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PROSPECTUS
FEBRUARY 28, 1994
Dean Witter New York 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 federal, New York State
and New York City income tax, consistent with the preservation of capital. The
Fund invests principally in New York tax-exempt fixed-income securities which
are rated in the four highest categories by Moody's Investors Service, Inc. or
Standard & Poor's Corporation. (See "Investment Objective and Policies.")
Shares of the Fund are continuously offered at net asset value
without the imposition of a sales charge. However, redemptions and/or
repurchases are subject in most cases to a contingent deferred sales charge,
scaled down from 5% to 1% of the amount redeemed, if made within six years of
purchase, which charge will be paid to the Fund's Distributor, Dean Witter
Distributors Inc. See "Redemptions and Repurchases--Contingent Deferred Sales
Charge." In addition, the Fund pays the Distributor a distribution fee pursuant
to a Plan of Distribution pursuant to Rule 12b-1 under the Investment Company
Act of 1940 at the annual rate of 0.75% of the lesser of the (i) average daily
aggregate net sales or (ii) average daily net assets of the Fund. See "Purchases
of Fund Shares--Plan of Distribution."
This prospectus sets forth concisely the information you should
know before investing in the Fund. It should be read and retained for future
reference. Additional information about the Fund is contained in the Statement
of Additional Information, dated February 28, 1994, which has been filed with
the Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone number listed below. The
Statement of Additional Information is incorporated herein by reference.
Dean Witter
New York Tax-Free
Income Fund
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 526-3143
TABLE OF CONTENTS
Prospectus Summary/2
Summary of Fund Expenses/3
Financial Highlights/4
The Fund and its Management/5
Investment Objective and Policies/5
Investment Restrictions/12
Purchase of Fund Shares/13
Shareholder Services/15
Redemptions and Repurchases/17
Dividends, Distributions and Taxes/19
Performance Information/21
Additional Information/21
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
DEAN WITTER DISTRIBUTORS INC.
DISTRIBUTOR
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<TABLE>
<CAPTION>
PROSPECTUS SUMMARY
<S> <C>
The The Fund is organized as a Trust, commonly known as a Massachusetts business
Fund trust, and is an open-end diversified management investment company investing
principally in New York tax-exempt fixed-income securities which are rated in the
four highest categories by Moody's Investors Service Inc. or Standard and Poor's
Corporation (see page 5).
Shares Shares of beneficial interest with $0.01 par value (see page 21).
Offered
Offering At net asset value without sales charge (see page 12). Shares redeemed within six
Price years of purchase are subject to a contingent deferred sales charge under most
circumstances (see page 16).
Minimum Minimum initial investment, $1,000; minimum subsequent investment, $100 (see page
Purchase 13).
Investment The investment objective of the Fund is to provide a high level of current income
Objective exempt from federal, New York State and New York City income tax, consistent with
preservation of capital.
Investment The Fund will invest principally in New York tax-exempt fixed-income securities.
Policies However, it may also invest in taxable money market instruments, non-New York
tax-exempt securities, futures and options.
Investment Dean Witter InterCapital Inc., the Investment Manager of the Fund, and its
Manager wholly-owned subsidiary, Dean Witter Services Company Inc., serve in various
investment management, advisory, management and administrative capacities to
eighty-one investment companies and other portfolios with assets of approximately
$71.2 billion at December 31, 1993 (see page 5).
Management The Investment Manager receives a monthly fee at the annual rate of .55 of 1% of
Fee daily net assets scaled down on assets over $500 million. The fee should not be
compared with fees paid by other investment companies without also considering
applicable sales loads and distribution fees, including those noted below.
Dividends Dividends are declared daily, and either paid monthly as additional shares of the
Fund or, at the shareholder's option, paid monthly in cash (see page 19).
Distributor and Dean Witter Distributors Inc. (the "Distributor"). The Distributor receives from
Distribution the Fund, pursuant to a Rule 12b-1 Plan of Distribution, a distribution fee
Fee accrued daily and payable monthly at the rate of .75% per annum of the lesser of
(i) the Fund's average daily aggregate net sales or (ii) the Fund's average daily
net assets. This fee compensates the Distributor for the services provided in
distributing shares of the Fund and for its sales-related expenses. The
Distributor also receives the proceeds of any contingent deferred sales charges
(see pages 13-19).
Redemption At net asset value; redeemable involuntarily if total value of the account is
less than $100. Redemptions within six years of purchase are subject to a
contingent deferred sales charge under most circumstances (see page 17).
Contingent Although no commission or sales charge is imposed upon the purchase of shares, a
Deferred contingent deferred sales charge (scaled down from 5% to 1%) is imposed on any
Sales redemption of shares if after such redemption the aggregate current value of an
Charge account with the Fund falls below the aggregate amount of the investor's purchase
payments made during the six years preceding the redemption. However, there is no
charge imposed on redemption of shares purchased through reinvestment of
dividends or distributions (see pages 17-19).
Risks The value of the Fund's portfolio securities, and therefore the Fund's net asset
value per share, may increase or decrease due to various factors, principally
changes in prevailing interest rates and the ability of the issuers of the Fund's
portfolio securities to pay interest and principal on such obligations. The Fund
also may invest in futures and options for portfolio hedging purposes. Futures
and options 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 New
York tax-exempt securities, the Fund is affected by any political, economic or
regulatory developments affecting the ability of New York issuers to pay interest
or repay principal (see pages 10-11).
THE ABOVE IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION.
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2
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SUMMARY OF FUND EXPENSES
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The following table illustrates all expenses that a shareholder of the Fund
will incur. The expenses and fees set forth in the table are for the fiscal year
ended December 31, 1993.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- -----------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases................................................ None
Maximum Sales Charge Imposed on Reinvested Dividends..................................... None
Deferred Sales Charge
(as a percentage of the lesser of original purchase price or redemption proceeds)...... 5.0%
A contingent deferred sales charge is imposed at the following declining rates:
</TABLE>
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE PAYMENT MADE PERCENTAGE
- --------------------------------------------------------------------------------------- -----------
<S> <C>
First.................................................................................. 5.0%
Second................................................................................. 4.0%
Third.................................................................................. 3.0%
Fourth................................................................................. 2.0%
Fifth.................................................................................. 2.0%
Sixth.................................................................................. 1.0%
Seventh and thereafter................................................................. None
Redemption Fees.......................................................................... None
Exchange Fee............................................................................. None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
- ---------------------------------------------------------------------------------
<S> <C>
Management Fee................................................................... 0.55%
12b-1 Fees....................................................................... 0.62%
Other Expenses................................................................... 0.10%
Total Fund Operating Expenses.................................................... 1.27%
<FN>
- ------------------------
* A PORTION OF THE 12B-1 FEE EQUAL TO 0.20% OF THE FUND'S AVERAGE DAILY NET
ASSETS IS CHARACTERIZED AS A SERVICE FEE WITHIN THE MEANING OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. ("NASD") GUIDELINES.
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period.............. $ 63 $ 70 $ 90 $ 154
You would pay the following expenses on the same investment, assuming no
redemption................................................................... $ 13 $ 40 $ 70 $ 154
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF THE FUND MAY BE GREATER OR
LESS THAN THOSE SHOWN.
The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"The Fund and its Management", "Plan of Distribution" and "Redemption and
Repurchases."
LONG-TERM SHAREHOLDERS OF THE FUND MAY PAY MORE IN SALES CHARGES AND
DISTRIBUTION FEES THAN THE ECONOMIC EQUIVALENT OF THE MAXIMUM FRONT-END SALES
CHARGE PERMITTED BY THE NASD.
3
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FINANCIAL HIGHLIGHTS
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The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by Price Waterhouse,
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 from the Fund.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED DECEMBER 31, APRIL 25, 1985*
------------------------------------------------------------------------------------- THROUGH
1993 1992 1991 1990 1989 1988 1987 1986 DECEMBER 31, 1985
-------- -------- -------- -------- -------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of
period............ $ 11.98 $ 11.68 $ 11.00 $ 11.25 $ 10.94 $ 10.50 $ 11.57 $ 10.57 $ 10.00
-------- -------- -------- -------- -------- -------- -------- -------- --------
Investment
income-net...... 0.65 0.65 0.68 0.68 0.68 0.68 0.70 0.72 0.51
Realized and
unrealized gain
(loss) on
investments-net... 0.72 0.34 0.70 (0.25) 0.31 0.44 (0.93) 1.09 0.57
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations........ 1.37 0.99 1.38 0.43 0.99 1.12 (0.23) 1.81 1.08
-------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Dividends from
net investment
income.......... (0.65) (0.65) (0.68) (0.68) (0.68) (0.67) (0.70) (0.72) (0.51)
Distributions
from realized
gain on
investments..... (0.20) (0.04) (0.02) -0- -0- (0.01) (0.14) (0.09) -0-
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions..... (0.85) (0.69) (0.70) (0.68) (0.68) (0.68) (0.84) (0.81) (0.51)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value,
end of period..... $ 12.50 $ 11.98 $ 11.68 $ 11.00 $ 11.25 $ 10.94 $ 10.50 $ 11.57 $ 10.57
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Investment
Return+............ 11.72% 8.70% 12.94% 4.01% 9.34% 10.91% (1.89%) 17.62% 11.04%(1)
Ratios/Supplemental
Data:
Net assets, end of
period (in
thousands)........ $246,461 $208,516 $181,714 $158,075 $147,363 $128,600 $112,795 $113,321 $ 73,408
Ratio of expenses
to average net
assets............ 1.27% 1.40% 1.32% 1.37% 1.37% 1.41% 1.40% 1.41% 1.16%(2)(3)
Ratio of net
investment income
to average net
assets............ 5.20% 5.48% 6.00% 6.13% 6.09% 6.28% 6.44% 6.36% 7.02%(2)(3)
Portfolio turnover
rate.............. 25% 16% 17% 23% 4% 18% 40% 23% 24%
<FN>
- ----------------------------------
* COMMENCEMENT OF OPERATIONS.
+ DOES NOT REFLECT THE DEDUCTION OF SALES LOAD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE ASSUMED OR WAIVED BY THE INVESTMENT MANAGER AND THE DISTRIBUTOR,
THE EXPENSE RATIO WOULD HAVE BEEN 1.58% AND THE NET INVESTMENT INCOME RATIO WOULD HAVE BEEN 6.60%.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
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THE FUND AND ITS MANAGEMENT
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Dean Witter New York 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 January 17, 1985.
Dean Witter InterCapital Inc. ("InterCapital" or the "Investment Manager"),
whose address is Two World Trade Center, New York, New York 10048, is the Fund's
Investment Manager. The Investment Manager, which was incorporated in July,
1992, is a wholly-owned subsidiary of Dean Witter, Discover & Co. ("DWDC"), a
balanced financial services organization providing a broad range of nationally
marketed credit and investment products.
InterCapital and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to a total of eighty-one investment companies, twenty-
nine of which are listed on the New York Stock Exchange, with combined total
assets including this Fund of approximately $69.2 billion as of December 31,
1993. The Investment Manager also manages portfolios of pension plans, other
institutions and individuals which aggregated approximately $2.0 billion at such
date.
The Fund has retained the Investment Manager to provide administrative
services, manage its business affairs and manage the investment of the Fund's
assets, including the placing of orders for the purchase and sale of portfolio
securities. InterCapital has retained Dean Witter Services Company Inc. to
perform the aforementioned administrative services for the Fund. The Fund's
Board of Trustees reviews the various services provided by or under the
direction of the Investment Manager to ensure that the Fund's general investment
policies and programs are being properly carried out and that administrative
services are being provided to the Fund in a satisfactory manner.
As full compensation for the services and facilities furnished to the Fund
and for expenses of the Fund assumed by the Investment Manager, the Fund pays
the Investment Manager monthly compensation calculated daily by applying the
following annual rates to the net assets of the Fund determined as of the close
of each business day: 0.55% of the portion of the daily net assets not exceeding
$500 million and 0.525% of the portion of the daily net assets exceeding $500
million. For the fiscal year ended December 31, 1993, the Fund accrued total
compensation to the Investment Manager amounting to 0.55% of the Fund's average
daily net assets and the Fund's total expenses amounted to 1.27% of the Fund's
average daily net assets.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The investment objective of the Fund is to provide a high level of current
income which is exempt from federal, New York State and New York City 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 New York tax-exempt securities, except as stated in
paragraph (3) below. New York tax-exempt securities consist of obligations
of New York State, its political subdivisions, authorities and corporations,
as well as any debt obligations (certain governmental entities and
territories such as Puerto Rico, Guam and the Virgin Islands) that generate
interest income which is exempt from federal, New York State and New York
City income taxes. New York tax-exempt securities
5
<PAGE>
consist of Municipal Bonds and Municipal Notes ("Municipal Obligations") and
Municipal Commercial Paper. Only New York tax-exempt securities which
satisfy the following standards may be purchased by the Fund: (a) 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) 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 Municipal Bonds rated as set
forth in clause (a) of this paragraph; (c) Municipal Commercial Paper which
at the time of purchase is rated P-1 by Moody's and 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. For a description of Moody's and S&P's ratings, see the Appendix to
the Statement of Additional Information.
2. In accordance with the current position of the staff of the
Securities and Exchange Commission, tax-exempt securities which are subject
to the federal alternative minimum tax for individual shareholders ("AMT")
will not be included in the 80% total described in paragraph 1 above. (See
"Dividends, Distributions and Taxes," page 20.) 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-New York tax-exempt securities, futures and
options and tax-exempt securities subject to the AMT. However, the Fund may
temporarily invest more than 20% of its total assets in taxable money market
instruments, non-New York tax-exempt securities and tax-exempt securities
subject to the AMT, in order 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-New York tax-exempt securities which
satisfy the standards set forth in paragraph (1) for New York 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
or higher by Moody's or A-1 or higher 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 is a short-term obligation of a
municipality. Any Municipal Obligation 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 New
York tax-exempt security only if, in the opinion of bond counsel, the interest
payable thereon is exempt from federal, New York State and New York City income
tax.
Investments in municipal bonds rated either Baa by Moody's or BBB by S&P
(investment grade bonds--the lowest rated permissible investments by the Fund)
may have speculative characteristics and, therefore, changes in economic
conditions or other circumstances are more likely to weaken their capacity to
make principal and interest payments than would be the case with investments in
securities with higher credit ratings.
The foregoing percentage and rating policies apply at the time of
acquisition of a security based upon the last previous determination of the
Fund's net asset value. Any subsequent change in any
6
<PAGE>
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.
Included within the revenue category are participations in lease obligations
or installment purchase contracts (hereinafter collectively called "lease
obligations") of municipalities. State and local governments issue lease
obligations to acquire equipment and facilities.
Lease obligations may have risks not normally associated with general
obligation or other revenue bonds. Leases and installment purchase or
conditional sale contracts (which may provide for title to the leased asset to
pass eventually to the issuer) have developed as a means for governmental
issuers to acquire property and equipment without the necessity of complying
with the constitutional and statutory requirements generally applicable for the
issuance of debt. Certain lease obligations contain "non-appropriation" clauses
that provide that the governmental issuer has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on an annual or other periodic
basis. Consequently, continued lease payments on those lease obligations
containing "non-appropriation" clauses are dependent on future legislative
actions. If such legislative actions do not occur, the holders of the lease
obligation may experience difficulty in exercising their rights, including
disposition of the property.
Lease obligations represent a relatively new type of financing that has not
yet developed the depth of marketability associated with more conventional
municipal obligations, and, as a result, certain of such lease obligations may
be considered illiquid securities. To determine whether or not the Fund will
consider such securities to be illiquid (the Fund may not invest more than ten
percent of its net assets in illiquid securities), the Trustees of the Fund have
established guidelines to be utilized by the Fund in determining the liquidity
of a lease obligation. The factors to be considered in making the determination
include: 1) the frequency of
7
<PAGE>
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 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 on a timely basis. Generally a rise in interest rates will result in
a decrease in the Fund's net asset value per share, while a drop in interest
rates will result in an increase in the Fund's net asset value per share.
VARIABLE RATE OBLIGATIONS. The interest rates payable on certain securities
in which the Fund may invest are not fixed and may fluctuate based upon changes
in market rates. Obligations of this type are called "variable rate"
obligations. The interest rate payable on a variable rate obligation is adjusted
either at predesignated periodic intervals or whenever there is a change in the
market rate of interest on which the interest rate payable is based.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase
securities on a when-issued or delayed delivery basis; i.e., delivery and
payment can take place a month or more after the date of the transaction. These
securities are subject to market fluctuation and no interest accrues to the
purchaser prior to settlement. At the time the Fund makes the commitment to
purchase such securities, it will record the transaction and thereafter reflect
the value each day of such security in determining its net asset value. An
increase in the percentage of the Fund's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of the Fund's net asset value.
HEDGING ACTIVITIES
The Fund may enter into financial futures contracts, options on such futures
and municipal bond index futures contracts for hedging purposes.
FINANCIAL FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Fund may invest in
financial futures contracts and related options thereon. The Fund may sell a
financial futures contract, or purchase a put option on such futures contract,
if the Investment Manager anticipates interest rates to rise, as a hedge against
a decrease in the value of the Fund's portfolio securities. If the Investment
Manager anticipates that interest rates will decline, the Fund may purchase a
financial futures contract or a call option thereon to protect against an
increase in the price of the securities the Fund intends to purchase. These
futures contracts and related options thereon will be used only as a hedge
against anticipated interest rate changes. A futures contract sale creates an
obligation by the Fund, as seller, to deliver the specific type of instrument
called for in the contract at a specified future time for a specified price. A
futures contract purchase would create an obligation by the Fund, as purchaser,
to take delivery of the specific type of financial instrument at a specified
future time at a specified price. The specific securities delivered or taken,
respectively, at settlement date, would not be determined until or near that
date. The determination would be in accordance with the rules of the exchange on
which the futures contract sale or purchase was effected.
Although the terms of financial futures contracts specify actual delivery or
receipt of securities, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the securities.
Closing out of a futures contract is effected by entering into an offsetting
purchase or sale transaction.
Unlike a financial futures contract, which requires the parties to buy and
sell a security on a set date, an option on such a futures contract entitles its
holder to decide on or before a future
8
<PAGE>
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 financial futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities subject to
futures contracts may correlate imperfectly with the behavior of the cash prices
of the Fund's portfolio securities. The risk of imperfect correlation will be
increased by the fact that financial futures contracts in which the Fund may
invest are on taxable securities rather than on 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 his
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 for hedging purposes. The Fund's strategies in employing such
contracts will be similar to that discussed above with respect to financial
futures and options thereon. A municipal bond index is a method of reflecting in
a single number the market value of many different municipal bonds and is
designed to be representative of the municipal bond market generally. The index
fluctuates in response to changes in the market values of the bonds included
within the index. Unlike futures contracts on particular financial instruments,
transactions in futures on a municipal bond index will be settled in cash, if
held until the close of trading in the contract. However, like any other futures
contract, a position in the contract may be closed out by purchase or sale of an
offsetting contract for the same delivery month prior to expiration of the
contract.
The Fund may not enter into futures contracts or related options thereon if
immediately thereafter the amount committed to margin plus the amount paid for
option premiums exceeds 5% of the value of the Fund's total assets. The Fund may
not purchase or sell futures contracts or related options if immediately
thereafter more than one-third of its net assets would be hedged.
PORTFOLIO MANAGEMENT
The Fund is managed by the Investment Manager with a view to achieving its
investment objective. In determining which securities to purchase for the Fund
or hold in the Fund's portfolio, the Investment Manager will rely on information
from various sources, including research, analysis and appraisals of brokers and
dealers, including Dean Witter Reynolds Inc. ("DWR"), a broker-dealer affiliate
of InterCapital; the views of Trustees of the Fund and others regarding economic
developments and interest rate trends; and the Investment Manager's own analysis
of
9
<PAGE>
factors it deems relevant. The Fund is managed within InterCapital's Municipal
Fixed Income Group, which manages 36 tax-exempt municipal funds and fund
portfolios, with approximately $12 billion in assets as of December 31, 1993.
James F. Willison, Senior Vice President of InterCapital and Manager of
InterCapital's Municipal Fixed Income Group, has been the primary portfolio
manager of the Fund since its inception and has been a portfolio manager at
InterCapital for over five years.
Securities are purchased and sold principally in response to the Investment
Manager's current evaluation of an issuer's ability to meet its debt obligations
in the future, and the Investment Manager's current assessment of future changes
in the levels of interest rates on tax-exempt securities of varying maturities,
qualities and purpose. 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.
Except as specified, the investment policies noted above are not fundamental
policies and may be changed without shareholder approval.
SPECIAL CONSIDERATIONS RELATING TO NEW YORK
TAX-EXEMPT SECURITIES
Since the Fund concentrates its investments in New York tax-exempt
securities, the Fund is affected by any political, economic or regulatory
developments affecting the ability of New York tax-exempt issuers to pay
interest or repay principal. Investors should be aware that certain issuers of
New York tax-exempt securities have experienced serious financial difficulties
in recent years. A reoccurrence of these difficulties may impair the ability of
certain New York issuers to maintain debt service on their obligations.
The fiscal stability of New York State (the "State") is related to the
fiscal stability of the State's municipalities, its Agencies and Authorities
(which generally finance, construct and operate revenue-producing public benefit
facilities). This is due in part to the fact that Agencies, Authorities and
local governments in financial trouble often seek State financial assistance.
The experience has been that if New York City (the "City") or any of the
Agencies or Authorities suffers serious financial difficulty, both the ability
of the State, the City, the State's political subdivisions, the Agencies and the
Authorities to obtain financing in the public credit markets and the market
price of outstanding New York tax-exempt securities are adversely affected.
NEW YORK CITY
GENERAL. More than any other municipality, the fiscal health of New York
City (the "City") has a significant effect on the fiscal health of the State.
Over the past three years, the rate of economic growth in the City has slowed
substantially. During the 1990 and 1991 fiscal years, the City experienced
significant shortfalls in almost all of its major tax sources and increases in
services costs. Beginning in 1992, the improvement in the national economy
helped stabilize conditions in the City. The City now projects, and its current
four-year financial plan assumes, that the City's economy will continue to
improve during calendar year 1993 and that a modest employment recovery will
begin during the second half of the 1993 calendar year.
As of August 12, 1993, Moody's rated the City's general obligation bonds
Baa1 and S&P rated such bonds A-. Such ratings reflect only the views of Moody's
and S&P, from which an explanation of the significance of such ratings may be
obtained. There is no assurance that such ratings will continue for any given
period of time or that they will be revised downward or withdrawn entirely. Any
such downward revision or withdrawal could have an adverse effect on the market
prices of bonds.
As of June 30, 1993, the City and the Municipal Assistance Corporation for
the City of New York had, respectively, $19.624 billion and $4.470 billion
10
<PAGE>
of outstanding net long-term debt. The City depends on the State for State aid
both to enable the City to balance its budget and to meet its cash requirements.
If the State experiences revenue shortfalls or spending increases beyond its
projections during its 1994 fiscal year or subsequent years, such developments
could result in reductions in anticipated State aid to the City. In addition,
there can be no assurance that State budgets in future fiscal years will be
adopted by the April 1 statutory deadline and that there will not be adverse
effects on the City's cash flow and additional City expenditures as a result of
such delays.
NEW YORK STATE
RECENT DEVELOPMENTS. The State has faced serious financial difficulties in
recent years. The effect of the national recession has been more severe in the
State than in other parts of the nation, and the 1993-94 New York State
Financial Plan (the "State Plan") is based on an economic projection that the
State will perform more poorly than the nation as a whole. Although real gross
domestic product grew modestly during calendar year 1992 and is expected to show
increased growth in calendar year 1993, preliminary data indicate that the
State's economy, as measured by employment, began to grow during the first part
of calendar year 1993. Many uncertainties exist in forecasts of both the
national and State economies, including consumer attitudes toward spending,
Federal financial and monetary policies, the availability of credit and the
condition of the world economy, which could have an adverse effect on the State.
There can be no assurance that the State economy will not experience
worse-than-predicted results in the 1993-94 fiscal year, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
1993-94 FISCAL YEAR. The State completed its 1993 fiscal year with a
cash-basis positive balance of $67.1 million in the State's General Fund (the
major operating fund of the State). The State's 1994 fiscal year budget, as
enacted, projects a balanced General Fund.
The State Plan projects General Fund receipts and transfers from other funds
at $32.367 billion and disbursements and transfers to other funds at $32.300
billion. Excess receipts of $67 million will be used for a required repayment to
the State's Tax Stabilization Reserve Fund. In comparison to the recommended
1993-94 Executive Budget, released by the Governor in early 1993, the 1993-94
State budget, as enacted, reflects increases in both receipts and disbursements
in the General Fund of $811 million. The $811 million increase in projected
receipts reflects many factors and assumptions, including (i) improving economic
conditions and higher-than-expected tax collections, (ii) improved 1992-93
results, (iii) additional payments from the Federal government to reimburse the
State for the cost of providing indigent medical care, (iv) the payment of
additional personal income tax refunds in the 1992-93 fiscal year which would
otherwise have been paid in fiscal year 1993-94; offset by revenue-raising
recommendations in the Executive Budget that were not enacted and thus are not
included in the State Plan. The $811 million increase in projected disbursements
reflects (i) an increase in projected school-aid payments, (ii) an increase in
projected payments for Medicaid assistance and other social service programs,
(iii) additional spending on the judiciary and criminal justice, (iv) a net
increase in projected disbursements for all other programs and purposes, and (v)
establishment of a new contingency reserve.
There can be no assurance that the State will not face substantial potential
budget gaps resulting from a significant disparity between tax revenues
projected from a lower recurring receipts base and the spending required to
maintain State programs at current levels. To address any potential budgetary
imbalance, the State may need to take significant actions to align recurring
receipts and disbursements in future fiscal years.
