<PAGE>
PROSPECTUS
FEBRUARY 25, 1997
Dean Witter California Tax-Free Daily Income Trust (the "Fund")
is a no-load, open-end, diversified management investment company whose
investment objective is to provide as high a level of daily income exempt from
federal and California income tax as is consistent with stability of principal
and liquidity. The Fund has a Rule 12b-1 Distribution Plan (see below). The Fund
seeks to achieve its objective by investing primarily in high quality California
tax-exempt securities with short-term maturities, including Municipal Bonds,
Municipal Notes and Municipal Commercial Paper. The Trust may invest a
significant percentage of its assets in the securities of a single issuer and
therefore an investment in the Trust may be riskier than an investment in other
types of money funds. (See "Investment Objective and Policies.")
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
In accordance with a Plan of Distribution pursuant to Rule 12b-1
under the Investment Company Act of 1940 (the "Act") with Dean Witter
Distributors Inc. (the "Distributor"), the Fund is authorized to reimburse for
specific expenses incurred in promoting the distribution of the Fund's shares.
Reimbursement may in no event exceed an amount equal to payments at the annual
rate of 0.15% of the average daily net assets of the Fund.
This Prospectus sets forth concisely the information you should
know before investing in the Fund. It should be read and retained for future
reference. Additional information about the Fund is contained in the Statement
of Additional Information, dated February 25, 1997, which has been filed with
the Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at its address or at one of its telephone numbers listed on
this page. The Statement of Additional Information is incorporated herein by
reference.
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<S> <C>
Minimum initial investment ...... $5,000
Minimum additional investment.... $ 100
</TABLE>
Dean Witter
California Tax-Free Daily Income Trust
Two World Trade Center
New York, New York 10048
TABLE OF CONTENTS
Prospectus Summary/2
Summary of Fund Expenses/3
Financial Highlights/4
The Fund and its Management/5
Investment Objective and Policies/5
Special Considerations Relating to California
Tax-Exempt Securities/8
Investment Restrictions/9
Purchase of Fund Shares/10
Shareholder Services/12
Redemption of Fund Shares/15
Dividends, Distributions and Taxes/17
Additional Information/19
Financial Statements--December 31, 1996/21
Report of Independent Accountants/30
For information about the Fund, including information on opening an account,
registration of shares, and other information relating to a specific account,
call:
- 800-869-NEWS (toll-free) or
- 212-392-2550
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, FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Dean Witter Distributors Inc.
Distributor
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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 open-end,
Fund diversified management investment company investing principally in short-term securities which are exempt from
federal and California income tax.
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Shares Offered Shares of beneficial interest with $0.01 par value. (see p. 19).
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Purchase of Shares Investments may be made:
- By wire
- By mail
- Through Dean Witter Reynolds Inc. Account Executives and other Selected Broker-Dealers
Purchases are at net asset value, without a sales charge. Minimum initial investment: $5,000. Subsequent
investments: $100 or more through the Transfer Agent; $1,000 or more through the account executive or $100 to
$5,000 through EasyInvest-SM-.
Orders for purchase of shares are effective on day of receipt of payment in Federal funds if payment is received
by the Fund's transfer agent before 12:00 noon New York time (see p. 10).
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Investment To provide as high a level of daily income exempt from federal and California income tax as is consistent with
Objective stability of principal and liquidity (see p. 5).
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Investment A diversified portfolio of California tax-exempt fixed-income securities with short-term maturities (see p. 5).
Policy
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Investment Dean Witter InterCapital Inc. ("InterCapital"), the Investment Manager of the Fund, and its wholly-owned
Manager subsidiary, Dean Witter Services Company Inc., serve in various investment management, advisory, management and
administrative capacities to 101 investment companies and other portfolios with assets of approximately $92.5
billion at January 31, 1997 (see page 5).
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Management The monthly fee is at an annual rate of 1/2 of 1% of average daily net assets, scaled down on assets over $500
Fee million (see p. 5).
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Distributor Dean Witter Distributors Inc. (the "Distributor") sells shares of the Fund through Dean Witter Reynolds Inc.
("DWR") and other selected broker-dealers pursuant to selected dealer agreements. Other than the reimbursement
to the Distributor pursuant to to the Rule 12b-1 Distribution Plan, the Distributor receives no distribution
fees. (see p. 10).
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Plan of The Fund is authorized to reimburse specific expenses incurred in promoting the distribution of the Fund's
Distribution shares pursuant to a Plan of Distribution with the Distributor pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Reimbursement may in no event exceed an amount equal to payments at the annual rate of .15
of 1% of average daily net assets of the Fund (see p. 11).
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Dividends Declared and automatically reinvested daily in additional shares; cash payments of dividends available monthly
(see p. 17).
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Reports Individual periodic account statements; annual and semi-annual Fund financial statements.
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Redemption of Shares are redeemable at net asset value without any charge (see p. 15):
Shares - By check
- By telephone or wire instructions, with proceeds wired or mailed to a predesignated bank account
- By mail
- Via an automatic redemption procedure (see p. 17).
A shareholder's account is subject to possible involuntary redemption if its value falls below $1,000 (see p.
17).
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Risks The Fund invests principally in short-term fixed income securities issued or guaranteed by the state of
California and its local governments which are subject to minimal risk of loss of income and principal. However,
the investor is directed to the discussions concerning "variable rate obligations" and "when-issued and delayed
delivery securities" on page 8 of the Prospectus and on page 13 of the Statement of Additional Information and
the discussions concerning "repurchase agreements" and "puts" on pages 14-15 of the Statement of Additional
Information, concerning any risks associated with such portfolio securities and management techniques. Since the
Fund concentrates its investments in California tax-exempt securities, the Fund is affected by any political,
economic or regulatory developments affecting the ability of California issuers to pay interest or repay
principal (see pages 8-9 of the Prospectus and pages 18-20 of the Statement of Additional Information).
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</TABLE>
THE ABOVE IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION APPEARING
ELSEWHERE
IN THE PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION.
2
<PAGE>
SUMMARY OF FUND EXPENSES
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The following table illustrates all expenses and fees that a shareholder of
the Fund will incur. The expenses and fees set forth in the table are for the
fiscal year ended December 31, 1996.
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<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
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Maximum Sales Charge Imposed on Purchases.............................................. None
Maximum Sales Charge Imposed on Reinvested Dividends................................... None
Deferred Sales Charge.................................................................. None
Redemption Fees........................................................................ None
Exchange Fees.......................................................................... None
</TABLE>
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<S> <C>
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
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Management Fees....................................................................... 0.50%
12b-1 Fee*............................................................................ 0.10%
Other Expenses........................................................................ 0.12%
Total Fund Operating Expenses......................................................... 0.72%
<FN>']
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* THE 12B-1 FEE IS CHARACTERIZED AS A SERVICE FEE WITHIN THE MEANING OF NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC., ("NASD") GUIDELINES (SEE "PURCHASE OF
FUND SHARES").
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time
period............................................................... $ 7 $ 23 $ 40 $ 89
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF THE FUND MAY BE GREATER OR
LESS THAN THOSE SHOWN.
The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"The Fund and Its Management," and "Purchase of Fund Shares--Plan of
Distribution" in this Prospectus.
3
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FINANCIAL HIGHLIGHTS
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The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by Price Waterhouse LLP,
independent accountants. The financial highlights should be read in conjunction
with the financial statements, notes thereto and the unqualified report of the
independent accountants which are contained in this Prospectus commencing on
page 21.
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<CAPTION>
FOR THE
PERIOD
JULY 22,
1988*
FOR THE YEAR ENDED DECEMBER 31, THROUGH
--------------------------------------------------------------------------------- DECEMBER 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................ $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-------- -------- -------- -------- -------- -------- -------- -------- ------------
Net investment income..... 0.026 0.030 0.021 0.018 0.023 0.037 0.049 0.056 0.024
Less dividends from net
investment income........ (0.026) (0.030) (0.021) (0.018) (0.023) (0.037) (0.049) (0.056) (0.024)
-------- -------- -------- -------- -------- -------- -------- -------- ------------
Net asset value, end of
period................... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-------- -------- -------- -------- -------- -------- -------- -------- ------------
-------- -------- -------- -------- -------- -------- -------- -------- ------------
TOTAL INVESTMENT RETURN+.. 2.68% 3.04% 2.17% 1.78% 2.37% 3.77% 5.04% 5.70% 2.45%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period,
in thousands............. $259,590 $254,376 $217,079 $251,059 $288,044 $332,426 $361,144 $341,682 $191,762
Ratios to average net
assets:
Expenses................ 0.72 (4) 0.75%(4) 0.72% 0.71% 0.73% 0.70% 0.71% 0.68% 0.67%(2)(3)
Net investment income... 2.63% 3.00% 2.13% 1.76% 2.35% 3.70% 4.89% 5.56% 5.47%(2)(3)
<FN>
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CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF
+ THE PERIOD.
* COMMENCEMENT OF OPERATIONS.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE ASSUMED OR WAIVED BY THE
INVESTMENT MANAGER, THE ABOVE ANNUALIZED EXPENSE AND NET INVESTMENT
INCOME RATIOS WOULD HAVE BEEN 0.81% AND 5.33%, RESPECTIVELY.
(4) THE ABOVE RATIOS DO NOT REFLECT THE EFFECT OF EXPENSE OFFSETS OF
0.01%.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
THE FUND AND ITS MANAGEMENT
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Dean Witter California Tax-Free Daily Income Trust (the "Fund") is an
open-end, diversified management investment company. The Fund was organized as a
trust of the type commonly
known as a "Massachusetts business trust" on April 25, 1988 under the name of
Dean Witter/Sears California Tax-Free Daily Income Trust.
Dean Witter InterCapital Inc. ("InterCapital" or the "Investment Manager"),
whose address is Two World Trade Center, New York, New York 10048, is the Fund's
Investment Manager. The Investment Manager, which was incorporated in July,
1992, is a wholly-owned subsidiary of Dean Witter, Discover & Co. ("DWDC"), a
balanced financial services organization providing a broad range of nationally
marketed credit and investment products.
InterCapital and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to a total of 101 investment companies, thirty of
which are listed on the New York Stock Exchange, with combined total assets of
approximately $89.3 billion as of January 31, 1997. The Investment Manager also
manages and advises portfolios of pension plans, other institutions and
individuals which aggregated approximately $3.2 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.
On February 5, 1997, DWDC and Morgan Stanley Group Inc. announced that they
had entered into an Agreement and Plan of Merger, with the combined company to
be named Morgan Stanley, Dean Witter, Discover & Co. The business of Morgan
Stanley Group Inc. and its affiliated companies is providing a wide range of
financial services for sovereign governments, corporations, institutions and
individuals throughout the world. DWDC is the direct parent of InterCapital and
Dean Witter Distributors Inc., the Fund's distributor. It is currently
anticipated that the transaction will close in mid-1997. Thereafter,
InterCapital and Dean Witter Distributors Inc. will be direct subsidiaries of
Morgan Stanley, Dean Witter, Discover & Co.
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 at an annual rate of
0.50% of the daily net assets of the Fund up to $500 million, scaled down at
various asset levels to 0.25% on net assets exceeding $3 billion. For the fiscal
year ended December 31, 1996, the Fund accrued total compensation to the
Investment Manager amounting to 0.50% of the Fund's average daily net assets and
the Fund's total expenses amounted to 0.72% of the Fund's average daily net
assets.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The investment objective of the Fund is to provide as high a level of daily
income exempt from federal and California income tax as is consistent with
stability of principal and liquidity. It is a fundamental policy of the Fund
that at least 80% of its total assets will be invested in securities the
interest on which is exempt from federal and California income tax. This policy
and the Fund's investment objective
5
<PAGE>
may not be changed without a vote of a majority of the Fund's outstanding voting
securities, as defined in the Investment Company Act of 1940, as amended (the
"Act"). There is no assurance that the objective will be achieved.
The Fund seeks to achieve its investment objective by investing primarily in
high quality tax-exempt securities with short-term maturities (remaining
maturities of thirteen months or less). Such securities will include California
Municipal Bonds and California Municipal Notes ("California Municipal
Obligations") and California Municipal Commercial Paper which are rated in one
of the two highest rating categories for debt obligations by at least two
nationally recognized statistical rating organizations ("NRSROS"--primarily
Standard & Poor's Corporation ["S&P"] and Moody's Investors Service
["Moody's"]), or one NRSRO if the obligation is rated by only one NRSRO. Unrated
obligations may be purchased if they are determined to be of comparable quality
by the Fund's Trustees.
The types of taxable securities in which the Fund may temporarily 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 or its agencies, instrumentalities or authorities; (ii) commercial
paper rated P-1 by Moody's or A-1 by S&P; (iii) certificates of deposit of
domestic banks with assets of $1 billion or more; and (iv) repurchase agreements
with respect to any of the foregoing portfolio securities.
California 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). California Municipal Commercial Paper refers to
short-term obligations of municipalities which may be issued at a discount and
are sometimes referred to as Short-Term Discount Notes. 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 Moody's rating
of Aaa or S&P rating of AAA. An obligation shall be considered a California
Municipal Obligation only if, in the opinion of bond counsel, the interest
payable therefrom is exempt from both federal income tax and California personal
income tax.
