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Filed Pursuant to Rule 497(c)
Registration File No.: 2-67087
PROSPECTUS -- FEBRUARY 24, 1997
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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 1% 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 24, 1997, 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.
<TABLE>
<CAPTION>
<S> <C>
Minimum initial investment ..... $5,000
Minimum additional investment... $ 100
</TABLE>
Dean Witter Tax-Free Daily Income Trust
Two World Trade Center
New York, New York 10048
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 ............................................. 13
Dividends, Distributions and Taxes .................................... 15
Additional Information ................................................ 17
Financial Statements--December 31, 1996 ............................... 19
Report of Independent Accountants ..................................... 30
INFORMATION ON OPENING AN ACCOUNT, REGISTRATION
OF SHARES, AND OTHER INFORMATION RELATING TO A
SPECIFIC ACCOUNT, CALL:
O 800-869-NEWS (TOLL-FREE)
O 212-392-2550
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 De-posit 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
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PROSPECTUS SUMMARY
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<TABLE>
<CAPTION>
<S> <C>
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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.
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Shares Offered Shares of beneficial interest with $0.01 par value (see page 17).
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Purchase of Investment may be made:
Shares o By wire
o By mail
o 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 (by wire or by mail); $1,000 or more (through account executives) or
$100 to $5,000 (by EasyInvest(Trademark)). 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).
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Investment To provide as high a level of daily income exempt from federal income tax
Objective as is consistent with stability of principal and liquidity (see p. 5).
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Investment A diversified portfolio of tax-exempt fixed-income securities with
Policy short-term maturities (see p. 5).
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Investment Dean Witter InterCapital Inc. ("InterCapital"), the Investment Manager of
Manager the Fund, and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to 101 investment companies and other portfolios
with assets of approximately $92.5 billion at January 31, 1997 (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. 5).
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Distributor Dean Witter Distributors Inc. (the "Distributor") sells shares of the Fund
through Dean Witter Reynolds Inc. and other Selected Broker-Dealers
pursuant to selected dealer agreements. Other than the reimbursement to the
Distributor pursuant to the Rule 12b-1 Distribution Plan, the Distributor
receives no distribution fees (see pages 8-10).
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Plan of The Fund is authorized to reimburse specific expenses incurred in promoting
Distribution the distribution of the Fund's shares pursuant to a Plan of Distribution
with the Distributor 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 0.15 of 1% of average daily net assets of
the Fund (see page 10).
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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. 5).
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Dividends Declared and automatically reinvested daily in additional shares; cash
payments of dividends available monthly (see p. 15).
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Reports Individual periodic account statements; annual and semi-annual Fund
financial statements.
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Redemption of Shares are redeemable by the shareholder at net asset value without any
Shares charge (see p. 13-15):
o By check
o By telephone or wire instructions, with proceeds wired or mailed to a
predesignated bank account
o By mail
A shareholder's account is subject to possible involuntary redemption
if its value falls below $1,000 (see p. 13).
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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 page 13 of the Statement of Additional Information
and the discussions concerning "repurchase agreements" and "puts" on pages
14 and 15 of the Statement of Additional Information, concerning any risks
associated with such portfolio securities and management techniques.
</TABLE>
The above is qualified in its entirety by the detailed information appearing
elsewhere in the Prospectus
and in the Statement of Additional Information.
2
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SUMMARY OF FUND EXPENSES
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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, 1996.
<TABLE>
<CAPTION>
<S> <C>
Shareholder Transaction Expenses
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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)
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Management Fees .......................................................... 0.50%
12b-1 Fee* ............................................................... 0.10%
Other Expenses ........................................................... 0.11%
Total Fund Operating Expenses ............................................ 0.71%
</TABLE>
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* The 12b-1 fee is characterized as a service fee within the meaning of
National Association of Securities Dealers, Inc., ("NASD") guidelines
(see "Purchase of Fund Shares").
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period .. $7 $23 $40 $89
</TABLE>
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", and "Purchase of Fund Shares--Plan of
Distribution" in this Prospectus.
3
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FINANCIAL HIGHLIGHTS
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The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by Price Waterhouse LLP,
independent accountants. The financial highlights should be read in
conjunction with the financial statements, notes thereto and the unqualified
report of the independent accountants which are contained in this Prospectus
commencing on page 19.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
----------------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- ---------
<S> <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
--------- --------- --------- --------- --------- ---------
Net investment income ............... 0.028 0.032 0.022 0.018 0.024 0.039
Less dividends from
net investment income .............. (0.028) (0.032) (0.022) (0.018) (0.024) (0.039)
--------- --------- --------- --------- --------- ---------
Net asset value, end of period ..... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
========= ========= ========= ========= ========= =========
TOTAL INVESTMENT RETURN+ ............ 2.83% 3.22% 2.25% 1.85% 2.39% 4.02%
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................ 0.71% 0.72% 0.71% 0.71% 0.68% 0.68%
Net investment income ............... 2.76% 3.16% 2.22% 1.83% 2.37% 3.95%
SUPPLEMENTAL DATA:
Net assets, end of period,
in millions ........................ $522 $522 $544 $568 $670 $823
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1990 1989 1988 1987
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- ---------
Net investment income ............... 0.053 0.058 0.048 0.041
Less dividends from
Net investment income .............. (0.053) (0.058) (0.048) (0.041)
--------- --------- --------- ---------
Net asset value, end of period ..... $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= =========
TOTAL INVESTMENT RETURN+ ............ 5.48% 5.96% 4.88% 4.18%
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................ 0.64% 0.61% 0.62% 0.62%
Net investment income ............... 5.30% 5.82% 4.78% 4.09%
SUPPLEMENTAL DATA:
Net assets, end of period,
in millions ........................ $897 $873 $946 $835
</TABLE>
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+ Calculated based on the net asset value as of the last business day of the
period.
See Notes to Financial Statements
THE FUND AND ITS MANAGEMENT
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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 101 investment companies, thirty of
which are listed on the New York Stock Exchange, with combined total assets
including this Fund of approximately $89.3 billion as of January 31, 1997.
The Investment Manager also manages portfolios of pension plans, other
institutions and individuals which aggregated approximately $3.2 billion at
such date.
The Fund has retained the Investment Manager to provide administrative
services, manage its business affairs and manage the investment of the Fund's
assets, including the placing of orders for the purchase and sale of
portfolio securities. InterCapital has retained Dean Witter Services Company
Inc.
4
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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.
On February 5, 1997, DWDC and Morgan Stanley Group Inc. announced that
they had entered into an Agreement and Plan of Merger, with the combined
company to be named Morgan Stanley, Dean Witter, Discover & Co. The business
of Morgan Stanley Group Inc. and its affiliated companies is providing a wide
range of financial services for sovereign governments, corporations,
institutions and individuals throughout the world. DWDC is the direct parent
of InterCapital and Dean Witter Distributors Inc., the Fund's distributor. It
is currently anticipated that the transaction will close in mid-1997.
Thereafter, InterCapital and Dean Witter Distributors Inc. will be direct
subsidiaries of Morgan Stanley, Dean Witter, Discover & Co.
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, 1996, the Fund accrued total compensation to
the Investment Manager amounting to 0.50% 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
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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
5
<PAGE>
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 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 creditworthiness analysis of any such downgraded securities, which analysis
will be reported to the Trustees 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
6
<PAGE>
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.
Certain lease obligations have 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 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 variable rate obligation is adjusted either at predesignated
periodic intervals or whenever there is a change in the market rate of
interest on which the interest rate payable is based.
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
7
<PAGE>
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.
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 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 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. This restriction shall not apply to
any obligation of the Unites States Government, its agencies or
instrumentalities.
PURCHASE OF FUND SHARES
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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
8
<PAGE>
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, 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.
Sales personnel are compensated for selling shares of the Fund at the time
of their sale by the Distributor and/or the Selected Broker-Dealer. In
addition, some sales personnel of the Selected Broker-Dealer will receive
various types of non-cash compensation as special sales incentives, including
trips, educational and/or business seminars and merchandise.
Orders for the purchase of Fund shares placed by customers through DWR or
another Selected Broker-Dealer 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 another
Selected Broker-Dealer will not have any of such funds invested in the Fund
until the business day after the customer places an order with DWR or another
Selected Broker-Dealer 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.
9
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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 the
Distributor, 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, 1996, 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. New York time) on each day that the New York
Stock Exchange is open (or, on days when the New York Stock Exchange closes
prior to 4:00 p.m., at such earlier time) by taking the 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. However, 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 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, or amounts credited to a shareholder's DWR
or other Selected Broker-Dealer brokerage account, 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.
EasyInvests (Trade Mark) . Shareholders may subscribe to EasyInvest, an
automatic purchase plan which provides for any amount from $100 to $5,000 to
be transferred automatically from a checking or savings account, on a
semi-monthly, monthly or quarterly basis, to the Transfer Agent for
investment in shares of the Fund. Shares purchased through EasyInvest
10
<PAGE>
will be added to the shareholder's existing account at the net asset value
calculated the same business day the transfer of funds is effected.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about any of
the above services.
Targeted Dividends. In states where it is legally permissible,
shareholders may elect to have all shares of the Fund earned as a result of
dividends paid in any given month redeemed as of the end of the month and
invested in shares of any other open-end investment company for which
InterCapital serves as investment manager (collectively, with the Fund, the
"Dean Witter Funds"), other than Dean Witter Tax-Free Daily Income Trust, at
the net asset value per share of the selected Dean Witter Fund determined as
of the last business day of the month, without the imposition of any applicable
front-end sales charge or without the imposition of any applicable contingent
deferred sales charge upon ultimate redemption. All such shares invested will
begin to earn dividends, if any, in the selected Dean Witter Fund on the
first business day of the succeeding month. Shareholders of the Fund must be
shareholders of the Dean Witter Fund targeted to receive investments from
dividends at the time they enter the Targeted Dividends program. Investors
should review the prospectus of the targeted Dean Witter Fund before entering
the program.
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 (at time of redemption) sales charge ("CDSC funds"), may
be exchanged for shares of the Fund, Dean Witter U.S. Government Money Market
Trust, Dean Witter California Tax-Free Daily Income Trust, Dean Witter New
York Municipal Money Market and Dean Witter Liquid Asset Fund Inc. (which
five Funds are hereinafter called "money market funds"), and for shares of
Dean Witter Short-Term U.S. Treasury Trust, Dean Witter Limited Term
Municipal Trust, Dean Witter Short-Term Bond Fund, Dean Witter Balanced
Income Fund, Dean Witter Balanced Growth Fund and Dean Witter Intermediate
Term U.S. Treasury Trust (which eleven Funds, including the Fund, are
referred to herein 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 the Exchange Fund 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 the
Exchange 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 other Exchange Funds or CDSC funds. Ultimately, any applicable
contingent deferred sales charge ("CDSC") 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 Fund 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 Fund (calculated from the last day of
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<PAGE>
the month in which the Exchange Fund shares were acquired), the holding
period (for the purpose of determining the rate of the CDSC) is frozen. If
those shares are subsequently reexchanged for shares of a CDSC fund, the
holding period previously frozen when the first exchange was made resumes on
the last day of the month in which shares of a CDSC fund are reacquired.