RATINGS. On June 6, 1990, Moody's changed its ratings on all the State's
outstanding general
11
<PAGE>
obligation bonds from A1 to A. On March 26, 1990, Standard & Poor's changed its
ratings of all of the State's outstanding general obligation bonds from AA- to
A. On January 13, 1992, Standard & Poor's changed its ratings of all of the
State's outstanding general obligation bonds from A to A-. Ratings reflect only
the respective views of such organizations, and an explanation of the
significance of such ratings must be obtained from the rating agency furnishing
the same. There is no assurance that a particular rating will continue for any
given period of time or that any such rating will not be revised downward or
withdrawn entirely if, in the judgment of the agency originally establishing the
rating, circumstances so warrant. A downward revision or withdrawal of such
ratings, or either of them, may have an effect on the market price of the State
Municipal Securities in which the New York Fund invests.
GENERAL OBLIGATION DEBT. As of March 31, 1993, the State had approximately
$5.132 billion in general obligation bonds, excluding refunding bonds, and $294
million in bond anticipation notes outstanding. On May 4, 1993, the State issued
$850 million in tax and revenue anticipation notes which will mature on December
31, 1993. Principal and interest due on general obligation bonds and interest
due on bond anticipation notes and on tax and revenue anticipation notes were
$890.0 million and $818.8 million for the 1991-92 and 1992-93 fiscal years,
respectively, and are estimated to be $799.1 million for the State's 1993-94
fiscal year, not including interest on refunding bonds, issued in July 1992, to
the extent that such interest is to be paid from escrowed funds.
For a more detailed discussion of the risks of investing in New York
tax-exempt securities, see the Statement of Additional Information.
The summary information furnished above and in the Statement of Additional
Information is based on official statements prepared by the State of New York
and the City of New York and their authorities in connection with their
borrowings and contains such information as the Fund deems relevant in
considering an investment in the Fund. It does not purport to be a complete
description of the considerations contained therein.
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
would be 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 New York 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 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 issued by the State of New York 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).
12
<PAGE>
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of total or net assets will not be considered a
violation of any of the foregoing restrictions.
PURCHASE OF FUND SHARES
- --------------------------------------------------------------------------------
The Fund offers its shares for sale to the public on a continuous basis.
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager, pursuant to a
Distribution Agreement between the Fund and the Distributor and are offered by
DWR and other dealers who have entered into agreements with the Distributor
("Selected Broker-Dealers"). The principal executive office of the Distributor
is located at Two World Trade Center, New York, New York 10048.
The minimum initial purchase is $1,000. Subsequent purchases of $100 or more
may be made by sending a check, payable to Dean Witter New York Tax-Free Income
Fund, directly to Dean Witter Trust Company ("Transfer Agent") at P.O. Box 1040,
Jersey City, New Jersey 07303 or by contacting a DWR or another Selected Broker-
Dealer account executive. Certificates for shares purchased will not be issued
unless a request is made by the shareholder in writing to the Transfer Agent.
Shares are sold through the Distributor or a Selected Broker-Dealer on a normal
five business day settlement basis; that is, payment generally is due on or
before the fifth business day (settlement date) after the order is placed with
the Distributor or a Selected Broker-Dealer. Shares of the Fund purchased
through the Distributor or a Selected Broker-Dealer are entitled to dividends
beginning on the next business day following settlement date. Since DWR and
other Selected Broker-Dealers forward investors' funds on settlement date, they
will benefit from the temporary use of the funds when 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. The offering price will be the net asset value per
share next determined following receipt of an order (see "Determination of Net
Asset Value" below). While no sales charge is imposed at the time shares are
purchased, a contingent deferred sales charge may be imposed at the time of
redemption (see "Redemptions and Repurchases"). The Fund and the Distributor
reserve the right to reject any purchase orders.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution, pursuant to Rule 12b-1 of the
Act (the "Plan"), under which the Fund pays the Distributor a fee, which is
accrued daily and payable monthly, at an annual rate of 0.75% of the lesser of:
(a) the average daily aggregate gross sales of the Fund's shares since the
inception of the Fund (not including reinvestments of dividends or capital gains
distributions), less the average daily aggregate net asset value of the Fund's
shares redeemed since the Fund's inception upon which a contingent deferred
sales charge has been imposed or waived, or (b) the Fund's average daily net
assets. Of the amount accrued under the Plan, 0.20% of the Fund's average net
assets is characterized as a service fee within the meaning of the NASD
guidelines. The 12b-1 fee is treated by the Fund as an expense in the year it is
accrued. Amounts paid under the Plan are paid to the Distributor to compensate
it for the services provided and the expenses borne by the Distributor and
others in the distribution of the Fund's shares, including the payment of
commissions for sales of the Fund's shares and incentive compensation to and
expenses of DWR and its affiliates and other Selected Broker-Dealers account
executives and
13
<PAGE>
other employees who engage in or support distribution of shares or who service
shareholder accounts, including overhead and telephone expenses; printing and
distribution of prospectuses and reports used in connection with the offering of
the Fund's shares to other than current shareholders; and preparation, printing
and distribution of sales literature and advertising materials. For the fiscal
year ended December 31, 1993, the Fund accrued payments under the Plan amounting
to $1,425,215, which amount is equal to 0.62% of the Fund's average daily net
assets for the fiscal year. The payments accrued under the Plan were calculated
pursuant to clause (a) of the compensation formula under the Plan.
At any given time, the expenses of distributing shares of the Fund may be in
excess of the total of (i) the payments made by the Fund pursuant to the Plan
and (ii) the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares (see "Redemptions and Repurchases-- Contingent
Deferred Sales Charge"). For example, if the Distributor incurred $1 million in
expenses in distributing shares of the Fund and $750,000 had been received as
described in (i) and (ii) above, the excess expense would amount to $250,000.
The Distributor has advised the Fund that the excess amounts, including the
carrying charge described above, totalled $4,739,785 at December 31, 1993, which
was equal to 1.92% of the Fund's net assets on such date. Because there is no
requirement under the Plan that the Distributor be reimbursed for all its
expenses or any requirement that the Plan be continued from year to year, this
excess amount does not constitute a liability of the Fund. Although there is no
legal obligation for the Fund to pay expenses incurred in excess of payments
made under the Plan, if for any reason the Plan is terminated the Trustees will
consider at that time the manner in which to treat such expenses. Any cumulative
expenses incurred but not yet recovered through distribution fees or contingent
deferred sales charges, may or may not be recovered through future distribution
fees or contingent deferred sales charges.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is determined once daily at 4:00
p.m. New York time on each day that the New York Stock Exchange is open by
taking the value of all assets of the Fund, subtracting its liabilities,
dividing by the number of shares outstanding and adjusting to the nearest cent.
The net asset value per share will not be determined on Good Friday and on such
other federal and non-federal holidays as are observed by the New York Stock
Exchange.
Certain of the Fund's portfolio securities may be valued for the Fund by an
outside independent pricing service approved by the Fund's Trustees. The service
utilizes a computerized grid matrix of tax-exempt securities and evaluations by
its staff in determining what it believes is the fair value of the Fund's
portfolio securities. The Board believes that timely and reliable market
quotations are generally not readily available to the Fund for purposes of
valuing tax-exempt securities and that the valuations supplied by the pricing
service are more likely to approximate the fair value of such securities.
Short-term taxable debt securities with remaining maturities of 60 days or
less to maturity at time of purchase are valued at amortized cost, unless the
Board determines such does not reflect the securities' fair value, in which case
these securities will be valued at their fair market value as determined by the
Board of Trustees. The value of other assets will be determined in good faith
under procedures established by and under the supervision of the Trustees.
14
<PAGE>
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. All income dividends
and capital gains distributions are automatically paid in full and fractional
shares of the Fund, (or, if specified by the shareholder, any other open-end
investment company for which InterCapital serves as investment manager
(collectively, with the Fund, the "Dean Witter Funds")), unless the shareholder
requests they be paid in cash. Shares so acquired are not subject to the
imposition of a contingent deferred sales charge upon their redemption (see
"Redemptions and Repurchases"). Such dividends and distributions will be paid in
shares of the Fund at net asset value per share (or in cash if the shareholder
so requests) on the monthly payment date, which will be no later than the last
business day of the month for which the dividend or distribution is payable.
Processing of dividend checks begins immediately following the monthly payment
date. Shareholders who have requested to receive dividends in cash will normally
receive their monthly dividend check during the first ten days of the following
month.
EASYINVEST-SM-. Shareholders may subscribe to EasyInvest, an automatic
purchase plan which provides for any amount from $100 to $5,000 to be
transferred automatically from a checking or savings account, on a semi-monthly,
monthly or quarterly basis, to the Transfer Agent for investment in shares of
the Fund.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan (the "Withdrawal
Plan") is available for shareholders who own or purchase shares of the Fund
having a minimum value of $10,000 based upon the then current net asset value.
The Withdrawal Plan provides for monthly or quarterly (March, June, September
and December) checks in any dollar amount, not less than $25 or in any whole
percentage of the account balances on an annualized basis. Any applicable
contingent deferred sales charge will be imposed on shares redeemed under the
Withdrawal Plan (See "Redemptions and Repurchases--Contingent Deferred Sales
Charge"). Therefore, any shareholder participating in the Withdrawal Plan will
have sufficient shares redeemed from his or her account so that the proceeds
(net of any applicable contingent deferred sales charge) to the shareholder will
be the designated monthly or quarterly dollar amount.
Shareholders should contact their DWR or Selected Broker-Dealer Account
Executive or the Transfer Agent for further information about any of the above
services.
EXCHANGE PRIVILEGE. The Fund makes available to its shareholders an
"Exchange Privilege" allowing the exchange of shares of the Fund for shares of
other Dean Witter Funds sold with a contingent deferred sales charge ("CDSC
funds"), and for shares of Dean Witter Short-Term U.S. Treasury Trust, Dean
Witter Limited Term Municipal Trust and Dean Witter Short-Term Bond Fund and for
five Dean Witter Funds which are money market funds (the foregoing eight non-
CDSC or FESC funds are hereinafter collectively referred to in this section as
the "Exchange Funds"). Exchanges may be made after the shares of the Fund
acquired by purchase (not by exchange or dividend reinvestment) have been held
for thirty days. There is no waiting period for exchanges of shares acquired by
exchange or dividend reinvestment.
An exchange to another CDSC fund or any Exchange Fund that is not a money
market fund is on the basis of the next calculated net asset value per share of
each fund after the exchange order is received. When exchanging into a money
market fund from the Fund, shares of the Fund are redeemed out of the Fund at
their next calculated net asset value and the proceeds of the redemption are
used to purchase shares of the money market fund at their net asset value
determined the following business day. Subsequent exchanges between any of the
money market funds and any of the CDSC funds can be effected on the same basis.
15
<PAGE>
No contingent deferred sales charge ("CDSC") is imposed at the time of any
exchange, although any applicable CDSC will be imposed upon ultimate redemption.
Shares of the Fund acquired in exchange for shares of another CDSC fund having a
different CDSC schedule than that of this Fund will be subject to the CDSC
schedule of this Fund, even if such shares are subsequently re-exchanged for
shares of the CDSC fund originally purchased. During the period of time the
shareholder remains in the Exchange Funds (calculated from the last day of the
month in which the shares were acquired), the holding period (for the purpose of
determining the rate of the CDSC) is frozen. If those shares are subsequently
reexchanged for shares of a CDSC fund, the holding period previously frozen when
the first exchange was made resumes on the last day of the month in which shares
of the CDSC fund are reacquired. Thus, the CDSC is based upon the time
(calculated as described above) the shareholder was invested in a CDSC fund (see
"Redemptions and Repurchases--Contingent Deferred Sales Charge"). However, in
the case of shares of the Fund exchanged into the Exchange Funds on or after
April 23, 1990, upon a redemption of shares which results in a CDSC being
imposed, a credit (not to exceed the amount of the CDSC) will be given in an
amount equal to the Exchange Funds 12b-1 distribution fees incurred on or after
that date which are attributable to those shares. (Exchange Funds' 12b-1
distribution fees are described in the prospectus for those funds).
In addition, shares of the Fund may be acquired in exchange for shares of
Dean Witter Funds sold with a front-end sales charge ("FESC funds"), but shares
of the Fund, however acquired, may not be exchanged for shares of FESC funds.
Shares of a CDSC fund acquired in exchange for shares of a FESC Fund (or in
exchange for shares of other Dean Witter Funds for which shares of a FESC fund
have been exchanged) are not subject to any CDSC upon their redemption.
Purchases and exchanges should be made for investment purposes only. A
pattern of frequent exchanges may be deemed by the Investment Manager to be
abusive and contrary to the best interests of the Fund's other shareholders and,
at the Investment Manager's discretion, may be limited by the Fund's refusal to
accept additional purchases and/or exchanges from the investor. Although the
Fund does not have any specific definition of what constitutes a pattern of
frequent exchanges, and will consider all relevant factors in determining
whether a particular situation is abusive and contrary to the best interests of
the Fund and its other shareholders, investors should be aware that the Fund and
each of the other Dean Witter Funds may in their discretion limit or otherwise
restrict the number of times this Exchange Privilege may be exercised by any
investor. Any such restriction will be made by the Fund on a prospective basis
only, upon notice to the shareholder not later than ten days following such
shareholder's most recent exchange.
Also, the Exchange Privilege may be terminated or revised at any time by the
Fund and/or any of such Dean Witter Funds for which shares of the Fund may be
exchanged, upon such notice as may be required by applicable regulatory
agencies. Shareholders maintaining margin accounts with DWR or another Selected
Broker-Dealer are referred to their account executive regarding restrictions on
exchange of shares of the Fund pledged in their margin account.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain one and read it carefully before
investing. Exchanges are subject to the minimum investment requirement and any
other conditions imposed by each fund. An exchange will be treated for federal
income tax purposes the same as a repurchase or redemption of shares on which
the shareholder has realized a capital gain or loss. However, the ability to
deduct capital losses on an exchange may be limited in situations where there is
an exchange of shares within ninety days after the shares are purchased. The
Exchange Privilege is only available in states where an exchange may legally be
made.
16
<PAGE>
If DWR or another Selected Broker-Dealer is the current dealer of record and
its account numbers are part of the account information, shareholders may
initiate an exchange of shares of the Fund for shares of any of the Dean Witter
Funds (for which the Exchange Privilege is available) pursuant to this Exchange
Privilege by contacting their DWR or other Selected Broker-Dealer account
executive (no Exchange Privilege Authorization Form is required). Other
shareholders (and those shareholders who are clients of DWR or another Selected
Broker-Dealer but who wish to make exchanges directly by writing or telephoning
the Transfer Agent) must complete and forward to the Transfer Agent an Exchange
Privilege Authorization Form, copies of which may be obtained from the Transfer
Agent, to initiate an exchange. If the Authorization Form is used, exchanges may
be made in writing or by contacting the Transfer Agent at (800) 526-3143 (toll
free). The Fund will employ reasonable procedures to confirm that exchange
instructions communicated over the telephone are genuine. Such procedures may
include requiring various forms of personal identification such as name, mailing
address, social security or other tax identification number and DWR or other
Selected Dealer account number (if any). Telephone instructions may also be
recorded. If such procedures are not employed, the Fund may be liable for any
losses due to unauthorized or fraudulent instructions.
Telephone exchange instructions will be accepted if received by the Transfer
Agent between 9:00 a.m. and 4:00 p.m. New York time, on any day the New York
Stock Exchange is open. Any shareholder wishing to make an exchange who is
unable to reach the Fund by telephone should contact his or her DWR or other
Selected Broker-Dealer account executive, if appropriate, or make a written
exchange request. Shareholders are advised that during periods of drastic
economic or market changes, it is possible that the telephone exchange
procedures may be difficult to implement, although this has not been the case
with the Dean Witter Funds in the past.
Additional information concerning the Exchange Privilege is available from a
DWR or other Selected Dealer account executive or the Transfer Agent.
REDEMPTIONS AND REPURCHASES
- --------------------------------------------------------------------------------
REDEMPTION. Shares of the Fund can be redeemed for cash at any time at the
net asset value per share next determined; however, such redemption proceeds may
be reduced by the amount of any applicable contingent deferred sales charges
(see below). If shares are held in a shareholder's account without a share
certificate, a written request for redemption to the Fund's Transfer Agent at
P.O. Box 983, Jersey City, N.J. 07303 is required. If certificates are held by
the shareholder(s), the shares may be redeemed by surrendering the
certificate(s) with a written request of redemption, along with any additional
information required by the Transfer Agent.
CONTINGENT DEFERRED SALES CHARGE. Shares of the Fund which are held for six
years or more after purchase (calculated from the last day of the month in which
the shares were purchased) will not be subject to any charge upon redemption.
Shares redeemed sooner than six years after purchase may, however, be subject to
a charge upon redemption. This charge is called a "contingent deferred sales
charge" ("CDSC"), which will be a percentage of the dollar amount of shares
redeemed and will be assessed on an amount equal to the lesser of the current
market value or the cost of the shares being redeemed. The size of this
17
<PAGE>
percentage will depend upon how long the shares have been held, and is set forth
in the table below:
<TABLE>
<CAPTION>
Contingent Deferred
Year Since Sales Charge
Purchase on a Percentage of
Payment Made Amount Redeemed
- ------------------------------------------ -------------------------
<S> <C>
First..................................... 5.0%
Second.................................... 4.0
Third..................................... 3.0%
Fourth.................................... 2.0%
Fifth..................................... 2.0%
Sixth..................................... 1.0%
Seventh and thereafter.................... None
</TABLE>
A CDSC will not be imposed on: (i) any amount which represents an increase
in value of shares purchased within the six years preceding the redemption; (ii)
the current net asset value of shares purchased more than six years prior to the
redemption; and (iii) the current net asset value of shares purchased through
reinvestment of dividends or distributions and/or shares acquired in exchange
for shares of Dean Witter Funds sold with a front-end sales charge or of other
Dean Witter Funds acquired in exchange for such shares. Moreover, in determining
whether a CDSC is applicable it will be assumed that amounts described in (i),
(ii), and (iii) above (in that order) are redeemed first. In addition, no CDSC
will be imposed on redemptions which were purchased by certain Unit Investment
Trusts (on which a sales charge has been paid) or which are attributable to
reinvestment of dividends or distributions from, or the proceeds of, such Unit
Investment Trusts.
In addition, the CDSC, if otherwise applicable, will be waived in the case
of (i) redemptions of shares held at the time a shareholder dies or becomes
disabled, only if the shares are (a) registered either in the name of an
individual shareholder (not a trust), or in the names of such shareholder and
his or her spouse as joint tenants with right of survivorship, or (b) held in a
qualified corporate or self-employed retirement plan, Individual Retirement
Account or Custodial Account under Section 403(b)(7) of the Internal Revenue
Code, provided in either case that the redemption is requested within one year
of the death or initial determination of disability, and (ii) redemptions in
connection with the following retirement plan distributions: (a) lump-sum or
other distributions from a qualified corporate or self-employed retirement plan
following retirement (or in the case of a "key employee" of a "top heavy" plan,
following attainment of age 59 1/2); (b) distributions from an Individual
Retirement Account or Custodial Account under Section 403(b)(7) of the Internal
Revenue Code following attainment of age 59 1/2; and (c) a tax-free return of an
excess contribution to an IRA. For the purpose of determining disability, the
Distributor utilizes the definition of disability contained in Section 72(m)(7)
of the Internal Revenue Code, which relates to the inability to engage in
gainful employment. All waivers will be granted subject to receipt by the
Distributor of confirmation of the investor's entitlement.
REPURCHASE. DWR or 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 are, reduced by any
applicable CDSC.
The CDSC, if any, will be the only fee imposed upon repurchase by either the
Fund, the Distributor or DWR. The offer by DWR or other Selected Broker-Dealers
to repurchase shares may be suspended without notice by them at any time. In
that event, shareholders may redeem their shares through the Fund's Transfer
Agent as set forth above under "Redemption."
PAYMENT FOR SHARES REDEEMED OR REPURCHASED. Payment for shares presented
for repurchase or redemption will be made by check within seven days after
receipt by the Transfer Agent of the certificate and/or written request in good
order.
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<PAGE>
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 the margin account.
REINSTATEMENT PRIVILEGE. A shareholder who has had his or her shares
redeemed or repurchased and has not previously exercised this reinstatement
privilege may, within 30 days after the date of the redemption or repurchase,
reinstate any portion or all of the proceeds of such redemption or repurchase in
shares of the Fund at the net asset value next determined after a reinstatement
request, together with the proceeds, is received by the Transfer Agent and
receive a pro-rata credit for any CDSC paid in connection with such redemption
or repurchase.
INVOLUNTARY REDEMPTION. The Fund reserves the right to redeem, on 60 days
notice and at net asset value, the shares of any shareholder (other than shares
held in an Individual Retirement Account or custodial account under Section
403(b)(7) of the Internal Revenue Code) whose shares have a value of less than
$100 as a result of redemptions or repurchases, or such lesser amount as may be
fixed by the Board of Trustees. However, before the Fund redeems such shares and
sends the proceeds to the shareholder, it will notify the shareholder that the
value of the shares is less than $100 and allow him or her 60 days to make an
additional investment in an amount which will increase the value of his or her
account to $100 or more before the redemption is processed. No CDSC will be
imposed on any involuntary redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. The Fund declares dividends from net
investment income on each day the New York Stock Exchange is open for business
(see "Purchase of Fund Shares"). Such dividends are payable monthly. The Fund
intends to distribute substantially all of the Fund's net investment income on
an annual basis.
The Fund will distribute at least once each year all net short-term capital
gains, if there are any. The Fund may, however, determine either to distribute
or to retain all or part of any net long-term capital gains in any year for
reinvestment. All dividends and capital gains distributions will be paid in
additional Fund shares (without sales charge) and automatically credited to the
shareholder's account without issuance of a share certificate unless the
shareholder requests in writing that they be paid in cash. (See "Shareholder
Services--Automatic Investment of Dividends and Distributions".) Taxable capital
gains may be generated by transactions in options and futures contracts engaged
in by the Fund. Any dividends or distributions declared in the last quarter of
any calendar year which are paid in the following year prior to February 1, will
be deemed received by shareholders of record in the prior year.
TAXES. Because the Fund currently intends to distribute substantially all
of its net investment income and capital gains to shareholders and intends to
otherwise comply with all the provisions of Subchapter M of the Internal Revenue
Code (the "Code") to qualify as a regulated investment company, it is not
expected that the Fund will be required to pay any federal income tax.
The Fund intends to continue to qualify to pay "exempt-interest dividends"
to its shareholders by maintaining, as of the close of each quarter of its
taxable year, at least 50% of the value of its total assets in tax-exempt
securities. If the Fund satisfies such requirement, distributions from net
investment
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<PAGE>
income to shareholders, whether taken in cash or reinvested in additional
shares, will be excludable from gross income for federal income tax purposes to
the extent net investment income is represented by interest on tax-exempt
securities.
Individual shareholders who are New York residents will not incur any
federal, New York State or New York City income tax on the amount of
exempt-interest dividends received by them from the Fund which represents a
distribution of income from New York tax-exempt securities 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. Within 60 days after the end of its
taxable year, the Fund will mail to shareholders a statement indicating the
percentage of the dividend distributions for such taxable year which constitutes
exempt-interest dividends and the percentage, if any, that is taxable.
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 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, New York State or New York
City income tax on dividends paid from interest income derived from taxable
securities and on distributions of net capital gains. For federal and New York
State or New York City income tax purposes, distributions of net long-term
capital gains, if any, are taxable to shareholders as long-term capital gains,
regardless of how long the shareholder has held the Fund shares and regardless
of whether the distribution is received in additional shares or in cash.
Distributions from investment income and capital gains, including
exempt-interest dividends, may be subject to New York franchise taxes if
received by a corporation doing business in New York, to state taxes in states
other than New York and to local taxes. To avoid being subject to a 31% backup
withholding tax on taxable dividends and capital gains distributions and the
proceeds of redemptions and repurchases, shareholders' taxpayer identification
numbers must be furnished and certified as to accuracy.
Any loss on the sale or exchange of shares of the Fund which are held for
six months or less is disallowed to the extent of the amount of any
exempt-interest dividend paid with respect to such shares. Treasury Regulations
may provide for a reduction in such required holding periods. If a shareholder
receives a distribution that is taxed as a long-term capital gain on shares held
for six moths 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 or city personal income tax purposes.
20
<PAGE>
The foregoing relates to federal income taxation and to New York State and
New York City personal income taxation as in effect as of the date of this
prospectus. Shareholders should consult their tax advisors as to the
applicability of the above to their own tax situation.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund may quote its "yield" and/or its "total return"
in advertisements and sales literature. Both the yield and the total return of
the Fund are based on historical earnings and are not intended to indicate
future performance. The yield of the Fund will be computed by dividing the
Fund's net investment income over a 30-day period by an average value (using the
average number of shares entitled to receive dividends and the net asset value
per share at the end of the period), all in accordance with applicable
regulatory requirements. Such amount is compounded for six months and then
annualized for a twelve-month period to derive the Fund's yield. The Fund may
also quote its tax-equivalent yield, which is calculated by determining the
pre-tax yield which, after being taxed at a stated rate, would be equivalent to
the yield determined as described above.
The "average annual total return" of the Fund refers to a figure reflecting
the average annualized percentage increase (or decrease) in the value of an
initial investment in the Fund of $1,000 over a period of one and five years, as
well as over the life of the Fund. Average annual total return reflects all
income earned by the Fund, any appreciation or depreciation of the Fund's
assets, all expenses incurred by the Fund and all sales charges which would be
incurred by redeeming shareholders, for the stated periods. It also assumes
reinvestment of all dividends and distributions paid by the Fund.
