on behalf of the Fund, except for expenses
that the Trustees determine to reimburse, as described below. The following
activities and services may be provided by the Distributor under the Plan: (1)
compensation to and expenses of DWR's and other selected dealers' account
executives and other employees, including overhead and telephone expenses; (2)
sales incentives and bonuses to sales representatives and to marketing
personnel in connection with promoting sales of the Fund's shares; (3) expenses
incurred in connection with promoting sales of the Fund's shares; (4) preparing
and distributing sales literature; and (5) providing advertising and
promotional activities, including direct mail solicitation and television,
radio, newspaper, magazine and other media advertisements.
The Fund is authorized to reimburse specific expenses incurred or to be
incurred in promoting the distribution of the Fund's shares. Reimbursement is
made through monthly payments in amounts determined in advance of each fiscal
quarter by the Trus tees, including a majority of the Independent Trustees. The
amount of each monthly payment may in no event exceed an amount equal to a
payment at the annual rate of .15 of 1% of the Fund's average daily net assets
during the month. No interest or other financing charges will be incurred by
DWR or other Selected Broker-Dealers for which reimbursements under the Plan
will be made. In addition, no interest charges, if any, incurred on any
distribution expense incurred pursuant to the Plan will be reimbursable under
the Plan. In making quarterly determinations of the amounts that may be
expended by the Fund, the Investment Manager provides and the Trustees review,
a quarterly budget of projected incremental distribution expenses to be
incurred on behalf of the Fund, together with a report explaining the purposes
and anticipated benefits of incurring such expenses. The Trustees determine
which particular expenses, and the portions thereof, that may be borne by the
Fund, and in making such a determination shall consider the scope of the
Distributor's commitment to promoting the distribution of the Fund's shares.
The Fund reimbursed $631,775 to the Distributor, pursuant to the Plan of
Distribution as then in effect, for its fiscal year ended December 31, 1993.
The amount accrued is equivalent to an annual rate of 0.10 of 1% of the Fund's
average daily net assets for its fiscal year ended December 31, 1993. Based
upon the total amounts spent by the Distributor during the period, it is
estimated that the amount paid by the Fund to the Distributor for distribution
was spent in approximately the following ways: (i) advertising--$-0-; (ii)
printing and mailing prospectuses to other than current shareholders--$-0-;
(iii) compensation to underwriters--$-0-; (iv) compensation to dealers--$-0-;
(v) compensation to sales personnel--$-0-; and (vi) other, which accrued for
expenses relating to compensation of sales personnel and other miscellaneous
expenses--$631,775. No payments under the Plan were made for overhead,
interest, carrying or other financing charges.
Under the Plan, the Distributor uses its best efforts in rendering services
to the Fund, but in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations, the Distributor is not
liable to the Fund or any of its shareholders for any error of judgment or
mistake of law or for any act or omission or for any losses sustained by the
Fund or its shareholders.
19
<PAGE>
The Plan remained in effect until December 31, 1988, and will continue in
effect from year to year thereafter, provided such continuance is approved
annually by a vote of the Trustees, including a majority of the Independent
Trustees. An amendment to increase materially the maximum amount authorized to
be spent under the Plan must be approved by the shareholders of the Fund, and
all material amendments to the Plan must be approved by the Trustees in the
manner described above. The Plan may be terminated at any time, without payment
of any penalty, by vote of the holders of a majority of the Independent
Trustees or by a vote of a majority of the outstanding voting securities of the
Fund (as defined in the Act) on not more than 30 days written notice to any
other party to the Plan.
Under the Plan, the Distributor provides the Fund, for review by the Trus
tees, and the Trustees review, promptly after the end of each calendar quarter,
a written report regarding the incremental distribution expenses incurred on
behalf of the Fund during such calendar quarter, which report includes (1) an
itemization of the types of expenses and the purposes therefore; (2) the
amounts of such expenses; and (3) a description of the benefits derived by the
Fund. In the Trustees' quarterly review of the Plan, they consider its
continued appropriateness and the level of compensation provided therein.
At their meeting held on October 30, 1992, the Trustees of the Fund,
including all of the Independent 12b-1 Trustees, approved certain amendments to
the Plan which took effect in January, 1993 and were designed to reflect the
fact that upon the reorganization described above, the share distribution
activities, theretofore performed by the Fund or for the Fund by DWR were
assumed by the Distributor and DWR's, sales activities are now being performed
pursuant to the terms of a selected dealer agreement between the Distributor
and DWR. The amendments provide that payments under the Plan will be made to
the Distributor rather than to the Investment Manager as before the amendment,
and that the Distributor in turn is authorized to make payments to DWR, its
affiliates or other Selected Broker-Dealers (or direct that the Fund pay such
entities directly). The Distributor is also authorized to retain part of such
fee as compensation for its own distribution-related expenses.
