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DEAN WITTER
CALIFORNIA TAX-FREE INCOME FUND
PROSPECTUS--APRIL 6, 1998
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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.")
The Fund offers four classes of shares (each, a "Class"), each with a different
combination of sales charges, ongoing fees and other features. The different
distribution arrangements permit an investor to choose the method of purchasing
shares that the investor believes is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances. (See "Purchase of Fund Shares--Alternative Purchase
Arrangements.")
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 April 6, 1998, 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 on this page. The
Statement of Additional Information is incorporated herein by reference.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Prospectus Summary................................ 2
Summary of Fund Expenses.......................... 4
Financial Highlights.............................. 5
The Fund and its Management....................... 8
Investment Objective and Policies................. 8
Risk Considerations............................. 9
Investment Restrictions........................... 13
Purchase of Fund Shares........................... 14
Shareholder Services.............................. 21
Redemptions and Repurchases....................... 23
Dividends, Distributions and Taxes................ 24
Performance Information........................... 25
Additional Information............................ 26
</TABLE>
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) 869-NEWS (toll-free)
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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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PROSPECTUS SUMMARY
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<TABLE>
<S> <C>
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.
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SHARES OFFERED Shares of beneficial interest with $0.01 par value (see page 26). The Fund offers four
Classes of shares, each with a different combination of sales charges, ongoing fees and
other features (see pages 14-20).
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MINIMUM The minimum initial investment for each Class is $1,000 ($100 if the account is opened
PURCHASE through EasyInvest-SM-). Class D shares are only available to persons investing $5
million or more and to certain other limited categories of investors. For the purpose of
meeting the minimum $5 million investment for Class D shares, and subject to the $1,000
minimum initial investment for each Class of the Fund, an investor's existing holdings
of Class A shares and shares of funds for which Dean Witter InterCapital Inc. serves as
investment manager ("Dean Witter Funds") that are sold with a front-end sales charge,
and concurrent investments in Class D shares of the Fund and other Dean Witter Funds
that are multiple class funds, will be aggregated. The minimum subsequent investment is
$100 (see page 14).
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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.
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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.
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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 101 investment companies and other
portfolios with assets of approximately $114 billion at March 31, 1998 (see page 8).
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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.
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DISTRIBUTOR Dean Witter Distributors Inc. (the "Distributor"). The Fund has adopted a distribution
AND plan pursuant to Rule 12b-1 under the Investment Company Act (the "12b-1 Plan") with
DISTRIBUTION respect to the distribution fees paid by the Class A, Class B and Class C shares of the
FEE Fund to the Distributor. The entire 12b-1 fee payable by Class A and a portion of the
12b-1 fee payable by each of Class B and Class C equal to 0.20% of the average daily net
assets of Class B and 0.25% of the average daily net assets of Class C are currently
each characterized as a service fee within the meaning of the National Association of
Securities Dealers, Inc. guidelines. The remaining portion of the 12b-1 fee, if any, is
characterized as an asset-based sales charge (see pages 14 and 19).
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ALTERNATIVE Four classes of shares are offered:
PURCHASE
ARRANGEMENTS - Class A shares are offered with a front-end sales charge, starting at 4.25% and
reduced for larger purchases. Investments of $1 million or more (and investments by
certain other limited categories of investors) are not subject to any sales charge at
the time of purchase but a contingent deferred sales charge ("CDSC") of 1.0% may be
imposed on redemptions within one year of purchase. The Fund is authorized to reimburse
the Distributor for specific expenses incurred in promoting the distribution of the
Fund's Class A shares and servicing shareholder accounts pursuant to the Fund's 12b-1
Plan. Reimbursement may in no event exceed an amount equal to payments at an annual rate
of 0.25% of average daily net assets of the Class (see pages 14, 16 and 19).
- Class B shares are offered without a front-end sales charge, but will in most cases be
subject to a CDSC (scaled down from 5.0% to 1.0%) if redeemed within six years after
purchase. The CDSC will be imposed on any redemption of shares if after such redemption
the aggregate current value of a Class B account with the Fund falls below the aggregate
amount of the investor's purchase payments made during the six years preceding the
redemption. Class B shares are also subject to a 12b-1 fee assessed at the annual rate
of 0.75% of the lesser of: (a) the average daily net sales of the Fund's Class B shares
or (b) the average daily net assets of Class B. All shares of the Fund held prior to
July 28, 1997 have been designated Class B shares. Shares held before May 1, 1997 will
convert to Class A shares in May, 2007. In all other instances, Class B shares convert
to Class A shares approximately ten years after the date of the original purchase (see
pages 14, 18 and 19).
</TABLE>
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2
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<TABLE>
<S> <C>
- Class C shares are offered without a front-end sales charge, but will in most cases be
subject to a CDSC of 1.0% if redeemed within one year after purchase. The Fund is
authorized to reimburse the Distributor for specific expenses incurred in promoting the
distribution of the Fund's Class C shares and servicing shareholder accounts pursuant to
the Fund's 12b-1 Plan. Reimbursement may in no event exceed an amount equal to payments
at an annual rate of 0.75% of average daily net assets of the Class (see pages 14 and
19).
- Class D shares are offered only to investors meeting an initial investment minimum of
$5 million and to certain other limited categories of investors. Class D shares are
offered without a front-end sales charge or CDSC and are not subject to any 12b-1 fee
(see pages 14 and 19).
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DIVIDENDS AND Dividends from net investment income are declared daily and paid monthly; capital gains,
CAPITAL GAINS if any, may be distributed at least annually or retained for reinvestment by the Fund.
DISTRIBUTIONS Dividends and capital gains distributions paid on shares of a Class are automatically
reinvested in additional shares of the same Class at net asset value unless the
shareholder elects to receive cash. Shares acquired by dividend and distribution
reinvestment will not be subject to any sales charge or CDSC (see pages 21 and 24).
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REDEMPTION Shares are redeemable by the shareholder at net asset value less any applicable CDSC on
Class A, Class B or Class C shares. An account may be involuntarily redeemed if the
total value of the account is less than $100 or, if the account was opened through
EasyInvest-SM-, if after twelve months the shareholder has invested less than $1,000 in
the account (see page 23).
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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 (see pages 9-13).
</TABLE>
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THE ABOVE IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION APPEARING
ELSEWHERE IN THIS PROSPECTUS AND IN THE STATEMENT OF
ADDITIONAL INFORMATION.
3
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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 based on the
expenses and fees for the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
--------- ------- --------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)... 4.25%(1) None None None
Sales Charge Imposed on Dividend Reinvestments.................................. None None None None
Maximum Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds).................................................. None(2) 5.00%(3) 1.00%(4) None
Redemption Fees................................................................. None None None None
Exchange Fee.................................................................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees................................................................. 0.53% 0.53% 0.53% 0.53%
12b-1 Fees (5) (6).............................................................. 0.25% 0.75% 0.75% None
Other Expenses.................................................................. 0.05% 0.05% 0.05% 0.05%
Total Fund Operating Expenses (7)............................................... 0.83% 1.33% 1.33% 0.58%
</TABLE>
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(1) REDUCED FOR PURCHASES OF $25,000 AND OVER (SEE "PURCHASE OF FUND
SHARES--INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES").
(2) INVESTMENTS THAT ARE NOT SUBJECT TO ANY SALES CHARGE AT THE TIME OF PURCHASE
ARE SUBJECT TO A CDSC OF 1.00% THAT WILL BE IMPOSED ON REDEMPTIONS MADE
WITHIN ONE YEAR AFTER PURCHASE, EXCEPT FOR CERTAIN SPECIFIC CIRCUMSTANCES
(SEE "PURCHASE OF FUND SHARES--INITIAL SALES CHARGE ALTERNATIVE--CLASS A
SHARES").
(3) THE CDSC IS SCALED DOWN TO 1.00% DURING THE SIXTH YEAR, REACHING ZERO
THEREAFTER.
(4) ONLY APPLICABLE TO REDEMPTIONS MADE WITHIN ONE YEAR AFTER PURCHASE (SEE
"PURCHASE OF FUND SHARES--LEVEL LOAD ALTERNATIVE--CLASS C SHARES").