In addition to the foregoing, the Fund may advertise its total return over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. Such calculations may or may not reflect the
deduction of the contingent deferred sales charge which, if reflected, would
reduce the performance quoted. The Fund may also advertise the growth of
hypothetical investments of $10,000, $50,000 and $100,000 in shares of the Fund.
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent organizations
(such as mutual fund performance rankings of Lipper Analytical Services, Inc.).
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS. All shares of beneficial interest of the Fund are of $0.01
par value and are equal as to earnings, assets and voting privileges.
The Fund is not required to hold Annual Meetings of Shareholders and in
ordinary circumstances the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances the Trustees may be removed by action of the Trustees or by the
Shareholders.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that notice
of such disclaimer be given in each instrument entered into or executed by the
Fund and provides for indemnification and reimbursement of expenses out of the
Fund's property for any shareholder held personally liable for the obligations
of the Fund. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is
21
<PAGE>
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's
being unable to meet its obligations is remote and, in the opinion of
Massachusetts counsel to the Fund, the risk to Fund shareholders of personal
liability is remote.
SHAREHOLDER INQUIRIES. All inquiries regarding the Fund should be directed
to the Fund at the telephone numbers or address set forth on the front cover of
this prospectus.
22
<PAGE>
THE DEAN WITTER FAMILY OF FUNDS
MONEY MARKET FUNDS
Dean Witter Liquid Asset Fund Inc.
Dean Witter U.S. Government Money
Market Trust
Dean Witter Tax-Free Daily Income Trust
Dean Witter California Tax-Free Daily
Income Trust
Dean Witter New York Municipal Money
Market Trust
EQUITY FUNDS
Dean Witter American Value Fund
Dean Witter Natural Resource Development
Securities Inc.
Dean Witter Dividend Growth Securities Inc.
Dean Witter Developing Growth Securities Trust
Dean Witter World Wide Investment Trust
Dean Witter Equity Income Trust
Dean Witter Value-Added Market Series
Dean Witter Utilities Fund
Dean Witter Capital Growth Securities
Dean Witter European Growth Fund Inc.
Dean Witter Precious Metals and Minerals Trust
Dean Witter Pacific Growth Fund Inc.
Dean Witter Health Sciences Trust
Dean Witter Global Dividend Growth Securities
FIXED-INCOME FUNDS
Dean Witter High Yield Securities Inc.
Dean Witter Tax-Exempt Securities Trust
Dean Witter U.S. Government Securities Trust
Dean Witter Federal Securities Trust
Dean Witter Convertible Securities Trust
Dean Witter California Tax-Free Income Fund
Dean Witter New York Tax-Free Income Fund
Dean Witter World Wide Income Trust
Dean Witter Intermediate Income Securities
Dean Witter Global Short-Term Income Fund Inc.
Dean Witter Multi-State Municipal Series Trust
Dean Witter Premier Income Trust
Dean Witter Short-Term U.S. Treasury Trust
Dean Witter Diversified Income Trust
Dean Witter Limited Term Municipal Trust
Dean Witter Short-Term Bond Fund
DEAN WITTER RETIREMENT SERIES
Liquid Asset Series
U.S. Government Money Market Series
U.S. Government Securities Series
Intermediate Income Securities Series
American Value Series
Capital Growth Series
Dividend Growth Series
Strategist Series
Utilities Series
Value-Added Market Series
Global Equity Series
ASSET ALLOCATION FUNDS
Dean Witter Managed Assets Trust
Dean Witter Strategist Fund
ACTIVE ASSETS ACCOUNT PROGRAM
Active Assets Money Trust
Active Assets Tax-Free Trust
Active Assets California Tax-Free Trust
Active Assets Government Securities Trust
<PAGE>
Dean Witter
New York Tax-Free Income Fund
Two World Trade Center
New York, New York 10048
TRUSTEES
Jack F. Bennett
Charles A. Fiumefreddo Dean Witter
Edwin J. Garn New York
John R. Haire Tax-Free
Dr. John E. Jeuck Income Fund
Dr. Manuel H. Johnson
Paul Kolton
Michael E. Nugent
Edward R. Telling
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive
Officer
Sheldon Curtis
Vice President, Secretary and
General Counsel
James F. Willison
Vice President
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
110 Washington Street
New York, New York 10286
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT
Dean Witter Trust Company
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc. Prospectus
February 28, 1994
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 28, 1994 DEAN WITTER
NEW YORK TAX-FREE
INCOME FUND
- --------------------------------------------------------------------------------
Dean Witter New York 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 federal, New York State and
New York City income tax, consistent with preservation of capital. The Fund
invests principally in New York tax-exempt fixed-income securities which are
rated in the four highest categories by Moody's Investors Service, Inc. or
Standard & Poor's Corporation. (See "Investment Practices and Policies".)
A Prospectus for the Fund dated February 28, 1994, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge from the Fund at the address or phone number listed below or from
the Fund's Distributor, Dean Witter Distributors Inc., or from Dean Witter
Reynolds Inc., at any of its branch offices. This Statement of Additional
Information is not a Prospectus. It contains information in addition to and more
detailed than that set forth in the Prospectus. It is intended to provide you
additional information regarding the activities and operations of the Fund, and
should be read in conjunction with the Prospectus.
Dean Witter
New York Tax-Free Income Fund
Two World Trade Center
New York, New York 10048
(212) 392-2550
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<S> <C>
The Fund and its Management............................................................ 3
Trustees and Officers.................................................................. 6
Investment Practices and Policies...................................................... 8
Investment Restrictions................................................................ 15
Portfolio Transactions and Brokerage................................................... 16
The Distributor........................................................................ 23
Shareholder Services................................................................... 27
Redemptions and Repurchases............................................................ 31
Dividends, Distributions and Taxes..................................................... 34
Performance Information................................................................ 36
Shares of the Fund..................................................................... 37
Custodian and Transfer Agent........................................................... 38
Independent Accountants................................................................ 38
Reports to Shareholders................................................................ 38
Legal Counsel.......................................................................... 39
Experts................................................................................ 39
Registration Statement................................................................. 39
Report of Independent Accountants...................................................... 40
Financial Statements--December 31, 1993................................................ 41
Appendix............................................................................... 49
</TABLE>
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THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
THE FUND
The Fund is a Fund of the type commonly known as a "Massachusetts business
trust" and was organized under the laws of the Commonwealth of Massachusetts on
January 17, 1985.
THE INVESTMENT MANAGER
Dean Witter InterCapital Inc., a Delaware corporation (the "Investment
Manager" or "InterCapital"), whose address is Two World Trade Center, New York,
New York 10048, is the Fund's Investment Manager. InterCapital is a wholly-owned
subsidiary of Dean Witter, Discover & Co. ("DWDC"), a Delaware Corporation. In
an internal reorganization which took place in January, 1993, InterCapital
assumed the investment advisory, administrative and management activities
previously performed by the InterCapital Division of Dean Witter Reynolds Inc.
("DWR"), a broker-dealer affiliate of InterCapital. (As hereinafter used in this
Statement of Additional Information, the terms "InterCapital" and "Investment
Manager" refer to DWR's InterCapital Division prior to the internal
reorganization and Dean Witter InterCapital Inc. thereafter.) The daily
management of the Fund and research relating to the Fund's portfolio is
conducted by or under the direction of officers of the Fund and of the
Investment Manager, subject to periodic review by the Fund's Board of Trustees.
In addition, Trustees of the Fund provide guidance on economic factors and
interest rate trends. Information as to these trustees and officers is contained
under the caption, "Trustees and Officers."
InterCapital is also the investment manager or investment adviser of the
following management investment companies: Active Assets Money Trust,Active
Assets Tax-Free Trust,Active Assets Government Securities Trust,Active Assets
California Tax-Free Trust,Dean Witter Liquid Asset Fund Inc., InterCapital
Income Securities Inc., Dean Witter High Yield Securities Inc., Dean Witter
Tax-Free Daily Income Trust,Dean Witter Developing Growth Securities Trust,Dean
Witter American Value Fund, Dean Witter Dividend Growth Securities Inc., Dean
Witter Natural Resource Development Securities Inc., Dean Witter U.S. Government
Money Market Trust, Dean Witter Tax-Exempt Securities Trust, Dean Witter
Variable Investment Series, Dean Witter World Wide Investment Trust, Dean Witter
Select Municipal Reinvestment Fund, Dean Witter U.S. Government Securities
Trust, Dean Witter Equity Income Trust, Dean Witter California Tax-Free Income
Fund, Dean Witter Convertible Securities Trust, Dean Witter Federal Securities
Trust, Dean Witter Value-Added Market Series, High Income Advantage Trust, Dean
Witter Government Income Trust, Dean Witter Utilities Fund, Dean Witter Managed
Assets Trust, Dean Witter Strategist Fund, Dean Witter California Tax-Free Daily
Income Trust, High Income Advantage Trust II, Dean Witter World Wide Income
Trust, Dean Witter Intermediate Income Securities, Dean Witter Capital Growth
Securities, Dean Witter European Growth Fund Inc., Dean Witter Pacific Growth
Fund Inc., Dean Witter Precious Metals and Minerals Trust, Dean Witter Global
Short-Term Income Fund Inc., Dean Witter Multi-State Municipal Series Trust,Dean
Witter New York Municipal Money Market Trust,InterCapital Insured Municipal Bond
Trust,InterCapital Quality Municipal Investment Trust,Dean Witter Premier Income
Trust,Dean Witter Short-Term U.S. Treasury Trust,InterCapital Insured Municipal
Trust,InterCapital Quality Municipal Income Trust,InterCapital California
Insured Municipal Income Trust,Dean Witter Diversified Income Trust,Dean Witter
Health Sciences Trust,Dean Witter Retirement Series, InterCapital Quality
Municipal Securities, InterCapital California Quality Municipal Securities,
InterCapital New York Quality Municipal Securities, Dean Witter Global Dividend
Growth Securities, Dean Witter Limited Term Municipal Trust, Dean Witter
Short-Term Bond Fund,InterCapital Insured Municipal Securities, InterCapital
Insured California Municipal Securities, InterCapital Insured Municipal Income
Trust, High Income Advantage Trust III, Municipal Income Trust, Municipal Income
Trust II, Municipal Income Trust III, Municipal Income Opportunities Trust,
Municipal Income Opportunities Trust II, Municipal Income Opportunities Trust
III, Prime Income Trust and Municipal Premium Income Trust. The foregoing
investment companies, together with the Fund, are collectively referred to as
the Dean Witter Funds. In addition, Dean Witter Services Company Inc. ("DWSC"),
a wholly-owned subsidiary of InterCapital, serves as manager for the following
companies for which TCW Funds Management Inc. is the investment adviser: TCW/DW
Core Equity Trust, TCW/DW North American Government Income Trust,
3
<PAGE>
TCW/DW Latin American Growth Fund, TCW/DW Income and Growth Fund, TCW/DW Small
Cap Growth Fund, TCW/DW Balanced Fund, TCW/DW Term Trust 2000, TCW/DW Term Trust
2002 and TCW/DW Term Trust 2003 (the "TCW/DW Funds"). InterCapital also serves
as: (i) sub-adviser to Templeton Global Opportunities Trust, an open-end
investment company; (ii) administrator of The BlackRock Strategic Term Trust
Inc., a closed-end investment company; and (iii) sub-administrator of MassMutual
Participation Investors and Templeton Global Governments Income Trust,
closed-end investment companies.
The Investment Manager also serves as an investment adviser for Dean Witter
World Wide Investment Fund , an investment company organized under the laws of
Luxembourg, shares of which may not be offered in the United States or purchased
by American citizens outside of the United States.
Pursuant to an Investment Management Agreement (the "Agreement") with the
Investment Manager, the Fund has retained the Investment Manager to manage the
investment of the Fund's assets, including the placing of orders for the
purchase and sale of portfolio securities. The Investment Manager obtains and
evaluates such information and advice relating to the economy, securities
markets, and specific securities as it considers necessary or useful to
continuously manage the assets of the Fund in a manner consistent with its
investment objective and policies.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, such office space, facilities,
equipment, clerical help, bookkeeping and certain legal services as the Fund may
reasonably require in the conduct of its business, including the preparation of
prospectuses, proxy statements and reports required to be filed with federal and
state securities commissions (except insofar as the participation or assistance
of independent accountants and attorneys is, in the opinion of the Investment
Manager, necessary or desirable). In addition, the Investment Manager pays the
salaries of all personnel, including officers of the Fund, who are employees of
the Investment Manager. The Investment Manager also bears the cost of telephone
service, heat, light, power and other utilities provided to the Fund.
Effective December 31, 1993, pursuant to a Services Agreement between
InterCapital and DWSC, DWSC began to provide the administrative services to the
Fund which were previously performed directly by InterCapital. The foregoing
internal reorganization did not result in any change in the nature or scope of
the administrative services being provided to the Fund or any of the fees being
paid by the Fund for the overall services being performed under the terms of the
existing Management Agreement.
Expenses not expressly assumed by the Investment Manager under the Agreement
or by the Distributor of the Fund's shares, Dean Witter Distributors Inc.
("Distributors" or the "Distributor") (see "The Distributor") will be paid by
the Fund. The expenses borne by the Fund include, but are not limited to: fees
pursuant to any plan of distribution, charges and expenses of any registrar,
custodian, stock transfer and dividend disbursing agent; brokerage commissions;
taxes; engraving and printing stock certificates; registration costs of the Fund
and its shares under federal and state securities laws; the cost and expense of
printing, including typesetting, and distributing prospectuses and statements of
additional information of the Fund and supplements thereto to the Fund's
shareholders; all expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing of proxy statements and reports to shareholders;
fees and travel expenses of Trustees or members of any advisory board or
committee who are not employees of the Investment Manager or any corporate
affiliate of the Investment Manager; all expenses incident to any dividend,
withdrawal or redemption options; charges and expenses of any outside service
used for pricing of the Fund's shares; fees and expenses of legal counsel,
including counsel to the Trustees who are not interested persons of the Fund or
of the Investment Manager (not including compensation or expenses of attorneys
who are employees of the Investment Manager) and independent accountants;
membership dues of industry associations; interest on Fund borrowings; postage;
insurance premiums on property or personnel (including officers and trustees) of
the Fund which inure to its benefit; extraordinary expenses (including, but not
limited to, legal claims and liabilities and litigation costs and any
indemnification relating thereto); and all other costs of the Fund's operation.
4
<PAGE>
As full compensation for the services and facilities furnished to the Fund
and expenses of the Fund assumed by the Investment Manager, the Fund pays the
Investment Manager monthly compensation calculated daily by applying the annual
rate of 0.55% to the Fund's net assets not exceeding $500 million and the annual
rate of 0.525% to the Fund's net assets exceeding $500 million. For the fiscal
years ended December 31, 1991, 1992 and 1993, the Fund accrued to the Investment
Manager total compensation under the Agreements in the amounts of $920,044,
$1,070,437 and $1,268,826, respectively. The Investment Manager has voluntarily
undertaken that, if in any fiscal year the Fund's total operating expenses,
exclusive of taxes, interest, distribution fees, brokerage fees and
extraordinary expenses, exceed 1 1/2%, of average daily net assets, the
Investment Manager will reimburse the Fund for the amount of such excess. Such
amount, if any, will be calculated daily and credited on a monthly basis. This
undertaking can be revoked by the Investment Manager at any time. For the fiscal
year ended December 31, 1993, the Fund's expenses did not exceed such
limitation.
The Agreement provides that in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations thereunder, the
Investment Manager is not liable to the Fund or any of its investors for any act
or omission by the Investment Manager or for any losses sustained by the Fund or
its investors. The Agreement does not restrict the Investment Manager from
acting as investment manager or adviser to others.
The Agreement was initially approved by the Trustees on October 22, 1992 and
by the Shareholders on January 12, 1993. The Agreement is substantially
identical to the prior investment management agreement which was initially
approved by the Board of Trustees on February 13, 1985 and by DWR as the sole
shareholder of the Fund on March 20, 1985. The Agreement took effect on June 30,
1993, upon the spin-off by Sears, Roebuck and Co. of its remaining shares of
DWDC. The Agreement may be terminated at any time, without penalty, on thirty
days' notice, by the Board of Trustees of the Fund, by the holders of a
majority, as defined in the Investment Company Act of 1940, as amended (the
"Act"), of the outstanding shares of the Fund, or by the Investment Manager. The
Agreement will automatically terminate in the event of its assignment (as
defined in the Act). The Agreement may be terminated at any time, without
penalty, on thirty days' notice by the Board of Trustees of the Fund, by the
holders of a majority, as defined in the Act, of the outstanding shares of the
Fund, or by the Investment Manager. The Agreement will automatically terminate
in the event of its assignment, as such is defined in the Investment Company Act
of 1940, as amended (the "Act"). Under its terms, the Agreement will continue in
effect until April 30, 1994 and will continue from year to year thereafter,
provided continuance of the Agreement is approved at least annually by the vote
of the holders of a majority, as defined in the Act, of the outstanding shares
of the Fund, or by the Board of Trustees of the Fund; provided that in either
event such continuance is approved annually by the vote of a majority of the
Trustees of the Fund who are not parties to the Agreement or "interested
persons" (as defined in the Act) of any such party, which vote must be cast in
person at a meeting called for the purpose of voting on such approval.
The Fund has acknowledged that the name "Dean Witter" is a property right of
DWR. The Fund has agreed that DWR or its parent company may use or, at any time,
permit others to use, the name "Dean Witter". The Fund has also agreed that in
the event the investment management contract between the Investment Manager and
the Fund is terminated, or if the affiliation between InterCapital and its
parent is terminated, the Fund will eliminate the name "Dean Witter" from its
name DWR or its parent shall so request.
5
<PAGE>
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The Trustees and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with
InterCapital, and with the Dean Witter Funds and the TCW/DW Funds, are shown
below.
<TABLE>
<CAPTION>
NAME, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Jack F. Bennett Retired; Director or Trustee of the Dean Witter Funds; formerly Senior
Trustee Vice President and Director of Exxon Corporation (1975-January, 1989)
141 Taconic Road and Under Secretary of the U.S. Treasury for Monetary Affairs
Greenwich, Connecticut (1974-1975); Director of Phillips Electronics N.V. (electronics),
Tandem Computers Inc. and Massachusetts Mutual Insurance Company;
director or trustee of various not-for-profit and business
organizations.
Charles A. Fiumefreddo* Chairman, Director and Chief Executive Officer of InterCapital,
Trustee, Chairman, President and Distributors and DWSC; Executive Vice President and Director of DWR;
Chief Executive Officer Trustee or Director, Chairman, President and Chief Executive Officer of
Two World Trade Center the Dean Witter Funds; Chairman, Chief Executive Officer and Trustee of
New York, New York the TCW/DW Funds; Chairman and Director of Dean Witter Trust Company;
Director and/or officer of various DWDC subsidiaries and affiliates;
formerly Executive Vice President and Director of DWDC (until February,
1993).
Edwin J. Garn Director or Trustee of the Dean Witter Funds; formerly United States
Trustee Senator (R-Utah) (1974-1992) and Chairman, Senate Banking Committee
2000 Eagle Gate Tower (1980-1986); formerly Mayor of Salt Lake City, Utah (1971-1974);
Salt Lake City, Utah 84111 formerly Astronaut, Space Shuttle Discovery (April 12-19, 1985); Vice
Chairman, Huntsman Chemical Corporation (since January, 1993); Member
of the board of various civic and charitable organizations.
John R. Haire Chairman of the Audit Committee and Chairman of the Committee of
Trustee Independent Directors or Trustees of each of the Dean Witter Funds;
439 East 51st Street Director or Trustee of the Dean Witter Funds; Trustee of the TCW/DW
New York, New York Funds; formerly President, Council for Aid to Education (1978-October,
1989); formerly Chairman and Chief Executive Officer of Anchor
Corporation, an Investment Adviser (1964-1978); Director of Washington
National Corporation (insurance) and Bowne & Co., Inc. (printing).
Dr. John E. Jeuck Retired; Director or Trustee of the Dean Witter Funds; formerly Robert
Trustee Law Professor of Business Administration, Graduate School of Business,
70 East Cedar Street University of Chicago (until July, 1989); Director of Midway Airlines;
Chicago, Illinois Business Consultant.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NAME, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Dr. Manuel H. Johnson Senior Partner, Johnson Smick International, Inc., a consulting firm;
Trustee Koch Professor of International Economics and Director of the Center
7521 Old Dominion Drive for Global Market Studies at George Mason University (since September,
McLean, Virginia 1990); Co-Chairman and a founder of the Group of Seven Council (G7C),
an international economic commission (since September, 1990); Director
or Trustee of the Dean Witter Funds; Trustee of the TCW/DW Funds;
Director of Greenwich Capital Markets Inc. (broker-dealer); formerly
Vice Chairman of the Board of Governors of the Federal Reserve System
(February, 1986-August, 1990) and Assistant Secretary of the U.S.
Treasury (1982-1986).
Paul Kolton Director or Trustee of the Dean Witter Funds; Chairman of the Audit
Trustee Committee and Chairman of the Committee of the Independent Trustees and
9 Hunting Ridge Road Trustee of the TCW/DW Funds; formerly Chairman of the Financial
Stamford, Connecticut Accounting Standards Advisory Council; formerly Chairman and Chief
Executive Officer of the American Stock Exchange; Director of UNUM
Corporation (insurance) and UCC Investors Holding Inc. (Uniroyal
Chemical Company, Inc.); director or trustee of various charitable
organizations.
Michael E. Nugent General Partner, Triumph Capital, L.P., a private investment part-
Trustee nership (since 1988); Director or Trustee of the Dean Witter Funds and
237 Park Avenue Trustee of the TCW/DW Funds; formerly Vice President, Bankers Trust
New York, New York Company and BT Capital Corporation (1984-1988); Director of various
business organizations.
Edward R. Telling* Retired; Director or Trustee of the Dean Witter Funds; formerly
Trustee Chairman of the Board of Directors and Chief Executive Officer (until
Sears Tower December 31, 1985) and President (from January, 1981-March, 1982 and
Chicago, Illinois from February, 1984-August, 1984) of Sears, Roebuck and Co.
Sheldon Curtis Senior Vice President, General Counsel of InterCapital and DWSC; Senior
Vice President, Secretary and Vice President and Secretary of Dean Witter Trust Company; Senior Vice
General Counsel President, Assistant Secretary and Assistant General Counsel of
Two World Trade Center Distributors; Assistant Secretary of DWR, Vice President, Secretary and
New York, New York General Counsel of the Dean Witter Funds and TCW/DW Funds.
James F. Willison Senior Vice President of InterCapital; Vice President of various Dean
Vice President Witter Funds.
Two World Trade Center
New York, New York
Thomas F. Caloia First Vice President (since May, 1991) and Assistant Treasurer (since
Treasurer January, 1993) of InterCapital; First Vice President and Assistant
Two World Trade Center Treasurer of DWSC; Treasurer Dean Witter Funds and TCW/DW Funds.
New York, New York
<FN>
- ------------------------
*Denotes Trustees who are "interested persons" of the Fund, as defined in the
Act.
</TABLE>
In addition, Robert M. Scanlan, President and Chief Operating Officer of
InterCapital, David A. Hughey, Executive Vice President of InterCapital and
Jonathan R. Page and Peter M. Avelar, Senior Vice
7
<PAGE>
Presidents of InterCapital are Vice Presidents of the Fund and Barry Fink, First
Vice President and Assistant General Counsel of InterCapital and Marilyn K.
Cranney, Lawrence S. Lafer, Lou Anne D. McInnis and Ruth Rossi, Vice Presidents
and Assistant General Counsels of InterCapital, are Assistant Secretaries of the
Fund.
The Fund pays each Trustee who is not an employee or retired employee of the
Investment Manager or an affiliated company an annual fee of $1,200 ($1,600
prior to December 31, 1993) plus $50 for each meeting of the Board of Trustees,
the Audit Committee or the Committee of Independent Trustees attended by the
Trustee (the Fund pays the Chairman of the Audit Committee an additional annual
fee of $1,000 ($1,200 prior to December 31, 1993), and pays the Chairman of the
Committee of Independent Trustees an additional annual fee of $2,400, in each
case inclusive of the Committee meeting fees). The Fund also reimburses such
trustees for travel and other out-of-pocket expenses incurred by them in
connection with attending such meetings. Trustees and officers of the Fund who
are or have been employed by the Investment Manager or an affiliated company
receive no compensation or expense reimbursement from the Fund. The Fund has
adopted a retirement program under which an Independent Trustee who is not an
"interested person" of the Fund and who retires after a minimum required period
of service would be entitled to retirement payments upon reaching the eligible
retirement age (normally, after attaining age 72) based upon length of service
and computed as a percentage of one-fifth of the total compensation earned by
such Trustee for service to the Fund in the five-year period prior to the date
of the Trustee's retirement. For the year ended December 31, 1993, the Fund
accrued a total of $36,064 for trustees' fees and expenses of which $12,232 was
for benefits under the above-described retirement program. As of the date of
this Statement of Additional Information, the aggregate shares of beneficial
interest of the Fund owned by the Fund's officers and trustees as a group was
less than 1 percent of the Fund's shares outstanding.
INVESTMENT PRACTICES AND POLICIES
- --------------------------------------------------------------------------------
PORTFOLIO SECURITIES
TAXABLE SECURITIES. As discussed in the Prospectus, the Fund may invest up
to 20% of its total assets in taxable money market instruments, non-New York
tax-exempt securities, futures and options. Investments in taxable money market
instruments would generally be made under any one of the following
circumstances: (a) pending investment of proceeds of sales of Fund shares or of
portfolio securities, (b) pending settlement of purchases of portfolio
securities and (c) to maintain liquidity for the purpose of meeting anticipated
redemptions. Only those non-New York tax-exempt securities which satisfy the
standards established for New York tax-exempt securities may be purchased by the
Fund.