At their meeting held on April 28, 1993, the Board of Trustees approved the
Plan until April 30, 1994. In making their determination to continue the Plan
until April 30, 1994, the Board of Trustees, including all of the Independent
Trustees, arrived at the conclusion that the Plan had benefited the Fund. This
conclusion was based upon the Investment Manager's belief that the expenditures
made pursuant to the Plan had tended to arrest the decline of Fund assets by
meeting the competitive efforts of other, similar financial products, and had
encouraged the account executives employed by DWR and other Selected Broker-
Dealers to increase their efforts in selling shares of the Fund. The Board of
Trus tees, including the Independent Trustees, also concluded that, in their
judgment, there is a reasonable likelihood that the Plan will continue to
benefit the Fund and its shareholders.
No interested person of the Fund nor any Trustee of the Fund who is not an
interested person of the Fund, as defined in the Act, had any direct or
indirect financial interest in the operation of the Plan and Agreement except
to the extent that the Distributor, DWR or the Investment Manager or certain of
its employees may be deemed to have such an interest as a result of benefits
derived from the successful operation of the Plan or as a result of receiving a
portion of the amounts expended thereunder by the Fund.
HOW NET ASSET VALUE IS DETERMINED
===============================================================================
As discussed in the Prospectus, the net asset value of the Fund is
determined as of the close of trading on each day that the New York Stock
Exchange is open. The New York Stock Exchange currently observes the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Fund utilizes the amortized cost method in valuing its portfolio
securities for purposes of determining the net asset value of shares of the
Fund. The Fund utilizes the amortized cost method in valuing its portfolio
securities even though the portfolio securities may increase or decrease in
market value, generally, in connection with changes in interest rates. The
amortized cost method of valuation involves valuing a security at its cost
adjusted by a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may
result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Fund would receive if it sold the
instrument. During such periods, the yield to investors in the Fund may differ
somewhat from that obtained in a simi-
20
<PAGE>
lar company which uses mark to market values for all its portfolio securities.
For example, if the use of amortized cost resulted in a lower (higher)
aggregate portfolio value on a particular day, a prospective investor in the
Fund would be able to obtain a somewhat higher (lower) yield than would result
from investment in such a similar company and existing investors would receive
less (more) investment income. The purpose of this method of calculation is to
facilitate the maintenance of a constant net asset value per share of $1.00.
The Fund's use of the amortized cost method to value its portfolio
securities and the maintenance of the per share net asset value of $1.00 is
permitted pursuant to Rule 2a-7 of the Act (the "Rule") and pursuant to an
order of exemption granted to the Fund by the Securities and Exchange
Commission, dated February 18, 1981 (the "Order"), and is conditioned on its
compliance with various conditions contained in the Rule including: (a) the
Fund's Board of Trustees is obligated, as a particular responsibility within
the overall duty of care owed to the Fund's shareholders, to establish
procedures reasonably designed, taking into account current market conditions
and the Fund's investment objective, to stabilize the net asset value per share
as computed for the purpose of distribution and redemption at $1.00 per share;
(b) (i) the procedures include calculation, at such intervals as are reasonable
in light of current market conditions, of the deviation, if any between net
asset value per share using amortized cost to value portfolio securities and
net asset value per share based upon available market quotations with respect
to such portfolio securities (for the purpose of determining market value,
securities as to which the Trust has a "put" will be valued at the higher of
market value or exercise price); (ii) periodic review by the Trustees of the
amount of deviation as well as methods used to calculate it, and (iii)
maintenance of written records of the procedures, the Trustees considerations
made pursuant to them and any actions taken upon such consideration; the
Trustees will consider what steps should be taken, if any, in the event of a
difference of more than 1/2 of 1% between the two methods of valuation; and (c)
the Trustees should take such action as they deem appropriate to eliminate or
reduce, to the extent reasonably practicable, material dilution or other unfair
results to investors or existing shareholders. Such action may include: selling
portfolio instruments prior to maturity to realize capital gains or losses or
to shorten the average portfolio maturity of the Trust; withholding dividends;
utilizing a net asset value per share as determined by using available market
quotations or reducing the number of its outstanding shares. Any reduction of
outstanding shares will be effected by having each shareholder proportionately
contribute to the Trust's capital a number of shares which represent the
difference between the amortized cost valuation and market valuation of the
portfolio. Each shareholder will be deemed to have agreed to such contribution
by his or her investment in the Trust.