The foregoing percentage and rating limitations apply at the time of
acquisition of a security based on the last previous determination of the Fund's
net asset value. Any subsequent change in any rating by a rating service or
change in percentages resulting from market fluctuations will not require
elimination of any security from the Fund's portfolio. However, in accordance
with procedures adopted by the Fund's Trustees pursuant to federal securities
regulations governing money market funds, if the Investment Manager becomes
aware that a portfolio security has received a new rating from an NRSRO that is
below the second highest rating, then, unless the security is disposed of within
five days, the Investment Manager will perform a creditworthiness analysis of
any such downgraded securities, which analysis will be reported to the Trustee
who will, in turn, determine whether the securities continue to present minimal
credit risks to the Fund.
The ratings assigned by NRSRO's represent their opinions as to the quality
of the securities which they undertake to rate (see the Appendix to the
Statement of Additional Information). It should be emphasized, however, that the
ratings are general and not absolute standards of quality.
The two principal classifications of California Municipal Obligations 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
6
<PAGE>
from the revenues derived from a particular facility or class of facilities or,
in some cases, from specific revenue sources. Revenue bonds, notes or commercial
paper are issued for a wide variety of purposes, including the financing of
electric, gas, water and sewer systems and other public utilities; industrial
development and pollution control facilities; single and multi-family housing
units; public buildings and facilities; air and marine ports, transportation
facilities such as toll roads, bridges and tunnels; and health and educational
facilities such as hospitals and dormitories. They rely primarily on user fees
to pay debt service, although the principal revenue source is often supplemented
by additional security features which are intended to enhance the
creditworthiness of the issuer's obligations. In some cases, particularly
revenue bonds issued to finance housing and public buildings, a direct or
implied "moral obligation" of a governmental unit may be pledged to the payment
of debt service. In other cases, a special tax or other charge may augment user
fees.
Included within the revenue bonds category are participations in lease
obligations or installment purchase contracts (hereinafter collectively called
"lease obligations") of municipalities. State and local governments issue lease
obligations to acquire equipment and facilities.
Lease obligations may have risks not normally associated with general
obligation or other revenue bonds. Leases and installment purchase or
conditional sale contracts (which may provide for title to the leased asset to
pass eventually to the issuer) have developed as a means for governmental
issuers to acquire property and equipment without the necessity of complying
with the constitutional and statutory requirements generally applicable for the
issuance of debt. Certain lease obligations contain "non-appropriation" clauses
that provide that the governmental issuer has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on an annual or other periodic
basis. Consequently, continued lease payments on those lease obligations
containing "non-appropriation" clauses are dependent on future legislative
actions. If such legislative actions do not occur, the holders of the lease
obligation may experience difficulty in exercising their rights, including
disposition of the property.
Certain lease obligations have not yet developed the depth of marketability
associated with more conventional municipal obligations, and, as a result,
certain of such lease obligations may be considered illiquid securities. To
determine whether or not the Fund will consider such securities to be illiquid
(the Fund may not invest more than ten percent of its net assets in illiquid
securities), the Trustees of the Fund have established guidelines to be utilized
by the Fund in determining the liquidity of a lease obligation. The factors to
be considered in making the determination include: 1) the frequency of trades
and quoted prices for the obligation; 2) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers; 3)
the willingness of dealers to undertake to make a market in the security; and 4)
the nature of the marketplace trades, including, the time needed to dispose of
the security, the method of soliciting offers, and the mechanics of the
transfer.
The Fund does not generally intend to invest more than 25% of its total
assets in securities of any one governmental unit. The Fund may invest more than
25% of its total assets in industrial development and pollution control bonds
(two kinds of tax-exempt Municipal Bonds) whether or not the users of facilities
financed by such bonds are in the same industry. In cases where such users are
in the same industry, there may be additional risk to the Fund in the event of
an economic downturn in such industry, which may result generally in a lowered
need for such facilities and a lowered ability of such users to pay for the use
of such facilities.
The high quality, short-term fixed income securities in which the Fund
principally invests are guaranteed by state and local governments and are
subject to minimal risk of loss of income and principal.
7
<PAGE>
PORTFOLIO MANAGEMENT
Although the Fund will generally acquire securities for investment with the
intent of holding them to maturity and will not seek profits through short-term
trading, the Fund may dispose of any security prior to its maturity to meet
redemption requests. Securities may also be sold when the Fund's Investment
Manager believes such disposition to be advisable on the basis of a revised
evaluation of the issuer or based upon relevant market considerations. There may
be occasions when, as a result of maturities of portfolio securities or sale of
Fund shares, or in order to meet anticipated redemption requests, the Fund may
hold cash which is not earning income.
The Fund anticipates that the average weighted maturity of the portfolio
will be 90 days or less. The relatively short-term nature of the Fund's
portfolio is expected to result in a lower yield than portfolios comprised of
longer-term tax-exempt securities.
VARIABLE RATE OBLIGATIONS. The interest rates payable on certain Municipal
Bonds and Municipal Notes are not fixed and may fluctuate based upon changes in
market rates. Municipal obligations of this type are called "variable rate" or
"floating rate" obligations. The interest rate payable on a variable rate
obligation is adjusted either at predesignated periodic intervals and on a
floating rate obligation whenever there is a change in the market rate of
interest on which the interest rate payable is based.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase
tax-exempt securities on a when-issued or delayed delivery basis; i.e., delivery
and payment can take place a month or more after the date of the transaction.
These securities are subject to market fluctuation and no interest accrues to
the purchaser prior to settlement. At the time the Fund makes the commitment to
purchase such securities, it will record the transaction and thereafter reflect
the value, each day, of such securities in determining its net asset value.
BROKERAGE ALLOCATION. Brokerage commissions are not normally charged on
purchases and sales of short-term municipal obligations, but such transactions
may involve transaction costs in the form of spreads between bid and asked
prices. Pursuant to an order of the Securities and Exchange Commission, the Fund
may effect principal transactions in certain money market instruments with DWR.
In addition, the Fund may incur brokerage commissions on transactions conducted
through DWR.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA TAX-EXEMPT SECURITIES
The Fund will be affected by any political, economic or regulatory
developments affecting the ability of California issuers to pay interest or
repay principal. Various developments regarding the California Constitution and
State statutes which limit the taxing and spending authority of California
governmental entities may impair the ability of California issuers to maintain
debt service on their obligations. The following information constitutes only a
brief summary and is not intended as a complete description. See the Statement
of Additional Information for a more detailed discussion.
California is the most populous state in the nation with a total population
at the 1990 census of 29,976,000. Growth has been incessant since World War II,
with population gains in each decade since 1950 of between 18% and 49%. During
the last decade, the population rose 20%. The State now comprises 12.3% of the
nation's population and 12.9% of its total personal income. Its economy is broad
and diversified with major concentrations in high technology research and
manufacturing, aerospace and defense-related manufacturing, trade, real estate,
and financial services. After experiencing strong growth throughout much of the
1980s, the State was adversely affected by both the national recession and the
cutbacks in aerospace and defense spending which had a severe impact on the
economy in Southern California. Although California is still experiencing some
of the effects of the recession and its unemployment is above the national
average, the gap is narrowing and is projected to close to within 1% of the
national average in 1997, although there can be no assurance this will occur.
8
<PAGE>
California's economic recovery from the recession is continuing at a strong
pace. Recent economic reports indicate that, while the rate of economic growth
in California is expected to moderate over the next three years, the increases
in employment and income may exceed those of the nation as a whole by a
significant margin.
These economic difficulties have exacerbated the structural budget imbalance
which has been evident since fiscal year 1985-1986. Since that time, budget
shortfalls have become increasingly more difficult to solve and the State has
recorded General Fund operating deficits in several fiscal years. Many of these
problems have been attributable to the fact that the great population influx has
produced increased demand for education and social services at a far greater
pace than the growth in the State's tax revenues. Despite substantial tax
increases, expenditure reductions and the shift of some expenditure
responsibilities to local government, the budget condition remains problematic.
In July, 1996, the Governor signed into law a new $62.8 billion budget
which, among other things, significantly increases education spending from the
previous fiscal year, reduces taxes for corporations and banks and provides for
a balanced budget at the close of the fiscal year. At the same time, the budget
continues several funding reductions made in past years, mostly to health and
welfare programs. Although the state's budget provides for a reserve of $305
million, revenue and expenditure developments have occurred which may have the
effect of reducing the reserve. The Governor's proposed budget for fiscal year
1997-1998 indicates total spending of $66.6 billion and anticipates a $553
million reserve for economic uncertainties. As in the past years, the state's
budget assumes savings which depend on future federal actions, both to fund
programs relating to Medical and incarceration costs associated with
undocumented immigrants and to relieve the state from federally mandated
spending, which may not occur. Accordingly, the anticipated reserves may be
reduced unless the economy outperforms expectations or spending falls below
planned levels.
Because of the State of California's continuing budget problems, the State's
General Obligation bonds were downgraded in July 1994 from A1 to Aa by Moody's,
to A from A+ by S&P, and from AA to A by Fitch Investors Service, Inc. All three
rating agencies expressed uncertainty in the State's ability to balance its
budget by 1996. However, in 1996, citing California's improving economy and
budget situation, both Fitch and Standard & Poor's raised their ratings from A
to A+.
The effect of these various constitutional and statutory amendments and
budget developments upon the ability of California issuers to pay interest and
principal on their obligations remains unclear and in any event may depend upon
whether a particular California tax-exempt security is a general or limited
obligation bond and on the type of security provided for the bond. It is
possible that other measures affecting the taxing or spending authority of
California or its political subdivisions may be approved or enacted in the
future.
For a more detailed discussion of the State of California economic factors,
see the Statement of Additional Information.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The investment restrictions listed below are among the restrictions which
have been adopted by the Fund as fundamental policies. Under 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.
For purposes of the following restrictions: (a) an "issuer" of a security is
the entity whose assets and revenues are committed to the payment of interest
and principal on that particular security, provided that the guarantee of a
security will be considered a separate security and provided further
9
<PAGE>
that a guarantee of a security shall not be deemed to be a security issued by
the guarantor if the value of all securities issued or guaranteed by the
guarantor and owned by the Fund does not exceed 10% of the value of the total
assets of the Fund; (b) a "taxable security" is any security the interest on
which is subject to federal income tax; and (c) all percentage limitations apply
immediately after a purchase or initial investment, and any subsequent change in
any applicable percentage resulting from market fluctuations does not require
elimination of any security from the portfolio.
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 value of its total assets are in
the securities of any one issuer (other than obligations issued, or guaranteed
by, the United States Government, its agencies or instrumentalities or by the
State of California or its political subdivisions).
2. With respect to 75% of its total assets, purchase more than 10% of all
outstanding taxable debt securities of any one issuer (other than debt
securities issued, or guaranteed as to principal and interest by, the United
States Government, its agencies or instrumentalities).
3. Invest 25% or more of the value of its total assets in taxable securities
of issuers in any one industry (industrial development and pollution control
bonds are grouped into industries based upon the business in which the issuers
of such obligations are engaged). This restriction does not apply to obligations
issued or guaranteed by the United States Government, its agencies or
instrumentalities or by the State of California or its political subdivisions,
or to domestic bank obligations.
PURCHASE OF FUND SHARES
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The Fund offers its shares for sale to the public on a continuous basis,
without a sales charge. Pursuant to a Distribution Agreement between the Fund
and Dean Witter Distributors Inc. (the "Distributor"), an affiliate of the
Investment Manager, shares of the Fund are distributed by the Distributor and
through DWR and certain selected 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 offering price of the shares will be at their net asset value next
determined (see "Determination of Net Asset Value" below) after receipt of a
purchase order and acceptance by the Fund's transfer agent, Dean Witter Trust
Company (the "Transfer Agent") in proper form and accompanied by payment in
Federal Funds (i.e., monies of member banks within the Federal Reserve System
held on deposit at a Federal Reserve Bank) available to the Fund for investment.
Shares commence earning income on the day following the date of purchase. Share
certificates will not be issued unless requested in writing by the shareholder.
To initiate purchase by mail or wire, a completed Investment Application
(contained in the Prospectus) must be sent to the Transfer Agent at P.O. Box
1040, Jersey City, N.J. 07303. Checks should be made payable to the Dean Witter
California Tax-Free Daily Income Trust and sent to Dean Witter Trust Company at
the above address. Purchases by wire must be preceded by a call to the Transfer
Agent advising it of the purchase (see Investment Application or the front cover
of this Prospectus for the telephone number) and must be wired to The Bank of
New York, for credit to account of Dean Witter Trust Company, Harborside
Financial Center, Plaza Two, Jersey City, New Jersey, Account Number 8900188413.
Wire purchase instructions must include the name of the Fund and the
shareholder's account number. Purchases made by check are normally effective
within two business days for checks drawn on Federal Reserve System member
banks, and longer for most other checks. Wire purchases received by the Transfer
Agent prior to 12 noon New York time are normally effective that day and wire
purchases received after 12 noon New
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York time are normally effective the next business day. Initial investments must
be at least $5,000, although the Fund, at its discretion, may accept initial
investments of smaller amounts, not less than $1,000. Subsequent investments
must be $100 or more and may be made through the Transfer Agent. The Fund will
waive the minimum initial investment for the automatic reinvestment of
distributions from certain unit investment trusts. The Fund reserves the right
to reject any purchase order.