In addition, the Fund may temporarily invest more than 20% of its total
assets in non-New York tax-exempt securities and taxable money market
instruments, or in tax-exempt securities subject to the federal alternative
minimum tax for individual shareholders, to maintain a "defensive" posture when,
in the opinion of the Investment Manager, it is advisable to do so because of
market conditions. The types of taxable money market instruments in which the
Fund may invest are limited to the following short-term fixed-income securities
(maturing in one year or less from the time of purchase): (i) obligations of the
United States Government, its agencies, instrumentalities or authorities; (ii)
commercial paper rated P-1 by Moody's Investors Service, Inc. ("Moody's") or A-1
by Standard & Poor's Corporation ("S&P"); (iii) certificates of deposit of
domestic banks with assets of $1 billion or more; and (iv) repurchase agreements
with respect to portfolio securities.
TAX-EXEMPT SECURITIES. As discussed in the Prospectus, at least 80% of the
Fund's total assets will be invested in New York tax-exempt securities (New York
Municipal Bonds, New York Municipal Notes and New York Municipal Commercial
Paper). In regard to the Moody's and S&P ratings discussed in the Prospectus, it
should be noted that the ratings represent the organizations' opinions as to the
quality of
8
<PAGE>
the securities which they undertake to rate and that the ratings are general and
not absolute standards of quality. For a description of Municipal Bond,
Municipal Note and Municipal Commercial Paper ratings by Moody's and S&P, see
the Appendix to this Statement of Additional Information.
The Fund does not have any minimum quality rating standard for its
downgraded investments. As such, the Fund may hold securities rated as low as
Caa, Ca or C by Moody's or CCC, CC, C or CI by S&P. Bonds rated Caa or Ca by
Moody's may already be in default on payment of interest or principal, while
bonds rated C by Moody's, their lowest bond rating, can be regarded as having
extremely poor prospects of ever attaining any real investment standing. Bonds
rated CI by S&P, their lowest bond rating, are no longer making interest
payments.
The payment of principal and interest by issuers of certain Municipal
Obligations purchased by the Fund may be guaranteed by letters of credit or
other credit facilities offered by banks or other financial institutions. Such
guarantees will be considered in determining whether a Municipal Obligation
meets the Fund's investment quality requirements. In addition, some issues may
contain provisions which permit the Fund to demand from the issuer repayment of
principal at some specified period(s) prior to maturity.
MUNICIPAL BONDS. Municipal Bonds, as referred to in the Prospectus, are
debt obligations of a United States territory or possession, state, its cities,
municipalities and municipal agencies (all of which are generally referred to as
"municipalities") which generally have a maturity at the time of issuance of one
year or more, and the interest from which is, in the opinion of bond counsel,
exempt from federal income tax. In addition to these requirements, the interest
from New York Municipal Bonds must be, in the opinion of bond counsel, exempt
from New York personal income tax. They are issued to raise funds for various
public purposes, such as construction of a wide range of public facilities, to
refund outstanding obligations and to obtain funds for general operating
expenses or to loan to other public institutions and facilities. In addition,
certain types of industrial development bonds and pollution control bonds are
issued by or on behalf of public authorities to provide funding for various
privately operated facilities.
MUNICIPAL NOTES. Municipal Notes are short-term obligations of
municipalities, generally with a maturity at the time of issuance ranging from
six months to three years, the interest from which is, in the opinion of bond
counsel, exempt from federal income tax. In addition to those requirements, the
interest from New York Municipal Notes must be, in the opinion of bond counsel,
exempt from New York personal income tax. The principal types of Municipal Notes
include tax anticipation notes, bond anticipation notes, revenue anticipation
notes and project notes, although there are other types of Municipal Notes in
which the Fund may invest. Notes sold in anticipation of collection of taxes, a
bond sale or receipt of other revenues are usually general obligations of the
issuing municipality or agency.
MUNICIPAL COMMERCIAL PAPER. Municipal Commercial Paper refers to short-term
obligations of municipalities the interest from which is, in the opinion of bond
counsel, exempt from federal income tax. In addition to those requirements, the
interest from New York Commercial Paper must be, in the opinion of bond counsel,
exempt from New York personal income tax. They may be issued at a discount and
are sometimes referred to as Short-Term Discount Notes. Municipal Commercial
Paper is likely to be used to meet seasonal working capital needs of a
municipality or interim construction financing and to be paid from general
revenues of the municipality or refinanced with long-term debt. In most cases
Municipal Commercial Paper is backed by letters of credit, lending agreements,
note repurchase agreements or other credit facility agreements offered by banks
or other institutions.
Issuers of these obligations are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, which may be enacted by
Congress or any state extending the time for payment of principal or interest,
or both, or imposing other constraints upon enforcement of such obligations or
upon municipalities to levy taxes. There is also the possibility that as a
result of litigation or other conditions the power or ability of any one or more
issuers to pay, when due, principal of and interest on its, or their, Municipal
Bonds, Municipal Notes and Municipal Commercial Paper may be materially
affected.
9
<PAGE>
SPECIAL INVESTMENT CONSIDERATIONS
Because of the special nature of securities which are rated below investment
grade by national credit rating agencies ("lower-rated securities"), the
Investment Manager must take into account certain special considerations in
assessing the risks associated with such investments. For example, as the
lower-rated securities market is relatively new, its growth has paralleled a
long economic expansion and it has not weathered a recession in its present size
and form. Therefore, an economic downturn or increase in interest rates is
likely to have a negative effect on this market and on the value of the
lower-rated securities held by the Fund, as well as on the ability of the
securities' issuers to repay principal and interest on their borrowings.
The prices of lower-rated securities have been found to be less sensitive to
changes in prevailing interest rates than higher-rated investments, but are
likely to be more sensitive to adverse economic changes or individual corporate
developments. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress which
would adversely affect their ability to service their principal and interest
payment obligations, to meet their projected business goals or to obtain
additional financing. If the issuer of a fixed-income security owned by the Fund
defaults, the Fund may incur additional expenses to seek recovery. In addition,
periods of economic uncertainty and change can be expected to result in an
increased volatility of market prices of lower rated securities and a
concomitant volatility in the net asset value of a share of the Fund. Moreover,
the market prices of certain of the Fund's portfolio securities which are
structured as zero coupon securities are affected to a greater extent by
interest rate changes and thereby tend to be more volatile than securities which
pay interest periodically and in cash (see "Dividends, Distributions and Taxes"
for a discussion of the tax ramifications of investments in such securities).
The secondary market for lower-rated securities may be less liquid than the
markets for higher quality securities and, as such, may have an adverse effect
on the market prices of certain securities. The limited liquidity of the market
may also adversely affect the ability of the Fund's Trustees to arrive at a fair
value for certain lower-rated securities at certain times and should make it
difficult for the Fund to sell certain securities.
New laws and proposed new laws may have a potentially negative impact on the
market for lower-rated securities. For example, recent legislation requires
federally-insured savings and loan associations to divest their investments in
lower-rated securities. This legislation and other proposed legislation may have
an adverse effect upon the value of lower-rated securities and a concomitant
negative impact upon the net asset value of a share of the Fund.
VARIABLE RATE OBLIGATIONS. As stated in the Prospectus, the Fund may invest
in obligations of the type called "variable rate obligations". The interest rate
payable on a variable rate obligation is adjusted either at predesignated
periodic intervals or whenever there is a change in the market rate of interest
on which the interest rate payable is based. Other features may include the
right whereby the Fund may demand prepayment of the principal amount of the
obligation prior to its stated maturity (a "demand feature") and the right of
the issuer to prepay the principal amount prior to maturity. The principal
benefit of a variable rate obligation is that the interest rate adjustment
minimizes changes in the market value of the obligation. The principal benefit
to the Fund of purchasing obligations with a demand feature is that liquidity,
and the ability of the Fund to obtain repayment of the full principal amount of
the obligation prior to maturity, is enhanced.
LENDING OF PORTFOLIO SECURITIES. The Fund may lend portfolio securities to
brokers, dealers and financial institutions provided that cash equal to at least
100%, of the market value of the securities loaned is deposited by the borrower
with the Fund and is maintained each business day in a segregated account
pursuant to applicable regulations. While such securities are on loan, the
borrower will pay the Fund any income accruing thereon, and the Fund may invest
the cash collateral in portfolio securities, thereby earning additional income.
The Fund will not lend its portfolio securities if such loans are not permitted
by the laws or regulations of any state in which its shares are qualified for
sale and will not lend more than 25% of the value of its total assets. Loans
will be subject to termination by the Fund in the
10
<PAGE>
normal settlement time, currently five business days after notice, or by the
borrower on one day's notice. Borrowed securities must be returned when the loan
is terminated. Any gain or loss in the market price of the borrowed securities
which occurs during the term of the loan inures to the Fund and its
shareholders. The Fund may pay reasonable finders, borrowers, administrative,
and custodial fees in connection with a loan. The creditworthiness of firms to
which the Fund lends its portfolio securities will be monitored on an ongoing
basis. During the fiscal year ended December 31, 1993, the Fund did not loan its
portfolio securities and it has no current intention to loan its portfolio
securities in the forseeable future.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. As stated in the Prospectus,
the Fund may purchase tax-exempt securities on a when-issued or delayed delivery
basis. When such transactions are negotiated, the price is fixed at the time of
the commitment, but delivery and payment can take place a month or more after
the date of the commitment. While the Fund will only purchase securities on a
when-issued or delayed delivery basis with the intention of acquiring the
securities, the Fund may sell the securities before the settlement date, if it
is deemed advisable. The securities so purchased or sold are subject to market
fluctuation and no interest accrues to the purchaser during this period. At the
time the Fund makes the commitment to purchase a Municipal Obligation on a
when-issued or delayed delivery basis, it will record the transaction and
thereafter reflect the value, each day, of the Municipal Obligation in
determining its net asset value. The Fund will also establish a segregated
account with its custodian bank in which it will maintain cash or cash
equivalents or other high quality Municipal Obligations equal in value to
commitments for such when-issued or delayed delivery securities. The Fund does
not believe that its net asset value or income will be adversely affected by its
purchase of Municipal Obligations on a when-issued or delayed delivery basis.
REPURCHASE AGREEMENTS. When cash may be available for only a few days, it
may be invested by the Fund in repurchase agreements until such time as it may
otherwise be invested or used for payments of obligations of the Fund. These
agreements, which may be viewed as a type of secured lending by the Fund,
typically involve the acquisition by the Fund of debt securities from a selling
financial institution such as a bank, savings and loan association or
broker-dealer. The agreement provides that the Fund will sell back to the
institution, and that the institution will repurchase, the underlying security
("collateral"), which is held by the Fund's Custodian at a specified price and
at a fixed time in the future which is usually not more than seven days from the
date of purchase. The Fund will receive interest from the institution until the
time when the repurchase is to occur. Although such date is deemed by the Fund
to be the maturity date of a repurchase agreement, the maturities of securities
subject to repurchase agreements are not subject to any limits and may exceed
one year. While repurchase agreements involve certain risks not associated with
direct investments in debt securities, the Fund follows procedures designed to
minimize such risks. These procedures include effecting repurchase transactions
only with large well-capitalized and well-established financial institutions,
whose financial condition will be continually monitored. In addition, the value
of the collateral underlying the repurchase agreement will always be at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. In the event of a default or bankruptcy by a selling
financial institution, the Fund will seek to liquidate such collateral. However,
the exercising of the Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price, the
Fund could suffer a loss. It is the current policy of the Fund not to invest in
repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by the Fund, amounts to
more than 10% of its total assets. During the fiscal year ended December 31,
1993, the Fund did not enter into repurchase agreements and it is the Fund's
current intention not to invest in repurchase agreements in the foreseeable
future.
HEDGING ACTIVITIES
The Fund may enter financial futures contracts, options on such futures and
municipal bond index futures contracts for hedging purposes.
11
<PAGE>
FUTURES CONTRACTS AND OPTIONS ON FUTURES
As discussed in the Prospectus, the Fund may invest in financial futures
contracts ("futures contracts") and related options thereon. These futures
contracts and related options thereon will be used only as a hedge against
anticipated interest rate changes. A futures contract sale creates an obligation
by the Fund, as seller, to deliver the specific type of instrument called for in
the contract at a specified future time for a specified price. A futures
contract purchase would create an obligation by the Fund, as purchaser, to take
delivery of the specific type of financial instrument at a specified future time
at a specified price. The specific securities delivered or taken, respectively,
at settlement date, would not be determined until or near that date. The
determination would be in accordance with the rules of the exchange on which the
futures contract sale or purchase was effected.
Although the terms of futures contracts specify actual delivery or receipt
of securities, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the securities.
Closing out of a futures contract is usually effected by entering into an
offsetting transaction. An offsetting transaction for a futures contract sale is
effected by the Fund entering into a futures contract purchase for the same
aggregate amount of the specific type of financial instrument at the same
delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is immediately paid the difference and thus realizes a gain.
If the offsetting purchase price exceeds the sale price, the Fund pays the
difference and realizes the loss. Similarly, the closing out of a futures
contract purchase is effected by the Fund entering into a futures contract sale.
If the offsetting sale price exceeds the purchase price the Fund realizes a
gain, and if the offsetting sale price is less than the purchase price the Fund
realizes a loss.
Unlike a futures contract, which requires the parties to buy and sell a
security on a set date, an option on a futures contract entitles its holder to
decide on or before a future date whether to enter into such a contract. If the
holder decides not to enter into the contract, the premium paid for the option
is lost. Since the value of the option is fixed at the point of sale, there are
no daily payments of cash to reflect the change in the value of the underlying
contract, as discussed below for futures contracts. The value of the option
changes and is reflected in the net asset value of the Fund.
The Fund is required to maintain margin deposits with brokerage firms
through which it effects futures contracts and options thereon. The initial
margin requirements vary according to the type of the underlying security. In
addition, due to current industry practice daily variations in gains and losses
on open contracts are required to be reflected in cash in the form of variation
margin payments. The Fund may be required to make additional margin payments
during the term of the contract.
Currently, futures contracts can be purchased on debt securities such as
U.S. Treasury Bills and Bonds, U.S. Treasury Notes with maturities between 6 1/2
and 10 years, Certificates of the Government National Mortgage Association and
Bank Certificates of Deposit. The Fund may invest in interest rate futures
contracts covering these types of financial instruments as well as in new types
of contracts that become available in the future.
12
<PAGE>
Financial futures contracts are traded in an auction environment on the
floors of several Exchanges -- principally the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. Each exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the exchange membership which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A risk in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities subject to
futures contracts may correlate imperfectly with the behavior of the cash prices
of the Fund's portfolio securities. The correlation may be distorted by the fact
that the futures market is dominated by short-term traders seeking to profit
from the difference between a contract or security price objective and their
cost of borrowed funds. This would reduce their value for hedging purposes over
a short time period. The correlation may be further distorted since the futures
contracts that are being used to hedge are not based on municipal obligations.
Another risk is that the Fund's manager could be incorrect in its
expectations as to the direction or extent of various interest rate movements or
the time span within which the movements take place. For example, if the Fund
sold futures contracts for the sale of securities in anticipation of an increase
in interest rates, and then interest rates went down instead, causing bond
prices to rise, the Fund would lose money on the sale.
Put and call options on financial futures have similar characteristics as
exchange-traded options. See below for a further description of options.
In addition to the risks associated with investing in options on securities,
there are particular risks associated with investing in options on futures. In
particular, the ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid secondary market.
It is not certain that this market will develop.
In order to assure that the Fund is entering into transactions in futures
contracts for hedging purposes as such is defined by the Commodity Futures
Trading Commission either: 1) a substantial majority (i.e., approximately 75%)
of all anticipatory hedge transactions (transactions in which the Fund does not
own at the time of the transaction, but expects to acquire, the securities
underlying the relevant futures contract) involving the purchase of futures
contracts will be completed by the purchase of securities which are the subject
of the hedge or 2) the underlying value of all long positions in futures
contracts will not exceed the total value of a) all short-term debt obligations
held by the Fund; b) cash held by the Fund; c) cash proceeds due to the Fund on
investments within thirty days; d) the margin deposited on the contracts; and e)
any unrealized appreciation in the value of the contracts.
The Fund may not enter into futures contracts or related options thereon if
immediately thereafter the amount committed to margin plus the amount paid for
option premiums exceeds 5% of the value of the Fund's total assets. In instances
involving the purchase of futures contracts by the Fund, the market value of the
futures contract will be deposited in a segregated account of cash and cash
equivalents to collateralize the position and thereby ensure that the use of
such futures is unleveraged. The Fund may not purchase or sell futures contacts
or related options if immediately thereafter more than one-third of its net
assets would be hedged.
MUNICIPAL BOND INDEX FUTURES. The Fund may utilize municipal bond index
futures contracts for hedging purposes. The Fund's strategies in employing such
contracts will be similar to that discussed above with respect to financial
futures and options thereon. A municipal bond index is a method of reflecting in
a single number the market value of many different municipal bonds and is
designed to be representative of the municipal bond market generally. The index
fluctuates in response to changes in the market values of the bonds included
within the index. Unlike futures contracts on particular financial instruments,
transactions in futures on a municipal bond index will be settled in cash if
held until the close of trading in the contract. However, like any other futures
contract, a position in the contract may be closed out by purchase or sale of an
offsetting contract for the same delivery month prior to expiration of the
contract.
13
<PAGE>
OPTIONS. The Fund may purchase or sell (write) options on debt securities
as a means of achieving additional return or hedging the value of the Fund's
portfolio. The Fund would only buy options listed on national securities
exchanges. The Fund will not purchase options if, as a result, the aggregate
cost of all outstanding options exceeds 10% of the Fund's total assets.
Presently there are no options on New York tax-exempt securities traded on
national securities exchanges and until such time as they become available, the
Fund will not invest in options on debt securities. It is anticipated that such
instruments will not become available during the next year.
A call option is a contract that gives the holder of the option the right to
buy from the writer of the call option, in return for a premium, the security
underlying the option at a specified exercise price at any time during the term
of the option. The writer of the call option has the obligation upon exercise of
the option to deliver the underlying security upon payment of the exercise price
during the option period. A put option is a contract that gives the holder of
the option the right to sell to the writer, in return for a premium, the
underlying security at a specified price during the term of the option. The
writer of the put has the obligation to buy the underlying security upon
exercise, at the exercise price during the option period.
The Fund will only write covered call or covered put options. The Fund may
not write covered options in an amount exceeding 20% of the value of its total
assets. A call option is "covered" if the Fund owns the underlying security
subject to the option or has an absolute and immediate right to acquire that
security or futures contract without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option is also covered if the Fund holds a call on the same security or futures
contract as the call written where the exercise price of the call held is (i)
equal to or less than the exercise price of the call written or (ii) greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash, Treasury bills or other high grade short-term obligations in a
segregated account with its custodian. A put option is "covered" if the Fund
maintains cash, Treasury bills or other high grade short-term obligations with a
value equal to the exercise price in a segregated account with its custodian, or
else holds a put on the same security or futures contract as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written.
If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing an
option of the same series as the option previously written. However, once the
Fund has been assigned an exercise notice, the Fund will be unable to effect a
closing purchase transaction. Similarly, if the Fund is the holder of an option
it may liquidate its position by effecting a closing sale transaction. This is
accomplished by selling an option of the same series as the option previously
purchased. There can be no assurance that either a closing purchase or sale
transaction can be effected when the Fund so desires.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Since call option prices generally reflect increases in the
price of the underlying security, any loss resulting from the repurchase of a
call option may also be wholly or partially offset by unrealized appreciation of
the underlying security. Other principal factors affecting the market value of a
put or a call option include supply and demand, interest rates, the current
market price and price volatility of the underlying security and the time
remaining until the expiration date.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although the Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option. In such event it might not be
possible to effect closing transactions in particular options, so that the Fund
would have to exercise its options in order to realize any profit and would
incur brokerage commissions upon the exercise of call options and upon the
subsequent disposition of underlying securities for the exercise of put options.
If the Fund as a
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covered call option writer is unable to effect a closing purchase transaction in
a secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
PORTFOLIO MANAGEMENT
The Fund's portfolio turnover rate during the fiscal year ended December 31,
1993 was 25%. It is anticipated that the Fund's portfolio turnover rate will not
exceed 50% during the fiscal year ending December 31, 1994. A 50% turnover rate
would occur, for example, if 50% of the securities held in the Fund's portfolio
(excluding all securities whose maturities at acquisition were one year or less)
were sold and replaced within one year. However, the Fund may engage in
short-term trading consistent with its investment objective. Securities may be
sold in anticipation of a market decline (a rise in interest rates) or purchased
in anticipation of a market rise (a decline in interest rates). In addition, a
security may be sold and another security of comparable quality purchased at
approximately the same time to take advantage of what the Investment Manager
believes to be a temporary disparity in the normal yield relationship between
the two securities. These yield disparities may occur for reasons not directly
related to the investment quality of particular issues or the general movement
of interest rates, such as changes in the overall demand for, or supply of,
various types of tax-exempt securities.
In general, purchases and sales may also be made to restructure the
portfolio in terms of average maturity, quality, coupon yield, or
diversification for any one or more of the following purposes: (a) to increase
income, (b) to improve portfolio quality, (c) to minimize capital depreciation,
(d) to realize gains or losses, or for such other reasons as the Investment
Manager deems relevant in light of economic and market conditions.
The Fund does not generally intend to invest more than 25% of its total
assets in securities of any one governmental unit. Subject to investment
restriction number 3 in the Prospectus, the Fund may invest more than 25% of its
total assets in industrial development and pollution control bonds (two kinds of
tax-exempt Municipal Bonds).
The Fund may invest in obligations customarily sold to institutional
investors in private transactions with the issuers thereof and up to 5% of its
total assets in securities for which a BONA FIDE market does not exist at the
time of purchase. With respect to any securities as to which a BONA FIDE market
does not exist, the Fund may be unable to dispose of such securities promptly at
reasonable prices. It is the Fund's current intention not to invest in such
obligations.
INVESTMENT RESTRICTIONS
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In addition to the investment restrictions enumerated in the Prospectus, the
investment restrictions listed below have been adopted by the Fund as
fundamental policies, which may not be changed without the vote of a majority of
the outstanding voting securities of the Fund, as defined in the Act. Such a
majority is defined as the lesser of (a) 67% of the shares present at a meeting
of shareholders, if the holders of more than 50% of the outstanding shares of
the Fund are present or represented by proxy or (b) more than 50% of the
outstanding shares of the Fund. For purposes of the following restrictions and
those recited in the Prospectus: (a) an "issuer" of a security is the entity
whose assets and revenues are committed to the payment of interest and principal
on that particular security, provided that securities guaranteed by separate
entities will be considered separate securities; (b) a "taxable security" is any
security the interest on which is subject to federal income tax; and (c) all
percentage limitations apply immediately after a purchase or initial investment,
and any subsequent change in any applicable percentage resulting from market
fluctuations or other changes in total or net assets does not require
elimination of any security from the portfolio.
The Fund may not:
1. Invest in common stock.
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2. Invest in securities of any issuer if, to the knowledge of the Fund,
any officer or Trustee of the Fund or officer or director of the Investment
Manager owns more than 1/2 of 1% of the outstanding securities of such
issuer, and such officers and directors who own more than 1/2 of 1% own in
the aggregate more than 5% of the outstanding securities of such issuer.
3. Purchase or sell real estate or interests therein, although it may
purchase securities secured by real estate or interests therein.
4. Purchase or sell commodities except that the Fund may purchase
financial futures contracts and related options in accordance with
procedures adopted by the Trustees described in its Prospectus and Statement
of Additional Information.
5. Purchase oil, gas or other mineral leases, rights or royalty
contracts, or exploration or development programs.
6. Write, purchase or sell puts, calls, or combinations thereof except
options on futures contracts or options on debt securities.
7. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
8. Borrow money, except that the Fund may borrow from a bank for
temporary or emergency purposes in amounts not exceeding 5% (taken at the
lower of cost or current value) of the value of its total assets (not
including the amount borrowed).
9. Pledge its assets or assign or otherwise encumber them except to
secure permitted borrowings. (For the purpose of this restriction,
collateral arrangements with respect to the writing of options and
collateral arrangements with respect to initial margin for futures are not
deemed to be pledges of assets and neither such arrangements nor the
purchase or sale of futures are deemed to be the issuance of a senior
security as set forth in restriction 10.)
10. Issue senior securities as defined in the Act except insofar as the
Fund may be deemed to have issued a senior security by reason of: (a)
entering into any repurchase agreement; (b) purchasing any securities on a
when-issued or delayed delivery basis; or (c) borrowing money in accordance
with restrictions described above.
11. Make loans of money or securities, except: (a) by the purchase of
debt obligations in which the Fund may invest consistent with its investment
objective and policies; (b) by investment in repurchase agreements; and (c)
by lending its portfolio securities.
12. Make short sales of securities.
13. Purchase securities on margin, except for such short-term loans as
are necessary for the clearance of purchases of portfolio securities. The
deposit or payment by the Fund of initial or variation margin in connection
with futures contracts or related options thereon is not considered the
purchase of a security on margin.
14. Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security.
15. Invest for the purpose of exercising control or management of any
other issuer.
PORTFOLIO TRANSACTIONS AND BROKERAGE
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The Investment Manager is responsible for decisions to buy and sell
securities and commodities for the Fund, the selection of brokers and dealers to
effect the transactions, and the negotiation of brokerage commissions, if any.
