<PAGE>
PROSPECTUS
FEBRUARY 28, 1994
Dean Witter California Tax-Free Income Fund (the "Fund") is an
open-end diversified management investment company whose investment objective is
to provide a high level of current income exempt from both federal and
California income tax, consistent with the preservation of capital. The Fund
invests principally in California tax-exempt fixed-income securities which are
rated in the four highest categories by Moody's Investors Service, Inc. or
Standard & Poor's Corporation. (See "Investment Objective and Policies.")
Shares of the Fund are continuously offered at net asset value.
However, redemptions and/or repurchases are subject in most cases to a
contingent deferred sales charge, scaled down from 5% to 1% of the amount
redeemed, if made within six years of purchase, which charge will be paid to the
Fund's Distributor, Dean Witter Distributors Inc. See "Redemptions and
Repurchases-- Contingent Deferred Sales Charge." In addition, the Fund pays the
Distributor a Rule 12b-1 distribution fee pursuant to a Plan of Distribution at
the annual rate of 0.75% of the lesser of the (i) average daily aggregate net
sales or (ii) average daily net assets of the Fund. See "Purchase of Fund
Shares--Plan of Distribution."
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 28, 1994, which has been filed with
the Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone numbers listed below. The
Statement of Additional Information is incorporated herein by reference.
Dean Witter
California Tax-Free
Income Fund
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 526-3143
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/12
Purchase of Fund Shares/12
Shareholder Services/14
Redemptions and Repurchases/17
Dividends, Distributions and Taxes/19
Performance Information/20
Additional Information/21
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCU-
RACY OR ADEQUACY OF THIS PROSPEC-
TUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE.
Dean Witter Distributors Inc.
Distributor
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<TABLE>
<S> <C>
PROSPECTUS
SUMMARY
The The Fund is organized as a Trust, commonly known as a Massachusetts business
Fund trust, and is an open-end diversified management investment company investing
principally in California tax-exempt fixed-income securities which are rated in
the four highest categories by Moody's Investors Service Inc. or Standard and
Poor's Corporation (see pages 4 and 5).
Shares Shares of beneficial interest with $0.01 par value (see page 21).
Offered
Offering At net asset value without sales charge (see page 12). Shares redeemed within
Price six years of purchase are subject to a contingent deferred sales charge under
most circumstances (see pages 17-18).
Minimum Minimum initial investment, $1,000; minimum subsequent investment, $100 (see
Purchase page 12).
Investment The investment objective of the Fund is to provide a high level of current
Objective income exempt from both federal and California income tax, consistent with
preservation of capital.
Investment The Fund will invest principally in California tax-exempt fixed-income
Policies securities. However, it may also invest in taxable money market instruments,
non-California tax-exempt securities, futures and options.
Investment Dean Witter InterCapital Inc., the Investment Manager of the Fund, and its
Manager wholly-owned subsidiary, Dean Witter Services Company Inc., serve in various
investment management, advisory, management and administrative capacities to
eighty-one investment companies and other portfolios with assets of
approximately $71.2 billion at December 31, 1993 (see page 4).
Management The Investment Manager receives a monthly fee at the annual rate of 0.55% of
Fee average daily net assets, scaled down on assets over $500 million. The fee
should not be compared with fees paid by other investment companies without also
considering applicable sales loads and distribution fees, including those noted
below.
Dividends Dividends are declared daily, and either paid monthly as additional shares of
the Fund or, at the shareholder's option, paid monthly in cash (see page 19).
Distributor and Dean Witter Distributors Inc. (the "Distributor"). The Distributor receives from
Distribution the Fund, pursuant to a Rule 12b-1 Plan of Distribution, a distribution fee
Fee accrued daily and payable monthly at the rate of 0.75% per annum of the lesser
of (i) the Fund's average daily aggregate net sales or (ii) the Fund's average
daily net assets. This fee compensates the Distributor for the services provided
in distributing shares of the Fund and for its sales-related expenses. The
Distributor also receives the proceeds of any contingent deferred sales charges
(see pages 12-14).
Redemption -- At net asset value; redeemable involuntarily if total value of the account is
Contingent less than $100. Although no commission or sales charge is imposed upon the
Deferred purchase of shares, a contingent deferred sales charge (scaled down from 5% to
Sales 1%) is imposed on any redemption of shares if after such redemption the
Charge aggregate current value of an account with the Fund falls below the aggregate
amount of the investor's purchase payments made during the six years preceding
the redemption. However, there is no charge imposed on redemption of shares
purchased through reinvestment of dividends or distributions (see pages 17-19).
Risks The value of the Fund's portfolio securities, and therefore the Fund's net asset
value per share, may increase or decrease due to various factors, principally
changes in prevailing interest rates and the ability of the issuers of the
Fund's portfolio securities to pay interest and principal on such obligations.
The Fund also may invest in futures and options which may be considered
speculative in nature and may involve greater risks than those customarily
assumed by certain other investment companies which do not invest in such
instruments. Since the Fund concentrates its investments in California
tax-exempt securities, the Fund is affected by any political, economic or
regulatory developments affecting the ability of California issuers to pay
interest or repay principal.
THE ABOVE IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION APPEARING ELSEWHERE IN THE
PROSPECTUS
AND IN THE STATEMENT OF ADDITIONAL INFORMATION.
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2
<PAGE>
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
The following table illustrates all expenses and fees that a shareholder of
the Fund will incur. The expenses and fees set forth in the table are for the
fiscal year ended December 31, 1993.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- -----------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases................................................. None
Maximum Sales Charge Imposed on Reinvested Dividends...................................... None
Deferred Sales Charge
(as a percentage of the lesser of original purchase price or redemption proceeds)....... 5.0%
</TABLE>
A contingent deferred sales charge is imposed at the following declining
rates:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE PAYMENT MADE PERCENTAGE
- --------------------------------------------------------------------------------------- ---------------
<S> <C>
First.................................................................................. 5.0%
Second................................................................................. 4.0%
Third.................................................................................. 3.0%
Fourth................................................................................. 2.0%
Fifth.................................................................................. 2.0%
Sixth.................................................................................. 1.0%
Seventh and thereafter................................................................. None
</TABLE>
<TABLE>
<S> <C>
Redemption Fees.......................................................................... None
Exchange Fee............................................................................. None
</TABLE>
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
- -----------------------------------------------------------------------------------------------------
Management Fee........................................................................... 0.53%
12b-1 Fees* 0.70%
Other Expenses........................................................................... 0.04%
Total Fund Operating Expenses............................................................ 1.27%
<FN>
- ------------
* A PORTION OF THE 12B-1 FEE, EQUAL TO 0.20% OF THE FUND'S AVERAGE DAILY NET
ASSETS, IS CHARACTERIZED AS A SERVICE FEE WITHIN THE MEANING OF NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. ("NASD") GUIDELINES.
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS
- ---------------------------------------------------------------------------------- ----------- ----------- -----------
<S> <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................................................................. $ 63 $ 70 $ 90
You would pay the following expenses on the same investment,
assuming no redemption........................................................... $ 13 $ 40 $ 70
<CAPTION>
EXAMPLE 10 YEARS
- ---------------------------------------------------------------------------------- -----------
<S> <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................................................................. $ 153
You would pay the following expenses on the same investment,
assuming no redemption........................................................... $ 153
</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," "Plan of Distribution" and "Redemptions and
Repurchases."
LONG-TERM SHAREHOLDERS OF THE FUND MAY PAY MORE IN SALES CHARGES AND
DISTRIBUTION FEES THAN THE ECONOMIC EQUIVALENT OF THE MAXIMUM FRONT-END SALES
CHARGES PERMITTED BY THE NASD.
3
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by Price Waterhouse,
independent accountants. The financial highlights should be read in conjunction
with the financial statements, notes thereto and the unqualified report of
independent accountants which are contained in the Statement of Additional
Information. Further information about the performance of the Fund is contained
in the Fund's Annual Report to Shareholders, which may be obtained without
charge upon request to the Fund.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987 1986 1985
---------- ---------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning
of period................ $12.70 $12.46 $11.99 $12.05 $11.68 $11.19 $12.25 $11.41 $10.31
---------- ---------- -------- -------- -------- -------- -------- -------- --------
Investment income --
net.................... 0.67 0.69 0.71 0.72 0.71 0.72 0.72 0.77 0.80
Realized and unrealized
gain (loss) on
investments............ 0.70 0.26 0.48 (0.06) 0.37 0.50 (1.06) 1.24 1.10
---------- ---------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations............... 1.37 0.95 1.19 0.66 1.08 1.22 (0.34) 2.01 1.90
---------- ---------- -------- -------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Dividends from net
investment income...... (0.67) (0.69) (0.71) (0.72) (0.71) (0.72) (0.72) (0.77) (0.80)
Distributions from
realized gain on
investments............ (0.09) (0.02) (0.01) -0- -0- (0.01) -0- (0.40) -0-
---------- ---------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions............ (0.76) (0.71) (0.72) (0.72) (0.71) (0.73) (0.72) (1.17) (0.80)
---------- ---------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period................... $13.31 $12.70 $12.46 $11.99 $12.05 $11.68 $11.19 $12.25 $11.41
---------- ---------- -------- -------- -------- -------- -------- -------- --------
---------- ---------- -------- -------- -------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN+.... 10.97% 7.83% 10.18% 5.69% 9.54% 11.23% (2.70)% 18.38% 19.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)........... $1,189,828 $ 987,449 $833,628 $677,270 $567,191 $430,148 $365,414 $358,939 $184,168
Ratio of expenses to
average net assets....... 1.27% 1.32% 1.28% 1.30% 1.32% 1.34% 1.35% 1.32% 1.41%
Ratio of net investment
income to average net
assets................... 5.03% 5.45% 5.78% 5.98% 6.00% 6.31% 6.27% 6.34% 7.22%
Portfolio turnover rate... 10% 6% 3% 16% 13% 13% 23% 31% 47%
<CAPTION>
JULY 11, 1984*
THROUGH
DECEMBER 31, 1984
------------------
<S> <C>
PER SHARE OPERATING PERFORMA
Net asset value, beginning
of period................ $10.00
-------
Investment income --
net.................... 0.39
Realized and unrealized
gain (loss) on
investments............ 0.31
-------
Total from investment
operations............... 0.70
-------
Less dividends and
distributions:
Dividends from net
investment income...... (0.39)
Distributions from
realized gain on
investments............ -0-
-------
Total dividends and
distributions............ (0.39)
-------
Net asset value, end of
period................... $10.31
-------
-------
TOTAL INVESTMENT RETURN+.... 7.10%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)........... $ 57,474
Ratio of expenses to
average net assets....... 0.23%(2)(3)
Ratio of net investment
income to average net
assets................... 8.96%(2)(3)
Portfolio turnover rate... 29%
<FN>
- -----------------
* COMMENCEMENT OF OPERATIONS.
+ DOES NOT REFLECT THE DEDUCTION OF SALES LOAD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE ASSUMED OR WAIVED BY THE
INVESTMENT MANAGER AND THE DISTRIBUTOR, THE EXPENSE RATIO WOULD HAVE BEEN
1.85% AND THE NET INVESTMENT INCOME RATIO WOULD HAVE BEEN 7.34%.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
Dean Witter California Tax-Free Income Fund (the "Fund") is an open-end
diversified management investment company. The Fund is a trust of the type
commonly known as a "Massachusetts business trust" and was organized under the
laws of Massachusetts on April 9, 1984.
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.
4
<PAGE>
InterCapital and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to a total of eighty-one investment companies,
twenty-nine of which are listed on the New York Stock Exchange, with combined
total assets including this Fund of approximately $69.2 billion as of December
31, 1993. The Investment Manager also manages portfolios of pension plans, other
institutions and individuals which aggregated approximately $2.0 billion at such
date.
The Fund has retained the Investment Manager to provide administrative
services, manage its business affairs and manage the investment of the Fund's
assets, including the placing of orders for the purchase and sale of portfolio
securities. InterCapital has retained Dean Witter Services Company Inc. to
perform the aforementioned administrative services for the Fund. The Fund's
Trustees review the various services provided by or under the direction of the
Investment Manager to ensure that the Fund's general investment policies and
programs are being properly carried out and that administrative services are
being provided to the Fund in a satisfactory manner.
As full compensation for the services and facilities furnished to the Fund
and for expenses of the Fund assumed by the Investment Manager, the Fund pays
the Investment Manager monthly compensation calculated daily at an annual rate
of 0.55% of the portion of the daily net assets of the Fund not exceeding $500
million, scaled down at various asset levels to 0.475% on the portion of the
Fund's assets exceeding $1 billion. For the fiscal year ended December 31, 1993,
the Fund accrued total compensation to the Investment Manager amounting to 0.53%
of the Fund's average daily net assets and the Fund's total expenses amounted to
1.27% of the Fund's average daily net assets.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The investment objective of the Fund is to provide a high level of current
income which is exempt from both federal and California income tax, consistent
with the preservation of capital. There is no assurance that this objective will
be achieved. The Fund seeks to achieve its investment objective by investing its
assets in accordance with the following policies:
1. As a fundamental policy the Fund must have at least 80% of its total
assets invested in California tax-exempt securities, except as stated in
paragraph (3) below. California tax-exempt securities consist of California
Municipal Bonds and California Municipal Notes ("California Municipal
Obligations") and California Municipal Commercial Paper. Only California
tax-exempt securities which satisfy the following standards may be purchased
by the Fund: (a) California Municipal Bonds which are rated at the time of
purchase within the four highest grades by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P"); (b) California
Municipal Notes of issuers which at the time of purchase are rated in the
two highest grades by Moody's or S&P, or, if not rated, have outstanding one
or more issues of California Municipal Bonds rated as set forth in clause
(a) of this paragraph; (c) California Municipal Commercial Paper which at
the time of purchase is rated P-1 by Moody's or A-1 by S&P; and (d) unrated
securities which at the time of purchase are judged by the Investment
Manager to be of comparable quality to the securities described above.
2. In accordance with the current position of the staff of the
Securities and Exchange Commission, tax-exempt securities which are subject
to the federal alternative minimum tax for individual shareholders ("AMT")
will not be included in the 80% total described in paragraph 1 above. (See
"Dividends, Distributions and Taxes," page 17.) As such, the remaining
portion of the Fund's total assets may be invested in tax-exempt securities
subject to the AMT.
5
<PAGE>
3. Up to 20% of the Fund's total assets may be invested in taxable
money market instruments, non-California tax-exempt securities, futures and
options and tax-exempt securities subject to the AMT. However, the Fund may
temporarily invest more than 20% of its total assets in taxable money market
instruments and non-California tax exempt securities, or in tax-exempt
securities subject to the federal alternative minimum tax for individual
shareholders, to maintain a "defensive" posture when, in the opinion of the
Investment Manager, it is advisable to do so because of market conditions.
Only those non-California tax-exempt securities which satisfy the standards
set forth in paragraph (1) for California tax-exempt securities may be
purchased by the Fund. The types of taxable money market instruments in
which the Fund may invest are limited to the following short-term
fixed-income securities (maturing in one year or less from the time of
purchase): (i) obligations of the United States Government, its agencies,
instrumentalities or authorities; (ii) commercial paper rated P-1 by Moody's
or A-1 by S&P; (iii) certificates of deposit of domestic banks with assets
of $1 billion or more; and (iv) repurchase agreements with respect to
portfolio securities.
Municipal Obligations 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 are 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 rating of Aaa/ AAA. An
obligation shall be considered a California Municipal Obligation or California
Municipal Commercial Paper only if, in the opinion of bond counsel, the interest
payable thereon is exempt from both federal income tax and California personal
income tax.
Investments in municipal bonds rated either BBB by S&P or Baa by Moody's
(investment grade bonds--the lowest-rated permissible investments by the Fund)
may have speculative characteristics and, therefore, changes in economic
conditions or other circumstances are more likely to weaken their capacity to
make principal and interest payments than would be the case with investments in
securities with higher credit ratings.
The foregoing percentage and rating policies apply at the time of
acquisition of a security based upon the last previous determination of the
Fund's net asset value. Any subsequent change in any rating or change in
percentages resulting from market fluctuations or other changes in the Fund's
total assets will not require elimination of any security from the Fund's
portfolio until such time as the value of all such securities exceeds 5% of the
Fund's total assets and, at such time, only when the Investment Manager
determines that it is practicable to sell the security without undue market or
tax consequences to the Fund. As such, the Fund may hold Municipal Bonds rated
below investment grade by Moody's and/or S&P in its portfolio. Municipal Bonds
rated below investment grade may not currently be paying any interest and may
have extremely poor prospects of ever attaining any real investment standing.
The two principal classifications of Municipal Obligations and Commercial
Paper are "general obligation" and "revenue" 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
6
<PAGE>
facilities; air and marine ports, transportation facilities such as toll roads,
bridges and tunnels; and health and educational facilities such as hospitals and
dormitories. They rely primarily on user fees to pay debt service, although the
principal revenue source is often supplemented by additional security features
which are intended to enhance the creditworthiness of the issuer's obligations.
In some cases, particularly revenue bonds issued to finance housing and public
buildings, a direct or implied "moral obligation" of a governmental unit may be
pledged to the payment of debt service. In other cases, a special tax or other
charge may augment user fees.
Included within the revenue bonds category are participations in lease
obligations or installment purchase contracts (hereinafter collectively called
"lease obligations") of municipalities. State and local governments issue lease
obligations to acquire equipment and facilities.
Lease obligations may have risks not normally associated with general
obligation or other revenue bonds. Leases and installment purchase or
conditional sale contracts (which may provide for title to the leased asset to
pass eventually to the issuer) have developed as a means for governmental
issuers to acquire property and equipment without the necessity of complying
with the constitutional and statutory requirements generally applicable for the
issuance of debt. Certain lease obligations contain "non-appropriation" clauses
that provide that the governmental issuer has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on an annual or other periodic
basis. Consequently, continued lease payments on those lease obligations
containing "non-appropriation" clauses are dependent on future legislative
actions. If such legislative actions do not occur, the holders of the lease
obligation may experience difficulty in exercising their rights, including
disposition of the property.
Lease obligations represent a relatively new type of financing that has not
yet developed the depth of marketability associated with more conventional
municipal obligations, and, as a result, certain of such lease obligations may
be considered illiquid securities. To determine whether or not the Fund will
consider such securities to be illiquid (the Fund may not invest 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 any one governmental unit. 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 value of the Fund's portfolio securities, and therefore the Fund's net
asset value per share, may increase or decrease due to various factors,
principally changes in prevailing interest rates and the ability of the issuers
of the Fund's portfolio securities to pay interest and principal on such
obligations. Generally, a rise in interest rates will result in a decrease in
the Fund's net asset value per share, while a drop in interest rates will result
in an increase in the Fund's net asset value per share.
VARIABLE RATE OBLIGATIONS. The interest rates payable on certain securities
in which the Fund may invest are not fixed and may fluctuate based upon changes
in market rates. Obligations of this type are called "variable rate"
obligations. The interest rate
7
<PAGE>
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
California tax-exempt securities on a when-issued or delayed delivery basis;
i.e., delivery and payment can take place a month or more after the date of the
transaction. These securities are subject to market fluctuation and no interest
accrues to the purchaser prior to settlement. At the time the Fund makes the
commitment to purchase such securities, it will record the transaction and
thereafter reflect the value each day of such security in determining its net
asset value.
HEDGING ACTIVITIES
The Fund may enter into financial futures contracts, options on such futures
and municipal bond index futures contracts for hedging purposes.
FINANCIAL FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Fund may invest in
financial futures contracts and related options thereon. The Fund may sell a
financial futures contract or purchase a put option on such futures contract, if
the Investment Manager anticipates interest rates to rise, as a hedge against a
decrease in the value of the Fund's portfolio securities. If the Investment
Manager anticipates that interest rates will decline, the Fund may purchase a
financial futures contract or a call option thereon to protect against an
increase in the price of the securities the Fund intends to purchase. These
futures contracts and related options thereon will be used only as a hedge
against anticipated interest rate changes. A futures contract sale creates an
obligation by the Fund, as seller, to deliver the specific type of instrument
called for in the contract at a specified future time for a specified price. A
futures contract purchase would create an obligation by the Fund, as purchaser,
to take delivery of the specific type of financial instrument at a specified
future time at a specified price. The specific securities delivered or taken,
respectively, at settlement date, would not be determined until or near that
date. The determination would be in accordance with the rules of the exchange on
which the futures contract sale or purchase was effected.
Although the terms of financial futures contracts specify actual delivery or
receipt of securities, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the securities.
Closing out of a futures contract is effected by entering into an offsetting
purchase or sale transaction.
Unlike a financial futures contract, which requires the parties to buy and
sell a security on a set date, an option on such a futures contract entitles its
holder to decide on or before a future date whether to enter into such a
contract (a long position in the case of a call option and a short position in
the case of a put option). If the holder decides not to enter into the contract,
the premium paid for the option on the contract is lost. Since the value of the
option is fixed at the point of sale, there are no daily payments of cash to
reflect the change in the value of the underlying contract as there is by a
purchaser or seller of a futures contract. The value of the option does change
and is reflected in the net asset value of the Fund.
A risk in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities subject to
such futures contracts may correlate imperfectly with the behavior of the cash
prices of the Fund's portfolio securities. The risk of imperfect correlation
will be increased by the fact that the financial futures contracts in which the
Fund may invest are on taxable securities rather than tax-exempt securities, and
there is no guarantee that the prices of taxable securities will move in a
similar manner to the prices of tax-exempt securities. The correlation may be
distorted by the fact that the futures market is dominated by short-term traders
seeking to profit from the difference between a contract or security price
objective and their cost of borrowed funds. Such distortions are generally minor
and would diminish as the contract approached maturity.
Another risk is that the Fund's manager could be incorrect in its
expectations as to the direction or
8
<PAGE>
extent of various interest rate movements or the time span within which the
movements take place. For example, if the Fund sold financial futures contracts
for the sale of securities in anticipation of an increase in interest rates, and
then interest rates went down instead, causing bond prices to rise, the Fund
would lose money on the sale.
In addition to the risks that apply to all options transactions (see the
Statement of Additional Information for a description of the characteristics of,
and the risks of investing in, options on debt securities), there are several
special risks relating to options on futures. In particular, the ability to
establish and close out positions on such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain that
this market will develop or be maintained.
MUNICIPAL BOND INDEX FUTURES. The Fund may utilize municipal bond index
futures contracts and options thereon for hedging purposes. The Fund's
strategies in employing such contracts will be similar to that discussed above
with respect to financial futures and options thereon. A municipal bond index is
a method of reflecting in a single number the market value of many different
municipal bonds and is designed to be representative of the municipal bond
market generally. The index fluctuates in response to changes in the market
values of the bonds included within the index. Unlike futures contracts on
particular financial instruments, transactions in futures on a municipal bond
index will be settled in cash, if held until the close of trading in the
contract. However, like any other futures contract, a position in the contract
may be closed out by a purchase or sale of an offsetting contract for the same
delivery month prior to expiration of the contract.
The Fund may not enter into futures contracts or related options thereon if
immediately thereafter the amount committed to margin plus the amount paid for
option premiums exceeds 5% of the value of the Fund's total assets. The Fund may
not purchase or sell futures contracts or related options if immediately
thereafter more than one-third of its net assets would be hedged.
PORTFOLIO MANAGEMENT
The Fund is managed by the Investment Manager with a view to achieving the
Fund's investment objective. In determining which securities to purchase for the
Fund or hold in the Fund's portfolio, the Investment Manager will rely on
information from various sources, including research, analysis and appraisals of
brokers and dealers, including Dean Witter Reynolds Inc. ("DWR"), a
broker-dealer affiliate of InterCapital; the views of Trustees of the Fund and
others regarding economic developments and interest rate trends; and the
Investment Manager's own analysis of factors it deems relevant. The Fund is
managed within InterCapital's Municipal Fixed Income Group, which manages 36
tax-exempt municipal funds and fund portfolios, with approximately $12 billion
in assets as of December 31, 1993. James F. Willison, Senior Vice President of
InterCapital and Manager of InterCapital's Municipal Fixed Income Group, has
been the primary portfolio manager of the Fund since its inception and has been
a portfolio manager at InterCapital for over five years.
Securities are purchased and sold principally in response to the Investment
Manager's current evaluation of an issuer's ability to meet its debt obligations
in the future, and the Investment Manager's current assessment of future changes
in the levels of interest rates on tax-exempt securities of varying maturities.
Securities purchased by the Fund are, generally, sold by dealers acting as
principal for their own accounts (pursuant to an order issued by the Securities
and Exchange Commission, the Fund may effect principal transactions in certain
taxable money market instruments with DWR.) In addition, the Fund may incur
brokerage commissions on transactions conducted through DWR.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA
TAX-EXEMPT SECURITIES
The Fund will be affected by any political, economic or regulatory
developments affecting the ability of California issuers to pay interest or
repay principal on their obligations. Various subsequent developments regarding
the California Consititution and State statutes which limit the taxing and
spend-
9
<PAGE>
ing authority of California governmental entities may impair the ability of
California issuers to maintain debt service on their obligations. Of particular
impact are constitutional voter initiatives, which have become common in recent
years. The following information constitutes only a brief summary and is not
intended as a complete description.
In 1978, Proposition 13, an amendment to the California Constitution, was
approved, limiting real property valuation for property tax purposes and the
power of local governments to increase real property tax revenues and revenues
from other sources. Legislation adopted after Proposition 13 provided for
assistance to local governments, including the redistribution of the
then-existing surplus in the General Fund, reallocation of revenues to local
governments, and assumption by the State of certain local government
obligations. However, more recent legislation reduced such state assistance.
There can be no assurance that any particular level of State aid to local
governments will be maintained in future years. In NORDLINGER V. HAHN, the
United States Supreme Court upheld certain provisions of Proposition 13 against
claims that it violated the equal protection clause of the Constitution. In
1979, an amendment was passed adding Article XIIIB to the State Constitution. As
amended in 1990, Article XIIIB imposes an "appropriations limit" on the spending
authority of the State and local government entities. In general, the
appropriations limit is based on certain 1985-86 expenditures, adjusted annually
to reflect changes in the cost of living, population and certain services
provided by State and local government entities. "Appropriations limit" does not
include appropriations for qualified capital outlay projects, certain increases
in transportation-related taxes, and certain emergency appropriations.