Sales personnel are compensated for selling shares of the Fund at the time
of their sale by the Distributor and/or Selected Broker-Dealer. In addition,
some sales personnel of the Selected Broker-Dealer will receive various types of
non-cash compensation as special sales incentives, including trips, educational
and/or business seminars and merchandise.
Orders for the purchase of Fund shares placed by customers through DWR or
another Selected Broker-Dealer with payment in clearing house funds will be
transmitted to the Fund with payment in Federal Funds on the business day
following the day the order is placed by the customer with DWR or another
Selected Broker-Dealer. Investors desiring same day effectiveness should wire
Federal Funds directly to the Transfer Agent. An order procedure exists pursuant
to which customers can, upon request: (a) have the proceeds from the sale of
listed securities invested in shares of the Fund on the day following the day
the customer receives such proceeds in his or her DWR or other Selected
Broker-Dealer brokerage account; and (b) pay for the purchase of certain listed
securities by automatic liquidation of Fund shares owned by the customer. In
addition, there is an automatic purchase procedure whereby consenting DWR or
other Selected Broker-Dealer customers who are shareholders of the Fund will
have free cash credit balances in their DWR or other Selected Broker-Dealer
brokerage accounts as of the close of business (4:00 p.m., New York time) on the
last business day of each week (where such balances do not exceed $5,000)
automatically invested in shares of the Fund the next following business day.
Investors with free cash credit balances (i.e., immediately available funds) in
brokerage accounts at DWR or another Selected Broker-Dealer, will not have any
of such funds invested in the Fund until the business day after the customer
places an order with DWR or another Selected Broker-Dealer to purchase shares of
the Fund and will not receive the daily dividend which would have been received
had such funds been invested in the Fund on the day the order was placed with
DWR or another Selected Broker-Dealer. Accordingly, DWR or any other Selected
Broker-Dealer who follows the above procedure may have the use of such free
credit balances during such period.
PLAN OF DISTRIBUTION
In accordance with a Plan of Distribution between the Fund and the
Distributor, pursuant to Rule 12b-1 under the Act, certain services and
activities in connection with the distribution of the Fund's shares are
reimbursable expenses. The principal activities and services which may be
provided by the Distributor, DWR, its affiliates and other Selected
Broker-Dealers under the Plan include: (1) compensation to, and expenses of,
DWR's and other Selected Broker-Dealers' account executives and other employees,
including overhead and telephone expenses; (2) sales incentives and bonuses to
sales representatives and to marketing personnel in connection with promoting
sales of the Fund's shares; (3) expenses incurred in connection with promoting
sales of the Fund's shares; (4) preparing and distributing sales literature; and
(5) providing advertising and promotional activities, including direct mail
solicitation and television, radio, newspaper, magazine and other media
advertisements. Reimbursements for these services will be made in monthly
payments by the Fund, which will in no event exceed an amount equal to a payment
at the annual rate of 0.15 of 1% of the Fund's average daily net assets. For the
fiscal year ended December 31, 1996, the fee paid was accrued at the annual rate
of 0.10 of 1% of the Fund's average daily net assets. Expenses incurred pursuant
to the Plan in any fiscal
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year will not be reimbursed by the Fund through payments accrued in any
subsequent fiscal year.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is determined 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 4:00 p.m., at such earlier time) by
taking the value of all assets of the Fund, subtracting its liabilities and
dividing by the number of shares outstanding. 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.
The Fund utilizes the amortized cost method in valuing its portfolio
securities, which method involves valuing a security at its cost adjusted by a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument. The
purpose of this method of calculation is to facilitate the maintenance of a
constant net asset value per share of $1.00. However, there can be no assurance
that the $1.00 net asset value will be maintained.
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available for
shareholders who own or purchase shares of the Fund having a minimum value of at
least $5,000. The plan provides for monthly or quarterly (March, June,
September, December) checks in any dollar amount, not less than $25, or in any
whole percentage of the account balance, on an annualized basis. 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 business day) of the relevant month or
quarter and normally a check for the proceeds will be mailed by the Transfer
Agent, or amounts credited to a shareholder's DWR or other Selected Broker-
Dealer brokerage account, within five days after the date of redemption. A
shareholder wishing to make this election should do so on the Investment
Application. The withdrawal plan may be terminated at any time by the Fund.
EASYINVEST-SM- Shareholders may subscribe to EasyInvest, an automatic
purchase plan which provides for any amount from $100 to $5,000 to be
transferred automatically from a checking or savings account, on a semi-monthly,
monthly or quarterly basis, to the Transfer Agent for investment in shares of
the Fund. Shares purchased through EasyInvest will be added to the shareholder's
existing account at the net asset value calculated the same business day the
transfer of funds is effected.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about any of the
above services.
TARGETED DIVIDENDS. In states where it is legally permissible,shareholders
may elect to have all shares of the Fund earned as a result of dividends paid in
any given month redeemed as of the end of the month and invested in shares of
any other open-end investment company for which InterCapital serves as
investment manager (collectively, with the Fund, the "Dean Witter Funds"), other
than Dean Witter California Tax-Free Daily Income Trust, at the net asset value
per share of the selected Dean Witter Fund determined as of the last business
day of the month, without the imposition of any applicable front-end sales
charge or without the imposition of any applicable contingent deferred sales
charge upon ultimate redemption. All such shares invested will begin to earn
dividends, if any, in the selected Dean Witter Fund on the first business day of
the succeeding month. Shareholders of the Fund must be shareholders of the Dean
Witter Fund targeted to receive investments from dividends at the time they
enter the Targeted Dividends program. Investors should review the prospectus of
the targeted Dean Witter Fund before entering the program.
EXCHANGE PRIVILEGE. An "Exchange Privilege", that is, the privilege of
exchanging shares of certain
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Dean Witter Funds for shares of the Fund, exists whereby shares of various Dean
Witter Funds which are open-end investment companies sold with either a
front-end (at time of purchase) sales charge ("FESC funds") or a contingent
deferred (at time of redemption) sales charge ("CDSC funds"), may be exchanged
for shares of the Fund, Dean Witter Tax-Free Daily Income Trust, Dean Witter
U.S. Government Money Market Trust, Dean Witter Liquid Asset Fund Inc. and Dean
Witter New York Municipal Money Market Trust (which five funds are hereinafter
called "money market funds") and for shares of Dean Witter Short-Term U.S.
Treasury Trust, Dean Witter Limited Term Municipal Trust, Dean Witter Short-Term
Bond Fund, Dean Witter Balanced Income Fund, Dean Witter Balanced Growth Fund,
and Dean Witter Intermediate Term U.S. Treasury Trust (which eleven Funds,
including the Fund, are referred to herein as the "Exchange Funds"). When
exchanging into a money market fund from an FESC fund or a CDSC fund, shares of
the FESC fund or the CDSC fund are redeemed at their next calculated net asset
value and exchanged for shares of the money market fund at their net asset value
determined the following business day. An exchange from an FESC fund or a CDSC
fund to an 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. Subsequently, shares of the Exchange Funds received in an exchange
for shares of an FESC fund (regardless of the type of fund originally purchased)
may be redeemed and exchanged for shares of the other Exchange Funds, FESC funds
or CDSC funds (however, shares of CDSC funds, including shares acquired in
exchange for (i) shares of FESC funds or (ii) shares of the Exchange Funds which
were acquired in exchange for shares of FESC funds, may not be exchanged for
shares of FESC funds). Additionally, shares of the Exchange Funds received in an
exchange for shares of a CDSC fund (regardless of the type of fund originally
purchased) may be redeemed and exchanged for shares of the other Exchange Funds
or CDSC funds. Ultimately, any applicable contingent deferred sales charge
("CDSC") will have to be paid upon redemption of shares originally purchased
from a CDSC fund. (If shares of the Exchange Funds received in exchange for
shares originally purchased from a CDSC fund are exchanged for shares of another
CDSC fund having a different CDSC schedule than that of the CDSC fund from which
the Exchange Funds shares were acquired, the shares will be subject to the
higher CDSC schedule.) During the period of time the shares originally purchased
from a CDSC fund remain in the Exchange Funds (calculated from the last day of
the month in which the Exchange Fund shares were acquired), the holding period
(for the purpose of determining the rate of CDSC) is frozen. If those shares are
subsequently reexchanged for shares of a CDSC fund, the holding period
previously frozen when the first exchange was made resumes on the last day of
the month in which shares of a CDSC fund are reacquired. Thus, the CDSC is based
upon the time (calculated as described above) the shareholder was invested in a
CDSC fund. 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, if any, incurred on
or after that date which are attributable to those shares (see "Purchase of Fund
Shares--Plan of Distribution" in the respective Exchange Funds Prospectuses for
a description of Exchange Fund distribution fees). Exchanges involving FESC
funds or CDSC funds may be made after the shares of the FESC fund or CDSC 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.
Exchange Privilege accounts may also be maintained for shareholders of the
money market funds who acquired their shares in exchange for shares of various
TCW/DW Funds, a group of funds distributed by the Distributor for which TCW
Funds
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<PAGE>
Management, Inc. serves as Adviser, under the terms and conditions described in
the Prospectus and Statement of Additional Information of each TCW/DW Fund.
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 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.
The Exchange Privilege may be terminated or revised at any time by the Fund
and/or any of such Funds for which shares of the Fund may be exchanged, upon
such notice as may be required by applicable regulatory agencies (presently
sixty days prior written notice for termination or material revision), provided
that six months prior written notice of termination will be given to the
shareholders who hold shares of the Exchange Funds, TCW/ DW North American
Government Income Trust, TCW/DW Income and Growth Fund and TCW/DW Balanced Fund
pursuant to the Exchange Privilege, and provided further that the Exchange
Privilege may be terminated or materially revised without notice under certain
unusual circumstances described in the Statement of Additional Information.
Shareholders maintaining margin accounts with DWR or another Selected
Broker-Dealer are referred to their account executive regarding restrictions on
exchanges of shares of the Fund pledged in their margin account.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain one and read it carefully before
investing. Exchanges are subject to the minimum investment requirement and any
other conditions imposed by each fund. In the case of any 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. 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 above Funds
pursuant to this Exchange Privilege by contacting their DWR or another Selected
Broker-Dealer account executive (no Exchange Privilege Authorization Form is
required). Other shareholders (and those who are shareholders of DWR or another
Selected Broker-Dealer but who wish to make exchanges directly by writing or
telephoning the Transfer Agent) must complete and forward to the Transfer Agent
an Exchange Privilege Authorization Form, copies of which may be obtained from
the Transfer Agent, to initiate an exchange. If the Authorization Form is used,
exchanges may be made in writing or by contacting the Transfer Agent at (800)
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,
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<PAGE>
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 has
previously filed an Exchange Privilege Authorization Form and who is unable to
reach the Fund by telephone should contact his or her DWR or other Selected
Broker-Dealer account executive, if appropriate, or make a written exchange
request. Shareholders are advised that during periods of drastic economic or
market changes, it is possible that the telephone exchange procedures may be
difficult to implement, although this has not been the experience of the Dean
Witter Funds in the past.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about the
Exchange Privilege.
REDEMPTION OF FUND SHARES
- --------------------------------------------------------------------------------
A shareholder may withdraw all or any of his or her investments at any time,
without penalty or charge, by redeeming shares through the Transfer Agent at the
net asset value per share next determined (see "Purchase of Fund
Shares--Determination of Net Asset Value") after the receipt of a redemption
request meeting the applicable requirements as follows (all of which are subject
to the General Redemption Requirements set forth below).
1. BY CHECK
The Transfer Agent will supply blank checks to any shareholder who has
requested them on an Investment Application. The shareholder may make checks
payable to the order of anyone in any amount not less than $500 (checks written
in amounts under $500 will not be honored by the Transfer Agent). Shareholders
must sign checks exactly as their shares are registered. If the account is a
joint account, the check may contain one signature unless the joint owners have
specified on an Investment Application that all owners are required to sign
checks. Only shareholders having accounts in which no share certificates have
been issued will be permitted to redeem shares by check.
Shares will be redeemed at their net asset value next determined (see
"Purchase of Fund Shares-- Determination of Net Asset Value") after receipt by
the Transfer Agent of a check which does not exceed the value of the account.
Payment of the proceeds of a check will normally be made on the next business
day after receipt by the Transfer Agent of the check in proper form. Shares
purchased by check (including a certified or bank cashier's check) are not
normally available to cover redemption checks until fifteen days after receipt
of the check used for investment by the Transfer Agent. The Transfer Agent will
not honor a check in an amount exceeding the value of the account at the time
the check is presented for payment.
2. BY TELEPHONE OR WIRE INSTRUCTIONS WITH PAYMENT TO PREDESIGNATED BANK ACCOUNT
A shareholder may redeem shares by telephoning or sending wire instructions
to the Transfer Agent. Payment will be made by the Transfer Agent to the
shareholder's bank account at any commercial bank designated by the shareholder
in an Investment Application, by wire if the amount is $1,000 or more and the
shareholder so requests, and otherwise by mail. Normally, the Transfer Agent
will transmit payment the next business day following receipt of a request for
redemption in proper form. Only shareholders having accounts in which no share
certificates have been issued will be permitted to redeem shares by telephone or
wire instructions.
