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PROSPECTUS
JULY 28, 1997
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.")
The Fund offers four classes of shares (each, a "Class"), each
with a different combination of sales charges, ongoing fees and other features.
The different distribution arrangements permit an investor to choose the method
of purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of the Fund held prior to July
28, 1997 have been designated Class B shares. (See "Purchase of Fund
Shares--Alternative Purchase Arrangements.")
This Prospectus sets forth concisely the information you should
know before investing in the Fund. It should be read and retained for future
reference. Additional information about the Fund is contained in the Statement
of Additional Information, dated July 28, 1997, which has been filed with the
Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone numbers listed on this page. The
Statement of Additional Information is incorporated herein by reference.
DEAN WITTER DISTRIBUTORS INC.
DISTRIBUTOR
TABLE OF CONTENTS
Prospectus Summary/2
Summary of Fund Expenses/4
Financial Highlights/6
The Fund and its Management/7
Investment Objective and Policies/7
Risk Considerations/9
Investment Restrictions/13
Purchase of Fund Shares/13
Shareholder Services/23
Redemptions and Repurchases/26
Dividends, Distributions and Taxes/27
Performance Information/29
Additional Information/30
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
New York Tax-Free Income Fund
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
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PROSPECTUS SUMMARY
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<S> <C>
The The Fund is organized as a Trust, commonly known as a Massachusetts business trust, and is an
Fund 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.
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Shares Offered Shares of beneficial interest with $0.01 par value (see page 30). The Fund offers four Classes of
shares, each with a different combination of sales charges, ongoing fees and other features (see
pages 13-23).
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Minimum The minimum initial investment for each Class is $1,000 ($100 if the account is opened through
Purchase EasyInvest-SM-). Class D shares are only available to persons investing $5 million or more and to
certain other limited categories of investors. For the purpose of meeting the minimum $5 million
investment for Class D shares, and subject to the $1,000 minimum initial investment for each Class
of the Fund, an investor's existing holdings of Class A shares and shares of funds for which Dean
Witter InterCapital Inc. serves as investment manager ("Dean Witter Funds") that are sold with a
front-end sales charge, and concurrent investments in Class D shares of the Fund and other Dean
Witter Funds that are multiple class funds, will be aggregated. The minimum subsequent investment is
$100 (see page 13).
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Investment The investment objective of the Fund is to provide a high level of current income exempt from
Objective federal, New York State and New York City income tax, consistent with preservation of capital.
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Investment The Fund will invest principally in New York tax-exempt fixed-income securities. However, it may
Policies also invest in taxable money market instruments, non-New York tax-exempt securities, futures and
options.
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Investment Dean Witter InterCapital Inc., the Investment Manager of the Fund, and its wholly-owned subsidiary,
Manager Dean Witter Services Company Inc., serve in various investment management, advisory, management and
administrative capacities to 100 investment companies and other portfolios with assets of
approximately $96.6 billion at June 30, 1997 (see page 7).
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Management The Investment Manager receives a monthly fee at the annual rate of 0.55 of 1% of daily net assets,
Fee scaled down on assets over $500 million. The fee should not be compared with fees paid by other
investment companies without also considering applicable sales loads and distribution fees,
including those noted below.
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Distributor Dean Witter Distributors Inc. (the "Distributor"). The Fund has adopted a distribution plan pursuant
and to Rule 12b-1 under the Investment Company Act (the "12b-1 Plan") with respect to the distribution
Distribution fees paid by the Class A, Class B and Class C shares of the Fund to the Distributor. The entire
Fee 12b-1 fee payable by Class A and a portion of the 12b-1 fee payable by each of Class B and Class C
equal to 0.20% of the average daily net assets of Class B and 0.25% of the average daily net assets
of Class C are currently each characterized as a service fee within the meaning of the National
Association of Securities Dealers, Inc. guidelines. The remaining portion of the 12b-1 fee, if any,
is characterized as an asset-based sales charge (see pages 13 and 21).
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Alternative Four classes of shares are offered:
Purchase
Arrangements - Class A shares are offered with a front-end sales charge, starting at 4.25% and reduced for larger
purchases. Investments of $1 million or more (and investments by certain other limited categories of
investors) are not subject to any sales charge at the time of purchase but a contingent deferred
sales charge ("CDSC") of 1.0% may be imposed on redemptions within one year of purchase. The Fund is
authorized to reimburse the Distributor for specific expenses incurred in promoting the distribution
of the Fund's Class A shares and servicing shareholder accounts pursuant to the Fund's 12b-1 Plan.
Reimbursement may in no event exceed an amount equal to payments at an annual rate of 0.25% of
average daily net assets of the Class (see pages 13, 17 and 21).
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2
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- Class B shares are offered without a front-end sales charge, but will in most cases be subject to
a CDSC (scaled down from 5.0% to 1.0%) if redeemed within six years after purchase. The CDSC will be
imposed on any redemption of shares if after such redemption the aggregate current value of a Class
B account with the Fund falls below the aggregate amount of the investor's purchase payments made
during the six years preceding the redemption. Class B shares are also subject to a 12b-1 fee
assessed at the annual rate of 0.75% of the lesser of: (a) the average daily net sales of the Fund's
Class B shares or (b) the average daily net assets of Class B. All shares of the Fund held prior to
July 28, 1997 have been designated Class B shares. Shares held before May 1, 1997 will convert to
Class A shares in May, 2007. In all other instances, Class B shares convert to Class A shares
approximately ten years after the date of the original purchase (see pages 13, 19 and 21).
- Class C shares are offered without a front-end sales charge, but will in most cases be subject to
a CDSC of 1.0% if redeemed within one year after purchase. The Fund is authorized to reimburse the
Distributor for specific expenses incurred in promoting the distribution of the Fund's Class C
shares and servicing shareholder accounts pursuant to the Fund's 12b-1 Plan. Reimbursement may in no
event exceed an amount equal to payments at an annual rate of 0.75% of average daily net assets of
the Class (see pages 13 and 21).
- Class D shares are offered only to investors meeting an initial investment minimum of $5 million
and to certain other limited categories of investors. Class D shares are offered without a front-end
sales charge or CDSC and are not subject to any 12b-1 fee (see pages 13 and 21).
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Dividends Dividends from net investment income are declared daily and paid monthly; capital gains, if any, may
and be distributed at least annually or retained for reinvestment by the Fund. Dividends and capital
Capital Gains gains distributions paid on shares of a Class are automatically reinvested in additional shares of
Distributions the same Class at net asset value unless the shareholder elects to receive cash. Shares acquired by
dividend and distribution reinvestment will not be subject to any sales charge or CDSC (see pages 23
and 27).
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Redemption Shares are redeemable by the shareholder at net asset value less any applicable CDSC on Class A,
Class B or Class C shares. An account may be involuntarily redeemed if the total value of the
account is less than $100 or, if the account was opened through EasyInvest-SM-, if after twelve
months the shareholder has invested less than $1,000 in the account (see page 26).
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Risks The value of the Fund's portfolio securities, and therefore the Fund's net asset value per share,
may increase or decrease due to various factors, principally changes in prevailing interest rates
and the ability of the issuers of the Fund's portfolio securities to pay interest and principal on
such obligations. The Fund also may invest in futures and options 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 9-13).
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</TABLE>
THE ABOVE IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION APPEARING
ELSEWHERE
IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION.
3
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SUMMARY OF FUND EXPENSES
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The following table illustrates all expenses and fees that a shareholder of
the Fund will incur. The expenses and fees set forth in the table are based on
the expenses and fees for the fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
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Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price)............................................... 4.25%(1) None None None
Sales Charge Imposed on Dividend Reinvestments.................. None None None None
Maximum Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds)............... None(2) 5.00%(3) 1.00%(4) None
Redemption Fees................................................. None None None None
Exchange Fee.................................................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET
ASSETS)
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Management Fees................................................. 0.55% 0.55% 0.55% 0.55%
12b-1 Fees (5) (6).............................................. 0.25% 0.75% 0.75% None
Other Expenses.................................................. 0.11% 0.11% 0.11% 0.11%
Total Fund Operating Expenses (7)............................... 0.91% 1.41% 1.41% 0.66%
</TABLE>
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(1) REDUCED FOR PURCHASES OF $25,000 AND OVER (SEE "PURCHASE OF FUND
SHARES--INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES").
(2) INVESTMENTS THAT ARE NOT SUBJECT TO ANY SALES CHARGE AT THE TIME OF PURCHASE
ARE SUBJECT TO A CDSC OF 1.00% THAT WILL BE IMPOSED ON REDEMPTIONS MADE
WITHIN ONE YEAR AFTER PURCHASE, EXCEPT FOR CERTAIN SPECIFIC CIRCUMSTANCES
(SEE "PURCHASE OF FUND SHARES--INITIAL SALES CHARGE ALTERNATIVE--CLASS A
SHARES").
(3) THE CDSC IS SCALED DOWN TO 1.00% DURING THE SIXTH YEAR, REACHING ZERO
THEREAFTER.
(4) ONLY APPLICABLE TO REDEMPTIONS MADE WITHIN ONE YEAR AFTER PURCHASE (SEE
"PURCHASE OF FUND SHARES-- LEVEL LOAD ALTERNATIVE--CLASS C SHARES").
(5) THE 12B-1 FEE IS ACCRUED DAILY AND PAYABLE MONTHLY. THE ENTIRE 12B-1 FEE
PAYABLE BY CLASS A AND A PORTION OF THE 12B-1 FEE PAYABLE BY EACH OF CLASS B
AND CLASS C EQUAL TO 0.20% OF THE AVERAGE DAILY NET ASSETS OF CLASS B AND
0.25% OF THE AVERAGE DAILY NET ASSETS OF CLASS C ARE CURRENTLY EACH
CHARACTERIZED AS A SERVICE FEE WITHIN THE MEANING OF NATIONAL ASSOCIATION OF
SECURITIES DEALERS, INC. ("NASD") GUIDELINES AND ARE PAYMENTS MADE FOR
PERSONAL SERVICE AND/OR MAINTENANCE OF SHAREHOLDER ACCOUNTS. THE REMAINDER
OF THE 12B-1 FEE, IF ANY, IS AN ASSET-BASED SALES CHARGE, AND IS A
DISTRIBUTION FEE PAID TO THE DISTRIBUTOR TO COMPENSATE IT FOR THE SERVICES
PROVIDED AND THE EXPENSES BORNE BY THE DISTRIBUTOR AND OTHERS IN THE
DISTRIBUTION OF THE FUND'S SHARES (SEE "PURCHASE OF FUND SHARES--PLAN OF
DISTRIBUTION").
(6) UPON CONVERSION OF CLASS B SHARES TO CLASS A SHARES, SUCH SHARES WILL BE
SUBJECT TO THE LOWER 12B-1 FEE APPLICABLE TO CLASS A SHARES. NO SALES CHARGE
IS IMPOSED AT THE TIME OF CONVERSION OF CLASS B SHARES TO CLASS A SHARES.
CLASS C SHARES DO NOT HAVE A CONVERSION FEATURE AND, THEREFORE, ARE SUBJECT
TO AN ONGOING 0.75% DISTRIBUTION FEE (SEE "PURCHASE OF FUND
SHARES--ALTERNATIVE PURCHASE ARRANGEMENTS").
(7) THERE WERE NO OUTSTANDING SHARES OF CLASS A, CLASS C OR CLASS D PRIOR TO THE
DATE OF THIS PROSPECTUS. ACCORDINGLY, "TOTAL FUND OPERATING EXPENSES," AS
SHOWN ABOVE WITH RESPECT TO THOSE CLASSES, ARE BASED UPON THE SUM OF 12B-1
FEES, MANAGEMENT FEES AND ESTIMATED "OTHER EXPENSES."
4
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<CAPTION>
EXAMPLES 1 YEAR 3 YEARS 5 YEARS
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<S> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1) a 5%
annual return and (2) redemption at the end of each time period:
Class A....................................................................... $ 51 $ 70 $ 91
Class B....................................................................... $ 64 $ 75 $ 97
Class C....................................................................... $ 24 $ 45 $ 77
Class D....................................................................... $ 7 $ 21 $ 37
You would pay the following expenses on the same $1,000 investment assuming no
redemption at the end of the period:
Class A....................................................................... $ 51 $ 70 $ 91
Class B....................................................................... $ 14 $ 45 $ 77
Class C....................................................................... $ 14 $ 45 $ 77
Class D....................................................................... $ 7 $ 21 $ 37
<CAPTION>
EXAMPLES 10 YEARS
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<S> <C>
You would pay the following expenses on a $1,000 investment assuming (1) a 5%
annual return and (2) redemption at the end of each time period:
Class A....................................................................... $ 150
Class B....................................................................... $ 169
Class C....................................................................... $ 169
Class D....................................................................... $ 82
You would pay the following expenses on the same $1,000 investment assuming no
redemption at the end of the period:
Class A....................................................................... $ 150
Class B....................................................................... $ 169
Class C....................................................................... $ 169
Class D....................................................................... $ 82
</TABLE>
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF EACH CLASS MAY BE GREATER OR
LESS THAN THOSE SHOWN.
The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"The Fund and its Management," "Purchase of Fund Shares--Plan of Distribution"
and "Redemptions and Repurchases."
Long-term shareholders of Class B and Class C may pay more in sales charges,
including distribution fees, than the economic equivalent of the maximum
front-end sales charges permitted by the NASD.
5
<PAGE>
FINANCIAL HIGHLIGHTS
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The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by Price Waterhouse LLP,
independent accountants. The financial highlights should be read in conjunction
with the financial statements, notes thereto and the unqualified report of
independent accountants which are contained in the Statement of Additional
Information. Further information about the performance of the Fund is contained
in the Fund's Annual Report to Shareholders, which may be obtained without
charge upon request from the Fund. All shares of the Fund held prior to July 28,
1997 have been designated Class B shares.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset
value,
beginning of
period........ $ 11.96 $ 10.83 $ 12.50 $ 11.98 $ 11.68 $ 11.00 $ 11.25 $ 10.94 $ 10.50 $ 11.57
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment
income........ 0.53 0.55 0.57 0.65 0.65 0.68 0.68 0.68 0.68 0.70
Net realized
and unrealized
gain (loss)... (0.21) 1.20 (1.51) 0.72 0.34 0.70 (0.25) 0.31 0.44 (0.93)
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations.... 0.32 1.75 (0.94) 1.37 0.99 1.38 0.43 0.99 1.12 (0.23)
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends
and
distributions
from:
Net investment
income........ (0.53) (0.54) (0.57) (0.65) (0.65) (0.68) (0.68) (0.68) (0.67) (0.70)
Net realized
gain.......... (0.04) (0.08) (0.16) (0.20) (0.04) (0.02) -- -- (0.01) (0.14)
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends
and
distributions... (0.57) (0.62) (0.73) (0.85) (0.69) (0.70) (0.68) (0.68) (0.68) (0.84)
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset
value, end of
period........ $ 11.71 $ 11.96 $ 10.83 $ 12.50 $ 11.98 $ 11.68 $ 11.00 $ 11.25 $ 10.94 $ 10.50
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL INVESTMENT
RETURN+......... 2.82% 16.59% (7.74)% 11.72% 8.70% 12.94% 4.01% 9.34% 10.91% (1.89)%
Ratios to
average net
assets:
Expenses..... 1.40%(1) 1.42%(1) 1.40% 1.27% 1.40% 1.32% 1.37% 1.37% 1.41% 1.40%
Net
investment
income...... 4.54% 4.70% 4.96% 5.20% 5.48% 6.00% 6.13% 6.09% 6.28% 6.44%
SUPPLEMENTAL
DATA:
Net assets, end
of period, in
millions...... $192 $217 $207 $246 $209 $182 $158 $147 $129 $113
Portfolio
turnover
rate.......... 16% 17% 10% 25% 16% 17% 23% 4% 18% 40%
</TABLE>
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+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) THE ABOVE RATIOS DO NOT REFLECT THE EFFECT OF EXPENSE OFFSETS OF 0.01%.
6
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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 Morgan Stanley, Dean Witter, Discover &
Co., a preeminent global financial services firm that maintains leading market
positions in each of its three primary businesses--securities, asset management
and credit services.
InterCapital and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to a total of 100 investment companies, thirty of
which are listed on the New York Stock Exchange, with combined total assets
including this Fund of approximately $93.1 billion as of June 30, 1997. The
Investment Manager also manages portfolios of pension plans, other institutions
and individuals which aggregated approximately $3.5 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, 1996, 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 1.41% of the Fund's
average daily net assets.
INVESTMENT OBJECTIVE AND POLICIES
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The investment objective of the Fund is to provide 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 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
7
<PAGE>
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 or A-1 by S&P; and (d) unrated securities which at the time of
purchase are judged by the Investment Manager to be of comparable quality to the
securities described above. 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.") 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. The Fund may also purchase Municipal Obligations which had originally been
issued by the same issuer as two separate series of the same issue with
different interest rates, but which are now linked together to form one series.
The 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
edu-
8
<PAGE>
cational facilities such as hospitals and dormitories. They rely primarily on
user fees to pay debt service, although the principal revenue source is often
supplemented by additional security features which are intended to enhance the
creditworthiness of the issuer's obligations. In some cases, particularly
revenue bonds issued to finance housing and public buildings, a direct or
implied "moral obligation" of a governmental unit may be pledged to the payment
of debt service. In other cases, a special tax or other charge may augment user
fees.
RISK CONSIDERATIONS
Investments in municipal bonds rated either 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.
Included within the revenue category of bonds described above are
participations in lease obligations or installment purchase contracts
(hereinafter collectively called "lease obligations") of municipalities. State
and local governments issue lease obligations to acquire equipment and
facilities.
Lease obligations may have risks not normally associated with general
obligation or other revenue bonds. Leases and installment purchase or
conditional sale contracts (which may provide for title to the leased asset to
pass eventually to the issuer) have developed as a means for governmental
issuers to acquire property and equipment without the necessity of complying
with the constitutional and statutory requirements generally applicable for the
issuance of debt. Certain lease obligations contain "non-appropriation" clauses
that provide that the governmental issuer has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on an annual or other periodic
basis. Consequently, continued lease payments on those lease obligations
containing "non-appropriation" clauses are dependent on future legislative
actions. If such legislative actions do not occur, the holders of the lease
obligation may experience difficulty in exercising their rights, including
disposition of the property.
Lease obligations represent a type of financing that may not have the depth
of marketability associated with more conventional municipal obligations, and,
as a result, certain of such lease obligations may be considered illiquid
securities. To determine whether or not the Fund will consider such securities
to be illiquid (the Fund may not invest more than ten percent of its net assets
in illiquid securities), the Trustees of the Fund have established guidelines to
be utilized by the Fund in determining the liquidity of a lease obligation. The
factors to be considered in making the determination include: 1) the frequency
of trades and quoted prices for the obligation; 2) the number of dealers willing
to purchase or sell the security and the number of other potential purchasers;
3) the willingness of dealers to undertake to make a market in the security; and
4) the nature of the marketplace trades, including, the time needed to dispose
of the security, the method of soliciting offers, and the mechanics of the
transfer.
The 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.
9
<PAGE>
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From
time to time, in the ordinary course of business, the Fund may purchase
securities on a when-issued or delayed delivery basis, or may purchase or sell
securities on a forward commitment basis. When such transactions are negotiated,
the price is fixed at the time of the commitment, but delivery and payment can
take place a month or more after the date of the commitment. There is no overall
limit on the percentage of the Fund's assets which may be committed to the
purchase of securities on a when-issued, delayed delivery or forward commitment
basis. An increase in the percentage of the Fund's assets committed to the
purchase of securities on a when-issued, delayed delivery or forward commitment
basis may increase the volatility of the Fund's net asset value.
ZERO COUPON SECURITIES. A portion of the fixed-income securities purchased
by the Fund may be zero coupon securities. Such securities are purchased at a
discount from their face amount, giving the purchaser the right to receive their
full value at maturity. The interest earned on such securities is, implicitly,
automatically compounded and paid out at maturity. While such compounding at a
constant rate eliminates the risk of receiving lower yields upon reinvestment of
interest if prevailing interest rates decline, the owner of a zero coupon
security will be unable to participate in higher yields upon reinvestment of
interest received on interest-paying securities if prevailing interest rates
rise.
A zero coupon security pays no interest to its holder during its life.
Therefore, to the extent the Fund invests in zero coupon securities, it will not
receive current cash available for distribution to shareholders. In addition,
zero coupon securities are subject to substantially greater price fluctuations
during periods of changing prevailing interest rates than are comparable
securities which pay interest on a current basis. Current federal tax law
requires that a holder (such as the Fund) of a zero coupon security accrue a
portion of the discount at which the security was purchased as income each year
even though the Fund receives no interest payments in cash on the security
during the year.
The Fund may enter into financial futures contracts, options on such futures
and municipal bond index futures contracts for hedging purposes.
FINANCIAL FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Fund may invest in
financial futures contracts and related options thereon. The Fund may sell a
financial futures contract, or purchase a put option on such futures contract,
if the Investment Manager anticipates interest rates to rise, as a hedge against
a decrease in the value of the Fund's portfolio securities. If the Investment
Manager anticipates that interest rates will decline, the Fund may purchase a
financial futures contract or a call option thereon to protect against an
increase in the price of the securities the Fund intends to purchase. These
futures contracts and related options thereon will be used only as a hedge
against anticipated interest rate changes. A futures contract sale creates an
obligation by the Fund, as seller, to deliver the specific type of instrument
called for in the contract at a specified future time for a specified price. A
futures contract purchase would create an obligation by the Fund, as purchaser,
to take delivery of the specific type of financial instrument at a specified
future time at a specified price. The specific securities delivered or taken,
respectively, at settlement date, would not be determined until or near that
date. The determination would be in accordance with the rules of the exchange on
which the futures contract sale or purchase was effected.
Although the terms of financial futures contracts specify actual delivery or
receipt of securities, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the securities.
Closing out of a futures contract is effected by entering into an offsetting
purchase or sale transaction.
Unlike a financial futures contract, which requires the parties to buy and
sell a security on a set date, an option on such a futures contract entitles its
holder to decide on or before a future date whether to enter into such a
contract (a long position in the case of a call option and a short position in
the case of a put option). If the holder decides not
10
<PAGE>
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.
Except as specified, the investment policies noted above are not fundamental
policies and may be changed without shareholder approval.