In 1988, State voters approved Proposition 87, which amended Article XVI of
the State Constitution to authorize the State Legislature to prohibt
redevelopment agencies from receiving any property tax revenues raised by
increased property taxes to repay bonded indebtedness of local government which
is not approved by voters on or before January 1, 1989. It is not possible to
predict whether the State Legislature will enact such a prohibition, nor is it
possible to predict the impact of Proposition 87 on redevelopment agencies and
their ability to make payments on outstanding debt obligations.
In November 1988, California voters approved Propositon 98. This initiative
requires that revenues in excess of amounts permitted to be spent and which
would otherwise be returned by revision of tax rates or fee schedules, be
transferred and allocated (up to a maximum of 40%) to the State School Fund and
be expended solely for purposes of instructional improvement and accountability.
No such transfer or allocation of funds will be required if certain designated
state officials determine that annual student expenditures and class size meet
certain criteria as set forth in Proposition 98. Any funds allocated to the
State School Fund shall cause the appropriation limits to be annually increased
for any such allocation made in the prior year. Proposition 98 also requires the
State of California to provide a minimum level of funding for public schools and
community colleges. The initiative permits the enactment of legislation, by a
two-thirds vote, to suspend the minimum funding requirement for one year.
In July 1991, California increased taxes by adding two new marginal tax
rates, at 10% and 11%, effective for tax years 1991 through 1995. After 1995,
the maximum personal income tax rate is scheduled to return to 9.3%, and the
alternative minimum tax rate is scheduled to drop from 8.5% to 7%. In addition,
legislation in July 1991 raised the sales tax by 1.25%. 0.5% was a permanent
addition to counties, but with the money earmarked to trust funds to pay for
health and welfare programs whose administration was transferred to counties.
This tax increase will be cancelled if a court rules that such transfer and tax
increase violate any constitutional requirements. 0.5% of the State tax rate was
scheduled to expire on June 30, 1993, but was extended for six months for the
benefit of counties and cities. On November 2, 1993, voters made this
half-percent levy a permanent source of funding for local government.
10
<PAGE>
Three court cases may further upset California's budgetary balance: one
concerning the medically indigent and Medi-Cal funding, a second concerning
employee pensions, and a third on California's unitary method of taxing
multinational companies. In KINLAW V. STATE OF CALIFORNIA, the State faced
possible retroactive reimbursement to counties of $2-$3 billion for Medi-Cal
costs for medically indigent adults. The ruling could have added annual
operating costs of $600-$700 million and would have precluded the State-county
realignment of responsiblities. On August 30, 1991, the California Supreme Court
over-turned the case on procedural grounds; however, a case of similar scope and
substance regarding employee pensions, SAN BERNADINO COUNTY V. STATE OF
CALIFORNIA, is pending in the Court of Appeals that raises the same substantial
questions. The California Supreme court in BARCLAY'S BANK INTERNATIONAL, LTD.
upheld California's unitary method of taxing multinational companies. The United
States Supreme Court has granted Certiorari in BARCLAY'S and the related case,
COLGATE-PALMOLIVE. An adverse holding could cost California $4 billion in
refunds and lost revenue, according to Brad Sherman, Chairman of the California
State Board of Equalization.
In "California Budget Outlook: A Staff Update To The Commission" (the
"Update"), the staff of the California Commission on State Finance (the
"Commission Staff") forecasts that economic conditions will stabilize in
California over the course of 1994, but that a meaningful economic recovery is
many months away. The Commission Staff notes that the proportional decline in
jobs, income, and sales since 1990 has been much greater in the south,
reflecting, among other things, the greater impact of defense cuts, home price
declines and related social and economic problems in the region. The Commission
Staff cautions, however, that California's economic woes extend well beyond
Southern California.
These economic difficulties have exacerbated the structural budget imbalance
which has been evident since fiscal year 1985-1986. Since that time, budget
shortfalls have become increasingly more difficult to solve. The State has
recorded General Fund operating deficits in five of the past six fiscal years.
Many of these problems have been attributable to the fact that the great
population influx has produced increased demand for education and social
services at a far greater pace than the growth in the State's tax revenues.
Despite substantial tax increases, expenditure reductions and the shift of some
expenditure responsibilities to local government, the budget condition remains
problematic. The State's General Fund revenues for the 1992-93 fiscal year
totalled nearly $2.5 billion less than the $43.4 billion that Governor Wilson
had projected. It is anticipated that revenues and transfers in the 1993-94
fiscal year will be lower than those in 1992-93 fiscal year. This represents the
second consecutive year of actual decline.
On June 30, 1993, the Governor signed into law a $52.1 billion budget which,
among other things, (a) shifts $2.6 billion of property taxes from cities,
counties, special districts and redevelopment agencies to schools and community
college districts, (b) reduces higher education and community college funding,
forcing higher student fees, and (c) reduces welfare grants and aid to the aged,
blind, and disabled. In addition, related legislation (a) suspends the renters'
tax credit for two years and (b) allows counties to reduce general assistance
welfare payments by as much as 27%. The stability of the budget would be
jeopardized if the property tax transfer were invalidated by the courts in
current and future cases between the State and its counties.
By June 30, 1993, the General Fund had an accumulated deficit, on a budgeted
basis, of approximately $2.8 billion. In addition, the large deficit over the
previous three years had exhausted California's available cash reserves and
resources. The Commission Staff estimated in its December 1993 Update that
revenues will fall short of budget projections by $1.0 billion in fiscal year
1993-94, and that expenditures will exceed budget projections by $700 million.
The State is expected to end the year with a deficit of $1.7 billion. Looking
ahead to 1994-95, the Commission Staff forecasts an oper-
11
<PAGE>
ating deficit of $2.1 billion which, when added to the 1993-94 operating
deficit, will lead to a cumulative funding gap of $3.8 billion by the end of
that fiscal year. In an alternative forecast, the Commission Staff predicts that
this cumulative funding gap could exceed $6.3 billion.
Because of California's continuing budget problems, the State's General
Obligation bonds were downgraded in 1992 by Moody's from Aa1 to Aa and by
Standard & Poor's from AA to A+. In February 1994, both ratings companies stated
that they were concerned about the deficit. While neither company lowered the
State's credit rating, Standard & Poor's changed its credit outlook for
California from "stable" to "negative" and Moody's stated that it is unlikely
that California will balance its budget by 1995.
On January 17, 1994, Northridge, California experienced an earthquake that
registered 8.7 on the Richter Scale resulting in significant property damage to
private and public facilities throughout Los Angeles and Ventura Counties, and
to parts of Orange and San Bernardino Counties.
The effect of these various constitutional and statutory amendments and
budget developments upon the ability of California issuers to pay interest and
principal on their obligations remains unclear and in any event may depend upon
whether a particular California tax-exempt security is a general or limited
obligation bond and on the type of security provided for the bond. It is
possible that other measures affecting the taxing or spending authority of
California or its political subdivisions may be approved or enacted in the
future.
For a more detailed discussion of the State of California economic factors,
see the Statement of Additional Information.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The investment restrictions listed below are among the restrictions that
have been adopted by the Fund as fundamental policies. Under the Investment
Company Act of 1940, as amended (the "Act"), a fundamental policy may not be
changed without the vote of a majority of the outstanding voting securities of
the Fund, as defined in the Act.
The Fund may not:
1. With respect to 75% of its total assets, purchase securities of any
issuer if immediately thereafter more than 5% of the Fund's total assets
were invested in securities of such issuer (other than obligations issued or
guaranteed by the United States Government, its agencies or
instrumentalities or by the State of California or its political
subdivisions).
2. Purchase more than 10% of all outstanding taxable debt securities of
any one issuer (other than obligations issued, or guaranteed as to principal
and interest, by the United States Government, its agencies or
instrumentalities).
3. Invest more than 25% of the value of its total assets in taxable
securities of issuers in any one industry. This restriction does not apply
to obligations issued or guaranteed by the United States Government, its
agencies or instrumentalities, or by the State of California or its
political subdivisions (industrial development and pollution control bonds
are grouped into industries based upon the business in which the issuers of
such obligations are engaged).
PURCHASE OF FUND SHARES
- --------------------------------------------------------------------------------
The Fund offers its shares for sale to the public on a continuous basis.
Pursuant to a Distribution Agreement between the Fund and Dean Witter
Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager,
shares of the Fund are distributed by the Distributor and are offered by DWR and
other dealers who have entered into agreements with the Distributor ("Selected
Broker-Dealers").
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<PAGE>
The principal executive office of the Distributor is located at Two World Trade
Center, New York, New York 10048.
The minimum initial purchase is $1,000. Subsequent purchases of $100 or more
may be made by sending a check, payable to Dean Witter California Tax-Free
Income Fund, directly to Dean Witter Trust Company ("Transfer Agent") at P.O.
Box 1040, Jersey City, New Jersey 07303 or by contacting a DWR or other Selected
Dealer account executive. Certificates for shares purchased will not be issued
unless a request is made by the shareholder in writing to the Transfer Agent.
The offering price will be the net asset value per share next determined
following receipt of an order (see "Determination of Net Asset Value" below).
Shares are sold through the Distributor or a Selected Broker-Dealer on a normal
five business day settlement basis; that is, payment generally is due on or
before the fifth business day (settlement date) after the order is placed with
the Distributor or a Selected Broker-Dealer. Shares of the Fund purchased
through the Distributor or a Selected Broker-Dealer are entitled to dividends
beginning on the next business day following settlement date. Since DWR and
other Selected Broker-Dealers forward investors' funds on settlement date, they
will benefit from the temporary use of the funds where payment is made prior
thereto. Shares purchased through the Transfer Agent are entitled to dividends
beginning on the next business day following receipt of an order. As noted
above, orders placed directly with the Transfer Agent must be accompanied by
payment. Investors will be entitled to receive capital gains distributions if
their order is received by the close of business on the day prior to the record
date for such distributions. While no sales charge is imposed at the time shares
are purchased, a contingent deferred sales charge may be imposed at the time of
redemption (see "Redemptions and Repurchases"). The Fund and the Distributor
reserve the right to reject any purchase orders.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution, pursuant to Rule 12b-1 of the
Act (the "Plan"), under which the Fund pays the Distributor a fee, which is
accrued daily and payable monthly, at an annual rate of 0.75% of the lesser of:
(a) the average daily aggregate gross sales of the Fund's shares since the
inception of the Fund (not including reinvestments of dividends or capital gains
distributions), less the average daily aggregate net asset value of the Fund's
shares redeemed since the Fund's inception upon which a contingent deferred
sales charge has been imposed or waived, or (b) the Fund's average daily net
assets. Of the amount accrued under the Plan, 0.20% of the Fund's average net
assets is characterized as a service fee within the meaning of the NASD
guidelines. The 12b-1 fee is treated by the Fund as an expense in the year it is
accrued. Amounts paid under the Plan are paid to the Distributor to compensate
it for the services provided and the expenses borne by the Distributor and
others in the distribution of the Fund's shares, including the payment of
commissions for sales of the Fund's shares and incentive compensation to and
expenses of account executives and other employees of DWR, its affiliates and
other Selected Broker-Dealers who engage in or support distribution of shares or
who service shareholder accounts, including overhead and telephone expenses;
printing and distribution of prospectuses and reports used in connection with
the offering of the Fund's shares to other than current shareholders; and
preparation, printing and distribution of sales literature and advertising
materials. For the fiscal year ended December 31, 1993, the Fund accrued
payments under the Plan amounting to $7,693,113, which amount is equal to .70%
of the Fund's average daily net assets for the fiscal year. The payments accrued
under the Plan were calculated pursuant to clause (a) of the compensation
formula under the Plan.
At any given time, the expenses of distributing shares of the Fund may be in
excess of the total of (i) the payments made by the Fund pursuant to the Plan
and (ii) the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares (see "Redemptions and Repurchases-- Contingent
Deferred Sales Charge"). For example, if $1 million in expenses in distributing
shares of the Fund had been incurred and $750,000 had been
13
<PAGE>
received as described in (i) and (ii) above, the excess expense would amount to
$250,000. The Distributor has advised the Fund that the excess distribution
expenses, including the carrying charge described above, totalled $16,051,125 at
December 31, 1993, which was equal to 1.35% of the Fund's net assets on such
date. Because there is no requirement under the Plan that the Distributor be
reimbursed for all its expenses or any requirement that the Plan be continued
from year to year, this excess amount does not constitute a liability of the
Fund. Although there is no legal obligation for the Fund to pay expenses
incurred by the Distributor in excess of payments made to the Distributor under
the Plan, if for any reason the Plan is terminated the Trustees will consider at
that time the manner in which to treat such expenses. Any cumulative expenses
incurred, but not yet recovered through distribution fees or contingent deferred
sales charges, may or may not be recovered through future distribution fees or
contingent deferred sales charges.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is determined once daily at 4:00
p.m. New York time on each day that the New York Stock Exchange is open by
taking the value of all assets of the Fund, subtracting its liabilities,
dividing by the number of shares outstanding and adjusting to the nearest cent.
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.
Certain of the Fund's portfolio securities may be valued for the Fund by an
outside independent pricing service approved by the Fund's Board of Trustees.
The pricing service utilizes a computerized grid matrix of tax-exempt securities
and evaluations by its staff in determining what it believes is the fair value
of the Fund's portfolio securities. The Board believes that timely and reliable
market quotations are generally not readily available to the Fund for purposes
of valuing tax-exempt securities and that the valuations supplied by the pricing
service are more likely to approximate the fair value of such securities.
Short-term taxable debt securities with remaining maturities of 60 days or
less to maturity at time of purchase are valued at amortized cost, unless the
Board determines such does not reflect the securities' fair value, in which case
these securities will be valued at their fair market value as determined by the
Board of Trustees. The value of other assets will be determined in good faith
under procedures established by and under the supervision of the Board of
Trustees.
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. All income dividends
and capital gains distributions are automatically paid in full and fractional
shares of the Fund (or, if specified by the Shareholder, any other open-end
investment company for which InterCapital serves as investment manager
(collectively, with the Fund, the "Dean Witter Funds")), unless the shareholder
requests they be paid in cash. Shares so acquired are not subject to the
imposition of a contingent deferred sales charge upon their redemption (see
"Redemptions and Repurchases"). Such dividends and distributions will be paid in
shares of the Fund at net asset value per share (or in cash if the shareholder
so requests) on the monthly payment date, which will be no later than the last
business day of the month for which the dividend or distribution is payable.
Processing of dividend checks begins immediately following the monthly payment
date. Shareholders who have requested to receive dividends in cash will normally
receive their monthly dividend check during the first ten days of the following
month.
EASYINVEST-SM-. 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
quar-
14
<PAGE>
terly basis, to the Transfer Agent for investment in shares of the Fund.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan (the "Withdrawal
Plan") is available for shareholders who own or purchase shares of the Fund
having a minimum value of $10,000 based upon the then current net asset value.
The Withdrawal Plan provides for monthly or quarterly (March, June, September
and December) checks in any dollar amount, not less than $25 or in any whole
percentage of the account balance, on an annualized basis. Any applicable
contingent deferred sales charge will be imposed on shares redeemed under the
Withdrawal Plan (See "Redemptions and Repurchases--Contingent Deferred Sales
Charge"). Therefore, any shareholder participating in the Withdrawal Plan will
have sufficient shares redeemed from his or her account so that the proceeds
(net of any applicable contingent deferred sales charge) to the shareholder will
be the designated monthly or quarterly dollar amount.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about any of the
above services.
EXCHANGE PRIVILEGE. The Fund makes available to its shareholders an
"Exchange Privilege" allowing the exchange of shares of the Fund for shares of
other Dean Witter Funds sold with a contigent deferred sales charge ("CDSC
funds") and for shares of Dean Witter Short-Term U.S. Treasury Trust, Dean
Witter Limited Term Municipal Trust, and Dean Witter Short-Term Bond Fund and
five Dean Witter Funds which are money market funds (the foregoing eight
non-CDSC or FESC funds are hereinafter collectively referred to in this section
as the "Exchange Funds"). Exchanges may be made after the shares of the Fund
acquired by purchase (not by exchange or dividend reinvestment) have been held
for thirty days. There is no waiting period for exchanges of shares acquired by
exchange or dividend reinvestment.
An exchange to another CDSC fund or any Exchange Fund that is not a money
market fund is on the basis of the next calculated net asset value per share of
each fund after the exchange order is received. When exchanging into a money
market fund from the Fund, shares of the Fund are redeemed out of the Fund at
their next calculated net asset value and the proceeds of the redemption are
used to purchase shares of the money market fund at their net asset value
determined the following business day. Subsequent exchanges between any of the
money market funds and any of the CDSC funds can be effected on the same basis.
No contingent deferred sales charge ("CDSC") is imposed at the time of any
exchange, although any applicable CDSC will be imposed upon ultimate redemption.
Shares of the Fund acquired in exchange for shares of another CDSC fund having a
different CDSC schedule than that of this Fund will be subject to the CDSC
schedule of this Fund, even if such shares are subsequently re-exchanged for
shares of the CDSC fund originally purchased. During the period of time the
shareholder remains in the Exchange Funds (calculated from the last day of the
month in which the Exchange Funds 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 (see "Redemptions and Repurchases--Contingent Deferred Sales Charge").
However, in the case of shares of the Fund exchanged into the Exchange Funds 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 Funds 12b-1 distribution fees incurred on or
after that date which are attributable to those shares. (The Exchange Funds'
12b-1 distribution fees are described in the prospectus for these funds.)
In addition, shares of the Fund may be acquired in exchange for shares of
Dean Witter Funds sold with a front-end sales charge ("FESC
15
<PAGE>
funds"), but shares of the Fund, however acquired, may not be exchanged for
shares of FESC funds. Shares of a CDSC fund acquired in exchange for shares of a
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.
Purchases and exchanges should be made for investment purposes only. A
pattern of frequent exchanges may be deemed by the Investment Manager to be
abusive and contrary to the best interests of the Fund's other shareholders and,
at the Investment Manager's discretion, may be limited by the Fund's refusal to
accept additional purchases and/or exchanges from the investor. Although the
Fund does not have any specific definition of what constitutes a pattern of
frequent exchanges, and will consider all relevant factors in determining
whether a particular situation is abusive and contrary to the best interests of
the Fund and its other shareholders, investors should be aware that the Fund and
each of the other Dean Witter Funds may in their discretion limit or otherwise
restrict the number of times this Exchange Privilege may be exercised by any
investor. Any such restriction will be made by the Fund on a prospective basis
only, upon notice to the shareholder not later than ten days following such
shareholder's most recent exchange.
Also, the Exchange Privilege may be terminated or revised at any time by the
Fund and/or any of such Dean Witter Funds for which shares of the Fund may be
exchanged, upon such notice as may be required by applicable regulatory
agencies. Shareholders maintaining margin accounts with DWR or another Selected
Broker-Dealer are referred to their account executive regarding restrictions on
exchange of shares of the Fund pledged in their margin account.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain one and read it carefully before
investing. Exchanges are subject to the minimum investment requirement and any
other conditions imposed by each fund. An exchange will be treated for federal
income tax purposes the same as a repurchase or redemption of shares on which
the shareholder has realized a capital gain or loss. However, the ability to
deduct capital losses on an exchange may be limited in situations where there is
an exchange of shares within ninety days after the shares are purchased. The
Exchange Privilege is only available in states where an exchange may legally be
made.
If DWR or another Selected Broker-Dealer is the current dealer of record and
its account numbers are part of the account information, shareholders may
initiate an exchange of shares of the Fund for shares of any of the Dean Witter
Funds (for which the Exchange Privilege is available) pursuant to this Exchange
Privilege by contacting their account executive (no Exchange Privilege
Authorization Form is required). Other shareholders (and those shareholders who
are clients of DWR or other Selected Broker-Dealers 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) 526-3143 (toll free). The Fund will
employ reasonable procedures to confirm that exchange instructions communicated
over the telephone are genuine. Such procedures may include requiring various
forms of personal identification such as name, mailing address, social security
or other tax identification number and DWR or other Selected 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
tele-
16
<PAGE>
phone 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 case with the Dean Witter Funds in the past.
Additional information concerning the Exchange Privilege is available from a
DWR or other Selected Broker-Dealer account executives or the Transfer Agent.
REDEMPTIONS AND REPURCHASES
- --------------------------------------------------------------------------------
REDEMPTION. Shares of the Fund can be redeemed for cash at any time at the
net asset value per share next determined; however, such redemption proceeds may
be reduced by the amount of
any applicable contingent deferred sales charges (see below). If shares are held
in a shareholder's account without a share certificate, a written request for
redemption to the Fund's Transfer Agent at
P.O. Box 983, Jersey City, N.J. 07303 is required. If certificates are held by
the shareholder(s), the shares may be redeemed by surrendering the
certificate(s) with a written request of redemption, along with any additional
information required by the Transfer Agent.
CONTINGENT DEFERRED SALES CHARGE. Shares of the Fund which are held for six
years or more after purchase (calculated from the last day of the month in which
the shares were purchased) will not be subject to any charge upon redemption.
Shares redeemed sooner than six years after purchase may, however, be subject to
a charge upon redemption. This charge is called a "contingent deferred sales
charge" ("CDSC"), which will be a percentage of the dollar amount of shares
redeemed and will be assessed on an amount equal to the lesser of the current
market value or the cost of the shares being redeemed. The size of this
percentage will depend upon how long the shares have been held, as set forth in
the table below:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR SINCE SALES CHARGE
PURCHASE ON A PERCENTAGE OF
PAYMENT MADE AMOUNT REDEEMED
- ----------------------------------- ---------------------
<S> <C>
First.............................. 5.0%
Second............................. 4.0%
Third.............................. 3.0%
Fourth............................. 2.0%
Fifth.............................. 2.0%
Sixth.............................. 1.0%
Seventh and thereafter............. None
</TABLE>
A CDSC will not be imposed on: (i) any amount which represents an increase
in value of shares purchased within the six years preceding the redemption; (ii)
the current net asset value of shares purchased more than six years prior to the
redemption; and (iii) the current net asset value of shares purchased through
reinvestment of dividends or distributions and/or shares acquired in exchange
for shares of Dean Witter Funds sold with a front-end sales charge or of other
Dean Witter Funds acquired in exchange for such shares. Moreover, in determining
whether a CDSC is applicable it will be assumed that amounts described in (i),
(ii), and (iii) above (in that order) are redeemed first. In addition, no CDSC
will be imposed on redemptions which were purchased by certain Unit Investment
Trusts (on which a sales charge has been paid) or which are attributable to
reinvestment of dividends or distributions from, or the proceeds of, such Unit
Investment Trusts.
In addition, the CDSC, if otherwise applicable, will be waived in the case
of (i) redemptions of shares held at the time a shareholder dies or becomes
disabled, only if the shares are (a) registered either in
17
<PAGE>
the name of an individual shareholder (not a trust), or in the names of such
shareholder and his or her spouse as joint tenants with right of survivorship,
or (b) held in a qualified corporate or self-employed retirement plan,
Individual Retirement Account or Custodial Account under Section 403(b)(7) of
the Internal Revenue Code, provided in either case that the redemption is
requested within one year of the death or initial determination of disability,
and (ii) redemptions in connection with the following retirement plan
distributions: (a) lump-sum or other distributions from a qualified corporate or
self-employed retirement plan following retirement (or in the case of a "key
employee" of a "top heavy" plan, following attainment of age 59 1/2); (b)
distributions from an Individual Retirement Account or Custodial Account under
Section 403(b)(7) of the Internal Revenue Code following attainment of age
59 1/2; and (c) a tax-free return of an excess contribution to an IRA. For the
purpose of determining disability, the Distributor utilizes the definition of
disability contained in Section 72(m)(7) of the Internal Revenue Code, which
relates to the inability to engage in gainful employment. All waivers will be
granted subject to receipt by the Distributor of confirmation of the investor's
entitlement.
REPURCHASE. DWR and other Selected Broker-Dealers are authorized to
repurchase shares represented by a share certificate which is delivered to any
of their offices. Shares held in a shareholder's account without a share
certificate may also be repurchased by DWR or other Selected Broker-Dealers upon
the telephonic request of the shareholder. The repurchase price is the net asset
value next computed (see "Purchase of Fund Shares") after such repurchase order
is received by DWR or other Selected Broker-Dealers, reduced by any applicable
CDSC.
The CDSC, if any, will be the only fee imposed upon repurchase by the Fund,
the Distributor or DWR. The offer by DWR or other Selected Broker-Dealers to
repurchase shares may be suspended without notice by them at any time. In that
event, shareholders may redeem their shares through the Fund's Transfer Agent as
set forth above under "Redemption."
PAYMENT FOR SHARES REDEEMED OR REPURCHASED. Payment for shares presented
for repurchase or redemption will be made by check within seven days after
receipt by the Transfer Agent of the certificate and/or written request in good
order. Such payment may be postponed or the right of redemption suspended under
unusual circumstances. If the shares to be redeemed have recently been purchased
by check, payment of the redemption proceeds may be delayed for the minimum time
needed to verify that the check used for investment has been honored (not more
than fifteen days from the time of receipt of the check by the Transfer Agent).
Shareholders maintaining margin accounts with DWR or other Selected
Broker-Dealers are referred to their account executive regarding restrictions on
redemption of shares of the Fund pledged in their margin account.
REINSTATEMENT PRIVILEGE. A shareholder who has had his or her shares
redeemed or repurchased and has not previously exercised this reinstatement
privilege may, within 30 days after the date of the redemption or repurchase,
reinstate any portion or all of the proceeds of such redemption or repurchase in
shares of the Fund at the net asset value next determined after a reinstatement
request, together with the proceeds, is received by the Transfer Agent and
receive a pro-rata credit for any CDSC paid in connection with such redemption
or repurchase.
INVOLUNTARY REDEMPTION. The Fund reserves the right to redeem, on 60 days
notice and 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 have a value of less than
$100 as a result of redemptions or repurchases, or such lesser amount as may be
fixed by the Board of Trustees. However, before the Fund redeems such shares and
sends the proceeds to the shareholder, it will notify the shareholder that the
value of the shares is less than $100 and allow him or her 60 days to make an
18
<PAGE>
additional investment in an amount which will increase the value of his or her
account to $100 or more before the redemption is processed. No CDSC will be
imposed on any involuntary redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. The Fund declares dividends from net
investment income on each day the New York Stock Exchange is open for business
(see "Purchase of Fund Shares"). Such dividends are payable monthly. The Fund
intends to distribute all of the Fund's net investment income on an annual
basis.