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<PAGE>
DWR and other participating Selected Broker-Dealers have informed the
Distributor and the Fund that, on behalf of and as agent for their customers who
are shareholders of the Fund, they will transmit to the Fund requests for
redemption of shares owned by their customers. In such cases, the Transfer Agent
will wire proceeds of redemptions to DWR's or another Selected Broker-Dealer's
bank account for credit to the shareholders' accounts the following business
day. DWR and other participating Selected Broker-Dealers have also informed the
Distributor and the Fund that they do not charge for this service.
Redemption instructions must include the shareholder's name and account
number and be wired or called to the Transfer Agent:
-- 800-869-NEWS (Toll-Free)
-- Telex No. 125076
3. BY MAIL
A shareholder may redeem shares by sending a letter to Dean Witter Trust
Company, P.O. Box 983, Jersey City, NJ 07303, requesting redemption and
surrendering share certificates if any have been issued.
Redemption proceeds will be mailed to the shareholder at his or her
registered address or mailed or wired to his or her predesignated bank account,
as he or she may request. Proceeds of redemption may also be sent to some other
person, as requested by the shareholder.
GENERAL REDEMPTION REQUIREMENTS
Written requests for redemption must be signed by the registered
shareholder(s). If the proceeds are to be paid to anyone other than the
registered shareholders or sent to any address other than the shareholder's
registered address or predesignated bank account, 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), except in the case of redemption by
check. Additional documentation may be required where shares are held by a
corporation, partnership, trustee or executor. With regard to shares of the Fund
acquired pursuant to the Exchange Privilege, any applicable contingent deferred
sales charge will be imposed upon the redemption of such shares (see "Purchase
of Fund Shares--Exchange Privilege").
If shares to be redeemed are represented by a share certificate, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholder(s) exactly as the account
is registered. Shareholders are advised, for their own protection, to send the
share certificate and assignment form in separate envelopes (if they are being
mailed and not hand delivered) to the Transfer Agent. Signatures must be
guaranteed by an eligible guarantor acceptable to the Transfer Agent (see
above). Additional documentation may be required where shares are held by a
corporation, partnership, trustee or executor.
All requests for redemption, all share certificates and all share
assignments should be sent to Dean Witter Trust Company, P.O. Box 983, Jersey
City, NJ 07303.
Generally, the Fund will attempt to make payment for all redemptions within
one business day, but in no event later than seven days after receipt of such
redemption request in proper form. However, if the shares being redeemed were
purchased by check (including a certified or bank cashier's check), payment 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). In addition, the Fund may postpone
redemptions at certain times when normal trading is not taking place on the New
York Stock Exchange.
The Fund reserves the right, on sixty days notice, to redeem at net asset
value the shares of any shareholder (other than shares held in an Individual
Retirement Account or custodial account
16
<PAGE>
under Section 403(b)(7) of the Internal Revenue Code) whose shares due to
redemptions by the shareholder have a value of less than $1,000, or such lesser
amount as may be fixed by the Board of Trustees.
AUTOMATIC REDEMPTION PROCEDURE
The Distributor has instituted an automatic redemption procedure which it
may utilize to satisfy amounts due by a shareholder maintaining a brokerage
account with DWR or another Selected Broker-Dealer, as a result of purchases of
securities or other transactions in the shareholder's brokerage account. Under
this procedure, if the shareholder elects to participate by so notifying DWR or
other Selected Broker-Dealer, the shareholder's DWR or other Selected
Broker-Dealer brokerage account will be scanned each business day prior to the
close of business (4:00 p.m., New York time). After application of any cash
balances in the account, a sufficient number of Fund shares may be redeemed at
the close of business to satisfy any amounts for which the shareholder is
obligated to make payment to DWR or another Selected Broker-Dealer. Redemptions
will be effected on the business day preceding the date the shareholder is
obligated to make such payment, and DWR or another Selected Broker-Dealer will
receive the redemption proceeds on the day following the redemption date.
Shareholders will receive all dividends declared and reinvested through the date
of redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. The Fund declares dividends, payable on each
day the New York Stock Exchange is open for business, of all of its daily net
investment income to shareholders of record as of the close of business the
preceding business day. Dividends from net short-term capital gains, if any,
will be paid periodically. The amount of dividend may fluctuate from day to day
and may be omitted on some days if net realized losses on portfolio securities
exceed the Fund's net investment income. Dividends are declared and
automatically reinvested daily in additional full and fractional shares of the
Fund at the net asset value per share at the close of business on that day. Any
dividends declared in the last quarter of any calendar year which are paid in
the following calendar year prior to February 1 will be deemed received by the
shareholder in the prior calendar year.
Shareholders may instruct the Transfer Agent (in writing) to have their
dividends paid out monthly in cash. For such shareholders, the shares reinvested
and credited to their account during the month will be redeemed as of the close
of business on the monthly payment date (which will be no later than the last
business day of the month) and the proceeds will be paid to them by check.
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.
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.
TAXES. Because the Fund intends to distribute substantially all of its net
investment income and net capital gains, if any, to shareholders, and intends to
otherwise comply with all the provisions of Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), to qualify as a regulated investment
company, it is not expected that the Fund will be required to pay any federal
income tax.
The Fund intends to qualify to pay "exempt-interest dividends" to its
shareholders by maintaining, as of the close of each quarter of its taxable
year, at least 50% of the value of its total assets in tax-exempt securities. If
the Fund satisfies such requirement, dividends from net investment income to
shareholders, whether taken in cash or reinvested in additional Fund shares,
will be excludable
17
<PAGE>
from gross income for federal income tax purposes to the extent net interest
income is represented by interest on tax-exempt securities. Exempt-interest
dividends are included, however, in determining what portion, if any, of a
person's Social Security benefits are subject to federal income tax.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. This alternative minimum tax applies
to interest received on "private activity bonds" (in general, bonds that benefit
non-governmental 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 may be
an item of tax preference to shareholders subject to the alternative minimum
tax. In addition, certain corporations which are subject to the alternative
minimum tax may have to include a portion of exempt-interest dividends in
calculating their alternative minimum taxable income in situations where the
"adjusted current earnings" of the corporation exceeds its alternative minimum
taxable income.
Under California law, a fund which qualifies as a regulated investment
company must have at least 50% of the value of its total assets invested in
California state and local issues or in obligations of the United States which
pay interest excludable from income (or in a combination thereof), at the end of
each quarter of its taxable year in order to be eligible to pay dividends which
will be exempt from California personal income tax. Shareholders who are
California residents will not incur any federal or California income tax on the
amount of exempt-interest dividends received by them from the Fund and derived
from California state and local issues or certain United States issues whether
taken in cash or reinvested in additional shares (to the extent that such
dividends are derived from California securities).
After the end of its calendar year, the shareholders will be sent 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, and the percentage, if any, of the exempt-interest
dividends which constitutes an item of tax preference. Unlike federal law, no
portion of the exempt-interest dividends will constitute an item of tax
preference for California personal income tax purposes. Moreover, unlike federal
law, an individual's Social Security benefits are not subject to California
personal income tax, so that the receipt of California exempt-interest dividends
will have no effect on an individual's California personal income tax.
Shareholders will normally be subject to federal and California personal
income tax on dividends paid from interest income derived from taxable
securities and on distributions of net capital gains. For federal income tax and
California personal income tax purposes, distributions of long-term capital
gains, if any, are taxable to shareholders as long-term capital gains,
regardless of how long a shareholder has held the Fund's shares and regardless
of whether the distribution is received in additional shares or cash. In
addition, for California personal income tax purposes, the shareholders of the
Fund will not be subject to tax, or receive a credit for tax paid by the Fund,
on undistributed capital gains, if any. To avoid being subject to a 31% backup
withholding tax on taxable dividends and capital gains distributions and the
proceeds of redemptions and repurchases, shareholders' taxpayer identification
numbers must be furnished and certified as to accuracy.
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
18
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
4 4 0 --
for office use only
[logo]
</TABLE>
[REMOVE APPLICATION CAREFULLY]
APPLICATION
DEAN WITTER CALIFORNIA TAX-FREE DAILY INCOME TRUST
Send to: Dean Witter Trust Company (the "Transfer Agent"), P.O. Box 1040,
Jersey City, NJ 07303
INSTRUCTIONS For assistance in completing this application, telephone Dean
Witter Trust Company at (800) 869-NEWS (Toll-Free).
<TABLE>
<S> <C> <C>
TO REGISTER
SHARES
(please print) 1.
---------------------------------------------------------------------------------------------------
First Name Last Name
- -As joint
tenants,
use line 1 & 2 2.
---------------------------------------------------------------------------------------------------
First Name Last Name
(Joint tenants with rights of survivorship unless otherwise specified)
---------------------------------------
Social Security Number
- -As custodian
for a minor,
use lines 1 & 3 3.
-------------------------------------------------------------------------------------------------
Minor's Name
---------------------------------------
Minor's Social Security Number
Under the ___________________________ Uniform Gifts to Minors Act
State of Residence of Minor
- -In the name of a
corporation, 4.
trust, ---------------------------------------------------------------------------------------------------
partnership
or other Name of Corporation, Trust (including trustee name(s)) or Other Organization
institutional
investors,
use
line 4 ---------------------------------------------------------------------------------------------------
---------------------------------------
Tax Identification Number
If Trust, Date of Trust Instrument: _____________________________
ADDRESS ---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
City State Zip Code
TO PURCHASE
SHARES:
Minimum Initial / / CHECK (enclosed) $________________ (Make Payable to Dean Witter California Tax-Free Daily Income Trust)
Investment:
$5,000 / / WIRE* On_______________ MF* _________________________________
(Date) (Control number, this transaction)
--------------------------------------------------------------------------------------------------
Name of Bank Branch
--------------------------------------------------------------------------------------------------
Address
--------------------------------------------------------------------------------------------------
Telephone Number
* For an initial investment made by wiring funds, obtain a control number by calling: (800) 869-NEWS (Toll
Free).
Your bank should wire to:
Bank of New York for credit to account of Dean Witter Trust Company
Account Number: 8900188413
Re: Dean Witter California Tax-Free Daily Income Trust
Account Of: _____________________________________________
(Investor's Account as Registered at the Transfer Agent)
Control or Account Number:______________________________________
(Assigned by Telephone)
OPTIONAL SERVICES
NOTE: If you are a current shareholder of Dean Witter California Tax-Free Daily Income Trust, please
indicate your fund account number here.
[4] [4] [0] -
------------------------------
DIVIDENDS All dividends will be reinvested daily in additional shares, unless the following option is selected:
/ / Pay income dividends by check at the end of each month.
WRITE YOUR OWN / / Send an initial supply of checks.
CHECK FOR JOINT ACCOUNTS:
/ / CHECK THIS BOX IF ALL OWNERS ARE REQUIRED TO SIGN CHECKS.
SYSTEMATIC / / Systematic Withdrawal Plan ($25 minimum) Percentage of balance (annualized basis)
WITHDRAWAL $_____________ / / Monthly or / / Quarterly __________% / / Monthly or / / Quarterly
PLAN / / 10th or / / 25th of Month/Quarter / / 10th or / / 25th of Month/Quarter
Minimum / / Pay shareholder(s) at address of record.
Account Value: / / Pay to the following: (If this payment option is selected a signature guarantee is required)
$5,000
--------------------------------------------------------------------------------------------------
Name
--------------------------------------------------------------------------------------------------
Address
--------------------------------------------------------------------------------------------------
City State Zip Code
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
PAYMENT TO / / Dean Witter Trust Company is hereby authorized to honor telephonic or other
PREDESIGNATED instructions, without signature guarantee, from any person for the redemption of any
BANK ACCOUNT or all shares of Dean Witter California Tax-Free Daily Income Trust held in my (our)
account provided that proceeds are transmitted only to the following bank account.
(Absent its own negligence, neither Dean Witter California Tax-Free Daily Income
Trust nor Dean Witter Trust Company (the "Transfer Agent") shall be liable for any
redemption caused by unauthorized instruction(s)):
Bank Account must be in
same name as shares are
registered -------------------------------------------------------------- ----------------------------
NAME & BANK ACCOUNT NUMBER BANK'S ROUTING TRASMIT CODE
(ASK YOUR BANK)
Minimum Amount:
$1,000 ---------------------------------------------------------------
NAME OF BANK
---------------------------------------------------------------
ADDRESS OF BANK
( )
---------------------------------------------------------------
TELEPHONE NUMBER OF BANK
SIGNATURE AUTHORIZATION
FOR ALL ACCOUNTS NOTE: RETAIN A COPY OF THIS DOCUMENT FOR YOUR RECORDS. ANY MODIFICATION OF THE INFORMATION
BELOW WILL REQUIRE AN AMENDMENT TO THIS FORM. THIS DOCUMENT IS IN FULL FORCE AND EFFECT
UNTIL ANOTHER DULY EXECUTED FORM IS RECEIVED BY THE TRANSFER AGENT.
The "Transfer Agent" is hereby authorized to act as agent for the registered owner of
shares of Dean Witter California Tax-Free Daily Income Trust (the "Fund") in effecting
redemptions of shares and is authorized to recognize the signature(s) below in payment of
funds resulting from such redemptions on behalf of the registered owners of such shares.