Thus, the CDSC is based upon the time (calculated as described above) the
shareholder was invested in a CDSC fund. However, in the case of shares
exchanged into an Exchange Fund on or after April 23, 1990, upon a redemption
of shares which results in a CDSC being imposed, a credit (not to exceed the
amount of the CDSC) will be given in an amount equal to the Exchange Fund
12b-1 distribution fees, if any, incurred on or after that date which are
attributable to those shares (see "Purchase of Fund Shares--Plan of
Distribution" in the respective Exchange Funds Prospectuses for a description
of Exchange Fund distribution fees). 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 thirty
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 Funds may in their discretion limit
or otherwise restrict the number of times this Exchange Privilege may be
exercised by any investor. Any such restriction will be made by the Fund on a
prospective basis only, upon notice to the shareholder not later than ten
days following such shareholder's most recent exchange.
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 (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 the Exchange
Funds, TCW/DW North American Government Income Trust, TCW/DW Income and
Growth Fund and TCW/DW Balanced Fund pursuant to the Exchange Privilege, and
provided further that the Exchange Privilege may be terminated or materially
revised without notice under certain unusual circumstances described in the
Statement of Additional Information. Shareholders maintaining margin accounts
with DWR or other Selected Broker-Dealers are referred to their account
executive regarding restrictions on exchanges 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. In the case of any shareholder
holding a share certificate or certificates, no exchanges may be made until
all applicable share certificates have been received by the Transfer Agent
and deposited in the shareholder's account. An exchange will be treated for
federal income tax purposes the same as a repurchase or
12
<PAGE>
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 above
Funds pursuant to this Exchange Privilege by contacting their DWR or another
Selected Broker-Dealer account executive (no Exchange Privilege Authorization
Form is required). Other shareholders (and those shareholders who are clients
of DWR or another Selected Broker-Dealer but who wish to make exchanges
directly by writing or telephoning the Transfer Agent) must complete and
forward to the Transfer Agent an Exchange Privilege Authorization Form,
copies of which may be obtained from the Transfer Agent, to initiate an
exchange. If the Authorization Form is used, exchanges may be made in writing
or by contacting the Transfer Agent at (800) 869-NEWS (toll free). The Fund
will employ reasonable procedures to confirm that exchange instructions
communicated over the telephone are genuine. Such procedures may include
requiring various forms of personal identification such as name, mailing
address, social security or other tax identification number and DWR or other
Selected Broker-Dealer account number (if any). Telephone instructions may
also be recorded. If such procedures are not employed, the Fund may be liable
for any losses due to unauthorized or fraudulent instructions.
Telephone exchange instructions will be accepted if received by the
Transfer Agent between 9:00 a.m. and 4:00 p.m. New York time, on any day the
New York Stock Exchange is open. Any shareholder wishing to make an exchange
who has previously filed an Exchange Privilege Authorization Form and who is
unable to reach the Fund by telephone should contact his or her DWR or other
Selected Broker-Dealer account executive, if appropriate, or make a written
exchange request. 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.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent, for further information about the
Exchange Privilege.
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 Transfer
Agent 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 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
13
<PAGE>
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 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 been issued will be permitted to redeem
shares by telephone or 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:
--800-869-NEWS (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(s). If the proceeds are to be paid to anyone other than the
registered shareholder(s) 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(s) exactly as the
account is registered. Share-
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<PAGE>
holders are advised, for their own protection, to send the share certificate
and assignment form in separate envelopes (if they are being mailed and not
hand delivered) to the Transfer Agent. Signatures must be guaranteed by an
eligible guarantor acceptable to the Transfer Agent (see above). 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 sixty days notice, 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 shareholder
have a value of less than $1,000, or such lesser amount as may be fixed by
the Board of Trustees.
AUTOMATIC REDEMPTION PROCEDURE
The Distributor has instituted an automatic redemption procedure which it
may utilize to satisfy amounts due by a 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, if the shareholder elects to participate by so
notifying DWR or other Selected Broker-Dealer, the shareholder's DWR or other
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 calendar year which are paid in the following calendar
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
15
<PAGE>
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 (the "Code"), 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-in-terest 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 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 tax able 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 dividends 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.
16
<PAGE>
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.
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.
Code of Ethics. Directors, officers and employees of InterCapital, Dean
Witter Services Company Inc. and the Distributor are subject to a strict Code
of Ethics adopted by those companies. The Code of Ethics is intended to
ensure that the interests of shareholders and other clients are placed ahead
of any personal interest, that no undue personal benefit is obtained from a
person's employment activities and that actual and potential conflicts of
interest are avoided. To achieve these goals and comply with regulatory
requirements, the Code of Ethics requires, among other things, that personal
securities transactions by employees of the companies be subject to an
advance clearance process to monitor that no Dean Witter Fund is engaged at
the same
17
<PAGE>
time in a purchase or sale of the same security. The Code of Ethics bans the
purchase of securities in an initial public offering and prohibits engaging
in futures and options transactions and profiting on short-term trading (that
is, a purchase within sixty days of a sale or a sale within sixty days of a
purchase) of a security. In addition, investment personnel may not purchase
or sell a security for their personal account within thirty days before or
after any transaction in any Dean Witter Fund managed by them. Any violations
of the Code of Ethics are subject to sanctions, including reprimand, demotion
or suspension or termination of employment. The Code of Ethics comports with
regulatory requirements and the recommendations in the 1994 report by the
Investment Company Institute Advisory Group on Personal Investing.
Shareholder Inquiries. All inquiries regarding the Fund should be directed
to the Fund or the Transfer Agent at one of the telephone numbers or at the
address, as are set forth on the front cover of this Prospectus.
18
<PAGE>
DEAN WITTER TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS (69.6%)
ALASKA
$ 5,000 Valdez, Marine Terminal Exxon Pipeline Co Ser C ................ 5.10% 01/02/97 $ 5,000,000
CALIFORNIA
8,000 California Public Capital Improvements Financing Authority,
Pooled Ser 1988 C ............................................. 3.65 03/17/97 8,000,000
7,000 Newport Beach, Hoag Memorial Hospital/Presbyterian 1996 Ser B .. 5.15 01/02/97 7,000,000
COLORADO
9,000 Colorado Health Facilities Authority, Kaiser Permanente 1994 Ser
A ............................................................. 4.15 01/08/97 9,000,000
CONNECTICUT
10,000 Connecticut Special Assessment, Unemployment Compensation 1993
Ser C (FGIC) .................................................. 3.90 07/01/97 10,000,000
DISTRICT OF COLUMBIA
4,800 The American University Ser 1985 ............................... 4.15 01/08/97 4,800,000
FLORIDA
9,800 Dade County, Water & Sewer Ser 1994 (FGIC) ..................... 4.00 01/08/97 9,800,000
17,900 Dade County Industrial Development Authority, Dolphins Stadium
Ser 1985 A .................................................... 4.05 01/08/97 17,900,000
9,300 University Athletic Association, University of Florida Ser 1990 4.95 01/02/97 9,300,000
11,800 Volusia County Health Facilities Authority, Pooled Ser 1985
(FGIC) ........................................................ 4.20 01/08/97 11,800,000
GEORGIA
12,000 Georgia Municipal Association, Pool Ser 1990 COPs (MBIA) ....... 4.00 01/08/97 12,000,000
HAWAII
Hawaii Department of Budget & Finance, Kaiser Permanente
5,000 Semiannual Tender Ser 1984 B .................................. 3.65 03/01/97 5,000,000
5,000 Ser 1995 A .................................................... 4.15 01/08/97 5,000,000
IDAHO
8,000 Idaho Health Facilities Authority, St. Luke's Regional Medical
Center Ser 1995 ............................................... 5.25 01/02/97 8,000,000
ILLINOIS
10,000 Illinois Educational Facilities Authority, Northwestern
University Ser 1988 ........................................... 4.25 01/08/97 10,000,000
Illinois Health Facilities Authority,
6,090 Evangelical Hospitals Corp Ser 1985 A ......................... 4.10 01/08/97 6,090,000
5,000 Lutheran General Health Care System Ser 1985 B ................ 3.50 01/08/97 5,000,000
5,000 Parkside Development Corp Ser 1991 ............................ 4.10 01/08/97 5,000,000
10,000 Oak Forest, Homewood South Suburban Mayors & Managers Assn Ser
1989 .......................................................... 4.20 01/08/97 10,000,000
INDIANA
10,000 Indiana Hospital Equipment Financing Authority, Ser 1985 A
(MBIA) ........................................................ 4.20 01/08/97 10,000,000
SEE NOTES TO FINANCIAL STATEMENTS
19
<PAGE>
DEAN WITTER TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996, continued
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- -----------------------------------------------------------------------------------------------------------------
KENTUCKY
$ 9,150 Mason County, East Kentucky Power Co-op Inc Ser 1984 (NRU-CFC
Gtd) .......................................................... 4.15 % 01/08/97 $ 9,150,000
LOUISIANA
10,000 New Orleans Aviation Board, Ser 1993 B (MBIA) .................. 4.10 01/08/97 10,000,000
MASSACHUSETTS
5,000 Massachusetts Bay Transportation Authority, 1984 Ser A ......... 3.625 03/01/97 5,000,000
7,800 Massachusetts Health & Educational Facilities Authority, Capital
Asset Ser E ................................................... 5.10 01/02/97 7,800,000
5,000 Massachusetts Municipal Wholesale Electric Company, Power Supply
1994 Ser C .................................................... 4.00 01/08/97 5,000,000
MICHIGAN
2,000 Royal Oak Hospital Finance Authority, William Beaumont Hospital
Ser 1996 J .................................................... 4.95 01/02/97 2,000,000
3,700 University of Michigan, Hospital Ser 1995 A .................... 5.10 01/02/97 3,700,000
MINNESOTA
1,900 Beltrami County, Environmental Northwood Panelboard Co Ser 1991 5.00 01/02/97 1,900,000
4,700 Minneapolis & St Paul Housing & Redevelopment Authority,
Childrens' Health Care Ser 1995 B (FSA) ....................... 5.05 01/02/97 4,700,000
4,000 University of Minnesota Regents, Ser 1985 F .................... 3.75 02/01/97 4,000,000
MISSOURI
10,000 Missouri Health & Educational Facilities Authority, Sisters of