The Fund will distribute at least once each year all net short-term capital
gains, if there are any. The Fund may, however, determine either to distribute
or to retain all or part of any net long-term capital gains in any year for
reinvestment. All dividends and capital gains distributions will be paid in
additional Fund shares (without sales charge) and automatically credited to the
shareholder's account without issuance of a share certificate unless the
shareholder requests in writing that all dividends be paid in cash. (See
"Shareholder Services--Automatic Investment of Dividends and Distributions".)
Taxable capital gains may be generated by transactions in options and futures
contracts engaged in by the Fund. Any dividends or distributions declared in the
last quarter of any calendar year which are paid in the following year prior to
February 1, will be deemed received by shareholders of record in the prior year.
TAXES. Because the Fund intends to distribute substantially all of its net
investment income and capital gains to shareholders and intends to otherwise
comply with all the provisions of Subchapter M of the Internal Revenue Code (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-interest dividends" to its
shareholders by maintaining, as of the close of each quarter of its taxable
year, at least 50% of the value of its total assets in tax-exempt securities. If
the Fund satisfies such requirement, then distributions from net investment
income to shareholders will be exempt from federal taxation to the extent net
investment income is represented by interest on tax-exempt securities.
Shareholders generally will not incur any federal income tax on the amount of
exempt-interest dividends received by them from the Fund, whether taken in cash
or reinvested in additional shares. 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 may subject interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. This alternative minimum tax may be
incurred due to interest received on "private activity bonds" (in general, bonds
that benefit non-government entities) issued after August 7, 1986 which,
although tax-exempt, are used for purposes other than those generally performed
by 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
will be an item of tax preference to shareholders subject to the alternative
minimum tax. In addition, certain corporations which are subject to the
alternative minimum tax may have to include a portion of exempt-interest
dividends in calculating their alternative minimum taxable income in situations
where the "adjusted current earnings" of the corporation exceeds its alternative
minimum taxable income.
Under California law, a fund which qualifies as a regulated investment
company must have at least 50% of its total assets invested in California state
and local issues (or in obligations of the United
19
<PAGE>
States which pay interest excludable from income) at the end of each quarter of
its taxable year in order to be eligible to pay dividends which will be exempt
from California personal income tax. Shareholders who are California residents
will not incur any federal or California income tax on the amount of
exempt-interest dividends received by them from the Fund and derived from
California state and local issues, whether taken in cash or reinvested in
additional shares.
After the end of the calendar year, the shareholders will be sent a
statement indicating the percentage of the dividend distributions for such
fiscal year which constitutes exempt-interest dividends and the percentage, if
any, that is taxable, and the percentage, if any, of the exempt-interest
dividends which constitutes an item of tax preference. Unlike federal law,
California law provides that no portion of the exempt-interest dividends will
constitute an item of tax preference for California personal income tax
purposes. Moreover, unlike federal law, an individual's Social Security benefits
are not subject to California personal income tax, so that the receipt of
California exempt-interest dividends will have no effect on an individual's
California personal income tax.
Under the Revenue Reconciliation Act of 1993, all or a portion of the Fund's
gain from the sale or redemption of tax-exempt obligations purchased at a market
discount after April 30, 1993 will be treated as ordinary income rather than
capital gain. This rule may increase the amount of ordinary income dividends
received by shareholders.
Shareholders will normally be subject to federal and California personal
income tax on dividends paid from interest income derived from taxable
securities and on distributions of net capital gains. For federal income tax and
California personal income tax purposes, distributions of long-term capital
gains, if any, are taxable to shareholders as long-term capital gains,
regardless of how long a shareholder has held the Fund's shares and regardless
of whether the distribution is received in additional shares or in cash. In
addition, unlike federal law, the shareholders of the Fund will not be subject
to tax, or receive a credit for tax paid by the Fund, on undistributed capital
gains, if any. To avoid being subject to a 31% backup withholding tax on taxable
dividends and capital gains distributions and the proceeds of redemptions and
repurchases, shareholders' taxpayer identification numbers must be furnished and
certified as to accuracy.
Any loss on the sale or exchange of shares of the Fund which are held for
six months or less is disallowed to the extent of the amount of any
exempt-interest dividend paid with respect to such shares. Treasury Regulations
may provide for a reduction in such required holding periods. If a shareholder
receives a distribution that is taxed as a long-term capital gain on shares held
for six months or less and sells those shares at a loss, the loss will be
treated as a long-term capital loss.
Interest on indebtedness incurred by shareholders or related parties to
purchase or carry shares of an investment company paying exempt-interest
dividends, such as the Fund, will not be deductible by the investor for federal
or state personal income tax purposes.
The foregoing relates to federal income taxation and to California personal
income taxation as in effect as of the date of this Prospectus. Distributions
from investment income and capital gains, including exempt-interest dividends,
may be subject to California franchise taxes if received by a corporation doing
business in California, to state taxes in states other than California and to
local taxes.
Shareholders should consult their tax advisors as to the applicability of
the above to their own tax situation.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund may quote its "yield" and/or its "total return"
in advertisements and sales literature. Both the yield and the total return of
the Fund are based on historical earnings
20
<PAGE>
and are not intended to indicate future performance. The yield of the Fund is
computed by dividing the Fund's net investment income over a 30-day period by an
average value (using the average number of shares entitled to receive dividends
and the net asset value per share at the end of the period), all in accordance
with applicable regulatory requirements. Such amount is compounded for six
months and then annualized for a twelve-month period to derive the Fund's yield.
The Fund may also quote its 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 "average annual total return" of the Fund refers to a figure reflecting
the average annualized percentage increase (or decrease) in the value of an
initial investment in the Fund of $1,000 over a period of one and five years, as
well as over the life of the Fund. Average annual total return reflects all
income earned by the Fund, any appreciation or depreciation of the Fund's
assets, all expenses incurred by the Fund and all sales charges which would be
incurred by redeeming shareholders, for the stated periods. It also assumes
reinvestment of all dividends and distributions paid by the Fund.
In addition to the foregoing, the Fund may advertise its total return over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. Such calculations may or may not reflect the
deduction of the contingent deferred sales charge which, if reflected, would
reduce the performance quoted. The Fund may also advertise the growth of
hypothetical investments of $10,000, $50,000 and $100,000 in shares of the Fund.
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent organizations
(such as mutual fund performance rankings of Lipper Analytical Services, Inc.)
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 the obligations of the
Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that 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 of personal liability is remote.
SHAREHOLDER INQUIRIES. All inquiries regarding the Fund should be directed
to the Fund at the telephone numbers or address set forth on the front cover of
this Prospectus.
21
<PAGE>
THE DEAN WITTER FAMILY OF FUNDS
MONEY MARKET FUNDS
Dean Witter Liquid Asset Fund Inc.
Dean Witter U.S. Government Money
Market Trust
Dean Witter Tax-Free Daily Income 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 Equity Income 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
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 RETIREMENT SERIES
Liquid Asset Series
U.S. Government Money Market Series
U.S. Government Securities Series
Intermediate Income Securities Series
American Value Series
Capital Growth Series
Dividend Growth Series
Stategist Series
Utilities Series
Value-Added Market Series
Global Equity Series
ASSET ALLOCATION FUNDS
Dean Witter Managed Assets Trust
Dean Witter Strategist Fund
ACTIVE ASSETS ACCOUNT PROGRAM
Active Assets Money Trust
Active Assets Tax-Free Trust
Active Assets California Tax-Free Trust
Active Assets Government Securities Trust
<PAGE>
<TABLE>
<S> <C>
Dean Witter
California Tax-Free Income Fund
Two World Trade Center
New York, New York 10048
TRUSTEES
Dean Witter
Jack F. Bennett California
Charles A. Fiumefreddo Tax-Free
Edwin J. Garn Income Fund
John R. Haire
Dr. John E. Jeuck
Dr. Manuel H. Johnson
Paul Kolton
Michael E. Nugent
Edward R. Telling
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Sheldon Curtis
Vice President, Secretary and
General Counsel
James F. Willison
Vice President
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
110 Washington Street
New York, New York 10286
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Dean Witter Trust Company
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
</TABLE>
Prospectus
February 28, 1994
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 28, 1994 DEAN WITTER
CALIFORNIA TAX-FREE
INCOME FUND
- --------------------------------------------------------------------------------
Dean Witter California Tax-Free Income Fund (the "Fund") is an open-end
diversified management investment company whose investment objective is to
provide a high level of current income exempt from both federal and California
income tax, consistent with the preservation of capital. The Fund invests
principally in California tax-exempt fixed-income securities which are rated in
the four highest categories by Moody's Investors Service, Inc. or Standard &
Poor's Corporation. (See "Investment Practices and Policies".)
A Prospectus for the Fund dated February 28, 1994, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge from the Fund at the address or phone number listed below or from
the Fund's Distributor, Dean Witter Distributors Inc., or from Dean Witter
Reynolds Inc. at any of its branch offices. This Statement of Additional
Information is not a Prospectus. It contains information in addition to and more
detailed than that set forth in the Prospectus. It is intended to provide you
additional information regarding the activities and operations of the Fund, and
should be read in conjunction with the Prospectus.
Dean Witter
California Tax-Free Income Fund
Two World Trade Center
New York, New York 10048
(212) 392-2550
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The Fund and its Management............................................................ 3
Trustees and Officers.................................................................. 6
Investment Practices and Policies...................................................... 8
Investment Restrictions................................................................ 15
Portfolio Transactions and Brokerage................................................... 16
The Distributor........................................................................ 21
Shareholder Services................................................................... 25
Redemptions and Repurchases............................................................ 29
Dividends, Distributions and Taxes..................................................... 31
Performance Information................................................................ 35
Shares of the Fund..................................................................... 36
Custodian and Transfer Agent........................................................... 36
Independent Accountants................................................................ 37
Reports to Shareholders................................................................ 37
Legal Counsel.......................................................................... 37
Experts................................................................................ 37
Registration Statement................................................................. 37
Report of Independent Accountants...................................................... 38
Financial Statements -- December 31, 1993.............................................. 39
Appendix............................................................................... 49
</TABLE>
2
<PAGE>
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
THE FUND
The Fund is a Trust of the type commonly known as a "Massachusetts business
trust" and was organized under the laws of the Commonwealth of Massachusetts on
April 9, 1984.
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 Dean Witter InterCapital Inc. thereafter.) The daily
management of the Fund and research relating to the Fund's portfolio is
conducted by or under the direction of officers of the Fund and of the
Investment Manager, subject to periodic review by the Fund's Board of Trustees.
In addition, Trustees of the Fund provide guidance on economic factors and
interest rate trends. Information as to these trustees and officers is contained
under the caption, "Trustees and Officers."
InterCapital is also the investment manager or investment adviser of the
following management investment companies: Active Assets Money Trust, Active
Assets Tax-Free Trust, Active Assets Government Securities Trust, Active Assets
California Tax-Free Trust, Dean Witter Liquid Asset Fund Inc., InterCapital
Income Securities Inc., Dean Witter High Yield Securities Inc., Dean Witter
Tax-Free Daily Income Trust, Dean Witter Developing Growth Securities Trust,
Dean Witter American Value Fund, Dean Witter Dividend Growth Securities Inc.,
Dean Witter Natural Resource Development Securities Inc., Dean Witter U.S.
Government Money Market Trust, Dean Witter Tax-Exempt Securities Trust, Dean
Witter Variable Investment Series, Dean Witter World Wide Investment Trust, Dean
Witter Select Municipal Reinvestment Fund, Dean Witter U.S. Government
Securities Trust, Dean Witter Equity Income Trust, Dean Witter New York Tax-Free
Income Fund, Dean Witter Convertible Securities Trust, Dean Witter Federal
Securities Trust, Dean Witter Value-Added Market Series, High Income Advantage
Trust, Dean Witter Government Income Trust, Dean Witter Utilities Fund, Dean
Witter Managed Assets Trust, Dean Witter Strategist Fund, Dean Witter California
Tax-Free Daily Income Trust, High Income Advantage Trust II, Dean Witter World
Wide Income Trust, Dean Witter Intermediate Income Securities, Dean Witter
Capital Growth Securities, Dean Witter European Growth Fund Inc., Dean Witter
Pacific Growth Fund Inc., Dean Witter Precious Metals and Minerals Trust, Dean
Witter Global Short-Term Income Fund Inc., Dean Witter Multi-State Municipal
Series Trust, InterCapital Insured Municipal Bond Trust, InterCapital Quality
Municipal Investment Trust, Dean Witter Premier Income Trust, Dean Witter New
York Municipal Money Market Trust, Dean Witter Short-Term U.S. Treasury 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,
InterCapital Insured Municipal Securities, InterCapital Insured California
Municipal Securities, InterCapital Insured Municipal Income Trust, InterCapital
California Insured Municipal Income Trust, High Income Advantage Trust III,
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, Prime Income Trust and Municipal
Premium Income Trust. The foregoing investment companies, together with the
Fund, are collectively referred to as the Dean Witter Funds. In addition, Dean
Witter Services Company Inc. ("DWSC"), a wholly-owned subsidiary of
InterCapital, serves as manager for the following companies for which TCW Funds
Management, Inc. is the investment adviser: TCW/DW Core Equity Trust, TCW/DW
North American Government Income Trust, TCW/
3
<PAGE>
DW Latin American Growth Fund, TCW/DW Income and Growth Fund, TCW/DW Small Cap
Growth Fund, TCW/DW Balanced Fund, TCW/DW Term Trust 2000, TCW/DW Term Trust
2002 and TCW/DW Term Trust 2003 (the "TCW/DW Funds"). InterCapital also serves
as: (i) sub-adviser to Templeton Global 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.
The Investment Manager also serves as an investment adviser for Dean Witter
World Wide Investment Fund, an investment company organized under the laws of
Luxembourg, shares of which may not be offered in the United States or purchased
by American citizens outside of the United States.
Pursuant to an Investment Management Agreement (the "Agreement") with the
Investment Manager, the Fund has retained the Investment Manager to manage the
investment of the Fund's assets, including the placing of orders for the
purchase and sale of portfolio securities. The Investment Manager obtains and
evaluates such information and advice relating to the economy, securities
markets, and specific securities as it considers necessary or useful to
continuously manage the assets of the Fund in a manner consistent with its
investment objective and policies.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, such office space, facilities,
equipment, clerical help, bookkeeping and certain legal services as the Fund may
reasonably require in the conduct of its business, including the preparation of
prospectuses, proxy statements and reports required to be filed with federal and
state securities commissions (except insofar as the participation or assistance
of independent accountants and attorneys is, in the opinion of the Investment
Manager, necessary or desirable). In addition, the Investment Manager pays the
salaries of all personnel, including officers of the Fund, who are employees of
the Investment Manager. The Investment Manager also bears the cost of telephone
service, heat, light, power and other utilities provided to the Fund.
Effective December 31, 1993, pursuant to a Services Agreement between
InterCapital and DWSC, DWSC began to provide the administrative services to the
Fund which were previously performed directly by InterCapital. The foregoing
internal reorganization did not result in any change in the nature or scope of
the administrative services being provided to the Fund or any of the fees being
paid by the Fund for the overall services being performed under the terms of the
existing Management Agreement.
Expenses not expressly assumed by the Investment Manager under the Agreement
or by the Distributor of the Fund's shares, Dean Witter Distributors Inc.
("Distributors" or the "Distributor") (see "The Distributor") will be paid by
the Fund. The expenses borne by the Fund include, but are not limited to: fees
pursuant to any plan of distribution, charges and expenses of any registrar,
custodian, stock transfer and dividend disbursing agent; brokerage commissions;
taxes; engraving and printing stock certificates; registration costs of the Fund
and its shares under federal and state securities laws; the cost and expense of
printing, including typesetting, and distributing prospectuses and statements of
additional information of the Fund and supplements thereto to the Fund's
shareholders; all expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing of proxy statements and reports to shareholders;
fees and travel expenses of Trustees or members of any advisory board or
committee who are not employees of the Investment Manager or any corporate
affiliate of the Investment Manager; all expenses incident to any dividend,
withdrawal or redemption options; charges and expenses of any outside service
used for pricing of the Fund's shares; fees and expenses of legal counsel,
including counsel to the Trustees who are not interested persons of the 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.
4
<PAGE>
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 annual
rate of 0.55% to the portion of the Fund's net assets not exceeding $500
million; 0.525% to the portion of the Fund's net assets exceeding $500 million
but not exceeding $750 million, and 0.50% to the portion of the Fund's net
assets exceeding $750 million but not exceeding $1 billion; and 0.475% of the
portion of daily net assets exceeding $1 billion. Total operating expenses of
the Fund are subject to applicable limitations under rules and regulations of
states where the Fund is authorized to sell its shares, as the same may be
amended from time to time. Presently, the most restrictive limitation is as
follows. If in any fiscal year the Fund's total operating expenses, exclusive of
taxes, interest, distribution fees, brokerage fees and extraordinary expenses
(to the extent permitted by applicable state securities laws and regulations),
exceed 2 1/2% of the first $30,000,000 of average daily net assets, 2% of the
next $70,000,000 and 1% of any excess over $100,000,000, the Investment Manager
will reimburse the Fund for the amount of such excess. Such amount, if any, will
be calculated daily and credited on a monthly basis. For the fiscal years ended
December 31, 1991, 1992, and 1993, the Fund accrued to the Investment Manager
total compensation under the Agreement in the amounts of $4,046,080, $4,846,808
and $5,806,822, respectively. During such periods, the Fund's expenses did not
exceed the limitation set forth above or the then existing most restrictive
limitation.
The Agreement provides that in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations thereunder, the
Investment Manager is not liable to the Fund or any of its investors for any act
or omission by the Investment Manager or for any losses sustained by the Fund or
its investors. The Agreement does not restrict the Investment Manager from
acting as investment manager or adviser to others.
The Agreement was initially approved by the Trustees on October 22, 1992 and
by the shareholders on January 12, 1993. The Agreement is substantially
identical to a prior investment management agreement which was initially
approved by the Board of Trustees on June 13, 1984 and by DWR as the sole
shareholder of the Fund on June 26, 1984. The Agreement was also approved by the
vote of a majority, as defined in the Investment Company Act of 1940, as amended
(the "Act"), of the outstanding shares of the Fund, at the first Annual Meeting
of the Fund held on October 21, 1985. The Agreement took effect on June 30,
1993, upon the spin-off by Sears, Roebuck and Co. of its remaining shares of
DWDC. The Agreement may be terminated at any time, without penalty, on thirty
days' notice, by the Board of Trustees of the Fund, by the holders of a
majority, as defined in the Investment Company Act of 1940, as amended (the
"Act"), of the outstanding shares of the Fund, or by the Investment Manager. The
Agreement will automatically terminate in the event of its assignment (as
defined in the Act).
Under its terms, the Agreement continues in effect until April 30, 1994, and
will continue from year to year thereafter, provided continuance of the
Agreement is approved at least annually by the vote of the holders of a majority
(as defined in the Act) of the outstanding shares of the Fund, or by the Board
of Trustees of the Fund; provided that in either event such continuance is
approved annually by the vote of a majority of the Independent Trustees, which
vote must be cast in person at a meeting called for the purpose of voting on
such approval.
The Fund has acknowledged that the name "Dean Witter" is a property right of
DWR. The Fund has agreed that DWR or its parent company may use or, at any time,
permit others to use, the name "Dean Witter". The Fund has also agreed that in
the event the investment management contract between the Investment Manager and
the Fund is terminated, or if the affiliation between InterCapital and its
parent is terminated, the Fund will eliminate the name "Dean Witter" from its
name if DWR or its parent shall so request.
5
<PAGE>
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The Trustees and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with
InterCapital, and with the Dean Witter Funds and the TCW/DW Funds' are shown
below.
<TABLE>
<CAPTION>
NAME, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------ --------------------------------------------------
<S> <C>
Jack F. Bennett Retired; Director or Trustee of the Dean Witter
Trustee Funds; formerly Senior Vice President and Director
141 Taconic Road of Exxon Corporation (1975-January, 1989) and
Greenwich, Connecticut Under Secretary of the U.S. Treasury for Monetary
Affairs (1974-1975); Director of Philips
Electronics N.V. (electronics), Tandem Computers
Inc. and Massachusetts Mutual Insurance Co.;
director or trustee of various not-for-profit and
business organizations.
Charles A. Fiumefreddo* Chairman, Chief Executive Officer and Director of
Chairman of the Board, InterCapital, Distributors and DWSC; Executive
President, Chief Executive Vice President and Director of DWR; Chairman,
Officer Director or Trustee, President and Chief Executive
and Trustee Officer of the Dean Witter Funds; Chairman, Chief
Two World Trade Center Executive Officer and Trustee of the TCW/ DW
New York, New York Funds; Chairman and Director of Dean Witter Trust
Company; Director and/or officer of various DWDC
subsidiaries; formerly Executive Vice President
and Director of DWDC (until February, 1993).
Edwin J. Garn Director or Trustee of the Dean Witter Funds;
Trustee formerly United States Senator (R-Utah)
2000 Eagle Gate Tower (1974-1992) and Chairman, Senate Banking Committee
Salt Lake City, Utah 84111 (1980-1986); formerly Mayor of Salt Lake City,
Utah (1971-1974); formerly Astronaut, Space
Shuttle Discovery (April 12-19, 1985); Vice
Chairman, Huntsman Chemical Corporation (since
January, 1993); Member of the board of various
civic and charitable organizations.
John R. Haire Chairman of the Audit Committee and Chairman of
Trustee the Committee of Independent Directors or Trustees
439 East 51st Street of each of the Dean Witter Funds; and Director or
New York, New York Trustee of the Dean Witter Funds; Trustee of the
TCW/DW Funds; formerly President, Council for Aid
to Education (1978-October, 1989) and Chairman and
Chief Executive Officer of Anchor Corporation, an
Investment Adviser (1964-1978); Director of Wash-
ington National Corporation (insurance) and Bowne
& Co. Inc., (printing).
Dr. John E. Jeuck Retired; Director or Trustee of the Dean Witter
Trustee Funds; formerly Robert Law Professor of Business
70 East Cedar Street Administration, Graduate School of Business,
Chicago, Illinois University of Chicago (until July 1989); Business
Consultant.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NAME, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------ --------------------------------------------------
<S> <C>
Dr. Manuel H. Johnson Senior Partner, Johnson Smick International, Inc.,
Trustee a consulting firm; Koch Professor of International
7521 Old Dominion Drive Economics and Director of the Center for Global
Maclean, Virginia Market Studies at George Mason University (since
September, 1990); Co-Chairman and a founder 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 Greenwich
Capital Markets Inc., (broker-dealer); formerly
Vice Chairman of the Board of Governors of the
Federal Reserve System (February, 1986-August,
1990) and Assistant Secretary of the U.S. Treasury
(1982-1986).
Paul Kolton Director or Trustee of the Dean Witter Funds;
Trustee Chairman of the Audit Committee and Chairman of
9 Hunting Ridge Road the Committee of the Independent Trustees and
Stamford, Connecticut Trustee of the TCW/DW Funds; formerly Chairman of
the Financial Accounting Standards Advisory
Council and Chairman and Chief Executive Officer
of the American Stock Exchange; Director of UCC
Investors Holding Inc. (Uniroyal Chemical
Company); director or trustee of various
not-for-profit organizations.
Michael E. Nugent General Partner, Triumph Capital, L.P., a private
Trustee investment partnership (since April, 1988);
237 Park Avenue Director or Trustee of the Dean Witter Funds, and
New York, New York Trustee of the TCW/DW Funds; formerly Vice
President, Bankers Trust Company and BT Capital
Corporation (September, 1984-March, 1988);
Director of various business organizations.
Edward R. Telling* Retired; Director or Trustee of the Dean Witter
Trustee Funds; formerly Chairman of the Board of Directors
Sears Tower and Chief Executive Officer (until December 31,
Chicago, Illinois 1985) and President (from January 1981-March 1982
and from February 1984-August 1984) of Sears,
Roebuck and Co.
Sheldon Curtis Senior Vice President, Secretary and General
Vice President, Secretary and Counsel of InterCapital and DWSC; Senior Vice
General Counsel President and Secretary of Dean Witter Trust
Two World Trade Center Company; Senior Vice President, Assistant
New York, New York Secretary and Assistant General Counsel of
Distributors; Assistant Secretary of DWR; Vice
President, Secretary and General Counsel of the
Dean Witter Funds and the TCW/DW Funds.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NAME, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------ --------------------------------------------------
<S> <C>
James F. Willison Senior Vice President of InterCapital; Vice
Vice President President of various Dean Witter Funds.
Two World Trade Center
New York, New York
Thomas F. Caloia First Vice President (since May, 1991) and
Treasurer Assistant Treasurer (since January, 1993) of
Two World Trade Center InterCapital; First Vice President and Assistant
New York, New York Treasurer of DWSC; Treasurer of the Dean Witter
Funds and TCW/DW Funds.
<FN>
- ------------------------
*Denotes Trustees who are "interested persons" of the Fund, as defined in the
Act.
</TABLE>
In addition, Robert M. Scanlan, President and Chief Operating Officer of
InterCapital, David A. Hughey, Executive Vice President of InterCapital, and
Peter M. Avelar, and Jonathan R. Page, Senior Vice Presidents of InterCapital,
are Vice Presidents of the Fund and Barry Fink, First Vice President and
Assistant General Counsel of InterCapital and Marilyn K. Cranney, Lawrence S.
Lafer, Lou Anne D. McInnis, and Ruth Rossi, Vice Presidents and Assistant
General Counsels of InterCapital, are Assistant Secretaries of the Fund.