The Fund expects that the primary market for the securities in which it intends
to invest will generally be the over-the-counter market. Securities are
generally traded in the over-the-counter market on a "net" basis with dealers
acting as principal for their own accounts without charging
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a stated commission, although the price of the security usually includes a
profit to the dealer. Options and futures transactions will usually be effected
through a broker and a commission will be charged. The Fund also expects that
securities will be purchased at times in underwritten offerings where the price
includes a fixed amount of compensation, generally referred to as the
underwriter's concession or discount. On occasion, the Fund may also purchase
certain money market instruments directly from an issuer, in which case no
commissions or discounts are paid. During the fiscal years ended December 31,
1991, 1992 and 1993, the Fund did not pay any brokerage commissions.
The Investment Manager currently serves as investment manager to a number of
clients, including other investment companies, and may in the future act as
investment manager or adviser to others. It is the practice of the Investment
Manager to cause purchase and sale transactions to be allocated among the Fund
and others whose assets it manages in such manner as it deems equitable. In
making such allocations among the Fund and other client accounts, the main
factors considered are the respective investment objectives, the relative size
of portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held and the
opinions of the persons responsible for managing the portfolios of the Fund and
other client accounts.
The policy of the Fund, regarding purchases and sales of securities for its
portfolio, is that primary consideration be given to obtaining the most
favorable prices and efficient execution of transactions. In seeking to
implement the Fund's policies, the Investment Manager effects transactions with
those brokers and dealers who the Investment Manager believes provide the most
favorable prices and are capable of providing efficient executions. If the
Investment Manager believes such price and executions are obtainable from more
than one broker or dealer, it may give consideration to placing portfolio
transactions with those brokers and dealers who also furnish research and other
services to the Fund or the Investment Manager. Such services may include, but
are not limited to, any one or more of the following: information as to the
availability of securities for purchase or sale; statistical or factual
information or opinions pertaining to investment; wire services; and appraisals
or evaluations of portfolio securities.
The information and services received by the Investment Manager from brokers
and dealers may be of benefit to the Investment Manager in the management of
accounts of some of its other clients and may not, in every case, benefit the
Fund directly. While the receipt of such information and services is useful in
varying degrees and would generally reduce the amount of research or services
otherwise performed by the Investment Manager and thereby reduce its expenses,
it is of indeterminable value and the Fund will not reduce the management fee it
pays to the Investment Manager by any amount that may be attributable to the
value of such services.
Pursuant to an order of the Securities and Exchange Commission, the Fund may
effect principal transactions in certain money market instruments with DWR. The
Fund will limit its transactions with DWR to U.S. Government and Government
Agency Securities, Bank Money Instruments (i.e. Certificates of Deposit and
Bankers' Acceptances) and Commercial Paper. Such transactions will be effected
with DWR only when the price available from DWR is better than that available
from other dealers.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may be
effected through DWR. In order for DWR to effect portfolio transactions for the
Fund, the commissions, fees or other remuneration received by DWR must be
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers in connection with comparable transactions involving similar
securities being purchased or sold on an exchange during a comparable period of
time. This standard would allow DWR to receive no more than the remuneration
which would be expected to be received by an unaffiliated broker in a
commensurate arms-length transaction. Furthermore, the Trustees of the Fund,
including a majority of the Trustees who are not "interested" Trustees, have
adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to DWR are consistent with the
foregoing standard.
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SPECIAL CONSIDERATIONS RELATING TO NEW YORK TAX-EXEMPT SECURITIES
During the mid-1970's, New York State (the "State"), some of its agencies,
instrumentalities and public benefit corporations (the "Authorities"), and
certain of its municipalities faced serious financial difficulties. To address
many of these financial problems, the State developed various programs, many of
which were successful in ameliorating the financial crisis. Any further
financial problems experienced by these Authorities or municipalities could have
a direct adverse effect on the New York Municipal Obligations in which the Fund
invests.
NEW YORK CITY
GENERAL. More than any other municipality, the fiscal health of New York
City (the "City") has a significant effect on the fiscal health of the State.
Over the past three years, the rate of economic growth in the City has slowed
substantially. During the 1990 and 1991 fiscal years, the City experienced
significant shortfalls in almost all of its major tax sources and increases in
services costs. Beginning in 1992, the improvement in the national economy
helped stabilize conditions in the City. The City now projects, and its current
four-year financial plan assumes, that the City's economy will continue to
improve during calendar year 1993 and that a modest employment recovery will
begin during the second half of the 1993 calendar year.
For each of the 1981 through 1992 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP") and the City's 1993 fiscal year results are projected to be
balanced in accordance with GAAP. The City was required to close substantial
budget gaps in its 1990, 1991 and 1992 fiscal years in order to maintain
balanced operating results. In order to achieve a balanced budget for the 1992
fiscal year, the City implemented various actions, including tax increases,
proposed service reductions and proposed productivity savings.
1994-1997 NEW YORK CITY FINANCIAL PLAN. The Mayor is responsible for
preparing the City's four-year financial plan. The City Council adopted a budget
for the City's 1994 fiscal year on June 14, 1993. On July 2, 1993 the Mayor
announced additional expenditure reductions in the amount of approximately $131
million for the City's 1994 fiscal year beyond those incorporated in the adopted
budget. Based on the adopted budget and the additional reductions, the City has
prepared a proposed financial plan for the 1994 through 1997 fiscal years (the
"1994-1997 Financial Plan", "Financial Plan" or "City Plan"), and is in the
process of preparing a more detailed financial plan, which will conform to the
Financial Plan and which the City expects to submit to the Control Board during
the first week of August, 1993. The 1994-1997 Financial Plan projects revenues
and expenditures for the 1994 fiscal year balanced in accordance with GAAP.
The City Plan sets forth actions to close a projected gap of approximately
$2.0 billion in the 1994 fiscal year. The gap-closing actions for the 1994
fiscal year include agency actions, including productivity savings and savings
from restructuring the delivery of City services; service reductions; the sale
of delinquent real property tax receivables; discretionary transfers from the
1993 fiscal year; reduced debt service costs, resulting from refinancings and
other actions; proposed increased Federal assistance; a proposed continuation of
the personal income tax surcharge; proposed increased State aid; and various
revenue actions.
The City Plan also sets forth projections for the 1995 through 1997 fiscal
years and outlines a proposed gap-closing program to close projected budget gaps
of $1.3 billion, $1.8 billion and $2.0 billion for the 1995 through 1997 years,
respectively. These projections take into account expected increases in Federal
and State assistance. Various actions proposed in the City Plan, including the
proposed continuation of the personal income tax surcharge and the proposed
increase in State aid, are subject to approval by the Governor and the State
Legislature, and the proposed increase in Federal aid is subject to approval by
Congress and the President. The State Legislature has failed to approve the
similar proposals for State assistance in previous sessions, thereby increasing
the uncertainty as to the
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receipt of the State assistance included in the City Plan. If these actions
cannot be implemented, the City will be required to take other actions to
decrease expenditures or increase revenues to maintain a balanced financial
plan.
The City Plan reflects certain cost and expenditure increases including
increases in salaries and benefits paid to City employees pursuant to certain
collective bargaining agreements and the costs associated with various lawsuits
in which the City has been named as a defendant. While the ultimate outcome and
fiscal impact, if any, of the proceedings and claims are not currently
predictable, adverse determination in certain of them might have a material
adverse effect upon the City's ability to carry out the City Plan.
RATINGS
As of August 12, 1993, Moody's rated the City's general obligation bonds
Baa1 and S&P rated such bonds A-. Such ratings reflect only the views of Moody's
and S&P, from which an explanation of the significance of such ratings may be
obtained. There is no assurance that such ratings will continue for any given
period of time or that they will be revised downward or withdrawn entirely. Any
such downward revision or withdrawal could have an adverse effect on the market
prices of bonds.
OUTSTANDING INDEBTEDNESS
As of June 30, 1993, the City and the Municipal Assistance Corporation for
the City of New York had, respectively, $19.624 billion and $4.470 billion of
outstanding net long-term debt.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. If the State experiences
revenue shortfalls or spending increases beyond its projections during its 1994
fiscal year or subsequent years, such developments could result in reductions in
anticipated State aid to the City. In addition, there can be no assurance that
State budgets in future fiscal years will be adopted by the April 1 statutory
deadline and that there will not be adverse effects on the City's cash flow and
additional City expenditures as a result of such delays.
The City's projections set forth in the City Plan are based on various
assumptions and contingencies which are uncertain and which may not materialize.
Changes in major assumptions could significantly affect the City's ability to
balance its budget as required by State law and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies include the timing of
any regional and local economic recovery, the impact on real estate tax revenues
of the current downturn in the real estate market, the absence of wage increases
for City employees in excess of the increases assumed in the City Plan,
employment growth, provision of State and Federal aid and mandate relief, State
legislative approval of future State budgets, adoption of City budgets by the
New York City Council, and approval by the Governor or the State Legislature of
various other actions proposed in the City Plan.
Implementation of the City Plan is also dependent upon the City's ability to
market its securities successfully in the public credit markets. The City's
financing program for fiscal years 1994 through 1997 contemplates the issuance
of $10.8 billion of general obligation bonds primarily to reconstruct and
rehabilitate the City's infrastructure and physical assets and to make capital
investments. In addition, the City issues revenue and tax anticipation notes to
finance its seasonal working capital requirements. The success of projected
public sales of City bonds and notes will be subject to prevailing market
conditions, and no assurance can be given that such sales will be completed. If
the City were unable to sell its general obligation bonds and notes, it would be
prevented from meeting its planned operating and capital expenditures.
The City Comptroller and other agencies and public officials have issued
reports and made public statements which, among other things, state that
projected revenues may be less and future expenditures may be greater than
forecast in the City Plan. In addition, the Control Board staff and others have
questioned whether the City has the capacity to generate sufficient revenues in
the future to meet the costs of its expenditure increases and to provide
necessary services. It is reasonable to expect that such reports and statements
will continue to be issued and to engender public comment.
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LITIGATION. The City is a defendant in a significant number of lawsuits.
Such litigation includes, but is not limited to, routine litigation incidental
to the performance of its governmental and other functions, actions commenced
and claims asserted against the City arising out of alleged constitutional
violations, alleged torts, alleged breaches of contracts and other violations of
law and condemnation proceedings and other tax and miscellaneous actions. While
the ultimate outcome and fiscal impact, if any, on the proceedings and claims
are not currently predictable, adverse determination in certain of them might
have a material adverse effect upon the City's ability to carry out the City
Plan. As of June 30, 1992, the City estimated its potential future liability on
account of all outstanding claims to be approximately $2.3 billion.
NEW YORK STATE
RECENT DEVELOPMENTS. The State has faced serious financial difficulties in
recent years. The effect of the national recession has been more severe in the
State than in other parts of the nation, and the 1993-94 New York State
Financial Plan (the "State Plan") is based on an economic projection that the
State will perform more poorly than the nation as a whole. Although real gross
domestic product grew modestly during calendar year 1992 and is expected to show
increased growth in calendar year 1993, preliminary data indicate that the
State's economy, as measured by employment, began to grow during the first part
of calendar year 1993. Many uncertainties exist in forecasts of both the
national and State economies, including consumer attitudes toward spending,
Federal financial and monetary policies, the availability of credit and the
condition of the world economy, which could have an adverse effect on the State.
There can be no assurance that the State economy will not experience
worse-than-predicted results in the 1993-94 fiscal year, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
1993-94 FISCAL YEAR. The State completed its 1993 fiscal year with a
cash-basis positive balance of $67.1 million in the State's General Fund (the
major operating fund of the State). The State's 1994 fiscal year budget, as
enacted, projects a balanced General Fund.
The State Plan projects General Fund receipts and transfers from other funds
at $32.367 billion and disbursements and transfers to other funds at $32.300
billion. Excess receipts of $67 million will be used for a required repayment to
the State's Tax Stabilization Reserve Fund. In comparison to the recommended
1993-94 Executive Budget, released by the Governor in early 1993, the 1993-94
State budget, as enacted, reflects increases in both receipts and disbursements
in the General Fund of $811 million. The $811 million increase in projected
receipts reflects many factors and assumptions, including (i) improving economic
conditions and higher-than-expected tax collections, (ii) improved 1992-93
results, (iii) additional payments from the Federal government to reimburse the
State for the cost of providing indigent medical care, (iv) the payment of
additional personal income tax refunds in the 1992-93 fiscal year which would
otherwise have been paid in fiscal year 1993-94; offset by revenue-raising
recommendations in the Executive Budget that were not enacted and thus are not
included in the State Plan. The $811 million increase in projected disbursements
reflects (i) an increase in projected school-aid payments, (ii) an increase in
projected payments for Medicaid assistance and other social service programs,
(iii) additional spending on the judiciary and criminal justice, (iv) a net
increase in projected disbursements for all other programs and purposes, and (v)
establishment of a new contingency reserve.
There can be no assurance that the State will not face substantial potential
budget gaps resulting from a significant disparity between tax revenues
projected from a lower recurring receipts base and the spending required to
maintain State programs at current levels. To address any potential budgetary
imbalance, the State may need to take significant actions to align recurring
receipts and disbursements in future fiscal years.
NEW YORK LOCAL GOVERNMENT ASSISTANCE CORPORATION. In 1990, as part of a
state fiscal reform program, legislation was enacted creating the New York Loan
Government Assistance Corporation ("LGAC"), a public benefit corporation
empowered to issue long-term obligations to fund certain
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payments to local governments traditionally funded through the State's annual
seasonal borrowing. The legislation empowered LGAC to issue bonds and notes in
an amount not in excess of $4.7 billion (exclusive of certain refunding bonds)
plus certain other amounts. Over a period of years, the issuance of those
long-term obligations, which will be amortized over no more than 30 years, is
expected to result in eliminating the need for continuing short-term seasonal
borrowing for those purposes. The legislation also imposed a cap on the annual
seasonal borrowing of the State at $4.7 billion, less net proceeds of bonds
issued by LGAC, except in cases where the Governor and the legislative leaders
have certified both the need for additional borrowing and provided a schedule
for reducing it to the cap. If borrowing above the cap is thus permitted in any
fiscal year, it is required by law to be reduced to the cap by the fourth fiscal
year after the limit was first exceeded. As of July 1, 1993, LGAC has issued its
bonds to provide net proceeds of approximately $3.680 billion. LGAC has been
authorized to issue its bonds to provide net proceeds of up to an additional
$703 million during the State's 1993-94 fiscal year.
COMPOSITION OF STATE CASH RECEIPTS AND DISBURSEMENTS. Substantially all
State non-pension financial operations are accounted for in the State's
governmental funds group, Governmental funds include the General Fund, which
receives all income not required by law to be deposited in another fund and
which for the State's 1993-94 fiscal year comprises approximately 52% of the
total projected governmental fund receipts; Special Revenue Funds, which receive
the preponderance of moneys received by the State from the Federal government
and other income the use of which is legally restricted to certain purposes and
which comprised approximately 39% of total projected governmental funds receipts
in the 1993-94 fiscal year; Capital Projects Funds, used to finance the
acquisition and construction of major capital facilities by the State and to aid
in certain of such projects conducted by local governments or public
authorities; and Debt Service Funds, which are used for the accumulation of
moneys for the payment of principal of and interest on long-term debt and to
meet lease-purchase and other contractual-obligation commitments. Receipts in
Capital Projects and Debt Service Funds comprise an aggregate of approximately
9% of total projected governmental funds receipts in the 1993-94 fiscal year.
A legislative change implemented in August 1990 affects the way in which a
portion of the State's sales and use tax collections are recorded as receipts in
the General Fund. Pursuant to the legislation creating LGAC, the Comptroller is
required to credit the equivalent of one percentage point of the four percent
sales and use tax collections to the Local Government Assistance Tax Fund (the
"Tax Fund"), which is a Debt Service Fund, for purposes of making payments to
LGAC to provide for the payment of debt service on its bonds and notes. To the
extent that these moneys are not necessary for payment to LGAC, they are
transferred from the Tax Fund to the General Fund and are reported to the
General Fund as a transfer from other funds, rather than as sales and use tax
receipts. During the State's 1991-92 and 1992-93 fiscal years $1.435 billion and
$1.504 billion, respectively, in sales and use tax receipts were credited to the
Tax Fund, and $1.527 billion is estimated to be credited to the Tax Fund during
the State's 1993-94 fiscal year. For the 1991-92 fiscal year, the amount
transferred to the General Fund from the Tax Fund was $1.316 billion, after
providing for the payment of $119 million to LGAC for the purpose of meeting
debt service on its bonds and its other cash requirements. For the 1992-93
fiscal year, $1.280 billion was transferred to the General Fund from the Tax
Fund after providing for payment of $224 million to LGAC for debt service and
other cash requirements, while $1.260 billion is estimated to be transferred in
1993-94, after payment of $267 million to LGAC for debt service and other cash
requirements.
The enacted 1993-94 Executive Budget includes several changes in the manner
in which General Fund tax receipts are recorded. Receipts from user taxes and
fees are reduced by approximately $377 million to reflect receipts that are
dedicated for highway and bridge capital purposes, which are to be deposited in
the Capital Projects Funds. Also, business taxes are reduced by approximately
$180 million to reflect tax receipts that are dedicated for transportation
purposes and which will be deposited in the Special Revenue and Capital Project
Funds.
AUTHORITIES. The fiscal stability of the State is related to the fiscal
stability of its Authorities, which generally have responsibility for financing,
constructing and operating revenue-producing public benefit facilities.
Authorities are not subject to the constitutional restrictions on the incurrence
of debt which
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apply to the State itself, and may issue bonds and notes within the amounts of,
and as otherwise restricted by, their legislative authorization. As of September
30, 1992, the latest data available, there were 18 Authorities that had
outstanding debt of $100 million or more. The aggregate outstanding debt,
including refunding bonds, of these 18 Authorities was $62.2 billion as of
September 30, 1992, of which approximately $8.2 billion was moral obligation
debt and approximately $17.1 billion was financed under lease-purchase or
contractual-obligation financing arrangements.
Authorities are generally supported by revenues generated by the projects
financed or operated, such as fares, user fees on bridges, highway tolls and
rentals for dormitory rooms and housing. In recent years, however, the State has
provided financial assistance through appropriations, in some cases of a
recurring nature, to certain of the 18 Authorities for operating and other
expenses and, in fulfillment of its commitments on moral obligation indebtedness
or otherwise, for debt service. This operating assistance is expected to
continue to be required in future years.
The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities to
obtain financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The New York
State Housing Finance Agency ("HFA") and the New York State Urban Development
Corporation ("UDC") have in the past required substantial amounts of assistance
from the State to meet debt service costs or to pay operating expenses. Further
assistance, possibly in increasing amounts, may be required for these, or other,
Authorities in the future. In addition, certain statutory arrangements provide
for State local assistance payments otherwise payable to localities to be made
under certain circumstances to certain Authorities. The State has no obligation
to provide additional assistance to localities whose local assistance payments
have been paid to Authorities under these arrangements. However, in the event
that such local assistance payments are so diverted, the affected localities
could seek additional State funds.
RATINGS. On June 6, 1990, Moody's changed its ratings on all the State's
outstanding general obligation bonds from A1 to A. On March 26, 1990, Standard &
Poor's changed its ratings of all of the State's outstanding general obligation
bonds from AA- to A. On January 13, 1992, Standard & Poor's changed its ratings
of all of the State's outstanding general obligation bonds from A to A-. Ratings
reflect only the respective views of such organizations, and an explanation of
the significance of such ratings must be obtained from the rating agency
furnishing the same. There is no assurance that a particular rating will
continue for any given period of time or that any such rating will not be
revised downward or withdrawn entirely if, in the judgment of the agency
originally establishing the rating, circumstances so warrant. A downward
revision or withdrawal of such ratings, or either of them, may have an effect on
the market price of the State Municipal Securities in which the New York Fund
invests.
GENERAL OBLIGATION DEBT. As of March 31, 1993, the State had approximately
$5.132 billion in general obligation bonds, excluding refunding bonds, and $294
million in bond anticipation notes outstanding. On May 4, 1993, the State issued
$850 million in tax and revenue anticipation notes which will mature on December
31, 1993. Principal and interest due on general obligation bonds and interest
due on bond anticipation notes and on tax and revenue anticipation notes were
$890.0 million and $818.8 million for the 1991-92 and 1992-93 fiscal years,
respectively, and are estimated to be $789.1 million for the State's 1993-94
fiscal year, not including interest on refunding bonds, issued in July 1992, to
the extent that such interest is to be paid from escrowed funds.
LITIGATION. The State is a defendant in numerous legal proceedings
pertaining to matters incidental to the performance of routine governmental
operations. Such litigation includes, but is not limited to, claims asserted
against the State arising from alleged torts, alleged breaches of contracts,
condemnation proceedings and other alleged violations of State and Federal laws.
Included in the State's outstanding litigation are a number of cases
challenging the constitutionality or the adequacy and effectiveness of a variety
of significant social welfare programs primarily involving the State's mental
hygiene programs. Adverse judgments in these matters generally could result in
injunctive relief coupled with prospective changes in patient care which could
require substantial
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increased financing of the litigated programs in the future. Because of the
prospective nature of these matters, no provision for this potential exposure
has been made in the State's audited financial statements for the 1991-92 fiscal
year.
As a result of the United States Supreme Court decision in the case of STATE
OF DELAWARE v. STATE OF NEW YORK, the State may be required to make certain
significant payments during the 1993-94 fiscal year or thereafter.
Adverse developments in any of these proceedings or the initiation of new
proceedings could affect the ability of the State to maintain a balanced State
Plan. In its audited financial statements for the 1991-92 fiscal year, the State
reported its estimated liability for awarded and anticipated unfavorable
judgments as $489 million.
OTHER LOCALITIES. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1993-94 fiscal year and thereafter. The potential impact on the
State of such actions by localities is not included in the projections of the
State receipts and disbursements in the State's 1993-94 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board for the City of Yonkers (the
"Yonkers Board") by the State of 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the Governor
or the State Legislature to assist Yonkers could result in allocation of State
resources in amounts that cannot yet be determined.
THE DISTRIBUTOR
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As discussed in the Prospectus, shares of the Fund are distributed by Dean
Witter Distributors Inc. (the "Distributor"), on a continuous basis. The
Distributor has entered into a selected dealer agreement with DWR, which through
its own sales organization sells shares of the Fund and may enter into selected
dealer agreements with other selected dealers ("Selected Broker-Dealers"). The
Distributor, a Delaware corporation, is a wholly-owned subsidiary of DWDC. The
Trustees who are not, and were not at the time they voted, interested persons of
the Fund, as defined in the Act (the "Independent Trustees"), at a meeting held
on October 30, 1992 approved the current Distribution Agreement appointing the
Distributor as exclusive distributor of the Fund's shares and providing for the
Distributor to bear distribution expenses not borne by the Fund. The
Distribution Agreement took effect on June 30, 1993 upon the spin-off by Sears,
Roebuck and Co. of its remaining shares of DWDC. By its terms, the Distribution
Agreement has an initial term ending April 30, 1994, and provides that it will
remain in effect from year to year thereafter if approved by the Board.
The Distributor bears all expenses incurred in providing services under the
Distribution Agreement. Such expenses include the payment of commissions for
sales of the Fund's shares and incentive compensation to account executives. The
Distributor also pays certain expenses in connection with the distribution of
the Fund's shares, including the costs of preparing, printing and distributing
advertising or promotional materials, and the costs of printing and distributing
prospectuses and supplements thereto used in connection with the offering and
sale of the Fund's shares to other than current shareholders. The Fund bears the
costs of initial typesetting, printing and distribution of prospectuses and
supplements thereto to shareholders. The Fund also bears the costs of
registering the Fund and its shares under federal and state securities laws. The
Fund and the Distributor have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
Under the Distribution Agreement, the Distributor uses its best efforts in
rendering services to the Fund, but in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations, the
Distributor is not liable to the Fund or any of its shareholders for any error
of judgment or mistake of law or for any act or omission or for any losses
sustained by the Fund or its shareholders.
PLAN OF DISTRIBUTION. To compensate the Distributor for the services
provided and for the expenses borne by the Distributor or any selected dealer
under the Distribution Agreement, the Fund has adopted
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a Plan of Distribution pursuant to Rule 12b-1 under the Act (the "Plan")
pursuant to which the Fund pays the Distributor compensation accrued daily and
payable monthly at the annual rate of 0.75% of the lesser of: (a) the average
daily aggregate gross sales of the Fund's shares since the inception of the Fund
(not including reinvestments of dividends or capital gains distributions), less
the average daily aggregate net asset value of the Fund's shares redeemed since
the Fund's inception upon which a contingent deferred sales charge has been
imposed or upon which such charge has been waived, or (b) the average daily net
assets of the Fund. An amount equal to 0.20% of the Fund's average annual net
assets of the fees payable by the Fund each year pursuant to the Plan of
Distribution is characterized as a "service fee" under the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. (of which the
Distributor is a member). Such fee is a payment made for personal service and/or
the maintenance of shareholder accounts. The remaining portion of the Plan of
Distribution fee payments made by the Fund is characterized as an "asset-based
sales charge" as such is defined by the aforementioned Rules of Fair Practice.
The Distributor also receives the proceeds of contingent deferred sales charges
imposed on certain redemptions of shares, which are separate and apart from
payments made pursuant to the Plan (see "Redemptions and Repurchases --
Contingent Deferred Sales Charge" in the Prospectus). The Distributor has
informed the Fund that it and/or DWR received contingent deferred sales charges
on redemptions of the Fund's shares in the approximate amounts of $248,000,
$214,000 and $244,000, for the fiscal years ended December 31, 1991, 1992 and
1993, respectively. (see "Redemptions and Repurchases -- Contingent Deferred
Sales Charge" in the Prospectus).
