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DEAN WITTER
CALIFORNIA TAX-FREE INCOME FUND
PROSPECTUS--FEBRUARY 28, 1994
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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.
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TABLE OF CONTENTS
Prospectus Summary................................ 3
Summary of Fund Expenses.......................... 5
Financial Highlights.............................. 6
The Fund and its Management....................... 7
Investment Objective and Policies................. 8
Investment Restrictions........................... 14
Purchase of Fund Shares........................... 14
Shareholder Services.............................. 16
Redemptions and Repurchases....................... 18
Dividends, Distributions and Taxes................ 20
Performance Information........................... 21
Additional Information............................ 22
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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.
DEAN WITTER
CALIFORNIA TAX-FREE INCOME FUND
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 392-2550 or
(800) 526-3143
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
DEAN WITTER DISTRIBUTORS INC., DISTRIBUTOR
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(This page has been left blank intentionally.)
2
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PROSPECTUS SUMMARY
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THE FUND The Fund is organized as a Trust, commonly known as a Massachusetts business trust, and
is an open-end diversified management investment company investing principally in
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
page 7).
SHARES OFFERED Shares of beneficial interest with $0.01 par value (see page 22).
OFFERING PRICE At net asset value without sales charge (see page 14). Shares redeemed within six years
of purchase are subject to a contingent deferred sales charge under most circumstances
(see pages 18-19).
MINIMUM Minimum initial investment, $1,000; minimum subsequent investment, $100 (see page 14).
PURCHASE
INVESTMENT The investment objective of the Fund is to provide a high level of current income exempt
OBJECTIVE from both federal and California income tax, consistent with preservation of capital.
INVESTMENT The Fund will invest principally in California tax-exempt fixed-income securities.
POLICIES 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 wholly-owned
MANAGER 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 7).
MANAGEMENT FEE The Investment Manager receives a monthly fee at the annual rate of 0.55% of 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 pages 20-21).
DISTRIBUTOR Dean Witter Distributors Inc. (the "Distributor"). The Distributor receives from the
AND Fund, pursuant to a Rule 12b-1 Plan of Distribution, a distribution fee accrued daily
DISTRIBUTION and payable monthly at the rate of 0.75% per annum of the lesser of (i) the Fund's
FEE 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 14-15).
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3
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REDEMPTION-- At net asset value; redeemable involuntarily if total value of the account is less than
CONTINGENT $100. Although no commission or sales charge is imposed upon the purchase of shares, a
DEFERRED SALES contingent deferred sales charge (scaled down from 5% to 1%) is imposed on any
CHARGE redemption of shares if after such redemption the 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 18-19).
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.
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THE ABOVE IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION APPEARING
ELSEWHERE IN THE PROSPECTUS
AND IN THE STATEMENT OF ADDITIONAL INFORMATION.
4
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SUMMARY OF FUND EXPENSES
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The following table illustrates all expenses and fees that a shareholder of
the Fund will incur. The expenses and fees set forth in the table are for the
fiscal year ended December 31, 1993.
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<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 %
A contingent deferred sales charge is imposed at the following declining rates:
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<CAPTION>
YEAR SINCE PURCHASE PAYMENT MADE PERCENTAGE
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First................................................................................................... 5.0%
Second.................................................................................................. 4.0%
Third................................................................................................... 3.0%
Fourth.................................................................................................. 2.0%
Fifth................................................................................................... 2.0%
Sixth................................................................................................... 1.0%
Seventh and thereafter.................................................................................. None
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Redemption Fees..................................................................................................... None
Exchange Fee........................................................................................................ None
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<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C>
Management Fee............................................................................... 0.53%
12b-1 Fees*.................................................................................. 0.70%
Other Expenses............................................................................... 0.04%
Total Fund Operating Expenses................................................................ 1.27%
<FN>
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* 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.
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EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period.............................................. $ 63 $ 70 $ 90 $ 153
You would pay the following expenses on the same investment,
assuming no redemption........................................ $ 13 $ 40 $ 70 $ 153
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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.
5
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FINANCIAL HIGHLIGHTS
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The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by Price Waterhouse,
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.