The Fund pays each trustee who is not an employee or retired employee of the
Investment Manager or an affiliated company an annual fee of $1,200 ($1,600
prior to December 31, 1993) plus $50 for each meeting of the Trustees, the Audit
Committee or of the Committee of Independent Trustees attended by the Trustee
(the Fund pays the Chairman of the Audit Committee an additional annual fee of
$1,000 ($1,200 prior to December 31, 1993), and pays the Chairman of the
Committee of Independent Trustees an additional annual fee of $2,400, in each
case inclusive of the Committee meeting fees). 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 Fund has
adopted a retirement program under which an Independent Trustee who is not an
"interested person" of the Fund and who retires after a minimum required period
of service would be entitled to retirement payments upon reaching the eligible
retirement age (normally, after attaining age 72) based upon length of service
and computed as a percentage of one-fifth of the total compensation earned by
such Trustee for service to the Fund in the five-year period prior to the date
of the Trustee's retirement. For the year ended December 31, 1993, the Fund
accrued a total of $36,071 for trustees' fees and expenses, of which $12,232 was
for benefits under the above described retirement program. As of the date of
this Statement of Additional Information, the aggregate 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 outstanding.
INVESTMENT PRACTICES AND POLICIES
- --------------------------------------------------------------------------------
PORTFOLIO SECURITIES
TAXABLE SECURITIES. As discussed in the Prospectus, the Fund may invest up
to 20% of its total assets in taxable money market instruments, non-California
tax-exempt securities, futures and options. Investments in taxable money market
instruments would generally be made under any one of the following
circumstances: (a) pending investment of proceeds of sale of Fund shares or of
portfolio securities, (b) pending settlement of purchases of portfolio
securities and (c) to maintain liquidity for the purpose of meeting anticipated
redemptions. Only those non-California tax-exempt securities which satisfy the
standards established for California tax-exempt securities may be purchased by
the Fund.
In addition, the Fund may temporarily invest more than 20% of its total
assets in non-California tax-exempt securities and taxable money market
instruments, or in tax-exempt securities subject to the federal alternative
minimum tax for individual shareholders, to maintain a "defensive" posture when,
in
8
<PAGE>
the opinion of the Investment Manager, it is advisable to do so because of
market conditions. The types of taxable money market instruments in which the
Fund may invest are limited to the following short-term fixed-income securities
(maturing in one year or less from the time of purchase): (i) obligations of the
United States Government, its agencies, instrumentalities or authorities; (ii)
commercial paper rated P-1 by Moody's Investors Service, Inc. ("Moody's") or A-1
by Standard & Poor's Corporation ("S&P"); (iii) certificates of deposit of
domestic banks with assets of $1 billion or more; and (iv) repurchase agreements
with respect to portfolio securities.
TAX-EXEMPT SECURITIES. As discussed in the Prospectus, at least 80% of the
Fund's total assets will be invested in California tax-exempt securities
(California Municipal Bonds, California Municipal Notes and California Municipal
Commercial Paper). In regard to the Moody's and S&P ratings discussed in the
Prospectus, it should be noted that the ratings represent the organizations'
opinions as to the quality of the securities which they undertake to rate and
that the ratings are general and not absolute standards of quality. For a
description of Municipal Bond, Municipal Note and Municipal Commercial Paper
ratings by Moody's and S&P, see the Appendix to this Statement of Additional
Information.
The Fund does not have any minimum quality rating standard for its
downgraded investments. As such, the Fund may invest in securities rated as low
as Caa, Ca or C by Moody's or CCC, CC, C or CI by S&P. Bonds rated Caa or Ca by
Moody's may already be in default on payment of interest or principal, while
bonds rated C by Moody's, their lowest bond rating, can be regarded as having
extremely poor prospects of ever attaining any real investment standing. Bonds
rated CI by S&P, their lowest bond rating, are no longer making interest
payments.
The payment of principal and interest by issuers of certain Municipal
Obligations purchased by the Fund may be guaranteed by letters of credit or
other credit facilities offered by banks or other financial institutions. Such
guarantees will be considered in determining whether a Municipal Obligation
meets the Fund's investment quality requirements. In addition, some issues may
contain provisions which permit the Fund to demand from the issuer repayment of
principal at some specified period(s) prior to maturity.
MUNICIPAL BONDS. Municipal Bonds, as referred to in the Prospectus, are
debt obligations of a state, its cities, municipalities and municipal agencies
(all of which are generally referred to as "municipalities") which generally
have a maturity at the time of issue of one year or more, and the interest from
which is, in the opinion of bond counsel, exempt from federal income tax. In
addition to these requirements, the interest from California Municipal Bonds
must be, in the opinion of bond counsel, exempt from California personal income
tax. They are issued to raise funds for various public purposes, such as
construction of a wide range of public facilities, to refund outstanding
obligations and to obtain funds for general operating expenses or to loan to
other public institutions and facilities. In addition, certain types of
industrial development bonds and pollution control bonds are issued by or on
behalf of public authorities to provide funding for various privately operated
facilities.
MUNICIPAL NOTES. Municipal Notes are short-term obligations of
municipalities, generally with a maturity at the time of issuance ranging from
six months to three years, the interest from which is, in the opinion of bond
counsel, exempt from federal income tax. In addition to those requirements, the
interest from California Municipal Notes must be, in the opinion of bond
counsel, exempt from California personal income tax. The principal types of
Municipal Notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes and project notes, although there are other types of
Municipal Notes in which the Fund may invest. Notes sold in anticipation of
collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuing municipality or agency. Project Notes are
issued by local agencies and are guaranteed by the United States Department of
Housing and Urban Development. Such notes are secured by the full faith and
credit of the United States Government.
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. In addition to those requirements, the
interest from California Commercial Paper must be, in the opinion
9
<PAGE>
of bond counsel, exempt from California personal income tax. It may be issued at
a discount and is sometimes referred to as Short-Term Discount Notes. Municipal
Commercial Paper is likely to be used to meet seasonal working capital needs of
a municipality or interim construction financing and to be paid from general
revenues of the municipality or refinanced with long-term debt. In most cases
Municipal Commercial Paper is backed by letters of credit, lending agreements,
note repurchase agreements or other credit facility agreements offered by banks
or other institutions.
Issuers of Municipal Obligations 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 any state extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations or upon municipalities to levy taxes. There is also the possibility
that as a result of litigation or other conditions the power or ability of any
one or more issuers to pay, when due, principal of and interest on its, or
their, Municipal Bonds, Municipal Notes and Municipal Commercial Paper may be
materially affected.
SPECIAL INVESTMENT CONSIDERATIONS
Because of the special nature of securities which are rated below investment
grade by national credit rating agencies ("lower-rated securities"), the
Investment Manager must take into account certain special considerations in
assessing the risks associated with such investments. For example, as the
lower-rated securities market is relatively new, its growth has paralleled a
long economic expansion and it has not weathered a recession in its present size
and form. Therefore, an economic downturn or increase in interest rates is
likely to have a negative effect on this market and on the value of the lower-
rated securities held by the Fund, as well as on the ability of the securities'
issuers to repay principal and interest on their borrowings.
The prices of lower-rated securities have been found to be less sensitive to
changes in prevailing interest rates than higher-rated investments, but are
likely to be more sensitive to adverse economic changes or individual corporate
developments. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress which
would adversely affect their ability to service their principal and interest
payment obligations, to meet their projected business goals or to obtain
additional financing. If the issuer of a fixed-income security owned by the Fund
defaults, the Fund may incur additional expenses to seek recovery. In addition,
periods of economic uncertainty and change can be expected to result in an
increased volatility of market prices of lower-rated securities and a
concomitant volatility in the net asset value of a share of the Fund. Moreover,
the market prices of certain of the Fund's portfolio securities which are
structured as zero coupon securities are affected to a greater extent by
interest rate changes and thereby tend to be more volatile than securities which
pay interest periodically and in cash (see "Dividends, Distributions and Taxes"
for a discussion of the tax ramifications of investments in such securities).
The secondary market for lower-rated securities may be less liquid than the
markets for higher quality securities and, as such, may have an adverse effect
on the market prices of certain securities. The limited liquidity of the market
may also adversely affect the ability of the Fund's Trustees to arrive at a fair
value for certain lower-rated securities at certain times and should make it
difficult for the Fund to sell certain securities.
New laws and proposed new laws may have a potentially negative impact on the
market for lower-rated securities. For example, recent legislation requires
federally-insured savings and loan associations to divest their investments in
lower-rated securities. This legislation and other proposed legislation may have
an adverse effect upon the value of lower-rated securities and a concomitant
negative impact upon the net asset value of a share of the Fund.
VARIABLE RATE OBLIGATIONS. As stated in the Prospectus, the Fund may invest
in obligations of the type called "variable rate obligations". The interest rate
payable on a variable rate obligation is adjusted either at predesignated
periodic intervals or whenever there is a change in the market rate of interest
on which the interest rate payable is based. Other features may include the
right whereby the Fund may
10
<PAGE>
demand prepayment of the principal amount of the obligation prior to its stated
maturity (a "demand feature") and the right of the issuer to prepay the
principal amount prior to maturity. The principal benefit of a variable rate
obligation is that the interest rate adjustment minimizes changes in the market
value of the obligation. The principal benefit to the Fund of purchasing
obligations with a demand feature is that liquidity, and the ability of the Fund
to obtain repayment of the full principal amount of the obligation prior to
maturity, is enhanced.
LENDING OF PORTFOLIO SECURITIES. The Fund may lend portfolio securities to
brokers, dealers and financial institutions provided that cash equal to at least
100% of the market value of the securities loaned is deposited by the borrower
with the Fund and is maintained each business day in a segregated account
pursuant to applicable regulations. While such securities are on loan, the
borrower will pay the Fund any income accruing thereon, and the Fund may invest
the cash collateral in portfolio securities, thereby earning additional income.
The Fund will not lend its portfolio securities if such loans are not permitted
by the laws or regulations of any state in which its shares are qualified for
sale and will not lend more than 25% of the value of its total assets. Loans
would be subject to termination by the Fund in the normal settlement time,
currently five business days after notice, or by the borrower on one day's
notice. Borrowed securities must be returned when the loan is terminated. Any
gain or loss in the market price of the borrowed securities which occurs during
the term of the loan inures to the Fund and its shareholders. The Fund may pay
reasonable finders, borrowers, administrative, and custodial fees in connection
with a loan. During the fiscal year ended December 31, 1993, the Fund did not
loan its portfolio securities and it has no current intention to loan its
portfolio securities in the forseeable future.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. As stated in the Prospectus,
the Fund may purchase tax-exempt securities on a when-issued or delayed delivery
basis. When such transactions are negotiated, the price is fixed at the time of
the commitment, but delivery and payment can take place a month or more after
the date of the commitment. While the Fund will only purchase securities on a
when-issued or delayed delivery basis with the intention of acquiring the
securities, the Fund may sell the securities before the settlement date, if it
is deemed advisable. The securities so purchased or sold are subject to market
fluctuation and no interest accrues to the purchaser during this period. At the
time the Fund makes the commitment to purchase a Municipal Obligation on a
when-issued or delayed delivery basis, it will record the transaction and
thereafter reflect the value, each day, of the Municipal Obligation in
determining its net asset value. The Fund will also establish a segregated
account with its custodian bank in which it will maintain cash or cash
equivalents or other high quality Municipal Obligations equal in value to
commitments for such when-issued or delayed delivery securities. The Fund does
not believe that its net asset value or income will be adversely affected by its
purchase of Municipal Obligations on a when-issued or delayed delivery basis.
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 receive interest from the institution until the
time when the repurchase is to occur. Although such date is deemed by the Fund
to be the maturity date of a repurchase agreement, the maturities of securities
subject to repurchase agreements are not subject to any limits and may exceed
one year. While repurchase agreements involve certain risks not associated with
direct investments in debt securities, the Fund follows procedures designed to
minimize such risks. These procedures include effecting repurchase transactions
only with large well-capitalized and well-established financial institutions,
whose financial condition will be continually monitored. In addition, the value
of the collateral underlying the repurchase agreement will always be at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. In the event of a default or bankruptcy by a selling
financial institution, the Fund
11
<PAGE>
will seek to liquidate such collateral. However, the exercising of the Fund's
right to liquidate such collateral could involve certain costs or delays and, to
the extent that proceeds from any sale upon a default of the obligation to
repurchase were less than the repurchase price, the Fund could suffer a loss. It
is the current policy of the Fund not to invest in repurchase agreements that do
not mature within seven days if any such investment, together with any other
illiquid assets held by the Fund, amounts to more than 10% of its total assets.
During the fiscal year ended December 31, 1993, the Fund did not enter into
repurchase agreements and it is the Fund's current intention not to invest in
repurchase agreements in the forseeable future.
HEDGING ACTIVITIES
The Fund may enter financial futures contracts, options on such futures and
municipal bond index futures contracts for hedging purposes.
FUTURES CONTRACTS AND OPTIONS ON FUTURES
As discussed in the Prospectus, the Fund may invest in financial futures
contracts ("futures contracts") and related options thereon. These futures
contracts and related options thereon will be used only as a hedge against
anticipated interest rate changes. A futures contract sale creates an obligation
by the Fund, as seller, to deliver the specific type of instrument called for in
the contract at a specified future time for a specified price. A futures
contract purchase would create an obligation by the Fund, as purchaser, to take
delivery of the specific type of financial instrument at a specified future time
at a specified price. The specific securities delivered or taken, respectively,
at settlement date, would not be determined until or near that date. The
determination would be in accordance with the rules of the exchange on which the
futures contract sale or purchase was effected.
Although the terms of futures contracts specify actual delivery or receipt
of securities, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the securities.
Closing out of a futures contract is usually effected by entering into an
offsetting transaction. An offsetting transaction for a futures contract sale is
effected by the Fund entering into a futures contract purchase for the same
aggregate amount of the specific type of financial instrument at the same
delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is immediately paid the difference and thus realizes a gain.
If the offsetting purchase price exceeds the sale price, the Fund pays the
difference and realizes the loss. Similarly, the closing out of a futures
contract purchase is effected by the Fund entering into a futures contract sale.
If the offsetting sale price exceeds the purchase price the Fund realizes a
gain, and if the offsetting sale price is less than the purchase price the Fund
realizes a loss.
Unlike a futures contract, which requires the parties to buy and sell a
security on a set date, an option on a futures contract entitles its holder to
decide on or before a future date whether to enter into such a contract. If the
holder decides not to enter into the contract, the premium paid for the option
is lost. Since the value of the option is fixed at the point of sale, there are
no daily payments of cash to reflect the change in the value of the underlying
contract, as discussed below for futures contracts. The value of the option
changes and is reflected in the net asset value of the Fund.
The Fund is required to maintain margin deposits with brokerage firms
through which it effects futures contracts and options thereon. The initial
margin requirements vary according to the type of the underlying security. In
addition, due to current industry practice daily variations in gains and losses
on open contracts are required to be reflected in cash in the form of variation
margin payments. The Fund may be required to make additional margin payments
during the term of the contract.
Currently, futures contracts can be purchased on debt securities such as
U.S. Treasury Bills and Bonds, U.S. Treasury Notes with maturities between 6 1/2
and 10 years, Certificates of the Government National Mortgage Association and
Bank Certificates of Deposit. The Fund may invest in interest rate futures
contracts covering these types of financial instruments as well as in new types
of contracts that become available in the future.
12
<PAGE>
Financial futures contracts are traded in an auction environment on the
floors of several Exchanges -- principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. Each Exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the Exchange membership which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A risk in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities subject to
futures contracts may correlate imperfectly with the behavior of the cash prices
of the Fund's portfolio securities. The correlation may be distorted by the fact
that the futures market is dominated by short-term traders seeking to profit
from the difference between a contract or security price objective and their
cost of borrowed funds. This would reduce their value for hedging purposes over
a short time period. The correlation may be further distorted since the futures
contracts that are being used to hedge are not based on municipal obligations.
Another risk is that the Fund's manager could be incorrect in its
expectations as to the direction or extent of various interest rate movements or
the time span within which the movements take place. For example, if the Fund
sold futures contracts for the sale of securities in anticipation of an increase
in interest rates, and then interest rates went down instead, causing bond
prices to rise, the Fund would lose money on the sale.
Put and call options on financial futures have similar characteristics as
Exchange-traded options. See below for a further description of options.
In addition to the risks associated in investing in options on securities,
there are particular risks associated with investing in options on futures. In
particular, the ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid secondary market.
It is not certain that this market will develop.
In order to assure that the Fund is entering into transactions in futures
contracts for hedging purposes as such is defined by the Commodity Futures
Trading Commission either: 1) a substantial majority (i.e., approximately 75%)
of all anticipatory hedge transactions (transactions in which the Fund does not
own at the time of the transaction, but expects to acquire, the securities
underlying the relevant futures contract) involving the purchase of futures
contracts will be completed by the purchase of securities which are the subject
of the hedge or 2) the underlying value of all long positions in futures
contracts will not exceed the total value of a) all short-term debt obligations
held by the Fund; b) cash held by the Fund; c) cash proceeds due to the Fund on
investments within thirty days; d) the margin deposited on the contracts; and e)
any unrealized appreciation in the value of the contracts.
The Fund may not enter into futures contracts or related options thereon if
immediately thereafter the amount committed to margin plus the amount paid for
option premiums exceeds 5% of the value of the Fund's total assets. In instances
involving the purchase of futures contracts by the Fund, the market value of the
futures contract will be deposited in a segregated account of cash and cash
equivalents to collateralize the position and thereby ensure that the use of
such futures is unleveraged. The Fund may not purchase or sell futures contracts
or related options if immediately thereafter more than one-third of its net
assets would be hedged.
MUNICIPAL BOND INDEX FUTURES. The Fund may utilize municipal bond index
futures contracts and options thereon for hedging purposes. The Fund's
strategies in employing such contracts will be similar to that discussed above
with respect to financial futures and options thereon. A municipal bond index is
a method of reflecting in a single number the market value of many different
municipal bonds and is designed to be representative of the municipal bond
market generally. The index fluctuates in response to changes in the market
values of the bonds included within the index. Unlike futures contracts on
particular financial instruments, transactions in futures on a municipal bond
index will be settled in cash if held until the close of trading in the
contract. However, like any other futures contract, a position in the contract
may be closed out by purchase or sale of an offsetting contract for the same
delivery month prior to expiration of the contract.
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OPTIONS. The Fund may purchase or sell (write) options on debt securities
as a means of achieving additional return or hedging the value of the Fund's
portfolio. The Fund would only buy options listed on national securities
exchanges. The Fund will not purchase options if, as a result, the aggregate
cost of all outstanding options exceeds 10% of the Fund's total assets.
Presently there are no options on California tax-exempt securities traded on
national securities exchanges and until such time as they become available, the
Fund will not invest in options on debt securities. It is anticipated that such
instruments will not become available during the next year.
A call option is a contract that gives the holder of the option the right to
buy from the writer of the call option, in return for a premium, the security
underlying the option at a specified exercise price at any time during the term
of the option. The writer of the call option has the obligation upon exercise of
the option to deliver the underlying security upon payment of the exercise price
during the option period. A put option is a contract that gives the holder of
the option the right to sell to the writer, in return for a premium, the
underlying security at a specified price during the term of the option. The
writer of the put has the obligation to buy the underlying security upon
exercise, at the exercise price during the option period.
The Fund will only write covered call or covered put options. The Fund may
not write covered options in an amount exceeding 20% of the value of its total
assets. A call option is "covered" if the Fund owns the underlying security
subject to the option or has an absolute and immediate right to acquire that
security or futures contract without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option is also covered if the Fund holds a call on the same security or futures
contract as the call written where the exercise price of the call held is (i)
equal to or less than the exercise price of the call written or (ii) greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash, Treasury bills or other high grade short-term obligations in a
segregated account with its custodian. A put option is "covered" if the Fund
maintains cash, Treasury bills or other high grade short-term obligations with a
value equal to the exercise price in a segregated account with its custodian, or
else holds a put on the same security or futures contract as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written.
If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing an
option of the same series as the option previously written. However, once the
Fund has been assigned an exercise notice, the Fund will be unable to effect a
closing purchase transaction. Similarly, if the Fund is the holder of an option
it may liquidate its position by effecting a closing sale transaction. This is
accomplished by selling an option of the same series as the option previously
purchased. There can be no assurance that either a closing purchase or sale
transaction can be effected when the Fund so desires.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Since call option prices generally reflect increases in the
price of the underlying security, any loss resulting from the repurchase of a
call option may also be wholly or partially offset by unrealized appreciation of
the underlying security. Other principal factors affecting the market value of a
put or a call option include supply and demand, interest rates, the current
market price and price volatility of the underlying security and the time
remaining until the expiration date.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although the Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option. In such event it might not be
possible to effect closing transactions in particular options, so that the Fund
would have to exercise its options in order to realize any profit and would
incur brokerage commissions upon the exercise of call options and upon the
subsequent disposition of underlying securities for the exercise of put options.
If the Fund as a
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covered call option writer is unable to effect a closing purchase transaction in
a secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
PORTFOLIO MANAGEMENT
The Fund's portfolio turnover rate during the fiscal year ended December 31,
1993 was 10%. It is anticipated that the Fund's portfolio turnover rate will not
exceed 50% during the fiscal year ending December 31, 1994. A 50% turnover rate
would occur, for example, if 50% of the securities held in the Fund's portfolio
(excluding all securities whose maturities at acquisition were one year or less)
were sold and replaced within one year. However, the Fund may engage in
short-term trading consistent with its investment objective. Securities may be
sold in anticipation of a market decline (a rise in interest rates) or purchased
in anticipation of a market rise (a decline in interest rates). In addition, a
security may be sold and another security of comparable quality purchased at
approximately the same time to take advantage of what the Investment Manager
believes to be a temporary disparity in the normal yield relationship between
the two securities. These yield disparities may occur for reasons not directly
related to the investment quality of particular issues or the general movement
of interest rates, such as changes in the overall demand for, or supply of,
various types of tax-exempt securities.
In general, purchases and sales may also be made to restructure the
portfolio in terms of average maturity, quality, coupon yield, or
diversification for any one or more of the following purposes: (a) to increase
income, (b) to improve portfolio quality, (c) to minimize capital depreciation,
(d) to realize gains or losses, or for such other reasons as the Investment
Manager deems relevant in light of economic and market conditions.
The Fund does not generally intend to invest more than 25% of its total
assets in securities of any one governmental unit. Subject to investment
restriction number 3 in the Prospectus, 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).
The Fund may invest in obligations customarily sold to institutional
investors in private transactions with the issuers thereof and up to 5% of its
total assets in securities for which a BONA FIDE market does not exist at the
time of purchase. With respect to any securities as to which a BONA FIDE market
does not exist, the Fund may be unable to dispose of such securities promptly at
reasonable prices. It is the Fund's current intention not to invest in such
obligations.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
In addition to the investment restrictions enumerated in the Prospectus, the
investment restrictions listed below have been adopted by the Fund as
fundamental policies, which may not be changed without the vote of a majority of
the outstanding voting securities of the Fund, as defined in the Act. Such a
majority is defined as the lesser of (a) 67% of the shares present at a meeting
of shareholders, if the holders of more than 50% of the outstanding shares of
the Fund are present or represented by proxy or (b) more than 50% of the
outstanding shares of the Fund. For purposes of the following restrictions 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 securities guaranteed by separate
entities will be considered a separate security; (b) a "taxable security" is any
security the interest on which is subject to federal income tax; and (c) all
percentage limitations apply immediately after a purchase or initial investment,
and any subsequent change in any applicable percentage resulting from market
fluctuations or other changes in total or net assets does not require
elimination of any security from the portfolio.
The Fund may not:
1. Invest in common stock.
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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 except that the Fund may purchase
financial futures contracts and related options in accordance with
procedures adopted by the Trustees described in its Prospectus and Statement
of Additional Information.
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
options on futures contracts or options on debt securities.
7. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
8. Borrow money, except that the Fund may borrow from a bank for
temporary or emergency purposes in amounts not exceeding 5% (taken at the
lower of cost or current value) of the value of its total assets (not
including the amount borrowed).
9. Pledge its assets or assign or otherwise encumber them except to
secure permitted borrowings. (For the purpose of this restriction,
collateral arrangements with respect to the writing of options and
collateral arrangements with respect to initial margin for futures are not
deemed to be pledges of assets and neither such arrangements nor the
purchase or sale of futures are deemed to be the issuance of a senior
security as set forth in restriction 10.)
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; (b) by investment in repurchase agreements; and (c)
by lending its portfolio securities.
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. The
deposit or payment by the Fund of initial or variation margin in connection
with futures contracts or related options thereon is not considered the
purchase of a security on margin.
14. Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security.
15. Invest for the purpose of exercising control or management of any
other issuer.
PORTFOLIO TRANSACTIONS AND BROKERAGE
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The Investment Manager is responsible for decisions to buy and sell
securities and commodities 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 charging a stated commission,
although the price of the security usually includes a profit to the dealer.
Options and futures transactions will usually be effected through a broker and a
commission will be charged. The Fund also expects that securities will be
purchased at times in underwritten offerings where the price
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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,
1991, 1992 and 1993, the Fund did not pay any brokerage commissions.
The Investment Manager currently serves as investment manager to a number of
clients, including other investment companies, and may in the future act as
investment manager or adviser to others. It is the practice of the Investment
Manager to cause purchase and sale transactions to be allocated among the Fund
and others whose assets it manages in such manner as it deems equitable. In
making such allocations among the Fund and other client accounts, the main
factors considered are the respective investment objectives, the relative size
of portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held and the
opinions of the persons responsible for managing the portfolios of the Fund and
other client accounts.
The policy of the Fund, regarding purchases and sales of securities for its
portfolio, is that primary consideration be given to obtaining the most
favorable prices and efficient execution of transactions. 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 executions 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 every case, 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 will not reduce the management fee it
pays to the Investment Manager by any amount that may be attributable to the
value of such services.
Pursuant to an order of the Securities and Exchange Commission, the Fund may
effect principal transactions in certain money market instruments with DWR. The
Fund will limit its transactions with DWR to U.S. Government and Government
Agency Securities, Bank Money Instruments (i.e. Certificates of Deposit and
Bankers' Acceptances) and Commercial Paper. Such transactions will be effected
with DWR only when the price available from DWR is better than that available
from other dealers.