(5) THE 12b-1 FEE IS ACCRUED DAILY AND PAYABLE MONTHLY. THE ENTIRE 12b-1 FEE
PAYABLE BY CLASS A AND A PORTION OF THE 12b-1 FEE PAYABLE BY EACH OF CLASS B
AND CLASS C EQUAL TO 0.20% OF THE AVERAGE DAILY NET ASSETS OF CLASS B AND
0.25% OF THE AVERAGE DAILY NET ASSETS OF CLASS C ARE CURRENTLY EACH
CHARACTERIZED AS A SERVICE FEE WITHIN THE MEANING OF NATIONAL ASSOCIATION OF
SECURITIES DEALERS, INC. ("NASD") GUIDELINES AND ARE PAYMENTS MADE FOR
PERSONAL SERVICE AND/OR MAINTENANCE OF SHAREHOLDER ACCOUNTS. THE REMAINDER
OF THE 12b-1 FEE, IF ANY, IS AN ASSET-BASED SALES CHARGE, AND IS A
DISTRIBUTION FEE 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 (SEE "PURCHASE OF FUND SHARES--PLAN OF
DISTRIBUTION").
(6) UPON CONVERSION OF CLASS B SHARES TO CLASS A SHARES, SUCH SHARES WILL BE
SUBJECT TO THE LOWER 12b-1 FEE APPLICABLE TO CLASS A SHARES. NO SALES CHARGE
IS IMPOSED AT THE TIME OF CONVERSION OF CLASS B SHARES TO CLASS A SHARES.
CLASS C SHARES DO NOT HAVE A CONVERSION FEATURE AND, THEREFORE, ARE SUBJECT
TO AN ONGOING 0.75% DISTRIBUTION FEE (SEE "PURCHASE OF FUND
SHARES--ALTERNATIVE PURCHASE ARRANGEMENTS").
(7) THERE WERE NO OUTSTANDING SHARES OF CLASS A, CLASS C OR CLASS D PRIOR TO
JULY 28, 1997. ACCORDINGLY, "TOTAL FUND OPERATING EXPENSES," AS SHOWN ABOVE
WITH RESPECT TO THOSE CLASSES, ARE ESTIMATES BASED UPON THE SUM OF 12b-1
FEES, MANAGEMENT FEES AND ESTIMATED "OTHER EXPENSES."
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLES YEAR YEARS YEARS YEARS
---- ---- ---- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment assuming (1) a 5% annual return and
(2) redemption at the end of each time period:
Class A....................................... $51 $68 $87 $141
Class B....................................... $64 $72 $93 $160
Class C....................................... $24 $42 $73 $160
Class D....................................... $ 6 $19 $32 $ 73
You would pay the following expenses on the same
$1,000 investment assuming no redemption at the
end of the period:
Class A....................................... $51 $68 $87 $141
Class B....................................... $14 $42 $73 $160
Class C....................................... $14 $42 $73 $160
Class D....................................... $ 6 $19 $32 $ 73
</TABLE>
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF EACH CLASS MAY BE GREATER OR LESS
THAN THOSE SHOWN.
The purpose of this table is to assist the investor in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"The Fund and its Management," "Purchase of Fund Shares--Plan of Distribution"
and "Redemptions and Repurchases."
Long-term shareholders of Class B and Class C may pay more in sales charges,
including distribution fees, than the economic equivalent of the maximum
front-end sales charges permitted by the NASD.
4
<PAGE>
FINANCIAL HIGHLIGHTS
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The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by Price Waterhouse LLP,
independent accountants. The financial highlights should be read in conjunction
with the financial statements, notes thereto and the unqualified report of
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,
----------------------------------------------------------------------------------------------
CLASS B SHARES 1997* 1996 1995 1994 1993 1992 1991 1990 1989 1988
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $12.57 $12.92 $11.87 $13.31 $12.70 $12.46 $11.99 $12.05 $11.68 $11.19
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income......... 0.57 0.58 0.61 0.64 0.67 0.69 0.71 0.72 0.71 0.72
Net realized and unrealized
gain (loss)................. 0.35 (0.21) 1.13 (1.42) 0.70 0.26 0.48 (0.06) 0.37 0.50
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations.................. 0.92 0.37 1.74 (0.78) 1.37 0.95 1.19 0.66 1.08 1.22
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less dividends and
distributions from:
Net investment income....... (0.57) (0.58) (0.61) (0.64) (0.67) (0.69) (0.71) (0.72) (0.71) (0.72)
Net realized gain........... -- (0.14) (0.08) (0.02) (0.09) (0.02) (0.01) -- -- (0.01)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total dividends and
distributions............... (0.57) (0.72) (0.69) (0.66) (0.76) (0.71) (0.72) (0.72) (0.71) (0.73)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period...................... $12.92 $12.57 $12.92 $11.87 $13.31 $12.70 $12.46 $11.99 $12.05 $11.68
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL INVESTMENT RETURN+...... 7.51% 3.13% 14.96% (5.97)% 10.97% 7.83% 10.18% 5.69% 9.54% 11.23%
RATIOS TO AVERAGE NET ASSETS:
Expenses...................... 1.33% 1.32%(1) 1.33% 1.32% 1.27% 1.32% 1.28% 1.30% 1.32% 1.34%
Net investment income......... 4.51% 4.66% 4.90% 5.10% 5.03% 5.45% 5.78% 5.98% 6.00% 6.31%
SUPPLEMENTAL DATA:
Net assets, end of period, in
millions.................... $914 $976 $1,055 $1,008 $1,190 $987 $834 $677 $567 $430
Portfolio turnover rate....... 15% 11% 23% 12% 10% 6% 3% 16% 13% 13%
</TABLE>
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* PRIOR TO JULY 28, 1997, THE FUND ISSUED ONE CLASS OF SHARES. ALL SHARES OF
THE FUND HELD PRIOR TO THAT DATE HAVE BEEN DESIGNATED CLASS B SHARES.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.01%.
5
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<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
DECEMBER 31,
CLASS A SHARES 1997
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $12.80
------
Net investment income................................................. 0.27
Net realized and unrealized gain...................................... 0.09
------
Total from investment operations...................................... 0.36
------
Less dividends from net investment income............................. (0.27)
------
Net asset value, end of period........................................ $12.89
------
------
TOTAL INVESTMENT RETURN+.............................................. 2.82%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 0.78%(2)
Net investment income................................................. 4.47%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $1,175
Portfolio turnover rate............................................... 15%
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $12.80
------
Net investment income................................................. 0.23
Net realized and unrealized gain...................................... 0.12
------
Total from investment operations...................................... 0.35
------
Less dividends from net investment income............................. (0.23)
------
Net asset value, end of period........................................ $12.92
------
------
TOTAL INVESTMENT RETURN+.............................................. 2.80%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.31%(2)
Net investment income................................................. 4.24%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $3,610
Portfolio turnover rate............................................... 15%
</TABLE>
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* THE DATE SHARES WERE FIRST ISSUED.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
6
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<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
DECEMBER 31,
CLASS D SHARES 1997
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $12.80
------
Net investment income................................................. 0.28
Net realized and unrealized gain...................................... 0.12
------
Total from investment operations...................................... 0.40
------
Less dividends from net investment income............................. (0.28)
------
Net asset value, end of period........................................ $12.92
------
------
TOTAL INVESTMENT RETURN+.............................................. 3.18%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 0.60%(2)
Net investment income................................................. 5.34%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $45
Portfolio turnover rate............................................... 15%
</TABLE>
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* THE DATE SHARES WERE FIRST ISSUED.
+ CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE
PERIOD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
7
<PAGE>
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 Morgan Stanley Dean Witter & Co., a
preeminent global financial services firm that maintains leading market
positions in each of its three primary businesses--securities, asset management
and credit services.