The Rule further requires that the Fund limit its investments to U.S.
dollar-denominated instruments which the Board of Trustees determines present
minimal credit risks and which are Eligible Securities as defined below. The
Rule also requires the Fund to maintain a dollar weighted average portfolio
maturity (not more than 90 days) appropriate to the objective of maintaining a
stable net asset value of $1.00 per share and precludes the purchase of any
instrument with a remaining maturity of more than thirteen months. Should the
disposition of a portfolio security result in a dollar weighted average
portfolio maturity of more than 90 days, the Fund would be required to invest
its available cash in such a manner as to reduce such maturity to 90 days or
less as soon as is reasonably practicable.
At the time the Fund makes the commitment to purchase a Municipal Obligation
on a when-issued or delayed delivery basis, it will record the transaction and
thereafter reflect the value, each day, of the Municipal Obligation in
determining its net asset value. Repurchase agreements are valued at the face
value of the repurchase agreement plus any accrued interest thereon to date.
Generally, for purposes of the procedures adopted under the Rule, the
maturity of a portfolio instrument is deemed to be the period remaining
(calculated from the trade date or such other date on which the Trust's
interest in the instrument is subject to market action) until the date noted on
the face of the instrument as the date on which the principal amount must be
paid, or in the case of an instrument called for redemption, the date on which
the redemption payment must be made.
A variable rate obligation that is subject to a demand feature is deemed to
have a maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand. A floating rate instrument that is
subject to
21
<PAGE>
a demand feature is deemed to have a maturity equal to the period remaining
until the principal amount can be recovered through demand.
An Eligible Security is defined in the Rule to mean a security which: (a)
has a remaining maturity of thirteen months or less; (b)(i) is rated in the two
highest short-term rating categories by any two NRSRO's that have issued a
short-term rating with respect to the security or class of debt obligations of
the issuer, or (ii) if only one NRSRO has issued a short-term rating with
respect to the security, then by that NRSRO; (c) was a long-term security at
the time of issuance whose issuer has outstanding a short-term debt obligation
which is comparable in priority and security and has a rating as specified in
clause (b) above; or (d) if no rating is assigned by any NRSRO as provided in
clauses (b) and (c) above, the unrated security is determined by the Board to
be of comparable quality to any such rated security.
As permitted by the Rule, the Board has delegated to the Fund's Investment
Manager, subject to the Board's oversight pursuant to guidelines and procedures
adopted by the Board, the authority to determine which securities present
minimal credit risks and which unrated securities are comparable in quality to
rated securities.
Also, as required by the Rule, the Fund will limit its investments in
securities, other than Government securities, so that, at the time of purchase:
(a) except as further limited in (b) below with regard to certain securities,
no more than 5% of its total assets will be invested in the securities of any
one issuer; and (b) with respect to Eligible Securities that have received a
rating in less than the highest category by any one of the NRSROs whose ratings
are used to qualify the security as an Eligible Security, or are determined to
be of comparable quality: (i) no more than 5% in the aggregate of the Fund's
total assets in all such securities, and (ii) no more than the greater of 1% of
total assets, or $1 million, in the securities of any one issuer.
If the Board determines that it is no longer in the best interests of the
Trust and its shareholders to maintain a stable price of $1 per share or if the
Board believes that maintaining such price no longer reflects a market-based
net asset value per share, the Board has the right to change from an amortized
cost basis of valuation to valuation based on market quotations. The Trust will
notify shareholders of any such changes.
In determining the "maturity" of variable rate Municipal Obligations, the
Board of Trustees of the Fund has adopted procedures under which the longer of
(i) the date upon which the Fund may obtain prepayment of the principal amount
of an obligation (provided demand for prepayment may be made on not more than
seven days' notice) or (ii) the date upon which the interest rate of a variable
rate obligation is required to be next adjusted, may in certain circumstances
be considered as the maturity date of the obligation. In addition, the presence
of a line of credit or other credit facility offered by a bank or other
financial institution which guarantees the payment obligation of the issuer of
a Municipal Obligation may be taken into account by the Board of Trustees in
determining whether an investment is of "high quality."