Consistent with the policy described above, brokerage transactions in
securities and commodities listed on exchanges or admitted to unlisted trading
privileges may be effected through DWR. In order for DWR to effect portfolio
transactions for the Fund, the commissions, fees or other remuneration received
by DWR must be reasonable and fair compared to the commissions, fees or other
remuneration paid to other brokers in connection with comparable transactions
involving similar securities being purchased or sold on an exchange during a
comparable period of time. This standard would allow DWR to receive no more than
the remuneration which would be expected to be received by an unaffiliated
broker in a commensurate arms-length transaction. Furthermore, the Trustees of
the Fund, including a majority of the Trustees who are not "interested"
Trustees, have adopted procedures which are reasonably designed to provide that
any commissions, fees or other remuneration paid to DWR are consistent with the
foregoing standard.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA TAX-EXEMPT SECURITIES
The Trust will be affected by any political, economic or regulatory
developments affecting the ability of California issuers to pay interest or
repay principal on their obligations. Various developments regarding the
California Constitution and State statutes which limit the taxing and spending
authority of
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California governmental entities may impair the ability of California issuers to
maintain debt service on their obligations. The following information
constitutes only a brief summary and is not intended as a complete description.
In 1978, Proposition 13, an amendment to the California Constitution, was
approved, limiting real property valuation for property tax purposes and the
power of local governments to increase real property tax revenues and revenues
from other sources. Legislation adopted after Proposition 13 provided for
assistance to local governments, including the redistribution of the
then-existing surplus in the General Fund, reallocation of revenues to local
governments, and assumption by the State of certain local government
obligations. However, more recent legislation reduced such state assistance.
There can be no assurance that any particular level of State aid to local
governments will be maintained in future years. In NORDLINGER V. HAHN, the
United States Supreme Court upheld certain provisions of Proposition 13 against
claims that it violated the equal protection clause of the Constitution.
In 1979, an amendment was passed adding Article XIIIB to the State
Constitution. As amended in 1990, Article XIIIB imposes an "appropriations
limit" on the spending authority of the State and local government entities. In
general, the appropriations limit is based on certain 1978-1979 expenditures,
adjusted annually to reflect changes in the cost of living, population and
certain services provided by State and local government entities.
"Appropriations limit" does not include appropriations for qualified capital
outlay projects, certain increases in transportation-related taxes, and certain
emergency appropriations.
If a government entity raises revenues beyond its "appropriations limit" in
any year, a portion of the excess which cannot be appropriated within the
following year's limit must be returned to the entity's taxpayers within two
subsequent fiscal years, generally by a tax credit, refund or temporary
suspension of tax rates or fee schedules. "Debt service" is excluded from these
limitations, and is defined as "appropriations required to pay the cost of
interest and redemption charges, including the funding of any reserve or sinking
fund required in connection therewith, on indebtedness existing or legally
authorized as of January 1, 1979 or on bonded indebtedness thereafter approved
[by the voters]." In addition, Article XIIIB requires the State Legislature to
establish a prudent State reserve, and to require the transfer of 50% of excess
revenue to the State School Fund; any amounts allocated to the State School Fund
will increase the appropriations limit.
In June 1982, the voters of California passed two initiative measures to
repeal the California gift and inheritance tax laws and to enact, in lieu
thereof, California death taxes. California voters also passed an initiative
measure to increase, for taxable years commencing on or after January 1, 1982,
the amount to account for the effects of inflation. Decreases in State and local
revenues in future fiscal years as a consequence of these initiatives may result
in reductions in allocations of State revenues to California issuers or in the
ability of California issuers to pay their obligations.
In 1986, California voters approved an initiative statute known as
Proposition 62. This initiative (i) requires that any tax for general
governmental purposes imposed by local governments be approved by resolution or
ordinance adopted by a two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental entity, (ii)
requires that any special tax (defined as tax levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction, (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed, (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by the
Proposition 13 amendment, (v) prohibits the imposition of transaction taxes and
sales taxes on the sale of real property by local governments, (vi) requires
that any tax imposed by a local government on or after August 1, 1985, be
ratified by a majority vote of the electorate within two years of the adoption
of the initiative or be terminated by November 15, 1989, (vii) requires that, in
the event a local government fails to comply with the provisions of this
measure, a reduction of the amount of property tax revenue allocated to such
local government occurs in an amount equal to the revenues received by such
entity attributable to the tax levied in violation of the initiative, and (viii)
permits these provisions to be amended exclusively by the voters of the State of
California.
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In September 1988, the California Court of Appeals in CITY OF WESTMINSTER V.
COUNTY OF ORANGE held that Proposition 62 is unconstitutional to the extent that
it requires a general tax by a general city law enacted on or after August 1,
1985, and prior to the effective date of Proposition 62, to be subject to
approval by a majority of voters. The Court held that the California
Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is not
possible to predict the impact of this decision on charter cities, on special
taxes or on new taxes imposed after the effective date of Proposition 62.
In 1988, State voters approved Proposition 87, which amended Article XVI of
the State Constitution to authorize the State Legislature to prohibit
redevelopment agencies from receiving any property tax revenues raised by
increased property taxes to repay bonded indebtedness of local government which
is not approved by voters on or before January 1, 1989. It is not possible to
predict whether the State Legislature will enact such a prohibition, nor is it
possible to predict the impact of Proposition 87 on redevelopment agencies and
their ability to make payments on outstanding debt obligations.
In November 1988, California voters approved Proposition 98. This initiative
requires that (i) revenues in excess of amounts permitted to be spent and which
would otherwise be returned by revision of tax rates or fee schedules, be
transferred and allocated (up to a maximum of 40%) to the State School Fund and
be expended solely for purposes of instructional improvement and accountability.
No such transfer or allocation of funds will be required if certain designated
state officials determine that annual student expenditures and class size meet
certain criteria as set forth in Proposition 98. Any funds allocated to the
State School Fund shall cause the appropriation limits to be annually increased
for any such allocation made in the prior year. Proposition 98 also requires the
State of California to provide a minimum level of funding for public schools and
community colleges. The initiative permits the enactment of legislation, by a
two-thirds vote, to suspend the minimum funding requirement for one year.
In July 1991, California increased taxes by adding two new marginal tax
rates, at 10% and 11%, effective for tax years 1991 through 1995. After 1995,
the maximum personal income tax rate is scheduled to return to 9.3%, and the
alternative minimum tax rate is scheduled to drop from 8.5% to 7%. In addition,
legislation in July 1991 raised the sales tax by 1.25%. 0.5% was a permanent
addition to counties, but with the money earmarked to trust funds to pay for
health and welfare programs whose administration was transferred to counties.
This tax increase will be cancelled if a court rules that such transfer and tax
increase violate any constitutional requirements. 0.5% of the State tax rate
will terminate after June 30, 1993.
On November 3, 1992, voters approved an initiative statute, Proposition 163,
which exempts certain food products, including candy and other snack foods, from
California's sales tax. The sales tax had been broadened to include those items
as part of the 1991-92 budget legislation. The State Legislative Analyst
estimates a resultant revenue reduction of $200 million for the remainder of the
1992-93 fiscal year and $300-330 million per year thereafter.
Three court cases may further upset California's budgetary balance: one
concerning the medically indigent and Medi-Cal funding, a second concerning
employee pensions, and a third on California's unitary method of taxing
multinational companies. In KINLAW V. STATE OF CALIFORNIA, the State faced
possible retroactive reimbursement to counties of $2-$3 billion for Medi-Cal
costs for medically indigent adults. The ruling could have added annual
operating costs of $600-$700 million and would have precluded the State-county
realignment of responsibilities. On August 30, 1991, the California Supreme
Court overturned the case on procedural grounds; however, a case of similar
scope regarding employee pensions, SAN BERNARDINO COUNTY V. STATE OF CALIFORNIA,
is pending in the Court of Appeals that raises the same substantial questions.
The California Supreme Court in BARCLAY'S BANK INTERNATIONAL, LTD. upheld
California's unitary method of taxing multinational companies. An appeal to the
United States Supreme Court is expected. An adverse holding could cost
California $729 million in refunds and lost revenue, according to the Commission
on State Finance.
California is the most populous state in the nation with a total population
at the 1990 census of 29,976,000. Growth has been incessant since World War II,
with population gains in each decade since 1950 of between 18% and 49%. During
the last decade, population rose 20%. The State now comprises
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12% of the nation's population and 13.3% of its personal income. Its economy is
broad and diversified with major concentrations in high technology research and
manufacturing, aerospace and defense-related manufacturing, trade, real estate,
and financial services. After experiencing strong growth throughout much of the
1980s, the State is now being adversely affected by both the national recession
and the cutbacks in aerospace and defense spending which have had a severe
impact on the economy in Southern California. This recession has been the
deepest and longest-lasting in the post World War II era. In the past three
years, California has lost nearly six percent of its job base.
In "California Budget Outlook: A Staff Update To The Commission" (the
"Update"), the staff of the California Commission on State Finance (the
"Commission Staff") forecasts that economic conditions will stabilize in
California over the course of 1994, but that a meaningful economic recovery is
many months away. The Commission Staff notes that the proportional decline in
jobs, income, and sales since 1990 has been much greater in the south,
reflecting, among other things, the greater impact of defense cuts, home price
declines and related social and economic problems in the region. The Commission
Staff cautions, however, that California's economic woes extend well beyond
Southern California.
These economic difficulties have exacerbated the structural budget imbalance
which has been evident since fiscal year 1985-1986. Since that time, budget
shortfalls have become increasingly more difficult to solve. The State has
recorded General Fund operating deficits in five of the past six fiscal years.
Many of these problems have been attributable to the fact that the great
population influx has produced increased demand for education and social
services at a far greater pace than the growth in the State's tax revenues.
Despite substantial tax increases, expenditure reductions and the shift of some
expenditure responsibilities to local government, the budget condition remains
problematic.
The State's General Fund revenues for the 1992-93 fiscal year totalled
nearly $2.5 billion less than the $43.4 billion that Governor Wilson had
projected. It is anticipated that revenues and transfers in the 1993-94 fiscal
year will be lower than those in 1992-93 fiscal year. This represents the second
consecutive year of actual decline.
On June 30, 1993, the Governor signed into law a $52.1 billion budget which,
among other things, (a) shifts $2.6 billion of property taxes from cities,
counties, special districts and redevelopment agencies to schools and community
college districts, (b) reduces higher education and community college funding,
forcing higher student fees, and (c) reduces welfare grants and aid to the aged,
blind, and disabled. In addition, related legislation (a) suspends the renters'
tax credit for two years and (b) allows counties to reduce general assistance
welfare payments by as much as 27%. The stability of the budget would be
jeopardized if the property tax transfer were invalidated by the courts in
current and future cases between the State and its counties.
By June 30, 1993, the General Fund had an accumulated deficit, on a budgeted
basis, of approximately $2.8 billion. In addition, the large deficit over the
previous three years had exhausted California's available cash reserves and
resources. The Commission Staff estimated in its December 1993 Update that
revenues will fall short of budget projections by $1.0 billion in fiscal year
1993-94, and that expenditures will exceed budget projections by $700 million.
The State is expected to end the year with a deficit of $1.7 billion. Looking
ahead to 1994-95, the Commission Staff forecasts an operating deficit of $2.1
billion which, when added to the 1993-94 operating deficit, will lead to a
cumulative funding gap of $3.8 billion by the end of that fiscal year. In an
alternative forecast, the Commission Staff predicts that this cumulative funding
gap could exceed $6.3 billion.
On January 17, 1994, Northridge, California experienced an earthquake that
registered 6.7 on the Richter Scale resulting in significant property damage to
private and public facilities throughout Los Angeles and Ventura Counties, and
to parts of Orange and San Bernardino Counties. The effected portions of the
counties were declared to be federal and state disaster areas. The total damage
is estimated to be between $13 billion and $20 billion. The cost to federal,
state and local government is estimated to be $11.6 billion with the State's and
local governments' share estimated to be $1.9 billion and $135 million,
respectively. The Governor has proposed to pay for the State's share of the cost
with
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federal loans, bond issues, and unspecified spending cuts. In addition, members
of the State legislature have proposed raising taxes to help cover a portion of
the cost. The impact of the earthquake on California's economy is uncertain.
Because of the State of California's continuing budget problems, the State's
General Obligation bonds were downgraded in 1992 by Moody's from Aa1 to Aa and
by Standard & Poor's from AA to A+.
The effect of these various constitutional and statutory amendments and
budget developments upon the ability of California issuers to pay interest and
principal on their obligations remains unclear and in any event may depend upon
whether a particular California tax-exempt security is a general or limited
obligation bond and on the type of security provided for the bond. It is
possible that other measures affecting the taxing or spending authority of
California or its political subdivisions may be approved or enacted in the
future.
THE DISTRIBUTOR
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As discussed in the Prospectus, shares of the Fund are distributed by Dean
Witter Distributors Inc. (the "Distributor"), on a continuous basis. The
Distributor has entered into a selected dealer agreement with DWR, which through
its own sales organization sells shares of the Fund and may enter into selected
dealer agreements with other selected dealers ("Selected Broker-Dealers"). The
Distributor, a Delaware corporation, is a wholly-owned subsidiary of DWDC. The
Trustees who are not, and were not at the time they voted, interested persons of
the Fund, as defined in the Act (the "Independent Trustees"), at a meeting held
on October 30, 1992 approved the current Distribution Agreement appointing the
Distributor exclusive distributor of the Fund's shares and providing for the
Distributor to bear distribution expenses not borne by the Fund. The
Distribution Agreement took effect on June 30, 1993 upon the spin-off by Sears,
Roebuck and Co. of its remaining shares of DWDC. By its terms, the Distribution
Agreement has an initial term ending April 30, 1994, and provides that it will
remain in effect from year to year thereafter if approved by the Board.
The Distributor bears all expenses incurred in providing services under the
Distribution Agreement. Such expenses include the payment of commissions for
sales of the Fund's shares and incentive compensation to account executives. The
Distributor also pays certain expenses in connection with the distribution of
the Fund's shares, including the costs of preparing, printing and distributing
advertising or promotional materials, and the costs of printing and distributing
prospectuses and supplements thereto used in connection with the offering and
sale of the Fund's shares to other than current shareholders. The Fund bears the
costs of initial typesetting, printing and distribution of prospectuses and
supplements thereto to shareholders. The Fund also bears the costs of
registering the Fund and its shares under federal and state securities laws. The
Fund and the Distributor have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
Under the Distribution Agreement, the Distributor uses its best efforts in
rendering services to the Fund, but in the 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.
PLAN OF DISTRIBUTION. To compensate the Distributor for the services
provided and for the expenses borne by the Distributor or any selected dealer
under the Distribution Agreement, the Fund has adopted a Plan of Distribution
pursuant to Rule 12b-1 under the Act (the "Plan") pursuant to which the Fund
pays the Distributor compensation accrued daily and paid monthly at the annual
rate of 0.75% of the lesser of: (a) the average daily aggregate gross sales of
the Fund's shares since the inception of the Fund (not including reinvestments
of dividends or capital gains distributions), less the average daily aggregate
net asset value of the Fund's shares redeemed since the Fund's inception upon
which a contingent deferred sales charge has been imposed or upon which such
charge has been waived, or (b) the average daily net assets of the Fund. An
amount equal to 0.20% of the Fund's average annual net assets of the fees
payable by the Fund each year pursuant to the Plan of Distribution is
characterized as a "service fee" under the Rules of Fair Practice of the
National Association of Securities Dealers (of which the Distributor is a
member). Such fee is a payment made for personal service and/or the maintenance
of shareholder
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accounts. The remaining portion of the Plan of Distribution fee payments made by
the Fund is characterized as an "asset-based sales charge" as such is defined by
the aforementioned Rules of Fair Practice. The Distributor also receives the
proceeds of contingent deferred sales charges imposed on certain redemptions of
shares, which are separate and apart from payments made pursuant to the Plan The
Distributor has informed the Fund that it and/or DWR received contingent
deferred sales charges on redemptions of the Fund's shares in the approximate
amounts of $1,029,000, $1,063,000 and $1,072,000, for the fiscal years ended
December 31, 1991, 1992 and 1993, respectively. (see "Redemptions and
Repurchases -- Contingent Deferred Sales Charge" in the Prospectus).
The Plan was adopted by a majority vote of the Board of Trustees, including
all of the Trustees of the Fund who are not "interested persons" of the Fund (as
defined in the Act) and who have no direct or indirect financial interest in the
operation of the Plan ( the "Independent 12b-1 Trustees") , cast in person at a
meeting called for the purpose of voting on the Plan, on June 13, 1984, by then
the sole shareholder of the Fund on June 26, 1984, and by the shareholders
holding a majority, as defined in the Act, of the outstanding voting securities
of the Fund at a Meeting of Shareholders of the Fund held on October 21, 1985.
Under its terms, the Plan had an initial term ending December 31, 1984, and
provides that it will remain in effect from year to year thereafter, provided
such continuance is approved annually by a vote of the Trustees in the manner
described above.
Continuation of the Plan for one year, until April 30, 1993, was approved by
the Board of Trustees of the Fund, including a majority of the independent 12b-1
Trustees, at a Board meeting held on April 29, 1992. Prior to approving the
continuation of the Plan, the Board requested and received from DWR and reviewed
all the information which it deemed necessary to arrive at an informed
determination. In making their determination to continue the Plan, the Trustees
considered: (1) the Fund's experience under the Plan and whether such experience
indicates that the Plan is operating as anticipated; (2) the benefits the Fund
had obtained, was obtaining and would be likely to obtain under the Plan; and
(3) what services had been provided and were continuing to be provided under the
Plan by the Distributor to the Fund and its shareholders. Based upon their
review, the Trustees of the Fund, including each of the Independent 12b-1
Trustees, determined that continuation of the Plan would be in the best interest
of the Fund and would have a reasonable likelihood of continuing to benefit the
Fund and its shareholders. This determination was based upon the conclusion of
the Trustees that the Plan provides an effective means of stimulating sales of
shares of the Fund and of reducing or avoiding net redemptions and the
potentially adverse effects that may occur therefrom. In the Trustees' quarterly
review of the Plan, they will 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 for the Fund by DWR were assumed by the
Distributor and DWR's sales activities are now being performed pursuant to the
terms of a selected dealer agreement between the Distributor and DWR. The
amendments provide that payments under the Plan will be made to the Distributor
rather than to DWR 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.
Under the Plan and as required by Rule 12b-1, the Trustees receive and
review promptly after the end of each calendar quarter a written report provided
by the Distributor of the amounts expended under the Plan and the purpose for
which such expenditures were made. The Fund accrued amounts payable under the
Plan, during the fiscal year ended December 31, 1993, of $7,693,113. This amount
is equal to payments required to be paid monthly by the Fund which were computed
at the annual rate of 0.70% of the average daily net assets of the Fund's
shares. This amount is treated by the Fund as an expense in the year it is
accrued.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method shares of the Fund are
sold without a sales load being deducted at the
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<PAGE>
time of purchase, so that the full amount of an investor's purchase payment will
be invested in shares without any deduction for sales charges. Shares of the
Fund may be subject to a contingent deferred sales charge, payable to the
Distributor, if redeemed during the six years after their purchase. DWR
compensates its account executives by paying them, from its own funds,
commissions for the sale of the Fund's shares, currently a gross sales credit of
up to 4% of the amount sold and an annual gross residual of up to .20 of 1% of
the current value of the respective accounts for which they are the account
executives of record and for which they provide personal service and/or the
maintenance of such accounts. The gross sales credit is a charge which reflects
commissions paid by DWR to its account executives for Fund associated
distribution-related expenses, including sales compensation, and overhead and
other branch office distribution-related expenses including (a) the expenses of
operating branch offices in connection with the sale of Fund shares, including
lease costs, the salaries and employee benefits of operations and sales support
personnel, utility costs, communications costs and the costs of stationery and
supplies, (b) the costs of client sales seminars, (c) travel expenses of mutual
fund sales coordinators to promote the sale of Fund shares and (d) other
expenses relating to branch promotion of Fund sales. The distribution fee that
the Distributor receives from the Fund under the Plan, in effect, offsets
distribution expenses incurred on behalf of the Fund and its opportunity costs,
such as the gross sales credit and an assumed interest charge thereon (
"carrying charge" ). In the Distributor's reporting of its distribution expenses
to the Fund, such assumed interest (computed at the "broker's call rate") has
been calculated on the gross sales credit as it is reduced by amounts received
by the Distributor under the Plan and any contingent deferred sales charges
received by the Distributor upon redemption of shares of the Fund. No other
interest charge is included as a distribution expense in the Distributor's
calculation of its distribution costs for this purpose. The broker's call rate
is the interest rate charged to securities brokers on loans secured by
exchange-listed securities.
The Fund paid 100% of the $7,693,113 accrued under the Plan for the fiscal
year ended December 31, 1993 to the Distributor of the Fund's shares. The
Distributor and DWR estimate that they have spent $61,271,057, pursuant to the
Plan, on behalf of the Fund since the inception of the Fund. It is estimated
that this amount was spent in approximately the following ways: (i) 3.24%
($1,983,080) -- advertising and promotional expenses; (ii) 0.31% ($194,964) --
printing of prospectuses for distribution to other than current shareholders;
and (iii) 96.45% ($59,093,013) -- other expenses, including the gross sales
credit and the carrying charge, of which 8.70% ($5,138,342) represents carrying
charges, 36.75% ($21,716,755) represents commission credits to DWR branch
offices for payments of commissions to account executives and 54.55%
($32,237,916) represents overhead and other branch office distribution-related
expenses.
At any given time, expenses may be incurred in distributing shares of the
Fund which may be more or less than the total of (i) the payments made by the
Fund pursuant to the Plan and (ii) the proceeds of contingent deferred sales
charges paid by investors upon redemption of shares. The Distributor has advised
the Fund that such excess amount, including the carrying charge designed to
approximate the opportunity costs incurred by the Distributor which arise from
it having advanced monies without having received the amount of any sales
charges imposed at the time of sale of the Fund's shares, totalled $16,051,125
or 1.35% as of December 31, 1993. Because there is no requirement under the Plan
that the Distributor be reimbursed for all its expenses or any requirement that
the Plan be continued from year to year, this excess amount does not constitute
a liability of the Fund. Although there is no legal obligation for the Fund to
pay expenses incurred by the Distributor in excess of payments made to it under
the Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
Any cumulative expenses incurred by the Distributor, but not yet recovered
through distribution fees or contingent deferred sales charges, may or may not
be recovered through future distribution fees or contingent deferred sales
charges.
No interested person of the Fund nor any Trustee of the Fund who is not an
interested person of the Fund, as defined in the Act, has any direct financial
interest in the operation of the Plan except to the
23
<PAGE>
extent that the Distributor 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.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of the
Fund, and all material amendments to the Plan must also be approved by the
Trustees in the manner described above. The Plan may be terminated at any time,
without payment of any penalty, by vote of a majority of the Independent 12b-1
Trustees or by a vote of a majority of the outstanding voting securities of the
Fund (as defined in the Act) on not more than thirty days' written notice to any
other party to the Plan. So long as the Plan is in effect, the election and
nomination of Independent 12b-1 Trustees shall be committed to the discretion of
the Independent 12b-1 Trustees.
DETERMINATION OF NET ASSET VALUE
As discussed in the Prospectus, portfolio securities (other than short-term
debt securities and futures and options) are valued for the Fund by an outside
independent pricing service approved by the Board of Trustees. The pricing
service has informed the Fund that in valuing the Fund's portfolio securities it
uses both a computerized grid matrix of tax-exempt securities and evaluations by
its staff, in each case based on information concerning market transactions and
quotations from dealers which reflect the bid side of the market each day. The
Fund's portfolio securities are thus valued by reference to a combination of
transactions and quotations for the same or other securities believed to be
comparable in quality, coupon, maturity, type of issue, call provisions, trading
characteristics and other features deemed to be relevant. The Board of Trustees
believes that timely and reliable market quotations are generally not readily
available to the Fund for purposes of valuing tax-exempt securities and that the
valuations supplied by the pricing service, using the procedures outlined above
and subject to periodic review, are more likely to approximate the fair value of
such securities.
The Investment Manager will periodically review and evaluate the procedures,
methods and quality of services provided by the pricing service then being used
by the Fund and may, from time to time, recommend to the Board of Trustees the
use of other pricing services or discontinuance of the use of any pricing
service in whole or part. The Board may determine to approve such recommendation
or to make other provisions for pricing of the Fund's portfolio securities.
Short-term taxable debt securities with 60 days or less remaining to maturity at
time of purchase are valued at amortized cost, unless the Board determines such
does not reflect the securities' fair value, in which case these securities will
be valued at their fair value as determined by the Board of Trustees. Other
short-term taxable debt securities will be valued on a mark to market basis
until such time as they have a remaining maturity of 60 days, whereupon they
will be valued at amortized cost using their value on the 61st day unless the
Trustees determine such does not reflect the securities' fair value, in which
case these securities will be valued at their fair market value as determined by
the Trustees. Listed options on debt securities are valued at the latest sale
price on the exchange on which they are listed unless no sales of such options
have taken place that day, in which case they will be valued at the mean between
their closing bid and asked prices. Unlisted options on debt securities are
valued at the mean between the latest bid and asked price. Futures contracts and
options thereon which are traded on commodities exchanges are valued at their
last sale price on such commodities exchanges unless the Trustees determine that
such price does not reflect their market value, in which case they will be
valued at their fair value as determined by the Trustees. All other securities,
including illiquid securities, and other assets are valued at their fair value
as determined in good faith under procedures established by and under the
supervision of the Board of Trustees.
As stated in the Prospectus, the Fund's net asset value will be computed
once daily at 4:00 P.M. 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.
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<PAGE>
SHAREHOLDER SERVICES
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Upon the purchase of shares of the Fund, a Shareholder Investment Account is
opened for the investor on the books of the Fund and maintained by the Fund's
Transfer Agent, Dean Witter Trust Company (the "Transfer Agent"). This is an
open account in which shares owned by the investor are credited by the Transfer
Agent in lieu of issuance of a share certificate. If a share certificate is
desired, it must be requested in writing for each transaction. Certificates are
issued only for full shares and may be redeposited in the account at any time.
There is no charge to the investor for issuance of a certificate. Whenever a
shareholder instituted transaction takes place in the Shareholder Investment
Account, the shareholder will be mailed a statement reflecting the status of
such Account.