RISK 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
11
<PAGE>
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.
Over the long term, the State and City face potential economic problems. The
City accounts for a large portion of the State's population and personal income,
and the City's financial health affects the State in numerous ways. The City
continues to require significant financial assistance from the State. The City
depends on State aid both to enable the City to balance its budget and to meet
its cash requirements. The State could also be affected by the ability of the
City to market its securities successfully in the public credit markets.
The economic and financial condition of the State also may be affected by
various financial, social, economic and political factors. Such factors can be
very complex, may vary from fiscal year to fiscal year and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the State.
On January 13, 1992, Standard & Poor's reduced its ratings on the State's
general obligation bonds from A to A- and, in addition, reduced its ratings on
the State's moral obligation, lease purchase, guaranteed and contractual
obligation debt. Standard & Poor's also continued its negative rating outlook
assessment on State general obligation debt. On April 26, 1993, Standard &
Poor's revised the rating outlook assessment to stable. On February 14, 1994,
Standard & Poor's raised its outlook to positive and, on August 5, 1996,
confirmed its A- rating. On January 6, 1992, Moody's reduced its ratings on
outstanding limited-liability State lease purchase and contractual obligations
from A to Baa1. On July 26, 1996, Moody's reconfirmed its A rating on the
State's general obligation long-term indebtedness.
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 and the City
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. The official
statements relied on are dated September 1, 1996 with respect to the State and
December 21, 1996 with respect to the City, and the information therein is
subject to change after such dates.
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") and other broker-dealer
affiliates of InterCapital; and others regarding economic developments and
interest rate trends; and the Investment Manager's own analysis of factors it
deems relevant. The Fund is managed within InterCapital's Tax-Exempt Group,
which manages 40 tax-exempt municipal funds and fund portfolios, with
approximately $10.5 billion in assets as of June 30, 1997. James F. Willison,
Senior Vice President of InterCapital and Manager of InterCapital's Municipal
Fixed-Income Group, and Joseph R. Arcieri, Vice
12
<PAGE>
President of InterCapital and a member of InterCapital's Municipal Fixed-Income
Group, have been the primary portfolio co-managers of the Fund since its
inception and February, 1997, respectively, and have been portfolio managers at
InterCapital for over five years.
Securities are purchased and sold principally in response to the Investment
Manager's current evaluation of an issuer's ability to meet its debt obligations
in the future, and the Investment Manager's current assessment of future changes
in the levels of interest rates on tax-exempt securities of varying maturities,
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 and other brokers and dealers that are
affiliates of InterCapital.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The investment restrictions listed below are among the restrictions that
have been adopted by the Fund as fundamental policies. Under the Investment
Company Act of 1940, as amended (the "Act"), a fundamental policy may not be
changed without the vote of a majority of the outstanding voting securities of
the Fund, as defined in the Act.
The Fund may not:
1. With respect to 75% of its total assets, purchase securities of any issuer
if immediately thereafter more than 5% of the Fund's total assets 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).
Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objective by investing all or substantially all
of its assets in another investment company having substantially the same
investment objective and policies as the Fund.
PURCHASE OF FUND SHARES
- --------------------------------------------------------------------------------
GENERAL
The Fund offers each class of 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 Fund offers four classes of shares (each, a "Class"). Class A shares are
sold to investors with an initial sales charge that declines to zero for larger
purchases; however, Class A shares sold without an initial sales charge are
subject to a contingent
13
<PAGE>
deferred sales charge ("CDSC") of 1.0% if redeemed within one year of purchase,
except for certain specific circumstances. Class B shares are sold without an
initial sales charge but are subject to a CDSC (scaled down from 5.0% to 1.0%)
payable upon most redemptions within six years after purchase. Class C shares
are sold without an initial sales charge but are subject to a CDSC of 1.0% on
most redemptions made within one year after purchase. Class D shares are sold
without an initial sales charge or CDSC and are available only to investors
meeting an initial investment minimum of $5 million, and to certain other
limited categories of investors. At the discretion of the Board of Trustees of
the Fund, Class A shares may be sold to categories of investors in addition to
those set forth in this prospectus at net asset value without a front-end sales
charge, and Class D shares may be sold to certain other categories of investors,
in each case as may be described in the then current prospectus of the Fund. See
"Alternative Purchase Arrangements--Selecting a Particular Class" for a
discussion of factors to consider in selecting which Class of shares to
purchase.
The minimum initial purchase is $1,000 for each Class of shares, although
Class D shares are only available to persons investing $5 million or more and to
certain other limited categories of investors. For the purpose of meeting the
minimum $5 million initial investment for Class D shares, and subject to the
$1,000 minimum initial investment for each Class of the Fund, an investor's
existing holdings of Class A shares of the Fund and other Dean Witter Funds that
are multiple class funds ("Dean Witter Multi-Class Funds") and shares of Dean
Witter Funds sold with a front-end sales charge ("FSC Funds") and concurrent
investments in Class D shares of the Fund and other Dean Witter Multi-Class
Funds will be aggregated. Subsequent purchases of $100 or more may be made by
sending a check, payable to Dean Witter 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 an account executive of DWR or other Selected
Broker-Dealer. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A, Class B, Class C or Class D shares. If no
Class is specified, the Transfer Agent will not process the transaction until
the proper Class is identified. The minimum initial purchase in the case of
investments through EasyInvest-SM-, an automatic purchase plan (see "Shareholder
Services"), is $100, provided that the schedule of automatic investments will
result in investments totalling at least $1,000 within the first twelve months.
In the case of purchases made pursuant to systematic payroll deduction plans,
the Fund, in its discretion, may accept such purchases without regard to any
minimum amounts which would otherwise be required if the Fund has reason to
believe that additional purchases will increase the amount of the purchase of
shares in all accounts under such plans to at least $1,000. Certificates for
shares purchased will not be issued unless a request is made by the shareholder
in writing to the Transfer Agent.
Shares are sold through the Distributor on a normal three business day
settlement basis; that is, payment generally is due on or before the third
business day (settlement date) after the order is placed with the Distributor.
Shares of the Fund purchased through the Distributor or a Selected Broker-Dealer
are entitled to dividends beginning on the next business day following
settlement date. Since DWR and other Selected Broker-Dealers forward investors'
funds on settlement date, they will benefit from the temporary use of the funds
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. Sales personnel of a Selected
Broker-Dealer are compensated for selling shares of the Fund at the time of
their sale by the Distributor or any of its affiliates and/or the Selected
Broker-Dealer. In addition, some sales personnel of the
14
<PAGE>
Selected Broker-Dealer will receive various types of non-cash compensation as
special sales incentives, including trips, educational and/or business seminars
and merchandise. The Fund and the Distributor reserve the right to reject any
purchase orders.
ANALOGOUS DEAN WITTER FUNDS. The Distributor and the Investment Manager
serve in the same capacities for Dean Witter Multi-State Municipal Series
Trust-New York Series, an open-end investment company with investment objectives
and policies similar to those of the Fund. Shares of Dean Witter Multi-State
Municipal Series Trust-New York Series, are offered to the public with a sales
charge imposed at the time of purchase. The Classes of the Fund and Dean Witter
Multi-State Municipal Series Trust, New York Series have differing fees and
expenses, which will affect performance. Investors who would like to receive a
prospectus for Dean Witter Multi-State Municipal Series Trust-New York Series,
should call the telephone numbers listed on the front cover of this Prospectus,
or may call their account executive for additional information.
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund offers several Classes of shares to investors designed to provide
them with the flexibility of selecting an investment best suited to their needs.
The general public is offered three Classes of shares: Class A shares, Class B
shares and Class C shares, which differ principally in terms of sales charges
and rate of expenses to which they are subject. A fourth Class of shares, Class
D shares, is offered only to limited categories of investors (see "No Load
Alternative--Class D Shares" below).
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund except that Class A,
Class B and Class C shares bear the expenses of the ongoing shareholder service
fees, Class B and Class C shares bear the expenses of the ongoing distribution
fees and Class A, Class B and Class C shares which are redeemed subject to a
CDSC bear the expense of the additional incremental distribution costs resulting
from the CDSC applicable to shares of those Classes. The ongoing distribution
fees that are imposed on Class A, Class B and Class C shares will be imposed
directly against those Classes and not against all assets of the Fund and,
accordingly, such charges against one Class will not affect the net asset value
of any other Class or have any impact on investors choosing another sales charge
option. See "Plan of Distribution" and "Redemptions and Repurchases."
Set forth below is a summary of the differences between the Classes and the
factors an investor should consider when selecting a particular Class. This
summary is qualified in its entirety by detailed discussion of each Class that
follows this summary.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.25%. The initial sales charge is reduced for certain
purchases. Investments of $1 million or more (and investments by certain other
limited categories of investors) are not subject to any sales charges at the
time of purchase but are subject to a CDSC of 1.0% on redemptions made within
one year after purchase, except for certain specific circumstances. Class A
shares are also subject to a 12b-1 fee of up to 0.25% of the average daily net
assets of the Class. See "Initial Sales Charge Alternative--Class A Shares."
CLASS B SHARES. Class B shares are offered at net asset value with no
initial sales charge but are subject to a CDSC (scaled down from 5.0% to 1.0%)
if redeemed within six years of purchase. This CDSC may be waived for certain
redemptions. Class B shares are also subject to an annual 12b-1 fee of 0.75% of
the lesser of: (a) the average daily aggregate gross sales of the Fund's Class B
shares since the inception of the Fund (not including reinvestments of dividends
or capital gains distributions), less the average daily aggregate net asset
value of the Fund's Class B shares redeemed since the Fund's inception upon
which a CDSC has been imposed or waived, or (b) the average daily net assets of
Class B. The Class B shares' distribution fee will cause that Class to have
higher expenses
15
<PAGE>
and pay lower dividends than Class A or Class D shares.
After approximately ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund, based on the relative net asset
values of the shares of the two Classes on the conversion date. In addition, a
certain portion of Class B shares that have been acquired through the
reinvestment of dividends and distributions will be converted at that time. See
"Contingent Deferred Sales Charge Alternative--Class B Shares."
CLASS C SHARES. Class C shares are sold at net asset value with no initial
sales charge but are subject to a CDSC of 1.0% on redemptions made within one
year after purchase. This CDSC may be waived for certain redemptions. They are
subject to an annual 12b-1 fee of up to 0.75% of the average daily net assets of
the Class C shares. The Class C shares' distribution fee may cause that Class to
have higher expenses and pay lower dividends than Class A or Class D shares. See
"Level Load Alternative--Class C Shares."
CLASS D SHARES. Class D shares are available only to limited categories of
investors (see "No Load Alternative--Class D Shares" below). Class D shares are
sold at net asset value with no initial sales charge or CDSC. They are not
subject to any 12b-1 fees. See "No Load Alternative--Class D Shares."
SELECTING A PARTICULAR CLASS. In deciding which Class of Fund shares to
purchase, investors should consider the following factors, as well as any other
relevant facts and circumstances:
The decision as to which Class of shares is more beneficial to an investor
depends on the amount and intended length of his or her investment. Investors
who prefer an initial sales charge alternative may elect to purchase Class A
shares. Investors qualifying for significantly reduced or, in the case of
purchases of $1 million or more, no initial sales charges may find Class A
shares particularly attractive because similar sales charge reductions are not
available with respect to Class B or Class C shares. Moreover, Class A shares
are sub-
ject to lower ongoing expenses than are Class B or Class C shares over the term
of the investment. As an alternative, Class B and Class C shares are sold
without any initial sales charge so the entire purchase price is immediately
invested in the Fund. Any investment return on these additional investment
amounts may partially or wholly offset the higher annual expenses of these
Classes. Because the Fund's future return cannot be predicted, however, there
can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, although Class C shares are subject to a significantly lower
CDSC upon redemptions, they do not, unlike Class B shares, convert into Class A
shares after approximately ten years, and, therefore, are subject to an ongoing
12b-1 fee of 0.75% (rather than the 0.25% fee applicable to Class A shares) for
an indefinite period of time. Thus, Class B shares may be more attractive than
Class C shares to investors with longer term investment outlooks. Other
investors, however, may elect to purchase Class C shares if, for example, they
determine that they do not wish to be subject to a front-end sales charge and
they are uncertain as to the length of time they intend to hold their shares.
For the purpose of meeting the $5 million minimum investment amount for
Class D shares, holdings of Class A shares in all Dean Witter Multi-Class Funds,
shares of FSC Funds and shares of Dean Witter Funds for which such shares have
been exchanged will be included together with the current investment amount.
Sales personnel may receive different compensation for selling each Class of
shares. Investors should understand that the purpose of a CDSC is the same as
that of the initial sales charge in that the sales charges applicable to each
Class provide for the financing of the distribution of shares of that Class.
16
<PAGE>
Set forth below is a chart comparing the sales charge, 12b-1 fees and
conversion options applicable to each Class of shares:
<TABLE>
<CAPTION>
<C> <S> <C> <C>
CONVERSION
CLASS SALES CHARGE 12B-1 FEE FEATURE
A Maximum 4.25% 0.25% No
initial sales
charge reduced
for purchases
of $25,000 and
over; shares
sold without an
initial sales
charge
generally
subject to a
1.0% CDSC
during first
year.
B Maximum 5.0% 0.75% B shares
CDSC during the convert to A
first year shares
decreasing to 0 automatically
after six years after
approximately
ten years
C 1.0% CDSC 0.75% No
during first
year
D None None No
</TABLE>
See "Purchase of Fund Shares" and "The Fund and its Management" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Determination of Net Asset Value," "Dividends,
Distributions and Taxes" and "Shareholder Services--Exchange Privilege" for
other differences between the Classes of shares.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
Class A shares are sold at net asset value plus an initial sales charge. In
some cases, reduced sales charges may be available, as described below.
Investments of $1 million or more (and investments by certain other limited
categories of investors) are not subject to any sales charges at the time of
purchase but are subject to a CDSC of 1.0% on redemptions made within one year
after purchase (calculated from the last day of the month in which the shares
were purchased), except for certain specific circumstances. The CDSC will be
assessed on an amount equal to the lesser of the current market value or the
cost of the shares being redeemed. The CDSC will not be imposed (i) in the
circumstances set forth below in the section "Contingent Deferred Sales Charge
Alternative--Class B Shares--CDSC Waivers," except that the references to six
years in the first paragraph of that section shall mean one year in the case of
Class A shares, and (ii) in the circumstances identified in the section
"Additional Net Asset Value Purchase Options" below. Class A shares are also
subject to an annual 12b-1 fee of up to 0.25% of the average daily net assets of
the Class.
The offering price of Class A shares will be the net asset value per share
next determined following receipt of an order (see "Determination of Net Asset
Value" below), plus a sales charge (expressed as a percentage of the offering
price) on a single transaction as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------------------
PERCENTAGE OF APPROXIMATE
AMOUNT OF SINGLE PUBLIC OFFERING PERCENTAGE OF AMOUNT
TRANSACTION PRICE INVESTED
- ------------------------- ------------------- ---------------------
<S> <C> <C>
Less than $25,000........ 4.25% 4.44%
$25,000 but less
than $50,000........ 4.00% 4.17%
$50,000 but less
than $100,000....... 3.50% 3.63%
$100,000 but less
than $250,000....... 2.75% 2.83%
$250,000 but less
than $1 million..... 1.75% 1.78%
$1 million and over...... 0 0
</TABLE>
Upon notice to all Selected Broker-Dealers, the Distributor may reallow up
to the full applicable sales charge as shown in the above schedule during
periods specified in such notice. During periods when 90% or more of the sales
charge is reallowed, such Selected Broker-Dealers may be deemed to be
underwriters as that term is defined in the Securities Act of 1933.
The above schedule of sales charges is applicable to purchases in a single
transaction by, among others: (a) an individual; (b) an individual, his or her
spouse and their children under the age of 21 purchasing shares for his, her or
their own
17
<PAGE>
accounts; (c) a trustee or other fiduciary purchasing shares for a single trust
estate or a single fiduciary account; (d) a pension, profit-sharing or other
employee benefit plan qualified or non-qualified under Section 401 of the
Internal Revenue Code; (e) tax-exempt organizations enumerated in Section
501(c)(3) or (13) of the Internal Revenue Code; (f) employee benefit plans
qualified under Section 401 of the Internal Revenue Code of a single employer or
of employers who are "affiliated persons" of each other within the meaning of
Section 2(a)(3)(c) of the Act; and for investments in Individual Retirement
Accounts of employees of a single employer through Systematic Payroll Deduction
plans; or (g) any other organized group of persons, whether incorporated or not,
provided the organization has been in existence for at least six months and has
some purpose other than the purchase of redeemable securities of a registered
investment company at a discount.
COMBINED PURCHASE PRIVILEGE. Investors may have the benefit of reduced
sales charges in accordance with the above schedule by combining purchases of
Class A shares of the Fund in single transactions with the purchase of Class A
shares of other Dean Witter Multi-Class Funds and shares of FSC Funds. The sales
charge payable on the purchase of the Class A shares of the Fund, the Class A
shares of the other Dean Witter Multi-Class Funds and the shares of the FSC
Funds will be at their respective rates applicable to the total amount of the
combined concurrent purchases of such shares.
RIGHT OF ACCUMULATION. The above persons and entities may benefit from a
reduction of the sales charges in accordance with the above schedule if the
cumulative net asset value of Class A shares purchased in a single transaction,
together with shares of the Fund and other Dean Witter Funds previously
purchased at a price including a front-end sales charge (including shares of the
Fund and other Dean Witter Funds acquired in exchange for those shares, and
including in each case shares acquired through reinvestment of dividends and
distributions), which are held at the time of such transaction, amounts to
$25,000 or more. If such investor has a cumulative net asset value of shares of
FSC Funds and Class A and Class D shares equal to at least $5 million, such
investor is eligible to purchase Class D shares subject to the $1,000 minimum
initial investment requirement of that Class of the Fund. See "No Load
Alternative-- Class D Shares" below.
The Distributor must be notified by DWR or a Selected Broker-Dealer or the
shareholder at the time a purchase order is placed that the purchase qualifies
for the reduced charge under the Right of Accumulation. Similar notification
must be made in writing by the dealer or shareholder when such an order is
placed by mail. The reduced sales charge will not be granted if: (a) such
notification is not furnished at the time of the order; or (b) a review of the
records of the Selected Broker-Dealer or the Transfer Agent fails to confirm the
investor's represented holdings.
LETTER OF INTENT. The foregoing schedule of reduced sales charges will also
be available to investors who enter into a written Letter of Intent providing
for the purchase, within a thirteen-month period, of Class A shares of the Fund
from DWR or other Selected Broker-Dealers. The cost of Class A shares of the
Fund or shares of other Dean Witter Funds which were previously purchased at a
price including a front-end sales charge during the 90-day period prior to the
date of receipt by the Distributor of the Letter of Intent, or of Class A shares
of the Fund or shares of other Dean Witter Funds acquired in exchange for shares
of such funds purchased during such period at a price including a front-end
sales charge, which are still owned by the shareholder, may also be included in
determining the applicable reduction.
ADDITIONAL NET ASSET VALUE PURCHASE OPTIONS. In addition to investments of
$1 million or more, Class A shares also may be purchased at net asset value by
the following:
(1) trusts for which Dean Witter Trust Company ("DWTC") or Dean Witter Trust
FSB ("DWTFSB") (each of which is an affiliate of the Investment Manager)
provides discretionary trustee services;
18
<PAGE>
(2) persons participating in a fee-based program approved by the Distributor,
pursuant to which such persons pay an asset based fee for services in the nature
of investment advisory or administrative services (such investments are subject
to all of the terms and conditions of such programs, which may include
termination fees and restrictions on transferability of Fund shares);
(3) investors who are clients of a Dean Witter account executive who joined
Dean Witter from another investment firm within six months prior to the date of
purchase of Fund shares by such investors, if the shares are being purchased
with the proceeds from a redemption of shares of an open-end proprietary mutual
fund of the account executive's previous firm which imposed either a front-end
or deferred sales charge, provided such purchase was made within sixty days
after the redemption and the proceeds of the redemption had been maintained in
the interim in cash or a money market fund; and
(4) other categories of investors, at the discretion of the Board, as
disclosed in the then current prospectus of the Fund.
No CDSC will be imposed on redemptions of shares purchased pursuant to
paragraphs (1), (2) or (3), above.
For further information concerning purchases of the Fund's shares, contact
DWR or another Selected Broker-Dealer or consult the Statement of Additional
Information.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE--
CLASS B SHARES
Class B shares are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Fund. A CDSC, however, will be imposed on
most Class B shares redeemed within six years after purchase. The CDSC will be
imposed on any redemption of shares if after such redemption the aggregate
current value of a Class B account with the Fund falls below the aggregate
amount of the investor's purchase payments for Class B shares made during the
six years preceding the redemption. In addition, Class B shares are subject to
an annual 12b-1 fee of 0.75% of the lesser of: (a) the average daily aggregate
gross sales of the Fund's Class B shares since the inception of the Fund (not
including reinvestments of dividends or capital gains distributions), less the
average daily aggregate net asset value of the Fund's Class B shares redeemed
since the Fund's inception upon which a CDSC has been imposed or waived, or (b)
the average daily net assets of Class B.
Class B shares of the Fund which are held for six years or more after
purchase (calculated from the last day of the month in which the shares were
purchased) will not be subject to any CDSC upon redemption. Shares redeemed
earlier than six years after purchase may, however, be subject to a CDSC which
will be a percentage of the dollar amount of shares redeemed and will be
assessed on an amount equal to the lesser of the current market value or the
cost of the shares being redeemed. The size of this percentage will depend upon
how long the shares have been held, as set forth in the following table:
<TABLE>
<CAPTION>
YEAR SINCE CDSC 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>
CDSC WAIVERS. A CDSC will not be imposed on: (i) any amount which
represents an increase in value of shares purchased within the six years
preceding the redemption; (ii) the current net asset value of shares purchased
more than six years prior to the redemption; and (iii) the current net asset
value of shares purchased through reinvestment of dividends or distributions
and/or shares acquired in exchange for shares of other open-end investment
companies for which InterCapital serves as investment manager (collectively,
with the Fund, the
19
<PAGE>
"Dean Witter Funds") sold with a front-end sales charge or of other Dean Witter
Funds acquired in exchange for such shares. Moreover, in determining whether a
CDSC is applicable it will be assumed that amounts described in (i), (ii) and
(iii) above (in that order) are redeemed first.