InterCapital and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to a total of 101 investment companies, twenty-eight
of which are listed on the New York Stock Exchange, with combined total assets
including this Fund of approximately $110 billion as of March 31, 1998. The
Investment Manager also manages portfolios of pension plans, other institutions
and individuals which aggregated approximately $4 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, 1997,
the Fund accrued total compensation to the Investment Manager amounting to 0.53%
of the Fund's average daily net assets and the total expenses of Class B
amounted to 1.33% of the Fund's average daily net assets of Class B. Shares of
Class A, Class C and Class D were first issued on July 28, 1997. The expenses of
the Fund include: the fee of the Investment Manager; the fee pursuant to the
Plan of Distribution (see "Purchase of Fund Shares"); taxes; transfer agent,
custodian and auditing fees; certain legal fees; and printing and other expenses
relating to the Fund's operations which are not expressly assumed by the
Investment Manager under its Investment Management Agreement with the Fund.
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.") 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%
8
<PAGE>
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. 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. The Fund may purchase Municipal Obligations which had originally been
issued by the same issuer as two separate series of the same issue with
different interest rates, but which are now linked together to form one series.
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
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.
RISK CONSIDERATIONS
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.
Included within the revenue bonds category of bonds described above 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
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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 type of financing that may not have 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 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 AND FORWARD COMMITMENTS. From time
to time, in the ordinary course of business, the Fund may purchase securities on
a when-issued or delayed delivery basis or may purchase or sell securities on a
forward commitment 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. There is no overall limit on the
percentage of the Fund's assets which may be committed to the purchase of
securities on a when-issued, delayed delivery or forward commitment basis. An
increase in the percentage of the Fund's assets committed to the purchase of
securities on a when-issued, delayed delivery or forward commitment basis may
increase the volatility of the Fund's net asset value.
ZERO COUPON SECURITIES. A portion of the fixed-income securities purchased by
the Fund may be zero coupon securities. Such securities are purchased at a
discount from their face amount, giving the purchaser the right to receive their
full value at maturity. The interest earned on such securities is, implicitly,
automatically compounded and paid out at maturity. While such compounding at a
constant rate eliminates the risk of receiving lower yields upon reinvestment of
interest if prevailing interest rates decline, the owner of a zero coupon
security will be unable to participate in higher yields upon reinvestment of
interest received on interest-paying securities if prevailing interest rates
rise.
A zero coupon security pays no interest to its holder during its life.
Therefore, to the extent the Fund invests in zero coupon securities, it will not
receive current cash available for distribution to shareholders. In addition,
zero coupon securities are subject to substantially greater price fluctuations
during periods of changing prevailing interest rates than are comparable
securities which pay interest on a current basis. Current federal tax law
requires that a holder (such as the Fund) of a zero coupon security accrue a
portion of the discount at which the security was purchased as income each year
even though the Fund receives no interest payments in cash on the security
during the year.
FINANCIAL FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Fund may enter into
financial futures contracts, options on such futures and municipal bond index
futures contracts for hedging purposes. 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
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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 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.
YEAR 2000. The investment management services provided to the Fund by the
Investment Manager and the services provided to shareholders by the Distributor
and the Transfer Agent depend on the smooth functioning of their computer
systems. Many computer software systems in use today cannot recognize the year
2000, but revert to 1900 or some other date, due to the manner in which dates
were encoded and calculated. That failure could have a negative impact on the
handling of securities trades, pricing and account services. The Investment
Manager, the Distributor and the Transfer Agent have been actively working on
necessary changes to their own computer systems to prepare for the year 2000 and
expect that their systems will be adapted before that date, but there can be no
assurance that they will be successful, or that interaction with other
non-complying computer systems will not impair their services at that time.
In addition, it is possible that the markets for securities in which the
Fund invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues. In
addition, corporate and governmental data processing errors may result in
production problems for individual companies and overall economic uncertainties.
Earnings of individual issuers will be affected by remediation costs, which may
be substantial. Accordingly, the Fund's investments may be adversely affected.
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RISK 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
Constitution and State of California ("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.
California is the most populous state in the nation with a total population
estimated at 32.4 million. 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, the population rose 20%. The State now comprises 12.2% of the
nation's population and 12.5% of its total personal income. Its economy is broad
and diversified with major concentrations in high technology research and
manufacturing, aerospace and defense-related manufacturing, trade,
entertainment, real estate, and financial services. After experiencing strong
growth throughout much of the 1980s, from 1990-1993 the State suffered through a
severe recession, the worst since the 1930's, heavily influenced by large
cutbacks in defense/aerospace industries, military base closures and a major
drop in real estate construction. California's economy has been recovering and
growing steadily stronger since the start of 1994, to the point where the
State's economic growth is outpacing the rest of the nation. The unemployment
rate, while still higher than the national average, fell to the low 6% range in
mid-1997, compared with over 10% in the worst of the recession. California's
economic recovery from the recession is continuing at a strong pace. Recent
economic reports indicate that, while the rate of economic growth in California
is expected to moderate over the next three years, the increases in employment
and income will likely exceed those of the nation as a whole. The unsettled
financial situation occurring in certain Asian economies may adversely affect
the State's export-related industries and, therefore, the State's rate of
economic growth.
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 and the State has
recorded in its general fund (the "General Fund") operating deficits in several
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.
On August 18, 1997, the Governor signed the 1997-98 Budget Act which
provides for General Fund and Special Fund expenditures of approximately $67.2
billion and projects a 1997-1998 fiscal year end reserve of $112 million. For
the second year in a row, the State budget contains a large increase in funding
for K-14 education, reflecting strong revenues which have exceeded initial
budgeted amounts. The Budget Act reflects a $1.235 billion pension case
judgement payment, and returns funding of the State's pension contribution to
the quarterly basis existing prior to the deferral actions invalidated by the
courts. Because of the effect of the pension payment, most other State programs
were continued at 1996-97 levels. Health and welfare costs are combined,
continuing generally the grant levels from prior years, as part of the initial
implementation of the new CalWORKs welfare reform program. Unlike prior years,
this Budget Act does not depend on uncertain federal budget actions. About $300
million in federal funds, already included in the federal FY 1997 and 1998
budgets, are included in the Budget Act to offset incarceration costs for
illegal immigrants. The Budget Act contains no tax increases and no tax
reductions. The Renters Tax Credit was suspended for another year, saving
approximately $500 million. After enactment of the Budget Act, and prior to the
end of the Legislative Session, the Legislature and the Governor reached certain
agreements related to State expenditures and taxes. Legislation signed by the
Governor includes a variety of phased-in tax cuts, conformity with certain
provisions of the federal tax reform law passed earlier in the year, and reform
of funding for county trial courts, with the State to assume greater financial
responsibility.
The Governor's proposed budget for fiscal year 1998-1999 proposes total
State spending of $70.6 billion (excluding the expenditure of federal funds and
selected bond funds), which is up 4.7% from the current year's budget. This
total includes $55.4 billion in General Fund spending (a 4.5% increase from the
current year) and $15.2 billion in special funds spending (a 5.3% increase). The
Governor's proposed budget anticipates a $296 million reserve for economic
uncertainties. The new budget reflects agreements reached in the prior year in
the areas of welfare reform, education, state tax relief, and the financial
restructuring of the State's trial court system. The budget contains no tax
changes and relatively few major programmatic changes.
Because of California's continuing budget problems, the State's General
Obligation bonds were downgraded in July 1994 from Aa to A1 by Moody's and from
A+ to A by S&P and from AA to A by Fitch Investment Service, Inc. ("Fitch"). All
three ratings companies expressed uncertainty in the State's ability to balance
its budget by 1996. However, in 1996, citing California's improving economy
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and budget situation, both Fitch and S&P raised their ratings from A to A+. In
October, 1997, Fitch raised its rating from A+ to AA- referring to the State's
fundamental strengths, the extent of its economic recovery and the return of
financial stability.
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.
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"), Morgan Stanley
and Co. Incorporated and other broker-dealer affiliates of InterCapital 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 Tax-Exempt Group, which manages 39 tax-exempt
municipal funds and fund portfolios, with approximately $11 billion in assets as
of March 31, 1998. James F. Willison, Senior Vice President of InterCapital and
Manager of InterCapital's Municipal Fixed-Income Group, and Joseph R. Arcieri,
Vice President of InterCapital and a member of InterCapital's Municipal
Fixed-Income Group, have been the primary portfolio managers of the Fund since
its inception and February 1997, respectively, and have been portfolio managers
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, Morgan Stanley and
Co. Incorporated and other brokers and dealers that are affiliates of
InterCapital.