AUTOMATIC INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. As stated in the
Prospectus, all income dividends and capital gains distributions are
automatically paid in full and fractional shares of the Fund, unless the
shareholder requests that they be paid in cash. Each purchase of shares of the
Fund is made upon the condition that the Transfer Agent is thereby automatically
appointed as agent of the investor to receive all dividends and capital gains
distributions on shares owned by the investor. Such dividends and distributions
will be paid, at the net asset value per share, in shares of the Fund (or in
cash if the shareholder so requests) as of the close of business on the monthly
payment date, as stated in the Prospectus. At any time an investor may request
the Transfer Agent, in writing, to have subsequent dividends and/or capital
gains distributions paid to him or her in cash rather than shares. To assure
sufficient time to process the change, such request should be received by the
Transfer Agent at least five business days prior to the payment date of the
dividend or the record date of the distribution. In the case of recently
purchased shares for which registration instructions have not been received on
the payment or record date, cash payments will be made to DWR or other selected
broker-dealer, and will be forwarded to the shareholder, upon the receipt of
proper instructions.
TARGETED DIVIDENDS.-SM- In states where it is legally permissible,
shareholders may also have all income dividends and capital gains distributions
automatically invested in shares of an open-end Dean Witter Fund other than Dean
Witter Tax-Exempt Securities Trust. Such investment will be made as described
above for automatic investment in shares of the Fund, at the net asset value per
share (without sales charge) of the selected Dean Witter Fund as of the close of
business on the monthly payment date and will begin to earn dividends, if any,
in the selected Dean Witter Fund the next business day. To participate in the
Targeted Dividends program, shareholders should contact their DWR or other
selected broker-dealer account executive or the Transfer Agent. Shareholders of
the Fund must be shareholders of the Dean Witter Fund targeted to receive
investments from dividends at the time they enter the Targeted Dividends
program. Investors should review the prospectus of the targeted Dean Witter Fund
before entering the program.
EASYINVEST.-SM- Shareholders may subscribe to EasyInvest, an automatic
purchase plan which provides for any amount from $100 to $5,000 to be
transferred automatically from a checking or savings account, on a semi-monthly,
monthly or quarterly basis, to the Transfer Agent for investment in shares of
the Fund. Shares purchased through EasyInvest will be added to the shareholder's
existing account at the net asset value calculated the same business day the
transfer of funds is effected. For further information or to subscribe to
EasyInvest, shareholders should contact their DWR or other selected
broker-dealer account executive or the Transfer Agent.
INVESTMENT OF DIVIDENDS OR DISTRIBUTIONS RECEIVED IN CASH. Any shareholder
who receives a cash payment representing a dividend or capital gains
distribution may invest such dividend or distribution at net asset value,
without the imposition of a contingent deferred sales charge upon redemption, by
returning the check or the proceeds to the Transfer Agent within 30 days after
the payment date. If the shareholder returns the proceeds of a dividend or
distribution, such funds must be accompanied by a signed statement indicating
that the proceeds constitute a dividend or distribution to be invested. Such
investment will be made at the net asset value per share next determined after
receipt of the check or proceeds by the Transfer Agent.
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<PAGE>
DIRECT INVESTMENTS THROUGH TRANSFER AGENT. As discussed in the Prospectus,
a shareholder may make additional investments in Fund shares at any time through
the Shareholder Investment Account by sending a check in any amount, not less
than $100, payable to Dean Witter California Tax-Free Income Fund, directly to
the Fund's Transfer Agent. Such amounts will be applied to the purchase of Fund
shares at the net asset value per share next computed after receipt of the check
or purchase payment by the Transfer Agent. The shares so purchased will be
credited to the investor's account.
SYSTEMATIC WITHDRAWAL PLAN. As discussed in the Prospectus, a systematic
withdrawal plan (the "Withdrawal Plan") is available for shareholders who own or
purchase shares of the Fund having a minimum value of $10,000 based upon the
then current net asset value. The Withdrawal Plan provides for monthly or
quarterly (March, June, September and December) checks in any dollar amount, not
less than $25 or in any whole percentage of the account balance, on an
annualized basis. Any applicable contingent deferred sales charge will be
imposed on shares redeemed under the Withdrawal Plan (see "Redemptions and
Repurchases--Contingent Deferred Sales Charge" in the Prospectus). Therefore,
any shareholder participating in the Withdrawal Plan will have sufficient shares
redeemed from his or her account so that the proceeds (net of any applicable
contingent deferred sales charge) to the shareholder will be the designated
monthly or quarterly dollar amount.
The Transfer Agent acts as agent for the shareholder in tendering to the
Fund for redemption sufficient full and fractional shares to provide the amount
of the periodic withdrawal payment designated in the application. The shares
will be redeemed at their net asset value determined, at the shareholder's
option, on the tenth or twenty-fifth day (or next following business day) of the
relevant month or quarter and normally a check for the proceeds will be mailed
by the Transfer Agent, or amounts credited to a shareholder's DWR or other
selected broker-dealer account, within five business days after the date of
redemption. The Withdrawal Plan may be terminated at any time by the Fund.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted.
Each withdrawal constitutes a redemption of shares and any gain or loss
realized must be recognized for federal income tax purposes. Although the
shareholder may make additional investments of $2,500 or more under the
Withdrawal Plan, withdrawals made concurrently with purchases of additional
shares may be inadvisable because of the contingent deferred sales charge
applicable to the redemption of shares purchased during the preceding six years
(see "Redemption and Repurchases -- Contingent Deferred Sales Charge").
Any shareholder who wishes to have payments under the Withdrawal Plan made
to a third party or sent to an address other than the one listed on the account
must send complete written instructions to the Transfer Agent to enroll in the
Withdrawal Plan. The shareholder's signature on such instructions must be
guaranteed by an eligible guarantor acceptable to the Transfer Agent
(shareholders should 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 DWR or other Selected Dealer 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
"Redemptions and Repurchases" in the Prospectus) at any time.
EXCHANGE PRIVILEGE. As discussed in the Prospectus, the Fund makes
available to its shareholders an Exchange Privilege whereby shareholders of the
Fund may exchange their shares for shares of other Dean Witter Funds sold with a
contingent deferred sales charge ("CDSC funds"), and for shares of Dean Witter
Short-Term U.S. Treasury Trust, Dean Witter Limited Term Municipal Trust and
Dean Witter Short-Term Bond Fund and for shares of five Dean Witter money market
funds (the foregoing eight non-FESC or CDSC funds are hereinafter referred to
for purposes of this section as the "Exchange Funds").
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<PAGE>
Exchanges may be made after the shares of the Fund acquired by purchase (not by
exchange or dividend reinvestment) have been held for 30 days. There is no
waiting period for exchanges of shares acquired by exchange or dividend
reinvestment. An exchange will be treated for federal income tax purposes the
same as a repurchase or redemption of shares, on which the shareholder may
realize a capital gain or loss.
Any new account established through the Exchange Privilege will have the
same registration and cash dividend or dividend reinvestment plan as the present
account, unless the Transfer Agent receives written notification to the
contrary. For telephone exchanges, the exact registration of the existing
account and the account number must be provided.
Any shares held in certificate form cannot be exchanged but must be
forwarded to the Transfer Agent and deposited into the shareholder's account
before being eligible for exchange. (Certificates mailed in for deposit should
not be endorsed.)
As described below, and in the Prospectus under the captions "Exchange
Privilege" and "Contingent Deferred Sales Charge", a contingent deferred sales
charge ("CDSC") may be imposed upon a redemption, depending on a number of
factors, including the number of years from the time of purchase until the time
of redemption or exchange ("holding period"). When shares of the Fund or any
other CDSC fund are exchanged for shares of the Exchange Funds, the exchange is
executed at no charge to the shareholder, without the imposition of the CDSC at
the time of the exchange. During the period of time the shareholder remains in
the Exchange Funds (calculated from the last day of the month in which the
shares were acquired), the holding period or "year since purchase payment made"
is frozen. When shares are redeemed out of the Exchange Funds, they will be
subject to a CDSC which would be based upon the period of time the shareholder
held shares in a CDSC fund. However, in the case of shares exchanged into the
Exchange Funds 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 Funds 12b-1 distribution fees
incurred on or after that date which are attributable to those shares.
Shareholders acquiring shares of the Exchange Funds pursuant to this exchange
privilege may exchange those shares back into a CDSC fund from the Exchange
Funds, with no CDSC being imposed on such exchange. The holding period
previously frozen when shares were first exchanged for shares of the Exchange
Funds 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.
In addition, shares of the Fund may be acquired in exchange for shares of
Dean Witter Funds sold with a front-end sales charge ("front-end sales charge
funds"), but shares of the Fund, however acquired, may not be exchanged for
shares of front-end sales charge funds. Shares of a CDSC fund acquired in
exchange for shares of a front-end sales charge fund (or in exchange for shares
of other Dean Witter Funds for which shares of a front-end sales charge fund
have been exchanged) are not subject to any CDSC upon their redemption.
When shares initially purchased in a CDSC fund are exchanged for shares of
another CDSC fund, or for shares of the Exchange Funds, 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 prior to the exchange, (ii) originally acquired through reinvestment
of dividends or distributions and (iii) acquired in exchange for shares of
front-end sales charge funds, or for shares of other Dean Witter Funds for which
shares of front-end sales charge funds have been exchanged (all such shares
called "Free Shares"), will be exchanged first. Shares of Dean Witter American
Value Fund (formerly Dean Witter Industry-Valued Securities Inc.) 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
Funds
27
<PAGE>
will be considered Free Shares. If the exchanged amount exceeds the value of
such Free Shares, an exchange is made, on a block-by-block basis, of non-Free
Shares held for the longest period of time (except that if shares held for
identical periods of time but subject to different CDSC schedules are held in
the same Exchange Privilege account, the shares of that block that are subject
to a lower CDSC rate will be exchanged prior to the shares of that block that
are subject to a higher CDSC rate). Shares equal to any appreciation in the
value of non-Free Shares exchanged will be treated as Free Shares, and the
amount of the purchase payments for the non-Free Shares of the fund exchanged
into will be equal to the lesser of (a) the purchase payments for, or (b) the
current net asset value of, the exchanged non-Free Shares. If an exchange
between funds would result in exchange of only part of a particular block of
non-Free Shares, then shares equal to any appreciation in the value of the block
(up to the amount of the exchange) will be treated as Free Shares and exchanged
first, and the purchase payment for that block will be allocated on a pro rata
basis between the non-Free Shares of that block to be retained and the non-Free
Shares to be exchanged. The prorated amount of such purchase payment
attributable to the retained non-Free Shares will remain as the purchase payment
for such shares, and the amount of purchase payment for the exchanged non-Free
Shares will be equal to the lesser of (a) the prorated amount of the purchase
payment for, or (b) the current net asset value of, those exchanged non-Free
Shares. Based upon the procedures described in the Prospectus under the caption
"Contingent Deferred Sales Charge", any applicable CDSC will be imposed upon the
ultimate redemption of shares of any fund, regardless of the number of exchanges
since those shares were originally purchased.
The Transfer Agent acts as agent for shareholders of the Fund in effecting
redemptions of Fund shares and in applying the proceeds to the purchase of other
fund shares. In the absence of negligence on its part, neither the Transfer
Agent nor the Fund shall be liable for any redemption of Fund shares caused by
unauthorized telephone instructions. Accordingly, in such event the investor
shall bear the risk of loss. The Staff of the Securities and Exchange Commission
is currently considering the propriety of such policies.
With respect to the repurchase of shares of the Fund, the application of
proceeds to the purchase of new shares in the Fund or any other of the funds and
the general administration of the Exchange Privilege, the Transfer Agent acts as
agent for the Distributor and for the shareholder's Selected Broker-Dealer, if
any, in the performance of such functions. With respect to exchanges,
redemptions or repurchases, the Transfer Agent shall be liable for its own
negligence and not for the default or negligence of its correspondents or for
losses in transit. The Fund shall not be liable for any default or negligence of
the Transfer Agent, the Distributor or any Selected Broker-Dealer. The
Distributor and any Selected Broker-Dealer have authorized and appointed the
Transfer Agent to act as their agent in connection with the application of
proceeds of any redemption of Fund shares to the purchase of shares of any other
fund and the general administration of the Exchange Privilege. No commission or
discounts will be paid to the Distributor or any Selected Broker-Dealer for any
transactions pursuant to this Exchange Privilege.
Exchanges are subject to the minimum investment requirement and any other
conditions imposed by each fund. (The minimum initial investment is $5,000 for
Dean Witter Liquid Asset Fund Inc., Dean Witter Tax-Free Daily Income Trust,
Dean Witter New York Municipal Money Market Trust and Dean Witter California
Tax-Free Daily Income Trust although those funds may, at their discretion,
accept initial investments of as low as $1,000. The minimum initial investment
is $10,000 for Dean Witter Short-Term U.S. Treasury Trust. The minimum initial
investment for all other Dean Witter Funds for which the Exchange Privilege is
available is $1,000.) Upon exchange into a money market 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 the Fund and/or any of the Dean Witter Funds for which
28
<PAGE>
shares of the Fund have been exchanged, upon such notice as may be required by
applicable regulatory agencies (presently sixty days prior written notice for
termination or material revision), provided that six months prior written notice
of termination will be given to the shareholders who hold shares of the Exchange
Funds, pursuant to this Exchange Privilege and provided further that the
Exchange Privilege may be terminated or materially revised without notice at
times (a) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (b) when trading on that Exchange is restricted, (c) when
an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, (d) during any
other period when the Securities and Exchange Commission by order so permits
(provided that applicable rules and regulations of the Securities and Exchange
Commission shall govern as to whether the conditions prescribed in (b) or (c)
exist) or (e) if the Fund would be unable to invest amounts effectively in
accordance with its investment objective, 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.
REDEMPTIONS AND REPURCHASES
- --------------------------------------------------------------------------------
REDEMPTION. As stated in the Prospectus, shares of the Fund can be redeemed
for cash at any time at the net asset value per share next determined; however,
such redemption proceeds may be reduced by the amount of any applicable
contingent deferred sales charges (see below). If shares are held in a
shareholder's account without a share certificate, a written request for
redemption to the Fund's Transfer Agent at P.O. Box 983, Jersey City, NJ 07303
is required. If certificates are held by the shareholder, the shares may be
redeemed by surrendering the certificates with a written request for redemption.
The share certificate, or an accompanying stock power, and the request for
redemption, must be signed by the shareholder or shareholders exactly as the
shares are registered. Each request for redemption, whether or not accompanied
by a share certificate, must be sent to the Fund's Transfer Agent, which will
redeem the shares at their net asset value next computed (see "Purchase of Fund
Shares" in the Prospectus) after it receives the request, and certificate, if
any, in good order. Any redemption request received after such computation will
be redeemed at the next determined net asset value. The term "good order" means
that the share certificate, if any, and request for redemption are properly
signed, accompanied by any documentation required by the Transfer Agent, and
bear signature guarantees when required by the Fund or the Transfer Agent. If
redemption is requested by a corporation, partnership, trust or fiduciary, the
Transfer Agent may require written evidence of authority acceptable to the
Transfer Agent be submitted before such request is accepted.
Whether certificates are held by the shareholder or shares are held in a
shareholder's account, if the proceeds are to be paid to any person other than
the record owner, or if the proceeds are to be paid to a corporation (other than
the Distributor or a selected broker-dealer for the account of the shareholder),
partnership, trust or fiduciary, or sent to the shareholder at an address other
than the registered address, signatures must be guaranteed by an eligible
guarantor acceptable to the Transfer Agent (shareholders should contact the
Transfer Agent for a determination as to whether a particular institution is
such an eligible guarantor). A stock power may be obtained from any dealer or
commercial bank. The Fund may change the signature guarantee requirements from
time to time upon notice to shareholders, which may be by means of a revised
prospectus.
29
<PAGE>
CONTINGENT DEFERRED SALES CHARGE. As stated in the Prospectus, a contingent
deferred sales charge ("CDSC") will be imposed on any redemption by an investor
if after such redemption the current value of the investor's shares of the Fund
is less than the dollar amount of all payments by the shareholder for the
purchase of Fund shares during the preceding six years. However, no CDSC will be
imposed to the extent that the net asset value of the shares redeemed does not
exceed: (a) the current net asset value of shares purchased more than six years
prior to the redemption, plus (b) the current net asset value of shares
purchased through reinvestment of dividends or distributions of the Fund or
another Dean Witter Fund (see "Shareholder Services -- Targeted Dividends"),
plus (c) the current net asset value of shares acquired in exchange for (i)
shares of Dean Witter front-end sales charge funds, or (ii) shares of other Dean
Witter Funds for which shares of front-end sales charge funds have been
exchanged (see "Shareholder Services -- Exchange Privilege"), plus (d) increases
in the net asset value of the investor's shares above the total amount of
payments for the purchase of Fund shares made during the preceding six years.
The CDSC will be paid to the Distributor.
In determining the applicability of the CDSC to each redemption, the amount
which represents an increase in the net asset value of the investor's shares
above the amount of the total payments for the purchase of shares within the
last six years will be redeemed first. In the event the redemption amount
exceeds such increase in value, the next portion of the amount redeemed will be
the amount which represents the net asset value of the investor's shares
purchased more than six years prior to the redemption and/or shares purchased
through reinvestment of dividends or distributions and/or shares acquired in
exchange for shares of Dean Witter front-end sales charge funds or for shares of
other Dean Witter funds which shares of front-end sales charge funds have been
exchanged. A portion of the amount redeemed which exceeds an amount which
represents both such increase in value and the value of shares purchased more
than six years prior to the redemption and/or shares purchased through
reinvestment of dividends or distributions and/or shares acquired in the
above-described exchanges will be subject to a CDSC.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Fund shares until the time of
redemption of such shares. For purposes of determining the number of years from
the time of any payment for the purchase of shares, all payments made during a
month will be aggregated and deemed to have been made on the last day of the
month. The following table sets forth the rates of the CDSC:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR SINCE SALES CHARGE AS A
PURCHASE PERCENTAGE OF
PAYMENT MADE AMOUNT REDEEMED
- ---------------------------------------------------------------------------------- --------------------
<S> <C>
First............................................................................. 5.0%
Second............................................................................ 4.0%
Third............................................................................. 3.0%
Fourth............................................................................ 2.0%
Fifth............................................................................. 2.0%
Sixth............................................................................. 1.0%
Seventh and thereafter............................................................ None
</TABLE>
In determining the rate of the CDSC, it will be assumed that a redemption is
made of shares held by the investor for the longest period of time within the
applicable six-year period. This will result in any such CDSC being imposed at
the lowest possible rate. Accordingly, shareholders may redeem, without
incurring any CDSC, amounts equal to any net increase in the value of their
shares above the amount of their purchase payments made within the past six
years and amounts equal to the current value of shares purchased more than six
years prior to the redemption and shares purchased through reinvestment of
dividends or distributions or acquired in exchange for shares of Dean Witter
front-end sales charge funds, or for shares of other Dean Witter Funds for which
shares of front-end sales charge funds have been exchanged. The CDSC will be
imposed, in accordance with the table shown above, on any redemptions within six
years of purchase which are in excess of these amounts and which redemptions
30
<PAGE>
are not (a) requested within one year of death or initial determination of
disability of a shareholder, or (b) made pursuant to certain taxable
distributions from retirement plans or retirement accounts, as described in the
Prospectus.
PAYMENT FOR SHARES REDEEMED OR REPURCHASED. As discussed in the Prospectus,
payment for shares presented for repurchase or redemption will be made by check
within seven days after receipt by the Transfer Agent of the certificate and/or
written request in good order. The term "good order" means that the share
certificate, if any, and request for redemption, are properly signed,
accompanied by any documentation required by the Transfer Agent, and bear
signature guarantees when required by the Fund or the Transfer Agent. Such
payment may be postponed or the right of redemption suspended at times (a) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (b) when trading on that Exchange is restricted, (c) when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (d) during any other period
when the Securities and Exchange Commission by order so permits; provided that
applicable rules and regulations of the Securities and Exchange Commission shall
govern as to whether the conditions prescribed in (b) or (c) exist. If the
shares to be redeemed have recently been purchased by check (including a
certified or bank cashier's check), payment of redemption proceeds may be
delayed for the minimum time needed to verify that the check used for investment
has been honored (not more than fifteen days from the time of investment of the
proceeds of the check by the Transfer Agent).
TRANSFERS OF SHARES. In the event a shareholder requests a transfer of any
shares to a new registration, such shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the contingent deferred sales charge or free of such charge
(and with regard to the length of time shares subject to the charge have been
held), any transfer involving less than all of the shares in an account will be
made on a pro-rata basis (that is, by transferring shares in the same proportion
that the transferred shares bear to the total shares in the account immediately
prior to the transfer). The transferred shares will continue to be subject to
any applicable contingent deferred sales charge as if they had not been so
transferred.
REINSTATEMENT PRIVILEGE. As discussed in the Prospectus, a shareholder who
has had his or her shares redeemed or repurchased and has not previously
exercised this reinstatement privilege may, within 30 days after the redemption
or repurchase, reinstate any portion or all of the proceeds of such redemption
or repurchase in shares of the Fund at the net asset value next determined after
a reinstatement request, together with the proceeds, is received by the Transfer
Agent.
Exercise of the reinstatement privilege will not affect the federal income
tax and California personal income tax treatment of any gain or loss realized
upon the redemption or repurchase, except that if the redemption or repurchase
resulted in a loss and reinstatement is made in shares of the Fund, some or all
of the loss, depending on the amount reinstated, will not be allowed as a
deduction for federal income tax and California personal income tax purposes but
will be applied to adjust the cost basis of the shares acquired upon
reinstatement.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
As stated in the Prospectus, the Fund intends to distribute all of its net
investment income and all of its net short-term capital gains, if any, and will
determine whether to retain all or part of any net long-term capital gains for
reinvestment.
As discussed in the Prospectus, the Fund may invest a portion of its assets
in certain "private activity bonds" issued after August 7, 1986. As a result, a
portion of the exempt-interest dividends paid by the Fund may be an item of tax
preference to shareholders subject to the federal alternative minimum tax.
Certain corporations which are subject to the alternative minimum tax may also
have to include exempt-interest dividends in calculating their alternative
minimum taxable income in situations where the "adjusted current earnings" of
the corporation exceeds its alternative minimum taxable income.
31
<PAGE>
Each shareholder will be sent at least a quarterly summary of his or her
account, including information as to reinvested dividends and capital gains
distributions. Share certificates for dividends or distributions will not be
issued unless a shareholder requests in writing that a certificate be issued for
a specific number of shares.
In computing interest income, the Fund will amortize any premiums and
original issue discounts on securities owned. 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. Gains and losses on
the sale, expiration or other termination of options on securities will
generally be treated as gains and losses from the sale of securities. Pursuant
to present federal income tax laws, futures contracts held by the Fund at the
end of each fiscal year will be required to be "marked to market", that is,
treated as having been sold at their fair market value at such date. Sixty
percent of any gain recognized on these deemed sales will be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss. Gains or losses from options on futures and listed options
on debt instruments will similarly be treated as part short-term and part
long-term capital gains or losses, unless such gains or losses were incurred as
part of a securities "straddle," in which case the appropriate straddle rules of
the Internal Revenue Code (the "Code") would apply.
Because the Fund intends to distribute all of its net investment income and
capital gains to shareholders and otherwise continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code, it is not
expected that the Fund will be required to pay any federal income tax.
Shareholders will normally have to pay federal income taxes, and any applicable
state and/or local income taxes, on the dividends and distributions they receive
from the Fund. Such dividends and distributions, to the extent that they are
derived from net investment income or short-term capital gains, are taxable to
the shareholder as ordinary income regardless of whether the shareholder
receives such payments in additional shares or in cash. Any dividends declared
in the last quarter of any year which are paid in the following year prior to
February 1 will be deemed received by the shareholder in the prior year.
With respect to the Fund's investments in zero coupon bonds, the Fund
accrues income prior to any actual cash payments by their issuers. In order to
continue to comply with Subchapter M of the Code and remain able to forego
payment of Federal income tax on its income and capital gains, the Fund must
distribute all of its net investment income, including income accrued from zero
coupon bonds. As such, the Fund may be required to dispose of some of its
portfolio securities under disadvantageous circumstances to generate the cash
required for distribution.
One of the requirements for regulated investment company status is that at
least 90% of a Fund's gross income be derived from dividends, interest, gains
from the sale or other disposition of securities and certain other related
income. Another requirement for regulated investment company status is that less
than 30% of the Fund's gross income can be derived from, among other sources,
gains from the sale or other disposition of securities held less than three
months. Accordingly, the Fund may be restricted in the writing of options on
securities held for less than three months, in the writing of options which
expire in less than three months, and in effecting closing transactions with
respect to call or put options which have been written or purchased less than
three months prior to such transactions. The Fund may also be restricted in its
ability to engage in transactions involving futures contracts.
Under the Revenue Reconciliation Act of 1993, all or a portion of the Fund's
gain from the sale or redemption of tax-exempt obligations purchased at a market
discount after April 30, 1993 will be treated as ordinary income rather than
capital gain. This rule may increase the amount of ordinary income dividends
received by shareholders.
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
32
<PAGE>
of its total assets in tax-exempt securities. An exempt-interest dividend is
that part of dividend distributions made by the Fund which consists of interest
received by the Fund on tax-exempt securities upon which the shareholder incurs
no federal income taxes.
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 the percentage, if any, of the exempt-
interest dividends which constitutes an item of tax preference, and to what
extent the taxable portion is long-term capital gain, short-term capital gain or
ordinary income. These percentages should be applied uniformly to all monthly
distributions made during the fiscal year to determine the proportion of
dividends that is tax-exempt. The percentages may differ from the percentage of
tax-exempt dividend distributions for any particular month.
Shareholders will be subject to federal income tax on dividends paid from
interest income derived from taxable securities and on distributions of net
short-term capital gains. Such dividends and distributions are taxable to the
shareholder as ordinary dividend income regardless of whether the shareholder
receives such distributions in additional shares or in cash. Distributions of
long-term capital gains, if any, are taxable as long-term gains, regardless of
how long the shareholder has held Fund shares and whether the distribution is
received in additional shares or in cash. Since the Fund's income is expected to
be derived entirely from interest rather than dividends, none of such dividend
distributions will be eligible for the 70% dividends received deduction
generally available to corporations. Net long-term capital gains distributions
are not eligible for the dividends received deduction.