Mercy Health System St Louis Inc Ser 1989 A ................... 4.20 01/08/97 10,000,000
NEBRASKA
14,600 Nebraska Higher Education Loan Program Inc, 1985 Ser A & E
(MBIA) ........................................................ 4.15 01/08/97 14,600,000
NEW JERSEY
4,000 Gloucester County, Mobil Oil Refining Corp Ser 1993 A .......... 3.75 01/08/97 4,000,000
NEW YORK
4,000 New York City Municipal Water Finance Authority, 1994 Ser C
(FGIC) ........................................................ 5.00 01/02/97 4,000,000
2,000 New York State Dormitory Authority, Oxford University Press Inc 5.45 01/02/97 2,000,000
4,025 New York State Energy Research & Development Authority, New York
State Electric & Gas Corp Ser 1994 C .......................... 4.75 01/02/97 4,025,000
NORTH CAROLINA
6,000 Asheville, Ser 1993 A COPs ..................................... 4.10 01/08/97 6,000,000
5,000 North Carolina Medical Care Commission, Duke University Hospital
Ser 1985 B .................................................... 3.95 01/08/97 5,000,000
OHIO
10,500 Columbus, Unlimited Tax Ser 1995-1 ............................. 4.00 01/08/97 10,500,000
Ohio Air Quality Development Authority,
2,200 Cincinnati Gas & Electric Co Ser A ............................ 5.10 01/02/97 2,200,000
2,100 Mead Co 1986 Ser A ............................................ 4.85 01/02/97 2,100,000
4,000 Sohio Air-British Petroleum Co Ser 1995 ....................... 4.95 01/02/97 4,000,000
SEE NOTES TO FINANCIAL STATEMENTS
20
<PAGE>
DEAN WITTER TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996, continued
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- -----------------------------------------------------------------------------------------------------------------
OKLAHOMA
Oklahoma Water Resources Board,
$ 5,000 State Loan Prog Ser 1994 A .................................... 3.75% 03/03/97 $ 5,000,000
5,000 State Loan Prog Ser 1995 ...................................... 3.70 03/03/97 5,000,000
PENNSYLVANIA
4,000 Delaware County Industrial Development Authority, United Parcel
Service of America Ser 1985 ................................... 4.85 01/02/97 4,000,000
5,000 Pennsylvania Higher Educational Facilities Authority, Thomas
Jefferson
University 1992 Ser C ......................................... 3.70 02/26/97 5,000,000
SOUTH CAROLINA
York County,
8,000 North Carolina Electric Membership Corp, Ser 1984 N-5 (NRU-CFC
Gtd) .......................................................... 3.80 03/15/97 8,000,000
8,815 Saluda River Electric Co-op Inc Ser 1984 E-1 & E-2 (NRU-CFC
Gtd) .......................................................... 3.65 02/15/97 8,815,000
TEXAS
4,900 Texas, Veterans' Housing Assistance Fund I Ser 1995 ............ 4.00 01/08/97 4,900,000
UTAH
17,000 Intermountain Power Agency, 1985 Ser F ......................... 3.75 03/17/97 17,000,000
WEST VIRGINIA
5,000 Pleasants County Commission, American Cyanamid Co Ser 1985 ..... 4.25 01/08/97 5,000,000
WISCONSIN
10,000 Wisconsin Health Facilities Authority, Franciscan Health Care
Inc Ser 1985 A-1 .............................................. 4.10 01/08/97 10,000,000
-------------
TOTAL SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS
(Amortized Cost $363,080,000) ..................................................... 363,080,000
-------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
21
<PAGE>
DEAN WITTER TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996, continued
<TABLE>
<CAPTION>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TAX-EXEMPT COMMERCIAL PAPER (20.2%)
ARIZONA
$ 4,800 Maricopa County Pollution Control Corporation, Southern
California Edison Co 1985 Ser G ............................... 3.50 % 03/12/97 3.50 % $ 4,800,000
COLORADO
11,000 Platte River Power Authority, Electric Subordinate Lien Ser S-1 3.70 01/27/97 3.70 11,000,000
FLORIDA
Florida Local Government Finance Commission,
5,000 Ser 1991 ...................................................... 3.50 02/25/97 3.50 5,000,000
3,000 Ser 1991 ...................................................... 3.55 03/19/97 3.55 3,000,000
5,500 Palm Beach County Health Facilities Authority, Hospital Pooled
Loan (MBIA) ................................................... 3.45 02/27/97 3.45 5,500,000
GEORGIA
5,000 Georgia Municipal Gas Authority, Southern Portfolio I Ser D .... 3.60 02/11/97 3.60 5,000,000
HAWAII
4,600 Hawaii Department of Budget & Finance, Citizens Utilities Co
Ser 1985 ...................................................... 3.45 03/06/97 3.45 4,600,000
INDIANA
6,000 Mount Vernon, General Electric Co Ser 1989 A ................... 3.55 02/12/97 3.55 6,000,000
MARYLAND
Baltimore County,
6,000 Ser 1995 BANs ................................................. 3.45 03/05/97 3.45 6,000,000
8,000 Metro District Ser 1995 BANs .................................. 3.45 02/05/97 3.45 8,000,000
10,000 Montgomery County, 1995 Ser BANs ............................... 3.35 03/11/97 3.35 10,000,000
MINNESOTA
4,500 Rochester, Mayo Foundation/Mayo Medical Center Ser 1992 B ...... 3.65 01/22/97 3.65 4,500,000
NEW JERSEY
5,000 New Jersey, Ser Fiscal 1997 A TRANs ............................ 3.625 01/14/97 3.625 5,000,000
SOUTH CAROLINA
5,000 South Carolina Public Service Authority, Promissory Notes ...... 3.55 02/18/97 3.55 5,000,000
TEXAS
Houston,
8,000 Water & Sewer Ser A ........................................... 3.50 01/29/97 3.50 8,000,000
10,000 Water & Sewer Ser A ........................................... 3.55 02/19/97 3.55 10,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
22
<PAGE>
DEAN WITTER TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996, continued
<TABLE>
<CAPTION>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
WASHINGTON
$ 4,000 Seattle, Municipal Light & Power Ser 1991 B .................... 3.55% 02/12/97 3.55% $ 4,000,000
-------------
TOTAL TAX-EXEMPT COMMERCIAL PAPER
(Amortized Cost $105,400,000) .................................................................. 105,400,000
-------------
SHORT-TERM MUNICIPAL NOTES (10.0%)
COLORADO
5,000 Colorado, Ser 1996 A TRANs, dtd 07/01/96 ....................... 4.50 06/27/97 3.85 5,015,175
IDAHO
7,000 Idaho, Ser 1996 TANs, dtd 07/02/96 ............................. 4.50 06/30/97 3.90 7,019,924
IOWA
10,000 Iowa School Corporations, Warrant Certificates Ser A 1996-97
(FSA), dtd 06/27/96 ........................................... 4.75 06/27/97 3.95 10,037,291
MASSACHUSETTS
5,000 Massachusetts, 1996 Ser A Notes, dtd 06/11/96 .................. 4.25 06/10/97 3.90 5,007,361
MICHIGAN
10,000 Michigan Municipal Bond Authority, Ser 1996 A Notes,
dtd 07/03/96 .................................................. 4.50 07/03/97 3.90 10,028,929
TEXAS
5,000 Texas, Ser 1996 TRANs, dtd 08/30/96 ............................ 4.75 08/29/97 3.97 5,024,660
WISCONSIN
10,000 Wisconsin, Operation Notes of 1996, dtd 07/11/96 ............... 4.50 06/16/97 3.88 10,026,981
-------------
TOTAL SHORT-TERM MUNICIPAL NOTES (Amortized Cost $52,160,321) ................................. 52,160,321
-------------
TOTAL INVESTMENTS (Amortized Cost $520,640,321) (a) ................................ 99.8 % 520,640,321
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES ..................................... 0.2 1,239,032
----- -------------
NET ASSETS .........................................................................100.0 % $521,879,353
- ------------ ===== =============
</TABLE>
BANs Bond Anticipation Notes.
COPs Certificates of Participation.
TANs Tax Anticipation Notes.
TRANs Tax and Revenue Anticipation Notes.
+ Rate shown is the rate in effect at December 31, 1996.
* Date in which the principal amount can be recovered through
demand.
(a) Cost is the same for federal income tax purposes.
Bond Insurance:
- --------------
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
SEE NOTES TO FINANCIAL STATEMENTS
23
<PAGE>
DEAN WITTER TAX-FREE DAILY INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value
(amortized cost $520,640,321) ........................................ $520,640,321
Cash .................................................................. 1,703,046
Receivable for:
Interest ............................................................ 3,570,761
Shares of beneficial interest sold .................................. 2,958
Prepaid expenses and other assets ..................................... 36,836
--------------
TOTAL ASSETS ........................................................ 525,953,922
--------------
LIABILITIES:
Payable for:
Shares of beneficial interest repurchased ........................... 3,665,187
Investment management fee ........................................... 237,972
Plan of distribution fee ............................................ 48,279
Accrued expenses ...................................................... 123,131
--------------
TOTAL LIABILITIES ................................................... 4,074,569
--------------
NET ASSETS:
Paid-in-capital ....................................................... 521,881,255
Accumulated undistributed net investment income ....................... 606
Accumulated net realized loss ......................................... (2,508)
--------------
NET ASSETS .......................................................... $521,879,353
==============
NET ASSET VALUE PER SHARE,
521,881,255 shares outstanding (unlimited shares authorized of $.01
par value) ........................................................... $ 1.00
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
24
<PAGE>
DEAN WITTER TAX-FREE DAILY INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME .................. $19,319,637
-------------
EXPENSES
Investment management fee ........ 2,738,887
Plan of distribution fee ......... 537,867
Transfer agent fees and expenses 455,855
Registration fees ................ 79,787
Shareholder reports and notices . 56,181
Professional fees ................ 45,381
Custodian fees ................... 28,842
Trustees' fees and expenses ..... 15,385
Other ............................ 8,247
-------------
TOTAL EXPENSES ................. 3,966,432
LESS: EXPENSE OFFSET .......... (6,469)
-------------
NET EXPENSES ................... 3,959,963
-------------
NET INVESTMENT INCOME .......... 15,359,674
NET REALIZED GAIN .............. 12,513
-------------
NET INCREASE ..................... $15,372,187
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
25
<PAGE>
DEAN WITTER TAX-FREE DAILY INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
- ------------------------------------------------------ ----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................. $ 15,359,674 $ 18,011,734
Net realized gain ..................................... 12,513 7,061
----------------- -----------------
NET INCREASE ........................................ 15,372,187 18,018,795
Dividends from net investment income .................. (15,359,493) (18,011,934)
Net increase (decrease) from transactions in shares of
beneficial interest .................................. 214,584 (21,937,469)
----------------- -----------------
NET INCREASE (DECREASE) ............................. 227,278 (21,930,608)
NET ASSETS:
Beginning of period ................................... 521,652,075 543,582,683
----------------- -----------------
END OF PERIOD
(Including undistributed net investment income of
$606 and $425, respectively) ........................ $521,879,353 $521,652,075
================= =================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
26
<PAGE>
DEAN WITTER TAX-FREE DAILY INCOME TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1996
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. The Fund's investment objective is to
provide a high level of daily income which is exempt from federal income tax,
consistent with stability of principal and liquidity. The Fund was
incorporated in Maryland in 1980, commenced operations on February 20, 1981
and reorganized as a Massachusetts business trust on
April 30, 1987.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- Portfolio securities are valued 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). Realized gains
and losses on security transactions are determined by the identified cost
method. The Fund amortizes premiums and accretes discounts over the life of
the respective securities. Interest income is accrued daily.
C. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable and nontaxable income to its
shareholders. Accordingly, no federal income tax provision is required.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to shareholders as of the close of each business day.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with Dean Witter InterCapital
Inc. (the "Investment Manager"), the Fund pays the Investment Manager a
management fee, accrued daily and payable monthly, by applying the following
annual rates to the net assets of the Fund determined as of the close of each
business day: 0.50% to the portion of the daily net assets not exceeding $500
million; 0.425% to the portion of the daily net assets exceeding $500 million
but not exceeding $750 million; 0.375% to the portion of the daily net assets
exceeding $750 million but not exceeding $1 billion; 0.35% to the portion of
27
<PAGE>
DEAN WITTER TAX-FREE DAILY INCOME TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1996, continued
the daily net assets exceeding $1 billion but not exceeding $1.5 billion;
0.325% to the portion of the daily net assets exceeding $1.5 billion but not
exceeding $2 billion; 0.30% to the portion of the daily net assets exceeding
$2 billion but not exceeding $2.5 billion; 0.275% to the portion of the daily
net assets exceeding $2.5 billion but not exceeding $3 billion; and 0.25% to
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, at its own expense, office space, facilities,
equipment, clerical, bookkeeping and certain legal services and pays the
salaries of all personnel, including officers of the Fund who are employees
of the Investment Manager. The Investment Manager also bears the cost of
telephone services, heat, light, power and other utilities provided to
the Fund.
3. PLAN OF DISTRIBUTION
Dean Witter Distributors Inc. (the "Distributor"), an affiliate of the
Investment Manager, is the distributor of the Fund's shares and, in
accordance with a Plan of Distribution (the "Plan") pursuant to Rule 12b-1
under the Act, finances certain expenses in connection therewith.
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
activities and services may be provided by the Distributor and other
broker-dealers under the Plan: (1) compensation to, and expenses 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 0.15% of the
Fund's average daily net assets. For the year ended December 31, 1996, the
distribution fee was accrued at the annual rate of 0.10%.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales/maturities of portfolio
securities for the year ended December 31, 1996 aggregated $1,054,917,180 and
$1,055,899,105, respectively.
28
<PAGE>
DEAN WITTER TAX-FREE DAILY INCOME TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1996, continued
Dean Witter Trust Company, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At December 31, 1996, the Fund had
transfer agent fees and expenses payable of approximately $42,400.
The Fund has an unfunded noncontributory defined benefit pension plan
covering all independent Trustees of the Fund who will have served as
independent Trustees for at least five years at the time of retirement.
Benefits under this plan are based on years of service and compensation
during the last five years of service. Aggregate pension costs for the year
ended December 31, 1996 included in Trustees' fees and expenses in the
Statement of Operations amounted to $851. At December 31, 1996, the Fund had
an accrued pension liability of $48,535 which is included in accrued expenses
in the Statement of Assets
and Liabilities.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest, at $1.00 per share, were as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Sold .......................................... 1,127,357,086 1,154,021,924
Reinvestment of dividends ..................... 15,359,493 18,011,934
----------------- -----------------
1,142,716,579 1,172,033,858
Repurchased ................................... (1,142,501,995) (1,193,971,327)
----------------- -----------------
Net increase (decrease) in shares outstanding 214,584 (21,937,469)
================= =================
</TABLE>
6. FEDERAL INCOME TAX STATUS
At December 31, 1996, the Fund had a net capital loss carryover of
approximately $2,500 which will be available through December 31, 2002 to
offset future capital gains to the extent provided by regulations.
During the year ended December 31, 1996, the Fund utilized capital loss
carryovers of approximately $12,500.
7. SELECTED PER SHARE DATA AND RATIOS
See the "Financial Highlights" table on page 4 of this Prospectus.
29
<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, 1996, the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the ten years in the period then ended, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at
December 31, 1996 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 6, 1997
- -------------------------------------------------------------------------------
1996 FEDERAL TAX NOTICE (unaudited)
During the year ended December 31, 1996, the Fund paid to the
shareholders $0.028 per share from net investment income. All of the
Fund's dividends from net investment income were exempt interest
dividends, excludable from gross income for Federal income tax
purposes.
- -------------------------------------------------------------------------------
30
<PAGE>
210-
for office use only
DEAN WITTER
TAX-FREE DAILY
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) 869-NEWS (Toll-Free).
- -------------------------------------------------------------------------------
TO REGISTER 1.
SHARES ------------------------------------------------------
(please print) First Name Last Name
- -As joint tenants, 2.
use line 1 & 2 ------------------------------------------------------
First Name Last Name
(Joint tenants with rights of survivorship unless
otherwise specified)
------------------------
Social Security Number
- -As custodian 3.
for a minor, ------------------------------------------------------
use lines 1 & 3 Minor's Name
------------------------------
Minor's Social Security Number
Under the Uniform Gifts to Minors Act
-------------------
State of Residence of Minor
- -In the name of a 4.
corporation, ------------------------------------------------------
trust, Name of Corporation, Trust (including trustee
partnership name(s)) or Other Organization
or other
institutional
investors, ------------------------------------------------------
use line 4
------------------------
Tax Identification Number
If Trust, Date of Trust Instrument:
---------------------
- -------------------------------------------------------------------------------
ADDRESS
--------------------------------------------------------
--------------------------------------------------------
City State Zip Code
- -----------------------------------------------------------------------------
TO PURCHASE [ ] CHECK (enclosed) $________ (Make Payable to Dean
SHARES: Witter Tax-Free Daily Income Trust)
Minimum Initial [ ] WIRE* On______________ MF*_____________________
Investment: (Date) (Control number, this
$5,000 transaction)
--------------------------------------------------------
Name of Bank Branch
--------------------------------------------------------
Address
--------------------------------------------------------
Telephone Number
* For an initial investment made by wiring funds, obtain
a control number by calling: (800) 869-NEWS (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.
210-
-----------------------------
- -------------------------------------------------------------------------------
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 [ ] Send an initial supply of checks.
OWN
CHECK FOR JOINT ACCOUNTS:
[ ] Check this box if all owners are required to sign
checks.
- -------------------------------------------------------------------------------
SYSTEMATIC [ ] Systematic Withdrawal Plan ($25 minimum)
WITHDRAWAL $_____ [ ] Monthly or [ ] Quarterly
PLAN [ ] 10th or [ ] 25th of Month/Quarter
Minimum
0ccount Value: [ ] Percentage of balance (annualized basis)
$5,000 _____% [ ] Monthly [ ] 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)
--------------------------------------------------------
Name
--------------------------------------------------------
Address
--------------------------------------------------------
City State Zip Code
<PAGE>
- -------------------------------------------------------------------------------
PAYMENT TO [ ] Dean Witter Trust Company is hereby authorized to
PREDESIGNATED honor telephonic or other instructions, without signature
BANK ACCOUNT 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)):
---------------------------------- -----------------------
Bank Account Name & Bank Account Number Bank's Routing Transmit
must be in Code (Ask Your Bank)
same name as
shares are
registered
----------------------------------
Minimum Amount: Name of Bank
$1,000
----------------------------------
( )
----------------------------------
Telephone Number of Bank
- -------------------------------------------------------------------------------
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 RECEIVED
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.
Name(s) must be SIGNATURE(S) (IF JOINT TENANTS, ALL MUST SIGN)
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:
<PAGE>
NAME/TITLE SIGNATURE
In addition, --------------------------------------------------------
complete | | |
Section A |-------------------------|----------------------------|
or B below. | | |
|-------------------------|----------------------------|
| | |
--------------------------------------------------------
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.
- -----------------------------------------------------------------------------
SECTION [A] NOTE: EITHER A SIGNATURE GUARANTEE OR CORPORATE SEAL IS
CORPORATIONS AND REQUIRED.
INCORPORATED I, _________, Secretary of the Registered Owner, do hereby
ASSOCIATIONS ONLY. 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
SIGN ABOVE AND resolution has been duly adopted and will remain in full
COMPLETE THIS force and effect until the Transfer Agent receives a duly
SECTION executed amendment to the Certification Form.
SIGNATURE Witness my hand on behalf of the corporation/association
GUARANTEE** this ________ day of ________________, 19____.
(or Corporate Seal)
-----------------------------
Secretary**
SIGNATURE The undersigned officer (other than the Secretary) hereby
GUARANTEE** certifies that the foregoing instrument has been signed
(or Corporate Seal) by the Secretary of the corporation/association.
-----------------------------
Certifying Officer of the
Corporation or Incorporated
Association**
- -------------------------------------------------------------------------------
SECTION [B] NOTE: A SIGNATURE GUARANTEE IS REQUIRED.
ALL OTHER
INSTITUTIONAL ---------------------------------------------
INVESTORS Certifying
Trustee(s)/General Partner(s)Other(s)**
SIGNATURE
GUARANTEE**
SIGN ABOVE AND ---------------------------------------------
COMPLETE THIS Certifying
SECTION Trustee(s)/General Partner(s)/Other(s)**
----------------------------------------------------------
**SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR
- -------------------------------------------------------------------------------
DEALER Above signature(s) guaranteed. Prospectus has been
(if any) delivered by undersigned to above-named applicant(s).
Completion by
dealer only
------------------------- ------------------------------
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>
THE DEAN WITTER FAMILY OF FUNDS
MONEY MARKET FUNDS
Dean Witter Liquid Asset Fund Inc.
Dean Witter Tax-Free Daily Income Trust
Dean Witter U.S. Government Money Market Trust
Dean Witter California Tax-Free Daily Income Trust
Dean Witter New York Municipal Money Market Trust
EQUITY FUNDS
Dean Witter American Value Fund
Dean Witter Natural Resource Development Securities Inc.