The Transfer Agent shall be liable only for its own negligence and not for 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.
I (we) certify to my (our) legal capacity, or the capacity of the investor named above, to
invest in and redeem shares of, and I (we) acknowledge receipt of a current prospectus of,
Dean Witter California Tax-Free Daily Income Trust and (we) further certify my (our)
authority to sign and act for and on behalf of the investor.
Under penalties of perjury, I certify (1) that the number shown on this form is my correct
taxpayer identification number and (2) that I am not subject to backup withholding either
because I have not been notified that I am subject to backup withholding as a result of a
failure to report all interest or dividends, or the Internal Revenue Service has notified
me that I am no longer subject to backup withholding. (Note: You must cross out item (2)
above if you have been notified by IRS that you are currently subject to backup
withholding because of underreporting interest or dividends on your tax return.)
For Individual, Joint and Custodial Accounts for Minors, Check Applicable Box:
/ / I am a United States Citizen. / / I am not a United States Citizen.
SIGNATURE(S) (IF JOINT TENANTS, ALL MUST SIGN)
Name(s) must be
signed exactly the
same as shown on
lines 1 to 4 on the
reverse side of this
application
SIGNATURE MUST BE KEPT WITHIN ABOVE AREA SIGNATURE MUST BE KEPT WITHIN ABOVE AREA
SIGNATURE MUST BE KEPT WITHIN ABOVE AREA SIGNATURE MUST BE KEPT WITHIN ABOVE AREA
SIGNED THIS ___________________ DAY OF ____________________, 19__.
FOR CORPORATIONS, TRUSTS, PARTNERSHIPS AND OTHER ORGANIZATIONS
The following named persons are currently officers/trustees/general partners/other authorized
signatories of the Registered Owner, and any __* of them ("Authorized Person(s)") is/are currently
authorized under the applicable governing document to act with full power to sell, assign or
transfer securities of the the Fund for the Registered Owner and to execute and deliver any
instrument necessary to effectuate the authority hereby conferred:
NAME/TITLE SIGNATURE
In addition,
complete
Section A or B
below.
SIGNATURE MUST BE KEPT WITHIN ABOVE AREA SIGNATURE MUST BE KEPT WITHIN ABOVE AREA
SIGNATURE MUST BE KEPT WITHIN ABOVE AREA SIGNATURE MUST BE KEPT WITHIN ABOVE AREA
SIGNATURE MUST BE KEPT WITHIN ABOVE AREA SIGNATURE MUST BE KEPT WITHIN ABOVE AREA
SIGNED THIS ___________________ DAY OF ____________________, 19__.
The Transfer Agent may, without inquiry, act only upon the instruction of ANY PERSON(S) purporting
to be (an) Authorized Person(s) as named in the Certification Form last received by the Transfer
Agent. The Transfer Agent and the Fund shall not be liable for any claims, expenses (including legal
fees) or losses resulting from the Transfer Agent having acted upon any instruction reasonably
believed genuine.
----------------------------------------------------------------------------------------------------
*INSERT A NUMBER. UNLESS OTHERWISE INDICATED, THE TRANSFER AGENT MAY HONOR INSTRUCTIONS OF ANY ONE
OF THE PERSONS NAMED ABOVE.
SECTION (A) NOTE: EITHER A SIGNATURE GUARANTEE OR CORPORATE SEAL IS REQUIRED.
CORPORATIONS AND
INCORPORATED
ASSOCIATIONS ONLY. I, ______________________, Secretary of the Registered Owner, do hereby certify that at a meeting
on _____________________ at which a quorum was present throughout, the Board of Directors of the
corporation/the officers of the association duly adopted a resolution, which is in full force and
SIGN ABOVE AND COM- effect and in accordance with the Registered Owner's charter and by-laws, which resolution did
PLETE THIS the following: (1) empowered the above-named Authorized Person(s) to effect securities
SECTION transactions for the Registered Owner on the terms described above; (2) authorized the Secretary
to certify, from time to time, the names and titles of the officers of the Registered Owner and
to notify the Transfer Agent when changes in office occur; and (3) authorized the Secretary to
certify that such a resolution has been duly adopted and will remain in full force and effect
until the Transfer Agent receives a duly execute amendment to the Certification Form.
SIGNATURE
GUARANTEE** Witness my hand on behalf of the corporation/association this__________ day of ___________ , 19__.
(or Corporate Seal)
------------------------------------------------------------------------
Secretary**
The undersigned officer (other than the Secretary) hereby certifies that the foregoing instrument
has been signed by the Secretary of the corporation/association.
SIGNATURE
GUARANTEE**
(or Corporate Seal)
------------------------------------------------------------------------
Certifying Officer of the Corporation or Incorporated Association**
SECTION (B) ALL NOTE: A SIGNATURE GUARANTEE IS REQUIRED.
OTHER
INSTITUTIONAL
INVESTORS ---------------------------------------------------------------------------------------
Certifying
SIGNATURE Trustee(s)/General Partner(s)/Other(s)**
GUARANTEE**
SIGN ABOVE AND COM- ---------------------------------------------------------------------------------------
PLETE THIS SECTION Certifying
Trustee(s)/General Partner(s)/Other(s)**
----------------------------------------------------------------------------------------------------
**SIGNATURE(S) MUST BE GUARANTEED BY AN ELIBIGLE GUARANTOR
DEALER Above signature(s) guaranteed. Prospectus has been delivered by undersigned to above-named applicant(s).
(if any)
Completion by
dealer only
------------------------------------------ ------------------------------------------------------
Firm Name Office Number-Account Number at Dealer-A/E Number
------------------------------------------ ------------------------------------------------------
Address Account Executive's Last Name
------------------------------------------ ------------------------------------------------------
City, State, Zip Code Branch Office
- -Registered Trademark- 1997 Dean Witter Distributors Inc.
</TABLE>
<PAGE>
SIGNATURE MUST BE KEPT WITHIN ABOVE AREA
SIGNATURE MUST BE KEPT WITHIN ABOVE AREA
SIGNATURE MUST BE KEPT WITHIN ABOVE AREA
SIGNATURE MUST BE KEPT WITHIN ABOVE AREA
SIGNATURE MUST BE KEPT WITHIN ABOVE AREA
SIGNATURE MUST BE KEPT WITHIN ABOVE AREA
SIGNATURE MUST BE KEPT WITHIN ABOVE AREA
SIGNATURE MUST BE KEPT WITHIN ABOVE AREA
REMOVE APPLICATION CAREFULLY
<PAGE>
deductible by the investor for federal or California personal income tax
purposes.
The foregoing relates to federal income taxation and to California personal
income taxation as in effect as of the date of this Prospectus. Distributions
from investment income and capital gains, including exempt-interest dividends,
may be subject to California franchise taxes if received by a corporation doing
business in California, to state taxes in states other than California and to
local taxes.
Shareholders should consult their tax advisers as to the applicability of
the above to their own tax situation.
CURRENT AND EFFECTIVE YIELD
From time to time the Fund advertises its "yield" and "effective yield."
Both yield figures are based on historical earnings and are not intended to
indicate future performance. The "yield" of the Fund refers to the income
generated by an investment in the Fund over a given seven-day period (which
period will be stated in the advertisement). This income is then "annualized."
That is, the amount of income generated by the investment during that seven-day
period is assumed to be generated each seven-day period within a 365-day period
and is shown as a percentage of the investment. The "effective yield" for a
seven-day period is calculated similarly but, when annualized, the income earned
by an investment in the Fund is assumed to be reinvested each week within a
365-day period. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment. The Fund may
also quote tax-equivalent yield which is calculated by determining the pre-tax
yield which, after being taxed at a stated rate, would be equivalent to the
yield determined as described above. The Fund may also advertise the growth of
hypothetical investments of $10,000, $50,000 and $100,000 in shares of the Fund.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS. All shares of beneficial interest of the Fund are of $0.01
par value and are equal as to earnings, assets and voting privileges.
The Fund is not required to hold Annual Meetings of Shareholders and, in
ordinary circumstances, the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances, the Trustees may be removed by action of the Trustees or by the
Shareholders.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for obligations of the
Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that notice
of such disclaimer be given in each instrument entered into or executed by the
Fund and provides for indemnification and reimbursement of expenses out of the
Fund's property for any shareholder held personally liable for the obligations
of the Fund. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which the Fund itself
would be unable to meet its obligations. Given the above limitations on
shareholder personal liability and the nature of the Fund's assets and
operations, the possibility of the Fund being unable to meet its obligations is
remote and, in the opinion of Massachusetts counsel to the Fund, the risk to
Fund shareholders of personal liability is remote.
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
19
<PAGE>
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 60 days of a sale or a sale within 60 days of a purchase)
of a security. In addition, investment personnel may not purchase or sell a
security for their personal account within 30 days before or after any
transaction in any Dean Witter Fund managed by them. Any violations of the Code
of Ethics are subject to sanctions, including reprimand, demotion or suspension
or termination of employment. The Code of Ethics comports with regulatory
requirements and the recommendations in the 1994 report by the Investment
Company Institute Advisory Group on Personal Investing.
SHAREHOLDER INQUIRIES. All inquiries regarding the Fund should be directed
to the Fund or the Transfer Agent at the telephone numbers or at the address, as
are set forth on the front cover of this Prospectus.
20
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE DAILY INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(amortized cost $261,110,289)............................. $261,110,289
Cash........................................................ 1,015,479
Receivable for:
Interest................................................ 1,494,185
Shares of beneficial interest sold...................... 20
Prepaid expenses and other assets........................... 18,164
------------
TOTAL ASSETS........................................... 263,638,137
------------
LIABILITIES:
Payable for:
Shares of beneficial interest repurchased............... 3,806,471
Investment management fee............................... 116,463
Plan of distribution fee................................ 23,293
Accrued expenses............................................ 101,564
------------
TOTAL LIABILITIES...................................... 4,047,791
------------
NET ASSETS:
Paid-in-capital............................................. 259,590,211
Accumulated undistributed net investment income............. 135
------------
NET ASSETS............................................. $259,590,346
------------
------------
NET ASSET VALUE PER SHARE,
259,590,211 SHARES OUTSTANDING (UNLIMITED SHARES
AUTHORIZED OF $.01 PAR VALUE).............................
$1.00
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
21
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE DAILY INCOME TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $8,859,047
----------
EXPENSES
Investment management fee................................... 1,326,761
Plan of distribution fee.................................... 263,178
Transfer agent fees and expenses............................ 180,040
Professional fees........................................... 44,689
Shareholder reports and notices............................. 44,109
Trustees' fees and expenses................................. 15,347
Custodian fees.............................................. 14,351
Registration fees........................................... 8,682
Other....................................................... 4,294
----------
TOTAL EXPENSES......................................... 1,901,451
LESS: EXPENSE OFFSET................................... (14,123)
----------
NET EXPENSES........................................... 1,887,328
----------
NET INVESTMENT INCOME.................................. 6,971,719
NET REALIZED GAIN...................................... 1,280
----------
NET INCREASE................................................ $6,972,999
----------
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
22
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE DAILY INCOME TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR YEAR ENDED
ENDED DECEMBER
DECEMBER 31, 1996 31, 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income....................................... $ 6,971,719 $6,918,770
Net realized gain........................................... 1,280 --
----------------- -----------
NET INCREASE........................................... 6,972,999 6,918,770
Dividends from net investment income........................ (6,972,113) (6,918,924 )
Net increase from transactions in shares of beneficial
interest.................................................. 5,213,109 37,297,439
----------------- -----------
NET INCREASE........................................... 5,213,995 37,297,285
NET ASSETS:
Beginning of period......................................... 254,376,351 217,079,066
----------------- -----------
END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $135
AND $182, RESPECTIVELY)................................. $259,590,346 $254,376,351
----------------- -----------
----------------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
23
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE DAILY INCOME TRUST
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter California Tax-Free Daily Income Trust (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 daily income which is exempt from
federal and California income tax, consistent with stability of principal and
liquidity. The Fund was organized as a Massachusetts business trust on April 25,
1988 and commenced operations on July 22, 1988.
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 at amortized
cost, which approximates market value.
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.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to shareholders as of the close of each business day.
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 net assets of the Fund determined as of the close of each
business day: 0.50% to the portion of the daily net assets not exceeding $500
million; 0.425% to the portion of the daily net assets exceeding $500 million
but not exceeding $750 million; 0.375% to the portion of the daily net assets
exceeding $750 million but not exceeding
24
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE DAILY INCOME TRUST
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, CONTINUED
$1 billion; 0.35% to the portion of the daily net assets exceeding $1 billion
but not exceeding $1.5 billion; 0.325% to the portion of the daily net assets
exceeding $1.5 billion but not exceeding $2 billion; 0.30% to the portion of the
daily net assets exceeding $2 billion but not exceeding $2.5 billion; 0.275% to
the portion of the daily net assets exceeding $2.5 billion but not exceeding $3
billion; and 0.25% to the portion of the daily net assets exceeding $3 billion.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, 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
Dean Witter Distributors Inc. (the "Distributor"), an affiliate of the
Investment Manager, is the distributor of the Fund's shares and, in accordance
with a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act,
finances certain expenses in connection therewith.