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).
Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objective by investing all or substantially all
of its assets in another investment company having substantially the same
investment objective and policies as the Fund.
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PURCHASE OF FUND SHARES
- --------------------------------------------------------------------------------
GENERAL
The Fund offers each class of 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 Fund offers four classes of shares (each, a "Class"). Class A shares are
sold to investors with an initial sales charge that declines to zero for larger
purchases; however, Class A shares sold without an initial sales charge are
subject to a contingent deferred sales charge ("CDSC") of 1.0% if redeemed
within one year of purchase, except for certain specific circumstances. Class B
shares are sold without an initial sales charge but are subject to a CDSC
(scaled down from 5.0% to 1.0%) payable upon most redemptions within six years
after purchase. Class C shares are sold without an initial sales charge but are
subject to a CDSC of 1.0% on most redemptions made within one year after
purchase. Class D shares are sold without an initial sales charge or CDSC and
are available only to investors meeting an initial investment minimum of $5
million, and to certain other limited categories of investors. At the discretion
of the Board of Trustees of the Fund, Class A shares may be sold to categories
of investors in addition to those set forth in this prospectus at net asset
value without a front-end sales charge, and Class D shares may be sold to
certain other categories of investors, in each case as may be described in the
then current prospectus of the Fund. See "Alternative Purchase
Arrangements--Selecting a Particular Class" for a discussion of factors to
consider in selecting which Class of shares to purchase.
The minimum initial purchase is $1,000 for each Class of shares, although
Class D shares are only available to persons investing $5 million or more and to
certain other limited categories of investors. For the purpose of meeting the
minimum $5 million initial investment for Class D shares, and subject to the
$1,000 minimum initial investment for each Class of the Fund, an investor's
existing holdings of Class A shares of the Fund and other Dean Witter Funds that
are multiple class funds ("Dean Witter Multi-Class Funds") and shares of Dean
Witter Funds sold with a front-end sales charge ("FSC Funds") and concurrent
investments in Class D shares of the Fund and other Dean Witter Multi-Class
Funds will be aggregated. Subsequent purchases of $100 or more may be made by
sending a check, payable to Dean Witter California Tax-Free Income Fund,
directly to Morgan Stanley Dean Witter Trust FSB ("Transfer Agent" or "MSDW
Trust") at P.O. Box 1040, Jersey City, New Jersey 07303 or by contacting an
account executive of DWR or other Selected Broker-Dealer. When purchasing shares
of the Fund, investors must specify whether the purchase is for Class A, Class
B, Class C or Class D shares. If no Class is specified, the Transfer Agent will
not process the transaction until the proper Class is identified. The minimum
initial purchase in the case of investments through EasyInvest-SM-, an automatic
purchase plan (see "Shareholder Services"), is $100, provided that the schedule
of automatic investments will result in investments totalling at least $1,000
within the first twelve months. In the case of investments made pursuant to (i)
Systematic Payroll Deduction Plans, (ii) the InterCapital mutual fund asset
allocation program and (iii) fee-based programs approved by the Distributor,
pursuant to which participants pay an asset based fee for services in the nature
of investment advisory, administrative and/or brokerage services, the Fund, in
its discretion, may accept such purchases without regard to any minimum amounts
which would otherwise be required, provided, in the case of Systematic Payroll
Deduction Plans, that the Distributor has reason to believe that additional
purchases will increase the amount of the purchase of shares in all accounts
under such plans to at least $1,000. Certificates for shares purchased will not
be issued unless a request is made by the shareholder in writing to the Transfer
Agent.
Shares are sold through the Distributor on a normal three business day
settlement basis; that is, payment generally is due on or before the third
business day (settlement date) after the order is placed with the Distributor.
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. Sales personnel of a Selected
Broker-Dealer are compensated for selling shares of the Fund at the time of
their sale by the Distributor or any of its affiliates and/or the Selected
Broker-Dealer. In addition, some sales personnel of the Selected Broker-Dealer
will receive various types of non-cash compensation as special sales incentives,
including trips, educational and/or business seminars and merchandise. The Fund
and the Distributor reserve the right to reject any purchase orders.
ANALOGOUS DEAN WITTER FUNDS. The Distributor and the Investment Manager serve
in the same capacities for Dean Witter Multi-State Municipal Series Trust,
California Series, an open-end investment company with investment objectives and
policies similar to those of the Fund. Shares
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of Dean Witter Multi-State Municipal Series Trust, California Series, are
offered to the public with a sales charge imposed at the time of purchase. The
Classes of the Fund and Dean Witter Multi-State Municipal Series Trust,
California Series have differing fees and expenses, which will affect
performance. Investors who would like to receive a prospectus for Dean Witter
Multi-State Municipal Series Trust, California Series, should call the telephone
numbers listed on the front cover of this Prospectus, or may call their account
executive for additional information.
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund offers several Classes of shares to investors designed to provide them
with the flexibility of selecting an investment best suited to their needs. The
general public is offered three Classes of shares: Class A shares, Class B
shares and Class C shares, which differ principally in terms of sales charges
and rate of expenses to which they are subject. A fourth Class of shares, Class
D shares, is offered only to limited categories of investors (see "No Load
Alternative--Class D Shares" below).
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund except that Class A,
Class B and Class C shares bear the expenses of the ongoing shareholder service
fees, Class B and Class C shares bear the expenses of the ongoing distribution
fees and Class A, Class B and Class C shares which are redeemed subject to a
CDSC bear the expense of the additional incremental distribution costs resulting
from the CDSC applicable to shares of those Classes. The ongoing distribution
fees that are imposed on Class A, Class B and Class C shares will be imposed
directly against those Classes and not against all assets of the Fund and,
accordingly, such charges against one Class will not affect the net asset value
of any other Class or have any impact on investors choosing another sales charge
option. See "Plan of Distribution" and "Redemptions and Repurchases."
Set forth below is a summary of the differences between the Classes and the
factors an investor should consider when selecting a particular Class. This
summary is qualified in its entirety by detailed discussion of each Class that
follows this summary.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.25%. The initial sales charge is reduced for certain
purchases. Investments of $1 million or more (and investments by certain other
limited categories of investors) are not subject to any sales charges at the
time of purchase but are subject to a CDSC of 1.0% on redemptions made within
one year after purchase, except for certain specific circumstances. Class A
shares are also subject to a 12b-1 fee of up to 0.25% of the average daily net
assets of the Class. See "Initial Sales Charge Alternative--Class A Shares."
CLASS B SHARES. Class B shares are offered at net asset value with no initial
sales charge but are subject to a CDSC (scaled down from 5.0% to 1.0%) if
redeemed within six years of purchase. This CDSC may be waived for certain
redemptions. Class B shares are also subject to an annual 12b-1 fee of 0.75% of
the lesser of: (a) the average daily aggregate gross sales of the Fund's Class B
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 Class B shares redeemed since the Fund's inception upon
which a CDSC has been imposed or waived, or (b) the average daily net assets of
Class B. The Class B shares' distribution fee will cause that Class to have
higher expenses and pay lower dividends than Class A or Class D shares.
After approximately ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund, based on the relative net asset
values of the shares of the two Classes on the conversion date. In addition, a
certain portion of Class B shares that have been acquired through the
reinvestment of dividends and distributions will be converted at that time. See
"Contingent Deferred Sales Charge Alternative--Class B Shares."
CLASS C SHARES. Class C shares are sold at net asset value with no initial
sales charge but are subject to a CDSC of 1.0% on redemptions made within one
year after purchase. This CDSC may be waived for certain redemptions. They are
subject to an annual 12b-1 fee of up to 0.75% of the average daily net assets of
the Class C shares. The Class C shares' distribution fee may cause that Class to
have higher expenses and pay lower dividends than Class A or Class D shares. See
"Level Load Alternative--Class C Shares."
CLASS D SHARES. Class D shares are available only to limited categories of
investors (see "No Load Alternative-- Class D Shares" below). Class D shares are
sold at net asset value with no initial sales charge or CDSC. They are not
subject to any 12b-1 fees. See "No Load Alternative-- Class D Shares."