Dean Witter Dividend Growth Securities Inc.
Dean Witter Developing Growth Securities Trust
Dean Witter World Wide Investment Trust
Dean Witter Value-Added Market Series
Dean Witter Utilities Fund
Dean Witter Capital Growth Securities
Dean Witter European Growth Fund Inc.
Dean Witter Precious Metals and Minerals Trust
Dean Witter Pacific Growth Fund Inc.
Dean Witter Health Sciences Trust
Dean Witter Global Dividend Growth Securities
Dean Witter Global Utilities Fund
Dean Witter International SmallCap Fund
Dean Witter Mid-Cap Growth Fund
Dean Witter Balanced Growth Fund
Dean Witter Capital Appreciation Fund
Dean Witter Information Fund
Dean Witter Japan Fund
Dean Witter Income Builder Fund
Dean Witter Special Value Fund
Dean Witter Financial Services Trust
FIXED-INCOME FUNDS
Dean Witter High Yield Securities Inc.
Dean Witter Tax-Exempt Securities Trust
Dean Witter U.S. Government Securities Trust
Dean Witter Federal Securities Trust
Dean Witter Convertible Securities Trust
Dean Witter California Tax-Free Income Fund
Dean Witter New York Tax-Free Income Fund
Dean Witter World Wide Income Trust
Dean Witter Intermediate Income Securities
Dean Witter Global Short-Term Income Fund Inc.
Dean Witter Multi-State Municipal Series Trust
Dean Witter 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 Fund
Dean Witter High Income Securities
Dean Witter National Municipal Trust
Dean Witter Balanced Income Fund
Dean Witter Hawaii Municipal Trust
Dean Witter Intermediate Term U.S. Treasury Trust
DEAN WITTER RETIREMENT SERIES
Liquid Asset Series
U.S. Government Money Market Series
U.S. Government Securities Series
Intermediate Income Securities Series
American Value Series
Capital Growth Series
Dividend Growth Series
Strategist Series
Utilities Series
Value-Added Market Series
Global Equity Series
ASSET ALLOCATION FUNDS
Dean Witter Strategist Fund
Dean Witter Global Asset Allocation Fund
ACTIVE ASSETS ACCOUNT PROGRAM
Active Assets Money Trust
Active Assets Tax-Free Trust
Active Assets California Tax-Free Trust
Active Assets Government Securities Trust
<PAGE>
Dean Witter
Tax-Free Daily Income Trust
Two World Trade Center
New York, New York 10048
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and
General Counsel
Katherine H. Stromberg
Vice President
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Dean Witter Trust Company
Harborside Financial Center,
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
DEAN WITTER
TAX-FREE DAILY
INCOME TRUST
PROSPECTUS--FEBRUARY 24, 1997
<PAGE>
Dean Witter
Tax-Free
Daily
Income Trust
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 24, 1997
- -----------------------------------------------------------------------------
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 1% of the average daily net assets of the Fund.
A Prospectus for the Fund dated February 24, 1997, 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
telephone 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-NEWS (toll-free) or
(212) 392-2550
<PAGE>
TABLE OF CONTENTS
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
The Fund and its Management ......... 3
Trustees and Officers ............... 6
Investment Practices and Policies .. 12
Investment Restrictions ............. 15
Portfolio Transactions and Brokerage 17
Purchase of Fund Shares ............. 18
How Net Asset Value is Determined .. 24
Redemption of Fund Shares ........... 27
Dividends, Distributions and Taxes . 28
Description of Shares ............... 30
Custodian and Transfer Agent ....... 30
Reports to Shareholders ............. 31
Independent Accountants ............. 31
Legal Counsel ....................... 31
Experts ............................. 31
Registration Statement .............. 31
Financial Statements ................ 31
Appendix ............................ 32
</TABLE>
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.
As of December 31, 1996 no shareholder was known to own beneficially or of
record as much as 5% of the outstanding shares of the Fund. The percentage of
ownership of shares of the Fund changes from time to time depending on
purchases and redemptions by shareholders and the total number of shares
outstanding.
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 by the Fund's Board of
Trustees. Information as to these Trustees and Officers is contained under
the caption "Trustees and Officers."
InterCapital is also the investment manager or investment adviser of the
following investment companies: Dean Witter Liquid Asset Fund Inc.,
InterCapital Income Securities Inc., Dean Witter High Yield Securities Inc.,
Dean Witter Tax-Exempt Securities Trust, Dean Witter Developing Growth
Securities Trust, Dean Witter American Value Fund, Dean Witter Dividend
Growth Securities Inc., Dean Witter Natural Resource Development Securities
Inc., Dean Witter U.S. Government Money Market Trust, Dean Witter California
Tax-Free Income Fund, Dean Witter Variable Investment Series, Dean Witter
Select Dimensions Investment Series, Dean Witter World Wide Investment Trust,
Dean Witter Select Municipal Reinvestment Fund, Dean Witter U.S. Government
Securities Trust, Dean Witter New York Tax-Free Income Fund, Dean Witter
Convertible Securities Trust, Dean Witter Federal Securities Trust, Dean
Witter Value-Added Market Series, High Income Advantage Trust, High Income
Advantage Trust II, High Income Advantage Trust III, Dean Witter Government
Income Trust, Dean Witter California Tax-Free Daily Income Trust, Dean Witter
Utilities Fund, Dean Witter Strategist Fund, Dean Witter World Wide Income
Trust, Dean Witter Intermediate Income Securities, Dean Witter Capital Growth
Securities, Dean Witter European Growth Fund Inc., Dean Witter Pacific Growth
Fund Inc., Dean Witter Precious Metals and Minerals Trust, Dean Witter Global
Short-Term Income Fund Inc., Dean Witter Multi-State
3
<PAGE>
Municipal Series Trust, Dean Witter New York Municipal Money Market Trust,
InterCapital Quality Municipal Investment Trust, Dean Witter Premier Income
Trust, Dean Witter Short-Term U.S. Treasury Trust, InterCapital Insured
Municipal Bond Trust, InterCapital Insured Municipal Trust, InterCapital
Quality Municipal Income Trust, Dean Witter Diversified Income Trust, Dean
Witter Health Sciences Trust, Dean Witter Retirement Series, InterCapital
Quality Municipal Securities, InterCapital California Quality Municipal
Securities, InterCapital New York Quality Municipal Securities, Dean Witter
Global Dividend Growth Securities, Dean Witter Limited Term Municipal Trust,
Dean Witter Short-Term Bond Fund, Dean Witter Global Utilities Fund, Dean
Witter National Municipal Trust, Dean Witter High Income Securities, Dean
Witter International SmallCap Fund, Dean Witter Mid-Cap Growth Fund, Dean
Witter Global Asset Allocation Fund, Dean Witter Select Dimensions Investment
Series, Dean Witter Balanced Growth Fund, Dean Witter Balanced Income Fund,
Dean Witter Hawaii Municipal Trust, Dean Witter Capital Appreciation Fund,
Dean Witter Information Fund, Dean Witter Intermediate Term U.S. Treasury
Trust, Dean Witter Japan Fund, Dean Witter Income Builder Fund, Dean Witter
Special Value Fund, Dean Witter Financial Services Trust, InterCapital
Insured Municipal Securities, InterCapital Insured California Municipal
Securities, InterCapital Insured Municipal Income Trust, InterCapital
California Insured Municipal Income Trust, Active Assets Money Trust, Active
Assets California Tax-Free Trust, Active Assets Tax-Free Trust, Active Assets
Government Securities Trust, Municipal Income Trust, Municipal Income Trust
II, Municipal Income Trust III, Municipal Income Opportunities Trust,
Municipal Income Opportunities Trust II, Municipal Income Opportunities Trust
III, Municipal Premium Income Trust and Prime Income Trust. The foregoing
investment companies, together with the Fund, are collectively referred to as
the Dean Witter Funds.
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,
TCW/DW Term Trust 2003, TCW/DW Emerging Markets Opportunities Trust, TCW/DW
Mid-Cap Equity Trust, TCW/DW Global Telecom Trust, TCW/DW Strategic Income
Trust, and TCW/DW Total Return Trust (the "TCW/DW Funds"). InterCapital also
serves as: (i) sub-adviser to Templeton Global Opportunities Trust, an
open-end investment company; (ii) administrator of The BlackRock Strategic
Term Trust Inc., a closed-end investment company; and (iii) sub-administrator
of MassMutual Participation Investors and Templeton Global Governments Income
Trust, closed-end investment companies.
Pursuant to an Investment Management Agreement (the "Agreement") with the
Investment Manager, the Fund has retained the Investment Manager to manage
the investment of the Fund's assets, including the placing of orders for the
purchase and sale of portfolio securities. The Investment Manager obtains and
evaluates such information and advice relating to the economy, securities
markets, and specific securities as it considers necessary or useful to
continuously manage the assets of the Fund in a manner consistent with its
investment objective and policies.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its 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 and the cost of printing (in excess of
costs borne by the Fund) and distributing prospectuses and supplements
thereto of the Fund used for sales purposes.
Effective December 31, 1993, pursuant to a Services Agreement between
InterCapital and DWSC, DWSC began to provide the administrative services to
the Fund which were previously performed directly by InterCapital. On April
17, 1995, DWSC was reorganized in the State of Delaware,
4
<PAGE>
necessitating the entry into a new Services Agreement by InterCapital and
DWSC on that date. The foregoing internal reorganizations did not result in
any change in the nature or scope of the administrative services being
provided to the Fund or any of the fees being paid by the Fund for the
overall services being performed under the terms of the existing Management
Agreement.
Expenses not expressly assumed by the Investment Manager under the
Agreement or by the Distributor of the Fund's shares, Dean Witter
Distributors Inc. ("Distributors" or the "Distributor"), (see "Purchase of
Fund Shares") 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 the Fund and supplements thereto to the Fund's
shareholders; all expenses of shareholders' and Trustees meetings and of
preparing, 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, distribution, 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, 1994, December
31, 1995 and December 31, 1996, the Fund accrued to the Investment Manager
total compensation of $2,964,072, $2,793,438 and $2,738,887, respectively.
The Agreement provides that in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations thereunder,
the Investment Manager is not liable to the Fund or any of its investors for
any act or omission by the Investment Manager or for any losses sustained by
the Fund or its investors. The Agreement in no way restricts the Investment
Manager from acting as investment manager or adviser to others.
The Agreement was initially approved by the Trustees on October 22, 1992,
and by the shareholders of the Fund at a Special Meeting of Shareholders held
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 took effect on June 30, 1993, upon the spin-off by
Sears, Roebuck and Co. of its remaining shares of DWDC.