In addition, the CDSC, if otherwise applicable, will be waived in the case
of:
(1) redemptions of shares held at the time a shareholder dies or becomes
disabled, only if the shares are: (a) registered either in the name of an
individual shareholder (not a trust), or in the names of such shareholder and
his or her spouse as joint tenants with right of survivorship; or (b) held in a
qualified corporate or self-employed retirement plan, Individual Retirement
Account ("IRA") or Custodial Account under Section 403(b)(7) of the Internal
Revenue Code ("403(b) Custodial Account"), provided in either case that the
redemption is requested within one year of the death or initial determination of
disability; and
(2) redemptions in connection with the following retirement plan
distributions: (a) lump-sum or other distributions from a qualified corporate
or self-employed retirement plan following retirement (or, in the case of a "key
employee" of a "top heavy" plan, following attainment of age 59 1/2); (b)
distributions from an IRA or 403(b) Custodial Account following attainment of
age 59 1/2; or (c) a tax-free return of an excess contribution to an IRA.
With reference to (1) above, for the purpose of determining disability, the
Distributor utilizes the definition of disability contained in Section 72(m)(7)
of the Internal Revenue Code, which relates to the inability to engage in
gainful employment. With reference to (2) above, the term "distribution" does
not encompass a direct transfer of IRA, 403(b) Custodial Account or retirement
plan assets to a successor custodian or trustee. All waivers will be granted
only following receipt by the Distributor of confirmation of the shareholder's
entitlement.
CONVERSION TO CLASS A SHARES. All shares of the Fund held prior to July 28,
1997 have been designated Class B shares. Shares held before May 1, 1997 will
convert to Class A shares in May, 2007. In all other instances Class B shares
will convert automatically to Class A shares, based on the relative net asset
values of the shares of the two Classes on the conversion date, which will be
approximately ten (10) years after the date of the original purchase. The ten
year period is calculated from the last day of the month in which the shares
were purchased or, in the case of Class B shares acquired through an exchange or
a series of exchanges, from the last day of the month in which the original
Class B shares were purchased, provided that shares originally purchased before
May 1, 1997 will convert to Class A shares in May, 2007. The conversion of
shares purchased on or after May 1, 1997 will take place in the month following
the tenth anniversary of the purchase. There will also be converted at that time
such proportion of Class B shares acquired through automatic reinvestment of
dividends and distributions owned by the shareholder as the total number of his
or her Class B shares converting at the time bears to the total number of
outstanding Class B shares purchased and owned by the shareholder. In the case
of Class B shares previously exchanged for shares of an "Exchange Fund" (see
"Shareholder Services--Exchange Privilege"), the period of time the shares were
held in the Exchange Fund (calculated from the last day of the month in which
the Exchange Fund shares were acquired) is excluded from the holding period for
conversion. If those shares are subsequently re-exchanged for Class B shares of
a Dean Witter Multi-Class Fund, the holding period resumes on the last day of
the month in which Class B shares are reacquired.
If a shareholder has received share certificates for Class B shares, such
certificates must be delivered to the Transfer Agent at least one week prior to
the date for conversion. Class B shares evidenced by share certificates that are
not received by the Transfer Agent at least one week prior to any conversion
date will be converted into Class A shares on the next scheduled conversion date
after such certificates are received.
20
<PAGE>
Effectiveness of the conversion feature is subject to the continuing
availability of a ruling of the Internal Revenue Service or an opinion of
counsel that (i) the conversion of shares does not constitute a taxable event
under the Internal Revenue Code, (ii) Class A shares received on conversion will
have a basis equal to the shareholder's basis in the converted Class B shares
immediately prior to the conversion, and (iii) Class A shares received on
conversion will have a holding period that includes the holding period of the
converted Class B shares. The conversion feature may be suspended if the ruling
or opinion is no longer available. In such event, Class B shares would continue
to be subject to Class B 12b-1 fees.
Class B shares purchased before July 28, 1997 by trusts for which DWTC or
DWTFSB provides discretionary trustee services will convert to Class A shares on
or about August 29, 1997. The CDSC will not be applicable to such shares.
LEVEL LOAD ALTERNATIVE--CLASS C SHARES
Class C shares are sold at net asset value next determined without an
initial sales charge but are subject to a CDSC of 1.0% on most redemptions made
within one year after purchase (calculated from the last day of the month in
which the shares were purchased). The CDSC will be assessed on an amount equal
to the lesser of the current market value or the cost of the shares being
redeemed. The CDSC will not be imposed in the circumstances set forth above in
the section "Contingent Deferred Sales Charge Alternative--Class B Shares--CDSC
Waivers," except that the references to six years in the first paragraph of that
section shall mean one year in the case of Class C shares. Class C shares are
subject to an annual 12b-1 fee of up to 0.75% of the average daily net assets of
the Class. Unlike Class B shares, Class C shares have no conversion feature and,
accordingly, an investor that purchases Class C shares will be subject to 12b-1
fees applicable to Class C shares for an indefinite period subject to annual
approval by the Fund's Board of Trustees and regulatory limitations.
NO LOAD ALTERNATIVE--CLASS D SHARES
Class D shares are offered without any sales charge on purchase or
redemption and without any 12b-1 fee. Class D shares are offered only to
investors meeting an initial investment minimum of $5 million and the following
categories of investors: (i) investors participating in the InterCapital mutual
fund asset allocation program pursuant to which such persons pay an asset based
fee; (ii) persons participating in a fee-based program approved by the
Distributor, pursuant to which such persons pay an asset based fee for services
in the nature of investment advisory or administrative services (subject to all
of the terms and conditions of such programs, which may include termination fees
and restrictions on transferability of Fund shares); (iii) certain Unit
Investment Trusts sponsored by DWR; (iv) certain other open-end investment
companies whose shares are distributed by the Distributor; and (v) other
categories of investors, at the discretion of the Board, as disclosed in the
then current prospectus of the Fund. Investors who require a $5 million minimum
initial investment to qualify to purchase Class D shares may satisfy that
requirement by investing that amount in a single transaction in Class D shares
of the Fund and other Dean Witter Multi-Class Funds, subject to the $1,000
minimum initial investment required for that Class of the Fund. In addition, for
the purpose of meeting the $5 million minimum investment amount, holdings of
Class A shares in all Dean Witter Multi-Class Funds, shares of FSC Funds and
shares of Dean Witter Funds for which such shares have been exchanged will be
included together with the current investment amount. If a shareholder redeems
Class A shares and purchases Class D shares, such redemption may be a taxable
event.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Act with respect to the distribution of Class A, Class B and Class C shares of
the Fund. In the case of Class A and Class C shares, the Plan provides that the
Fund will reimburse the Distributor and others for the
21
<PAGE>
expenses of certain activities and services incurred by them specifically on
behalf of those shares. Reimbursements for these expenses will be made in
monthly payments by the Fund to the Distributor, which will in no event exceed
amounts equal to payments at the annual rates of 0.25% and 0.75% of the average
daily net assets of Class A and Class C, respectively. In the case of Class B
shares, the Plan provides that the Fund will pay the Distributor a fee, which is
accrued daily and paid monthly, at the annual rate of 0.75% of the lesser of:
(a) the average daily aggregate gross sales of the Fund's Class B shares since
the inception of the Fund (not including reinvestments of dividends or capital
gains distributions), less the average daily aggregate net asset value of the
Fund's Class B shares redeemed since the Fund's inception upon which a CDSC has
been imposed or waived, or (b) the average daily net assets of Class B. The fee
is treated by the Fund as an expense in the year it is accrued. In the case of
Class A shares, the entire amount of the fee currently represents a service fee
within the meaning of the NASD guidelines. In the case of Class B and Class C
shares, a portion of the fee payable pursuant to the Plan, equal to 0.20% and
0.25% of the average daily net assets of each of these Classes, respectively, is
currently characterized as a service fee. A service fee is a payment made for
personal service and/or the maintenance of shareholder accounts.
Additional amounts paid under the Plan in the case of Class B and Class C
shares are paid to the Distributor for services provided and the expenses borne
by the Distributor and others in the distribution of the shares of those
Classes, including the payment of commissions for sales of the shares of those
Classes and incentive compensation to and expenses of DWR's account executives
and others who engage in or support distribution of shares or who service
shareholder accounts, including overhead and telephone expenses; printing and
distribution of prospectuses and reports used in connection with the offering of
the Fund's shares to other than current shareholders; and preparation, printing
and distribution of sales literature and advertising materials. In addition, the
Distributor may utilize fees paid pursuant to the Plan in the case of Class B
shares to compensate DWR and other Selected Broker-Dealers for their opportunity
costs in advancing such amounts, which compensation would be in the form of a
carrying charge on any unreimbursed expenses.
For the fiscal year ended December 31, 1996, Class B shares of the Fund
accrued payments under the Plan amounting to $1,518,807, which amount is equal
to 0.75% of the Fund's average daily net assets for the fiscal year. The
payments accrued under the Plan were calculated pursuant to clause (b) of the
compensation formula under the Plan. All shares held prior to July 28, 1997 have
been designated Class B shares.
In the case of Class B shares, at any given time, the expenses in
distributing Class B shares of the Fund may be in excess of the total of (i) the
payments made by the Fund pursuant to the Plan, and (ii) the proceeds of CDSCs
paid by investors upon the redemption of Class B shares. For example, if $1
million in expenses in distributing Class B shares of the Fund had been incurred
and $750,000 had been received as described in (i) and (ii) above, the excess
expense would amount to $250,000. The Distributor has advised the Fund that such
excess amounts, including the carrying charge described above, totalled
$2,741,726 at December 31, 1996, which was equal to 1.43% of the net assets of
the Fund on such date. Because there is no requirement under the Plan that the
Distributor be reimbursed for all distribution expenses or any requirement that
the Plan be continued from year to year, such excess amount does not constitute
a liability of the Fund. Although there is no legal obligation for the Fund to
pay expenses incurred in excess of payments made to the Distributor under the
Plan, and the proceeds of CDSCs paid by investors upon redemption of shares, if
for any reason the Plan is terminated the Trustees will consider at that time
the manner in which to treat such expenses. Any cumulative expenses incurred,
but not yet recovered through distribution fees or CDSCs, may or may not
22
<PAGE>
be recovered through future distribution fees or CDSCs.
In the case of Class A and Class C shares, expenses incurred pursuant to the
Plan in any calendar year in excess of 0.25% or 0.75% of the average daily net
assets of Class A or Class C, respectively, will not be reimbursed by the Fund
through payments in any subsequent year, except that expenses representing a
gross sales commission credited to account executives at the time of sale may be
reimbursed in the subsequent calendar year. No interest or other financing
charges will be incurred on any Class A or Class C distribution expenses
incurred by the Distributor under the Plan or on any unreimbursed expenses due
to the Distributor pursuant to the Plan.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined once daily at 4:00 p.m. New York
time on each day that the New York Stock Exchange is open (or, on days when the
New York Stock Exchange closes prior to 4 p.m., at such earlier time), by taking
the net assets of the Fund, dividing by the number of shares outstanding and
adjusting to the nearest cent. The assets belonging to Class A, Class B, Class C
and Class D shares will be invested together in a single portfolio. The net
asset value of each Class, however, will be determined separately by subtracting
each Class's accrued expenses and liabilities. The net asset value per share
will not be determined on Good Friday and on such other federal and non-federal
holidays as are observed by the New York Stock Exchange.
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 sixty days
or less to maturity at time of purchase are valued at amortized cost, unless the
Board determines such does not reflect the securities' market value, in which
case these securities will be valued at their fair market value as determined by
the Board of Trustees. The value of other assets will be determined in good
faith under procedures established by and under the supervision of the Trustees.
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. All income dividends
and capital gains distributions are automatically paid in full and fractional
shares of the applicable Class of the Fund, (or, if specified by the
shareholder, in shares of any other open-end Dean Witter Fund), unless the
shareholder requests they be paid in cash. Shares so acquired are acquired at
net asset value and are not subject to the imposition of a front-end sales
charge or a CDSC (see "Redemptions and Repurchases"). Such dividends and
distributions will be paid, at the net asset value per share (without sales
charge), in shares of the applicable Class of the Fund (or in cash if the
shareholder so requests) on the monthly payment date, which will be no later
than the last business day of the month for which the dividend or distribution
is payable. Processing of dividend checks begins immediately following the
monthly payment date. Shareholders who have requested to receive dividends in
cash will normally receive their monthly dividend check during the first ten
days of the following month.
INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS RECEIVED IN CASH. Any shareholder
who receives a cash payment representing a dividend or capital gains
distribution may invest such dividend or distribution in shares of the
applicable Class at the net
23
<PAGE>
asset value per share next determined after receipt by the Transfer Agent, by
returning the check or the proceeds to the Transfer Agent within thirty days
after the payment date. Shares so acquired are acquired at net asset value and
are not subject to the imposition of a front-end sales charge or a CDSC (see
"Redemptions and Repurchases").
EASYINVEST-SM-. Shareholders may subscribe to EasyInvest, an automatic
purchase plan which provides for any amount from $100 to $5,000 to be
transferred automatically from a checking or savings account or following
redemption of shares of a Dean Witter money market fund, on a semi-monthly,
monthly or quarterly basis, to the Transfer Agent for investment in shares of
the Fund (see "Purchase of Fund Shares" and "Redemptions and
Repurchase--Involuntary Redemption").
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan (the "Withdrawal
Plan") is available for shareholders who own or purchase shares of the Fund
having a minimum value of $10,000 based upon the then current net asset value.
The Withdrawal Plan provides for monthly or quarterly (March, June, September
and December) checks in any dollar amount, not less than $25 or in any whole
percentage of the account balances on an annualized basis. Any applicable CDSC
will be imposed on shares redeemed under the Withdrawal Plan (see "Purchase of
Fund Shares"). Therefore, any shareholder participating in the Withdrawal Plan
will have sufficient shares redeemed from his or her account so that the
proceeds (net of any applicable CDSC) to the shareholder will be the designated
monthly or quarterly amount. Withdrawal plan payments should not be considered
as dividends, yields or income. If periodic withdrawal plan payments
continuously exceed net investment income and net capital gains, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. Each withdrawal constitutes a redemption of shares and any gain or
loss realized must be recognized for federal income tax purposes.
Shareholders should contact their DWR or Selected Broker-Dealer Account
Executive or the Transfer Agent for further information about any of the above
services.
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class of any
other Dean Witter Multi-Class Fund without the imposition of any exchange fee.
Shares may also be exchanged for shares of the following funds: Dean Witter
Short-Term U.S. Treasury Trust, Dean Witter Limited Term Municipal Trust, Dean
Witter Short-Term Bond Fund, Dean Witter Intermediate Term U.S. Treasury Trust
and five Dean Witter funds which are money market funds (the "Exchange Funds").
Class A shares may also be exchanged for shares of Dean Witter Multi-State
Municipal Series Trust and Dean Witter Hawaii Municipal Trust, which are Dean
Witter Funds sold with a front-end sales charge ("FSC Funds"). Class B shares
may also be exchanged for shares of Dean Witter Global Short-Term Income Fund
Inc., Dean Witter High Income Securities and Dean Witter National Municipal
Trust, which are Dean Witter Funds offered with a CDSC ("CDSC 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 Dean Witter Multi-Class Fund, any FSC Fund, any 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 Dean
Witter Multi-Class Funds, FSC Funds, or CDSC Funds or any Exchange Fund that is
not a money market fund can be effected on the same basis.
24
<PAGE>
No CDSC is imposed at the time of any exchange of shares, although any
applicable CDSC will be imposed upon ultimate redemption. During the period of
time the shareholder remains in an Exchange Fund (calculated from the last day
of the month in which the shares were acquired), the holding period (for the
purpose of determining the rate of the CDSC) is frozen. If those shares are
subsequently re-exchanged for shares of a Dean Witter Multi-Class Fund or shares
of a CDSC Fund, the holding period previously frozen when the first exchange was
made resumes on the last day of the month in which shares of a Dean Witter
Multi-Class Fund or shares of a CDSC Fund are reacquired. Thus, the CDSC is
based upon the time (calculated as described above) the shareholder was invested
in shares of a Dean Witter Multi-Class Fund or in shares of a CDSC Fund (see
"Purchase of Fund Shares"). In the case of exchanges of Class A shares which are
subject to a CDSC, the holding period also includes the time (calculated as
described above) the shareholder was invested in shares of a FSC Fund. 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 Fund 12b-1 distribution fees incurred on or after
that date which are attributable to those shares. (Exchange Fund 12b-1
distribution fees are described in the prospectus for those funds). Class B
shares of the Fund acquired in exchange for Class B shares of another Dean
Witter Multi-Class Fund or shares of a CDSC Fund having a different CDSC
schedule than that of this Fund will be subject to the higher CDSC schedule,
even if such shares are subsequently re-exchanged for shares of the fund with
the lower CDSC schedule.
ADDITIONAL INFORMATION REGARDING EXCHANGES. Purchases and exchanges should
be made for investment purposes only. A pattern of frequent exchanges may be
deemed by the Investment Manager to be abusive and contrary to the best
interests of the Fund's other shareholders and, at the Investment Manager's
discretion, may be limited by the Fund's refusal to accept additional purchases
and/ or exchanges from the investor. Although the Fund does not have any
specific definition of what constitutes a pattern of frequent exchanges, and
will consider all relevant factors in determining whether a particular situation
is abusive and contrary to the best interests of the Fund and its other
shareholders, investors should be aware that the Fund and each of the other Dean
Witter Funds may in their discretion limit or otherwise restrict the number of
times this Exchange Privilege may be exercised by any investor. Any such
restriction will be made by the Fund on a prospective basis only, upon notice to
the shareholder not later than ten days following such shareholder's most recent
exchange. Also, the Exchange Privilege may be terminated or revised at any time
by the Fund and/or any of such Dean Witter Funds for which shares of the Fund
may be exchanged, upon such notice as may be required by applicable regulatory
agencies. Shareholders maintaining margin accounts with DWR or another Selected
Broker-Dealer are referred to their account executive regarding restrictions on
exchange of shares of the Fund pledged in their margin account.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain one and read it carefully before
investing. Exchanges are subject to the minimum investment requirement of each
Class of shares and any other conditions imposed by each fund. In the case of a
shareholder holding a share certificate or certificates, no exchanges may be
made until all applicable share certificates have been received by the Transfer
Agent and deposited in the shareholder's account. An exchange will be treated
for federal income tax purposes the same as a repurchase or redemption of shares
on which the shareholder has realized a capital gain or loss. However, the
ability to deduct capital losses on an exchange may be limited in situations
where there is an exchange of shares within ninety days after the shares are
purchased. There are also limits on the deduction of losses after the payment of
exempt-interest dividends for shares held for less
25
<PAGE>
than six months (see "Dividends, Distributions and Taxes"). The Exchange
Privilege is only available in states where an exchange may legally be made.
If DWR or another Selected Broker-Dealer is the current dealer of record and
its account numbers are part of the account information, shareholders may
initiate an exchange of shares of the Fund for shares of any of the Dean Witter
Funds (for which the Exchange Privilege is available) pursuant to this Exchange
Privilege by contacting their 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 other Selected
Broker-Dealer but who wish to make exchanges directly by writing or telephoning
the Transfer Agent) must complete and forward to the Transfer Agent an Exchange
Privilege Authorization Form, copies of which may be obtained from the Transfer
Agent, to initiate an exchange. If the Authorization Form is used, exchanges may
be made in writing or by contacting the Transfer Agent at (800) 869-NEWS
(toll-free). The Fund will employ reasonable procedures to confirm that exchange
instructions communicated over the telephone are genuine. Such procedures may
include requiring various forms of personal identification such as name, mailing
address, social security or other tax identification number and DWR or other
Selected Broker-Dealer account number (if any). Telephone instructions may also
be recorded. If such procedures are not employed, the Fund may be liable for any
losses due to unauthorized or fraudulent instructions.
Telephone exchange instructions will be accepted if received by the Transfer
Agent between 9:00 a.m. and 4:00 p.m. New York time, on any day the New York
Stock Exchange is open. Any shareholder wishing to make an exchange who is
unable to reach the Fund by telephone should contact his or her DWR or other
Selected Broker-Dealer account executive, if appropriate, or make a written
exchange request. Shareholders are advised that during periods of drastic
economic or market changes, it is possible that the telephone exchange
procedures may be difficult to implement, although this has not been the case
with the Dean Witter Funds in the past.
For further information regarding the Exchange Privilege, shareholders
should contact their DWR or other Selected Dealer account executive or the
Transfer Agent.
REDEMPTIONS AND REPURCHASES
- --------------------------------------------------------------------------------
REDEMPTION. Shares of each Class of the Fund can be redeemed for cash at
any time at the net asset value per share next determined less the amount of any
applicable CDSC in the case of Class A, Class B or Class C shares (see "Purchase
of Fund Shares"). If shares are held in a shareholder's account without a share
certificate, a written request for redemption to the Fund's Transfer Agent at
P.O. Box 983, Jersey City, NJ 07303 is required. If certificates are held by the
shareholder, the shares may be redeemed by surrendering the certificates with a
written request of redemption, along with any additional information required by
the Transfer Agent.
REPURCHASE. DWR 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, reduced by any applicable
CDSC.
26
<PAGE>
The CDSC, if any, will be the only fee imposed upon repurchase by either the
Fund, or the Distributor. The offer by DWR or other Selected Broker-Dealers to
repurchase shares may be suspended without notice by them at any time. In that
event, shareholders may redeem their shares through the Fund's Transfer Agent as
set forth above under "Redemption."
PAYMENT FOR SHARES REDEEMED OR REPURCHASED. Payment for shares presented
for repurchase or redemption will be made by check within seven days after
receipt by the Transfer Agent of the certificate and/or written request in good
order. Such payment may be postponed or the right of redemption suspended under
unusual circumstances. If the shares to be redeemed have recently been purchased
by check, payment of the redemption proceeds may be delayed for the minimum time
needed to verify that the check used for investment has been honored (not more
than fifteen days from the time of receipt of the check by the Transfer Agent).
Shareholders maintaining margin accounts with DWR or other Selected
Broker-Dealers are referred to their account executive regarding restrictions on
redemption of shares of the Fund pledged in 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 35 days after the date of the redemption or repurchase,
reinstate any portion or all of the proceeds of such redemption or repurchase in
shares of the Fund in the same Class from which such shares were redeemed or
repurchased at their net asset value next determined after a reinstatement
request, together with the proceeds, is received by the Transfer Agent and
receive a pro rata credit for any CDSC paid in connection with such redemption
or repurchase.