SELECTING A PARTICULAR CLASS. In deciding which Class of Fund shares to
purchase, investors should consider the following factors, as well as any other
relevant facts and circumstances:
The decision as to which Class of shares is more beneficial to an investor
depends on the amount and intended length of his or her investment. Investors
who prefer an initial sales charge alternative may elect to purchase Class A
shares. Investors qualifying for significantly reduced or, in the case of
purchases of $1 million or more, no initial sales charges may find Class A
shares particularly attractive because similar sales charge reductions are not
available with respect to Class B or Class C shares. Moreover, Class A shares
are subject to lower ongoing expenses than are Class B or Class C shares over
the term of the investment. As an alternative, Class B and Class C shares
15
<PAGE>
are sold without any initial sales charge so the entire purchase price is
immediately invested in the Fund. Any investment return on these additional
investment amounts may partially or wholly offset the higher annual expenses of
these Classes. Because the Fund's future return cannot be predicted, however,
there can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, although Class C shares are subject to a significantly lower
CDSC upon redemptions, they do not, unlike Class B shares, convert into Class A
shares after approximately ten years, and, therefore, are subject to an ongoing
12b-1 fee of 0.75% (rather than the 0.25% fee applicable to Class A shares) for
an indefinite period of time. Thus, Class B shares may be more attractive than
Class C shares to investors with longer term investment outlooks. Other
investors, however, may elect to purchase Class C shares if, for example, they
determine that they do not wish to be subject to a front-end sales charge and
they are uncertain as to the length of time they intend to hold their shares.
For the purpose of meeting the $5 million minimum investment amount for
Class D shares, holdings of Class A shares in all Dean Witter Multi-Class Funds,
shares of FSC Funds and shares of Dean Witter Funds for which such shares have
been exchanged will be included together with the current investment amount.
Sales personnel may receive different compensation for selling each Class of
shares. Investors should understand that the purpose of a CDSC is the same as
that of the initial sales charge in that the sales charges applicable to each
Class provide for the financing of the distribution of shares of that Class.
Set forth below is a chart comparing the sales charge, 12b-1 fees and
conversion options applicable to each Class of shares:
<TABLE>
<CAPTION>
CONVERSION
CLASS SALES CHARGE 12b-1 FEE FEATURE
<C> <S> <C> <C>
A Maximum 4.25% initial 0.25% No
sales charge reduced for
purchases of $25,000 and
over; shares sold without
an initial sales charge
generally subject to a
1.0% CDSC during first
year.
B Maximum 5.0% CDSC during 0.75% B shares
the first year decreasing convert to A
to 0 after six years shares
automatically
after
approximately
ten years
C 1.0% CDSC during first 0.75% No
year
D None None No
</TABLE>
See "Purchase of Fund Shares" and "The Fund and its Management" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Determination of Net Asset Value," "Dividends,
Distributions and Taxes" and "Shareholder Services--Exchange Privilege" for
other differences between the Classes of shares.
INITIAL SALES CHARGE ALTERNATIVE-- CLASS A SHARES
Class A shares are sold at net asset value plus an initial sales charge. In some
cases, reduced sales charges may be available, as described below. Investments
of $1 million or more (and investments by certain other limited categories of
investors) are not subject to any sales charges at the time of purchase but are
subject to a CDSC of 1.0% on redemptions made within one year after purchase
(calculated from the last day of the month in which the shares were purchased),
except for certain specific circumstances. The CDSC will be assessed on an
amount equal to the lesser of the current market value or the cost of the shares
being redeemed. The CDSC will not be imposed (i) in the circumstances set forth
below in the section "Contingent Deferred Sales Charge Alternative--Class B
Shares-- CDSC Waivers," except that the references to six years in the first
paragraph of that section shall mean one year in the case of Class A shares, and
(ii) in the circumstances identified in the section "Additional Net Asset Value
Purchase Options" below. Class A shares are also subject to an annual 12b-1 fee
of up to 0.25% of the average daily net assets of the Class.
The offering price of Class A shares will be the net asset value per share
next determined following receipt of an order (see "Determination of Net Asset
Value" below), plus a sales charge (expressed as a percentage of the offering
price) on a single transaction as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE
-------------------------------------
PERCENTAGE OF APPROXIMATE
AMOUNT OF PUBLIC OFFERING PERCENTAGE OF
SINGLE TRANSACTION PRICE AMOUNT INVESTED
- --------------------------- ----------------- ------------------
<S> <C> <C>
Less than $25,000.......... 4.25% 4.44%
$25,000 but less
than $50,000............. 4.00% 4.17%
$50,000 but less
than $100,000............ 3.50% 3.63%
$100,000 but less
than $250,000............ 2.75% 2.83%
$250,000 but less
than $1 million.......... 1.75% 1.78%
$1 million and over........ 0 0
</TABLE>
Upon notice to all Selected Broker-Dealers, the Distributor may reallow up
to the full applicable sales charge as shown in the above schedule during
periods specified in such notice. During periods when 90% or more of the sales
charge is reallowed, such Selected Broker-Dealers may be
16
<PAGE>
deemed to be underwriters as that term is defined in the Securities Act of 1933.
The above schedule of sales charges is applicable to purchases in a single
transaction by, among others: (a) an individual; (b) an individual, his or her
spouse and their children under the age of 21 purchasing shares for his, her or
their own accounts; (c) a trustee or other fiduciary purchasing shares for a
single trust estate or a single fiduciary account; (d) a pension, profit-sharing
or other employee benefit plan qualified or non-qualified under Section 401 of
the Internal Revenue Code; (e) tax-exempt organizations enumerated in Section
501(c)(3) or (13) of the Internal Revenue Code; (f) employee benefit plans
qualified under Section 401 of the Internal Revenue Code of a single employer or
of employers who are "affiliated persons" of each other within the meaning of
Section 2(a)(3)(c) of the Act; and for investments in Individual Retirement
Accounts of employees of a single employer through Systematic Payroll Deduction
plans; or (g) any other organized group of persons, whether incorporated or not,
provided the organization has been in existence for at least six months and has
some purpose other than the purchase of redeemable securities of a registered
investment company at a discount.
COMBINED PURCHASE PRIVILEGE. Investors may have the benefit of reduced sales
charges in accordance with the above schedule by combining purchases of Class A
shares of the Fund in single transactions with the purchase of Class A shares of
other Dean Witter Multi-Class Funds and shares of FSC Funds. The sales charge
payable on the purchase of the Class A shares of the Fund, the Class A shares of
the other Dean Witter Multi-Class Funds and the shares of the FSC Funds will be
at their respective rates applicable to the total amount of the combined
concurrent purchases of such shares.
RIGHT OF ACCUMULATION. The above persons and entities may benefit from a
reduction of the sales charges in accordance with the above schedule if the
cumulative net asset value of Class A shares purchased in a single transaction,
together with shares of the Fund and other Dean Witter Funds previously
purchased at a price including a front-end sales charge (including shares of the
Fund and other Dean Witter Funds acquired in exchange for those shares, and
including in each case shares acquired through reinvestment of dividends and
distributions), which are held at the time of such transaction, amounts to
$25,000 or more. If such investor has a cumulative net asset value of shares of
FSC Funds and Class A and Class D shares that, together with the current
investment amount, is equal to at least $5 million, such investor is eligible to
purchase Class D shares subject to the $1,000 minimum initial investment
requirement of that Class of the Fund. See "No Load Alternative--Class D Shares"
below.
The Distributor must be notified by DWR or a Selected Broker-Dealer or the
shareholder at the time a purchase order is placed that the purchase qualifies
for the reduced charge under the Right of Accumulation. Similar notification
must be made in writing by the dealer or shareholder when such an order is
placed by mail. The reduced sales charge will not be granted if: (a) such
notification is not furnished at the time of the order; or (b) a review of the
records of the Selected Broker-Dealer or the Transfer Agent fails to confirm the
investor's represented holdings.