Under the Plan, the Distributor bears the expense of all promotional and
distribution related activities on behalf of the Fund, except for expenses that
the Trustees determine to reimburse, as described below. The following
activities and services may be provided by the Distributor and other
broker-dealers under the Plan: (1) compensation to, and expenses of, the
Distributor and other broker-dealers; (2) sales incentives and bonuses to sales
representatives and to marketing personnel in connection with promoting sales of
the Fund's shares; (3) expenses incurred in connection with promoting sales of
the Fund's shares; (4) preparing and distributing sales literature; and (5)
providing advertising and promotional activities, including direct mail
solicitation and television, radio, newspaper, magazine and other media
advertisements.
The Fund is authorized to reimburse the Distributor for specific expenses the
Distributor incurs or plans to incur in promoting the distribution of the Fund's
shares. The amount of each monthly reimbursement payment may in no event exceed
an amount equal to a payment at the annual rate of 0.15% of the Fund's average
daily net assets during the month. Expenses incurred by the Distributor pursuant
to the Plan in any fiscal year will not be reimbursed by the Fund through
payments accrued in any subsequent fiscal year. For the year ended December 31,
1996, the distribution fee was accrued at the annual rate of 0.10%.
25
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE DAILY INCOME TRUST
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, CONTINUED
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales/maturities of portfolio securities
for the year ended December 31, 1996 aggregated $574,934,850 and $568,092,000,
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 $20,000.
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 $855. At December 31, 1996, the Fund had an accrued pension liability of
$48,535 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest, at $1.00 per share, were as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31,1996 DECEMBER 31, 1995
-------------------- --------------------
<S> <C> <C>
Shares sold...................................................... 496,028,291 483,320,990
Shares issued in reinvestment of dividends....................... 6,972,113 6,918,252
-------------------- --------------------
503,000,404 490,239,242
Shares repurchased............................................... (497,787,295) (452,941,803)
-------------------- --------------------
Net increase in shares outstanding............................... 5,213,109 37,297,439
-------------------- --------------------
-------------------- --------------------
</TABLE>
6. SELECTED PER SHARE DATA AND RATIOS
See the "Financial Highlights" table on page 4 of this Prospectus.
26
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- --------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA TAX-EXEMPT SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS (61.8%)
$ 10,300 California Educational Facilities Authority, California
Institute of Technology Ser 1994..................... 3.95% 01/08/97 $ 10,300,000
California Health Facilities Financing Authority,
4,100 Catholic HealthCare West 1988 Ser A (MBIA)........... 4.00 01/08/97 4,100,000
6,000 Childrens Hospital of Orange County Ser 1991
(MBIA)............................................... 4.00 01/08/97 6,000,000
5,000 Memorial Health Services Ser 1994.................... 4.00 01/08/97 5,000,000
9,800 St Francis Medical Center 1995 Ser E (MBIA).......... 4.00 01/08/97 9,800,000
9,000 St Joseph Health System Ser 1991 B................... 5.10 01/02/97 9,000,000
4,000 Scripps Memorial Hospital Ser 1991 B (MBIA).......... 3.95 01/08/97 4,000,000
10,800 Sutter/California Healthcare System Ser 1996 B....... 5.10 01/02/97 10,800,000
California Pollution Control Financing Authority,
1,615 Chevron USA Ser 1983................................. 3.90 11/15/97 1,618,814
5,000 Chevron USA Ser 1984 B............................... 3.70 06/16/97 5,001,181
3,400 Noranda-Grey Eagle Mines Inc Ser 1985 C.............. 3.60 01/08/97 3,400,000
6,300 Pacific Gas & Electric Co 1996 Ser F................. 4.80 01/02/97 6,300,000
10,000 California Public Capital Improvements Financing
Authority, Pooled Ser 1988 C......................... 3.65 03/17/97 10,000,000
California Statewide Communities Development Authority,
6,000 Kaiser Permanente Ser 1995 COPs...................... 4.00 01/08/97 6,000,000
4,500 St Joseph Health System COPs......................... 5.10 01/02/97 4,500,000
5,000 Foothill/Eastern Transportation Corridor Agency, Toll
Road Ser 1995 C...................................... 3.90 01/08/97 5,000,000
5,000 Long Beach, Memorial Health Services Ser 1991.......... 4.00 01/08/97 5,000,000
5,900 Los Angeles, Multi-family 1985 Ser K................... 3.55 01/08/97 5,900,000
5,000 Los Angeles County Metropolitan Transportation
Authority, Prop C Sales Tax Refg Ser 1993 A (MBIA)... 4.00 01/08/97 5,000,000
10,600 Newport Beach, Hoag Memorial Hospital/Presbyterian 1992
Ser A................................................ 5.15 01/02/97 10,600,000
5,000 Riverside County, 1996-1997 Ser B TRANs................ 3.90 01/08/97 5,000,000
9,000 Sacramento County, Administration Center & Courthouse
Ser 1990 COPs........................................ 3.75 01/08/97 9,000,000
5,000 San Diego, Lusk Mira Mesa Apts Issue E 1985............ 4.05 01/08/97 5,000,000
6,600 San Jose - Santa Clara Clean Water Financing Authority,
Sewer Ser 1995 B (FGIC).............................. 3.85 01/08/97 6,600,000
2,100 Santa Clara County Financing Authority, Valley Medical
Center 1994 Ser B.................................... 4.00 01/08/97 2,100,000
4,000 Southern California Public Power Authority,
Transmission Ser 1996 B (FSA)........................ 4.00 01/08/97 4,000,000
1,300 Puerto Rico Highway & Transportation, Ser X............ 3.75 01/08/97 1,300,000
---------------
TOTAL CALIFORNIA TAX-EXEMPT SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS
(AMORTIZED COST $160,319,995)..................................................... 160,319,995
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
27
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996, CONTINUED
<TABLE>
<CAPTION>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE
THOUSANDS RATE DATE OF PURCHASE VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
CALIFORNIA TAX-EXEMPT COMMERCIAL PAPER (28.8%)
California Pollution Control Financing Authority,
$ 3,000 Southern California Edison Co Ser B 1985............. 3.40% 02/06/97 3.40% $ 3,000,000
4,100 Southern California Edison Co Ser D 1985............. 3.35 03/13/97 3.35 4,100,000
East Bay Municipal Utility District,
3,000 Water System......................................... 3.40 01/23/97 3.40 3,000,000
6,000 Water System......................................... 3.40 01/29/97 3.40 6,000,000
4,000 Water System......................................... 3.35 02/25/97 3.35 4,000,000
Metropolitan Water District of Southern California,
5,000 Ser 1991............................................. 3.55 02/12/97 3.55 5,000,000
6,100 Ser 1991............................................. 3.55 02/18/97 3.55 6,100,000
4,500 Ser B................................................ 3.45 03/11/97 3.45 4,500,000
San Diego,
4,000 San Diego Gas & Electric Co Ser 1995 A............... 3.55 01/31/97 3.55 4,000,000
3,500 San Diego Gas & Electric Co Ser 1995 B............... 3.45 02/13/97 3.45 3,500,000
San Diego County Water Authority,
5,000 Ser # 1.............................................. 3.60 02/19/97 3.60 5,000,000
5,500 Ser # 1.............................................. 3.40 02/26/97 3.40 5,500,000
5,000 University of California Regents, Ser A................ 3.50 02/27/97 3.50 5,000,000
West & Central Basin Financing Authority,
3,000 West Basin Municipal Water District TRANs............ 3.40 02/11/97 3.40 3,000,000
3,000 West Basin Municipal Water District TRANs............ 3.50 02/11/97 3.50 3,000,000
Puerto Rico Government Development Bank,
5,000 Ser 1996............................................. 3.45 02/07/97 3.45 5,000,000
5,000 Ser 1996............................................. 3.35 03/12/97 3.35 5,000,000
---------------
TOTAL CALIFORNIA TAX-EXEMPT COMMERCIAL PAPER
(AMORTIZED COST $74,700,000)................................................................... 74,700,000
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
28
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1996, CONTINUED
<TABLE>
<CAPTION>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE
THOUSANDS RATE DATE OF PURCHASE VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
CALIFORNIA TAX-EXEMPT SHORT-TERM MUNICIPAL NOTES (10.0%)
$ 7,000 Contra Costa County, 1996-97 TRANs, dtd 07/01/96....... 4.50% 07/03/97 3.755% $ 7,025,251
5,000 Riverside County, 1996-97 Ser A TRANs, dtd 07/01/96.... 4.50 06/30/97 3.90 5,014,217
5,000 San Bernadino County, 1996-1997 TRANs, dtd 07/01/96.... 4.50 06/30/97 3.875 5,014,835
4,000 San Diego, 1996-1997 Ser A TANs, dtd 07/02/96.......... 4.50 07/02/97 3.75 4,014,400
5,000 Ventura County, Ser 1996 TRANs, dtd 07/02/96........... 4.75 07/02/97 3.85 5,021,591
---------------
TOTAL CALIFORNIA TAX-EXEMPT SHORT-TERM MUNICIPAL NOTES
(AMORTIZED COST $26,090,294)................................................................... 26,090,294
---------------
TOTAL INVESTMENTS
(AMORTIZED COST $261,110,289) (A)...................... 100.6 261,110,289
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS......... (0.6) (1,519,943)
----- ------------
NET ASSETS............................................. 100.0% $259,590,346
----- ------------
----- ------------
<FN>
- ---------------
COPs Certificates of Participation.
TANs Tax Anticipation Notes.
TRANs Tax and Revenue Anticipation Notes.
+ Rate shown is rate in effect at December 31, 1996.
* Date on which the principal amount can be recovered through demand.
(a) Cost is the same for federal income tax purposes.
BOND INSURANCE:
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
29
<PAGE>
DEAN WITTER CALIFORNIA TAX-FREE DAILY INCOME TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER CALIFORNIA TAX-FREE DAILY INCOME TRUST
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 (appearing in the "Financial
Highlights" table on page 4 of this Prospectus) present fairly, in all material
respects, the financial position of Dean Witter California Tax-Free Daily Income
Trust (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 eight years in
the period then ended and for the period July 22, 1988 (commencement of
operations) through December 31, 1988, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities 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 6, 1997
1996 FEDERAL TAX NOTICE (UNAUDITED)
During the year ended December 31, 1996, the Fund paid to the
shareholders $0.026 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.
30
<PAGE>
THE DEAN WITTER FAMILY OF FUNDS
<TABLE>
<S> <C>
MONEY MARKET FUNDS DEAN WITTER RETIREMENT SERIES
Dean Witter Liquid Asset Fund Inc. Liquid Asset Series
Dean Witter U.S. Government Money Market Trust U.S. Government Money Market Series
Dean Witter Tax-Free Daily Income Trust U.S. Government Securities Series
Dean Witter California Tax-Free Daily Income Trust Intermediate Income Securities Series
Dean Witter New York Municipal Money Market Trust American Value Series
EQUITY FUNDS Capital Growth Series
Dean Witter American Value Fund Dividend Growth Series
Dean Witter Natural Resource Development Securities Inc. Stategist Series
Dean Witter Dividend Growth Securities Inc. Utilities Series
Dean Witter Developing Growth Securities Trust Value-Added Market Series
Dean Witter World Wide Investment Trust Global Equity Series
Dean Witter Value-Added Market Series ASSET ALLOCATION FUNDS
Dean Witter Utilities Fund Dean Witter Strategist Fund
Dean Witter Capital Growth Securities Dean Witter Global Asset Allocation Fund
Dean Witter European Growth Fund Inc. ACTIVE ASSETS ACCOUNT PROGRAM
Dean Witter Precious Metals and Minerals Trust Active Assets Money Trust
Dean Witter Pacific Growth Fund Inc. Active Assets Tax-Free Trust
Dean Witter Health Sciences Trust Active Assets California Tax-Free Trust
Dean Witter Global Dividend Growth Securities Active Assets Government Securities Trust
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 Japan Fund
Dean Witter Income Builder Fund
Dean Witter Special Value Fund
Dean Witter Financial Services 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 Premier Income Trust
Dean Witter Short-Term U.S. Treasury Trust
Dean Witter Diversified Income Trust
Dean Witter Limited Term Municipal Trust
Dean Witter Short-Term Bond Fund
Dean Witter High Income Securities
Dean Witter National Municipal Trust
Dean Witter Balanced Income Fund
Dean Witter Hawaii Municipal Trust
Dean Witter Intermediate Term U.S. Treasury Trust
</TABLE>
<PAGE>
Dean Witter California
Tax-Free Daily Income Trust Dean Witter
Two World Trade Center California Tax-Free
New York, New York 10048
TRUSTEES Daily Income Trust
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
Katherine H. Stromberg
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 -- FEBRUARY 25, 1997
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION DEAN WITTER
FEBRUARY 25, 1997 CALIFORNIA TAX-FREE
DAILY INCOME TRUST
- --------------------------------------------------------------------------------
Dean Witter California Tax-Free Daily Income Trust (the "Fund") is an
open-end, diversified management investment company whose investment objective
is to provide as high a level of daily income exempt from federal and California
income tax as is consistent with stability of principal and liquidity. The Fund
seeks to achieve its objective by investing primarily in high quality tax-exempt
securities with short-term maturities, including Municipal Bonds, Municipal
Notes and Municipal Commercial Paper. (See "Investment Practices and Policies".)