Any loss on the sale or exchange of shares of the Fund which are held for
six months or less is disallowed to the extent of the amount of any
exempt-interest dividends paid with respect to such shares. Treasury Regulations
may provide for a reduction in such required holding period. If a shareholder
receives a distribution that is taxed as 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 to the extent of the capital gains
distribution.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry shares of the Fund is not deductible to the extent allocable to
exempt-interest dividends of the Fund (which allocation does not take into
account capital gain dividends of the Fund). Furthermore, entities or persons
who are "substantial users" (or related persons) of facilities financed by
industrial development bonds should consult their tax advisers before purchasing
shares of the Fund. "Substantial user" is defined generally by Income Tax
Regulation 1.103-11 (b) as including a "non-exempt person" who regularly uses in
a trade or business a part of a facility financed from the proceeds of
industrial development bonds.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities. It can be expected that 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 such
event, the Fund would re-evaluate its investment objective and policies.
In any year in which the Fund qualifies as a regulated investment company
under the Internal Revenue Code and is exempt from federal income tax, (i) the
Fund will also be exempt from the California corporate income and franchise
taxes to the extent it distributes its income and (ii), provided 50% or more of
the value of the total assets of the Fund at the close of each quarter of its
taxable year consists of obligations the interest on which (when held by an
individual) is exempt from personal income taxation under California law, the
Fund will be qualified under California law to pay "exempt-interest" dividends
which will be exempt from the California personal income tax.
The portion of dividends constituting exempt-interest dividends is that
portion derived from interest on obligations which pay interest excludable from
California personal income under California law. The total amount of California
exempt-interest dividends paid by the Fund to all of its shareholders with
respect to any taxable year cannot exceed the amount of interest received by the
Fund during such year
33
<PAGE>
on such obligations less any expenses and expenditures (including dividends paid
to corporate shareholders) deemed to have been paid from such interest. Any
dividends paid to corporate shareholders subject to the California franchise or
corporate income tax will be taxed as ordinary dividends to such shareholders.
Individual shareholders of the Fund who reside in California will not be
subject to California personal income tax on distributions received from the
Fund to the extent such distributions are attributable to interest received by
the Fund during its taxable year on obligations, the interest from which (when
held by an individual) is exempt from taxation under California law.
Because, unlike federal law, California law does not impose personal income
tax on an individual's Social Security benefits, the receipt of California
exempt-interest dividends will have no effect on an individual's California
personal income tax.
Individual shareholders will normally be subject to federal and California
personal income tax on dividends paid from interest income derived from taxable
securities and distributions of net capital gains. In addition, distributions
other than exempt-interest dividends to such shareholders are includable in
income subject to the California alternative minimum tax. For federal and
California personal income tax purposes, distributions of long-term capital
gains, if any, are taxable to shareholders as long-term capital gains,
regardless of how long a shareholder has held shares of the Fund, and regardless
of whether the distributions are received in additional shares or in cash. In
addition, unlike federal law, California law provides that the shareholders of
the Fund will not be subject to tax, or receive a credit for tax paid by the
Fund, on undistributed capital gains, if any.
Interest on indebtedness incurred by shareholders or related parties to
purchase or carry shares of an investment company paying exempt-interest
dividends, such as the Fund, generally will not be deductible by the investor
for California personal income tax purposes. In addition, as a result of
California's incorporation of certain provisions of the Code, a loss realized by
a shareholder upon the sale of shares held for six months or less may be
disallowed to the extent of any exempt-interest dividends received with respect
to such shares. Moreover, any loss realized upon the sale of shares within six
months from the date of purchase of such shares and following receipt of a
long-term capital gains distribution will be treated as a long-term capital loss
to the extent of such long-term capital gains distribution. Finally, any loss
realized upon the sale of shares within 30 days before or after the acquisition
of other shares of the Fund may be disallowed under the "wash sale" rules.
Distributions from investment income and long-term and short-term capital
gains will not be excluded from taxable income in determining the California
corporate franchise tax for corporate shareholders. Such distributions also may
be includable in income subject to the alternative minimum tax. In addition,
distributions from investment income and long-term and short-term capital gains
may be subject to state taxes in states other than California and to local
taxes.
The foregoing is only a summary of some of the important California income
tax considerations generally affecting the Fund and its shareholders. No attempt
is made to present a detailed explanation of the California personal income tax
treatment of the Fund or its shareholders, and this discussion is not intended
as a substitute for careful planning. Shareholders should consult their tax
advisers regarding specific questions as to federal, state or local taxes and
how these relate to their own tax situation.
The Fund is organized as a Massachusetts business trust. Under current law,
so long as it qualifies as a "regulated investment company" under the Internal
Revenue Code, the Fund itself is not liable for any income or franchise tax in
The Commonwealth of Massachusetts.
Any dividend or capital gains distribution 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
34
<PAGE>
of realized long-term capital gains, such payment or distribution would be in
part a return of capital but nonetheless taxable to the shareholder. Therefore,
an investor should consider the tax implications of purchasing Fund shares
immediately prior to a distribution record date.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
As discussed in the Prospectus, from time to time the Fund may quote its
"yield" and/or its "total return" in advertisements and sales literature. Yield
is calculated for any 30-day period as follows: the amount of interest income
for each security in the Fund's portfolio is determined in accordance with
regulatory requirements; the total for the entire portfolio constitutes the
Fund's gross income for the period. Expenses accrued during the period are
subtracted to arrive at "net investment income". The resulting amount is divided
by the product of the net asset value per share on the last day of the period
multiplied by the average number of Fund shares outstanding during the period
that were entitled to dividends. This amount is added to 1 and raised to the
sixth power. 1 is then subtracted from the result and the difference is
multiplied by 2 to arrive at the annualized yield. For the 30-day period ended
December 31, 1993, the Fund's yield, calculated pursuant to the formula
described above, was 3.81%.
The Fund may also quote a "tax-equivalent yield" determined by dividing the
tax-exempt portion of the quoted yield by 1 minus the stated income tax rate and
adding the result to the portion of the yield that is not tax-exempt. The Fund's
tax-equivalent yield, based upon a combined Federal and California personal
income tax bracket of 43.04% for the 30-day period ending December 31, 1993, was
6.69% based upon the yield quoted above.
The Fund's "average annual total return" represents an annualization of the
Fund's total return over a particular period and is computed by finding the
annual percentage rate which will result in the ending redeemable value of a
hypothetical $1,000 investment made at the beginning of a one, five or ten year
period, or for the period from the date of commencement of the Fund's
operations, if shorter than any of the foregoing. The ending redeemable value is
reduced by any contingent deferred sales charge at the end of the one, five or
ten year or other period. For the purpose of this calculation, it is assumed
that all dividends and distributions are reinvested. The formula for computing
the average annual total return involves a percentage obtained by dividing the
ending redeemable value by the amount of the initial investment, taking a root
of the quotient (where the root is equivalent to the number of years in the
period) and subtracting 1 from the result.
The average annual total returns of the Fund for the year ended December 31,
1993, the five years ended December 31, 1993 and for the period from July 11,
1984 (commencement of operations) through December 31, 1993, were 5.97%, 8.54%
and 10.12%, respectively.
In addition to the foregoing, the Fund may advertise its total return over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. Such calculations may or may not reflect the
deduction of the contingent deferred sales charge which, if reflected, would
reduce the performance quoted. For example, the average annual total return of
the Fund may be calculated in the manner described above, but without deduction
for any applicable contingent deferred sales charge. Based on this calculation,
the average annual total returns of the Fund for the year ended December 31,
1993, the five years ended December 31, 1993 and for the period from July 11,
1984 through December 31, 1993, were 10.97%, 8.82% and 10.12%, respectively.
In addition, the Fund may compute its aggregate total return for specified
periods by determining the aggregate percentage rate which will result in the
ending value of a hypothetical $1,000 investment made at the beginning of the
period. For the purpose of this calculation, it is assumed that all dividends
and distributions are reinvested. The formula for computing aggregate total
return involves a percentage obtained by dividing the ending value (without the
reduction for any contingent deferred sales charge) by the initial $1,000
investment and subtracting 1 from the result. Based on the foregoing
calculation, the
35
<PAGE>
Fund's total return for the year ended December 31, 1993, the five years ended
December 31, 1993 and the period from July 11, 1984 through December 31, 1993
were 10.97%, 52.63% and 149.30%, respectively.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in shares of the Fund by adding 1 to the Fund's
aggregate total return (expressed as a decimal and without reflecting the
deduction of the contingent deferred sales charge) and multiplying by $10,000
$50,000 or $100,000. Investments of $10,000, $50,000 and $100,000 in the Fund
since inception (July 11, 1984) would have grown to $24,930, $124,650 and
$249,300, respectively at December 31, 1993.
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent organizations.
SHARES OF THE FUND
- --------------------------------------------------------------------------------
As discussed in the Prospectus, the shareholders of the Fund are entitled to
a full vote for each full share held. The Trustees have been elected by the
shareholders of the Fund. The Trustees themselves have the power to alter the
number and the terms of office of the Trustees, and they may at any time
lengthen their own terms or make their terms of unlimited duration and appoint
their own successors, provided that always at least a majority of the Trustees
has been elected by the shareholders of the Fund. Under certain circumstances
the Trustees may be removed by action of the Trustees. The shareholders also
have the right under certain circumstances to remove the Trustees. The voting
rights of shareholders are not cumulative, so that holders of more than 50
percent of the shares voting can, if they choose, elect all Trustees being
selected, while the holders of the remaining shares would be unable to elect any
Trustees.
The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios) and additional classes of shares
within any series (which would be used to distinguish among the rights of
different categories of shareholders, as might be required by future regulations
or other unforeseen circumstances). However, the Trustees have not authorized
any such additional series or classes of shares.
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/her or its duties. It also provides that all third persons shall look
solely to the Fund's 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 is authorized to issue an unlimited number of shares of beneficial
interest. The Fund shall be of unlimited duration subject to the provisions in
the Declaration of Trust concerning termination by action of the shareholders.
CUSTODIAN AND TRANSFER AGENT
- --------------------------------------------------------------------------------
The Bank of New York, 110 Washington Street, New York, New York 10286 is the
Custodian of the Fund's assets. The Custodian has no part in deciding the Fund's
investment policies or which securities are to be purchased or sold for the
Fund. Any of the Fund's cash balances with the Custodian in excess of $100,000
are unprotected by Federal deposit insurance. Such balances may, at times, be
substantial.
Dean Witter Trust Company, Harborside Financial Center, Plaza Two,, Jersey
City, New Jersey 07311 is the Transfer Agent of the Fund's shares and Dividend
Disbursing Agent for payment of
36
<PAGE>
dividends and distributions of Fund shares and Agent for shareholders under
various investment plans described herein. Dean Witter Trust Company is an
affiliate of Dean Witter Distributors Inc., the Fund's Distributor and Dean
Witter InterCapital Inc., the Fund's Investment Manager. As Transfer Agent and
Dividend Disbursing Agent, Dean Witter Trust Company's responsibilities include
maintaining shareholder accounts; disbursing cash dividends and reinvesting
dividends; processing account registration changes; handling purchase and
redemption transactions; mailing prospectuses and reports; mailing and
tabulating proxies; processing share certificate transactions; and maintaining
shareholder records and lists. For these services, Dean Witter Trust Company
receives a per shareholder account fee from the Fund.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
Price Waterhouse, serves as the independent accountants of the Fund. The
independent accountants are responsible for auditing the annual financial
statements of the Fund.
REPORTS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports showing
the Fund's portfolio and other information. An annual report, containing
financial statements audited by independent accountants, together with their
report thereon, will be sent to shareholders each year.
The Fund's fiscal year ends on December 31. 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 Trustees.
LEGAL COUNSEL
- --------------------------------------------------------------------------------
Sheldon Curtis, Esq., who is an officer and General Counsel of the
Investment Manager, is an officer and General Counsel of the Fund.
EXPERTS
- --------------------------------------------------------------------------------
The annual financial statements of the Fund for the year ended December 31,
1993 which are included herein and incorporated by reference in the Prospectus
have been so included and incorporated in reliance on the report of Price
Waterhouse, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. 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.
37
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of Dean Witter California Tax-Free Income Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dean Witter California Tax-Free
Income Fund (the "Fund") at December 31, 1993, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended and the financial highlights for each of the nine years in
the period then ended and for the period July 11, 1984 (commencement of
operations) through December 31, 1984, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities owned at December 31, 1993 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE
New York, New York
February 14, 1994
38
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATE VALUE
- ----------- -------- -------- ------------
<C> <S> <C> <C> <C>
CALIFORNIA EXEMPT MUNICIPAL BONDS (94.0%)
GENERAL OBLIGATION (6.3%)
California,
$ 5,000 Ser 1990.................................................... 7.00 % 8/ 1/07 $ 5,988,100
5,000 Ser 1990.................................................... 7.00 8/ 1/08 5,991,700
2,000 Ser AT...................................................... 9.50 2/ 1/10 2,929,360
20,000 Various Purpose Dtd 4/1/93 (FSA Insured).................... 5.50 4/ 1/19 20,114,800
5,000 San Diego Open Space Park Facilities District #1, Ser 86A..... 7.60 1/ 1/07 5,470,600
Santa Margarita Water District
6,000 Impr Dists #3&4 Refg Ser 1986............................... 7.50 11/ 1/05 6,565,380
12,000 Impr Dist #4 1978 Ser E..................................... 7.40 7/ 1/15 13,056,600
3,500 Impr Dist #4A 1984 Ser A.................................... 7.75 8/ 1/06 3,841,495
Puerto Rico, Pub Impr
5,000 Refg Ser 1987 A............................................. 5.00 7/ 1/05 4,991,300
5,085 Ser 1991 (Prerefunded)...................................... 7.30 7/ 1/20 6,064,980
- ----------- ------------
68,585 75,014,315
- ----------- ------------
EDUCATIONAL FACILITIES REVENUE (5.5%)
California Educational Facilities Authority,
1,750 Loyola Marymount University Ser 1992 B...................... 6.55 10/ 1/12 1,909,355
2,300 Loyola Marymount University Ser 1992 B...................... 6.60 10/ 1/22 2,507,253
2,500 1985 Pooled (USF&G Insured) (Prerefunded)................... 8.00 11/ 1/10 2,766,150
3,000 Stanford University Ser I................................... 6.75 1/ 1/13 3,338,670
3,000 Stanford University Ser I................................... 6.00 1/ 1/18 3,132,120
3,500 University of Southern California Ser 1989 A................ 7.20 10/ 1/15 3,912,545
California Public Works Board,
8,000 State University 1992 Ser A................................. 6.70 10/ 1/17 8,699,840
7,000 University of California 1990 Ser A (Prerefunded)........... 7.00 9/ 1/15 8,236,130
University of California, Multiple Purpose
11,000 Refg Ser A.................................................. 6.875 9/ 1/16 12,103,630
20,000 Refg Ser 1993 C (AMBAC Insured)............................. 5.125 9/ 1/18 19,385,800
- ----------- ------------
62,050 65,991,493
- ----------- ------------
ELECTRIC REVENUE (12.2%)
2,000 Kings River Conservation District, Pine Flat Power Ser D...... 6.00 1/ 1/17 2,083,200
Los Angeles Department of Water & Power,
3,450 Refg Issue of 1993.......................................... 5.375 9/ 1/23 3,377,067
15,000 Second Issue of 1993........................................ 5.40 11/15/13 15,195,900
9,500 Refg Second Issue of 1993................................... 5.40 11/15/31 9,333,845
Northern California Power Agency,
15,000 Geothermal #3 1985 Ser A (Crossover Refunded)............... 7.00 7/ 1/10 15,684,450
7,000 Hydro #1 1993 Refg Ser A (MBIA insured)..................... 5.50 7/ 1/16 7,071,260
10,000 Northern California Transmission Agency, California-Oregon
1990
Ser A (MBIA Insured)(Prerefunded)........................... 7.00 5/ 1/24 11,662,100
5,000 Redding, Ser 1989 A COPs (MBIA Insured) (Prerefunded)......... 7.125 7/ 1/14 5,655,350
13,000 Sacramento Municipal Utility District, Refg 1992 Ser A INFLOS
(FGIC Insured).............................................. 9.875+ 8/15/18 15,047,500
Southern California Public Power Authority,
16,000 Multiple Projects 1989 Ser.................................. 6.00 7/ 1/18 16,362,080
8,000 Power 1993 Refg Ser A....................................... 5.00 7/ 1/15 7,634,880
3,000 Power Refg Ser C 1992 (AMBAC Insured) (Prerefunded)......... 5.75 7/ 1/17 3,285,180
8,000 Southern Transmission Sub Crossover Refg Ser 1992........... 5.75 7/ 1/21 8,113,280
7,000 Transmission Refg Ser 1988 (FGIC Insured)................... 0.00 7/ 1/06 3,771,110
10,000 Transmission 1986 Refg Ser B................................ 5.50 7/ 1/23 9,884,800
Puerto Rico Electric Power Authority,
3,000 Power Ser N................................................. 5.00 7/ 1/12 2,901,540
9,000 Power Ser O................................................. 5.00 7/ 1/12 8,704,620
- ----------- ------------
143,950 145,768,162
- ----------- ------------
</TABLE>
39
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATE VALUE
- ----------- -------- -------- ------------
<C> <S> <C> <C> <C>
HOSPITAL REVENUE (11.5%)
$ 7,100 Antelope Valley Hospital District, Ser 1989 COPs.............. 7.35 % 1/ 1/20 $ 7,809,148
Bakersfield, Bakersfield Memorial Hospital
1,750 Ser 1992 A.................................................. 6.375 1/ 1/12 1,863,803
2,000 Ser 1992 A.................................................. 6.50 1/ 1/22 2,131,640
Berkeley,
7,600 Alta Bates Hospital 1995 Ser A.............................. 6.50 12/ 1/11 7,833,092
3,110 Alta Bates Hospital 1985 Ser B (Prerefunded)................ 7.65 12/ 1/15 3,671,479
California Health Facilities Financing Authority,
4,350 Downey Community Hospital Ser 1993.......................... 5.625 5/15/08 4,406,202
10,000 Kaiser Permanente 1983 Ser.................................. 5.45 10/ 1/13 9,999,000
8,000 Kaiser Permanente 1985 Ser A................................ 9.125 10/ 1/15 8,818,800
3,500 Kaiser Permanente 1991 Ser A................................ 6.25 3/ 1/21 3,671,255
3,500 Merrit Peralta Medical Center 1985 Ser A.................... 9.00 5/ 1/15 3,616,095
5,000 St Joseph Health Ser 1991 A (Prerefunded)................... 6.75 7/ 1/21 5,861,500
5,000 Sutter Community Hospitals of Sacramento Ser A (Crossover
Refunded)................................................... 9.25 1/ 1/13 5,361,650
Desert Hospital District, Desert Hospital Corp
5,000 Ser 1990 COPs (Prerefunded)................................. 8.00 7/ 1/10 6,150,350
3,000 Ser 1990 COPs (Prerefunded)................................. 8.10 7/ 1/20 3,707,160
10,000 Ser 1992 COPs MVRICS (Capital Guaranty Insured)............. 9.659+ 7/28/20 11,700,000
4,000 Duarte, City of Hope National Medical Center COPs............. 6.25 4/ 1/23 4,060,800
6,000 Eden Township Hospital District, Ser 1989..................... 7.40 11/ 1/19 6,373,860
5,000 Hemet Valley Hospital District, Moreno Valley Regional Medical
Center 1988 Ser A........................................... 8.50 7/ 1/18 5,400,800
5,000 Los Angeles, Hollywood Presbyterian Hospital/Olmstead Memorial
Ser 1985 COPs (State Insured)............................... 9.00 7/ 1/13 5,441,600
1,250 Rancho Mirage Joint Powers Financing Authority, Eisenhower
Memorial Hospital COPs...................................... 7.00 3/ 1/22 1,357,738
4,000 Riverside, Kaiser Permanente 1985 Ser A....................... 9.00 12/ 1/15 4,440,960
5,000 Santa Rosa, Kaiser Permanente 1985 Ser A...................... 9.00 12/ 1/15 5,550,150
2,000 Stockton, Dameron Hospital Assn Refg Ser 1988................. 8.25 12/ 1/00 2,240,920
6,000 Stockton, St Joseph Medical Center of Stockton 1993 Ser A
(MBIA Insured)(a)........................................... 5.50 6/ 1/23 6,036,120
8,500 University of California, UCLA Medical Center Ser 1986........ 6.90 12/ 1/16 9,220,120
- ----------- ------------
125,660 136,724,242
- ----------- ------------
INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE (5.6%)
2,500 California Alternative Energy Source Financing Authority, SRI
International Cogeneration Ser 1985 (b)..................... 9.75 12/ 1/05 1,250,000
California Pollution Control Financing Authority,
5,000 Atlantic Richfield Co Ser 1985.............................. 9.125 11/ 1/04 5,590,550
6,000 Pacific Gas & Electric Co 1987 Ser B (AMT).................. 8.875 1/ 1/10 7,119,240
5,000 Southern California Edison Co 1988 Ser A (AMT).............. 6.90 9/ 1/06 5,512,750
10,000 Southern California Edison Co Ser D......................... 6.85 12/ 1/08 11,109,800
10,000 Southern California Edison Co 1992 Ser B (AMT).............. 6.40 12/ 1/24 10,739,100
5,000 Waste Management Inc 1991 Ser A (AMT)....................... 7.15 2/ 1/11 5,637,200
1,400 Intermodal Container Transfer Facility Joint Powers Authority,
Southern Pacific Transportation Co 1989 Ser A............... 7.70 11/ 1/14 1,641,962
San Diego,
5,000 San Diego Gas & Electric Co Ser A 1992...................... 6.40 9/ 1/18 5,338,200
6,000 San Diego Gas & Electric Co 1986 Ser B (AMT)................ 7.375 12/ 1/21 6,692,340
5,000 San Diego Gas & Electric Co 1987 Ser A (AMT)................ 8.75 3/ 1/23 5,839,800
- ----------- ------------
60,900 66,470,942
- ----------- ------------
</TABLE>
40
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATE VALUE
- ----------- -------- -------- ------------
<C> <S> <C> <C> <C>
MORTGAGE REVENUE -- SINGLE FAMILY (2.5%)
$ 585 California Department of Veterans Affairs, 1984 Ser A......... 10.50 % 8/ 1/10 $ 605,721
California Housing Finance Agency,
12,620 Home 1989 Ser A............................................. 7.75 8/ 1/17 13,772,206
750 Home 1991 Ser B (AMT)....................................... 7.55 8/ 1/20 785,003
10,000 Home 1991 Ser G (AMT)....................................... 7.05 8/ 1/27 10,386,900
125 Huntington Beach, Home 1983 Ser A............................. 9.60 3/ 1/14 133,104
80 Newark Redevelopment Agency, 1984 Residential................. 10.00 9/ 1/11 85,516
12,605 San Francisco Redevelopment Agency, Residential 1984 Issue
A........................................................... 0.00 4/ 1/17 1,054,156
475 Southern California Home Financing Authority, GNMA &
FNMA-Backed 1991 Issue A (AMT).............................. 7.35 9/ 1/24 517,774
Puerto Rico Housing Finance Corporation,
1,695 Portfolio One GNMA-Backed Ser B............................. 7.65 10/15/22 1,823,701
1,000 Portfolio One GNMA-Backed Ser C............................. 6.85 10/15/23 1,080,930
- ----------- ------------
39,935 30,245,011
- ----------- ------------
PUBLIC FACILITIES REVENUE (7.9%)
10,000 Alameda County Public Facilities Corporation, 1991 Financing
COPs........................................................ 6.15 9/ 1/21 10,405,000
5,000 Beverly Hills, Civic Center Impr Refg COPs.................... 7.00 6/ 1/15 5,540,550
4,000 California Public Works Board, Corrections 1986 Ser A
(Prerefunded)............................................... 7.375 11/ 1/05 4,493,800
9,000 El Cajon-San Diego County Civic Center Authority, East County
Regional Center 1986 Refg (Prerefunded)..................... 6.70 12/ 1/07 9,954,180
Los Angeles Convention & Exhibition Center Authority,
10,000 Ser 1985 COPs (Prerefunded)................................. 9.00 12/ 1/10 13,950,500
12,500 Ser 1993 A (MBIA Insured)................................... 5.375 8/15/18 12,473,625
14,000 Ser 1985 COPs (Prerefunded)................................. 9.00 12/ 1/20 19,530,700
5,500 Los Angeles County-West Covina Civic Center Authority, 1987
Refg COPs................................................... 6.875 9/ 1/14 5,837,590
5,000 North City West School Facilities Financing Authority,
Community Facs Dist #1 Spl Tax Ser 1989 A................... 7.85 9/ 1/19 5,359,950
5,000 San Jose Financing Authority, Convention Center Refg 1993 Ser
C........................................................... 6.40 9/ 1/17 5,368,350
1,200 Puerto Rico Infrastructure Financing Authority, Spl Tax Ser
1988 A...................................................... 7.90 7/ 1/07 1,383,648
- ----------- ------------
81,200 94,297,893
- ----------- ------------
RESOURCE RECOVERY REVENUE (0.5%)
5,000 Stanislaus Waste Energy Financing Agency, Ogden Martin Systems
of Stanislaus Inc Refg Ser 1990............................. 7.625 1/ 1/10 5,581,700
------------
TAX ALLOCATION (7.7%)
5,000 Fountain Valley Agency For Community Development, Industrial
Area 1985................................................... 9.10 1/ 1/15 5,562,400
Garden Grove Community Development Agency,
5,000 Refg Issue of 1993.......................................... 5.70 10/ 1/13 5,046,350
7,000 Refg Issue of 1993.......................................... 5.875 10/ 1/23 7,085,120
Industry Urban Development Agency,
10,000 Civic Rec-Ind Redev Proj #1 Sub Refg Ser 1987 A............. 7.30 5/ 1/06 10,934,700
2,160 Civic Rec-Ind Redev Proj #1 Sub Refg Ser 1987 B............. 7.375 5/ 1/15 2,369,628
6,840 Civic Rec-Ind Redev Proj #1 Sub Refg Ser 1987 B
(Prerefunded)............................................... 7.375 5/ 1/15 7,755,466
Long Beach Financing Authority,
25,500 Ser 1992 (AMBAC Insured).................................... 6.00 11/ 1/17 27,933,720
2,000 Ser 1992 (AMBAC Insured).................................... 5.50 11/ 1/22 2,008,160
3,750 Long Beach Redevelopment Agency, Downtown Refg
Ser 1988 B (Prerefunded).................................... 8.30 11/ 1/10 4,456,837