LETTER OF INTENT. The foregoing schedule of reduced sales charges will also be
available to investors who enter into a written Letter of Intent providing for
the purchase, within a thirteen-month period, of Class A shares of the Fund from
DWR or other Selected Broker-Dealers. The cost of Class A shares of the Fund or
shares of other Dean Witter Funds which were previously purchased at a price
including a front-end sales charge during the 90-day period prior to the date of
receipt by the Distributor of the Letter of Intent, or of Class A shares of the
Fund or shares of other Dean Witter Funds acquired in exchange for shares of
such funds purchased during such period at a price including a front-end sales
charge, which are still owned by the shareholder, may also be included in
determining the applicable reduction.
ADDITIONAL NET ASSET VALUE PURCHASE OPTIONS. In addition to investments of $1
million or more, Class A shares also may be purchased at net asset value by the
following:
(1) trusts for which MSDW Trust (an affiliate of the Investment Manager)
provides discretionary trustee services;
(2) persons participating in a fee-based program approved by the
Distributor, pursuant to which such persons pay an asset based fee for services
in the nature of investment advisory, administrative and/or brokerage services
(such investments are subject to all of the terms and conditions of such
programs, which may include termination fees, mandatory redemption upon
termination and such other circumstances as specified in the programs'
agreements, and restrictions on transferability of Fund shares);
(3) investors who are clients of a Dean Witter account executive who joined
Dean Witter from another investment firm within six months prior to the date of
purchase of Fund shares by such investors, if the shares are being purchased
with the proceeds from a redemption of shares of an open-end proprietary mutual
fund of the account executive's previous firm which imposed either a front-end
or deferred sales charge, provided such purchase was made within sixty days
after the redemption and the proceeds of the redemption had been maintained in
the interim in cash or a money market fund; and
(4) other categories of investors, at the discretion of the Board, as
disclosed in the then current prospectus of the Fund.
No CDSC will be imposed on redemptions of shares purchased pursuant to
paragraphs (1), (2) or (3), above.
17
<PAGE>
For further information concerning purchases of the Fund's shares, contact
DWR or another Selected Broker-Dealer or consult the Statement of Additional
Information.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Class B shares are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, will be imposed on most Class
B shares redeemed within six years after purchase. The CDSC will be imposed on
any redemption of shares if after such redemption the aggregate current value of
a Class B account with the Fund falls below the aggregate amount of the
investor's purchase payments for Class B shares made during the six years
preceding the redemption. In addition, Class B shares are subject to an annual
12b-1 fee of 0.75% of the lesser of: (a) the average daily aggregate gross sales
of the Fund's Class B 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 Class B shares redeemed since the
Fund's inception upon which a CDSC has been imposed or waived, or (b) the
average daily net assets of Class B.
Class B 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 CDSC upon redemption. Shares redeemed
earlier than six years after purchase may, however, be subject to a 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 following table:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE CDSC AS A PERCENTAGE
PAYMENT MADE OF 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>
CDSC WAIVERS. 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 other open-end investment companies for which
InterCapital serves as investment manager (collectively, with the Fund, the
"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, the CDSC, if otherwise applicable, will be waived in the case
of:
(1) 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 ("IRA") or Custodial Account under Section 403(b)(7) of the Internal
Revenue Code ("403(b) Custodial Account"), provided in either case that the
redemption is requested within one year of the death or initial determination of
disability; and
(2) 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 IRA or 403(b) Custodial Account following attainment of
age 59 1/2; or (c) a tax-free return of an excess contribution to an IRA.
With reference to (1) above, 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. With reference to (2) above, the term "distribution" does
not encompass a direct transfer of IRA, 403(b) Custodial Account or retirement
plan assets to a successor custodian or trustee. All waivers will be granted
only following receipt by the Distributor of confirmation of the shareholder's
entitlement.
CONVERSION TO CLASS A SHARES. All shares of the Fund held prior to July 28,
1997 have been designated Class B shares. Shares held before May 1, 1997 will
convert to Class A shares in May, 2007. In all other instances Class B shares
will convert automatically to Class A shares, based on the relative net asset
values of the shares of the two Classes on the conversion date, which will be
approximately ten (10) years after the date of the original purchase. The ten
year period is calculated from the last day of the month in which the shares
were purchased or, in the case of Class B shares acquired through an exchange or
a series of exchanges, from the last day of the month in which the original
Class B shares were purchased, provided that shares originally purchased before
May 1, 1997 will convert to Class A shares in May, 2007. The conversion of
shares purchased on or after May 1, 1997 will take place in the month following
the tenth anniversary of the purchase. There will also be converted at that time
such proportion of Class B shares acquired
18
<PAGE>
through automatic reinvestment of dividends and distributions owned by the
shareholder as the total number of his or her Class B shares converting at the
time bears to the total number of outstanding Class B shares purchased and owned
by the shareholder. In the case of Class B shares previously exchanged for
shares of an "Exchange Fund" (see "Shareholder Services--Exchange Privilege"),
the period of time the shares were held in the Exchange Fund (calculated from
the last day of the month in which the Exchange Fund shares were acquired) is
excluded from the holding period for conversion. If those shares are
subsequently re-exchanged for Class B shares of a Dean Witter Multi-Class Fund,
the holding period resumes on the last day of the month in which Class B shares
are reacquired.
If a shareholder has received share certificates for Class B shares, such
certificates must be delivered to the Transfer Agent at least one week prior to
the date for conversion. Class B shares evidenced by share certificates that are
not received by the Transfer Agent at least one week prior to any conversion
date will be converted into Class A shares on the next scheduled conversion date
after such certificates are received.
Effectiveness of the conversion feature is subject to the continuing
availability of a ruling of the Internal Revenue Service or an opinion of
counsel that (i) the conversion of shares does not constitute a taxable event
under the Internal Revenue Code, (ii) Class A shares received on conversion will
have a basis equal to the shareholder's basis in the converted Class B shares
immediately prior to the conversion, and (iii) Class A shares received on
conversion will have a holding period that includes the holding period of the
converted Class B shares. The conversion feature may be suspended if the ruling
or opinion is no longer available. In such event, Class B shares would continue
to be subject to Class B 12b-1 fees.
LEVEL LOAD ALTERNATIVE--CLASS C SHARES
Class C shares are sold at net asset value next determined without an initial
sales charge but are subject to a CDSC of 1.0% on most redemptions made within
one year after purchase (calculated from the last day of the month in which the
shares were purchased). The CDSC will be assessed on an amount equal to the
lesser of the current market value or the cost of the shares being redeemed. The
CDSC will not be imposed in the circumstances set forth above in the section
"Contingent Deferred Sales Charge Alternative-- Class B Shares--CDSC Waivers,"
except that the references to six years in the first paragraph of that section
shall mean one year in the case of Class C shares. Class C shares are subject to
an annual 12b-1 fee of up to 0.75% of the average daily net assets of the Class.
Unlike Class B shares, Class C shares have no conversion feature and,
accordingly, an investor that purchases Class C shares will be subject to 12b-1
fees applicable to Class C shares for an indefinite period subject to annual
approval by the Fund's Board of Trustees and regulatory limitations.
NO LOAD ALTERNATIVE--CLASS D SHARES
Class D shares are offered without any sales charge on purchase or redemption
and without any 12b-1 fee. Class D shares are offered only to investors meeting
an initial investment minimum of $5 million and the following categories of
investors: (i) investors participating in the InterCapital mutual fund asset
allocation program pursuant to which such persons pay an asset based fee; (ii)
persons participating in a fee-based program approved by the Distributor,
pursuant to which such persons pay an asset based fee for services in the nature
of investment advisory, administrative and/or brokerage services (subject to all
of the terms and conditions of such programs referred to in (i) and (ii) above,
which may include termination fees, mandatory redemption upon termination and
such other circumstances as specified in the programs' agreements, and
restrictions on transferability of Fund shares); (iii) certain Unit Investment
Trusts sponsored by DWR; (iv) certain other open-end investment companies whose
shares are distributed by the Distributor; and (v) other categories of
investors, at the discretion of the Board, as disclosed in the then current
prospectus of the Fund. Investors who require a $5 million minimum initial
investment to qualify to purchase Class D shares may satisfy that requirement by
investing that amount in a single transaction in Class D shares of the Fund and
other Dean Witter Multi-Class Funds, subject to the $1,000 minimum initial
investment required for that Class of the Fund. In addition, for the purpose of
meeting the $5 million minimum investment amount, holdings of Class A shares in
all Dean Witter Multi-Class Funds, shares of FSC Funds and shares of Dean Witter
Funds for which such shares have been exchanged will be included together with
the current investment amount. If a shareholder redeems Class A shares and
purchases Class D shares, such redemption may be a taxable event.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the Act
with respect to the distribution of Class A, Class B and Class C shares of the
Fund. In the case of Class A and Class C shares, the Plan provides that the Fund
will reimburse the Distributor and others for the expenses of certain activities
and services incurred by them specifically on behalf of those shares.