The Fund is authorized to reimburse specific expenses incurred in promoting
the distribution of the Fund's shares pursuant to a Plan of Distribution with
Dean Witter Distributors Inc. pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Reimbursement may in no event exceed an amount equal to
payments at the annual rate of 0.15% of the average daily net assets of the
Fund.
A Prospectus for the Fund, dated February 25, 1997, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge by request of the Fund at its 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 or from any other
Selected Broker-Dealer. This Statement of Additional Information 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 California Tax-Free Daily Income Trust
Two World Trade Center
New York, New York 10048
(800) 869-NEWS (toll-free) or
(212) 392-2550
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The Fund and its Management............................................................ 3
Trustees and Officers.................................................................. 6
Investment Practices and Policies...................................................... 11
Investment Restrictions................................................................ 15
Portfolio Transactions and Brokerage................................................... 16
Purchase of Fund Shares................................................................ 20
Redemption of Fund Shares.............................................................. 29
Dividends, Distributions and Taxes..................................................... 30
Description of Shares.................................................................. 33
Custodian and Transfer Agent........................................................... 33
Independent Accountants................................................................ 34
Reports to Shareholders................................................................ 34
Legal Counsel.......................................................................... 34
Experts................................................................................ 34
Registration Statement................................................................. 34
Financial Statements................................................................... 34
Appendix............................................................................... 35
</TABLE>
2
<PAGE>
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
THE FUND
The Fund is a Trust of the type commonly known as a "Massachusetts business
trust" and was organized under the laws of the Commonwealth of Massachusetts on
April 25, 1988 under the name "Dean Witter/Sears California Tax-Free Daily
Income Trust." On February 19, 1993, the Trust Agreement was amended to change
the Fund's name to Dean Witter California Tax-Free Daily Income Trust.
As of December 31, 1996 no shareholder was known to own beneficially or of
record as much as 5% of the outstanding shares of the Fund. The percentage
ownership of shares of the Fund changes from time to time depending on purchases
and redemptions by shareholders and the total number of shares outstanding.
THE INVESTMENT MANAGER
Dean Witter InterCapital Inc., a Delaware corporation, (the "Investment
Manager" or "InterCapital"), whose address is Two World Trade Center, New York,
New York 10048, is the Fund's Investment Manager. InterCapital is a wholly-owned
subsidiary of Dean Witter, Discover Co. ("DWDC"), a Delaware corporation. In an
internal reorganization which took place in January, 1993, InterCapital assumed
the investment advisory, administrative and management activities previously
performed by the InterCapital Division of Dean Witter Reynolds, Inc. ("DWR"), a
broker-dealer affiliate of InterCapital. (As hereinafter used in this Statement
of Additional Information, the terms "InterCapital" and "Investment Manager"
refer to DWR's InterCapital Division prior to the reorganization and to Dean
Witter InterCapital Inc. thereafter.) The daily management of the Fund is
conducted by or under the direction of officers of the Fund and of the
Investment Manager, subject to review by the Fund's 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 investment companies: 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 California Tax-Free Income Fund, 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 New York Tax-Free Income Fund, Dean Witter
Convertible Securities Trust, Dean Witter Federal Securities Trust, Dean Witter
Value-Added Market Series, High Income Advantage Trust, High Income Advantage
Trust II, High Income Advantage Trust III, Dean Witter Government Income Trust,
Dean Witter Tax-Exempt Securities Trust, Dean Witter Utilities Fund, Dean Witter
Strategist Fund, 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 Quality Municipal Investment Trust, Dean Witter
Premier Income Trust, Dean Witter Short-Term U.S. Treasury Trust, InterCapital
Insured Municipal Bond Trust, InterCapital Insured Municipal Trust, InterCapital
Quality Municipal Income Trust, Dean Witter Diversified Income Trust, Dean
Witter Health Sciences Trust, Dean Witter Retirement Series, InterCapital
Quality Municipal Securities, InterCapital California Quality Municipal
Securities, InterCapital New York Quality Municipal Securities, Dean Witter
Global Dividend Growth Securities, Dean Witter Limited Term Municipal Trust,
Dean Witter Short-Term Bond Fund, Dean Witter Global Utilities Fund, Dean Witter
National Municipal Trust, Dean Witter High Income Securities, Dean Witter
International SmallCap Fund, Dean Witter Mid-Cap Growth Fund, Dean Witter Global
Asset Allocation Fund, Dean Witter Select Dimensions Investment Series, Dean
Witter Balanced Growth Fund, Dean Witter Balanced Income Fund, Dean Witter
Hawaii Municipal Trust, Dean Witter Capital Appreciation Fund, Dean Witter
Intermediate Term U.S. Treasury Trust, Dean Witter Information Fund, Dean Witter
Japan Fund, Dean Witter Income Builder Fund, Dean Witter Special Value Fund,
Dean Witter Financial Services Trust, InterCapital Insured Municipal Securities,
InterCapital
3
<PAGE>
Insured California Municipal Securities, InterCapital Insured Municipal Income
Trust, InterCapital California Insured Municipal Income Trust, Active Assets
Money Trust, Active Assets California Tax-Free Trust, Active Assets Tax-Free
Trust, Active Assets Government Securities Trust, 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, Municipal Premium Income Trust and Prime Income Trust.
The foregoing investment companies, together with the Fund, are collectively
referred to as the Dean Witter Funds.
In addition, Dean Witter Services Company Inc. ("DWSC"), a wholly-owned
subsidiary of InterCapital, serves as manager for the following companies for
which TCW Funds Management, Inc. is the investment adviser: TCW/DW Core Equity
Trust, TCW/DW North American Government Income Trust, TCW/DW Latin American
Growth Fund, TCW/DW Income and Growth Fund, TCW/DW Small Cap Growth Fund, TCW/DW
Balanced Fund, TCW/DW Term Trust 2000, TCW/DW Term Trust 2002, TCW/DW Term Trust
2003, TCW/DW Mid-Cap Equity Trust, TCW/DW Global Telecom Trust, TCW/DW Strategic
Income Trust, TCW/DW Emerging Markets Opportunities Trust, and TCW/DW Total
Return Trust (the "TCW/DW Funds"). InterCapital also serves as: (i) sub-adviser
to Templeton Global Opportunities Trust, an open-end investment company; (ii)
administrator of The BlackRock Strategic Term Trust Inc., a closed-end
investment company; and (iii) sub-administrator of MassMutual Participation
Investors and Templeton Global Governments Income Trust, closed-end investment
companies.
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.
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 legal services as the Fund may
reasonably require in the conduct of its business, including the preparation of
prospectuses, statements of additional information, 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 Management Agreement.
Expenses not expressly assumed by the Investment Manager under the Agreement
or by the Distributors of the Fund's shares, Dean Witter Distributors Inc.
("Distributors" or the "Distributor"), (see "Purchase of Fund Shares") will be
paid by the Fund. The expenses borne by the Fund include, but are not limited
to: the distribution fee under the Plan pursuant to Rule 12b-1 (see "Purchase of
Fund Shares"); charges and expenses of any registrar, custodian, stock transfer
and dividend disbursing agent; brokerage commissions; taxes; engraving and
printing of share 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'
4
<PAGE>
meetings and of preparing, printing and mailing of proxy statements and reports
to shareholders; fees and travel expenses of Trustees or members of any advisory
board or committee who are not employees of the Investment Manager or any
corporate affiliate of the Investment Manager; all expenses incident to any
dividend, withdrawal or redemption options; charges and expenses of any outside
service used for pricing of the Fund's shares; fees and expenses of legal
counsel, including counsel to the Trustees who are not interested persons of the
Fund or of the Investment Manager (not including compensation or expenses of
attorneys who are employees of the Investment Manager) and independent
accountants; membership dues of industry associations; interest on Fund
borrowings; postage; insurance premiums on property or personnel (including
officers and Trustees) of the Fund which inure to its benefit; extraordinary
expenses (including, but not limited to, legal claims and liabilities and
litigation costs and any indemnification relating thereto); and all other costs
of the Fund's operation.
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
following annual rates to the net assets of the Fund, determined as of the close
of business on each business day: 0.50% of the portion of the daily net assets
not exceeding $500 million; 0.425% of the portion of the daily net assets
exceeding $500 million but not exceeding $750 million; 0.375% of the portion of
the daily net assets exceeding $750 million but not exceeding $1 billion; 0.35%
of the portion of the daily net assets exceeding $1 billion but not exceeding
$1.5 billion; 0.325% of the portion of the daily net assets exceeding $1.5
billion but not exceeding $2 billion; 0.30% of the portion of the daily net
assets exceeding $2 billion but not exceeding $2.5 billion; 0.275% of the
portion of the daily net assets exceeding $2.5 billion but not exceeding $3
billion; and 0.25% of the portion of the daily net assets exceeding $3 billion.
The Fund accrued to the Investment Manager $1,290,675, $1,153,594 and
$1,326,761, in total compensation under the Agreement for the fiscal years ended
December 31, 1994, 1995 and 1996, 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 in no way restricts the Investment Manager from
acting as investment manager or adviser to others.
The Agreement was initially approved by the Trustees on October 22, 1992,
and by the shareholders of the Fund at a Special Meeting of Shareholders held on
January 12, 1993. The Agreement is substantially identical to a prior investment
management agreement which was initially approved by the Trustees on June 20,
1988 and by DWR, as the then sole shareholder, on June 22, 1988. The Agreement
may be terminated at any time, without penalty, on thirty days notice by the
Trustees of the Fund, by the holders of a majority, as defined in the Act, of
the outstanding shares of the Fund, or by the Investment Manager. The Agreement
will automatically terminate in the event of its assignment (as defined in the
Act). The Agreement took effect on June 30, 1993, upon the spin-off by Sears,
Roebuck and Co. of its remaining shares of DWDC. The Agreement may be terminated
at any time, without penalty, on thirty days notice, by the Board of Trustees of
the Fund, by the holders of a majority, as defined in the Investment Company Act
of 1940, as amended (the "Act"), of the outstanding shares of the Fund, or by
the Investment Manager. The Agreement will automatically terminate in the event
of its assignment (as defined in the Act).
Under its terms, the Agreement had an initial term ending April 30, 1994,
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 (the "Independent Trustees"),
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 a majority of the Independent Trustees, approved the most
recent continuation of the Agreement until April 30, 1997.
5
<PAGE>
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 the Fund is terminated, or if the affiliation between
InterCapital and its parent company is terminated, the Fund will eliminate the
name "Dean Witter" from its name if DWR or its parent company shall so request.
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 OCCUPATION DURING LAST FIVE YEARS
- --------------------------------------------- ------------------------------------------------------------------
<S> <C>
Michael Bozic (56) .......................... Chairman and Chief Executive Officer of Levitz Furniture
Trustee Corporation (since November, 1995); Director or Trustee of the
c/o Levitz Furniture Corporation Dean Witter Funds; formerly President and Chief Executive Officer
6111 Broken Sound Parkway, N.W. of Hills Department Stores (May, 1991-July, 1995); formerly
Boca Raton, Florida variously Chairman, Chief 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* (63) ................ Chairman, Chief Executive Officer and Director of InterCapital,
Chairman of the Board, Distributors and DWSC; Executive Vice President and Director or
President, Chief Executive Officer DWR; Chairman, Director or Trustee, President and Chief Executive
and Trustee Officer of the Dean Witter Funds; Chairman, Chief Executive
Two World Trade Center Officer and Trustee of the TCW/DW Funds; Chairman and Director of
New York, New York Dean Witter Trust Company ("DWTC"); Director and/or officer of
various DWDC subsidiaries; formerly, Director and Executive Vice
President of DWDC (until February, 1993).
Edwin J. Garn (64) .......................... Director or Trustee of the Dean Witter Funds; formerly United
Trustee States Senator (R-Utah) (1974-1992) and Chairman, Senate Banking
c/o Huntsman Chemical Corporation Committee (1980-1986); formerly Mayor of Salt Lake City, Utah
500 Huntsman Way (1971-1974); formerly Astronaut, Space Shuttle Discovery (April
Salt Lake City, Utah 12-19, 1985); Vice Chairman, Huntsman Chemical Corporation (since
January, 1993); Director of Franklin Quest (time management
systems) and John Alden Financial Corp.; 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 of each of the Dean Witter
Two World Trade Center Funds; and Director or Trustee of the Dean Witter Funds; Chairman
New York, New York of the Audit Committee and Chairman of the 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 OCCUPATION DURING LAST FIVE YEARS
- --------------------------------------------- ------------------------------------------------------------------
<S> <C>
Dr. Manuel H. Johnson (48) .................. Senior Partner, Johnson Smick International, Inc., a consulting
Trustee firm; Koch Professor of International Economics and Director of
c/o Johnson Smick International Inc. the Center for Global Market Studies at George Mason University;
1133 Connecticut Avenue, N.W. Co-Chairman and a founder of the Group of Seven Council (G7C), an
Washington, DC international economic commission; Director or Trustee of the Dean
Witter Funds; Trustee of the TCW/DW Funds; Director of NASDAQ
(since June, 1995); Director of Greenwich Capital Markets Inc.