INVOLUNTARY REDEMPTION. The Fund reserves the right to redeem, on sixty
days' notice and at net asset value, the shares of any shareholder (other than
shares held in an Individual Retirement Account or Custodial Account under
Section 403(b)(7) of the Internal Revenue Code) whose shares 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 or, in the case of an account opened
through EasyInvest, if after twelve months the shareholder has invested less
than $1,000 in the account. However, before the Fund redeems such shares and
sends the proceeds to the shareholder, it will notify the shareholder that the
value of the shares is less than the applicable amount and allow him or her
sixty days to make an additional investment in an amount which will increase the
value of his or her account to at least the applicable amount before the
redemption is processed. No CDSC will be imposed on any involuntary redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. The Fund declares dividends separately for
each Class of shares from net investment income on each day the New York Stock
Exchange is open for business to shareholders of record as of the close of
business the preceding business day. The amount of such dividends may fluctuate
from day to day. Such dividends are paid monthly.
The Fund will distribute at least once each year all net realized short-term
capital gains in excess of any realized net long-term capital losses, if any.
The Fund intends to distribute all of its realized net long-term capital gains,
if any, in excess of any realized net short-term capital losses and any
available net capital loss carryovers, at least once per fiscal year, although
it may elect to retain all or part of such gains for reinvestment. Taxable
capital gains may be generated by the sale of portfolio securities and by
transactions in options and futures contracts engaged in by the Fund.
All dividends and any capital gains distributions will be paid in additional
shares of the same Class and automatically credited to the shareholder's account
without issuance of a share certificate
27
<PAGE>
unless the shareholder requests in writing that all dividends be paid in cash.
Shares acquired by dividend and distribution reinvestments will not be subject
to any front-end sales charge or CDSC. Class B shares acquired through dividend
and distribution reinvestments will become eligible for conversion to Class A
shares on a pro rata basis. Distributions paid on Class A and Class D shares
will be higher than for Class B and Class C shares because distribution fees
paid by Class B and Class C shares are higher. (See "Shareholder
Services--Automatic Investment of Dividends and Distributions.") Any dividends
declared in the last quarter of any calendar year which are paid in the
following calendar year prior to February 1 will be deemed received by the
shareholder in the prior 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. Taxable
capital gains may be generated by transactions in options and futures contracts
engaged in by the Fund.
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 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 sixty 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
28
<PAGE>
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.
The Fund may at times make payments from sources other than income or net
capital gains. Payments from such sources will, in effect, represent a return of
a portion of each shareholder's investment. All, or a portion, of such payments
will not be taxable to shareholders.
Any loss on the sale or exchange of shares of the Fund which are held for
six months or less is disallowed to the extent of the amount of any
exempt-interest dividend paid with respect to such shares. Treasury Regulations
may provide for a reduction in such required holding periods. If a shareholder
receives a distribution that is taxed as a long-term capital gain on shares held
for six 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.
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 advisers as to the
applicability of the above to their own tax situation.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund may quote its "yield" and/or its "total return"
in advertisements and sales literature. These figures are computed separately
for Class A, Class B, Class C and Class D shares. Both the yield and the total
return of the Fund are based on historical earnings and are not intended to
indicate future performance. The yield of each Class of the Fund is computed by
dividing the Class's net investment income over a 30-day period by an average
value (using the average number of shares entitled to receive dividends and the
maximum offering price per share at the end of the period), all in accordance
with applicable regulatory requirements. Such amount is compounded for six
months and then annualized for a twelve-month period to derive the Fund's yield
for each Class. The Fund may also quote its tax-equivalent yield, which is
calculated by determining the pre-tax yield for each Class which, after being
taxed at a stated rate, would be equivalent to the yield determined as described
above.
The "average annual total return" of the Fund refers to a figure reflecting
the average annualized percentage increase (or decrease) in the value of an
initial investment in a Class of the Fund of $1,000 over a period of one, five,
ten years or over the life of the Fund. Average annual total return reflects all
income earned by the Fund, any appreciation or depreciation of the Fund's
assets, all expenses incurred by the applicable Class and all sales charges
which would be incurred by shareholders, for the stated periods. It also assumes
reinvestment of all dividends and distributions paid by the Fund.
In addition to the foregoing, the Fund may advertise its total return for
each Class over different
29
<PAGE>
periods of time by means of aggregate, average, year-by-year or other types of
total return figures. Such calculations may or may not reflect the deduction of
any sales charge which, if reflected, would reduce the performance quoted. The
Fund may also advertise the growth of hypothetical investments of $10,000,
$50,000 and $100,000 in each Class of shares of the Fund. The Fund from time to
time may also advertise its performance relative to certain performance rankings
and indexes compiled by independent organizations (such as mutual fund
performance rankings of Lipper Analytical Services, Inc.).
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS. All shares of beneficial interest of the Fund are of $0.01
par value and are equal as to earnings, assets and voting privileges except that
each Class will have exclusive voting privileges with respect to matters
relating to distribution expenses borne solely by such Class or any other matter
in which the interests of one Class differ from the interests of any other
Class. In addition, Class B shareholders will have the right to vote on any
proposed material increase in Class A's expenses, if such proposal is submitted
separately to Class A shareholders. Also, as discussed herein, Class A, Class B
and Class C bear the expenses related to the distribution of their respective
shares.
The Fund is not required to hold Annual Meetings of Shareholders and, under
ordinary circumstances, the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances the Trustees may be removed by action of the Trustees or by the
Shareholders.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that Fund
obligations include such disclaimer and provides for indemnification and
reimbursement of expenses out of the Fund's property for any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability and
the nature of the Fund's assets and operations, the possibility of the Fund'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.
CODE OF ETHICS. Directors, officers and employees of InterCapital, Dean
Witter Services Company Inc. and the Distributor are subject to a strict Code of
Ethics adopted by those companies. The Code of Ethics is intended to ensure that
the interests of shareholders and other clients are placed ahead of any personal
interest, that no undue personal benefit is obtained from a person's employment
activities and that actual and potential conflicts of interest are avoided. To
achieve these goals and comply with regulatory requirements, the Code of Ethics
requires, among other things, that personal securities transactions by employees
of the companies be subject to an advance clearance process to monitor that no
Dean Witter Fund is engaged at the same time in a purchase or sale of the same
security. The Code of Ethics bans the purchase of securities in an initial
public offering and prohibits engaging in futures and options transactions and
profiting on short-term trading (that is, a purchase within sixty days of a sale
or a sale within sixty days of a purchase) of a security. In addition,
investment personnel may not purchase or sell a security for their personal
account within thirty days before or after any transaction in any Dean Witter
Fund managed by them. Any violations of the Code of Ethics are subject to
sanctions, including reprimand, demotion or suspension or termination of
employment. The Code of Ethics comports with regulatory requirements and the
recommendations in
30
<PAGE>
the 1994 report by the Investment Company Institute Advisory Group on Personal
Investing.
MASTER/FEEDER CONVERSION. The Fund reserves the right to seek to achieve
its investment objective by investing all of its investable assets in a
diversified, open-end management investment company having the same investment
objective and policies and substantially the same investment restrictions as
those applicable to the Fund.
SHAREHOLDER INQUIRIES. All inquiries regarding the Fund should be directed
to the Fund at the telephone numbers or address set forth on the front cover of
this prospectus.
31
<PAGE>
THE DEAN WITTER FAMILY OF FUNDS
MONEY MARKET FUNDS DEAN WITTER RETIREMENT SERIES
Dean Witter Liquid Asset Fund Inc. Liquid Asset Series
Dean Witter U.S. Government Money U.S. Government Money Market Series
Market Trust U.S. Government Securities Series
Dean Witter Tax-Free Daily Income Trust Intermediate Income Securities Series
Dean Witter California Tax-Free Daily American Value Series
Income Trust Capital Growth Series
Dean Witter New York Municipal Money Dividend Growth Series
Market Trust Strategist Series
EQUITY FUNDS Utilities Series
Dean Witter American Value Fund Value-Added Market Series
Dean Witter Natural Resource Global Equity Series
Development Securities Inc. ASSET ALLOCATION FUNDS
Dean Witter Dividend Growth Securities Dean Witter Strategist Fund
Inc. Dean Witter Global Asset Allocation
Dean Witter Developing Growth Fund
Securities Trust ACTIVE ASSETS ACCOUNT PROGRAM
Dean Witter World Wide Investment Trust Active Assets Money Trust
Dean Witter Value-Added Market Series Active Assets Tax-Free Trust
Dean Witter Utilities Fund Active Assets California Tax-Free Trust
Dean Witter Capital Growth Securities Active Assets Government Securities
Dean Witter European Growth Fund Inc. Trust
Dean Witter Precious Metals and
Minerals Trust
Dean Witter Pacific Growth Fund Inc.
Dean Witter Health Sciences Trust
Dean Witter Global Dividend Growth
Securities
Dean Witter Global Utilities Fund
Dean Witter International SmallCap Fund
Dean Witter Mid-Cap Growth Fund
Dean Witter Balanced Growth Fund
Dean Witter Capital Appreciation Fund
Dean Witter Information Fund
Dean Witter Income Builder Fund
Dean Witter Japan Fund
Dean Witter Special Value Fund
Dean Witter Financial Services Trust
Dean Witter Market Leader Trust
FIXED-INCOME FUNDS
Dean Witter High Yield Securities Inc.
Dean Witter Tax-Exempt Securities Trust
Dean Witter U.S. Government Securities
Trust
Dean Witter Federal Securities Trust
Dean Witter Convertible Securities
Trust
Dean Witter California Tax-Free Income
Fund
Dean Witter New York Tax-Free Income
Fund
Dean Witter World Wide Income Trust
Dean Witter Intermediate Income
Securities
Dean Witter Global Short-Term Income
Fund Inc.
Dean Witter Multi-State Municipal
Series Trust
Dean Witter 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 National Municipal Trust
Dean Witter High Income Securities
Dean Witter Balanced Income Fund
Dean Witter Hawaii Municipal Trust
Dean Witter Intermediate Term U.S.
Treasury Trust
<PAGE>
Dean Witter DEAN WITTER
New York Tax-Free Income Fund
Two World Trade Center NEW YORK
New York, New York 10048 TAX-FREE
TRUSTEES INCOME FUND
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive
Officer
Barry Fink
Vice President, Secretary and
General Counsel
James F. Willison
Vice President
Joseph R. Arcieri
Vice President
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT
Dean Witter Trust Company
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
PROSPECTUS -- JULY 28, 1997
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
JULY 28, 1997 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 July 28, 1997, 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 telephone numbers 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
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 or
(800) 869-NEWS (toll-free)
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The Fund and its Management............................................................ 3
Trustees and Officers.................................................................. 6
Investment Practices and Policies...................................................... 12
Investment Restrictions................................................................ 23
Portfolio Transactions and Brokerage................................................... 25
The Distributor........................................................................ 26
Determination of Net Asset Value....................................................... 30
Purchase of Fund Shares................................................................ 31
Shareholder Services................................................................... 33
Redemptions and Repurchases............................................................ 38
Dividends, Distributions and Taxes..................................................... 39
Performance Information................................................................ 41
Description of Shares of the Fund...................................................... 43
Custodian and Transfer Agent........................................................... 43
Independent Accountants................................................................ 43
Reports to Shareholders................................................................ 44
Legal Counsel.......................................................................... 44
Experts................................................................................ 44
Registration Statement................................................................. 44
Report of Independent Accountants...................................................... 45
Financial Statements--December 31, 1996................................................ 46
Appendix............................................................................... 57
</TABLE>
2
<PAGE>
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 Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD"), 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. 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 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 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 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, Dean Witter National Municipal Trust,
Dean Witter High Income Securities, Dean Witter International SmallCap Fund,
Dean Witter Mid-Cap Growth Fund, Dean Witter Select Dimensions Investment
Series, Dean Witter Global Utilities Fund, Dean Witter Global Asset Allocation
Fund, Dean Witter Balanced Growth Fund, Dean Witter Balanced Income Fund, Dean
Witter Capital Appreciation Fund, Dean Witter Information Fund, Dean Witter
Hawaii Municipal Trust, Dean Witter Intermediate Terms U.S. Treasury Trust, Dean
Witter Japan Fund, Dean Witter Income Builder Fund, Dean Witter Special Value
Fund, Dean Witter Financial Services Trust, Dean Witter Market Leader Trust,
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
3
<PAGE>
collectively referred to as the Dean Witter Funds. In addition, Dean Witter
Services Company Inc. ("DWSC"), a wholly-owned subsidiary of InterCapital,
serves as manager for the following companies for which TCW Funds Management
Inc. is the investment adviser: TCW/DW Core Equity Trust, TCW/DW North American
Government Income Trust, TCW/DW Latin American Growth Fund, TCW/DW Income and
Growth Fund, TCW/DW Small Cap Growth Fund, TCW/DW Balanced Fund, TCW/DW Total
Return Trust, TCW/DW Mid-Cap Equity Trust, TCW/DW Global Telecom Trust, TCW/DW
Strategic Income Trust, TCW/DW Emerging Markets Opportunities Trust, 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) administrator of The BlackRock
Strategic Term Trust Inc., a closed-end investment company; and (ii)
sub-administrator of MassMutual Participation Investors and Templeton Global
Governments Income Trust, closed-end investment companies.
Pursuant to an Investment Management Agreement (the "Agreement") with the
Investment Manager, the Fund has retained the Investment Manager to manage the
investment of the Fund's assets, including the placing of orders for the
purchase and sale of portfolio securities. The Investment Manager obtains and
evaluates such information and advice relating to the economy, securities
markets, and specific securities as it considers necessary or useful to
continuously manage the assets of the Fund in a manner consistent with its
investment objective and policies.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its 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. On April 17,
1995, DWSC was reorganized in the State of Delaware, necessitating the entry
into a new Services Agreement by InterCapital and DWSC on that date. The
foregoing internal reorganizations did not result in any change in the nature or
scope of the administrative services being provided to the Fund or any of the
fees being paid by the Fund for the overall services being performed under the
terms of the existing 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. These expenses will be allocated among the four classes of shares of
the Fund (each, a "Class") pro rata based on the net assets of the Fund
attributable to each Class, except as described below. The expenses borne by the
Fund include, but are not limited to: fees pursuant to any plan of distribution
(the "12b-1 fee"); (see "The Distributor") 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
4
<PAGE>
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. The 12b-1 fees
relating to a particular Class will be allocated directly to that Class. In
addition, other expenses associated with a particular Class (except advisory or
custodial fees) may be allocated directly to that Class, provided that such
expenses are reasonably identified as specifically attributable to that Class
and the direct allocation to that Class is approved by the Trustees.
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, 1994, 1995 and 1996, the Fund accrued to the Investment
Manager total compensation under the Agreements in the amounts of $1,254,000,
$1,179,074 and $1,113,792, respectively.
The Agreement provides that in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations thereunder, the
Investment Manager is not liable to the Fund or any of its investors for any act
or omission by the Investment Manager or for any losses sustained by the Fund or
its investors. The Agreement does not restrict the Investment Manager from
acting as investment manager or adviser to others.
The Agreement was initially approved by the Board of Trustees on February
21, 1997 and by the shareholders of the Fund at a Special Meeting of
Shareholders held on May 21, 1997. The Agreement is substantially identical to a
prior investment management agreement which was initially approved by the Board
of Trustees on October 22, 1992 and by the shareholders of the Fund at a Special
Meeting of Shareholders held on January 12, 1993. The Agreement took effect on
May 31, 1997 upon the consummation of the merger of Dean Witter, Discover & Co.
with Morgan Stanley Group Inc. 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 (the
"Act"), of the outstanding shares of the Fund, or by the Investment Manager. The
Agreement will automatically terminate in the event of its assignment (as
defined in the Act).
Under its terms, the Agreement has an initial term ending April 30, 1999 and
provides that it will continue in effect from year to year thereafter, provided
continuance of the Agreement is approved at least annually by the vote of the
holders of a majority, as defined in the Act, of the outstanding shares of the
Fund, or by the Board of Trustees of the Fund; provided that in either event
such continuance is approved annually by the vote of a majority of the Trustees
of the Fund who are not parties to the Agreement or "interested persons" (as
defined in the Act) of any such party, which vote must be cast in person at a
meeting called for the purpose of voting on such approval. At their meeting held
on April 17, 1996, the Fund's Board of Trustees, including all of the
Independent Trustees, approved continuance of the Agreement until April 30,
1997.
The Fund has acknowledged that the name "Dean Witter" is a property right of
DWR. The Fund has agreed that DWR or its parent company may use or, at any time,
permit others to use, the name "Dean Witter." The Fund has also agreed that in
the event the Agreement is terminated, or if the affiliation between
InterCapital and its parent is terminated, the Fund will eliminate the name
"Dean Witter" from its name if DWR or its parent company 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 83 Dean Witter Funds and the 14 TCW/DW Funds, are
shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Michael Bozic (56) Chairman and Chief Executive Officer of Levitz Furniture Corporation
Trustee (since November, 1995); Director or Trustee of the Dean Witter Funds;
c/o Levitz Furniture Corporation formerly President and Chief Executive Officer of Hills Department
6111 Broken Sound Parkway, N.W. Stores (May, 1991-July, 1995); formerly variously Chairman, Chief
Boca Raton, Florida Executive Officer, President and Chief Operating Officer (1987-1991) of
the Sears Merchandise Group of Sears, Roebuck and Co.; Director of
Eaglemark Financial Services, Inc., the United Negro College Fund and
Weirton Steel Corporation.
Charles A. Fiumefreddo* (64) Chairman, Director and Chief Executive Officer of InterCapital,
Chairman, President, Distributors and DWSC; Executive Vice President and Director of DWR;
Chief Executive Officer Trustee or Director, Chairman, President and Chief Executive Officer of
and Trustee the Dean Witter Funds; Chairman, Chief Executive Officer and Trustee of
Two World Trade Center the TCW/DW Funds; Chairman and Director of Dean Witter Trust Company
New York, New York ("DWTC"); Director and/or officer of various MSDWD subsidiaries and
affiliates; formerly Executive Vice President and Director of Dean
Witter, Discover & Co. (until February, 1993).
Edwin J. Garn (64) Director or Trustee of the Dean Witter Funds; formerly United States
Trustee Senator (R-Utah) (1974-1992) and Chairman, Senate Banking Committee
c/o Huntsman Corporation (1980-1986); formerly Mayor of Salt Lake City, Utah (1971-1974);
500 Huntsman Way formerly Astronaut, Space Shuttle Discovery (April 12-19, 1985); Vice
Salt Lake City, Utah Chairman, Huntsman Corporation (since January, 1993); Director of
Franklin Quest (time management systems) and John Alden Financial Corp
(health insurance); Member of the board of various civic and charitable
organizations.
John R. Haire (72) Chairman of the Audit Committee and Chairman of the Committee of
Trustee Independent Directors or Trustees and Director or Trustee of the Dean
Two World Trade Center Witter Funds; Chairman of the Audit Committee and Chairman of the
New York, New York Committee of the Independent Trustees and Trustee of the TCW/DW Funds;
formerly President, Council for Aid to Education (1978-1989) and
Chairman and Chief Executive Officer of Anchor Corporation, an
Investment Adviser (1964-1978); Director of Washington National
Corporation (insurance).
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Wayne E. Hedien** (63) Retired, Director or Trustee of the Dean Witter Funds (commencing on
Trustee September 1, 1997); Director of The PMI Group, Inc. (private mortgage
c/o Gordon Altman Butowsky insurance); Trustee and Vice Chairman of The Field Museum of Natural
Weitzen Shalov & Wein History; formerly associated with the Allstate Companies (1966-1994),
Counsel to the Independent most recently as Chairman of The Allstate Corporation (March,
Trustees 1993-December, 1994) and Chairman and Chief Executive Officer of its
114 West 47th Street wholly-owned subsidiary, Allstate Insurance Company (July,
New York, New York 1989-December, 1994); director of various other business and charitable
organizations.
Dr. Manuel H. Johnson (48) Senior Partner, Johnson Smick International, Inc., a consulting firm;
Trustee Co-Chairman and a founder of the Group of Seven Council (G7C), an
c/o Johnson Smick international economic commission; Director or Trustee of the Dean
International, Inc. Witter Funds; Trustee of the TCW/DW Funds; Director of NASDAQ (since
1133 Connecticut Avenue, N.W. June, 1995); Director of Greenwich Capital Markets, Inc.
Washington, DC (broker-dealer); Trustee of the Financial Accounting Foundation
(oversight organization for the Financial Accounting Standards Board);
formerly Vice Chairman of the Board of Governors of the Federal Reserve
System (1986-1990) and Assistant Secretary of the U.S. Treasury
(1982-1986).
Michael E. Nugent (61) General Partner, Triumph Capital, L.P., a private investment part-
Trustee nership; Director or Trustee of the Dean Witter Funds and Trustee of
c/o Triumph Capital, L.P. the TCW/DW Funds; formerly Vice President, Bankers Trust Company and BT
237 Park Avenue Capital Corporation (1984-1988); director of various business
New York, New York organizations.
Philip J. Purcell* (53) Chairman of the Board of Directors and Chief Executive Officer of
Trustee MSDWD, DWR and Novus Credit Services, Inc.; Director of InterCapital,
1585 Broadway DWSC and Distributors; Director or Trustee of the Dean Witter Funds;
New York, New York Director and/or officer of various MSDWD subsidiaries.
John L. Schroeder (66) Retired; Director or Trustee of the Dean Witter Funds; Trustee of the
Trustee TCW/DW Funds; Director of Citizens Utilities Company; formerly
c/o Gordon Altman Butowsky Executive Vice President and Chief Investment Officer of the Home
Weitzen Shalov & Wein Insurance Company (August, 1991-September, 1995).