5
<PAGE>
Under its terms, the Agreement had an initial term ending April 30, 1994,
and provides that it will continue in effect from year to year thereafter,
provided continuance of the Agreement is approved at least annually by the
vote of the holders of a majority (as defined in the Act) of the outstanding
shares of the Fund, or by the Board of Trustees of the Fund; provided that in
either event such continuance is approved annually by the vote of a majority
of the Trustees of the Fund who are not parties to the Agreement or
"interested persons" (as defined in the Act) of any such party (the
"Independent Trustees"), which vote must be cast in person at a meeting
called for the purpose of voting on such approval. At its meeting held on
April 17, 1996, the Fund's Board of Trustees, including all of the
Independent Trustees, approved the most recent continuation of the Agreement
until April 30, 1997.
The Fund has acknowledged that the name "Dean Witter" is a property right
of DWR. The Fund has agreed that DWR or its parent company may use, or at any
time, permit others to use, the name "Dean Witter." The Fund has also agreed
that in the event the Agreement 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 83 Dean Witter Funds and the 14 TCW/DW Funds, are
shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------------- --------------------------------------------------------
<S> <C>
Michael Bozic (56) Chairman and Chief Executive Officer of Levitz Furniture
Trustee Corporation (since November, 1995); Director or Trustee of
c/o Levitz Furniture Corporation the Dean Witter Funds; formerly President and Chief Executive
6111 Broken Sound Parkway, N.W. Officer of Hills Department Stores (May, 1991-July, 1995);
Boca Raton, Florida formerly variously Chairman, Chief Executive Officer,
President and Chief Operating Officer (1987-1991) of the Sears
Merchandise Group of Sears, Roebuck and Co.; Director of
Eaglemark Financial Services, Inc., the United Negro College
Fund and Weirton Steel Corporation.
Charles A. Fiumefreddo* (63) Chairman, Chief Executive Officer and Director of InterCapital,
Trustee, Chairman, President and Chief Distributors and DWSC; Executive Vice President and Director
Executive Officer of DWR; Chairman, Director or Trustee, President and Chief
Two World Trade Center Executive Officer of the Dean Witter Funds; Chairman, Chief
New York, New York Executive Officer and Trustee of the TCW/DW Funds; Chairman
and Director of Dean Witter Trust Company ("DWTC"); Director
and/or officer of various DWDC subsidiaries; formerly Executive
Vice President and Director of DWDC (until February, 1993).
6
<PAGE>
Edwin J. Garn (64) Director or Trustee of the Dean Witter Funds; formerly United
Trustee States Senator (R-Utah) (1974-1992) and Chairman, Senate
c/o Huntsman Chemical Corporation Banking Committee (1980-1986); formerly Mayor of Salt Lake
500 Huntsman Way City, Utah (1971-1974); formerly Astronaut, Space Shuttle
Salt Lake City, Utah Discovery (April 12-19, 1985); Vice Chairman, Huntsman Chemical
Corporation (since January, 1993); Director of Franklin Quest
(time management systems) and John Alden Financial Corp.;
Member of the board of various civic and charitable
organizations.
John R. Haire (72) Chairman of the Audit Committee and Chairman of the Committee
Trustee of Independent Directors or Trus-tees and Director or Trustee
Two World Trade Center of the Dean Witter Funds; Chairman of the Audit Committee
New York, New York and Chairman of the Committee of the Independent Trustees
and Trustee of the TCW/DW Funds; formerly President, Council
for Aid to Education (1978-1989) and Chairman and Chief Executive
Officer of Anchor Corporation, an Investment Adviser
(1964-1978); Director of Washington National Corporation
(insurance).
Dr. Manuel H. Johnson (48) Senior Partner, Johnson Smick International, Inc., a consulting
Trustee firm; Koch Professor of International Economics and Director
c/o Johnson Smick International, Inc. of the Center for Global Market Studies at George Mason
1133 Connecticut Avenue, N.W. University (since September, 1990); Co-Chairman and a founder
Washington, D.C. of the Group of Seven Council (G7C), an international economic
commission (since September, 1990); Director or Trustee of
the Dean Witter Funds; Trustee of the TCW/DW Funds; Director
of NASDAQ (since June, 1995); Director of Greenwich Capital
Markets Inc. (broker-dealer); formerly Vice Chairman of the
Board of Governors of the Federal Reserve System (February,
1986-August, 1990) and Assistant Secretary of the U.S. Treasury
(1982-1986).
Michael E. Nugent (60) General Partner, Triumph Capital, L.P., a private investment
Trustee partnership (since 1988); Director or Trustee of the Dean
c/o Triumph Capital, L.P. Witter Funds; Trustee of the TCW/DW Funds; formerly Vice
237 Park Avenue President, Bankers Trust Company and BT Capital Corporation
New York, New York (1984-1988); Director of various business organizations.
Philip J. Purcell* (53) Chairman of the Board of Directors and Chief Executive Officer
Trustee of DWDC, DWR and Novus Credit Services Inc.; Director of
Two World Trade Center InterCapital, DWSC and Distributors; Director or Trustee of
New York, New York the Dean Witter Funds; Director and/or officer of various
DWDC subsidiaries.
7
<PAGE>
John L. Schroeder (66) Retired; Director or Trustee of the Dean Witter Funds; Trustee
Trustee of the TCW/DW Funds; Director of Citizens Utilities Company;
c/o Gordon Altman Butowsky Weitzen formerly Executive Vice President and Chief Investment Officer
Shalov & Wein of the Home Insurance Company (August, 1991-September, 1995)
Counsel to the Independent Trustees and formerly Chairman and Chief Investment Officer of
114 West 47th Street Axe-Houghton Management and the Axe-Houghton Funds
New York, New York (1983-1991).
Barry Fink (42) First Vice President (since June, 1993) and Secretary and
Vice President, Secretary and General Counsel General Counsel (since February, 1997) of InterCapital and
Two World Trade Center DWSC; First Vice President, Assistant Secretary and Assistant
New York, New York General Counsel of Dean Witter Distributors Inc. (since
February, 1997); Assistant Secretary of DWR (since August,
1996); Vice President, Secretary and General Counsel of the
Dean Witter Funds and the TCW/DW Funds (since February, 1997);
previously Vice President, Assistant Secretary and Assistant
General Counsel of InterCapital and DWSC and Assistant Secretary
of the Dean Witter Funds and the TCW/DW Funds.
Katherine H. Stromberg (48) Vice President of InterCapital; Vice President of various
Vice President Dean Witter Funds.
Two World Trade Center
New York, New York
Thomas F. Caloia (50) First Vice President and Assistant Treasurer (since January,
Treasurer 1993) of InterCapital and DWSC and Treasurer of the Dean Witter
Two World Trade Center Funds and the TCW/DW Funds.
New York, New York
</TABLE>
- ------------
* "Interested persons", as defined in the Act.
In addition, Robert M. Scanlan, President and Chief Operating Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWTC and
Director of DWTC, and Robert S. Giambrone, Senior Vice President of
InterCapital, DWSC, Distributors and DWTC and Director of DWTC and Joseph J.
McAlinden, Executive Vice President and Chief Investment Officer of
InterCapital and Director of DWTC and Peter M. Avelar, Jonathan R. Page and
James F. Willison, Senior Vice Presidents of InterCapital, and Joseph R.
Arcieri and Gerard J. Lian, Vice Presidents of InterCapital are Vice
Presidents of the Fund. In addition, Marilyn K. Cranney, First Vice President
and Assistant General Counsel of InterCapital, and Lou Anne D. McInnis and
Ruth Rossi, Vice Presidents and Assistant General Counsels of InterCapital
and DWSC, and Frank Bruttomesso and Carsten Otto, Staff Attorneys with
InterCapital, are Assistant Secretaries of the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees consists of eight (8) trustees. These same
individuals also serve as directors or trustees for all of the Dean Witter
Funds, and are referred to in this section as Trustees. As of the date of
this Statement of Additional Information, there are a total of 83 Dean Witter
Funds, comprised of 126 portfolios. As of January 31, 1997, the Dean Witter
Funds had total net assets of approximately $83.6 billion and more than five
million shareholders.
Six Trustees (75% of the total number) have no affiliation or business
connection with InterCapital or any of its affiliated persons and do not own
any stock or other securities issued by InterCapital's parent
8
<PAGE>
company, DWDC. These are the "disinterested" or "independent" Trustees. The
other two Trustees (the "management Trustees") are affiliated with InterCapital.
Four of the six independent Trustees are also Independent Trustees of the
TCW/DW Funds.
Law and regulation establish both general guidelines and specific duties
for the Independent Trustees. The Dean Witter Funds seek as Independent
Trustees individuals of distinction and experience in business and finance,
government service or academia; these are people whose advice and counsel are
in demand by others and for whom there is often competition. To accept a
position on the Funds' Boards, such individuals may reject other attractive
assignments because the Funds make substantial demands on their time. Indeed,
by serving on the Funds' Boards, certain Trustees who would otherwise be
qualified and in demand to serve on bank boards would be prohibited by law
from doing so.
All of the Independent Trustees serve as members of the Audit Committee
and the Committee of the Independent Trustees. Three of them also serve as
members of the Derivatives Committee. During the calendar year ended December
31, 1996, the three Committees held a combined total of sixteen meetings. The
Committees hold some meetings at InterCapital's offices and some outside
InterCapital. Management Trustees or officers do not attend these meetings
unless they are invited for purposes of furnishing information or making a
report.
The Committee of the Independent Trustees is charged with recommending to
the full Board approval of management, advisory and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing Fund performance; checking on the pricing of portfolio securities,
brokerage commissions, transfer agent costs and performance, and trading
among Funds in the same complex; and approving fidelity bond and related
insurance coverage and allocations, as well as other matters that arise from
time to time. The Independent Trustees are required to select and nominate
individuals to fill any Independent Trustee vacancy on the Board of any Fund
that has a Rule 12b-1 plan of distribution. Most of the Dean Witter Funds
have such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing
engagement; approving professional services provided by the independent
accountants and other accounting firms prior to the performance of such
services; reviewing the independence of the independent accountants;
considering the range of audit and non-audit fees; reviewing the adequacy of
the Fund's system of internal controls; and preparing and submitting
Committee meeting minutes to the full Board.
Finally, the Board of each Fund has formed a Derivatives Committee to
establish parameters for and oversee the activities of the Fund with respect
to derivative investments, if any, made by the Fund.