Reimbursements for these expenses will be made in monthly payments by the Fund
to the Distributor, which will in no event exceed amounts equal to payments at
the annual rates of 0.25% and 0.75% of the average daily net assets of Class A
and Class C, respectively. In the case of Class B shares, the Plan provides that
the Fund will pay the Distributor a fee,
19
<PAGE>
which is 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 Class B
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 Class B shares redeemed since the Fund's inception upon
which a CDSC has been imposed or waived, or (b) the average daily net assets of
Class B. The fee is treated by the Fund as an expense in the year it is accrued.
In the case of Class A shares, the entire amount of the fee currently represents
a service fee within the meaning of the NASD guidelines. In the case of Class B
and Class C shares, a portion of the fee payable pursuant to the Plan, equal to
0.20% and 0.25% of the average daily net assets of each of these Classes,
respectively, is currently characterized as a service fee. A service fee is a
payment made for personal service and/or the maintenance of shareholder
accounts.
Additional amounts paid under the Plan in the case of Class B and Class C
shares are paid to the Distributor for services provided and the expenses borne
by the Distributor and others in the distribution of the shares of those
Classes, including the payment of commissions for sales of the shares of those
Classes and incentive compensation to and expenses of DWR's account executives
and others 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. In addition, the
Distributor may utilize fees paid pursuant to the Plan in the case of Class B
shares to compensate DWR and other Selected Broker-Dealers for their opportunity
costs in advancing such amounts, which compensation would be in the form of a
carrying charge on any unreimbursed expenses.
For the fiscal year ended December 31, 1997, Class B shares of the Fund
accrued payments under the Plan amounting to $6,971,901, which amount is equal
to 0.75% of the average daily net assets of Class B for the fiscal year. These
payments accrued under the Plan were calculated pursuant to clause (b) of the
compensation formula under the Plan. All shares held prior to July 28, 1997 have
been designated Class B shares. For the fiscal period July 28 through December
31, 1997, Class A and Class C shares of the Fund accrued payments under the Plan
amounting to $116 and $6,739, respectively, which amounts on an annualized basis
are equal to 0.25% and 0.75% of the average daily net assets of Class A and
Class C, respectively, for such period.
In the case of Class B shares, at any given time, the expenses in
distributing Class B 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 CDSCs
paid by investors upon the redemption of Class B shares. For example, if $1
million in expenses in distributing Class B 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 such
excess amounts, including the carrying charge described above, totalled $689,086
at December 31, 1997, which was equal to 0.08% of the net assets of Class B on
such date. Because there is no requirement under the Plan that the Distributor
be reimbursed for all distribution expenses or any requirement that the Plan be
continued from year to year, such excess amount does not constitute a liability
of the Fund. Although there is no legal obligation for the Fund to pay expenses
incurred in excess of payments made to the Distributor under the Plan, and the
proceeds of CDSCs 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, but not yet
recovered through distribution fees or CDSCs, may or may not be recovered
through future distribution fees or CDSCs.
In the case of Class A and Class C shares, expenses incurred pursuant to the
Plan in any calendar year in excess of 0.25% or 0.75% of the average daily net
assets of Class A or Class C, respectively, will not be reimbursed by the Fund
in any subsequent year, except that expenses representing a gross sales
commission credited to account executives at the time of sale may be reimbursed
in the subsequent calendar year. The Distributor has advised the Fund that
unreimbursed expenses representing a gross sales commission credited to account
executives at the time of sale totalled $25,080 in the case of Class C at
December 31, 1997, which amount was equal to 0.78% of the net assets of Class C
on such date, and that there were no such expenses that may be reimbursed in the
subsequent year in the case of Class A on such date. No interest or other
financing charges will be incurred on any Class A or Class C distribution
expenses incurred by the Distributor under the Plan or on any unreimbursed
expenses due to the Distributor pursuant to the Plan.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined once daily at 4:00 p.m., New York
time (or, on days when the New York Stock Exchange closes prior to 4:00 p.m., at
such earlier time) on each day that the New York Stock Exchange is open by
taking the net assets of the Fund, dividing by the number of shares outstanding
and adjusting to the nearest cent. The assets belonging to the Class A, Class B,
Class C and Class D shares will be invested together in a single portfolio. The
net asset value of each Class, however, will be determined separately by
subtracting each Class's accrued expenses and liabilities. 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.
20
<PAGE>
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 sixty days
or less to maturity at time of purchase are valued at amortized cost, unless the
Board of Trustees determines such does not reflect the securities' market 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
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AUTOMATIC INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. All income dividends and
capital gains distributions are automatically paid in full and fractional shares
of the applicable Class of the Fund (or, if specified by the shareholder, in
shares of any other open-end Dean Witter Fund), unless the shareholder requests
they be paid in cash. Shares so acquired are acquired at net asset value and are
not subject to the imposition of a front-end sales charge or a CDSC (see
"Redemptions and Repurchases"). Such dividends and distributions will be paid,
at the net asset value per share (without sales charge), in shares of the
applicable Class of the Fund (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.
INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS RECEIVED IN CASH. Any shareholder who
receives a cash payment representing a dividend or capital gains distribution
may invest such dividend or distribution in shares of the applicable Class at
the net asset value per share next determined after receipt by the Transfer
Agent, by returning the check or the proceeds to the Transfer Agent within
thirty days after the payment date. Shares so acquired are acquired at net asset
value and are not subject to the imposition of a front-end sales charge or a
CDSC (see "Redemptions and Repurchases").
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 or following redemption of
shares of a Dean Witter money market fund, on a semi-monthly, monthly or
quarterly basis, to the Transfer Agent for investment in shares of the Fund (see
"Purchase of Fund Shares" and "Redemptions and Repurchases--Involuntary
Redemption").
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 CDSC
will be imposed on shares redeemed under the Withdrawal Plan (See "Purchase of
Fund Shares"). 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 CDSC) to the shareholder will be the designated
monthly or quarterly amount. 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.
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
Shares of each Class may be exchanged for shares of the same Class of any other
Dean Witter Multi-Class Fund without the imposition of any exchange fee. Shares
may also be exchanged for shares of the following funds: Dean Witter Short-Term
U.S. Treasury Trust, Dean Witter Limited Term Municipal Trust, Dean Witter
Short-Term Bond Fund, Dean Witter Intermediate Term U.S. Treasury Trust and five
Dean Witter funds which are money market funds (the "Exchange Funds"). Class A
shares may also be exchanged for shares of Dean Witter Multi-State Municipal
Series Trust and Dean Witter Hawaii Municipal Trust, which are Dean Witter Funds
sold with a front-end sales charge ("FSC Funds"). Class B shares may also be
exchanged for shares of Dean Witter Global Short-Term Income Fund Inc. ("Global
Short-Term"), which is a Dean
21
<PAGE>
Witter Fund offered with a CDSC. 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 Dean Witter Multi-Class Fund, any FSC Fund, Global
Short-Term 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
Dean Witter Multi-Class Funds, FSC Funds, Global Short-Term or any Exchange Fund
that is not a money market fund can be effected on the same basis.
No CDSC is imposed at the time of any exchange of shares, although any
applicable CDSC will be imposed upon ultimate redemption. During the period of
time the shareholder remains in an Exchange Fund (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 re-exchanged for shares of a Dean Witter Multi-Class
Fund or shares of Global Short-Term, the holding period previously frozen when
the first exchange was made resumes on the last day of the month in which shares
of a Dean Witter Multi-Class Fund or shares of Global Short-Term are reacquired.