The Fund will manage its portfolio in an effort to maintain a constant $1.00
per share price, but it cannot assure that the value of its shares will never
deviate from this price. Since dividends from net investment income are
declared and reinvested on a daily basis, the net asset value per share, under
ordinary circumstances, is likely to remain constant. Realized and unrealized
gains and losses will not be distributed on a daily basis but will be reflected
in the Fund's net asset value. The amounts of such gains and losses will be
considered by the Board of Trustees in determining the action to be taken to
maintain the Fund's $1.00 per share net asset value. Such action may include
distribution at any time of part or all of the then accumulated undistributed
net realized capital gains, or reduction or elimination of daily dividends by
an amount equal to part or all of the then accumulated net realized capital
losses. However, if realized losses should exceed the sum of net investment
income plus realized gains on any day, the net asset value per share on that
day might decline below $1.00 per share. In such circumstances, the Fund may
reduce or eliminate the payment of daily dividends for a period of time in an
effort to restore the Fund's $1.00 per share net asset value. A decline in
prices of securities could result in significant unrealized depreciation on a
mark to market basis. Under these circumstances the Fund may reduce or
eliminate the payment of dividends and utilize a net asset value per share as
determined by using available market quotations or reduce the number of its
shares outstanding.
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<PAGE>
REDEMPTION OF FUND SHARES
===============================================================================
As discussed in the Prospectus, shares of the Fund may be redeemed at net
asset value at any time. When a redemption is made by check and a check is
presented to the Transfer Agent for payment, the Transfer Agent will redeem a
sufficient number of full and fractional shares in the shareholder's account to
cover the amount of the check. This enables the shareholder to continue earning
daily income dividends until the check has cleared.
A check drawn by a shareholder against his or her account in the Fund
constitutes a request for redemption of a number of shares sufficient to
provide proceeds equal to the amount of the check. Payment of the proceeds of a
check will normally be made on the next business day after receipt by the
Transfer Agent of the check in proper form. Subject to the foregoing, if a
check is presented for payment to the Transfer Agent by a shareholder or payee
in person, the Transfer Agent will make payment by means of a check drawn on
the Fund's account or, in the case of a shareholder payee, to the shareholder's
predesignated bank account, but will not make payment in cash.
The Fund reserves the right to suspend redemptions or postpone the date of
payment (1) for any periods during which the New York Stock Exchange is closed
(other than for customary weekend and holiday closings), (2) when trading on
that Exchange is restricted or an emergency exists, as determined by the
Securities and Exchange Commission, so that disposal of the Fund's investments
or determination of the Fund's net asset value is not reasonably practicable,
or (3) for such other periods as the Commission by order may permit for the
protection of the Fund's investors.
As discussed in the Prospectus, due to the relatively high cost of handling
small investments, the Fund reserves the right to redeem, at net asset value,
the shares of any shareholder (other than shares held in an Individual
Retirement Account or custodial account under Section 403(b)(7) of the Internal
Revenue Code) whose shares due to redemptions by the shareholders have a value
of less than $1,000 or such lesser amounts as may be fixed by the Board of
Trustees. However, before the Fund redeems such shares and sends the proceeds
to the shareholder, it will notify the shareholder that the value of his or her
shares is less than $1,000 and allow him or her 60 days to make an additional
investment in an amount which will increase the value of his or her account to
$1,000 or more before the redemption is processed.
Systematic Cash Withdrawal. As discussed in the Prospectus, a systematic
withdrawal plan is available for shareholders who own or purchase shares of the
Fund having a minimum value of at least $5,000, which provides for monthly or
quarterly checks in any dollar amount not less than $25, or in any whole
percentage of the account balance on an annualized basis. The Transfer Agent
acts as agent for the shareholder in tendering to the Fund for redemption
sufficient full and fractional shares to provide the amount of the periodic
withdrawal payment designated in the application. The shares will be redeemed
at their net asset value determined, at the shareholder's option, on the tenth
or twenty-fifth day (or next business day) of the relevant month or quarter and
normally a check for the proceeds will be mailed by the Transfer Agent within
five days after the date of redemption. The withdrawal plan may be terminated
at any time by the Fund.
Any shareholder who wishes to have payments under the withdrawal plan made
to a third party or sent to an address other than the one listed on the account
must send complete written instructions to the Transfer Agent to enroll in the
withdrawal plan. The shareholder's signature on such instructions must be
guaranteed by an eligible guarantor acceptable to the Transfer Agent
(shareholders should contact the Transfer Agent for a determination as to
whether a particular institution is such an eligible guarantor). A shareholder
may, at any time, change the amount and interval of withdrawal payments through
his or her Account Executive or by written notification to the Transfer Agent.