Counsel to the Independent
Trustees
114 West 47th Street
New York, New York
Barry Fink (42) Senior Vice President (since March, 1997) and Secretary and General
Vice President, Secretary Counsel (since February, 1997) of InterCapital and DWSC; Senior Vice
and General Counsel President (since March, 1997) and Assistant Secretary and Assistant
Two World Trade Center General Counsel (since February, 1997) of Distributors; Assistant
New York, New York Secretary of DWR (since August, 1996); Vice President, Secretary and
General Counsel of the Dean Witter Funds and the TCW/DW Funds (since
February, 1997); previously First Vice President (June, 1993-February,
1997), Vice President (until June, 1993) and Assistant Secretary and
Assistant General Counsel of InterCapital and DWSC and Assistant
Secretary of the Dean Witter Funds and the TCW/DW Funds.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
James F. Willison (53) Senior Vice President of InterCapital; Vice President of various Dean
Vice President Witter Funds.
Two World Trade Center
New York, New York
Joseph R. Arcieri (48) Vice President of InterCapital; Vice President of various Dean Witter
Vice President Funds.
Two World Trade Center
New York, New York
Thomas F. Caloia (51) First Vice President and Assistant Treasurer of InterCapital and DWSC;
Treasurer Treasurer of the Dean Witter Funds and the TCW/DW Funds.
Two World Trade Center
New York, New York
<FN>
- ------------------------
*Denotes Trustees who are "interested persons" of the Fund, as defined in the
Act.
**Mr. Hedien's term as Trustee will commence on September 1, 1997.
</TABLE>
In addition, Robert M. Scanlan, President and Chief Operating Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWTC and
Director of DWTC, Mitchell M. Merin, President and Chief Strategic Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWTC and
Director of DWTC, Executive Vice President and Director of DWR, and Director of
SPS Transaction Services, Inc. and various other MSDWD subsidiaries, Joseph J.
McAlinden, Executive Vice President and Chief Investment Officer of InterCapital
and Director of DWTC and Robert S. Giambrone, Senior Vice President of
InterCapital, DWSC, Distributors and DWTC and Director of DWTC, Jonathan R. Page
and Peter M. Avelar, Senior Vice Presidents and Katherine Stromberg and J. Lian
Gerard, Vice Presidents of InterCapital, are Vice Presidents of the Fund.
Marilyn K. Cranney, First Vice President and Assistant General Counsel of
InterCapital and DWSC, and Lou Anne D. McInnis, Ruth Rossi and Carsten Otto,
Vice Presidents and Assistant General Counsels of InterCapital and DWSC, and
Frank Bruttomesso, a staff attorney with InterCapital, are Assistant Secretaries
of the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees currently consists of eight (8) trustees; as noted
above, Mr. Hedien's term will commence on September 1, 1997. These same
individuals also serve as directors or trustees for all of the Dean Witter
Funds, and are referred to in this section as Trustees. As of the date of this
Statement of Additional Information, there are a total of 83 Dean Witter Funds,
comprised of 126 portfolios. As of June 30, 1997, the Dean Witter Funds had
total net assets of approximately $87.9 billion and more than six million
shareholders.
Six Trustees and Mr. Hedien (77% of the total number) have no affiliation or
business connection with InterCapital or any of its affiliated persons and do
not own any stock or other securities issued by InterCapital's parent company,
MSDWD. These are the "disinterested" or "independent" Trustees. The other two
Trustees (the "management Trustees") are affiliated with InterCapital. Four of
the six independent Trustees are also Independent Trustees of the TCW/DW Funds.
Law and regulation establish both general guidelines and specific duties for
the Independent Trustees. The Dean Witter Funds seek as Independent Trustees
individuals of distinction and experience in business and finance, government
service or academia; these are people whose advice and counsel are in demand by
others and for whom there is often competition. To accept a position on the
Funds' Boards, such individuals may reject other attractive assignments because
the Funds make substantial demands on their time. Indeed, by serving on the
Funds' Boards, certain Trustees who would otherwise be qualified and in demand
to serve on bank boards would be prohibited by law from doing so.
8
<PAGE>
All of the current Independent Trustees serve as members of the Audit
Committee and the Committee of the Independent Trustees. Three of them also
serve as members of the Derivatives Committee. During the calendar year ended
December 31, 1996, the three Committees held a combined total of sixteen
meetings. The Committees hold some meetings at InterCapital's offices and some
outside InterCapital. Management Trustees or officers do not attend these
meetings unless they are invited for purposes of furnishing information or
making a report.
The Committee of the Independent Trustees is charged with recommending to
the full Board approval of management, advisory and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing Fund performance; checking on the pricing of portfolio securities,
brokerage commissions, transfer agent costs and performance, and trading among
Funds in the same complex; and approving fidelity bond and related insurance
coverage and allocations, as well as other matters that arise from time to time.
The Independent Trustees are required to select and nominate individuals to fill
any Independent Trustee vacancy on the Board of any Fund that has a Rule 12b-1
plan of distribution. Most of the Dean Witter Funds have such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of such services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; reviewing the adequacy of the Fund's system of internal
controls; and preparing and submitting Committee meeting minutes to the full
Board.
Finally, the Board of each Fund has formed a Derivatives Committee to
establish parameters for and oversee the activities of the Fund with respect to
derivative investments, if any, made by the Fund.
DUTIES OF CHAIRMAN OF COMMITTEE OF THE INDEPENDENT TRUSTEES AND AUDIT COMMITTEE
The Chairman of the Committee of the Independent Trustees and the Audit
Committee maintains an office at the Funds' headquarters in New York. He is
responsible for keeping abreast of regulatory and industry developments and the
Funds' operations and management. He screens and/or prepares written materials
and identifies critical issues for the Independent Trustees to consider,
develops agendas for Committee meetings, determines the type and amount of
information that the Committees will need to form a judgment on various issues,
and arranges to have that information furnished to Committee members. He also
arranges for the services of independent experts and consults with them in
advance of meetings to help refine reports and to focus on critical issues.
Members of the Committees believe that the person who serves as Chairman of both
Committees and guides their efforts is pivotal to the effective functioning of
the Committees.
The Chairman of the Committees also maintains continuous contact with the
Funds' management, with independent counsel to the Independent Trustees and with
the Funds' independent auditors. He arranges for a series of special meetings
involving the annual review of investment advisory, management and other
operating contracts of the Funds and, on behalf of the Committees, conducts
negotiations with the Investment Manager and other service providers. In effect,
the Chairman of the Committees serves as a combination of chief executive and
support staff of the Independent Trustees.
The Chairman of the Committee of the Independent Trustees and the Audit
Committee is not employed by any other organization and devotes his time
primarily to the services he performs as Committee Chairman and Independent
Trustee of the Dean Witter Funds and as an Independent Trustee and, since July
1, 1996, as Chairman of the Committee of the Independent Trustees and the Audit
Committee of the TCW/DW Funds. The current Committee Chairman has had more than
35 years experience as a senior executive in the investment company industry.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL DEAN
WITTER FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the Dean Witter Funds avoids the
duplication of effort that would arise from having
9
<PAGE>
different groups of individuals serving as Independent Trustees for each of the
Funds or even of sub-groups of Funds. They believe that having the same
individuals serve as Independent Trustees of all the Funds tends to increase
their knowledge and expertise regarding matters which affect the Fund complex
generally and enhances their ability to negotiate on behalf of each Fund with
the Fund's service providers. This arrangement also precludes the possibility of
separate groups of Independent Trustees arriving at conflicting decisions
regarding operations and management of the Funds and avoids the cost and
confusion that would likely ensue. Finally, having the same Independent Trustees
serve on all Fund Boards enhances the ability of each Fund to obtain, at modest
cost to each separate Fund, the services of Independent Trustees, and a Chairman
of their Committees, of the caliber, experience and business acumen of the
individuals who serve as Independent Trustees of the Dean Witter Funds.
CASH COMPENSATION OF INDEPENDENT TRUSTEES
The Fund pays each Independent Trustee an annual fee of $1,000 plus a per
meeting fee of $50 for meetings of the Board of Trustees or committees of the
Board of Trustees attended by the Trustee (the Fund pays the Chairman of the
Audit Committee an annual fee of $750 and pays the Chairman of the Committee of
the Independent Trustees an additional annual fee of $1,200). The Fund also
reimburses such Trustees for travel and other out-of-pocket expenses incurred by
them in connection with attending such meetings. Trustees and officers of the
Fund who are or have been employed by the Investment Manager or an affiliated
company receive no compensation or expense reimbursement from the Fund.
The following table illustrates the compensation paid to the Fund's
Independent Trustees by the Fund for the fiscal year ended December 31, 1996.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- -------------------------------------------------------------- ---------------
<S> <C>
Michael Bozic................................................. $1,800
Edwin J. Garn................................................. 1,800
John R. Haire................................................. 3,900
Dr. Manuel H. Johnson......................................... 1,750
Michael E. Nugent............................................. 1,800
John L. Schroeder............................................. 1,750
</TABLE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1996 for services
to the 82 Dean Witter Funds and, in the case of Messrs. Haire, Johnson, Nugent
and Schroeder, the 14 TCW/DW Funds that were in operation at December 31, 1996.
With respect to Messrs. Haire, Johnson, Nugent and Schroeder, the TCW/DW Funds
are included solely because of a limited exchange privilege between those Funds
and five Dean Witter Money Market Funds.
CASH COMPENSATION FROM DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
TOTAL
FOR SERVICE AS FOR SERVICE CASH
CHAIRMAN OF AS COMPENSATION
COMMITTEES OF CHAIRMAN OF PAID
FOR SERVICE INDEPENDENT COMMITTEES OF FOR SERVICES
AS DIRECTOR OR DIRECTORS/ INDEPENDENT TO
TRUSTEE AND FOR SERVICE AS TRUSTEES AND TRUSTEES AND 82 DEAN
COMMITTEE MEMBER TRUSTEE AND AUDIT AUDIT WITTER
OF 82 DEAN COMMITTEE MEMBER COMMITTEES OF COMMITTEES OF FUNDS AND
NAME OF WITTER OF 14 TCW/DW 82 DEAN WITTER 14 TCW/DW 14 TCW/DW
INDEPENDENT TRUSTEE FUNDS FUNDS FUNDS FUNDS FUNDS
- --------------------------- ---------------- ---------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Michael Bozic.............. $138,850 -- -- -- $138,850
Edwin J. Garn.............. 140,900 -- -- -- 140,900
John R. Haire.............. 106,400 $64,283 $195,450 $ 12,187 378,320
Dr. Manuel H. Johnson...... 137,100 66,483 -- -- 203,583
Michael E. Nugent.......... 138,850 64,283 -- -- 203,133
John L. Schroeder.......... 137,150 69,083 -- -- 206,233
</TABLE>
10
<PAGE>
As of the date of this Statement of Additional Information, 57 of the Dean
Witter Funds, including the Fund, have adopted a retirement program under which
an Independent Trustee who retires after serving for at least five years (or
such lesser period as may be determined by the Board) as an Independent Director
or Trustee of any Dean Witter Fund that has adopted the retirement program (each
such Fund referred to as an "Adopting Fund" and each such Trustee referred to as
an "Eligible Trustee") is entitled to retirement payments upon reaching the
eligible retirement age (normally, after attaining age 72). Annual payments are
based upon length of service. Currently, upon retirement, each Eligible Trustee
is entitled to receive from the Adopting Fund, commencing as of his or her
retirement date and continuing for the remainder of his or her life, an annual
retirement benefit (the "Regular Benefit") equal to 25.0% of his or her Eligible
Compensation plus 0.4166666% of such Eligible Compensation for each full month
of service as an Independent Director or Trustee of any Adopting Fund in excess
of five years up to a maximum of 50.0% after ten years of service. The foregoing
percentages may be changed by the Board.(1) "Eligible Compensation" is one-fifth
of the total compensation earned by such Eligible Trustee for service to the
Adopting Fund in the five year period prior to the date of the Eligible
Trustee's retirement. Benefits under the retirement program are not secured or
funded by the Adopting Funds.
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the Fund for the fiscal year ended December 31,
1996 and by the 57 Dean Witter Funds (including the Fund) for the year ended
December 31, 1996, and the estimated retirement benefits for the Fund's
Independent Trustees, to commence upon their retirement, from the Fund as of
December 31, 1996 and from the 57 Dean Witter Funds as of December 31, 1996.
RETIREMENT BENEFITS FROM THE FUND AND ALL DEAN WITTER FUNDS
<TABLE>
<CAPTION>
ESTIMATED
ANNUAL
FOR ALL ADOPTING FUNDS RETIREMENT BENEFITS BENEFITS
------------------------------- ACCRUED AS EXPENSES UPON
ESTIMATED RETIREMENT(2)
CREDITED YEARS ESTIMATED ------------------------ ---------------
OF SERVICE AT PERCENTAGE OF BY ALL FROM FROM ALL
RETIREMENT ELIGIBLE BY THE ADOPTING THE ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS
- ------------------------------ -------------- --------------- ----------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic................. 10 50.0% $ 338 $20,147 $ 850 $ 51,325
Edwin J. Garn................. 10 50.0 473 27,772 850 51,325
John R. Haire................. 10 50.0 (376)(3) 46,952 2,304 129,550
Dr. Manuel H. Johnson......... 10 50.0 202 10,926 850 51,325
Michael E. Nugent............. 10 50.0 338 19,217 850 51,325
John L. Schroeder............. 8 41.7 645 38,700 708 42,771
</TABLE>
- ------------------------
(1) An Eligible Trustee may elect alternate payments of his or her retirement
benefits based upon the combined life expectancy of such Eligible Trustee
and his or her spouse on the date of such Eligible Trustee's retirement. The
amount estimated to be payable under this method, through the remainder of
the later of the lives of such Eligible Trustee and spouse, will be the
actuarial equivalent of the Regular Benefit. In addition, the Eligible
Trustee may elect that the surviving spouse's periodic payment of benefits
will be equal to either 50% or 100% of the previous periodic amount, an
election that, respectively, increases or decreases the previous periodic
amount so that the resulting payments will be the actuarial equivalent of
the Regular Benefit.
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1) above.
(3) This number reflects the effect of the extension of Mr. Haire's term as
Trustee until June 1, 1998.
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's officers
and Trustees as a group was less than 1 percent of the Fund's shares of
beneficial interest outstanding.
11
<PAGE>
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
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
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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.
RISK 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
issuer/debtor 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
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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 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, 1996, the Fund did not loan its portfolio securities and it has no
current intention to loan its portfolio securities in the foreseeable future.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. As
discussed in the Prospectus, from time to time, in the ordinary course of
business, the Fund may purchase securities on a when-issued or delayed delivery
basis and may purchase or sell securities on a forward commitment basis. When
such transactions are negotiated, the price is fixed at the time of the
commitment, but delivery and payment can take place a month or more after the
date of the commitment. The securities so purchased are subject to market
fluctuation and no interest accrues to the purchaser during this period. While
the Fund will only purchase securities on a when-issued, delayed delivery or
forward commitment basis with the intention of acquiring the securities, the
Fund may sell the securities before the settlement date, if it is deemed
advisable. At the time the Fund makes the commitment to purchase securities on a
when-issued or delayed delivery basis, the Fund will record the transaction and
thereafter reflect the value, each day, of such security in determining the net
asset value of the Fund. At the time of delivery of the securities, the value
may be more or less than the purchase price. The Fund will also establish a
segregated account with the Fund's custodian bank in which it will continuously
maintain cash or U.S. Government securities or other liquid portfolio securities
equal in value to commitments for such when-issued or delayed delivery
securities; subject to this requirement, the Fund may purchase securities on
such basis without limit. 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. The Investment
Manager and the Trustees do not believe that the Fund's net asset value or
income will be adversely affected by its purchase of securities on such basis.
HEDGING ACTIVITIES
The Fund may enter financial futures contracts, options on such futures and
municipal bond index futures contracts for hedging purposes.
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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.
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.
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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.
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
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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 liquid portfolio securities in a
segregated account with its custodian. A put option is "covered" if the Fund
maintains cash, Treasury bills or other liquid portfolio securities 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 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.
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.
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NEW YORK CITY
GENERAL. The national economic downturn which began in July 1990 adversely
affected the local economy, which had been declining since late 1989. As a
result, New York City (the "City") experienced job losses in 1990 and 1991 and
real Gross City Product (GCP) fell in those two years. For the 1992 fiscal year,
the City closed a projected budget gap of $3.3 billion in order to achieve a
balanced budget as required by the laws of the State. Beginning in 1992, the
improvement in the national economy helped stabilize conditions in the City.
Employment losses moderated toward year-end and real GCP increased, boosted by
strong wage gains. After noticeable improvements in the City's economy during
calendar year 1994, economic growth slowed in 1995, and the City's current
four-year financial plan assumes that moderate economic growth will continue
through the year 2000.
For each of the 1981 through 1996 fiscal years, the City achieved balanced
operating results as reported in accordance with then applicable generally
accepted accounting principles ("GAAP"). The City was required to close
substantial budget gaps in recent years in order to maintain balanced operating
results.
1997-2000 NEW YORK CITY FINANCIAL PLAN. The Mayor is responsible for
preparing the City's four-year financial plan (the "1997-2000 Financial Plan,"
the "Financial Plan" or "City Plan").
On November 14, 1996, the City submitted to the Control Board the Financial
Plan for the 1997-2000 fiscal years, which is a modification to a financial plan
submitted to the Control Board on June 21, 1996 (the "June Financial Plan") and
which relates to the City, the Board of Education ("BOE") and the City
University of New York.
The June Financial Plan set forth proposed actions to close a previously
projected gap of approximately $2.6 billion for the 1996 fiscal year, including:
(i) agency actions totaling $1.2 billion; (ii) a revised tax reduction program
which would increase projected tax revenues by $369 million due to the four year
extension of the 12.5% personal income tax surcharge and other actions; (iii)
savings resulting from cost containment in entitlement programs to reduce City
expenditures and additional proposed State aid of $74 million; (iv) the assumed
receipt of revenues relating to rent payments for the City's airports, which are
currently the subject of a dispute with the Port Authority of New York and New
Jersey (the "Port Authority"); (v) the sale of the City's television station for
$207 million; and (vi) pension cost savings totaling $134 million resulting from
a proposed increase in the earnings assumption for pension assets from 8.5% to
8.75%.
The 1997-2000 Financial Plan published on November 14, 1996 reflects actual
receipts and expenditures and changes in forecast revenues and expenditures
since the June Financial Plan. The 1997-2000 Financial Plan projects revenues
and expenditures for 1997 fiscal year balanced in accordance with GAAP, and
projects gaps of $1.2 billion, $2.1 billion and $3.0 billion for the 1998, 1999
and 2000 fiscal years, respectively. Changes since the June Financial Plan
include: (i) an increase in projected tax revenues of $450 million, $120
million, $50 million and $45 million in fiscal years 1997 through 2000,
respectively; (ii) a delay in the assumed receipt of $304 million relating to
projected rent payments for the City airports from the 1997 fiscal year to the
1998 and 1999 fiscal years, and a $34 million reduction in assumed State and
Federal aid for the 1997 fiscal year; (iii) an approximate $200 million increase
in projected overtime and other expenditures in each of the fiscal years 1997
through 2000; (iv) a $70 million increase in expenditures for BOE in the 1997
fiscal year for school text books; (v) a reduction in projected pension costs of
$34 million, $50 million, $49 million and $47 million in fiscal years 1997
through 2000, respectively; and (vi) additional agency actions totaling $179
million, $386 million, $473 million and $589 million in fiscal years 1997
through 2000, respectively, including personnel reductions through attrition and
early retirement.
The City depends on the State for aid both to enable the City to balance its
budget and to meet its cash requirements. There can be no assurance that there
will not be reductions in State aid to the City from amounts currently projected
or that the State budgets in future fiscal years will be adopted by the April 1
statutory deadline and that such reductions or delays will not have adverse
effects on the City's cash flow or expenditures.
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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
condition of the regional and local economies, the impact on real estate tax
revenues of the real estate market, wage increases for City employees consistent
with those assumed in the Financial Plan, employment growth, the ability to
implement proposed reductions in City personnel and other cost reduction
initiatives, which may require in certain cases the cooperation of the City's
municipal unions, the ability of the New York City Health and Hospitals
Corporations and BOE to take actions to offset reduced revenues, the ability to
complete revenue generating transactions, provision of State and Federal aid and
mandate relief and the impact on City revenues of proposals for Federal and
State welfare reform and any future legislation affecting Medicare or other
entitlement.
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 1997 through 2000 contemplates the issuance
of $7.7 billion of general obligation bonds and $4.5 billion of bonds to be
issued by the proposed New York City Infrastructure Finance Authority ("IFA"),
primarily to reconstruct and rehabilitate the City's infrastructure and physical
assets and to make other capital investments. The creation of the IFA is subject
to the enactment of State legislation. 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 and IFA Bonds 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 or bonds of the proposed IFA, 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. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.
RATINGS.
Moody's has rated the City's general obligation bonds Baa1. Standard &
Poor's has rated the bonds BBB+. Fitch has rated the bonds A-. On February 28,
1996, Fitch placed the City's general obligation bonds on FitchAlert with
negative implications. On November 5, 1996, Fitch removed the City's general
obligation bonds from FitchAlert, although Fitch stated that the outlook remains
negative. These ratings do not reflect any bond insurance relating to any
portion of the bonds. The city expects that ratings on the Financial Guaranty
Insured Bonds and the AMBAC Insured Bonds will be received prior to January 7,
1997. The ratings on the Financial Guaranty Insured Bonds and the AMBAC Insured
Bonds will be based on the insurance policies to be issued by Financial Guaranty
and AMBAC Indemnity, respectively. Bonds insured to maturity by Financial
Guaranty are rated "AAA" by Standard & Poor's, "Aaa" by Moody's and "AAA" by
Fitch. Bonds insured to maturity by AMBAC Indemnity are rated "AAA" by Standard
& Poor's, "Aaa" by Moody's and "AAA" by Fitch. Such ratings reflect only the
views of Moody's, Standard & Poor's and Fitch, 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 not be
revised downward or withdrawn entirely. Any such downward revision or withdrawal
could have an adverse effect on the market prices of the bonds.
OUTSTANDING INDEBTEDNESS
As of September 30, 1996, the City and the Municipal Assistance Corporation
for the City of New York had, respectively, $25.099 billion and $3.889 billion
of outstanding net long-term debt.
LITIGATION. The City is a defendant in lawsuits pertaining to material
matters, including claims asserted which are incidental to performing routine
governmental and other functions. This litigation includes, but is not limited
to, actions commenced and claims asserted against the City arising out of
alleged torts, alleged breaches of contracts, alleged violations of law and
condemnation proceedings.