Thus, the CDSC is based upon the time (calculated as described above) the
shareholder was invested in shares of a Dean Witter Multi-Class Fund or in
shares of Global Short-Term (see "Purchase of Fund Shares"). In the case of
exchanges of Class A shares which are subject to a CDSC, the holding period also
includes the time (calculated as described above) the shareholder was invested
in shares of a FSC Fund. 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 Fund 12b-1 distribution fees
incurred on or after that date which are attributable to those shares. (Exchange
Fund 12b-1 distribution fees are described in the prospectus for these funds.)
Class B shares of the Fund acquired in exchange for shares of Global Short-Term
or Class B shares of another Dean Witter Multi-Class Fund having a different
CDSC schedule than that of this Fund will be subject to the higher CDSC
schedule, even if such shares are subsequently re-exchanged for shares of the
fund with the lower CDSC schedule.
ADDITIONAL INFORMATION REGARDING EXCHANGES. 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 of each
Class of shares and any other conditions imposed by each fund. In the case of a
shareholder holding a share certificate or certificates, no exchanges may be
made until all applicable share certificates have been received by the Transfer
Agent and deposited in the shareholder's account. An exchange will be treated
for federal income tax purposes the same as a repurchase or 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. There are also limits on the deduction of losses after the payment of
exempt-interest dividends for shares held for less than six months (see
"Dividends, Distributions and Taxes"). 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
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<PAGE>
Authorization Form, copies of which may be obtained from the Transfer Agent, to
initiate an exchange. If the Authorization Form is used, exchanges may be made
in writing or by contacting the Transfer Agent at (800) 869-NEWS (toll-free).
The Fund will employ reasonable procedures to confirm that exchange instructions
communicated over the telephone are genuine. Such procedures may include
requiring various forms of personal identification such as name, mailing
address, social security or other tax identification number and DWR or other
Selected 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.
For further information regarding the Exchange Privilege, shareholders
should contact their DWR or other Selected Broker-Dealer account executives or
the Transfer Agent.
REDEMPTIONS AND REPURCHASES
- --------------------------------------------------------------------------------
REDEMPTION. Shares of each Class of the Fund can be redeemed for cash at any
time at the net asset value per share next determined less the amount of any
applicable CDSC in the case of Class A, Class B or Class C shares (see "Purchase
of Fund Shares"). 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, New Jersey 07303 is required. If certificates are
held by the shareholder, the shares may be redeemed by surrendering the
certificates with a written request of redemption, along with any additional
information required by the Transfer Agent.
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 by the Fund or the
Distributor. 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 35 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 in the same Class from which such shares were redeemed or repurchased,
at their 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 sixty 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 due to redemptions by the
shareholder have a value of less than $100 or such lesser amount as may be fixed
by the Board of Trustees or, in the case of an account opened through
EasyInvest, if after twelve months, the shareholder has invested less than
$1,000 in the account. 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 the applicable amount and allow him or her sixty days
to make an additional investment in an amount which will increase the value of
his or her account to at least the applicable amount before the redemption is
processed. No CDSC will be imposed on any involuntary redemption.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. The Fund declares dividends separately for each
Class of shares from net investment income on each day the New York Stock
Exchange is open for business to shareholders of record as of the close of
business the preceding business day. The amount of such dividends may fluctuate
from day to day. Such dividends are paid monthly.
The Fund will distribute at least once each year all net realized short-term
capital gains in excess of any realized net long-term capital losses, if any.
The Fund intends to distribute all of its realized net long-term capital gains,
if any, in excess of any realized net short-term capital losses and any
available net capital loss carryovers, at least once per fiscal year, although
it may elect to retain all or part of such gains for reinvestment. Taxable
capital gains may be generated by the sale of portfolio securities and by
transactions in options and futures contracts engaged in by the Fund.
All dividends and any capital gains distributions will be paid in additional
shares of the same Class 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. Shares acquired by dividend and
distribution reinvestments will not be subject to any front-end sales charge or
CDSC. Class B shares acquired through dividend and distribution reinvestments
will become eligible for conversion to Class A shares on a pro rata basis.
Distributions paid on Class A and Class D shares will be higher than for Class B
and Class C shares because distribution fees paid by Class B and Class C shares
are higher. (See "Shareholder Services--Automatic Investment of Dividends and
Distributions.") Any dividends declared in the last quarter of any calendar year
which are paid in the following calendar year prior to February 1 will be deemed
received by the shareholder in the prior calendar year.
TAXES. Because the Fund intends to distribute substantially all of its net
investment income and net short-term 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.
Taxable capital gains may be generated by transactions in options and futures
contracts engaged in by the Fund.
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 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. Shareholders will also be notified of their
proportionate share of long-term capital gains distributions
24
<PAGE>
that are eligible for a reduced rate of tax under the Taxpayer Relief Act of
1997.
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. The
maximum federal capital gains rate for individuals is 28% with respect to
capital assets held for more than 12 months, but not more than 18 months, and
20% with respect to capital assets held more than 18 months. The maximum capital
gains rate for corporate shareholders is the same as the maximum tax rate for
ordinary income. 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.
The Fund may at times make payments from sources other than income or net
capital gains. Payments from such sources will, in effect, represent a return of
a portion of each shareholder's investment. All, or a portion, of such payments
will not be taxable to shareholders.
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 adviser 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. These figures are computed separately for
Class A, Class B, Class C and Class D shares. 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 each Class of the Fund is computed by
dividing the Class'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
maximum offering price 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
for each Class. The Fund may also quote its tax-equivalent yield, which is
calculated by determining the pre-tax yield for each Class 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 a Class of the Fund of $1,000 over a period of one, five,
ten years, or 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 applicable Class and all sales charges
which would be incurred by 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 for
each Class 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 any 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 each Class of
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.).
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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 except that
each Class will have exclusive voting privileges with respect to matters
relating to distribution expenses borne solely by such Class or any other matter
in which the interests of one Class differ from the interests of any other
Class. In addition, Class B shareholders will have the right to vote on any
proposed material increase in Class A's expenses, if such proposal is submitted
separately to Class A shareholders. Also, as discussed herein, Class A, Class B
and Class C bear the expenses related to the distribution of their respective
shares.
The Fund is not required to hold Annual Meetings of Shareholders and, under
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 Fund
obligations include such disclaimer, 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.
CODE OF ETHICS. Directors, officers and employees of InterCapital, Dean Witter
Services Company Inc. and the Distributor are subject to a strict Code of Ethics
adopted by those companies. The Code of Ethics is intended to ensure that the
interests of shareholders and other clients are placed ahead of any personal
interest, that no undue personal benefit is obtained from a person's employment
activities and that actual and potential conflicts of interest are avoided. To
achieve these goals and comply with regulatory requirements, the Code of Ethics
requires, among other things, that personal securities transactions by employees
of the companies be subject to an advance clearance process to monitor that no
Dean Witter Fund is engaged at the same time in a purchase or sale of the same
security. The Code of Ethics bans the purchase of securities in an initial
public offering and prohibits engaging in futures and options transactions and
profiting on short-term trading (that is, a purchase within sixty days of a sale
or a sale within sixty days of a purchase) of a security. In addition,
investment personnel may not purchase or sell a security for their personal
account within thirty days before or after any transaction in any Dean Witter
Fund managed by them. Any violations of the Code of Ethics are subject to
sanctions, including reprimand, demotion or suspension or termination of
employment. The Code of Ethics comports with regulatory requirements and the
recommendations in the 1994 report by the Investment Company Institute Advisory
Group on Personal Investing.
MASTER/FEEDER CONVERSION. The Fund reserves the right to seek to achieve its
investment objective by investing all of its investable assets in a diversified,
open-end management investment company having the same investment objective and
policies and substantially the same investment restrictions as those applicable
to the Fund.
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.
26
<PAGE>
DEAN WITTER
CALIFORNIA TAX-FREE INCOME FUND
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
James F. Willison
Vice President
Joseph R. Arcieri
Vice President
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