In addition, the party and/or the address to which checks are mailed may be
changed by written notification to the Transfer Agent, with signature
guarantees required in the manner described above. The shareholder may also
terminate the withdrawal plan at any time by written notice to the Transfer
Agent. In the event of such termination, the account will be continued as a
regular shareholder investment account. The shareholder may also redeem all or
part of the shares held in the withdrawal plan account (see "Redemption of Fund
Shares" in the Prospectus) at any time. If the number of shares redeemed is
greater than the number of shares
23
<PAGE>
paid as dividends, such redemptions may, of course, eventually result in
liquidation of all the shares in the account. The automatic cash withdrawal
method of redemption is not available for shares held in an Exchange Privilege
Account.
DIVIDENDS, DISTRIBUTIONS AND TAXES
===============================================================================
As discussed in the Prospectus, the Fund intends to declare dividends,
payable on each day the New York Stock Exchange is open for business, of all of
its daily net investment income to shareholders of record as of the close of
business the preceding business day.
In computing net investment income, the Fund will amortize any premiums and
original issue discount on securities owned, if applicable. Capital gains or
losses realized upon sale or maturity of such securities will be based on their
amortized cost.
Gains or losses on the sales of securities by the Fund will be long-term
capital gains or losses if the securities have been held by the Fund for more
than twelve months. Gains or losses on the sale of securities held for twelve
months or less will be short-term capital gains or losses.
The Fund has qualified and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986 (the
"Code"). If so qualified, the Fund will not be subject to federal income tax on
its net investment income and capital gains, if any, realized during any fiscal
year to the extent that it distributes such income and capital gains to its
shareholders.
As discussed in the Prospectus, the Fund intends to qualify to pay "exempt-
interest dividends" to its shareholders by maintaining, as of the close of each
quarter of its taxable year, at least 50% of the value of its assets in tax-
exempt securities. An exempt-interest dividend is that part of a dividend
distribution made by the Fund which consists of interest received by the Fund
on tax-exempt securities upon which the shareholder incurs no federal income
taxes. Exempt-interest dividends are included, however, in determining what
portion, if any, of a person's Social Security benefits are subject to federal
income tax.
Within 60 days after the end of its fiscal year, the Fund will mail to
shareholders a statement indicating the percentage of the dividend
distributions for such fiscal year which constitutes exempt-interest dividends
and the percentage, if any, that is taxable, and to what extent the taxable
portion is long-term capital gains, short-term capital gains or ordinary
income. This percentage should be applied uniformly to all monthly
distributions made during the fiscal year to determine what proportion of the
dividends paid is tax-exempt. The percentage may differ from the percentage of
tax-exempt dividend distributions for any particular month.
Shareholders will be subject to federal income tax on dividends paid from
interest income derived from taxable securities and on distributions of net
short-term gains. Such interest and realized net short-term capital gains
dividends and distributions are taxable to the shareholder as ordinary dividend
income regardless of whether the shareholder receives such distributions in
additional shares or in cash. Distributions of long-term capital gains, if any,
are taxable as long-term capital gains, regardless of how long the shareholder
has held the Fund shares and regardless of whether the distribution is received
in addi tional shares or cash. Since the Fund's income is expected to be
derived entirely from interest rather than dividends, it is anticipated that
none of such dividend distributions will be eligible for the federal dividends
received deduction available to corporations. Realized net long-term capital
gains distributions, which are taxable as long-term capital gains, are not
eligible for the dividends received deduction.
At December 31, 1993 the Fund had a net capital loss carryover of
approximately $17,500 of which $5,800 will be available through December 31,
1995 and $11,700 will be available through December 31, 1999, to the extent
provided by regulations. To the extent that these carryover losses are used to
offset future capital gains, it is probable that the gains so offset will not
be distributed to shareholders since any such distributions may be taxable to
shareholders as ordinary income.
Any loss on the sale or exchange of shares of the Fund which are held for 6
months or less is disallowed to the extent of the amount of any exempt-interest
dividend paid with respect to such shares.
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<PAGE>
Treasury Regulations may provide for a reduction in such required holding
periods. If a shareholder receives a dividend that is taxed as a long-term
capital gain on shares held for six months or less and sells those shares at a
loss, the loss will be treated as a long-term capital loss.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry shares of the Fund is not deductible. Furthermore, entities or persons
who are "substantial users" (or related persons) of facilities financed by
industrial development bonds should consult their tax advisers before
purchasing shares of the Fund. "Substantial user" is defined generally by
Income Tax Regulation 1.103-11(b) as including a "non-exempt person" who
regularly uses in trade or business a part of a facility financed from the
proceeds of industrial development bonds.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities. Similar proposals may be introduced in the
future. If such a proposal were enacted, the availability of municipal
securities for investment by the Fund could be affected. In that event, the
Fund would re-evaluate its investment objective and policies.