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As of June 30, 1996 and 1995, claims in excess of $380 billion and $311 billion,
respectively, were outstanding against the City for which the City estimates its
potential future liability to be $2.8 billion and $2.5 billion, respectively.
NEW YORK STATE
RECENT DEVELOPMENTS. The national economy has resumed a more robust rate of
growth after a "soft landing" in 1995, with over 11 million jobs added
nationally since early 1992. The State economy has continued to expand, but
growth remains somewhat slower than in the nation. Although the State has added
approximately 240,000 jobs since late 1992, employment growth in the State has
been hindered during recent years by significant cutbacks in the computer and
instrument manufacturing, utility, defense and banking industries. Government
downsizing has also moderated these job gains.
The 1996-97 New York State Financial Plan (the "State Plan") or "July
Financial Plan" is based on the State's economy showing modest expansion during
the first half of 1996, but that some slowdown is projected during the second
half of the year. Although industries that export goods and services are
expected to continue to do well, growth is expected to be slowed by government
cutbacks at all levels and by tight fiscal constraints on health and social
services. On an average annual basis, employment growth in the State is expected
to be up slightly from the 1995 rate. Personal income is expected to record
moderate gains in 1996. Bonus payments in the securities industry are expected
to increase further from last year's record level.
The State Plan is based upon forecasts of national and State economic
activity developed through both internal analysis and review of State and
national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending, the extent of
corporate and governmental restructuring, federal fiscal and monetary policies,
the level of interest rates, 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 results in the current fiscal year that are worse
than predicted, with corresponding material and adverse effects on the State's
projections of receipts and disbursements.
THE 1996-97 FISCAL YEAR. The State's General Fund (the major operating fund
of the State) was projected in the State Plan to be balanced on a cash basis for
the 1996-97 fiscal year. The State Plan projected General Fund receipts and
transfers from other funds at $33.17 billion, an increase of $365 million from
the prior fiscal year, and disbursements and transfers to other funds at $33.12
billion, an increase of $444 million from the total disbursed in the prior
fiscal year.
The State issued its first update to the State Plan (the "Mid-Year Update")
on October 25, 1996. The Mid-Year Update projects a continued balanced 1996-97
State Financial Plan, with a reserve for contingencies in the General Fund of
$300 million. This reserve will be utilized to help offset a variety of
potential risks and other unexpected contingencies that the State may face
during the balance of the 1996-97 fiscal year. The Mid-Year Update reflects
revisions made to estimates of both receipts and disbursements based on: (1)
updated economic forecasts for both the nation and the State, (2) an analysis of
actual receipts and disbursements through the first six months of the fiscal
year, and (3) an assessment of changing State program requirements.
More specifically, based on the revised economic outlook and actual receipts
for the first six months of 1996-97, projected General Fund receipts for the
1996-97 State fiscal year have been increased by $420 million. Most of this
projected increase is in the yield of the personal income tax ($241 million),
with additional increases now expected in business taxes ($124 million) and
other tax receipts ($49 million). Projected collections from user taxes and fees
have been revised downward slightly ($5 million). Revisions were also made to
both miscellaneous receipts and in transfers from other funds (an $11 million
combined projected increase).
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Disbursements through the first six months of the fiscal year were $415
million less than projected, primarily because of delays in processing payments
following delayed enactment of the State budget. As a result, no savings are
included in the Mid-Year Update from this slower-than-expected spending.
Projections of 1996-97 General Fund disbursements are increased by $120 million,
since increased General Fund disbursements for education are required to replace
a projected decrease in lottery receipts.
Revisions to all governmental funds receipts and disbursements estimates
primarily reflect changes to the General Fund and transfers between fund types.
The projected closing fund balance for all governmental funds is $623 million,
unchanged from the projection in the State Plan. The annual increase in spending
for all governmental funds remains approximately 4 percent, the same as
projected in the State Plan.
Uncertainties with regard to the economy, as well as the outcome of certain
litigation now pending against the State, could produce adverse effects on the
projections of receipts and disbursements in the Mid-Year Update. For example,
changes to current levels of interest rates or deteriorating world economic
conditions could have an adverse effect on the State economy and produce results
in the current fiscal year that are worse than predicted. Similarly, an adverse
judgment in legal proceedings against the State could exceed amounts reserved in
the 1996-97 Financial Plan for payment of such judgments and produce additional
unbudgeted costs to the State.
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 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 June 30, 1995, LGAC issued bonds and notes to provide net proceeds of
$4.7 billion, completing the program. The impact of this borrowing, together
with the availability of certain cash reserves is that the State Plan includes
no seasonal short-term borrowing.
COMPOSITION OF STATE GOVERNMENTAL FUNDS GROUP. Substantially all State
non-pension financial operations are accounted for in the State's governmental
funds group. Governmental funds include: (i) the General Fund, which receives
all income not required by law to be deposited in another fund; (ii) 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; (iii) Capital Projects Funds, used to finance
the acquisition, construction and rehabilitation of major capital facilities by
the State and to aid in certain of such projects conducted by local governments
or public authorities; and (iv) 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.
AUTHORITIES. The fiscal stability of the State is related to the fiscal
stability of its public authorities (i.e. public benefit corporations, created
pursuant to State law, other than local authorities), which generally have
responsibility for financing, constructing and operating revenue-producing
public benefit facilities. The State's public authorities (the "Authorities")
are not subject to the constitutional restrictions on the incurrence of debt
which apply to the State itself, and may issue bonds and notes within the
amounts of,
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and as otherwise restricted by, their legislative authorization. As of September
30, 1995, there were 17 Authorities that had outstanding debt of $100 million or
more and the aggregate outstanding debt, including refunding bonds, of these 17
Authorities was $73.45 billion.
Authorities are generally supported by revenues generated by the projects
financed or operated, such as fares, user fees on bridges or tunnels, highway
tolls and rentals for dormitory rooms and housing units and charges for
occupancy at medical care facilities. In addition, State legislation authorizes
several financing techniques for Authorities. Also, there are statutory
arrangements providing for State local assistance payments otherwise payable to
localities to be made under certain circumstances to Authorities. Although the
State has no obligation to provide additional assistance to localities whose
local assistance payments have been paid to Authorities under these
arrangements, if local assistance payments are diverted the affected localities
could seek additional State assistance. Some Authorities also receive moneys
from State appropriations to pay for the operating costs of certain of their
programs.
RATINGS. On January 13, 1992, Standard & Poor's reduced its ratings on the
State's general obligation bonds from A to A- and, in addition, reduced its
ratings on the State's moral obligation, lease purchase, guaranteed and
contractual obligation debt. Standard & Poor's also continued its negative
rating outlook assessment on State general obligation debt. On April 26, 1993,
Standard & Poor's revised the rating outlook assessment to stable. On February
14, 1994, Standard & Poor's raised is outlook to positive and, on August 5,
1996, confirmed its A- rating. On January 6, 1992, Moody's Investors Service
reduced its ratings on outstanding limited-liability State lease purchase and
contractual obligations from A to Baa1. On July 26, 1996, Moody's Investors
Service reconfirmed its A rating on the State's general obligation long-term
indebtedness. 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, 1996, the State had outstanding
approximately $5.05 billion in general obligation bonds, including $294 million
in bond anticipation notes outstanding. Principal and interest due on general
obligation bonds and interest due on bond anticipation notes were $735 million
for the 1995-96 fiscal years, and are estimated to be $719 million for the
State's 1996-97 fiscal year.
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.
These proceedings could affect adversely the financial condition of the State in
the 1996-1997 Fiscal Year or thereafter.
The State believes that the 1995-1996 State Financial Plan includes
sufficient reserves for the payment of judgments that may be required during the
1996-1997 fiscal year. There can be no assurance, however, that an adverse
decision in any of these proceedings would not exceed the amount of the
1996-1997 Financial Plan reserves for the payment of judgments and, therefore,
could affect the ability of the State to maintain a balanced 1996-1997 State
Financial Plan. In its audited financial statements for the fiscal year ended
March 31, 1996, the State reported its estimated liability for awarded and
unanticipated unfavorable judgments at $474 million.
In addition, the State is party to other claims and litigations which its
counsel has advised are not probable of adverse court decisions. Although the
amounts of potential losses, if any, are not presently determinable, it is the
State's opinion that its ultimate liability in these cases is not expected to
have a material adverse effect on the State's financial position in the
1996-1997 fiscal year or thereafter.
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OTHER LOCALITIES. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1996-97 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 1996-97 fiscal year.
For example, 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 in 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
increased state expenditures for extra ordinary local assistance.
PORTFOLIO MANAGEMENT
The Fund's portfolio turnover rate during the fiscal year ended December 31,
1996 was 16%. It is anticipated that the Fund's portfolio turnover rate will not
exceed 50% during the fiscal year ending December 31, 1997. 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
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immediately after a purchase or initial investment, and any subsequent change in
any applicable percentage resulting from market fluctuations or other changes in
total or net assets does not require elimination of any security from the
portfolio.
The Fund may not:
1. Invest in common stock.
2. Invest in securities of any issuer if, to the knowledge of the Fund,
any officer or Trustee of the Fund or 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.
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Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objective by investing all or substantially all
of its assets in another investment company having substantially the same
investment objective and policies as the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
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The Investment Manager is responsible for decisions to buy and sell
securities and commodities for the Fund, the selection of brokers and dealers to
effect the transactions, and the negotiation of brokerage commissions, if any.
The Fund expects that the primary market for the securities in which it intends
to invest will generally be the over-the-counter market. Securities are
generally traded in the over-the-counter market on a "net" basis with dealers
acting as principal for their own accounts without charging a stated commission,
although the price of the security usually includes a profit to the dealer.
Options and futures transactions will usually be effected through a broker and a
commission will be charged. The Fund also expects that securities will be
purchased at times in underwritten offerings where the price includes a fixed
amount of compensation, generally referred to as the underwriter's concession or
discount. On occasion, the Fund may also purchase certain money market
instruments directly from an issuer, in which case no commissions or discounts
are paid. During the fiscal years ended December 31, 1994, 1995 and 1996, the
Fund 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, various
factors are considered, including the respective investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held and the opinions of the persons responsible for managing the
portfolios of the Fund and other client accounts. In the case of certain initial
and secondary public offerings, the Investment Manager may utilize a pro rata
allocation process based on the size of the Dean Witter Funds involved and the
number of shares available from the public offering.
The policy of the Fund, regarding purchases and 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
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DWR only when the price available from DWR is better than that available from
other dealers. During the fiscal years ended December 31, 1994, 1995 and 1996,
the Fund did not effect any principal transactions with DWR.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may be
effected through DWR and other affiliated brokers and dealers. In order for an
affiliated broker or dealer to effect portfolio transactions for the Fund, the
commissions, fees or other remuneration received by the affiliated broker or
dealer 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 the affiliated broker or
dealer 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 an
affiliated broker or dealer are consistent with the foregoing standard.
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. In addition, the
Distributor may enter into selected dealer agreements with other selected
dealers. The Distributor, a Delaware corporation, is a wholly-owned subsidiary
of MSDWD. The Trustees, including a majority of 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"), approved, at their meeting held on June
30, 1997 the current Distribution Agreement appointing the Distributor exclusive
distributor of the Fund's shares and providing for the Distributor to bear
distribution expenses not borne by the Fund. By its terms, the Distribution
Agreement has an initial term ending April 30, 1998 and will remain in effect
from year to year thereafter if approved by the Board.
The Distributor bears all expenses it may incur 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. 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 securities laws and pays filing fees in accordance with
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 losses sustained by the Fund or its shareholders.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Act (the "Plan") pursuant to which each Class, other than Class D, pays the
Distributor compensation accrued daily and payable monthly at the following
annual rates: 0.25% and 0.75% of the average daily net assets of Class A and
Class C, respectively, and, with respect to Class B, 0.75% of the lesser of: (a)
the average daily aggregate gross sales of the Fund's Class B shares since the
inception of the Fund (not including reinvestments of dividends or capital gains
distributions), less the average daily aggregate net asset value of the Fund's
Class B shares redeemed since the Fund's inception upon which a contingent
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deferred sales charge has been imposed or upon which such charge has been
waived, or (b) the average daily net assets of Class B. The Distributor also
receives the proceeds of front-end sales charges and of contingent deferred
sales charges imposed on certain redemptions of shares, which are separate and
apart from payments made pursuant to the Plan (see "Purchase of Fund Shares" in
the Prospectus). The Distributor has informed the Fund that it and/or DWR
received approximately $312,000, $337,000 and $224,082 in contingent deferred
sales charges for the fiscal years ended December 31, 1994, 1995 and 1996,
respectively.
The Distributor has informed the Fund that the entire fee payable by Class A
and a portion of the fees payable by each of Class B and Class C each year
pursuant to the Plan equal to 0.20% of the average daily net assets of Class B
and 0.25% of the average daily net assets of Class C are currently each
characterized as a "service fee" under the Rules of the Association of the
National Association of Securities Dealers, Inc. (of which the Distributor is a
member). The "service fee" is a payment made for personal service and/or the
maintenance of shareholder accounts. The remaining portion of the Plan fees
payable by a Class, if any, is characterized as an "asset-based sales charge" as
such is defined by the aforementioned Rules of the Association.
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 Special Meeting of Shareholders of the Fund held on April 29,
1986.
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 an internal reorganization the share distribution activities
theretofore performed for the Fund by DWR were assumed by the Distributor and
DWR's sales activities are now being performed pursuant to the terms of a
selected dealer agreement between the Distributor and DWR. The amendments
provide that payments under the Plan will be made to the Distributor rather than
to DWR as before the amendment, and that the Distributor in turn is authorized
to make payments to DWR, its affiliates or other selected broker-dealers (or
direct that the Fund pay such entities directly). The Distributor is also
authorized to retain part of such fee as compensation for its own
distribution-related expenses. At their meeting held on April 28, 1993, the
Trustees, including a majority of the Independent 12b-1 Trustees, approved
certain technical amendments to the Plan in connection with amendments adopted
by the National Association of Securities Dealers, Inc. to its Rules of the
Association. At their meeting held on October 26, 1995, the Trustees of the
Fund, including all of the Independent 12b-1 Trustees, approved an amendment to
the Plan to permit payments to be made under the Plan with respect to certain
distribution expenses incurred in connection with the distribution of shares,
including personal services to shareholders with respect to holdings of such
shares, of an investment company whose assets are acquired by the Fund in a
tax-free reorganization. At their meeting held on June 30, 1997, the Trustees,
including a majority of the Independent 12b-1 Trustees, approved amendments to
the Plan to reflect the multiple-class structure for the Fund, which took effect
on July 28, 1997.
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 the
Distributor under the Plan, during the fiscal year ended December 31, 1996, of
$1,518,807. This amount is equal to 0.75% of the Fund's average daily net assets
for the fiscal year and was calculated pursuant to clause (b) of the
compensation formula under the Plan. This amount is treated by the Fund as an
expense in the year it is accrued. This amount represents amounts paid by Class
B only; there were no Class A or Class C shares outstanding on such date.
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The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method the Fund offers four
Classes of shares, each with a different distribution arrangement as set forth
in the Prospectus.
With respect to Class A shares, DWR compensates its account executives by
paying them, from proceeds of the front-end sales charge, commissions for the
sale of Class A shares, currently a gross sales credit of up to 4.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.20% of the current value of
the respective accounts for which they are the account executives or dealers of
record in all cases. On orders of $1 million or more (for which no sales charge
was paid), the Investment Manager compensates DWR's account executives by paying
them, from its own funds, a gross sales credit of 1.0% of the amount sold.
With respect to Class B shares, DWR compensates its account executives by
paying them, from its own funds, commissions for the sale of Class B shares,
currently a gross sales credit of up to 4.0% of the amount sold and an annual
residual commission, currently a residual of up to 0.20% of the current value
(not including reinvested dividends or distributions) of the amount sold in all
cases.
With respect to Class C shares, DWR compensates its account executives by
paying them, from its own funds, commissions for the sale of Class C shares,
currently a gross sales credit of up to 1.0% of the amount sold and an annual
residual commission, currently a residual of up to 0.75% of the current value of
the respective accounts for which they are the account executives of record.
With respect to Class D shares other than shares held by participants in
InterCapital's mutual fund asset allocation program, the Investment Manager
compensates DWR's account executives by paying them, from its own funds,
commissions for the sale of Class D shares, currently a gross sales credit of up
to 1.0% of the amount sold. There is a chargeback of 100% of the amount paid if
the Class D shares are redeemed in the first year and a chargeback of 50% of the
amount paid if the Class D shares are redeemed in the second year after
purchase. The Investment Manager also compensates DWR's account executives by
paying them, from its own funds, an annual residual commission, currently a
residual of up to 0.10% of the current value of the respective accounts for
which they are the account executives of record (not including accounts of
participants in the InterCapital mutual fund asset allocation program).
The gross sales credit is a charge which reflects commissions paid by DWR to
its account executives and DWR's 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 under the Plan on behalf of the Fund and, in the
case of Class B shares, opportunity costs, such as the gross sales credit and an
assumed interest charge thereon ("carrying charge"). In the Distributor's
reporting of the distribution expenses to the Fund, in the case of Class B
shares, such assumed interest (computed at the "broker's call rate") has been
calculated on the gross 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 $1,518,807 accrued under the Plan for the fiscal
year ended December 31, 1996 to the Distributor. The Distributor and DWR
estimate that they have spent, pursuant to the Plan, $19,765,770 on behalf of
the Fund since the inception of the Plan. It is estimated that this amount was
spent in approximately the following ways: (i) 12.49% ($2,468,549)--advertising
and promotional expenses; (ii) 1.22% ($240,294)--printing of prospectuses for
distribution to other than current
share-
28
<PAGE>
holders; and (iii) 86.29% ($17,056,927)--other expenses, including the gross
sales credit and the carrying charge, of which 10.08% ($1,719,232) represents
carrying charges, 36.47% ($6,220,969) represents commission credits to DWR
branch offices for payments of commissions to account executives and 53.45%
($9,116,726) represents overhead and other branch office distribution-related
expenses. These amounts represent amounts paid by Class B only; there were no
Class A or Class C shares outstanding on such date.
The Fund is authorized to reimburse expenses incurred or to be incurred in
promoting the distribution of the Fund's Class A and Class C shares and in
servicing shareholder accounts. Reimbursement will be made through payments at
the end of each month. The amount of each monthly payment may in no event exceed
an amount equal to a payment at the annual rate of 0.25%, in the case of Class
A, and 0.75%, in the case of Class C, of the average net assets of the
respective Class during the month. No interest or other financing charges, if
any, incurred on any distribution expenses on behalf of Class A and Class C will
be reimbursable under the Plan. With respect to Class A, in the case of all
expenses other than expenses representing the service fee, and, with respect to
Class C, in the case of all expenses other than expenses representing a gross
sales credit or a residual to account executives, such amounts shall be
determined at the beginning of each calendar quarter by the Trustees, including
a majority of the Independent 12b-1 Trustees. Expenses representing the service
fee (for Class A) or a gross sales credit or a residual to account executives
(for Class C) may be reimbursed without prior determination. In the event that
the Distributor proposes that monies shall be reimbursed for other than such
expenses, then in making quarterly determinations of the amounts that may be
reimbursed by the Fund, the Distributor will provide and the Trustees will
review a quarterly budget of projected distribution expenses to be incurred on
behalf of the Fund, together with a report explaining the purposes and
anticipated benefits of incurring such expenses. The Trustees will determine
which particular expenses, and the portions thereof, that may be borne by the
Fund, and in making such a determination shall consider the scope of the
Distributor's commitment to promoting the distribution of the Fund's Class A and
Class C shares.
At any given time, the expenses of distributing shares of the Fund 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
in the case of Class B shares, the excess distribution expenses, including the
carrying charge designed to approximate the opportunity costs incurred by DWR
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 Class B shares,
totalled $2,741,726, which was equal to 1.43% of the net assets of the Fund as
of December 31, 1996. Because there is no requirement under the Plan that the
Distributor be reimbursed for all distribution expenses with respect to Class B
shares 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 to the Distributor 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, 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,
InterCapital, DWR, DWSC or certain of their 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.
Under its terms, the Plan had an initial term ending December 31, 1985 and
will continue from year to year thereafter, provided such continuance is
approved annually by a vote of the Trustees in the manner described above. Prior
to the Board's approval of amendments to the Plan to reflect the multiple-class
structure for the Fund, the most recent continuance of the Plan for one year,
until April 30, 1998, was approved by the Board of Trustees of the Fund,
including a majority of the Independent 12b-1
29
<PAGE>
Trustees, at a Board meeting held on April 24, 1997. Prior to approving the
continuation of the Plan, the Trustees requested and received from the
Distributor and reviewed all the information which they 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 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. In the Trustees' quarterly review of the Plan, they
will consider its continued appropriateness and the level of compensation
provided therein.
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
affected Class or Classes of the Fund, and all material amendments to the Plan
must also be approved by the Trustees in the manner described above. The Plan
may be terminated at any time, without payment of any penalty, by vote of a
majority of the Independent 12b-1 Trustees or by a vote of a majority of the
outstanding voting securities of the Fund (as defined in the Act) on not more
than thirty days' written notice to any other party to the Plan. So long as the
Plan is in effect, the election and nomination of Independent 12b-1 Trustees
shall be committed to the discretion of the Independent 12b-1 Trustees.
DETERMINATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
As discussed in the Prospectus, portfolio securities (other than short-term
debt securities and futures and options) are valued for the Fund by an outside
independent pricing service approved by the Board of Trustees. The pricing
service has informed the Fund that in valuing the Fund's portfolio securities it
uses both a computerized grid matrix of tax-exempt securities and evaluations by
its staff, in each case based on information concerning market transactions and
quotations from dealers which reflect the bid side of the market each day. The
Fund's portfolio securities are thus valued by reference to a combination of
transactions and quotations for the same or other securities believed to be
comparable in quality, coupon, maturity, type of issue, call provisions, trading
characteristics and other features deemed to be relevant. The Board of Trustees
believes that timely and reliable market quotations are generally not readily
available to the Fund for purposes of valuing tax-exempt securities and that the
valuations supplied by the pricing service, using the procedures outlined above
and subject to periodic review, are more likely to approximate the fair value of
such securities.
The Investment Manager will periodically review and evaluate the procedures,
methods and quality of services provided by the pricing service then being used
by the Fund and may, from time to time, recommend to the Board of Trustees the
use of other pricing services or discontinuance of the use of any pricing
service in whole or part. The Board may determine to approve such recommendation
or to make other provisions for pricing of the Fund's portfolio securities.