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<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
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1993 1992 1991 1990 1989 1988 1987
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<S> <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
------ ------ ------ ------ ------ ------ ------
Investment income--
net................ 0.67 0.69 0.71 0.72 0.71 0.72 0.72
Realized and
unrealized gain
(loss) on
investments........ 0.70 0.26 0.48 (0.06) 0.37 0.50 (1.06)
------ ------ ------ ------ ------ ------ ------
Total from investment
operations........... 1.37 0.95 1.19 0.66 1.08 1.22 (0.34)
------ ------ ------ ------ ------ ------ ------
Less dividends and
distributions:
Dividends from net
investment
income............. (0.67) (0.69) (0.71) (0.72) (0.71) (0.72) (0.72)
Distributions from
realized gain on
investments........ (0.09) (0.02) (0.01) -0- -0- (0.01) -0-
------ ------ ------ ------ ------ ------ ------
Total dividends and
distributions........ (0.76) (0.71) (0.72) (0.72) (0.71) (0.73) (0.72)
------ ------ ------ ------ ------ ------ ------
Net asset value, end
of period............ $13.31 $12.70 $12.46 $11.99 $12.05 $11.68 $11.19
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
Total Investment
Return+............... 10.97 % 7.83 % 10.18 % 5.69 % 9.54 % 11.23 % (2.70)%
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
Ratio of expenses to
average net assets... 1.27 % 1.32 % 1.28 % 1.30 % 1.32 % 1.34 % 1.35%
Ratio of net
investment income to
average net assets... 5.03 % 5.45 % 5.78 % 5.98 % 6.00 % 6.31 % 6.27%
Portfolio turnover
rate................. 10 % 6 % 3 % 16 % 13 % 13 % 23%
<CAPTION>
JULY 11, 1984*
THROUGH
1986 1985 DECEMBER 31, 1984
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<S> <C> <C> <C>
Per share operating
performance:
Net asset value,
beginning of
period............... $11.41 $10.31 $10.00
------ ------ ------
Investment income--
net................ 0.77 0.80 0.39
Realized and
unrealized gain
(loss) on
investments........ 1.24 1.10 0.31
------ ------ ------
Total from investment
operations........... 2.01 1.90 0.70
------ ------ ------
Less dividends and
distributions:
Dividends from net
investment
income............. (0.77) (0.80) (0.39)
Distributions from
realized gain on
investments........ (0.40) -0- -0-
------ ------ ------
Total dividends and
distributions........ (1.17) (0.80) (0.39)
------ ------ ------
Net asset value, end
of period............ $12.25 $11.41 $10.31
------ ------ ------
------ ------ ------
Total Investment
Return+............... 18.38 % 19.03 % 7.10 %(1)
Ratios/Supplemental
Data:
Net assets, end of
period (in
thousands)........... $358,939 $184,168 $57,474
Ratio of expenses to
average net assets... 1.32 % 1.41 % 0.23 %(2)(3)
Ratio of net
investment income to
average net assets... 6.34 % 7.22 % 8.96 %(2)(3)
Portfolio turnover
rate................. 31 % 47 % 29 %
</TABLE>
*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%.
SEE NOTES TO FINANCIAL STATEMENTS
6
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THE FUND AND ITS MANAGEMENT
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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.
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.
7
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INVESTMENT OBJECTIVE AND POLICIES
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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 19.) As such, the remaining portion of the Fund's total assets
may be invested in tax-exempt securities subject to the AMT.
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
8
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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
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
9
<PAGE>
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 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
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<PAGE>
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 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.
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<PAGE>
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 spending 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.
Three court cases may further upset California's budgetary balance: one
concerning the medically indigent and Medi-Cal funding, a second concerning
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<PAGE>
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 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.
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.
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<PAGE>
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"). 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
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<PAGE>
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 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
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<PAGE>
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
quarterly 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.
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<PAGE>
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 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
17
<PAGE>
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 telephone should contact his or her DWR or other Selected
Broker-Dealer account executive, if appropriate, or make a written exchange
request. Shareholders are advised that during periods of drastic economic or
market changes, it is possible that the telephone exchange procedures may be
difficult to implement, although this has not been the 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
SALES CHARGE
ON A PERCENTAGE OF
YEAR SINCE PURCHASE 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
18
<PAGE>
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 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
additional investment in an
19
<PAGE>
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 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
consti-
20
<PAGE>
tutes 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 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
share-
21
<PAGE>
holders, 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.
22
<PAGE>
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23
<PAGE>
DEAN WITTER
CALIFORNIA TAX-FREE INCOME FUND
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
TRUSTEES
Jack F. Bennett
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. John E. Jeuck
Dr. Manuel H. Johnson
Paul Kolton
Michael E. Nugent
Edward R. Telling
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Sheldon Curtis
Vice President, Secretary and General Counsel
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.