DUTIES OF CHAIRMAN OF COMMITTEE OF THE INDEPENDENT TRUSTEES AND AUDIT
COMMITTEE
The Chairman of the Committee of the Independent Trustees and the Audit
Committee maintains an office at the Funds' headquarters in New York. He is
responsible for keeping abreast of regulatory and industry developments and
the Funds' operations and management. He screens and/or prepares written
materials and identifies critical issues for the Independent Trustees to
consider, develops agendas for Committee meetings, determines the type and
amount of information that the Committees will need to form a judgment on
various issues, and arranges to have that information furnished to Committee
members. He also arranges for the services of independent experts and
consults with them in advance of meetings to help refine reports and to focus
on critical issues. Members of the Committees believe that the person who
serves as Chairman of both Committees and guides their efforts is pivotal to
the effective functioning of the Committees.
The Chairman of the Committees also maintains continuous contact with the
Funds' management, with independent counsel to the Independent Trustees and
with the Funds' independent auditors. He arranges for a series of special
meetings involving the annual review of investment advisory,
9
<PAGE>
management and other operating contracts of the Funds and, on behalf of the
Committees, conducts negotiations with the Investment Manager and other
service providers. In effect, the Chairman of the Committees serves as a
combination of chief executive and support staff of the Independent Trustees.
The Chairman of the Committee of the Independent Trustees and the Audit
Committee is not employed by any other organization and devotes his time
primarily to the services he performs as Committee Chairman and Independent
Trustee of the Dean Witter Funds and as an Independent Trustee and, since
July 1, 1996, as Chairman of the Committee of the Independent Trustees and the
Audit Committee of the TCW/DW Funds. The current Committee Chairman has had
more than 35 years experience as a senior executive in the investment company
industry.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL DEAN
WITTER FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the Dean Witter Funds avoids the
duplication of effort that would arise from having different groups of
individuals serving as Independent Trustees for each of the Funds or even of
sub-groups of Funds. They believe that having the same individuals serve as
Independent Trustees of all the Funds tends to increase their knowledge and
expertise regarding matters which affect the Fund complex generally and
enhances their ability to negotiate on behalf of each Fund with the Fund's
service providers. This arrangement also precludes the possibility of
separate groups of Independent Trustees arriving at conflicting decisions
regarding operations and management of the Funds and avoids the cost and
confusion that would likely ensue. Finally, having the same Independent
Trustees serve on all Fund Boards enhances the ability of each Fund to
obtain, at modest cost to each separate Fund, the services of Independent
Trustees, and a Chairman of their Committees, of the caliber, experience and
business acumen of the individuals who serve as Independent Trustees of the
Dean Witter Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Fund pays each Independent Trustee an annual fee of $1,000 plus a per
meeting fee of $50 for meetings of the Board of Trustees or committees of the
Board of Trustees attended by the Trustee (the Fund pays the Chairman of the
Audit Committee an annual fee of $750 and pays the Chairman of the Committee
of the Independent Trustees an additional annual fee of $1,200). The Fund
also reimburses such Trustees for travel and other out-of-pocket expenses
incurred by them in connection with attending such meetings. Trustees and
officers of the Fund who are or have been employed by the Investment Manager
or an affiliated company receive no compensation or expense reimbursement
from the Fund.
The following table illustrates the compensation paid to the Fund's
Independent Trustees by the Fund for the fiscal year ended December 31, 1996.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
NAME OF INDEPENDENT COMPENSATION
TRUSTEE FROM THE FUND
- -------------------------- ---------------
<S> <C>
Michael Bozic ............. $1,800
Edwin J. Garn ............. 1,800
John R. Haire ............. 3,900
Dr. Manuel H. Johnson .... 1,750
Michael E. Nugent ......... 1,800
John L. Schroeder ......... 1,750
</TABLE>
10
<PAGE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1996 for
services to the 82 Dean Witter Funds and, in the case of Messrs. Haire,
Johnson, Nugent and Schroeder, the 14 TCW/DW Funds that were in operation at
December 31, 1996. With respect to Messrs. Haire, Johnson, Nugent and
Schroeder, the TCW/DW Funds are included solely because of a limited exchange
privilege between those Funds and five Dean Witter Money Market Funds.
COMPENSATION FROM DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
FOR SERVICE AS
CHAIRMAN OF
COMMITTEES OF FOR SERVICE AS
INDEPENDENT CHAIRMAN OF TOTAL
FOR SERVICE DIRECTORS/ COMMITTEES OF COMPENSATION
AS DIRECTOR OR FOR SERVICE AS TRUSTEES AND INDEPENDENT PAID
TRUSTEE AND TRUSTEE AND AUDIT TRUSTEES FOR SERVICES TO
COMMITTEE MEMBER COMMITTEE MEMBER COMMITTEES OF 82 AND AUDIT 82 DEAN WITTER
NAME OF OF 82 DEAN WITTER OF 14 TCW/DW DEAN WITTER COMMITTEES OF 14 FUNDS AND 14
INDEPENDENT TRUSTEE FUNDS FUNDS FUNDS TCW/DW FUNDS TCW/DW FUNDS
- ---------------------- ----------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Michael Bozic ......... $138,850 -- -- -- $138,850
Edwin J. Garn ......... 140,900 -- -- -- 140,900
John R. Haire ......... 106,400 $64,283 $195,450 $12,187 378,320
Dr. Manuel H. Johnson 137,100 66,483 -- -- 203,583
Michael E. Nugent .... 138,850 64,283 -- -- 203,133
John L. Schroeder .... 137,150 69,083 -- -- 206,233
</TABLE>
As of the date of this Statement of Additional Information, 57 of the Dean
Witter Funds, including the Fund, have adopted a retirement program under
which an Independent Trustee who retires after serving for at least five
years (or such lesser period as may be determined by the Board) as an
Independent Director or Trustee of any Dean Witter Fund that has adopted the
retirement program (each such Fund referred to as an "Adopting Fund" and each
such Trustee referred to as an "Eligible Trustee") is entitled to retirement
payments upon reaching the eligible retirement age (normally, after attaining
age 72). Annual payments are based upon length of service. Currently, upon
retirement, each Eligible Trustee is entitled to receive from the Adopting
Fund, commencing as of his or her retirement date and continuing for the
remainder of his or her life, an annual retirement benefit (the "Regular
Benefit") equal to 25.0% of his or her Eligible Compensation plus 0.4166666%
of such Eligible Compensation for each full month of service as an
Independent Director or Trustee of any Adopting Fund in excess of five years
up to a maximum of 50.0% after ten years of service. The foregoing
percentages may be changed by the Board.(1) "Eligible Compensation" is
one-fifth of the total compensation earned by such Eligible Trustee for
service to the Adopting Fund in the five year period prior to the date of the
Eligible Trustee's retirement. Benefits under the retirement program are not
secured or funded by the Adopting Funds.
(1) An Eligible Trustee may elect alternate payments of his or her
retirement benefits based upon the combined life expectancy of such
Eligible Trustee and his or her spouse on the date of such Eligible
Trustee's retirement. The amount estimated to be payable under this
method, through the remainder of the later of the lives of such
Eligible Trustee and spouse, will be the actuarial equivalent of the
Regular Benefit. In addition, the Eligible Trustee may elect that the
surviving spouse's periodic payment of benefits will be equal to either
50% or 100% of the previous periodic amount, an election that,
respectively, increases or decreases the previous periodic amount so
that the resulting payments will be the actuarial equivalent of the
Regular Benefit.
11
<PAGE>
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the Fund for the fiscal year ended December
31, 1996 and by the 57 Dean Witter Funds (including the Fund) for the year
ended December 31, 1996, and the estimated retirement benefits for the Fund's
Independent Trustees, to commence upon their retirement, from the Fund as of
December 31, 1996 and from the 57 Dean Witter Funds as of December 31, 1996.
RETIREMENT BENEFITS FROM THE FUND AND ALL DEAN WITTER FUNDS
<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS
-------------------------------- ESTIMATED ANNUAL
ESTIMATED RETIREMENT BENEFITS BENEFITS
CREDITED ACCRUED AS EXPENSES UPON RETIREMENT(2)
YEARS ESTIMATED -------------------- -------------------
OF SERVICE AT PERCENTAGE OF BY ALL FROM FROM ALL
NAME OF INDEPENDENT RETIREMENT ELIGIBLE BY THE ADOPTING THE ADOPTING
TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS
- -------------------------- --------------- --------------- -------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic ............. 10 50.0% $ 338 $20,147 $ 850 $ 51,325
Edwin J. Garn ............. 10 50.0 473 27,772 850 51,325
John R. Haire ............. 10 50.0 (365)(3) 46,952 2,296 129,550
Dr. Manuel H. Johnson .... 10 50.0 202 10,926 850 51,325
Michael E. Nugent ......... 10 50.0 338 19,217 850 51,325
John L. Schroeder ......... 8 41.7 645 38,700 708 42,771
</TABLE>
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1)
above.
(3) This number reflects the effect of the extension of Mr. Haire's term as
Trustee until June 1, 1998.
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's
officers and Trustees as a group was less than 1 percent of the Fund's shares
of beneficial interest outstanding.
INVESTMENT PRACTICES AND POLICIES
- -----------------------------------------------------------------------------
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
12
<PAGE>
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 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 possibility 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 "Purchase of Fund
Shares--Determination of Net Asset Value" in the Prospectus) 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
13
<PAGE>
before the settlement date, if it is deemed advisable. The securities so
purchased or sold are subject to market fluctuation and no interest accrues
to the purchaser during this period. At the time the Fund makes the
commitment to purchase a Municipal Obligation on a when-issued or delayed
delivery basis, it will record the transaction and thereafter reflect the
value, each day, of the Municipal Obligation in determining its net asset
value. The Fund will also establish a segregated account with its custodian
bank in which it will maintain cash, cash equivalents or other liquid
portfolio securities equal in value to commitments for such when-issued or
delayed delivery securities. The Fund does not believe that its net asset
value or income will be adversely affected by its purchase of Municipal
Obligations on a when-issued or delayed delivery basis. During the fiscal
year ended December 31, 1996, the Fund's investments in when-issued and
delayed delivery securities did not exceed 5% of the Fund's net assets.
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 resale price which
consists of the purchase price paid to the seller of the securities plus the
accrued resale premium which is defined as the amount specified in the
repurchase agreement or the daily amortization of the difference between the
purchase price and the resale price specified in the repurchase agreement.
Such collateral will consist entirely of securities that are direct
obligations of, or that are fully guaranteed as to principal and interest by,
the United States or any agency thereof, and/or certificates of deposit,
bankers' acceptances which are eligible for acceptance by a Federal Reserve
Bank, and, if the seller is a bank, mortgage related securities (as such term
is defined in section 3(a)(41) of the Securities Exchange Act of 1934) that,
at the time the repurchase agreement is entered into, are rated in the
highest rating category by the Requisite NRSROs. Additionally, the collateral
must qualify the repurchase agreement for preferential treatment under the
Federal Deposit Insurance Act or the Federal Bankruptcy Code. 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,
1996, the Fund did not enter into any repurchase agreements.