Short-term taxable debt securities with sixty 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 sixty 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' market value, in
which case these securities will be valued at their fair market value as
determined by the Trustees. Listed options on debt securities are valued at the
latest sale price on the exchange on which they are listed unless no sales of
such options have taken place that day, in which case, they will be valued at
the mean between their closing bid and asked prices. Unlisted options on debt
securities are valued at the mean between the latest bid and asked price.
Futures contracts and options thereon which are traded on commodities exchanges
are valued at their latest sale price on such commodities exchanges unless the
Trustees determine that such price does not reflect their
30
<PAGE>
market value, in which case they will be valued at their fair value as
determined by the Trustees. All other securities, including illiquid securities,
and other assets are valued at their fair value as determined in good faith
under procedures established by and under the supervision of the Board of
Trustees.
As stated in the Prospectus, the net asset value for each Class of shares of
the Fund will be computed once daily at 4:00 P.M., New York time (or, on days
when the New York Stock Exchange closes prior to 4:00 P.M., at such earlier
time), on each day that the New York Stock Exchange is open. The New York Stock
Exchange currently observes the following holidays: New Year's Day; Reverend Dr.
Martin Luther King, Jr. Day; Presidents' Day; Good Friday; Memorial Day;
Independence Day; Labor Day; Thanksgiving Day; and Christmas Day.
PURCHASE OF FUND SHARES
- --------------------------------------------------------------------------------
As discussed in the Prospectus, the Fund offers four Classes of shares as
follows:
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
Class A shares are sold to investors with an initial sales charge that
declines to zero for larger purchases; however, Class A shares sold without an
initial sales charge are subject to a contingent deferred sales charge ("CDSC")
of 1.0% if redeemed within one year of purchase, except in the circumstances
discussed in the Prospectus.
RIGHT OF ACCUMULATION. As discussed in the Prospectus, investors may
combine the current value of shares purchased in separate transactions for
purposes of benefitting from the reduced sales charges available for purchases
of shares of the Fund totalling at least $25,000 in net asset value. For
example, if any person or entity who qualifies for this privilege holds Class A
shares of the Fund and/or other Dean Witter Funds that are multiple class funds
("Dean Witter Multi-Class Funds") or shares of other Dean Witter Funds sold with
a front-end sales charge purchased at a price including a front-end sales charge
having a current value of $5,000, and purchases $20,000 of additional shares of
the Fund, the sales charge applicable to the $20,000 purchase would be 4.0% of
the offering price.
The Distributor must be notified by the selected broker-dealer or the
shareholder at the time a purchase order is placed that the purchase qualifies
for the reduced charge under the Right of Accumulation. Similar notification
must be made in writing by the selected broker-dealer or shareholder when such
an order is placed by mail. The reduced sales charge will not be granted if: (a)
such notification is not furnished at the time of the order; or (b) a review of
the records of the Distributor or Dean Witter Trust Company (the "Transfer
Agent") fails to confirm the investor's represented holdings.
LETTER OF INTENT. As discussed in the Prospectus, reduced sales charges are
available to investors who enter into a written Letter of Intent providing for
the purchase, within a thirteen-month period, of Class A shares of the Fund from
the Distributor or from a single Selected Broker-Dealer.
A Letter of Intent permits an investor to establish a total investment goal
to be achieved by any number of purchases over a thirteen-month period. Each
purchase of Class A shares made during the period will receive the reduced sales
commission applicable to the amount represented by the goal, as if it were a
single purchase. A number of shares equal in value to 5% of the dollar amount of
the Letter of Intent will be held in escrow by the Transfer Agent, in the name
of the shareholder. The initial purchase under a Letter of Intent must be equal
to at least 5% of the stated investment goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the investor is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and sales charges actually paid. Such payment may be
made directly to the Distributor or, if not paid, the Distributor is authorized
by the shareholder to liquidate a sufficient number of his or her escrowed
shares to obtain such difference.
If the goal is exceeded and purchases pass the next sales charge level, the
sales charge on the entire amount of the purchase that results in passing that
level and on subsequent purchases will be
31
<PAGE>
subject to further reduced sales charges in the same manner as set forth above
under "Right of Accumulation," but there will be no retroactive reduction of
sales charges on previous purchases. For the purpose of determining whether the
investor is entitled to a further reduced sales charge applicable to purchases
at or above a sales charge level which exceeds the stated goal of a Letter of
Intent, the cumulative current net asset value of any shares owned by the
investor in any other Dean Witter Funds held by the shareholder which were
previously purchased at a price including a front-end sales charge (including
shares of the Fund and other Dean Witter Funds acquired in exchange for those
shares, and including in each case shares acquired through reinvestment of
dividends and distributions) will be added to the cost or net asset value of
shares of the Fund owned by the investor. However, shares of "Exchange Funds"
(see "Shareholder Services--Exchange Privilege") and the purchase of shares of
other Dean Witter Funds will not be included in determining whether the stated
goal of a Letter of Intent has been reached.
At any time while a Letter of Intent is in effect, a shareholder may, by
written notice to the Distributor, increase the amount of the stated goal. In
that event, only shares purchased during the previous 90-day period and still
owned by the shareholder will be included in the new sales charge reduction. The
5% escrow and minimum purchase requirements will be applicable to the new stated
goal. Investors electing to purchase shares of the Fund pursuant to a Letter of
Intent should carefully read such Letter of Intent.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Class B shares are sold without an initial sales charge but are subject to a
CDSC payable upon most redemptions within six years after purchase. As stated in
the Prospectus, a CDSC will be imposed on any redemption by an investor if after
such redemption the current value of the investor's Class B shares of the Fund
is less than the dollar amount of all payments by the shareholder for the
purchase of Class B shares during the preceding six years. However, no CDSC will
be imposed to the extent that the net asset value of the shares redeemed does
not exceed: (a) the current net asset value of shares purchased more than six
years prior to the redemption, plus (b) the current net asset value of shares
purchased through reinvestment of dividends or distributions of the Fund or
another Dean Witter Fund (see "Shareholder Services--Targeted Dividends"), plus
(c) the current net asset value of shares acquired in exchange for (i) shares of
Dean Witter front-end sales charge funds, or (ii) shares of other Dean Witter
Funds for which shares of front-end sales charge funds have been exchanged (see
"Shareholder Services--Exchange Privilege"), plus (d) increases in the net asset
value of the investor's shares above the total amount of payments for the
purchase of Fund shares made during the preceding six years. The CDSC will be
paid to the Distributor.
In determining the applicability of the CDSC to each redemption, the amount
which represents an increase in the net asset value of the investor's shares
above the amount of the total payments for the purchase of shares within the
last six years will be redeemed first. In the event the redemption amount
exceeds such increase in value, the next portion of the amount redeemed will be
the amount which represents the net asset value of the investor's shares
purchased more than six years prior to the redemption and/or shares purchased
through reinvestment of dividends or distributions and/or shares acquired in
exchange for shares of Dean Witter front-end sales charge funds, or for shares
of other Dean Witter funds 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 Class B shares of the Fund until
the time of redemption of such shares. For
32
<PAGE>
purposes of determining the number of years from the time of any payment for the
purchase of shares, all payments made during a month will be aggregated and
deemed to have been made on the last day of the month. The following table sets
forth the rates of the CDSC applicable to Class B shares of the Fund:
<TABLE>
<CAPTION>
YEAR SINCE
PURCHASE CDSC AS 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>
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. 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 do not qualify for waiver of the CDSC, as
described in the Prospectus.
LEVEL LOAD ALTERNATIVE--CLASS C SHARES
Class C shares are sold without a sales charge but are subject to a CDSC of
1.0% on most redemptions made within one year after purchase, except in the
circumstances discussed in the Prospectus.
NO LOAD ALTERNATIVE--CLASS D SHARES
Class D shares are offered without any sales charge on purchase or
redemption. Class D shares are offered only to those persons meeting the
qualifications set forth in the Prospectus.
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
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 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 applicable Class 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 applicable Class 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.
33
<PAGE>
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 any Class of an open-end Dean Witter Fund
other than Dean Witter New York Tax-Free Income Fund or in another Class of Dean
Witter New York Tax-Free Income Fund. Such investment will be made as described
above for automatic investment in shares of the applicable Class of the Fund, at
the net asset value per share of the dividend or distribution of the selected
Dean Witter Fund as of the close of business on the 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 selected
Class 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 or following a
redemption of shares of a Dean Witter money market fund, on a semi-monthly,
monthly or quarterly basis, to the Transfer Agent for investment in shares of
the Fund. Shares purchased through EasyInvest will be added to the shareholder's
existing account at the net asset value calculated the same business day the
transfer of funds is effected. For further information or to subscribe to
EasyInvest, shareholders should contact their DWR or other selected
broker-dealer account executive or the Transfer Agent.
INVESTMENT OF DIVIDENDS OR DISTRIBUTIONS RECEIVED IN CASH. Any shareholder
who receives a cash payment representing a dividend or capital gains
distribution may invest such dividend or distribution in shares of the
applicable Class, without the imposition of a CDSC upon redemption, by returning
the check or the proceeds to the Transfer Agent within thirty 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 any Class of shares of the Fund
for which they qualify 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, and indicating the selected Class, directly to the
Fund's Transfer Agent. In the case of Class A shares, after deduction of any
applicable sales charge, the balance will be applied to the purchase of Fund
shares, and, in the case of shares of the other Classes, the entire amount 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 CDSC will be imposed on shares redeemed under
the Withdrawal Plan (see "Purchase of Fund Shares"). Therefore, any shareholder
participating in the Withdrawal Plan will have sufficient shares redeemed from
his or her account so that the proceeds (net of any applicable CDSC) to the
shareholder will be the designated monthly or quarterly 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
34
<PAGE>
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 sales charges which may be applicable to
purchases or redemptions of shares (see "Purchase of Fund Shares").
Any shareholder who wishes to have payments under the Withdrawal Plan made
to a third party or sent to an address other than the one listed on the account
must send complete written instructions to the Transfer Agent to enroll in the
Withdrawal Plan. The shareholder's signature on such instructions must be
guaranteed by an eligible guarantor acceptable to the Transfer Agent
(shareholders should contact the Transfer Agent for a determination as to
whether a particular institution is such an eligible guarantor). A shareholder
may, at any time, change the amount and interval of withdrawal payments through
his or her DWR or other selected broker-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 each Class of shares of the Fund
may exchange their shares for shares of the same Class of shares of any other
Dean Witter Multi-Class Fund without the imposition of any exchange fee. Shares
may also be exchanged for shares of any of the following funds: Dean Witter
Short-Term U.S. Treasury Trust, Dean Witter Limited Term Municipal Trust, Dean
Witter Short-Term Bond Fund, Dean Witter Intermediate Term U.S. Treasury Trust
and five Dean Witter Funds which are money market funds (the foregoing nine
funds are hereinafter referred to as the "Exchange Funds"). Class A shares may
also be exchanged for shares of Dean Witter Multi-State Municipal Series Trust
and Dean Witter Hawaii Municipal Trust, which are Dean Witter Funds sold with a
front-end sales charge ("FSC Funds"). Class B shares may also be exchanged for
shares of Dean Witter Global Short-Term Income Fund Inc., Dean Witter High
Income Securities and Dean Witter National Municipal Trust, which are Dean
Witter Funds offered with a CDSC ("CDSC 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
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.)
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As described below, and in the Prospectus under the caption "Purchase of
Fund Shares," a 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 a Dean Witter
Multi-Class Fund or any CDSC Fund are exchanged for shares of an Exchange Fund,
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 Fund (calculated from the last day of the
month in which the Exchange Fund shares were acquired), the holding period or
"year since purchase payment made" is frozen. When shares are redeemed out of
the Exchange Fund, they will be subject to a CDSC which would be based upon the
period of time the shareholder held shares in a Dean Witter Multi-Class Fund or
in a CDSC Fund. However, in the case of shares exchanged into an Exchange Fund
on or after April 23, 1990, upon a redemption of shares which results in a CDSC
being imposed, a credit (not to exceed the amount of the CDSC) will be given in
an amount equal to the Exchange Fund 12b-1 distribution fees incurred on or
after that date which are attributable to those shares. Shareholders acquiring
shares of an Exchange Fund pursuant to this exchange privilege may exchange
those shares back into a Dean Witter Multi-Class Fund or a CDSC Fund from the
Exchange Fund, with no CDSC being imposed on such exchange. The holding period
previously frozen when shares were first exchanged for shares of the Exchange
Fund resumes on the last day of the month in which shares of a Dean Witter
Multi-Class Fund or 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 Dean Witter Multi-Class Fund or in a CDSC Fund. In
the case of exchanges of Class A shares which are subject to a CDSC, the holding
period also includes the time (calculated as described above) the shareholder
was invested in a FSC Fund.
When shares initially purchased in a Dean Witter Multi-Class Fund or in a
CDSC Fund are exchanged for shares of a Dean Witter Multi-Class Fund, shares of
a CDSC Fund, shares of a FSC Fund, or shares of an Exchange Fund, the date of
purchase of the shares of the fund exchanged into, for purposes of the CDSC upon
redemption, will be the last day of the month in which the shares being
exchanged were originally purchased. In allocating the purchase payments between
funds for purposes of the CDSC, the amount which represents the current net
asset value of shares at the time of the exchange which were (i) purchased more
than one, three or six years (depending on the CDSC schedule applicable to the
shares) prior to the exchange, (ii) originally acquired through reinvestment of
dividends or distributions and (iii) acquired in exchange for shares of FSC
Funds, or for shares of other Dean Witter Funds for which shares of FSC Funds
have been exchanged (all such shares called "Free Shares"), will be exchanged
first. After an exchange, all dividends earned on shares in an Exchange Fund
will be considered Free Shares. If the exchanged amount exceeds the value of
such Free Shares, an exchange is made, on a block-by-block basis, of non-Free
Shares held for the longest period of time (except that, with respect to Class B
shares, 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
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caption "Purchase of Fund Shares," any applicable CDSC will be imposed upon the
ultimate redemption of shares of any fund, regardless of the number of exchanges
since those shares were originally purchased.
With respect to the redemption or repurchase of shares of the Fund, the
application of proceeds to the purchase of new shares in the Fund or any other
of the funds and the general administration of the Exchange Privilege, the
Transfer Agent acts as agent for the Distributor and for the shareholder's
selected broker-dealer, if any, in the performance of such functions. With
respect to exchanges, redemptions or repurchases, the Transfer Agent shall be
liable for its own negligence and not for the default or negligence of its
correspondents or for losses in transit. The Fund shall not be liable for any
default or negligence of the Transfer Agent, the Distributor or any selected
broker-dealer.
The Distributor and any selected broker-dealer have authorized and appointed
the Transfer Agent to act as their agent in connection with the application of
proceeds of any redemption of Fund shares to the purchase of shares of any other
fund and the general administration of the Exchange Privilege. No commission or
discounts will be paid to the Distributor or any selected broker-dealer for any
transactions pursuant to this Exchange Privilege.
Exchanges are subject to the minimum investment requirement and any other
conditions imposed by each fund. (The minimum initial investment for the
Exchange Privilege account of each Class is $5,000 for Dean Witter Liquid Asset
Fund Inc., Dean Witter Tax-Free Daily Income Trust, Dean Witter California Tax-
Free Daily Income Trust and Dean Witter New York Municipal Money Market Trust,
although those funds may, in their discretion, accept initial investments of as
low as $1,000. The minimum initial investment for the Exchange Privilege account
of each Class is $10,000 for Dean Witter Short-Term U.S. Treasury Trust,
although that fund, in its discretion, may accept initial purchases of as low as
$5,000. The minimum initial investment for the Exchange Privilege account of
each Class is $5,000 for Dean Witter Special Value Fund. The minimum initial
investment for the Exchange Privilege account of each Class of all other Dean
Witter Funds for which the Exchange Privilege is available is $1,000.) Upon
exchange into an Exchange Fund, the shares of that fund will be held in a
special Exchange Privilege Account separately from accounts of those
shareholders who have acquired their shares directly from that fund. As a
result, certain services normally available to shareholders of those 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
Exchange Funds pursuant to the 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.
For further information regarding the Exchange Privilege, shareholders
should contact their DWR or other selected broker-dealer account executive or
the Transfer Agent.
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REDEMPTIONS AND REPURCHASES
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REDEMPTION. As stated in the Prospectus, shares of each Class of the Fund
can be redeemed for cash at any time at the net asset value per share next
determined; however, such redemption proceeds will be reduced by the amount of
any applicable CDSC. If shares are held in a shareholder's account without a
share certificate, a written request for redemption to the Fund's Transfer Agent
at P.O. Box 983, Jersey City, New Jersey 07303 is required. If certificates are
held by the shareholder, the shares may be redeemed by surrendering the
certificates with a written request for redemption. The share certificate, or an
accompanying stock power, and the request for redemption, must be signed by the
shareholder or shareholders exactly as the shares are registered. Each request
for redemption, whether or not accompanied by a share certificate, must be sent
to the Fund's Transfer Agent, which will redeem the shares at their net asset
value next computed (see "Purchase of Fund Shares" in the Prospectus) after it
receives the request, and certificate, if any, in good order. Any redemption
request received after such computation will be redeemed at the next determined
net asset value.
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 supplement
to the prospectus or a revised prospectus.
REPURCHASE. As stated in the Prospectus, DWR and other selected
broker-dealers are authorized to repurchase shares represented by a share
certificate which is delivered to any of their offices. Shares held in a
shareholder's account without a share certificate may also be repurchased by DWR
and other selected broker-dealers upon the telephonic request of the
shareholder. The repurchase price is the net asset value next computed after
such purchase order is received by DWR or other selected broker-dealer reduced
by any applicable CDSC.
PAYMENT FOR SHARES REDEEMED OR REPURCHASED. As discussed in the Prospectus,
payment for shares of any Class 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 receipt of the
proceeds of the check by the Transfer Agent). Shareholders maintaining margin
accounts with DWR or another selected broker-dealer are referred to their
account executives regarding restrictions on redemption of shares of the Fund
pledged in the margin account.
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 a CDSC or free of such charge (and with regard to the length
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<PAGE>
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 CDSC as if they
had not been so transferred.
REINSTATEMENT PRIVILEGE. As discussed in the Prospectus, a shareholder who
has had his or her shares redeemed or repurchased and has not previously
exercised this reinstatement privilege may, within 35 days after the redemption
or repurchase, reinstate any portion or all of the proceeds of such redemption
or repurchase in shares of the Fund in the same Class 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
39
<PAGE>
of the Internal Revenue Code, it is not expected that the Fund will be required
to pay any federal income tax. Shareholders will normally have to pay federal
income taxes, and any applicable state and/or local income taxes, on the
dividends and distributions they receive from the Fund. Such dividends and
distributions, to the extent that they are derived from net investment income or
short-term capital gains, are taxable to the shareholder as ordinary income
regardless of whether the shareholder receives such payments in additional
shares or in cash. Any dividends declared in the last quarter of any calendar
year which are paid in the following year prior to February 1 will be deemed
received by the shareholder in the prior calendar 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 sixty 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.
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Any loss on the sale or exchange of shares of the Fund which are held for
six months or less is disallowed to the extent of the amount of any
exempt-interest dividends paid with respect to such shares. Treasury Regulations
may provide for a reduction in such required holding period. If a shareholder
receives a distribution that is taxed as long-term capital gain on shares held
for six months or less and sells those shares at a loss, the loss will be
treated as a long-term capital loss to the extent of the capital gains
distribution.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry shares of the Fund is not deductible to the extent allocable to
exempt-interest dividends of the Fund (which allocation does not take into
account capital gain dividends of the Fund). Furthermore, entities or persons
who are "substantial users" (or related persons) of facilities financed by
industrial development bonds should consult their tax advisers before purchasing
shares of the Fund. "Substantial user" is defined generally by Income Tax
Regulation 1.103-11 (b) as including a "non-exempt person" who regularly uses in
a trade or business a part of a facility financed from the proceeds of
industrial development bonds.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities. It can be expected that similar proposals may
be introduced in the future. If such a proposal were enacted, the availability
of municipal securities for investment by the Fund could be affected. In such
event, the Fund would re-evaluate its investment objective and policies.
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, in effect, would be a return of
capital but nonetheless 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. These
figures are computed separately for Class A, Class B, Class C and Class D
shares. 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" of each Class. The
resulting amount is divided by the product of the maximum offering price per
share on the last day of the period multiplied by the average number of shares
of the applicable Class outstanding during the period that were entitled to
dividends. This amount is added to 1 and raised to the sixth power. 1 is then
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<PAGE>
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, 1996, the Fund's
yield, calculated pursuant to the formula described above, was 4.15%. This yield
is for Class B only; there were no other Classes of shares outstanding on such
date.
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 State personal
income tax bracket of 44.70% (the highest current individual marginal tax rate),
for the 30-day period ending December 31, 1996, was 7.50% based upon the yield
quoted above.
The Fund's "average annual total return" represents an annualization of the
Fund's total return over a specified 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 CDSC 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 one, five and
ten year periods ended December 31, 1996 were -2.08%, 5.76% and 6.50%,
respectively. These returns are for Class B only; there were no other Classes of
shares outstanding on such date.
In addition to the foregoing, the Fund may advertise its total return for
each Class over different periods of time by means of aggregate, average,
year-by-year or other types of total return figures. Such calculations may or
may not reflect the imposition of the maximum front-end sales charge for Class A
or the deduction of the CDSC for each of Class B and Class C 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 in the
preceding paragraph, but without deduction for any applicable sales charge.
Based on this calculation, the average annual total returns of the Fund for the
one, five and ten year periods ended December 31, 1996 were 2.82%, 6.08% and
6.50%, respectively. These returns are for Class B only; there were no other
Classes of shares outstanding on such date.
In addition, the Fund may compute its aggregate total return for each Class
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 reduction for any 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 one, five and ten year periods ended December 31,
1996 were 2.82%, 34.31% and 87.71%, respectively. These returns are for Class B
only; there were no other Classes of shares outstanding on such date.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in each Class of shares of the Fund by adding 1 to
the Fund's aggregate total return to date (expressed as a decimal and without
taking into account the effect of any applicable CDSC) and multiplying by
$9,575, $48,250 and $97,250 in the case of Class A (investments of $10,000,
$50,000 and $100,000 adjusted for the initial sales charge) or by $10,000,
$50,000 and $100,000 in the case of each of Class B, Class C and Class D, as the
case may be. Investments of $10,000, $50,000 and $100,000 in the Fund at
inception would have grown to $24,517, $122,585 and $245,170, respectively, at
December 31, 1996. This information is for Class B only; there were no other
Classes of shares outstanding on such date.