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any state
or local taxing authority. Thus, shareholders of the Fund may be subject to
state and local taxes on exempt-interest dividends. Shareholders should consult
their tax advisers about the status of dividends from the Fund in their own
states and localities. The Fund will report annually to shareholders the
percentage of interest income earned by the Fund during the preceding year on
tax-exempt obligations, indicating, on a state-by-state basis, the source of
such income.
Any dividends or capital gains distributions received by a shareholder from
any investment company will have the effect of reducing the net asset value of
the shareholder's stock in that fund by the exact amount of the dividend or
capital gains distribution. Furthermore, capital gains distributions are, and
some portion of the dividends may be, subject to income tax. If the net asset
value of the shares should be reduced below a shareholder's cost as a result of
the payment of taxable dividends or the distribution of realized net long-term
capital gains, such payment or distribution would be in part a return of
capital but nonetheless would be taxable to the shareholder. Therefore, an
investor should consider the tax implications of purchasing Fund shares
immediately prior to a distribution record date.
Shareholders are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, state or local taxes.
INFORMATION ON COMPUTATION OF YIELD
The Fund's current yield for the seven days ending December 31, 1993 was
2.22%. The effective annual yield on 2.22% is 2.24%, assuming daily
compounding.
The Fund's annualized "current yield" as may be quoted from time to time in
advertisements and other communications to shareholders and potential
investors, is computed by determining, for a stated seven-day period, the net
change, exclusive of capital changes and including the value of additional
shares purchased with dividends and any dividends declared therefrom (which
reflect deductions of all expenses of the Fund such as management fees), in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of the period, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base period return,
and then multiplying the base period return by (365/7).
The Fund's annualized effective yield, as may be quoted from time to time in
advertisements and other communications to shareholders and potential
investors, is computed by determining (for the same stated seven-day period as
the current yield), the net change, exclusive of capital changes and including
the value of additional shares purchased with dividends and any dividends
declared therefrom (which reflect deductions of all expenses of the Fund such
as management fees), in the value of a hypothetical pre-existing account having
a balance of one share at the beginning of the period, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return,
25
<PAGE>
and then compounding the base period return by adding 1, raising the sum to a
power equal to 365 divided by 7, and subtracting 1 from the result.
The yields quoted in any advertisement or other communication should not be
considered a representation of the yields of the Fund in the future since the
yield is not fixed. Actual yields will depend not only on the type, quality and
maturities of the investments held by the Fund and changes in interest rates on
such investments, but also on changes in the Fund's expenses during the period.
The income used in all calculation of yields are comprised totally of tax-
exempt income.
Yield information may be useful in reviewing the performance of the Fund and
for providing a basis for comparison with other investment alternatives.
However, unlike bank deposits or other investments which typically pay a fixed
yield for a stated period of time, the Fund's yield fluctuates.
Based upon a Federal personal income tax bracket of 36%, the Fund's tax-
equivalent yield for the seven days ending December 31, 1993 was 3.47%.
Tax-equivalent yield is computed by dividing that portion of the current
yield (calculated as described above) which is tax-exempt by 1 minus a stated
tax rate and adding the quotient to that portion, if any, of the yield of the
Fund that is not tax-exempt.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in shares of the Fund by adding the sum of all
distributions on 10,000, 50,000 or 100,000 shares of the Fund since inception
to $10,000, $50,000 and $100,000, as the case may be. Investments of $10,000,
$50,000 and $100,000 in the Fund at inception would have grown to $15,349,
$76,747 and $153,493, respectively, at December 31, 1993.
SHARES OF THE FUND
===============================================================================
The shareholders of the Fund are entitled to a full vote for each full share
of beneficial interest held. The Fund is authorized to issue an unlimited
number of shares of beneficial interest. In accordance with the Fund's
Declaration of Trust, the Trustees of the Fund have been elected pursuant to a
majority shareholder vote at the meeting of shareholders held immediately prior
to the Fund's reorganization as a Massachusetts business trust in April, 1987.