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
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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 unrealized 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, 1996, the Fund did not
purchase any put options.
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
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In addition to the investment restrictions enumerated in the Prospectus,
the investment restrictions listed below have been adopted by the Fund as
fundamental policies, 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
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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 outstanding securities
of such issuer, and such officers, trustees and directors who own more
than 1/2 of 1% own in the aggregate more than 5% of the outstanding
securities of such issuer.
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.
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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. During the fiscal years ended December 31, 1994, 1995 and
1996, the Fund paid no brokerage commissions.
The Investment Manager currently serves as investment manager to a number
of clients, including other investment companies, and may in the future act
as investment manager or adviser to others. It is the practice of the
Investment Manager to cause purchase and sale transactions to be allocated
among the Fund and others whose assets it manages in such manner as it deems
equitable. In making such allocations among the Fund and other client
accounts, various factors may be considered including the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the Fund and other client
accounts. In the case of certain initial and secondary public offerings, the
Investment Manager may utilize a pro-rata allocation process based on the
size of the Dean Witter Funds involved and the number of shares available
from the public offering.
The policy of the Fund, regarding purchases and 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 is not ascertainable.
In seeking to implement the Fund's policies, the Investment Manager
effects transactions with those brokers and dealers who the Investment
Manager believes provide the most favorable prices and 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.
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<PAGE>
Pursuant to an order of the Securities and Exchange Commission, the Fund
may effect principal transactions in certain money market instruments with
DWR. The Fund will limit its transactions with DWR to U.S. Government and
Government Agency Securities, Bank Money Instruments (i.e. Certificates of
Deposit and Bankers' Acceptances) and Commercial Paper (not including
Tax-Exempt Municipal Paper). Such transactions will be effected with DWR only
when the price available from DWR is better than that available from other
dealers. During the fiscal years ended December 31, 1994, 1995 and 1996, the
Fund did not effect any principal 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, 1994, December 31, 1995 and December 31,
1996, the Fund paid no brokerage commissions to DWR.
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 broker-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. All checks submitted for payment are accepted subject
to collection at full face value in United States funds and must be drawn in
United States dollars in a United States bank.
The Board of Trustees 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
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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 had 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. At its meeting held on April 17, 1996, the Fund's
Board of Trustees, including all of the Independent Trustees, approved the
most recent continuation of the Distribution Agreement until April 30, 1997.
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 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 thirty 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 (these five funds are
hereinafter called "money market funds") or Dean Witter Short-Term U.S.
Treasury Trust, Dean Witter Limited Term Municipal Trust, Dean Witter
Short-Term Bond Fund, Dean Witter Balanced Income Fund, Dean Witter Balanced
Growth Fund and Dean Witter Intermediate Term U.S. Treasury Trust (these
eleven funds, including the Fund, are hereinafter referred to as the
"Exchange Funds"). There is no waiting period for exchanges of 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
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CDSC funds, including shares acquired in exchange of (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 Exchange 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 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 Exchange Fund shares were acquired), the holding period or
"year since purchase payment made" is frozen. When shares are redeemed out of
the Exchange Fund, they will be subject to a CDSC which would be based upon
the period of time the shareholder 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 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 the 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.
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
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<PAGE>
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.
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, Distributor, 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.
The Distributor and any Selected Broker-Dealer have authorized and
appointed the Transfer Agent to act as their agent in connection with the
application of proceeds of any redemption of Fund shares to the purchase of
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 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
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initial investments of as low as $1,000. The minimum initial investment is
$5,000 for Dean Witter Special Value Fund. The minimum initial investment for
all other Dean Witter Funds for which the Exchange Privilege is available is
$1,000.) Upon exchange into an Exchange Fund, the shares of that fund will be
held in a special Exchange Privilege Account separately from accounts of
those shareholders who have acquired their shares directly from that fund. As
a result, certain services normally available to shareholders of 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 Exchange Funds, TCW/DW North American Government Income
Trust, TCW/DW Income and Growth Fund and TCW/DW Balanced 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.
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 Trustees"), 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
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
22
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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
calendar quarter by the Trustees, 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 0.15 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 accrued $537,867 to the Distributor, pursuant to the Plan of
Distribution, for its fiscal year ended December 31, 1996. The amount accrued
is equivalent to an annual rate of 0.10 of 1% of the Fund's average daily net
assets for its fiscal year ended December 31, 1996. Based upon the total
amounts spent by the Distributor during the period, it is estimated that the
amount paid by the Fund to the Distributor for distribution was spent in
approximately the following ways: (i) advertising--$-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--$537,867. 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.
The Plan will continue in effect from year to year, 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. So long
as the Plan is in effect, the selection or nomination of the Independent
12b-1 Trustees is committed to the discretion of the 12b-1 Trustees.
Under the Plan, the Distributor provides the Fund, for review by the
Trustees, 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
23
<PAGE>
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 17, 1996, the Board of Trustees approved
the continuance of the Plan until April 30, 1997. In making their
determination to continue the Plan until April 30, 1997, 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 Trustees,
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, DWSC 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
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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 similar 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
24
<PAGE>
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 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 generally is defined in the Rule to mean (i) A
security with a remaining maturity of 397 calendar days or less that has
received a short-term rating (or that has been issued by an issuer that has
received a short-term rating with respect to a class of debt obligations, or
any debt obligation within that class, that is comparable in priority and
security with the security) by the Requisite NRSROs in one of the two highest
short-term rating categories (within which there may be sub-categories or
gradations indicating relative standing); or (ii) A security: (A) That at the
time of issuance had a remaining maturity of more than 397 calendar days but
that has a remaining maturity of 397 calendar days or less; and (B) Whose
issuer has received from the Requisite NRSROs a rating with respect to a
class of debt obligations (or any debt obligation within that class) that is
now comparable in priority and security with the security, in one of the two
highest short-term rating categories (within which there may be
sub-categories or gradations indicating relative standing); or (iii) An
Unrated Security that is of comparable quality to a security meeting the
requirements of (i) or (ii) above, as determined by the money market fund's
board of directors.
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<PAGE>
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 that are "conduit
securities" as that term is defined in the Rule: (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.
The Rule further requires that the Fund limit its investments to U.S.
dollar-denominated instruments which the Directors determine present minimal
credit risks and which are Eligible Securities. The Rule also requires the
Fund to maintain a dollar-weighted average portfolio maturity (not more than
90 days) appropriate to its 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 397 days. Should the disposition of a
portfolio security result in a dollar-weighted average portfolio maturity of
more than 90 days, the Fund will invest its available cash in such a manner
as to reduce such maturity to 90 days or less as soon as is reasonably
practicable.
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.
26
<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 sixty 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 Withdrawal Plan. 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"
27
<PAGE>
in the Prospectus) at any time. If the number of shares redeemed is greater
than the number of shares 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 and
distribute 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.
At December 31, 1996, the Fund had a net capital loss carryover of
approximately $2,500 which will be available through December 31, 2002, to
offset future capital gains to the extent provided by regulations. During the
fiscal year ended December 31, 1996, the Fund utilized capital loss
carryovers of approximately $12,500.
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 additional 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.
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, 1996 was
3.29%. The effective annual yield on December 31, 1996 was 3.34%, 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
29
<PAGE>
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
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 39.6% (the highest
current individual marginal tax rate), the Fund's tax-equivalent yield for
the seven days ending December 31, 1996 was 5.45%.
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 $19,856,
$99,280 and $198,560, respectively, at December 31, 1996.
DESCRIPTION OF SHARES
- -----------------------------------------------------------------------------
The shareholders of the Fund are entitled to a full vote for each full
share of beneficial interest held. The Fund is authorized to issue an
unlimited number of shares of beneficial interest. The shareholders of the
Fund are entitled to a full vote for each full share held. All of the
Trustees, except for Messrs. Bozic, Purcell and Schroeder, have been elected
by the shareholders of the Fund, most recently at a Special Meeting of
Shareholders held on January 12, 1993. Messrs. Bozic, Purcell and Schroeder
were elected by the other Trustees of the Fund on April 8, 1994.
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, officer, employee or agent is
entitled to be indemnified against all liability in connection with the
affairs of the Fund.
The Fund shall be of unlimited duration subject to the provisions in the
Declaration of Trust concerning termination by action of the shareholders or
the Trustees.
CUSTODIAN AND TRANSFER AGENT
- -----------------------------------------------------------------------------
The Bank of New York, 90 Washington Street, New York, New York 10286 is
the Custodian of the Fund's assets. 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
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<PAGE>
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 LLP serves as the independent accountants of the Fund.
The independent accountants are responsible for auditing the annual financial
statements of the Fund.
LEGAL COUNSEL
- -----------------------------------------------------------------------------
Barry Fink, Esq., who is an officer and the General Counsel of the
Investment Manager, is an officer and the General Counsel of the Fund.
EXPERTS
- -----------------------------------------------------------------------------
The 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 LLP, independent accountants, given on the authority of said firm
as experts in auditing and accounting.
REGISTRATION STATEMENT
- -----------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
The audited financial statements of the Fund for the fiscal year ended
December 31, 1996, and the report of the independent accountants thereon, are
set forth in the Fund's Prospectus, and are incorporated herein by reference.
31
<PAGE>
APPENDIX
RATING OF INVESTMENTS
- -----------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")
MUNICIPAL BOND RATINGS
<TABLE>
<CAPTION>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are Aa are judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may
be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper
medium grade obligations. Factors giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations; i.e., they are neither highly protected
nor poorly secured. Interest payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as
well.
Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as
well assured. Often the protection of interest and principal payments may be very moderate, and therefore
not well safeguarded during both good and bad times in the future. Uncertainty of position characterizes
bonds in this class.
B Bonds which are rated B generally lack characteristics of 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.
</TABLE>
Conditional Rating: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These bonds 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.
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<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.
<TABLE>
<CAPTION>
<S> <C>
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the highest-rated
issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal although they are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories.
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<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 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.
</TABLE>
MUNICIPAL NOTE RATINGS
Commencing on July 27, 1984, Standard & Poor's instituted a new rating
category with respect to certain municipal note issues with a maturity of
less than three years. The new note ratings denote the following:
SP-1 denotes a very strong or strong capacity to pay principal and
interest. Issues determined to possess overwhelming safety characteristics
are given a plus (+) designation (SP-1 +).
SP-2 denotes a satisfactory capacity to pay principal and interest.
SP-3 denotes a speculative capacity to pay principal and interest.
34
<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.
35