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent organizations.
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DESCRIPTION OF SHARES OF THE FUND
- --------------------------------------------------------------------------------
The shareholders of the Fund are entitled to a full vote for each full share
held. All of the Trustees have been elected by the shareholders of the Fund,
most recently at a Special Meeting of Shareholders held on May 21, 1997. On that
date, Wayne E. Hedien was also elected as a Trustee of the Fund, with his term
to commence on September 1, 1997. The Trustees themselves have the power to
alter the number and the terms of office of the Trustees, and they may at any
time lengthen their own terms or make their terms of unlimited duration and
appoint their own successors, provided that always at least a majority of the
Trustees has been elected by the shareholders of the Fund. Under certain
circumstances the Trustees may be removed by action of the Trustees. The
shareholders also have the right under certain circumstances to remove the
Trustees. The voting rights of shareholders are not cumulative, so that holders
of more than 50 percent of the shares voting can, if they choose, elect all
Trustees being selected, while the holders of the remaining shares would be
unable to elect any Trustees.
The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios) and additional classes of shares
within any series. The Trustees have not authorized any such additional series
or classes of shares other than as set forth in the Prospectus.
The Declaration of Trust 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 property for satisfaction of claims arising in connection with the
affairs of the Fund. With the exceptions stated above, 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, 90 Washington Street, New York, New York 10286 is the
Custodian of the Fund's assets. Any of the Fund's cash balances with the
Custodian in excess of $100,000 are unprotected by federal deposit insurance.
Such balances may at times, be substantial.
Dean Witter Trust Company, Harborside Financial Center, Plaza Two, Jersey
City, New Jersey 07302 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 LLP serves as the independent accountants of the Fund. The
independent accountants are responsible for auditing the annual financial
statements of the Fund.
43
<PAGE>
REPORTS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports showing
the Fund's portfolio and other information. An annual report, containing
financial statements audited by independent accountants, together with their
report thereon, will be sent to shareholders each year.
The Fund's fiscal year ends on December 31. The financial statements of the
Fund must be audited at least once a year by independent accountants whose
selection is made annually by the Fund's Trustees.
LEGAL COUNSEL
- --------------------------------------------------------------------------------
Barry Fink, 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,
1996 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 LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
44
<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, 1996, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended and the financial highlights for each of the ten years in
the period then ended, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statements presentation. We believe that our audits, which included
confirmation of securities at December 31, 1996 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
FEBRUARY 10, 1997
1996 FEDERAL TAX NOTICE (UNAUDITED)
During the year ended December 31, 1996, the Fund paid to the
shareholders $0.53 per share from net investment income. All of
the Fund's dividends from net investment income were exempt
interest dividends, excludable from gross income for Federal
income tax purposes. For the year ended December 31, 1996, the
Fund paid to shareholders $0.04 per share from long-term capital
gains.
45
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
NEW YORK TAX-EXEMPT MUNICIPAL BONDS (92.3%)
GENERAL OBLIGATION (12.9%)
Monroe County,
$ 1,000 Public Improvement Refg 1996.......................................................... 6.00 % 03/01/13
1,000 Public Improvement Refg 1996.......................................................... 6.00 03/01/15
New York City,
3,500 Various Purpose 1973.................................................................. 3.50 05/01/01
2,500 Various Purpose 1973.................................................................. 3.50 05/01/03
4,000 1990 Ser D............................................................................ 6.00 08/01/06
New York State,
2,500 Ser 1996 A Refg....................................................................... 6.00 07/15/08
3,000 Ser 1995 B Refg....................................................................... 5.70 08/15/13
8,800 Puerto Rico, Public Improvement Refg Ser 1987 A......................................... 3.00 07/01/06
- -----------
26,300
- -----------
EDUCATIONAL FACILITIES REVENUE (9.2%)
New York State Dormitory Authority,
2,150 City University Ser 1992 U............................................................ 6.375 07/01/08
3,000 City University Ser 1993 A............................................................ 5.75 07/01/09
3,000 State University Ser 1989 B........................................................... 0.00 05/15/05
5,000 State University Ser 1993 C........................................................... 5.375 05/15/13
2,000 State University Ser 1993 A........................................................... 5.25 05/15/15
4,000 University of Rochester Ser 1987...................................................... 6.50 07/01/09
- -----------
19,150
- -----------
ELECTRIC REVENUE (5.3%)
3,000 New York State Power Authority, Ser CC.................................................. 5.00 01/01/14
8,000 Puerto Rico Electric Power Authority, Power Ser O....................................... 5.00 07/01/12
- -----------
11,000
- -----------
HOSPITAL REVENUE (4.8%)
9,460 New York State Medical Care Facilities Finance Agency, Insured Hospital & Nursing
Home-FHA Ins Mtge 1993 Ser B.......................................................... 5.50 02/15/22
- -----------
INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE (14.7%)
New York City Industrial Development Agency,
4,500 1990 American Airlines Inc (AMT)...................................................... 8.00 07/01/20
4,000 Japan Airlines Co 1991 (AMT) (FSA).................................................... 6.00 11/01/15
New York State Energy Research & Development Authority,
3,000 Brooklyn Union Gas Co 1993 Ser B...................................................... 6.368 04/01/20
11,000 Brooklyn Union Gas Co 1991 Ser A (AMT)................................................ 6.952 07/01/26
4,000 Consolidated Edison Co of New York Inc Ser 1986 A (AMT)............................... 7.50 11/15/21
- -----------
26,500
- -----------
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- -----------
<C> <C>
$ 1,000 $ 1,073,040
1,000 1,071,220
3,500 3,247,195
2,500 2,217,375
4,000 4,042,560
2,500 2,689,850
3,000 3,045,150
8,800 7,322,040
---------------
- -----------
24,708,430
26,300
---------------
- -----------
2,150 2,241,569
3,000 3,023,970
3,000 1,843,740
5,000 4,676,650
2,000 1,872,260
4,000 4,117,560
---------------
- -----------
17,775,749
19,150
---------------
- -----------
3,000 2,810,520
8,000 7,405,360
---------------
- -----------
10,215,880
11,000
---------------
- -----------
9,460
9,183,673
---------------
- -----------
4,500 4,768,830
4,000 4,077,720
3,000 3,150,000
11,000 12,213,080
4,000 4,088,440
---------------
- -----------
28,298,070
26,500
---------------
- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
46
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
MORTGAGE REVENUE - MULTI-FAMILY (5.2%)
New York City Housing Development Corporation,
$ 2,348 East Midtown Proj-FHA Ins Sec 223..................................................... 6.50 % 11/15/18
2,358 Ruppert Proj-FHA Ins Sec 223.......................................................... 6.50 11/15/18
5,000 New York State Housing Finance Agency, Housing 1996 Ser A Refg (FSA).................... 6.10 11/01/15
- -----------
9,706
- -----------
MORTGAGE REVENUE - SINGLE FAMILY (3.3%)
New York State Mortgage Agency,
4,500 Homeowner Ser 27...................................................................... 6.90 04/01/15
1,400 Homeowner Ser MM-1 (AMT).............................................................. 7.95 10/01/21
- -----------
5,900
- -----------
NURSING & HEALTH RELATED FACILITIES REVENUE (4.7%)
2,500 New York State Medical Care Facilities Finance Authority, Long Term Health Care 1992 Ser
D (FSA)............................................................................... 6.50 11/01/15
6,995 New York State Medical Care Facilities Finance Agency, Mental Health Ser F.............. 5.25 02/15/19
- -----------
9,495
- -----------
RESOURCE RECOVERY REVENUE (4.3%)
3,000 Hempstead Industrial Development Agency, 1985 American REF-FUEL Co of Hempstead......... 7.40 12/01/10
3,000 New York State Environmental Facilities Corporation, Huntington
1989 Ser A (AMT)...................................................................... 7.50 10/01/12
2,000 Oneida-Herkimer Solid Waste Management Authority, Ser 1992.............................. 6.75 04/01/14
- -----------
8,000
- -----------
TRANSPORTATION FACILITIES REVENUE (4.5%)
New York State Thruway Authority,
3,500 Ser A................................................................................. 5.75 01/01/12
2,000 Ser C (FGIC).......................................................................... 6.00 01/01/25
3,000 Puerto Rico Highway & Transportation Authority, Refg Ser X.............................. 5.50 07/01/15
- -----------
8,500
- -----------
WATER & SEWER REVENUE (8.2%)
New York City Municipal Water Finance Authority,
2,000 1994 Ser B............................................................................ 5.375 06/15/07
4,000 1990 Ser A............................................................................ 6.00 06/15/19
Suffolk County Industrial Development Agency,
5,000 Southwest Sewer Ser 1994 (FGIC)....................................................... 6.00 02/01/07
4,000 Southwest Sewer Ser 1994 (FGIC)....................................................... 6.00 02/01/08
- -----------
15,000
- -----------
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- -----------
<C> <C>
$ 2,348 $ 2,434,992
2,358 2,408,093
5,000 5,156,400
---------------
- -----------
9,999,485
9,706
---------------
- -----------
4,500 4,772,655
1,400 1,488,144
---------------
- -----------
6,260,799
5,900
---------------
- -----------
2,500
2,695,950
6,995 6,285,567
---------------
- -----------
8,981,517
9,495
---------------
- -----------
3,000 3,075,000
3,000
3,172,110
2,000 2,043,040
---------------
- -----------
8,290,150
8,000
---------------
- -----------
3,500 3,548,230
2,000 2,071,460
3,000 2,979,360
---------------
- -----------
8,599,050
8,500
---------------
- -----------
2,000 2,018,200
4,000 4,016,120
5,000 5,454,050
4,000 4,347,680
---------------
- -----------
15,836,050
15,000
---------------
- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
47
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
OTHER REVENUE (8.0%)
$ 5,000 Municipal Assistance Corporation for the City of New York, Ser E........................ 6.00 % 07/01/06
5,000 New York Local Government Assistance Corporation, Ser 1994 A............................ 5.50 04/01/17
5,000 United Nations Development Corporation, 1992 Refg Ser A Sr Lien......................... 6.00 07/01/26
- -----------
15,000
- -----------
REFUNDED (7.2%)
5,000 New York Local Government Assistance Corporation, Ser 1991 B............................ 7.50 04/01/01++
3,000 New York State Dormitory Authority, Suffolk County Judicial Ser 1986 (ETM).............. 7.375 07/01/16
4,000 New York State Medical Care Facilities Finance Agency, St Lukes-Roosevelt Hospital
Center-FHA Ins Mtge 1989 Ser B........................................................ 7.40 02/15/00++
- -----------
12,000
- -----------
TOTAL NEW YORK TAX-EXEMPT MUNICIPAL BONDS (IDENTIFIED COST $165,042,190)........................................
176,011
- -----------
SHORT-TERM NEW YORK TAX-EXEMPT MUNICIPAL OBLIGATIONS (6.2%)
4,100 New York City, Fiscal 1994 Sub-Ser A-5 (Demand 01/02/97)................................ 5.00* 08/01/15
5,400 New York State Dormitory Authority, Oxford University Press Inc Ser 1993 (Demand
01/02/97)............................................................................. 5.45* 07/01/23
2,500 New York State Energy Research & Development Authority, New York Electric & Gas Corp Ser
1994 D (Demand 01/02/97).............................................................. 4.40* 10/01/29
- -----------
TOTAL SHORT-TERM NEW YORK TAX-EXEMPT MUNICIPAL OBLIGATIONS
(IDENTIFIED COST $12,000,000)...................................................................................
12,000
- -----------
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- -----------
<C> <C>
$ 5,000 $ 5,409,850
5,000 4,993,500
5,000 5,039,700
---------------
- -----------
15,443,050
15,000
---------------
- -----------
5,000 5,683,750
3,000 3,632,670
4,000
4,431,800
---------------
- -----------
13,748,220
12,000
---------------
- -----------
176,011 177,340,123
- ----------- ---------------
4,100 4,100,000
5,400
5,400,000
2,500
2,500,000
---------------
- -----------
12,000 12,000,000
- ----------- ---------------
$ 188,011 TOTAL INVESTMENTS (IDENTIFIED COST $177,042,190)(A)......................... 98.5% 189,340,123
- -----------
- -----------
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES.............................. 1.5 2,851,604
----- ------------
NET ASSETS.................................................................. 100.0% $192,191,727
----- ------------
----- ------------
<FN>
- ---------------------
</TABLE>
<TABLE>
<C> <S>
AMT Alternative Minimum Tax.
ETM Escrowed to Maturity.
++ Prerefunded to call date shown.
* Current coupon of variable rate security.
(a) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $12,855,119, and the
aggregate gross unrealized depreciation is $557,186, resulting in net
unrealized appreciation of $12,297,933.
</TABLE>
<TABLE>
<C> <S>
BOND INSURANCE:
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
48
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $177,042,190)............................ $189,340,123
Cash........................................................ 186,629
Receivable for:
Interest................................................ 3,188,286
Shares of beneficial interest sold...................... 227,043
Prepaid expenses and other assets........................... 17,759
------------
TOTAL ASSETS........................................... 192,959,840
------------
LIABILITIES:
Payable for:
Dividends to shareholders............................... 359,088
Plan of distribution fee................................ 126,461
Investment management fee............................... 92,738
Shares of beneficial interest repurchased............... 87,189
Accrued expenses and other payables......................... 102,637
------------
TOTAL LIABILITIES...................................... 768,113
------------
NET ASSETS:
Paid-in-capital............................................. 180,760,263
Net unrealized appreciation................................. 12,297,933
Accumulated undistributed net investment income............. 26
Accumulated net realized loss............................... (866,495)
------------
NET ASSETS............................................. $192,191,727
------------
------------
NET ASSET VALUE PER SHARE,
16,409,289 SHARES OUTSTANDING (UNLIMITED SHARES AUTHORIZED
OF $.01 PAR VALUE)........................................
$11.71
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
49
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $12,045,647
-----------
EXPENSES
Plan of distribution fee.................................... 1,518,807
Investment management fee................................... 1,113,792
Transfer agent fees and expenses............................ 74,718
Professional fees........................................... 56,931
Shareholder reports and notices............................. 50,583
Trustees' fees and expenses................................. 14,146
Custodian fees.............................................. 9,737
Registration fees........................................... 3,560
Other....................................................... 11,523
-----------
TOTAL EXPENSES......................................... 2,853,797
LESS: EXPENSE OFFSET................................... (9,709)
-----------
NET EXPENSES........................................... 2,844,088
-----------
NET INVESTMENT INCOME.................................. 9,201,559
-----------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss........................................... (866,502)
Net change in unrealized appreciation....................... (3,130,905)
-----------
NET LOSS............................................... (3,997,407)
-----------
NET INCREASE................................................ $ 5,204,152
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
50
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income....................................... $ 9,201,559 $ 10,093,730
Net realized gain (loss).................................... (866,502) 2,568,550
Net change in unrealized appreciation/depreciation.......... (3,130,905) 20,081,778
----------------- -----------------
NET INCREASE........................................... 5,204,152 32,744,058
----------------- -----------------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income....................................... (9,254,430) (10,054,862)
Net realized gain........................................... (656,506) (1,424,236)
----------------- -----------------
TOTAL.................................................. (9,910,936) (11,479,098)
----------------- -----------------
Net decrease from transactions in shares of beneficial
interest.................................................. (19,719,531) (11,693,907)
----------------- -----------------
NET INCREASE (DECREASE)................................ (24,426,315) 9,571,053
NET ASSETS:
Beginning of period......................................... 216,618,042 207,046,989
----------------- -----------------
END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $26
AND $52,897, RESPECTIVELY).............................. $192,191,727 $216,618,042
----------------- -----------------
----------------- -----------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
51
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996
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. The Fund's investment objective 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.
The Fund was organized as a Massachusetts business trust on January 17, 1985 and
commenced operations on April 25, 1985.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- Portfolio securities are valued for the Fund by
an outside independent pricing service approved by the Trustees. The pricing
service has informed the Fund that in valuing the Fund's portfolio securities,
it uses both a computerized 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. Short-term debt
securities having a maturity date of more than sixty days at time of purchase
are valued on a mark-to-market basis until sixty days prior to maturity and
thereafter at amortized cost based on their value on the 61st day. Short-term
debt securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
The Fund amortizes premiums and accretes discounts over the life of the
respective securities. Interest income is accrued daily.
C. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable and nontaxable income to its
shareholders. Accordingly, no federal income tax provision is required.
52
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, CONTINUED
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 reclassification. 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 with Dean Witter InterCapital
Inc. (the "Investment Manager"), the Fund pays the Investment Manager a
management fee, accrued daily and payable monthly, by applying the following
annual rates to the Fund's net assets determined as of
the close of each business day: 0.55% to the portion of daily net assets not
exceeding $500 million and 0.525% to the portion of 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, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. 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 an annual rate of 0.75% of the lesser of: (a) the average daily
aggregate gross sales of the Fund's shares since the Fund's inception (not
including reinvestment of dividend or capital gain 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
53
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, CONTINUED
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,
account executives of Dean Witter Reynolds Inc., an affiliate of the Investment
Manager and Distributor, and other employees and selected broker-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 to other than current shareholders 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 unreimbursed expenses by the Distributor.
Provided that the Plan continues in effect, any cumulative expenses incurred but
not yet recovered may be recovered through future distribution fees from the
Fund and contingent deferred sales charges from the Fund's shareholders.
Although there is no legal obligation for the Fund to pay expenses incurred in
excess of payments made to the Distributor under the Plan and the proceeds of
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. The Distributor has advised the
Fund that such excess amounts, including carrying charges, totaled $2,741,726 at
December 31, 1996.
The Distributor has informed the Fund that for the year ended December 31, 1996,
it received approximately $224,082 in contingent deferred sales charges from
certain redemptions of the Fund's shares.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended December 31, 1996 aggregated
$31,110,448 and $60,183,584, respectively.
Dean Witter Trust Company, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At December 31, 1996, the Fund had
transfer agent fees and expenses payable of approximately $8,000.
54
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, CONTINUED
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended December 31, 1996
included in Trustees' fees and expenses in the Statement of Operations amounted
to $14,146. At December 31 ,1996, the Fund had an accrued pension liability of
$48,715 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Sold............................................................. 1,126,418 $ 13,143,567 1,646,704 $ 18,911,488
Reinvestment of dividends and distributions...................... 492,455 5,712,064 580,096 6,745,389
----------- -------------- ----------- ------------
1,618,873 18,855,631 2,226,800 25,656,877
Repurchased...................................................... (3,323,154) (38,575,162) (3,239,090) (37,350,784)
----------- -------------- ----------- ------------
Net decrease..................................................... (1,704,281) $ (19,719,531) (1,012,290) $(11,693,907)
----------- -------------- ----------- ------------
----------- -------------- ----------- ------------
</TABLE>
6. FEDERAL INCOME TAX STATUS
At December 31, 1996, the Fund had a net capital loss carryover of approximately
$820,000, which will be available through December 31, 2004 to offset future
capital gains to the extent provided by regulations.
Capital losses incurred after October 31 ("post-October" losses) within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $46,000 during fiscal 1996.
As of December 31, 1996, the Fund had temporary book/tax differences primarily
attributable to post-October losses.
55
<PAGE>
DEAN WITTER NEW YORK TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of
period.......... $ 11.96 $ 10.83 $ 12.50 $ 11.98 $ 11.68 $ 11.00 $ 11.25 $ 10.94 $ 10.50 $ 11.57
---------- --------- --------- ---------- --------- --------- ---------- --------- --------- ----------
Net investment
income.......... 0.53 0.55 0.57 0.65 0.65 0.68 0.68 0.68 0.68 0.70
Net realized and
unrealized gain
(loss).......... (0.21) 1.20 (1.51) 0.72 0.34 0.70 (0.25) 0.31 0.44 (0.93)
---------- --------- --------- ---------- --------- --------- ---------- --------- --------- ----------
Total from
investment
operations...... 0.32 1.75 (0.94) 1.37 0.99 1.38 0.43 0.99 1.12 (0.23)
---------- --------- --------- ---------- --------- --------- ---------- --------- --------- ----------
Less dividends
and
distributions
from:
Net investment
income........ (0.53) (0.54) (0.57) (0.65) (0.65) (0.68) (0.68) (0.68) (0.67) (0.70)
Net realized
gain.......... (0.04) (0.08) (0.16) (0.20) (0.04) (0.02) -- -- (0.01) (0.14)
---------- --------- --------- ---------- --------- --------- ---------- --------- --------- ----------
Total dividends
and
distributions... (0.57) (0.62) (0.73) (0.85) (0.69) (0.70) (0.68) (0.68) (0.68) (0.84)
---------- --------- --------- ---------- --------- --------- ---------- --------- --------- ----------
Net asset value,
end of period... $ 11.71 $ 11.96 $ 10.83 $ 12.50 $ 11.98 $ 11.68 $ 11.00 $ 11.25 $ 10.94 $ 10.50
---------- --------- --------- ---------- --------- --------- ---------- --------- --------- ----------
---------- --------- --------- ---------- --------- --------- ---------- --------- --------- ----------
TOTAL INVESTMENT
RETURN+ 2.82% 16.59% (7.74)% 11.72% 8.70% 12.94% 4.01% 9.34% 10.91% (1.89)%
RATIOS TO AVERAGE
NET ASSETS:
Expenses......... 1.40%(1) 1.42%(1) 1.40% 1.27% 1.40% 1.32% 1.37% 1.37% 1.41% 1.40%
Net investment
income.......... 4.54% 4.70% 4.96% 5.20% 5.48% 6.00% 6.13% 6.09% 6.28% 6.44%
SUPPLEMENTAL
DATA:
Net assets, end
of period, in
millions........ $192 $217 $207 $246 $209 $182 $158 $147 $129 $113
Portfolio
turnover rate... 16% 17% 10% 25% 16% 17% 23% 4% 18% 40%
<FN>
- ---------------------
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) The above ratios do not reflect the effect of expense offsets of 0.01%.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
56
<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.
57
<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.
58
<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.
59
<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 Standard & Poor's 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>
60