The Trustees themselves have the power to alter the number and the terms of
office of the Trustees (as provided for in the Declaration of Trust), and they
may at any time lengthen or shorten their own terms or make their terms of
unlimited duration and appoint their own successors, provided that always at
least a majority of the Trustees has been elected by the shareholders of the
Fund. Under certain circumstances a Trustee may be removed by action of the
other Trustees. The shareholders also have the right under certain
circumstances to remove the Trustees. The voting rights of shareholders are not
cumulative, so that holders of more than 50 percent of the shares voting can,
if they choose, elect all Trustees being elected, while the holders of the
remaining shares would be unable to elect any Trustees. The Fund is not
required to hold Annual Meetings of Shareholders. The Trustees may call Special
Meetings of Shareholders for action by shareholder vote as may be required by
the Act or the Declaration of Trust.
The 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 (which would be used to distinguish among the rights of
different categories of shareholders, as might be required by future
regulations or other unforeseen circumstances). However, the Trustees have not
authorized any such additional series or classes of shares and the Fund has no
present intention to add additional series or classes of shares.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his/her
or its own bad faith, willful misfeasance, gross negligence, or reckless
disregard of his duties. It also provides that all third persons shall look
solely to the Fund property for satisfaction of claims arising in connection
with the affairs of the Fund. With the exceptions stated, the Declaration of
Trust provides that a Trustee,
26
<PAGE>
officer, employee or agent is entitled to be indemnified against all liability
in connection with the affairs of the Fund.
The Fund is authorized to issue an unlimited number of shares of beneficial
interest. The Trust shall be of unlimited duration subject to the provisions in
the Declaration of Trust concerning termination by action of the shareholders
or the Trustees.
CUSTODIAN AND TRANSFER AGENT
===============================================================================
The Bank of New York, 110 Washington Street, New York, New York 10286 is the
Custodian of the Fund's assets. Any of the Fund's cash balances in excess of
$100,000 are unprotected by federal deposit insurance. Such balances may, at
times, be substantial.
Dean Witter Trust Company, Harborside Financial Center, Plaza Two, Jersey
City, New Jersey 07311 is the Transfer Agent of the Fund's shares and Dividend
Disbursing Agent for payment of dividends and distributions on Fund shares and
Agent for shareholders under various investment plans described herein. Dean
Witter Trust Company is an affiliate of Dean Witter InterCapital Inc., the
Fund's Investment Manager, and Dean Witter Distributors Inc., the Fund's
Distributor. As Transfer Agent and Dividend Disbursing Agent, Dean Witter Trust
Company's responsibilities include maintaining shareholder accounts; disbursing
cash dividends and reinvesting dividends; processing account registration
changes; handling purchase and redemption transactions; mailing prospectuses
and reports; mailing and tabulating proxies; processing share certificate
transactions; and maintaining shareholder records and lists. For these services
Dean Witter Trust Company receives a per shareholder account fee from the Fund.
REPORTS TO SHAREHOLDERS
===============================================================================
The Fund will send to shareholders, at least semi-annually, reports showing
the Fund's portfolio and other information. An annual report, containing
financial statements audited by independent accountants, will be sent to
shareholders each year.
The Fund's fiscal year is the calendar year. The financial statements of the
Fund must be audited at least once a year by independent accountants whose
selection is made annually by the Fund's Board of Trustees.
INDEPENDENT ACCOUNTANTS
===============================================================================
Price Waterhouse serves as the independent accountants of the Fund. The
independent accountants are responsible for auditing the annual financial
statements of the Fund.
LEGAL COUNSEL
===============================================================================
Sheldon Curtis, Esq., who is an officer and the General Counsel of the
Investment Manager, is an officer and the General Counsel of the Fund.
EXPERTS
===============================================================================
The financial statements of the Fund included in the Prospectus and
incorporated by reference in this Statement of Additional Information have been
so included and incorporated in reliance on the report of Price Waterhouse,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
REGISTRATION STATEMENT
===============================================================================
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission.
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<PAGE>
The complete Registration Statement may be obtained from the Securities and
Exchange Commission upon payment of the fee prescribed by the rules and
regulations of the Commission.
FINANCIAL STATEMENTS
===============================================================================
The audited financial statements of the Fund for the fiscal year ended
December 31, 1993, and the report of the independent accountants thereon, are
set forth in the Fund's Prospectus, and are incorporated herein by reference.
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<PAGE>
APPENDIX
RATING OF INVESTMENTS
===============================================================================
Moody's Investors Service Inc. ("Moody's")
MUNICIPAL BOND RATINGS
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa
Bonds which are Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.