The Plan was adopted by a majority vote of the Board of Trustees, including
all of the Trustees of the Fund who are not "interested persons" of the Fund (as
defined in the Act) and who have no direct or indirect financial interest in the
operation of the Plan (the "Independent 12b-1 Trustees"), cast in person at a
meeting called for the purpose of voting on the Plan, on February 13, 1985, by
the then sole shareholder of the Fund on March 20, 1985, and by the shareholders
holding a majority, as defined in the Act, of the outstanding voting securities
of the Fund at a Meeting of Shareholders of the Fund held on April 29, 1986.
Under its terms, the Plan had an initial term ending December 31, 1985, and
provides that it will remain in effect from year to year thereafter, provided
such continuance is approved annually by a vote of the Trustees in the manner
described above.
Continuation of the Plan for one year, until April 30, 1993, was approved by
the Board of Trustees of the Fund, including a majority of the Independent 12b-1
Trustees, at a Board meeting held on April 29, 1992. Prior to approving the
continuation of the Plan, the Board requested and received from DWR and reviewed
all the information which it deemed necessary to arrive at an informed
determination. In making their determination to continue the Plan, the Trustees
considered: (1) the Fund's experience under the Plan and whether such experience
indicates that the Plan is operating as anticipated; (2) the benefits the Fund
had obtained, was obtaining and would be likely to obtain under the Plan; and
(3) what services had been provided and were continuing to be provided under the
Plan by the Distributor to the Fund and its shareholders. Based upon their
review, the Trustees of the Fund, including each of the Independent 12b-1
Trustees, determined that continuation of the Plan would be in the best interest
of the Fund and would have a reasonable likelihood of continuing to benefit the
Fund and its shareholders. This determination was based upon the conclusion of
the Trustees that the Plan provides an effective means of stimulating sales of
shares of the Fund and of reducing or avoiding net redemptions and the
potentially adverse effects that may occur therefrom. In the Trustees' quarterly
review of the Plan, they will consider its continued appropriateness and the
level of compensation provided therein.
At their meeting held on October 30, 1992, the Trustees of the Fund,
including all of the Independent 12b-1 Trustees, approved certain amendments to
the Plan which took effect in January, 1993 and were designed to reflect the
fact that upon the reorganization described above the share distribution
activities theretofore performed for the Fund by DWR were assumed by the
Distributor and DWR's sales activities are now being performed pursuant to the
terms of a selected dealer agreement between the Distributor and DWR. The
amendments provide that payments under the Plan will be made to the Distributor
rather than to DWR as before the amendment, and that the Distributor in turn is
authorized to
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<PAGE>
make payments to DWR, its affiliates or other selected broker-dealers (or direct
that the Fund pay such entities directly). The Distributor is also authorized to
retain part of such fee as compensation for its own distribution-related
expenses.
Under the Plan and as required by Rule 12b-1, the Trustees receive and
review promptly after the end of each calendar quarter a written report provided
by the Distributor of the amounts expended under the Plan and the purpose for
which such expenditures were made. The Fund accrued amounts payable to DWR under
the Plan, during the fiscal year ended December 31, 1993, of $1,425,215. This
amount is equal to payments required to be paid monthly by the Fund which were
computed at the annual rate of 0.62% of the average daily net assets of the
Fund's shares. This amount is treated by the Fund as an expense in the year it
is accrued.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method shares of the Fund are
sold without a sales load being deducted at the time of purchase, so that the
full amount of an investor's purchase payment will be invested in shares without
any deduction for sales charges. Shares of the Fund may be subject to a
contingent deferred sales charge, payable to the Distributor, if redeemed during
the six years after their purchase. DWR compensates its account executives by
paying them, from its own funds, commissions for the sale of the Fund's shares,
currently a gross sales credit of up to 4% of the amount sold and an annual
gross residual of up to .20 of 1% of the current value of the respective
accounts for which they are the account executives of record and for which they
provide personal service and/or the maintenance of such accounts. The gross
sales credit is a charge which reflects commissions paid to account executives
and Fund associated distribution-related expenses, including sales compensation,
and overhead and other branch office distribution-related expenses including (a)
the expenses of operating DWR's branch offices in connection with the sale of
Fund shares, including lease costs, the salaries and employee benefits of
operations and sales support personnel, utility costs, communications costs and
the costs of stationery and supplies, (b) the costs of client sales seminars,
(c) travel expenses of mutual fund sales coordinators to promote the sale of
Fund shares and (d) other expenses relating to branch promotion of Fund sales.
The distribution fee that the Distributor receives from the Fund under the Plan,
in effect, offsets distribution expenses incurred on behalf of the Fund and its
opportunity costs, such as the gross sales credit and an assumed interest charge
thereon ("carrying charge"). In the Distributor's reporting of its distribution
expenses to the Fund, such assumed interest (computed at the "broker's call
rate") has been calculated on the gross sales credit as it is reduced by amounts
received by the Distributor under the Plan and any contingent deferred sales
charges received by the Distributor upon redemption of shares of the Fund. No
other interest charge is included as a distribution expense in the Distributor's
calculation of its distribution costs for this purpose. The broker's call rate
is the interest rate charged to securities brokers on loans secured by
exchange-listed securities.
The Fund paid 100% of the $1,425,215 accrued under the Plan for the fiscal
year ended December 31, 1993 to the Distributor of the Fund's shares. The
Distributor and DWR estimate that they have spent $15,981,227, pursuant to the
Plan, on behalf of the Fund since the inception of the Fund. It is estimated
that this amount was spent in approximately the following ways: (i) 10.33%
($1,650,339) -- advertising and promotional expenses; (ii) 1.23% ($196,559) --
printing of prospectuses for distribution to other than current shareholders;
and (iii) 88.44% ($14,134,329) -- other expenses, including the gross sales
credit and the carrying charge, of which 10.76% ($1,520,275) represents carrying
charges, 36.33% ($5,135,181) represents commission credits to DWR branch offices
for payments of commissions to account executives and 52.91% ($7,478,873)
represents overhead and other branch office distribution-related expenses.
At any given time, expenses may be incurred in distributing shares of the
Fund which may be more or less than the total of (i) the payments made by the
Fund pursuant to the Plan and (ii) the proceeds of contingent deferred sales
charges paid by investors upon redemption of shares. The Distributor has advised
the Fund that such excess amount, including the carrying charge designed to
approximate the opportunity costs incurred which arise from it having advanced
monies without having received the amount of any sales charges imposed at the
time of sale of the Fund's shares, totalled $4,739,785 as of
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December 31, 1993. Because there is no requirement under the Plan that the
Distributor be reimbursed for all its expenses or any requirement that the Plan
be continued from year to year, this excess amount does not constitute a
liability of the Fund. Although there is no legal obligation for the Fund to pay
expenses incurred by the Distributor in excess of payments made to it under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
Any cumulative expenses incurred by the Distributor, but not yet recovered
through distribution fees or contingent deferred sales charges, may or may not
be recovered through future distribution fees or contingent deferred sales
charges.
No interested person of the Fund nor any Trustee of the Fund who is not an
interested person of the Fund, as defined in the Act, has any direct financial
interest in the operation of the Plan except to the extent that the Distributor
or certain of its employees may be deemed to have such an interest as a result
of benefits derived from the successful operation of the Plan or as a result of
receiving a portion of the amounts expended thereunder by the Fund.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of the
Fund, and all material amendments to the Plan must also be approved by the
Trustees in the manner described above. The Plan may be terminated at any time,
without payment of any penalty, by vote of a majority of the Independent 12b-1
Trustees or by a vote of a majority of the outstanding voting securities of the
Fund (as defined in the Act) on not more than thirty days' written notice to any
other party to the Plan. So long as the Plan is in effect, the election and
nomination of Independent 12b-1 Trustees shall be committed to the discretion of
the Independent 12b-1 Trustees.
DETERMINATION OF NET ASSET VALUE
As discussed in the Prospectus, portfolio securities (other than short-term
debt securities and futures and options) are valued for the Fund by an outside
independent pricing service approved by the Board of Trustees. The pricing
service has informed the Fund that in valuing the Fund's portfolio securities it
uses both a computerized grid matrix of tax-exempt securities and evaluations by
its staff, in each case based on information concerning market transactions and
quotations from dealers which reflect the bid side of the market each day. The
Fund's portfolio securities are thus valued by reference to a combination of
transactions and quotations for the same or other securities believed to be
comparable in quality, coupon, maturity, type of issue, call provisions, trading
characteristics and other features deemed to be relevant. The Board of Trustees
believes that timely and reliable market quotations are generally not readily
available to the Fund for purposes of valuing tax-exempt securities and that the
valuations supplied by the pricing service, using the procedures outlined above
and subject to periodic review, are more likely to approximate the fair value of
such securities. The net asset value of shares of the Fund is not calculated on
such federal and non-federal holidays as are observed by the New York Stock
Exchange. The New York Stock Exchange currently observes the following holidays:
New Year's Day; Presidents' Day; Good Friday; Memorial Day; Independence Day;
Labor Day; Thanksgiving Day; and Christmas Day.
The Investment Manager will periodically review and evaluate the procedures,
methods and quality of services provided by the pricing service then being used
by the Fund and may, from time to time, recommend to the Board of Trustees the
use of other pricing services or discontinuance of the use of any pricing
service in whole or part. The Board may determine to approve such recommendation
or to make other provisions for pricing of the Fund's portfolio securities.
Short-term taxable debt securities with 60 days or less remaining to maturity at
time of purchase are valued at amortized cost, unless the Board determines such
does not reflect the securities' fair value, in which case these securities will
be valued at their fair value as determined by the Board of Trustees. Other
short-term taxable debt securities will be valued on a mark to market basis
until such time as they have a remaining maturity of 60 days, whereupon they
will be valued at amortized cost using their value on the 61st day unless the
Trustees determine such value does not reflect the securities' fair value, in
which case these securities will be
26
<PAGE>
valued at their fair market value as determined by the Trustees. Listed options
on debt securities are valued at the latest sale price on the exchange on which
they are listed unless no sales of such options have taken place that day, in
which case, they will be valued at the mean between their closing bid and asked
prices. Unlisted options on debt securities are valued at the mean between the
latest bid and asked price. Futures contracts and options thereon which are
traded on commodities exchanges are valued at their latest sale price on such
commodities exchanges unless the Trustees determine that such price does not
reflect their market value, in which case they will be valued at their fair
value as determined by the Trustees. All other securities, including illiquid
securities, and other assets are valued at their fair value as determined in
good faith under procedures established by and under the supervision of the
Board of Trustees.
SHAREHOLDER SERVICES
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Upon the purchase of shares of the Fund, a Shareholder Investment Account is
opened for the investor on the books of the Fund and maintained by the Fund's
Transfer Agent, Dean Witter Trust Company (the "Transfer Agent"). This is an
open account in which shares owned by the investor are credited by the Transfer
Agent in lieu of issuance of a share certificate. If a share certificate is
desired, it must be requested in writing for each transaction. Certificates are
issued only for full shares and may be redeposited in the account at any time.
There is no charge to the investor for issuance of a certificate. Whenever a
shareholder instituted transaction takes place in the Shareholder Investment
Account, the shareholder will be mailed a statement reflecting the status of
such Account.
AUTOMATIC INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. As stated in the
Prospectus, all income dividends and capital gains distributions are
automatically paid in full and fractional shares of the Fund, unless the
shareholder requests that they be paid in cash. Each purchase of shares of the
Fund is made upon the condition that the Transfer Agent is thereby automatically
appointed as agent of the investor to receive all dividends and capital gains
distributions on shares owned by the investor. Such dividends and distributions
will be paid, at the net asset value per share, in shares of the Fund (or in
cash if the shareholder so requests) as of the close of business on the monthly
payment date, as stated in the Prospectus. At any time an investor may request
the Transfer Agent, in writing, to have subsequent dividends and/or capital
gains distributions paid to him or her in cash rather than shares. To assure
sufficient time to process the change, such request should be received by the
Transfer Agent at least five business days prior to the payment date of the
dividend or the record date of the distribution. In the case of recently
purchased shares for which registration instructions have not been received on
the payment or record date, cash payments will be made to DWR or other selected
broker-dealer, and will be forwarded to the shareholder, upon the receipt of
proper instructions.
TARGETED DIVIDENDS.-SM- In states where it is legally permissible,
shareholders may also have all income dividends and capital gains distributions
automatically invested in shares of an open-end Dean Witter Fund other than Dean
Witter Tax-Exempt Securities Trust. Such investment will be made as described
above for automatic investment in shares of the Fund, at the net asset value per
share (without sales charge) of the selected Dean Witter Fund as of the close of
business on the monthly payment date and will begin to earn dividends, if any,
in the selected Dean Witter Fund the next business day. To participate in the
Targeted Dividends program, shareholders should contact their DWR or other
selected broker-dealer account executive or the Transfer Agent. Shareholders of
the Fund must be shareholders of the Dean Witter Fund targeted to receive
investments from dividends at the time they enter the Targeted Dividends
program. Investors should review the prospectus of the targeted Dean Witter Fund
before entering the program.
EASYINVEST.-SM- Shareholders may subscribe to EasyInvest, an automatic
purchase plan which provides for any amount from $100 to $5,000 to be
transferred automatically from a checking or savings account, on a semi-monthly,
monthly or quarterly basis, to the Transfer Agent for investment in shares of
the Fund. Shares purchased through EasyInvest will be added to the shareholder's
existing account at
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the net asset value calculated the same business day the transfer of funds is
effected. For further information or to subscribe to EasyInvest, shareholders
should contact their DWR or other selected broker-dealer account executive or
the Transfer Agent.
INVESTMENT OF DIVIDENDS OR DISTRIBUTIONS RECEIVED IN CASH. Any shareholder
who receives a cash payment representing a dividend or capital gains
distribution may invest such dividend or distribution at net asset value,
without the imposition of a contingent deferred sales charge upon redemption, by
returning the check or the proceeds to the Transfer Agent within 30 days after
the payment date. If the shareholder returns the proceeds of a dividend or
distribution, such funds must be accompanied by a signed statement indicating
that the proceeds constitute a dividend or distribution to be invested. Such
investment will be made at the net asset value per share next determined after
receipt of the check or proceeds by the Transfer Agent.
DIRECT INVESTMENTS THROUGH TRANSFER AGENT. As discussed in the Prospectus,
a shareholder may make additional investments in Fund shares at any time through
the Shareholder Investment Account by sending a check in any amount, not less
than $100, payable to Dean Witter New York Tax-Free Income Fund, directly to the
Fund's Transfer Agent. Such amounts will be applied to the purchase of Fund
shares at the net asset value per share next computed after receipt of the check
or purchase payment by the Transfer Agent. The shares so purchased will be
credited to the investor's account.
SYSTEMATIC WITHDRAWAL PLAN. As discussed in the Prospectus, a systematic
withdrawal plan (the "Withdrawal Plan") is available for shareholders who own or
purchase shares of the Fund having a minimum value of $10,000 based upon the
then current net asset value. The Withdrawal Plan provides for monthly or
quarterly (March, June, September and December) checks in any dollar amount, not
less than $25 or in any whole percentage of the account balance, on an
annualized basis. Any applicable contingent deferred sales charge will be
imposed on shares redeemed under the Withdrawal Plan (see "Redemptions and
Repurchases -- Contingent Deferred Sales Charge" in the Prospectus). Therefore,
any shareholder participating in the Withdrawal Plan will have sufficient shares
redeemed from his or her account so that the proceeds (net of any applicable
contingent deferred sales charge) to the shareholder will be the designated
monthly or quarterly dollar amount.
The Transfer Agent acts as agent for the shareholder in tendering to the
Fund for redemption sufficient full and fractional shares to provide the amount
of the periodic withdrawal payment designated in the application. The shares
will be redeemed at their net asset value determined, at the shareholder's
option, on the tenth or twenty-fifth day (or next following business day) of the
relevant month or quarter and normally a check for the proceeds will be mailed
by the Transfer Agent, or amounts credited to a shareholder's DWR or other
selected broker-dealer account, within five business days after the date of
redemption. The Withdrawal Plan may be terminated at any time by the Fund.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted.
Each withdrawal constitutes a redemption of shares and any gain or loss
realized must be recognized for federal income tax purposes. Although the
shareholder may make additional investments of $2,500 or more under the
Withdrawal Plan, withdrawals made concurrently with purchases of additional
shares may be inadvisable because of the contingent deferred sales charge
applicable to the redemption of shares purchased during the preceding six years
(see "Redemption and Repurchases -- Contingent Deferred Sales Charge").
Any shareholder who wishes to have payments under the Withdrawal Plan made
to a third party or sent to an address other than the one listed on the account
must send complete written instructions to the Transfer Agent to enroll in the
Withdrawal Plan. The shareholder's signature on such instructions must be
guaranteed by an eligible guarantor acceptable to the Transfer Agent
(shareholders should contact the Transfer Agent for a determination as to
whether a particular institution is such an eligible guarantor). A shareholder
may, at any time, change the amount and interval of withdrawal payments
28
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through his or her DWR or other Selected Dealer Account Executive or by written
notification to the Transfer Agent. In addition, the party and/or the address to
which checks are mailed may be changed by written notification to the Transfer
Agent, with signature guarantees required in the manner described above. The
shareholder may also terminate the Withdrawal Plan at any time by written notice
to the Transfer Agent. In the event of such termination, the account will be
continued as a regular shareholder investment account. The shareholder may also
redeem all or part of the shares held in the Withdrawal Plan account (see
"Redemptions and Repurchases" in the Prospectus) at any time.
EXCHANGE PRIVILEGE. As discussed in the Prospectus, the Fund makes
available to its shareholders an Exchange Privilege whereby shareholders of the
Fund may exchange their shares for shares of other Dean Witter Funds sold with a
contingent deferred sales charge ("CDSC funds"), and for shares of Dean Witter
Short-Term U.S. Treasury Trust, Dean Witter Limited Term Municipal Trust and
Dean Witter Short-Term Bond Fund and for shares of any Dean Witter money market
funds (the foregoing eight non-FESC or CDSC funds are hereinafter referred to
for purposes of this section as the "Exchange Funds"). Exchanges may be made
after the shares of the Fund acquired by purchase (not by exchange or dividend
reinvestment) have been held for 30 days. There is no waiting period for
exchanges of shares acquired by exchange or dividend reinvestment. An exchange
will be treated for federal income tax purposes the same as a repurchase or
redemption of shares, on which the shareholder may realize a capital gain or
loss.
Any new account established through the Exchange Privilege will have the
same registration and cash dividend or dividend reinvestment plan as the present
account, unless the Transfer Agent receives written notification to the
contrary. For telephone exchanges, the exact registration of the existing
account and the account number must be provided.
Any shares held in certificate form cannot be exchanged but must be
forwarded to the Transfer Agent and deposited into the shareholder's account
before being eligible for exchange. (Certificates mailed in for deposit should
not be endorsed.)
As described below, and in the Prospectus under the captions "Exchange
Privilege" and "Contingent Deferred Sales Charge", a contingent deferred sales
charge ("CDSC") may be imposed upon a redemption, depending on a number of
factors, including the number of years from the time of purchase until the time
of redemption or exchange ("holding period"). When shares of the Fund or any
other CDSC fund are exchanged for shares of the Exchange Funds, the exchange is
executed at no charge to the shareholder, without the imposition of the CDSC at
the time of the exchange. During the period of time the shareholder remains in
the Exchange Funds (calculated from the last day of the month in which the fund
shares were acquired), the holding period or "year since purchase payment made"
is frozen. When shares are redeemed out of the Exchange Funds, they will be
subject to a CDSC which would be based upon the period of time the shareholder
held shares in a CDSC fund. However, in the case of shares exchanged into the
Exchange Funds on or after April 23, 1990, upon a redemption of shares which
results in a CDSC being imposed, a credit (not to exceed the amount of the CDSC)
will be given in an amount equal to the the Exchange Funds 12b-1 distribution
fees incurred on or after that date which are attributable to those shares.
Shareholders acquiring shares of the Exchange Funds pursuant to this exchange
privilege may exchange those shares back into a CDSC fund from the Exchange
Funds with no CDSC being imposed on such exchange. The holding period previously
frozen when shares were first exchanged for shares of the Exchange Funds resumes
on the last day of the month in which shares of a CDSC fund are reacquired. A
CDSC is imposed only upon an ultimate redemption, based upon the time
(calculated as described above) the shareholder was invested in a CDSC fund.
In addition, shares of the Fund may be acquired in exchange for shares of
Dean Witter Funds sold with a front-end sales charge ("front-end sales charge
funds"), but shares of the Fund, however acquired, may not be exchanged for
shares of front-end sales charge funds. Shares of a CDSC fund acquired in
exchange for shares of a front-end sales charge fund (or in exchange for shares
of other Dean Witter Funds for which shares of a front-end sales charge fund
have been exchanged) are not subject to any CDSC upon their redemption.
29
<PAGE>
When shares initially purchased in a CDSC fund are exchanged for shares of
another CDSC fund, or for shares of the Exchange Funds, the date of purchase of
the shares of the fund exchanged into, for purposes of the CDSC upon redemption,
will be the last day of the month in which the shares being exchanged were
originally purchased. In allocating the purchase payments between funds for
purposes of the CDSC the amount which represents the current net asset value of
shares at the time of the exchange which were (i) purchased more than three or
six years prior to the exchange, (ii) originally acquired through reinvestment
of dividends or distributions and (iii) acquired in exchange for shares of
front-end sales charge funds, or for shares of other Dean Witter Funds for which
shares of front-end sales charge funds have been exchanged (all such shares
called "Free Shares"), will be exchanged first. Shares of Dean Witter American
Value Fund (formerly Dean Witter Industry-Valued Securities Inc.) acquired prior
to April 30, 1984, shares of Dean Witter Dividend Growth Securities Inc. and
Dean Witter Natural Resource Development Securities Inc. acquired prior to July
2, 1984, and shares of Dean Witter Strategist Fund acquired prior to November 8,
1989, are also considered Free Shares and will be the first Free Shares to be
exchanged. After an exchange, all dividends earned on shares in the Exchange
Funds will be considered Free Shares. If the exchanged amount exceeds the value
of such Free Shares, an exchange is made, on a block-by-block basis, of non-Free
Shares held for the longest period of time (except that if shares held for
identical periods of time but subject to different CDSC schedules are held in
the same Exchange Privilege account, the shares of that block that are subject
to a lower CDSC rate will be exchanged prior to the shares of that block that
are subject to a higher CDSC rate). Shares equal to any appreciation in the
value of non-Free Shares exchanged will be treated as Free Shares, and the
amount of the purchase payments for the non-Free Shares of the fund exchanged
into will be equal to the lesser of (a) the purchase payments for, or (b) the
current net asset value of, the exchanged non-Free Shares. If an exchange
between funds would result in exchange of only part of a particular block of
non-Free Shares, then shares equal to any appreciation in the value of the block
(up to the amount of the exchange) will be treated as Free Shares and exchanged
first, and the purchase payment for that block will be allocated on a pro rata
basis between the non-Free Shares of that block to be retained and the non-Free
Shares to be exchanged. The prorated amount of such purchase payment
attributable to the retained non-Free Shares will remain as the purchase payment
for such shares, and the amount of purchase payment for the exchanged non-Free
Shares will be equal to the lesser of (a) the prorated amount of the purchase
payment for, or (b) the current net asset value of, those exchanged non-Free
Shares. Based upon the procedures described in the Prospectus under the caption
"Contingent Deferred Sales Charge", any applicable CDSC will be imposed upon the
ultimate redemption of shares of any fund, regardless of the number of exchanges
since those shares were originally purchased.
The Transfer Agent acts as agent for shareholders of the Fund in effecting
redemptions of Fund shares and in applying the proceeds to the purchase of other
fund shares. In the absence of negligence on its part, neither the Transfer
Agent nor the Fund shall be liable for any redemption of Fund shares caused by
unauthorized telephone instructions. Accordingly, in such event the investor
shall bear the risk of loss. The Staff of the Securities and Exchange Commission
is currently considering the propriety of such policies.
With respect to the redemption or repurchase of shares of the Fund, the
application of proceeds to the purchase of new shares in the Fund or any other
of the funds and the general administration of the Exchange Privilege, the
Transfer Agent acts as agent for the Distributor and for the shareholder's
Selected Broker-Dealer, if any, in the performance of such functions. With
respect to exchanges, redemptions or repurchases, the Transfer Agent shall be
liable for its own negligence and not for the default or negligence of its
correspondents or for losses in transit. The Fund shall not be liable for any
default or negligence of the Transfer Agent, the Distributor or any Selected
Broker-Dealer. The Distributor and any Selected Broker-Dealer have authorized
and appointed the Transfer Agent to act as their agent in connection with the
application of proceeds of any redemption of Fund shares to the purchase of
shares of any other fund and the general administration of the Exchange
Privilege. No commission or discounts will be paid to the Distributor or any
Selected Broker-Dealer for any transactions pursuant to this Exchange Privilege.
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<PAGE>
Exchanges are subject to the minimum investment requirement and any other
conditions imposed by each fund. (The minimum initial investment is $5,000 for
Dean Witter/Sears Liquid Asset Fund Inc., Dean Witter Tax-Free Daily Income
Trust, Dean Witter New York Municipal Money Market Fund and Dean Witter
California Tax-Free Daily Income Trust although those funds may, at their
discretion, accept initial investments of as low as $1,000. The minimum initial
investment is $10,000 for Dean Witter Short-Term U.S. Treasury Trust. The
minimum initial investment for all other Dean Witter Funds for which the
Exchange Privilege is available is $1,000.) Upon exchange into a money market
fund, the shares of that fund will be held in a special Exchange Privilege
Account separately from accounts of those shareholders who have acquired their
shares directly from that fund. As a result, certain services normally available
to shareholders of money market funds, including the check writing feature, will
not be available for funds held in that account.