5,000 Los Angeles Community Redevelopment Agency, Central Business
Dist Ser E (Prerefunded).................................... 8.85 7/ 1/10 5,517,600
7,000 Norwalk Redevelopment Agency, Proj #1 1987 Refg............... 7.15 12/ 1/15 7,435,750
3,000 Oakland Redevelopment Agency, 1985 Ser A COPs (Prerefunded)... 9.25 8/ 1/16 3,342,420
2,000 Pleasanton Joint Powers Financing Authority, Reassessment 1993
Ser A....................................................... 6.15 9/ 2/12 2,034,760
- ----------- ------------
84,250 91,482,911
- ----------- ------------
</TABLE>
41
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATE VALUE
- ----------- -------- -------- ------------
<C> <S> <C> <C> <C>
TRANSPORTATION FACILITIES REVENUE (11.6%)
Long Beach,
$ 11,000 Harbor Ser 1989 A (AMT)..................................... 7.375% 5/15/09 $ 12,352,560
10,000 Harbor Ser 1989 A (AMT)..................................... 7.25 5/15/19 11,096,600
Los Angeles,
5,000 Department of Airports Refg 1989 Ser C...................... 7.00 5/ 1/10 5,544,300
6,000 Harbor Department Issue of 1985............................. 8.70 9/ 1/15 6,564,060
Los Angeles County Transportation Commission,
20,000 Sales Tax Ser 1991 B........................................ 6.50 7/ 1/13 21,804,400
5,000 Sales Tax Ser 1986 A........................................ 6.25 7/ 1/16 5,115,650
10,000 Sales Tax Ser 1987 A (Prerefunded).......................... 6.75 7/ 1/19 11,813,200
2,650 Sales Tax Ser 1989 A........................................ 7.00 7/ 1/19 2,991,718
Orange County Airport,
2,000 Refg Ser 1993 (AMT) (MBIA Insured).......................... 5.50 7/ 1/13 2,013,540
2,100 Ser 1987 (AMT) (Prerefunded)................................ 6.625 7/ 1/18 2,294,859
4,900 Ser 1987 (AMT).............................................. 6.625 7/ 1/18 5,209,239
3,000 San Diego County Regional Transportation Commission, Sales Tax
1989 Ser A (Prerefunded).................................... 7.375 4/ 1/06 3,509,610
5,000 San Francisco Airports Commission, San Francisco Int'l Airport
Second Ser Refg Issue 4 (MBIA Insured)...................... 6.00 5/ 1/20 5,338,800
San Francisco Bay Area Rapid Transit District,
5,000 Sales Tax Ser 1990 (AMBAC Insured).......................... 6.75 7/ 1/09 5,597,100
10,000 Sales Tax Ser 1985 (Prerefunded)............................ 9.00 7/ 1/11 11,152,600
13,000 Puerto Rico Highway Authority, Ser Q (Prerefunded)............ 7.75 7/ 1/10 15,835,950
10,000 Puerto Rico Highway & Transportation Authority, Refg Ser X.... 5.25 7/ 1/21 9,606,500
- ----------- ------------
124,650 137,840,686
- ----------- ------------
WATER & SEWER REVENUE (17.1%)
California Department of Water Resources,
4,000 Central Valley Ser F........................................ 6.00 12/ 1/11 4,121,400
9,500 Central Valley Ser J-2...................................... 6.125 12/ 1/13 10,036,845
2,000 Central Valley Ser J-2...................................... 6.00 12/ 1/20 2,083,920
10,000 Central Coast Water Authority, Ser 1992 (AMBAC Insured)....... 6.50 10/ 1/14 11,113,000
Contra Costa Water Authority,
3,400 Water Treatment 1990 Ser A (Prerefunded).................... 7.25 10/ 1/10 4,059,498
5,000 Water Treatment 1990 Ser A (Prerefunded).................... 6.875 10/ 1/20 5,860,600
East Bay Municipal Utility District,
8,000 Water Refg Ser 1986 (Prerefunded)........................... 7.00 3/ 1/08 8,784,160
8,000 Water Refg Ser 1992......................................... 6.00 6/ 1/20 8,339,200
4,000 Eastern Municipal Water District, Water & Sewer Ser 1991
COPs........................................................ 6.00 7/ 1/23 4,113,640
3,600 Goleta Water District, Refg Ser 1993 COPs (FGIC Insured)...... 5.50 12/ 1/12 3,653,244
Los Angeles,
5,745 Wastewater Ser 1990......................................... 7.10 6/ 1/18 6,522,069
5,000 Wastewater Ser 1990-A (Prerefunded)......................... 7.00 2/ 1/20 5,813,300
17,000 Wastewater Ser 1990-B (Prerefunded)......................... 7.15 6/ 1/20 19,928,590
20,500 Los Angeles County Sanitation Districts Financing Authority,
1993 Ser A.................................................. 5.375 10/ 1/13 20,411,645
5,000 Los Angeles Department of Water & Power, Water Works Issue of
1991 (Crossover Refunded)................................... 7.00 4/ 1/31 5,872,200
3,600 Moulton Niguel Water District, 1993 Refg (MBIA Insured)....... 5.25 9/ 1/13 3,582,252
10,000 Orange County Sanitation Districts #1, 2 & 3, Joint Facilities
COPs (Prerefunded).......................................... 7.10 8/ 1/11 11,080,000
5,045 Riverside, Water Ser 1985 (Prerefunded)....................... 8.60 10/ 1/10 5,661,751
15,000 San Diego, Sewer 1993 Ser A................................... 5.25 5/15/20 14,359,350
San Diego County Water Authority,
11,000 Water Ser 1989 A COPs (Prerefunded)......................... 7.30 5/ 1/09 12,446,500
4,000 Water Ser 1991 B COPs CARS (MBIA Insured)................... 9.78 + 4/ 8/21 4,860,000
5,750 San Francisco Public Utilities Commission, Water 1992 Refg Ser
A........................................................... 6.00 11/ 1/15 6,072,000
8,250 West & Central Basin Financing Authority, Water Basin Refg Ser
1993 A (AMBAC Insured)...................................... 5.00 8/ 1/16 7,915,380
Puerto Rico Aqueduct & Sewer Authority,
5,000 Ser 1988 A.................................................. 7.90 7/ 1/07 5,765,200
9,450 Ser 1988 A.................................................. 7.875 7/ 1/17 10,886,683
- ----------- ------------
187,840 203,342,427
- ----------- ------------
</TABLE>
42
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATE VALUE
- ----------- -------- -------- ------------
<C> <S> <C> <C> <C>
OTHER REVENUE (5.6%)
$ 3,500 CSAC Finance Corp, Contra Costa County Project III Ser 1986
COPs
(Prerefunded)............................................... 7.50 % 10/ 1/09 $ 4,012,540
Campell Redevelopment Agency,
1,875 1991 Financing COPs......................................... 6.75 10/ 1/17 3,676,563
3,125 1991 Financing COPs (Prerefunded)........................... 6.75 10/ 1/17 2,035,762
5,560 Grossmont Union High School District, Land Acquisition
Convertible
Cap Apprec COPs (FSA Insured)............................... 0.00 9/ 1/25 4,934,500
Los Angeles County,
2,750 1991 Master Refg RIBS COPs.................................. 10.447+ 5/ 1/15 3,148,750
10,000 Pension Obligations Certificates Ser A...................... 6.875 6/30/07 10,795,700
9,500 Public Properties Refg of 1987 COPs......................... 0.00 4/ 1/04 5,720,710
6,500 Nevada County, Western Nevada County Solid Waste Mgmt 1991
COPs........................................................ 7.50 6/ 1/21 7,289,035
5,000 Orange County Community Facilities District #86-2, Rancho
Santa
Margarita Series A of 1990.................................. 7.65 8/15/17 5,420,950
1,000 Orange County Community Facilities District #87-3, Mission
Viejo
Ser A of 1990............................................... 7.80 8/15/15 1,158,240
3,500 Poway Redevelopment Agency, 1986 Cap Impr COPs................ 7.875 8/ 1/11 3,831,905
10,000 Stanislaus County Capital Improvements Financing Authority,
Refg Ser 1990 COPs.......................................... 7.55 4/ 1/18 10,813,400
3,000 University of California, Los Angeles Campus Parking Ser C
(Prerefunded)............................................... 7.75 11/ 1/15 3,400,440
- ----------- ------------
65,310 66,238,495
- ----------- ------------
1,049,330 TOTAL CALIFORNIA EXEMPT MUNICIPAL BONDS
(IDENTIFIED COST $1,001,388,452).......................... 1,118,998,277
------------
SHORT-TERM CALIFORNIA EXEMPT MUNICIPAL OBLIGATIONS (4.0%)
10,000 California Health Facilities Financing Authority,
St Francis Memorial Hospital Ser 1993 B (Tender 1/3/94)..... 4.75 * 11/ 1/19 10,000,000
5,000 California School Cash Reserve Program Authority, 1993 Pool
Ser A....................................................... 3.40 7/ 5/94 5,031,950
5,000 Loma Linda, Loma Linda University Medical Center Ser 1985 C
(Tender 1/6/94)............................................. 2.85 * 12/21/15 5,000,000
9,750 Los Angeles County, Ser B TRANs TECP.......................... 2.50 1/11/94 9,750,000
12,500 Newport Beach, Hoag Memorial Hospital Presbyterian Ser 1992
(Tender 1/3/94)............................................. 3.05 * 10/ 1/22 12,500,000
5,000 Sacramento County Administration Center & Courthouse, Ser 1990
COPS (Tender 1/6/94)........................................ 2.85 * 6/ 1/20 5,000,000
- ----------- ------------
47,281,950
47,250 TOTAL CALIFORNIA EXEMPT SHORT-TERM MUNICIPAL OBLIGATIONS
(IDENTIFIED COST $47,262,291).............................
------------
$ 1,096,580 TOTAL INVESTMENTS (IDENTIFIED COST $1,048,650,743) (C)........ 98.0% 1,166,280,227
- -----------
- -----------
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES................ 2.0 23,547,601
-------- ------------
NET ASSETS.................................................... 100.0 % $1,189,827,828
-------- ------------
-------- ------------
<FN>
- ------------------------------
+ Current coupon rate for residual interest bonds. This rate resets
periodically as the auction rate on the related short-term securities
fluctuates.
* Variable or floating rate securities. Coupon rates shown reflect current
rate.
(a) Security purchased on a when issued basis.
(b) Security in default. Partial interest paid. Interest income is recorded as
received.
(c) The aggregate cost for federal income tax purposes is $1,048,650,743; the
aggregate gross unrealized appreciation is $119,410,424 and the aggregate
gross unrealized depreciation is $1,780,940, resulting in net unrealized
appreciation of $117,629,484.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
43
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $1,048,650,743) (Note
1).................................... $ 1,166,280,227
Cash.................................... 11,368,930
Receivables for:
Interest.............................. 20,817,516
Shares of beneficial interest sold.... 2,522,191
Investments sold...................... 1,728,608
Prepaid expenses........................ 20,051
---------------
TOTAL ASSETS.................... 1,202,737,523
---------------
LIABILITIES:
Payables for:
Investments purchased................. 5,859,670
Shares of beneficial interest
repurchased......................... 856,377
Plan of distribution fee payable (Note
3).................................... 706,436
Investment management fee payable (Note
2).................................... 524,467
Dividends and distributions to
shareholders.......................... 4,786,179
Accrued expenses (Note 4)............... 176,566
---------------
TOTAL LIABILITIES............... 12,909,695
---------------
NET ASSETS:
Paid in capital......................... 1,070,194,384
Accumulated undistributed realized gain
on investments -- net................. 2,006,279
Unrealized appreciation on investments
-- net................................ 117,629,484
Distributions in excess of net
investment income..................... (2,319)
---------------
TOTAL NET ASSETS................ $ 1,189,827,828
---------------
---------------
NET ASSET VALUE PER SHARE, 89,424,792
shares outstanding (unlimited
authorized shares of $.01 par
value)................................ $13.31
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
INVESTMENT INCOME:
INTEREST INCOME......................... $ 69,526,656
------------
EXPENSES
Plan of distribution fee (Note 3)..... 7,693,113
Investment management fee (Note 2).... 5,806,822
Transfer agent fees and expenses
(Note 4)............................ 285,535
Professional fees..................... 54,425
Shareholder reports and notices....... 54,212
Registration fee...................... 45,877
Trustees' fees and expenses (Note
4).................................. 36,071
Other................................. 46,573
------------
TOTAL EXPENSES.................... 14,022,628
------------
INVESTMENT INCOME--NET.......... 55,504,028
------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS -- NET (Note 1):
Realized gain on investments -- net... 10,170,859
Change in unrealized appreciation on
investments -- net.................. 46,376,952
------------
NET GAIN ON INVESTMENTS........... 56,547,811
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS..... $112,051,839
------------
------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992
<S> <C> <C>
------------------ ------------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Investment income -- net.............................................. $ 55,504,028 $ 49,423,435
Realized gain on investments -- net................................... 10,170,859 1,674,559
Change in unrealized appreciation on investments -- net............... 46,376,952 18,197,043
------------------ ------------------
Net increase in net assets resulting from operations.............. 112,051,839 69,295,037
------------------ ------------------
Dividends and distributions to shareholders from:
Investment income -- net.............................................. (55,504,028 ) (49,423,435 )
Realized gain on investments -- net................................... (8,123,876 ) (1,686,572 )
------------------ ------------------
Total dividends and distributions................................. (63,627,904 ) (51,110,007 )
------------------ ------------------
Transactions in shares of beneficial interest -- net increase (Note
5)..................................................................... 153,955,199 135,635,179
------------------ ------------------
Total increase.................................................... 202,379,134 153,820,209
NET ASSETS:
Beginning of period..................................................... 987,448,694 833,628,485
------------------ ------------------
END OF PERIOD (including distributions in excess of net investment
income of $2,319 and $2,319, respectively)............................. $ 1,189,827,828 $ 987,448,694
------------------ ------------------
------------------ ------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
44
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND ACCOUNTING POLICIES -- Dean Witter California Tax-Free
Income Fund (the "Fund") is registered under the Investment Company Act of 1940,
as amended (the "Act"), as a diversified, open-end management investment company
and was organized on April 9, 1984 as a Massachusetts business trust. The Fund
commenced operations on July 11, 1984.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- Portfolio securities are valued for the Fund
by an outside independent pricing service approved by the Fund's Trustees.
The pricing service has informed the Fund that in valuing the Fund's
portfolio securities, it uses both a computerized grid matrix of tax-exempt
securities and evaluations by its staff, in each case based on information
concerning market transactions and quotations from dealers which reflect the
bid side of the market each day. The Fund's portfolio securities are thus
valued by reference to a combination of transactions and quotations for the
same or other securities believed to be comparable in quality, coupon,
maturity, type of issue, call provisions, trading characteristics and other
features deemed to be relevant.
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 on the identified cost
method. Net investment income includes amortization of premiums and original
issue discounts. Additionally, with respect to market discount on bonds
purchased after April 30, 1993, a portion of any capital gain realized upon
disposition is recharacterized as taxable investment income. Interest income
is accrued daily except where collection is not expected.
C. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable and non-taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records
dividends and distributions to its shareholders on the record date. The
amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations, which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such
amounts are reclassified within the capital accounts based on their federal
tax-basis treatment; temporary differences do not require reclassifications.
Dividends and distributions which exceed net investment income and net
realized capital gains for financial reporting purposes but not for tax
purposes are reported as dividends in excess of net investment income or
distributions in excess of net realized capital gains. To the extent they
exceed net investment income and net realized capital gains for tax
purposes, they are reported as distributions of paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT -- Pursuant to an Investment Management
Agreement (the "Agreement") with Dean Witter InterCapital Inc. (the "Investment
Manager"), the Fund pays its 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: 0.55 of 1% of the
portion of the daily net assets not exceeding $500 million; 0.525 of 1% of the
portion of the daily net assets exceeding $500 million but not exceeding $750
million; 0.50 of 1% of the portion of the daily net assets exceeding $750
million but not exceeding $1 billion; and 0.475 of 1% of the portion of the
daily net assets exceeding $1 billion.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes office space and facilities,
45
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
equipment, clerical, bookkeeping and certain legal services, and pays the
salaries of all personnel, including officers of the Fund who are employees of
the Investment Manager. The Investment Manager also bears the cost of telephone
services, heat, light, power and other utilities provided to the Fund.
3. PLAN OF DISTRIBUTION -- Shares of the Fund are distributed by Dean Witter
Distributors Inc. (the "Distributor") an affiliate of the Investment Manager,
through its own sales organization. To compensate the Distributor, the Fund has
adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act
pursuant to which the Fund pays the Distributor compensation accrued daily and
payable monthly at the annual rate of .75 of 1% of the lesser of: (a) the
average daily aggregate gross sales of the Fund's shares since the inception of
the Fund (not including reinvestments of dividends or capital gains
distributions), less the average daily aggregate net asset value of the Fund's
shares redeemed since the Fund's inception upon which a contingent deferred
sales charge has been imposed or upon which such charge has been waived, or (b)
the Fund's average daily net assets. Amounts paid under the Plan are paid to the
Distributor to compensate it for the services provided and the expenses borne by
it and others in the distribution of the Fund's shares, including the payment of
commissions for sales of the Fund's shares and incentive compensation to and
expenses of the account executives of Dean Witter Reynolds Inc., an affiliate of
the Investment Manager, and other employees or selected dealers who engage in or
support distribution of the Fund's shares or who service shareholder accounts,
including overhead and telephone expenses; printing and distribution of
prospectuses and reports used in connection with the offering of the Fund's
shares; and preparation, printing and distribution of sales literature and
advertising material. In addition, the Distributor may be compensated under the
Plan for its opportunity costs in advancing such amounts, which compensation
would be in the form of a carrying charge on any unrecovered expenses incurred
by the Distributor.
Provided that the Plan continues in effect, any cumulative expenses incurred
by the Distributor, but not yet recovered, may be recovered through future
distribution fees from the Fund and contingent deferred sales charges from the
Fund's shareholders.
The Distributor has informed the Fund that it received approximately
$1,072,000 in deferred sales charges from certain redemptions of the Fund's
shares of beneficial interest during the year ended December 31, 1993. The
Fund's shareholders pay such charges which are not expenses of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES -- The cost of
purchases and the proceeds from sales of portfolio securities for the year ended
December 31, 1993, excluding short-term investments, aggregated $219,644,352 and
$101,025,656, respectively.
On April 1, 1991 the Fund established an unfunded noncontributory defined
benefit pension plan covering all independent Trustees of the Fund who will have
served as 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, 1993, included in Trustees' fees and expenses in the
Statement of Operations, amounted to $12,231. At December 31, 1993, the Fund had
an accrued pension liability of $39,298 which is included in accrued expenses in
the Statement of Assets and Liabilities.
Dean Witter Trust Company, an affiliate of the Investment Manager and the
Distributor, is the Fund's transfer agent. During the year ended December 31,
1993, the Fund incurred transfer agent fees and expenses of $285,535, of which
$40,173 was payable at December 31, 1993.
46
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
5. SHARES OF BENEFICIAL INTEREST -- Transactions in shares of beneficial
interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992
-------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Sold.............................. 20,116,156 $ 264,871,259 18,442,556 $ 231,137,820
Reinvestment of dividends and
distributions.................... 2,852,146 37,675,586 2,393,695 30,022,451
-------------- ---------------- -------------- ----------------
22,968,302 302,546,845 20,836,251 261,160,271
Repurchased....................... (11,273,363) (148,591,646) (10,009,007) (125,525,092)
-------------- ---------------- -------------- ----------------
Net increase...................... 11,694,939 $ 153,955,199 10,827,244 $ 135,635,179
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
</TABLE>
1993 FEDERAL TAX NOTICE (UNAUDITED)
During the year ended December 31, 1993 the Fund paid to shareholders $0.665
per share from net investment income. All of the Fund's dividends from net
investment income were exempt interest dividends, excludable from gross
income for Federal income tax purposes. For the year ended December 31,
1993, the Fund paid to shareholders $0.092 per share from long-term capital
gains.
47
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data and ratios for a share of beneficial interest outstanding
throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987 1986 1985
---------- ---------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................ $12.70 $12.46 $11.99 $12.05 $11.68 $11.19 $12.25 $11.41 $10.31
---------- ---------- -------- -------- -------- -------- -------- -------- --------
Investment income -- net..... 0.67 0.69 0.71 0.72 0.71 0.72 0.72 0.77 0.80
Realized and unrealized gain
(loss) on investments....... 0.70 0.26 0.48 (0.06) 0.37 0.50 (1.06) 1.24 1.10
---------- ---------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations.................... 1.37 0.95 1.19 0.66 1.08 1.22 (0.34) 2.01 1.90
---------- ---------- -------- -------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Dividends from net investment
income...................... (0.67) (0.69) (0.71) (0.72) (0.71) (0.72) (0.72) (0.77) (0.80)
Distributions from realized
gain on investments......... (0.09) (0.02) (0.01) -0- -0- (0.01) -0- (0.40) -0-
---------- ---------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions................. (0.76) (0.71) (0.72) (0.72) (0.71) (0.73) (0.72) (1.17) (0.80)
---------- ---------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period........................ $13.31 $12.70 $12.46 $11.99 $12.05 $11.68 $11.19 $12.25 $11.41
---------- ---------- -------- -------- -------- -------- -------- -------- --------
---------- ---------- -------- -------- -------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN+......... 10.97% 7.83% 10.18% 5.69% 9.54% 11.23% (2.70)% 18.38% 19.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................... $1,189,828 $ 987,449 $833,628 $677,270 $567,191 $430,148 $365,414 $358,939 $184,168
Ratio of expenses to average
net assets.................... 1.27% 1.32% 1.28% 1.30% 1.32% 1.34% 1.35% 1.32% 1.41%
Ratio of net investment income
to average net assets......... 5.03% 5.45% 5.78% 5.98% 6.00% 6.31% 6.27% 6.34% 7.22%
Portfolio turnover rate........ 10% 6% 3% 16% 13% 13% 23% 31% 47%
<CAPTION>
JULY 11, 1984*
THROUGH
DECEMBER 31, 1984
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................ $10.00
-------
Investment income -- net..... 0.39
Realized and unrealized gain
(loss) on investments....... 0.31
-------
Total from investment
operations.................... 0.70
-------
Less dividends and
distributions:
Dividends from net investment
income...................... (0.39)
Distributions from realized
gain on investments......... -0-
-------
Total dividends and
distributions................. (0.39)
-------
Net asset value, end of
period........................ $10.31
-------
-------
TOTAL INVESTMENT RETURN+......... 7.10%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................... $ 57,474
Ratio of expenses to average
net assets.................... 0.23%(2)(3)
Ratio of net investment income
to average net assets......... 8.96%(2)(3)
Portfolio turnover rate........ 29%
<FN>
- ----------------------------------
* COMMENCEMENT OF OPERATIONS.
+ DOES NOT REFLECT THE DEDUCTION OF SALES LOAD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE ASSUMED OR WAIVED BY THE
INVESTMENT MANAGER AND THE DISTRIBUTOR, THE EXPENSE RATIO WOULD HAVE BEEN
1.85% AND THE NET INVESTMENT INCOME RATIO WOULD HAVE BEEN 7.34%.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
48
<PAGE>
APPENDIX
- --------------------------------------------------------------------------------
RATINGS OF INVESTMENTS
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")
MUNICIPAL BOND RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not
well safeguarded during both good and bad times over 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.
CONDITIONAL RATING: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are 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.
49
<PAGE>
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 a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
MUNICIPAL NOTE RATINGS
Moody's ratings for state and municipal notes 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.
lssuers 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.
50
<PAGE>
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extemely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.
Bonds rated AAA, AA, A and BBB are considered investment grade bonds.
BB Debt rated "BB" has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payment.
B Debt rated "B" has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
CCC Debt rated "CCC" has a current identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayments of principal. In the event
of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal.
CC The rating "CC" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC" rating.
C The rating "C" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC" debt rating.
CI The rating "CI" is reserved for income bonds on which no interest is being
paid.
D Debt rated "D" is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The "D" rating also
will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not
rate a particular type of obligation as a matter of policy.
Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of
speculation and "C" the highest degree of speculation. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the
major ratings categories.
The foregoing ratings are sometimes followed by a "p" which indicates that
the rating is provisional. A provisional rating assumes the successful
completion of the project being financed by the bonds being rated and
indicates that payment of debt service requirements is largely or entirely
dependent upon the successful and timely completion of the project. This
rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood or risk of default upon
failure of such completion.
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MUNICIPAL NOTE RATINGS
Commencing on July 27, 1984, Standard & Poor's instituted a new rating
category with respect to certain municipal note issues with a maturity of less
than three years. The new note ratings denote the following:
SP-1 denotes a very strong or strong capacity to pay principal and
interest. Issues determined to possess overwhelming safety
characteristics are given a plus (+) designation (SP-1+).
SP-2 denotes a satisfactory capacity to pay principal and interest.
SP-3 denotes a speculative capacity to pay principal and interest.
COMMERCIAL PAPER RATINGS
Standard and Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The commercial paper rating is not a recommendation to purchase or
sell a security. The ratings are based upon current information furnished by the
issuer or obtained by S&P from other sources it considers reliable. The ratings
may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information. Ratings are graded into group categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Ratings are applicable to both taxable and tax-exempt commercial paper. The
categories are as follows:
Issues assigned A ratings are regarded as having the greatest capacity for
timely payment. Issues in this category are further refined with the designation
1, 2 and 3 to indicate the relative degree of safety.
A-1 indicates that the degree of safety regarding timely 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.
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