Ba
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and therefore not well safeguarded
during both good and bad times in the future. Uncertainly of position
characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca
Bonds which are rated Ca present obligations which are speculative in a
high degree. Such
issues are often in default or have other marked shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Conditional Rating: Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2, and 3 in
each generic rating classification from Aa through B in its municipal bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and a modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
29
<PAGE>
MUNICIPAL NOTE RATINGS
Moody's ratings for state and municipal note and other short-term loans are
designated Moody's Investment Grade (MIG). MIG 1 denotes best quality and means
there is present strong protection from established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing. MIG 2 denotes high quality and means that margins of protection
are ample although not as large as in MIG 1. MIG 3 denotes favorable quality
and means that all security elements are accounted for but that the undeniable
strength of the previous grades, MIG 1 and MIG 2, is lacking. MIG 4 denotes
adequate quality and means that the protection commonly regarded as required of
an investment security is present and that while the notes are not distinctly
or predominantly speculative, there is specific risk.
VARIABLE RATE DEMAND OBLIGATIONS
A short-term rating, in addition to the Bond or MIG ratings, designated VMIG
may also be assigned to an issue having a demand feature. The assignment of the
VMIG symbol reflects such characteristics as payment upon periodic demand
rather than fixed maturity dates and payment relying on external liquidity. The
VMIG rating criteria are identical to the MIG criteria discussed above.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess of
nine months. These ratings apply to Municipal Commercial Paper as well as
taxable Commercial Paper. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers: Prime-1, Prime-2, Prime-3.
Issuers rated Prime-1 have a superior capacity for repayment of short-term
promissory obligations; Issuers rated Prime-2 have a strong capacity for
repayment of short-term promissory obligations; and Issuers rated Prime-3 have
an acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S")
MUNICIPAL BOND RATINGS
A Standard & Poor's municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers or
lessees.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. The
ratings are based, in varying degrees, on the following considerations: (1)
likelihood of default-capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with any rating
and may, on occasion, rely on unaudited financial information. The ratings may
be changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or for other reasons.
AAA
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A
Debt rated "A" has a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher-rated categories.
30
<PAGE>
BBB
Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher-rated categories.
Bonds rated AAA, AA, A and BBB are considered investment grade bonds.
BB
Debt rated "BB" has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which would lead
to inadequate capacity or willingness to pay interest and repay principal.
B
Debt rated "B" has a greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions would likely impair capacity or willingness to
pay interest and repay principal.
CCC
Debt rated "CCC" has a current identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payments of interest and repayments of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have
the capacity to pay interest and repay principal.
CC
The rating "CC" is typically applied to debt subordinated to senior debt
which is assigned an actual or "CCC" rating.
C
The rating "C" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC\" debt rating.
CI
The rating "Cl" is reserved for income bonds on which no interest is being
paid.
NR
Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Bonds rated "BB", "B", "CCC" and "C" are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. "BB" indicates the least degree of speculation and "C" the highest
degree of speculation. While such such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
Plus (+) or minus (-): The ratings from "AA" or "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
ratings categories.
The foregoing ratings are sometimes followed by a "p" which indicates that
the rating is provisional. A provisional rating assumes the successful
completion of the project being financed by the bonds being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however,
while addressing credit quality subsequent to completion of the project, makes
no comment on the likelihood or risk of default upon failure of such
completion.
MUNICIPAL NOTE RATINGS
Commencing on July 27, 1984, Standard & Poor's instituted a new rating
category with respect to certain municipal note issues with a maturity of less
than three years. The new note ratings denote the following:
SP-1 denotes a very strong or strong capacity to pay principal and
interest. Issues determined to possess overwhelming safety characteristics are
given a plus (+) designation (SP-1 +).
SP-2 denotes a satisfactory capacity to pay principal and interest.
SP-3 denotes a speculative capacity to pay principal and interest.
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<PAGE>
COMMERCIAL PAPER RATINGS
Standard and Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. The commercial paper rating is not a recommendation to purchase
or sell a security. The ratings are based upon current information furnished by
the issuer or obtained by S&P from other sources it considers reliable. The
ratings may be changed, suspended or withdrawn as a result of changes in or
unavailability of such information. Ratings are graded into group categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Ratings are applicable to both taxable and tax-exempt commercial paper. The
categories are as follows:
Issuers assigned A ratings are regarded as having the greatest capacity for
timely payment. Issues in this category are further refined with the
designation 1, 2 and 3 to indicate the relative degree of safety.
A-1 indicates that the degree of safety regarding timely payment is very
strong.
A-2 indicates capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated "A-1".
A-3 indicates a satisfactory capacity for timely payment. Obligations
carrying this designation are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
32