The Fund and each of the other Dean Witter Funds may limit the number of
times this Exchange Privilege may be exercised by any investor within a
specified period of time. Also, the Exchange Privilege may be terminated or
revised at any time by the Fund and/or any of the Dean Witter Funds for which
shares of the Fund have been exchanged, upon such notice as may be required by
applicable regulatory agencies (presently sixty days prior written notice for
termination or material revision), provided that six months prior written notice
of termination will be given to the shareholders who hold shares of the Exchange
Funds pursuant to this Exchange Privilege and provided further that the Exchange
Privilege may be terminated or materially revised without notice at times (a)
when the New York Stock Exchange is closed for other than customary weekends and
holidays, (b) when trading on that Exchange is restricted, (c) when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, (d) during any other period
when the Securities and Exchange Commission by order so permits (provided that
applicable rules and regulations of the Securities and Exchange Commission shall
govern as to whether the conditions prescribed in (b) or (c) exist) or (e) if
the Fund would be unable to invest amounts effectively in accordance with its
investment objective, policies and restrictions.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain a copy and examine it carefully
before investing. An exchange will be treated for federal income tax purposes
the same as a repurchase or redemption of shares, on which the shareholder may
realize a capital gain or loss. However, the ability to deduct capital losses on
an exchange may be limited in situations where there is an exchange of shares
within ninety days after the shares are purchased. The Exchange Privilege is
only available in states where an exchange may legally be made.
For further information regarding the Exchange Privilege, shareholders
should contact their DWR or other Selected Broker-Dealer account executive or
the Transfer Agent.
REDEMPTIONS AND REPURCHASES
- --------------------------------------------------------------------------------
REDEMPTION. As stated in the Prospectus, shares of the Fund can be redeemed
for cash at any time at the net asset value per share next determined; however,
such redemption proceeds may be reduced by the amount of any applicable
contingent deferred sales charge (see below). If shares are held in a
shareholder's account without a share certificate, a written request for
redemption to the Fund's Transfer Agent at P.O. Box 983, Jersey City, NJ 07303
is required. If certificates are held by the shareholder, the shares may be
redeemed by surrendering the certificates with a written request for redemption.
The share certificate, or an accompanying stock power, and the request for
redemption, must be signed by the shareholder or shareholders exactly as the
shares are registered. Each request for redemption, whether or not accompanied
by a share certificate, must be sent to the Fund's Transfer Agent, which will
redeem the shares at their net asset value next computed (see "Purchase of Fund
Shares" in the Prospectus) after it receives the request, and certificate, if
any, in good order. Any redemption request received after such computation will
be redeemed at the next determined net asset
31
<PAGE>
value. The term "good order" means that the share certificate, if any, and
request for redemption are properly signed, accompanied by any documentation
required by the Transfer Agent, and bear signature guarantees when required by
the Fund or the Transfer Agent. If redemption is requested by a corporation,
partnership, trust or fiduciary, the Transfer Agent may require that written
evidence of authority acceptable to the Transfer Agent be submitted before such
request is accepted.
Whether certificates are held by the shareholder or shares are held in a
shareholder's account, if the proceeds are to be paid to any person other than
the record owner, or if the proceeds are to be paid to a corporation (other than
the Distributor or a selected broker-dealer for the account of the shareholder),
partnership, trust or fiduciary, or sent to the shareholder at an address other
than the registered address, signatures must be guaranteed by an eligible
guarantor acceptable to the Transfer Agent (shareholders should contact the
Transfer Agent for a determination as to whether a particular institution is
such an eligible guarantor). A stock power may be obtained from any dealer or
commercial bank. The Fund may change the signature guarantee requirements from
time to time upon notice to shareholders, which may be by means of a revised
prospectus.
CONTINGENT DEFERRED SALES CHARGE. As stated in the Prospectus, a contingent
deferred sales charge ("CDSC") will be imposed on any redemption by an investor
if after such redemption the current value of the investor's shares of the Fund
is less than the dollar amount of all payments by the shareholder for the
purchase of Fund shares during the preceding six years. However, no CDSC will be
imposed to the extent that the net asset value of the shares redeemed does not
exceed: (a) the current net asset value of shares purchased more than six years
prior to the redemption, plus (b) the current net asset value of shares
purchased through reinvestment of dividends or distributions of the Fund or
another Dean Witter Fund (see "Shareholder Services -- Targeted Dividends"),
plus (c) the current net asset value of shares acquired in exchange for (i)
shares of Dean Witter front-end sales charge funds, or (ii) shares of other Dean
Witter Funds for which shares of front-end sales charge funds have been
exchanged (see "Shareholder Services -- Exchange Privilege"), plus (d) increases
in the net asset value of the investor's shares above the total amount of
payments for the purchase of Fund shares made during the preceding six years.
The CDSC will be paid to the Distributor.
In determining the applicability of the CDSC to each redemption, the amount
which represents an increase in the net asset value of the investor's shares
above the amount of the total payments for the purchase of shares within the
past six years will be redeemed first. In the event the redemption amount
exceeds such increase in value, the next portion of the amount redeemed will be
the amount which represents the net asset value of the investor's shares
purchased more than six years prior to the redemption and/or shares purchased
through reinvestment of dividends or distributions and/or shares acquired in
exchange for shares of Dean Witter front-end sales charge funds or for shares of
other Dean Witter funds for which shares of front-end sales charge funds have
been exchanged. A portion of the amount redeemed which exceeds an amount which
represents both such increase in value and the value of shares purchased more
than six years prior to the redemption and/or shares purchased through
reinvestment of dividends or distributions and/or shares acquired in the
above-described exchanges will be subject to a CDSC.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Fund shares until the time of
redemption of such shares. For purposes of
32
<PAGE>
determining the number of years from the time of any payment for the purchase of
shares, all payments made during a month will be aggregated and deemed to have
been made on the last day of the month. The following table sets forth the rates
of the CDSC:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR SINCE SALES CHARGE AS A
PURCHASE PERCENTAGE OF
PAYMENT MADE AMOUNT REDEEMED
- ------------------------------------------------------------------------------- -----------------------
<S> <C>
First.......................................................................... 5.0%
Second......................................................................... 4.0%
Third.......................................................................... 3.0%
Fourth......................................................................... 2.0%
Fifth.......................................................................... 2.0%
Sixth.......................................................................... 1.0%
Seventh and thereafter......................................................... None
</TABLE>
In determining the rate of the CDSC, it will be assumed that a redemption is
made of shares held by the investor for the longest period of time within the
applicable six-year period. This will result in any such CDSC being imposed at
the lowest possible rate. Accordingly, shareholders may redeem, without
incurring any CDSC, amounts equal to any net increase in the value of their
shares above the amount of their purchase payments made within the past six
years and amounts equal to the current value of shares purchased more than six
years prior to the redemption and shares purchased through reinvestment of
dividends or distributions or acquired in exchange for shares of Dean Witter
front-end sales charge funds, or for shares of other Dean Witter Funds for which
shares of front-end sales charge funds have been exchanged. The CDSC will be
imposed, in accordance with the table shown above, on any redemptions within six
years of purchase which are in excess of these amounts and which redemptions are
not (a) requested within one year of death or initial determination of
disability of a shareholder, or (b) made pursuant to certain taxable
distributions from retirement plans or retirement accounts, as described in the
Prospectus.
PAYMENT FOR SHARES REDEEMED OR REPURCHASED. As discussed in the Prospectus,
payment for shares presented for repurchase or redemption will be made by check
within seven days after receipt by the Transfer Agent of the certificate and/or
written request in good order. The term "good order" means that the share
certificate, if any, and request for redemption, are properly signed,
accompanied by any documentation required by the Transfer Agent, and bear
signature guarantees when required by the Fund or the Transfer Agent. Such
payment may be postponed or the right of redemption suspended at times (a) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (b) when trading on that Exchange is restricted, (c) when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (d) during any other period
when the Securities and Exchange Commission by order so permits; provided that
applicable rules and regulations of the Securities and Exchange Commission shall
govern as to whether the conditions prescribed in (b) or (c) exist. If the
shares to be redeemed have recently been purchased by check (including a
certified or bank cashier's check), payment of redemption proceeds may be
delayed for the minimum time needed to verify that the check used for investment
has been honored (not more than fifteen days from the time of investment of the
proceeds of the check by the Transfer Agent).
TRANSFERS OF SHARES. In the event a shareholder requests a transfer of any
shares to a new registration, such shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the contingent deferred sales charge or free of such charge
(and with regard to the length of time shares subject to the charge have been
held), any transfer involving less than all of the shares in an account will be
made on a pro-rata basis (that is, by transferring shares in the same proportion
that the transferred shares bear to the total shares in the account immediately
prior to the transfer). The transferred shares will continue to be subject to
any applicable contingent deferred sales charge as if they had not been so
transferred.
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<PAGE>
REINSTATEMENT PRIVILEGE. As discussed in the Prospectus, a shareholder who
has had his or her shares redeemed or repurchased and has not previously
exercised this reinstatement privilege may, within 30 days after the redemption
or repurchase, reinstate any portion or all of the proceeds of such redemption
or repurchase in shares of the Fund at the net asset value next determined after
a reinstatement request, together with the proceeds, is received by the Transfer
Agent.
Exercise of the reinstatement privilege will not affect the federal income
tax treatment of any gain or loss realized upon the redemption or repurchase,
except that if the redemption or repurchase resulted in a loss and reinstatement
is made in shares of the Fund, some or all of the loss, depending on the amount
reinstated, will not be allowed as a deduction for federal income tax purposes
but will be applied to adjust the cost basis of the shares acquired upon
reinstatement.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
As stated in the Prospectus, the Fund intends to distribute all of its net
investment income and all of its net short-term capital gains, if any, and will
determine whether to retain all or part of any net long-term capital gains.
As discussed in the Prospectus, the Fund may invest a portion of its assets
in certain "private activity bonds" issued after August 7, 1986. As a result, a
portion of the exempt-interest dividends paid by the Fund may be an item of tax
preference to shareholders subject to the federal alternative minimum tax.
Certain corporations which are subject to the alternative minimum tax may also
have to include 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.
Each shareholder will be sent at least a quarterly summary of his or her
account, including information as to reinvested dividends and capital gains
distributions. Share certificates for dividends or distributions will not be
issued unless a shareholder requests in writing that a certificate be issued for
a specific number of shares.
In computing interest income, the Fund will amortize any premiums and
original issue discounts on securities owned. Capital gains or losses realized
upon sale or maturity of such securities will be based on their amortized cost.
Gains or losses on the sales of securities by the Fund will be long-term
capital gains or losses if the securities have been held by the Fund for more
than twelve months. Gains or losses on the sale of securities held for twelve
months or less will be short-term capital gains or losses. Gains and losses on
the sale, expiration or other termination of options on securities will
generally be treated as gains and losses from the sale of securities. Pursuant
to present federal income tax laws, futures contracts held by the Fund at the
end of each fiscal year will be required to be "marked to market", that is,
treated as having been sold at their fair market value at such date. Sixty
percent of any gain or loss recognized on these deemed sales will be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss. Gains or losses from options on futures and listed options
on debt instruments will similarily be treated as part short-term and part
long-term capital gains or losses, unless such gains or losses were incurred as
part of a securities "straddle," in which case the appropriate straddle rules of
the Internal Revenue Code (the "Code") would apply.
Because the Fund intends to distribute all of its net investment income and
capital gains to shareholders and otherwise continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code, it is not
expected that the Fund will be required to pay any federal income tax.
Shareholders will normally have to pay federal income taxes, and any applicable
state and/or local income taxes, on the dividends and distributions they receive
from the Fund. Such dividends and distributions, to the extent that they are
derived from net investment income or short-term capital gains,
34
<PAGE>
are taxable to the shareholder as ordinary income regardless of whether the
shareholder receives such payments in additional shares or in cash. Any
dividends declared in the last quarter of any year which are paid in the
following year prior to February 1 will be deemed received by the shareholder in
the prior year.
With respect to the Fund's investments in zero coupon bonds, the Fund
accrues income prior to any actual cash payments by their issuers. In order to
continue to comply with Subchapter M of the Code and remain able to forego
payment of Federal income tax on its income and capital gains, the Fund must
distribute all of its net investment income, including income accrued from zero
coupon bonds. As such, the Fund may be required to dispose of some of its
portfolio securities under disadvantageous circumstances to generate the cash
required for distribution.
One of the requirements for regulated investment company status is that at
least 90% of a Fund's gross income be derived from dividends, interest and gains
from the sale or other disposition of securities. Another requirement for
regulated investment company status is that less than 30% of the Fund's gross
income can be derived from, among other sources, gains from the sale or other
disposition of securities held less than three months. Accordingly, the Fund may
be restricted in the writing of options on securities held for less than three
months, in the writing of options which expire in less than three months, and in
effecting closing transactions with respect to call or put options which have
been written or purchased less than three months prior to such transactions. The
Fund may also be restricted in its ability to engage in transactions involving
futures contracts.
Under the Revenue Reconciliation Act of 1993, all or a portion of the Fund's
gain from the sale or redemption of tax-exempt obligations purchased at a market
discount after April 30, 1993 will be treated as ordinary income rather than
capital gain. This rule may increase the amount of ordinary income dividends
received by shareholders.
As discussed in the Prospectus, the Fund intends to continue 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. An exempt-interest dividend is that part
of dividend distributions made by the Fund which consists of interest received
by the Fund on tax-exempt securities upon which the shareholder incurs no
federal income taxes.
Within 60 days after the end of its fiscal year, the Fund will mail to
shareholders a statement indicating the percentage of the dividend distributions
for such fiscal year which constitutes exempt-interest dividends and the
percentage, if any, that is taxable, and the percentage, if any, of the
exempt-interest dividends which constitutes an item of tax preference, and to
what extent the taxable portion is long-term capital gain, short-term capital
gain or ordinary income. These percentages should be applied uniformly to all
monthly distributions made during the fiscal year to determine the proportion of
dividends that is tax-exempt. The percentages may differ from the percentage of
tax-exempt dividend distributions for any particular month.
Shareholders will be subject to federal income tax on dividends paid from
interest income derived from taxable securities and on distributions of net
short-term capital gains. Such dividends and distributions are taxable to the
shareholder as ordinary dividend income regardless of whether the shareholder
receives such distributions in additional shares or in cash. Distributions of
long-term capital gains, if any, are taxable as long-term gains, regardless of
how long the shareholder has held Fund shares and whether the distribution is
received in additional shares or in cash. Since the Fund's income is expected to
be derived entirely from interest rather than dividends, none of such dividend
distributions will be eligible for the 70% dividends received deduction
generally available to corporations. Net long-term capital gains distributions
are not eligible for the dividends received deduction.
Any loss on the sale or exchange of shares of the Fund which are held for
six months or less is disallowed to the extent of the amount of any
exempt-interest dividends paid with respect to such shares. Treasury Regulations
may provide for a reduction in such required holding period. If a shareholder
35
<PAGE>
receives a distribution that is taxed as long-term capital gain on shares held
for six months or less and sells those shares at a loss, the loss will be
treated as a long-term capital loss to the extent of the capital gains
distribution.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry shares of the Fund is not deductible to the extent allocable to
exempt-interest dividends of the Fund (which allocation does not take into
account capital gain dividends of the Fund). Furthermore, entities or persons
who are "substantial users" (or related persons) of facilities financed by
industrial development bonds should consult their tax advisers before purchasing
shares of the Fund. "Substantial user" is defined generally by Income Tax
Regulation 1.103-11 (b) as including a "non-exempt person" who regularly uses in
a trade or business a part of a facility financed from the proceeds of
industrial development bonds.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities. It can be expected that similar proposals may
be introduced in the future. If such a proposal were enacted, the availability
of municipal securities for investment by the Fund could be affected. In such
event, the Fund would re-evaluate its investment objective and policies.
To the extent that dividends are derived from interest on New York
tax-exempt securities, such dividends will also be exempt from New York State
and City personal income taxes. Interest on indebtedness incurred or continued
to purchase or carry shares of an investment company paying exempt-interest
dividends, such as the Fund, may not be deductible by the investor for State or
City personal income tax purposes.
The foregoing relates to federal income taxation and to New York State and
City personal income taxation as in effect as of the date of the Prospectus.
Distributions from investment income and capital gains, including
exempt-interest dividends, may be subject to New York franchise taxes if
received by a corporation doing business in New York, to state taxes in states
other than New York and to local taxes.
The Fund is organized as a Massachusetts business trust. Under current law,
so long as it qualifies as a "regulated investment company" under the Internal
Revenue Code, the Fund itself is not liable for any income or franchise tax in
The Commonwealth of Massachusetts.
Any dividend or capital gains distribution received by a shareholder from
any investment company will have the effect of reducing the net asset value of
the shareholder's stock in that fund by the exact amount of the dividend or
capital gains distribution. Furthermore, capital gains distributions are, and
some portion of the dividends may be, subject to income tax. If the net asset
value of the shares should be reduced below a shareholder's cost as a result of
the payment of taxable dividends or the distribution of realized long-term
capital gains, such payment or distribution would be a return of capital but
taxable at ordinary rates. Therefore, an investor should consider the tax
implications of purchasing Fund shares immediately prior to a distribution
record date.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
As discussed in the Prospectus, from time to time the Fund may quote its
"yield" and/or its "total return" in advertisements and sales literature. Yield
is calculated for any 30-day period as follows: the amount of interest income
for each security in the Fund's portfolio is determined in accordance with
regulatory requirements; the total for the entire portfolio constitutes the
Fund's gross income for the period. Expenses accrued during the period are
subtracted to arrive at "net investment income". The resulting amount is divided
by the product of the net asset value per share on the last day of the period
multiplied by the average number of Fund shares outstanding during the period
that were entitled to dividends. This amount is added to 1 and raised to the
sixth power. 1 is then subtracted from the result and the difference is
multiplied by 2 to arrive at the annualized yield. For the 30-day period ended
December 31, 1993, the Fund's yield, calculated pursuant to the formula
described above was 3.90%.
36
<PAGE>
The Fund may also quote a "tax-equivalent yield" determined by dividing the
tax-exempt portion of the quoted yield by 1 minus the stated income tax rate and
adding the result to the portion of the yield that is not tax-exempt. The Fund's
tax-equivalent yield, based upon a combined Federal and New York personal income
tax bracket of 41.04% for the 30-day period ending December 31, 1993, was 6.61%
based upon the yield quoted above.
The Fund's "average annual total return" represents an annualization of the
Fund's total return over a particular period and is computed by finding the
annual percentage rate which will result in the ending redeemable value of a
hypothetical $1,000 investment made at the beginning of a one, five or ten year
period, or for the period from the date of commencement of the Fund's
operations, if shorter than any of the foregoing. The ending redeemable value is
reduced by any contingent deferred sales charge at the end of the one, five or
ten year or other period. For the purpose of this calculation, it is assumed
that all dividends and distributions are reinvested. The formula for computing
the average annual total return involves a percentage obtained by dividing the
ending redeemable value by the amount of the initial investment, taking a root
of the quotient (where the root is equivalent to the number of years in the
period), and subtracting 1 from the result.
The average annual total returns of the Fund for the year ended December 31,
1993, the five years ended December 31, 1993 and for the period from April 25,
1985 (commencement of operations) through December 31, 1993, were 6.72%, 9.02%
and 9.60%, respectively.
In addition to the foregoing, the Fund may advertise its total return over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. Such calculations may or may not reflect the
deduction of the contingent deferred sales charge which, if reflected, would
reduce the performance quoted. For example, the average annual total return of
the Fund may be calculated in the manner described above, but without deduction
for any applicable contingent deferred sales charge. Based on this calculation,
the average annual total returns of the Fund for the year ended December 31,
1993, the five years ended December 31, 1993 and for the period from April 25,
1985 through December 31, 1993, were 11.72%, 9.30% and 9.60%, respectively.
In addition, the Fund may compute its aggregate total return for specified
periods by determining the aggregate percentage rate which will result in the
ending value of a hypothetical $1,000 investment made at the beginning of the
period. For the purpose of this calculation, it is assumed that all dividends
and distributions are reinvested. The formula for computing aggregate total
return involves a percentage obtained by dividing the ending value (without the
reduction for any contingent deferred sales charge) by the initial $1,000
investment and subtracting 1 from the result. Based on the foregoing
calculation, the Fund's total return for the year ended December 31, 1993, the
five years ended December 31, 1993 and the period from April 25, 1985 through
December 31, 1993 were 11.72%, 55.98% and 121.68%, respectively.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in shares of the Fund by adding 1 to the Fund's
aggregate total return (expressed as a decimal and without reflecting the
deduction of the contingent deferred sales charge) and multiplying by $10,000,
$50,000 and $100,000. Investments of $10,000, $50,000 and $100,000 in the Fund
since inception (April 25, 1985) would have grown to $22,168, $110,840 and
$221,680, respectively at December 31, 1993.
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent organizations.
SHARES OF THE FUND
- --------------------------------------------------------------------------------
As discussed in the Prospectus, the shareholders of the Fund are entitled to
a full vote for each full share held. The Trustees have been elected by the
shareholders of the Fund. The Trustees themselves have the power to alter the
number and the terms of office of the Trustees, and they may at any time
lengthen their own terms or make their terms of unlimited duration and appoint
their own successors,
37
<PAGE>
provided that always at least a majority of the Trustees has been elected by the
shareholders of the Fund. Under certain circumstances the Trustees may be
removed by action of the Trustees. The shareholders also have the right under
certain circumstances to remove the Trustees. The voting rights of shareholders
are not cumulative, so that holders of more than 50 percent of the shares voting
can, if they choose, elect all Trustees being selected, while the holders of the
remaining shares would be unable to elect any Trustees.
The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios) and additional classes of shares
within any series (which would be used to distinguish among the rights of
different categories of shareholders, as might be required by future regulations
or other unforeseen circumstances). However, the Trustees have not authorized
any such additional series or classes of shares.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his/her or
its own bad faith, willful misfeasance, gross negligence, or reckless disregard
of his/her or its duties. It also provides that all third persons shall look
solely to the Fund's property for satisfaction of claims arising in connection
with the affairs of the Fund. With the exceptions stated, the Declaration of
Trust provides that a Trustee, officer, employee or agent is entitled to be
indemnified against all liability in connection with the affairs of the Fund.
The Fund is authorized to issue an unlimited number of shares of beneficial
interest. The Fund shall be of unlimited duration subject to the provisions in
the Declaration of Trust concerning termination by action of the shareholders.
CUSTODIAN AND TRANSFER AGENT
- --------------------------------------------------------------------------------
The Bank of New York, 110 Washington Street, New York, New York 10286 is the
Custodian of the Fund's assets.
Dean Witter Trust Company, Harborside Financial Center, Plaza Two, Jersey
City, New Jersey 07311 is the Transfer Agent of the Fund's shares and Dividend
Disbursing Agent for payment of dividends and distributions of Fund shares and
Agent for shareholders under various investment plans described herein. Dean
Witter Trust Company is an affiliate of Dean Witter Distributors Inc., the
Fund's Distributor and Dean Witter InterCapital Inc., the Fund's Investment
Manager. As Transfer Agent and Dividend Disbursing Agent, Dean Witter Trust
Company's responsibilities include maintaining shareholder accounts; disbursing
cash dividends and reinvesting dividends; processing account registration
changes; handling purchase and redemption transactions; mailing prospectuses and
reports; mailing and tabulating proxies; processing share certificate
transactions; and maintaining shareholder records and lists. For these services,
Dean Witter Trust Company receives a per shareholder account fee from the Fund.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
Price Waterhouse serves as the independent accountants of the Fund. The
independent accountants are responsible for auditing the annual financial
statements of the Fund.
REPORTS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports showing
the Fund's portfolio and other information. An annual report, containing
financial statements audited by independent accountants, together with their
report thereon, will be sent to shareholders each year.
38
<PAGE>
The Fund's fiscal year ends on December 31. The financial statements of the
Fund must be audited at least once a year by independent accountants whose
selection is made annually by the Fund's Trustees.
LEGAL COUNSEL
- --------------------------------------------------------------------------------
Sheldon Curtis, Esq., who is an officer and General Counsel of the
Investment Manager is an officer and General Counsel of the Fund.
EXPERTS
- --------------------------------------------------------------------------------
The annual financial statements of the Fund for the year ended December 31,
1993 which are included herein and incorporated by reference in the Prospectus
have been so included and incorporated in reliance on the report of Price
Waterhouse, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
39
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of Dean Witter New York Tax-Free Income Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dean Witter New York Tax-Free
Income Fund (the "Fund") at December 31, 1993, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended and the financial highlights for each of the eight years
in the period then ended and for the period April 25, 1985 (commencement of
operations) through December 31, 1985, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities owned at December 31, 1993 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE
New York, New York
February 14, 1994
40
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) NEW YORK EXEMPT MUNICIPAL BONDS (98.4%) RATE DATE VALUE
- ----------- ---------- --------- -------------
<C> <S> <C> <C> <C>
GENERAL OBLIGATION (9.0%)
New York City,
$ 3,500 Various Purpose 1973............................... 3.50 % 5/ 1/01 $ 3,180,205
2,500 Various Purpose 1973............................... 3.50 5/ 1/03 2,167,125
4,000 1990 Ser D......................................... 6.00 8/ 1/06 4,052,880
5,000 1993 Ser C CARS (AMBAC Insured).................... 9.22 + 9/ 1/11 5,693,750
8,800 Puerto Rico, Public Impr Refg Ser 1987 A............. 3.00 7/ 1/06 7,085,936
- ----------- -------------
23,800 22,179,896
- ----------- -------------
EDUCATIONAL FACILITIES REVENUE (13.6%)
New York State Dormitory Authority,
2,150 City University Ser U.............................. 6.375 7/ 1/08 2,316,324
3,000 City University Ser 1993 A......................... 5.75 7/ 1/09 3,093,360
5,000 City University Ser 1993 F......................... 5.50 7/ 1/12 4,925,850
5,000 Columbia University Ser 1988 A (Prerefunded)....... 7.60 7/ 1/15 5,592,700
3,000 State University Ser 1989 B........................ 0.00 5/15/05 1,590,210
10,000 State University Ser 1993 C........................ 5.375 5/15/13 9,689,300
2,000 State University Ser 1993 A........................ 5.25 5/15/15 1,927,720
4,000 University of Rochester Ser 1987................... 6.50 7/ 1/09 4,341,160
- ----------- -------------
34,150 33,476,624
- ----------- -------------
ELECTRIC REVENUE (7.1%)
10,000 New York State Power Authority, Ser CC............... 5.00 1/ 1/14 9,765,100
8,000 Puerto Rico Electric Power Authority, Power Ser O.... 5.00 7/ 1/12 7,737,440
- ----------- -------------
18,000 17,502,540
- ----------- -------------
HOSPITAL REVENUE (7.1%)
New York State Medical Care Facilities Finance
Agency,
10,000 Insured Hospital & Nursing Home-FHA Insured Mtge
1993 Ser B (a).................................... 5.50 2/15/22 10,016,700
2,490 Insured Hospital & Nursing Home-FHA Insured Mtge
1985 Ser B........................................ 9.125 2/15/25 2,673,488
4,000 St Luke's-Roosevelt Hospital Center--FHA Insured
Mtge 1989 Ser B (Prerefunded)..................... 7.40 2/15/09 4,751,240
- ----------- -------------
16,490 17,441,428
- ----------- -------------
INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE
(14.5%)
4,500 New York City Industrial Development Agency, 1990
American Airlines Inc (AMT)........................ 8.00 7/ 1/20 5,002,380
New York State Energy Research & Development
Authority,
3,500 Brooklyn Union Gas Co 1993 Ser B RIBS.............. 9.562+ 4/ 1/20 4,186,875
7,500 Brooklyn Union Gas Co 1991 Ser B RIBS (AMT)........ 10.958+ 7/15/26 9,506,250
5,000 Consolidated Edison Co of New York Inc
Refg Ser 1993 B................................... 5.25 8/15/20 4,901,300
4,000 Consolidated Edison Co of New York Inc
Ser 1986 A (AMT).................................. 7.50 11/15/21 4,468,280
2,500 Long Island Lighting Co 1990 Ser A (AMT)........... 7.15 6/ 1/20 2,716,975
4,000 Niagara Mohawk Power Corp 1985 Ser I............... 8.875 11/ 1/25 4,434,320
</TABLE>
41
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) NEW YORK EXEMPT MUNICIPAL BONDS (98.4%) RATE DATE VALUE
- ----------- ---------- --------- -------------
<C> <S> <C> <C> <C>
$ 400 Puerto Rico Industrial, Medical & Environmental
Pollution Control Facilities Financing Authority,
Baxter Travenol Labs Inc 1983 Ser A................ 8.00 % 9/ 1/12 $ 468,788
- ----------- -------------
31,400 35,685,168
- ----------- -------------
MORTGAGE REVENUE--MULTI-FAMILY (2.6%)
New York City Housing Development Corporation,
2,466 East Midtown Proj-FHA Insured Sec 223.............. 6.50 11/15/18 2,647,666
1,000 Gen Hsg Ser A (AMBAC Insured)...................... 6.50 5/ 1/06 1,034,770
2,462 Ruppert Proj-FHA Insured Sec 223................... 6.50 11/15/18 2,646,003
- ----------- -------------
5,928 6,328,439
- ----------- -------------
MORTGAGE REVENUE--SINGLE FAMILY (4.6%)
New York State Mortgage Agency,
125 Fifth Ser.......................................... 9.75 10/ 1/10 129,766
4,500 Homeowner Ser 27................................... 6.90 4/ 1/15 4,788,360
5,000 Homeowner Ser 29A.................................. 5.25 4/ 1/15 4,850,050
1,400 Ser MM-1 (AMT)..................................... 7.95 10/ 1/21 1,515,724
- ----------- -------------
11,025 11,283,900
- ----------- -------------
NURSING & HEALTH RELATED FACILITIES REVENUE (1.6%)
New York State Medical Care Facilities Finance
Authority,
2,500 Long Term Health Care 1992 Ser D (Capital Guaranty
Insured).......................................... 6.50 11/ 1/15 2,791,400
1,000 Mental Health 1991 Ser A........................... 7.50 2/15/21 1,197,610
- ----------- -------------
3,500 3,989,010
- ----------- -------------
PUBLIC FACILITIES, REVENUE (4.7%)
3,000 New York State Dormitory Authority, Suffolk County
Judicial Ser 1986 (ETM)............................ 7.375 7/ 1/16 3,812,910
New York State Urban Development Corporation,
3,000 Correctional 1986 Refg Ser (Prerefunded)........... 7.00 1/ 1/16 3,264,420
3,750 Correctional Ser 3 (Prerefunded)................... 7.375 1/ 1/18 4,550,062
- ----------- -------------
9,750 11,627,392
- ----------- -------------
RESOURCE RECOVERY REVENUE (6.9%)
3,000 Hempstead Industrial Development Agency, 1985
American REF-FUEL Co of Hempstead.................. 7.40 12/ 1/10 3,270,600
5,695 New York State Environmental Facilities Corporation,
Huntington 1989 Ser A (AMT)........................ 7.50 10/ 1/12 6,267,348
2,000 Oneida-Herkimer Solid Waste Management Authority, Ser
1992............................................... 6.75 4/ 1/14 2,151,700
5,000 Onondaga County Resource Recovery Agency, 1992 Ser
(AMT).............................................. 7.00 5/ 1/15 5,450,150
- ----------- -------------
15,695 17,139,798
- ----------- -------------
</TABLE>
42
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1993 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) NEW YORK EXEMPT MUNICIPAL BONDS (98.4%) RATE DATE VALUE
- ----------- ---------- --------- -------------
<C> <S> <C> <C> <C>
TRANSPORTATION REVENUE (6.0%)
$ 3,400 Port Authority of New York & New Jersey, Cons 53rd
Ser................................................ 8.70 % 7/15/20 $ 3,732,078
3,000 Triborough Bridge & Tunnel Authority, Gen Pur Ser
1993 B............................................. 5.00 1/ 1/20 2,919,120
1,700 Puerto Rico Highway Authority, Ser Q (Prerefunded)... 7.75 7/ 1/10 2,070,855
6,000 Puerto Rico Highway & Transportation Authority, Refg
Ser X.............................................. 5.50 7/ 1/15 6,094,920
- ----------- -------------
14,100 14,816,973
- ----------- -------------
WATER & SEWER REVENUE (8.0%)
New York City Municipal Water Finance Authority,
4,000 1994 Ser B......................................... 5.375 6/15/07 4,045,960
3,000 1991 Ser C (Prerefunded)........................... 7.375 6/15/14 3,617,280
4,000 1990 Ser A......................................... 6.00 6/15/19 4,077,920
7,000 Puerto Rico Aqueduct & Sewer Authority, Ser 1988 A... 7.90 7/ 1/07 8,071,280
- ----------- -------------
18,000 19,812,440
- ----------- -------------
OTHER REVENUE (12.7%)
4,000 Municipal Assistance Corporation for the City of New
York, Ser 57....................................... 7.25 7/ 1/08 4,378,800
New York Local Government Assistance Corporation,
5,000 Ser 1993 C (Prerefunded)........................... 7.625 4/ 1/17 5,065,300
5,000 Ser 1991 B (Prerefunded)........................... 7.50 4/ 1/20 6,063,050
5,000 New York State Dormitory Authority, The Metropolitan
Museum of Art Ser 1987 (Prefunded)................. 7.625 7/ 1/15 5,299,700
10,000 United Nations Development Corporation, 1992 Refg Ser
A Sr Lien.......................................... 6.00 7/ 1/26 10,396,000
- ----------- -------------
29,000 31,202,850
- ----------- -------------
TOTAL NEW YORK EXEMPT MUNICIPAL BONDS
$ 230,838
- -----------
- -----------
(IDENTIFIED COST $217,327,520) (B)................... 98.4% 242,486,458
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES....... 1.6 3,974,133
---------- -------------
NET ASSETS........................................... 100.0% $ 246,460,591
---------- -------------
---------- -------------
<FN>
- --------------------------
+ CURRENT COUPON RATE FOR RESIDUAL INTEREST BONDS. THIS RATE RESETS
PERIODICALLY AS THE AUCTION RATE ON THE RELATED SHORT-TERM SECURITIES
FLUCTUATES.
(A) SECURITY PURCHASED ON A WHEN ISSUED BASIS.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $217,327,520; THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $25,455,563 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $296,625, RESULTING IN NET UNREALIZED
APPRECIATION OF $25,158,938.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
43
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $217,327,520) (Note
1)...................................... $ 242,486,458
Cash...................................... 4,657,118
Receivables for:
Investments sold........................ 10,301,828
Interest................................ 4,488,394
Shares of beneficial interest sold...... 1,149,698
Prepaid expenses.......................... 14,459
-------------
TOTAL ASSETS...................... 263,097,955
-------------
LIABILITIES:
Payables for:
Investments purchased................... 14,938,561
Shares of beneficial interest
repurchased........................... 8,472
Plan of distribution fee payable (Note
3)...................................... 138,995
Investment management fee payable (Note
2)...................................... 114,292
Dividends and distributions to
shareholders............................ 1,330,436
Accrued expenses (Note 4)................. 106,608
-------------
TOTAL LIABILITIES................. 16,637,364
-------------
NET ASSETS:
Paid in capital........................... 218,102,851
Accumulated undistributed realized gain on
investments - net....................... 3,193,039
Unrealized appreciation on investments -
net..................................... 25,158,938
Accumulated undistributed investment
income - net............................ 5,763
-------------
NET ASSETS........................ $ 246,460,591
-------------
-------------
NET ASSET VALUE PER SHARE, 19,712,307
shares outstanding (unlimited authorized
shares of $.01 par value)............... $12.50
------
------
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
INVESTMENT INCOME:
INTEREST INCOME.......................... $ 14,930,931
------------
EXPENSES
Plan of distribution fee (Note 3)...... 1,425,215
Investment management fee (Note 2)..... 1,268,826
Transfer agent fees and expenses (Note
4)................................... 83,054
Professional fees...................... 49,105
Shareholder reports and notices (Note
4)................................... 39,558
Trustees' fees and expenses (Note 4)... 36,064
Registration fees...................... 14,445
Other.................................. 17,916
------------
TOTAL EXPENSES..................... 2,934,183
------------
INVESTMENT INCOME - NET.......... 11,996,748
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- NET (Note 1):
Realized gain on investments - net..... 6,322,958
Change in unrealized appreciation on
investments - net.................... 6,844,389
------------
NET GAIN ON INVESTMENTS............ 13,167,347
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS...... $ 25,164,095
------------
------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992
------------------ ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Investment income -- net............................................. $ 11,996,748 $ 10,673,000
Realized gain on investments -- net.................................. 6,322,958 1,472,865
Change in unrealized appreciation on investments -- net.............. 6,844,389 4,144,670
------------------ ------------------
Net increase in net assets resulting from operations............. 25,164,095 16,290,535
------------------ ------------------
Dividends and distributions to shareholders from:
Investment income -- net............................................. (11,996,748 ) (10,673,000 )
Realized gain on investments -- net.................................. (3,940,210 ) (657,540 )
------------------ ------------------
Total dividends and distributions................................ (15,936,958 ) (11,330,540 )
------------------ ------------------
Transactions in shares of beneficial interest -- net increase (Note
5).................................................................... 28,717,907 21,841,786
------------------ ------------------
Total increase................................................... 37,945,044 26,801,781
------------------ ------------------
NET ASSETS:
Beginning of period.................................................... 208,515,547 181,713,766
------------------ ------------------
END OF PERIOD (including undistributed net investment income of
$5,763 and $5,763, respectively)...................................... $ 246,460,591 $ 208,515,547
------------------ ------------------
------------------ ------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
44
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND ACCOUNTING POLICIES -- Dean Witter New York Tax-Free Income
Fund (the "Fund") is registered under the Investment Company Act of 1940, as
amended (the "Act"), as a diversified, open-end management investment company
and was organized on January 17, 1985, as a Massachusetts business trust. The
Fund commenced operations on April 25, 1985.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- Portfolio securities are valued for the Fund
by an outside independent pricing service approved by the Fund's Trustees.
The pricing service has informed the Fund that in valuing the Fund's
portfolio securities, it uses both a computerized grid matrix of tax-exempt
securities and evaluations by its staff, in each case based on information
concerning market transactions and quotations from dealers which reflect the
bid side of the market each day. The Fund's portfolio securities are thus
valued by reference to a combination of transactions and quotations for the
same or other securities believed to be comparable in quality, coupon,
maturity, state of issuance, type of issue, call provisions, trading
characteristics and other features deemed to be relevant.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on
the trade date (date the order to buy or sell is executed). Realized gains
and losses on security transactions are determined on the identified cost
method. Net investment income includes amortization of premiums and original
issue discounts. Additionally, with respect to market discount on bonds
purchased after April 30, 1993, a portion of any capital gain realized upon
disposition is recharacterized as taxable investment income. Interest income
is accrued daily.
C. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable and nontaxable income to its
shareholders. Accordingly, no federal income tax provision is required.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized
capital gains are determined in accordance with federal income tax
regulations, which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such
amounts are reclassified within the capital accounts based on their federal
tax-basis treatment; temporary differences do not require reclassifications.
Dividends and distributions which exceed net investment income and net
realized capital gains for financial reporting purposes but not for tax
purposes are reported as dividends in excess of net investment income or
distributions in excess of net realized capital gains. To the extent they
exceed net investment income and net realized capital gains for tax
purposes, they are reported as distributions of paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT -- Pursuant to an Investment Management
Agreement (the "Agreement") with Dean Witter InterCapital Inc. (the "Investment
Manager"), the Fund pays its Investment Manager a management fee, accrued daily
and payable monthly, by applying the following annual rates to the daily net
assets of the Fund determined as of the close of each business day: 0.55% of the
portion of the daily net assets not exceeding $500 million and 0.525% of the
portion of the daily net assets exceeding $500 million.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes office space and facilities,
45
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
equipment, clerical, bookkeeping and certain legal services, and pays the
salaries of all personnel, including officers of the Fund who are employees of
the Investment Manager. The Investment Manager also bears the cost of telephone
services, heat, light, power and other utilities provided to the Fund.
3. PLAN OF DISTRIBUTION -- Shares of the Fund are distributed by Dean Witter
Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager,
through its own sales organization. To compensate the Distributor, the Fund has
adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act
pursuant to which the Fund pays the Distributor compensation accrued daily and
payable monthly at the annual rate of .75 of 1% of the lesser of: (a) the
average daily aggregate gross sales of the Fund's shares since the inception of
the Fund (not including reinvestments of dividends or capital gains
distributions), less the average daily aggregate net asset value of the Fund's
shares redeemed since the Fund's inception upon which a contingent deferred
sales charge has been imposed or upon which such charge has been waived, or (b)
the Fund's average daily net assets. Amounts paid under the Plan are paid to the
Distributor to compensate it for the services provided and the expenses borne by
it and others in the distribution of the Fund's shares, including the payment of
commissions for sales of the Fund's shares and incentive compensation to and
expenses of the account executives of Dean Witter Reynolds Inc., an affiliate of
the Investment Manager, and other employees or selected dealers who engage in or
support distribution of the Fund's shares or who service shareholder accounts,
including overhead and telephone expenses; printing and distribution of
prospectuses and reports used in connection with the offering of the Fund's
shares; and preparation, printing and distribution of sales literature and
advertising materials. In addition, the Distributor may be compensated under the
Plan for its opportunity costs in advancing such amounts, which compensation
would be in the form of a carrying charge on any unrecovered expenses incurred
by the Distributor.
Provided that the Plan continues in effect, any cumulative expenses incurred
by the Distributor, but not yet recovered, may be recovered through future
distribution fees from the Fund and contingent deferred sales charges from the
Fund's shareholders.
The Distributor has informed the Fund that it received approximately
$244,000 in deferred sales charges from certain redemptions of the Fund's shares
of beneficial interest during the year ended December 31, 1993. The Fund's
shareholders pay such charges which are not expenses of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES -- The cost of
purchases and the proceeds from sales of portfolio securities for the year ended
December 31, 1993, excluding short-term investments, aggregated $75,654,955 and
$56,757,285, respectively.
On April 1, 1991, the Fund established an unfunded noncontributory defined
benefit pension plan covering all independent Trustees of the Fund who will have
served as independent Trustees for at least five years at the time of
retirement. Benefits under this plan are based on years of service and
compensation during the last five years of service. Aggregate pension costs for
the year ended December 31, 1993, included in Trustees' fees and expenses in the
Statement of Operations, amounted to $12,232. At December 31, 1993, the Fund had
an accrued pension liability of $39,649 which is included in accrued expenses in
the Statement of Assets and Liabilities.
Dean Witter Trust Company, an affiliate of the Investment Manager and the
Distributor, is the Fund's transfer agent. During the year ended December 31,
1993, the Fund incurred transfer agent fees and expenses of $83,054, of which
$7,728 was payable at December 31, 1993.
Bowne & Co., Inc. is an affiliate of the Fund by virtue of a common Fund
Trustee and Director of Bowne & Co., Inc. During the year ended December 31,
1993, the Fund paid Bowne & Co., Inc. $4,250 for printing of shareholder
reports.
46
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
5. SHARES OF BENEFICIAL INTEREST -- Transactions in shares of beneficial
interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED DECEMBER
DECEMBER 31, 1993 31, 1992
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Sold...................................... 3,452,052 $ 43,018,205 3,098,789 $ 36,563,558
Reinvestment of dividends and
distributions............................ 802,145 10,012,352 577,032 6,816,205
------------ --------------- ------------ ---------------
4,254,197 53,030,557 3,675,821 43,379,763
Repurchased............................... (1,950,896) (24,312,650) (1,823,628) (21,537,977)
------------ --------------- ------------ ---------------
Net increase.............................. 2,303,301 $ 28,717,907 1,852,193 $ 21,841,786
------------ --------------- ------------ ---------------
------------ --------------- ------------ ---------------
</TABLE>
1993 FEDERAL TAX NOTICE (UNAUDITED)
During the year ended December 31, 1993, the Fund paid to shareholders
$0.651 per share from net investment income. All of the Fund's dividends
from net investment income were exempt interest dividends, excludable
from gross income for Federal income tax purposes. For the same period,
the Fund paid to shareholders $0.185 per share from long-term capital
gains.
47
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data and ratios for a share of beneficial interest outstanding
throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED DECEMBER 31, APRIL 25, 1985*
------------------------------------------------------------------------------------- THROUGH
1993 1992 1991 1990 1989 1988 1987 1986 DECEMBER 31, 1985
-------- -------- -------- -------- -------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............ $ 11.98 $ 11.68 $ 11.00 $ 11.25 $ 10.94 $ 10.50 $ 11.57 $ 10.57 $ 10.00
-------- -------- -------- -------- -------- -------- -------- -------- --------
Investment
income-net...... 0.65 0.65 0.68 0.68 0.68 0.68 0.70 0.72 0.51
Realized and
unrealized gain
(loss) on
investments-net... 0.72 0.34 0.70 (0.25) 0.31 0.44 (0.93) 1.09 0.57
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations........ 1.37 0.99 1.38 0.43 0.99 1.12 (0.23) 1.81 1.08
-------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Dividends from
net investment
income.......... (0.65) (0.65) (0.68) (0.68) (0.68) (0.67) (0.70) (0.72) (0.51)
Distributions
from realized
gain on
investments..... (0.20) (0.04) (0.02) -0- -0- (0.01) (0.14) (0.09) -0-
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions..... (0.85) (0.69) (0.70) (0.68) (0.68) (0.68) (0.84) (0.81) (0.51)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value,
end of period..... $ 12.50 $ 11.98 $ 11.68 $ 11.00 $ 11.25 $ 10.94 $ 10.50 $ 11.57 $ 10.57
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL INVESTMENT
RETURN+............ 11.72% 8.70% 12.94% 4.01% 9.34% 10.91% (1.89%) 17.62% 11.04%(1)
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (in
thousands)........ $246,461 $208,516 $181,714 $158,075 $147,363 $128,600 $112,795 $113,321 $ 73,408
Ratio of expenses
to average net
assets............ 1.27% 1.40% 1.32% 1.37% 1.37% 1.41% 1.40% 1.41% 1.16%(2)(3)
Ratio of net
investment income
to average net
assets............ 5.20% 5.48% 6.00% 6.13% 6.09% 6.28% 6.44% 6.36% 7.02%(2)(3)
Portfolio turnover
rate.............. 25% 16% 17% 23% 4% 18% 40% 23% 24%
</TABLE>
- --------------------
<TABLE>
<S> <C>
* COMMENCEMENT OF OPERATIONS.
+ DOES NOT REFLECT THE DEDUCTION OF SALES LOAD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) IF THE FUND HAD BORNE ALL ITS EXPENSES THAT WERE ASSUMED OR WAIVED BY THE INVESTMENT MANAGER AND THE
DISTRIBUTOR, THE EXPENSE RATIO WOULD HAVE BEEN 1.58% AND THE NET INVESTMENT INCOME RATIO WOULD HAVE BEEN
6.60%.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
48
<PAGE>
APPENDIX
- --------------------------------------------------------------------------------
RATINGS OF INVESTMENTS
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")
MUNICIPAL BOND RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger
than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not
well safeguarded during both good and bad times in the future. Uncertainty
of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca present obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
CONDITIONAL RATING: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2, and 3 in
each generic rating classification from Aa through B in its municipal bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and a modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
49
<PAGE>
MUNICIPAL NOTE RATINGS
Moody's ratings for state and municipal note and other short-term loans are
designated Moody's Investment Grade (MIG). MIG 1 denotes best quality and means
there is present strong protection from established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing. MIG 2 denotes high quality and means that margins of protection are
ample although not as large as in MIG 1. MIG 3 denotes favorable quality and
means that all security elements are accounted for but that the undeniable
strength of the previous grades, MIG 1 and MIG 2, is lacking. MIG 4 denotes
adequate quality and means that the protection commonly regarded as required of
an investment security is present and that while the notes are not distinctly or
predominantly speculative, there is specific risk.
VARIABLE RATE DEMAND OBLIGATIONS
A short-term rating, in addition to the Bond or MIG ratings, designated VMIG
may also be assigned to an issue having a demand feature. The assignment of the
VMIG symbol reflects such characteristics as payment upon periodic demand rather
than fixed maturity dates and payment relying on external liquidity. The VMIG
rating criteria are identical to the MIG criteria discussed above.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess of
nine months. These ratings apply to Municipal Commercial Paper as well as
taxable Commercial Paper. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers: Prime-1, Prime-2, Prime-3.
Issuers rated Prime-1 have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 have a strong capacity for
repayment of short-term promissory obligations; and Issuers rated Prime-3 have
an acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S")
MUNICIPAL BOND RATINGS
A Standard & Poor's municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers or
lessees.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. The
ratings are based, in varying degrees, on the following considerations: (1)
likelihood of default-capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with any rating
and may, on occasion, rely on unaudited financial information. The ratings may
be changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or for other reasons.
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
50
<PAGE>
A Debt rated "A" has a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.
Bonds rated AAA, AA, A and BBB are considered investment grade bonds.
BB Debt rated "BB" has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which would
lead to inadequate capacity or willingness to pay interest and repay
principal.
B Debt rated "B" has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
CCC Debt rated "CCC" has a current identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayments of principal. In the event
of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal.
CC The rating "CC" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC" rating.
C The rating "C" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating.
CI The rating "CI" is reserved for income bonds on which no interest is being
paid.
D Debt rated "D" is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The 'D' rating also
will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not
rate a particular type of obligation as a matter of policy.
Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of
speculation and "C" the highest degree of speculation. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing with the
major ratings categories.
The foregoing ratings are sometimes followed by a "p" which indicates that
the rating is provisional. A provisional rating assumes the successful
completion of the project being financed by the bonds being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood or risk of default upon failure of such completion.
51
<PAGE>
MUNICIPAL NOTE RATINGS
Commencing on July 27, 1984, Standard & Poor's instituted a new rating
category with respect to certain municipal note issues with a maturity of less
than three years. The new note ratings denote the following:
SP-1 denotes a very strong or strong capacity to pay principal and
interest. Issues determined to possess overwhelming safety
characteristics are given a plus (+) designation (SP-1+).
SP-2 denotes a satisfactory capacity to pay principal and interest.
SP-3 denotes a speculative capacity to pay principal and interest.
COMMERCIAL PAPER RATINGS
Standard and Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The commercial paper rating is not a recommendation to purchase or
sell a security. The ratings are based upon current information furnished by the
issuer or obtained by S&P from other sources it considers reliable. The ratings
may be changed, suspended or withdrawn as a result of changes in or
unavailability of such information. Ratings are graded into group categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Ratings are applicable to both taxable and tax-exempt commercial paper. The
categories are as follows:
Issuers assigned A ratings are regarded as having the greatest capacity for
timely payment. Issues in this category are further refined with the designation
1, 2 and 3 to indicate the relative degree of safety.
<TABLE>
<S> <C>
A-1 indicates that the degree of safety regarding timely payment is very strong.
A-2 indicates capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues designated
"A-1".
A-3 indicates a satisfactory capacity for timely payment. Obligations carrying this
designation are, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
</TABLE>
52