(broker-dealer); 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 (60) ...................... General Partner, Triumph Capital, L.P., a private investment
Trustee partnership; Director or Trustee of the Dean Witter Funds, and
c/o Triumph Capital, L.P. Trustee of the TCW/DW Funds; formerly Vice President, Bankers
237 Park Avenue Trust Company and BT Capital Corporation (1984-1988); Director of
New York, New York various business organizations.
Philip J. Purcell* (53) ..................... Chairman of the Board of Directors and Chief Executive Officer of
Trustee DWDC, DWR and Novus Credit Services Inc.; Director of
Two World Trade Center InterCapital, DWSC and Distributors; Director or Trustee of the
New York, New York Dean Witter Funds; Director and/or officer of various DWDC
subsidiaries.
John L. Schroeder (66) ...................... Retired; Director or Trustee of the Dean Witter Funds; Trustee of
Trustee the TCW/DW Funds; Director of Citizens Utilities Company; formerly
c/o Gordon Altman Butowsky Weitzen Executive Vice President and Chief Investment Officer of the Home
Shalov & Wein Insurance Company (August, 1991-September, 1995); and formerly
Counsel to the Independent Trustees Chairman and Chief Investment Officer of Axe-Houghton Management
114 West 47th Street and the Axe-Houghton Funds (1983-1991).
New York, New York
Barry Fink (42) ............................. First Vice President (since June, 1993) and Secretary and General
Vice President, Secretary Counsel (since February, 1997) of InterCapital and DWSC; First
and General Counsel Vice President, Assistant Secretary and Assistant General Counsel
Two World Trade Center of Dean Witter Distributors Inc. (since February, 1997); 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 Vice President, Assistant
Secretary and Assistant General Counsel of InterCapital and DWSC
and Assistant Secretary of the Dean Witter Funds and the TCW/DW
Funds.
Katherine H. Stromberg (48) ................. Vice President of InterCapital; Vice President of various Dean
Vice President Witter Funds.
Two World Trade Center
New York, New York
Thomas F. Caloia (50) ....................... First Vice President and Assistant Treasurer (since January, 1993)
Treasurer of InterCapital and DWSC and Treasurer of the Dean Witter Funds
Two World Trade Center and TCW/DW Funds.
New York, New York
<FN>
- ------------
*Denotes Trustees who are "interested persons" of the Fund, as defined in the
Act.
</TABLE>
7
<PAGE>
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, Joseph J. McAliden, 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 a Director of DWTC and Peter M. Avelar, James F. Willison, Joseph Arcieri
and Jonathan R. Page, Senior Vice Presidents of InterCapital, and Gerard J.
Lian, Vice President of InterCapital, are Vice Presidents of the Fund. In
addition, Marilyn K. Cranney, First Vice President and Assistant General Counsel
of InterCapital and DWSC, and LouAnne D. McInnis and Ruth Rossi, Vice Presidents
and Assistant General Counsels of InterCapital and DWSC, and Frank Bruttomesso
and Carsten Otto, Staff Attorneys with InterCapital, are Assistant Secretaries
of the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees consists of eight (8) trustees. 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 January 31, 1997, the Dean Witter Funds had total net
assets of approximately $83.6 billion and more than five million shareholders.
Six Trustees (75% 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, DWDC. 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.
All of the 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
8
<PAGE>
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 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.
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.
9
<PAGE>
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>
FOR SERVICE AS FOR SERVICE
CHAIRMAN OF AS TOTAL CASH
COMMITTEES OF CHAIRMAN OF COMPENSATION
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
- --------------------------- ---------------- ---------------- -------------- ------------- -------------
Michael Bozic.............. $138,850 -- -- -- $138,850
<S> <C> <C> <C> <C> <C>
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>
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
10
<PAGE>
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>
FOR ALL ADOPTING FUNDS ESTIMATED ANNUAL
-------------------------------------- RETIREMENT BENEFITS BENEFITS
ESTIMATED ACCRUED AS EXPENSES UPON 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 (365 (3) 46,952 2,296 129,550
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.
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, repurchase
agreements and non-California tax-exempt securities. Investments in taxable
money market instruments would generally be made under any one of the following
circumstances: (a) pending investment proceeds of sale of Fund shares or of
portfolio securities; (b) pending settlement of purchases of portfolio
securities; and (c) to maintain liquidity for the purpose of meeting anticipated
redemptions. Only those non-California tax-exempt securities which satisfy the
standards established for California tax-exempt securities may be purchased by
the Fund.
In addition, the Fund may temporarily invest more than 20% of its total
assets in non-California tax-exempt securities and taxable money market
instruments, or in short-term 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 Services, 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.
11
<PAGE>
TAX-EXEMPT SECURITIES. As discussed in the Prospectus, at least 80% of the
Fund's total assets will be invested in California tax-exempt securities
(California Municipal Bonds, California Municipal Notes and California Municipal
Commercial Paper). In regard to the Moody's and S&P ratings discussed in the
Prospectus, it should be noted that the ratings represent the organizations'
opinions as to the quality of the securities which they undertake to rate and
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 percentage and rating limitations discussed above and in the Prospectus
apply at the time of acquisition of a security based upon the last previous
determination of the Fund's net asset value; any subsequent change in any
ratings by a rating service or change in percentages resulting from market
fluctuations or other changes in total assets will not require elimination of
any security from the Fund's portfolio.
The payment of principal and interest by issuers of certain Municipal
Obligations purchased by the Fund may be guaranteed by letters of credit or
other credit facilities offered by banks or other financial institutions. Such
guarantees will be considered in determining whether a Municipal Obligation
meets the Fund's investment quality requirements. In addition, some issues may
contain provisions which permit the Fund to demand from the issuer repayment of
principal at some specified period(s) prior to maturity.
MUNICIPAL BONDS. Municipal Bonds, as referred to in the Prospectus, are
debt obligations of a state, its cities, municipalities and municipal agencies
(all of which are generally referred to as "municipalities") which generally
have a maturity at the time of issue of one year or more, and the interest from
which is, in the opinion of bond counsel, exempt from federal income tax. In
addition to these requirements, the interest from California Municipal Bonds
must be, in the opinion of bond counsel, exempt from California personal income
tax. They are issued to raise funds for various public purposes, such as
construction of a wide range of public facilities, to refund outstanding
obligations and to obtain funds for general operating expenses or to loan to
other public institutions and facilities. In addition, certain types of
industrial development bonds and pollution control bonds are issued by or on
behalf of public authorities to provide funding for various privately operated
facilities.
MUNICIPAL NOTES. Municipal Notes are short-term obligations of
municipalities, generally with a maturity at the time of issuance ranging from
six months to three years, the interest from which is, in the opinion of bond
counsel, exempt from federal income tax. In addition to those requirements, the
interest from California Municipal Notes must be, in the opinion of bond
counsel, exempt from California personal income tax. The principal types of
Municipal Notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes and project notes, although there are other types of
Municipal Notes in which the Fund may invest. Notes sold in anticipation of
collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuing municipality or agency. Project Notes are
issued by local agencies and are guaranteed by the United States Department of
Housing and Urban Development. Such notes are secured by the full faith and
credit of the United States Government.
MUNICIPAL COMMERCIAL PAPER. Municipal Commercial Paper refers to short-term
obligations of municipalities the interest from which is, in the opinion of bond
counsel, exempt from federal income tax. In addition to those requirements, the
interest from California Commercial Paper must be, in the opinion of bond
counsel, exempt from California personal income tax. It may be issued at a
discount and is sometimes referred to as Short-Term Discount Notes. Municipal
Commercial Paper is likely to be used to meet seasonal working capital needs of
a municipality or interim construction financing and to be paid from general
revenues of the municipality or refinanced with long-term debt. In most cases
Municipal Commercial Paper is backed by letters of credit, lending agreements,
note repurchase agreements or other credit facility agreements offered by banks
or other institutions.
The two principal classifications of Municipal Bonds, Notes and Commercial
Paper are "general obligation" and "revenue" bonds, notes or commercial paper.
General obligation bonds, notes or
12
<PAGE>
commercial paper are secured by the issuer's pledge of its faith, credit and
taxing power for the payment of principal and interest. Issuers of general
obligation bonds, notes or commercial paper include a state, its counties,
cities, towns and other governmental units. Revenue bonds, notes or commercial
paper are payable from the revenues derived from a particular facility or class
of facilities or, in some cases, from specific revenue sources. Revenue bonds,
notes or commercial paper are issued for a wide variety of purposes, including
the financing of electric, gas, water and sewer systems and other public
utilities; industrial development and pollution control facilities; single and
multi-family housing units; public buildings and facilities; air and marine
ports; transportation facilities such as toll roads, bridges and tunnels; and
health and educational facilities such as hospitals and dormitories. They rely
primarily on user fees to pay debt service, although the principal revenue
source is often supplemented by additional security features which are intended
to enhance the creditworthiness of the issuer's obligations. In some cases,
particularly with respect to 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.
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.
PORTFOLIO MANAGEMENT
VARIABLE RATE AND FLOATING RATE OBLIGATIONS. As stated in the Prospectus,
the Fund may invest in Municipal Bonds and Municipal Notes ("Municipal
Obligations") of the type called "variable rate" and "floating rate"
obligations.
The interest rate payable on a variable rate Municipal Obligation is
adjusted either at predesignated periodic intervals and on "floating rate"
Municipal Obligations 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 Municipal Obligation is that the interest rate
adjustment minimizes changes in the market value of the obligation. As a result,
the purchase of variable rate and floating rate Municipal Obligations could
enhance the ability of the Fund to maintain a stable net asset value per share
(see "Purchase of Fund Shares--Determination of Net Asset Value" in the
Prospectus). 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 a Municipal Obligation prior to
maturity, is enhanced.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. As stated in the Prospectus,
the Fund may purchase tax-exempt securities on a when-issued or delayed delivery
basis. When such transactions are negotiated, the price is fixed at the time of
commitment, but delivery and payment can take place a month or more after the
date of the commitment. While the Fund will only purchase securities on a when-
issued or delayed delivery basis with the intention of acquiring the securities,
the Fund may sell the securities before the settlement date, if it is deemed
advisable. The securities so purchased or sold are subject to market fluctuation
and no interest accrues to the purchaser during this period. At the time the
Fund makes the commitment to purchase a Municipal Obligation on a when-issued or
delayed delivery basis, it will record the transaction and thereafter reflect
the value, each day, of the Municipal Obligation in determining its net asset
value. The Fund will also establish a segregated account with its custodian bank
in which it will maintain liquid assets such as cash, U.S. government securities
or other liquid portfolio securities equal in value to commitments for such
when-issued or delayed delivery securities. The Fund does not believe that its
net asset value or income will be adversely affected by its purchase of
13
<PAGE>
Municipal Obligations on a when-issued or delayed delivery basis. During the
fiscal year ended December 31, 1996, the Fund's investments in when-issued and
delayed delivery securities did not exceed 5% of its net assets.
REPURCHASE AGREEMENTS. When cash may be available for only a few days, it
may be invested by the Fund in repurchase agreements until such time as it may
otherwise be invested or used for payments of obligations of the Fund. These
agreements, which may be viewed as a type of secured lending by the Fund,
typically involve the acquisition by the Fund of debt securities from a selling
financial institution such as a bank, savings and loan association or
broker-dealer. The agreement provides that the Fund will sell back to the
institution, and that the institution will repurchase, the underlying security
("collateral"), which is held by the Fund's Custodian, at a specified price and
at a fixed time in the future, which is usually not more than seven days from
the date of purchase. The Fund will accrue interest from the institution until
the time when the repurchase is to occur. Although such date is deemed by the
Fund to be the maturity date of a repurchase agreement, the maturities of
securities subject to repurchase agreements are not subject to any limits and
may exceed one year.
While repurchase agreements involve certain risks not associated with direct
investments in debt securities, the Fund follows procedures designed to minimize
such risks. These procedures include effecting repurchase transactions only with
large, well capitalized and well established financial institutions, whose
financial condition will be continually monitored. In addition, the value of the
collateral underlying the repurchase agreement will always be at least equal to
the resale price, the resale price which consists of the purchase price paid to
the seller of the securities plus the accrued resale premium which is defined as
the amount specified in the repurchase agreement or the daily amortization of
the difference between the purchase price and the resale price specified in the
repurchase agreement. Such collateral will consist entirely of securities that
are direct obligations of, or that are fully guaranteed as to principal and
interest by, the United States or any agency thereof, and/or certificates of
deposit, bankers' acceptances which are eligible for acceptance by a Federal
Reserve Bank, and, if the seller is a bank, mortgage related securities (as such
term is defined in section 3(a)(41) of the Securities Exchange Act of 1934)
that, at the time the repurchase agreement is entered into, are rated in the
highest rating category by the Requisite NRSROs. Additionally, the collateral
must qualify the repurchase agreement for preferential treatment under the
Federal Deposit Insurance Act or the Federal Bankruptcy Code. In the event of a
default or bankruptcy by a selling financial institution, the Fund will seek to
liquidate such collateral. However, the exercise of the Fund's right to
liquidate such collateral could involve certain costs or delays and, to the
extent that proceeds from any sale upon a default of the obligation to
repurchase were less than the repurchase price, the Fund could suffer a loss. It
is the current policy of the Fund not to invest in repurchase agreements that do
not mature within seven days if any such investment, together with any other
illiquid asset held by the Fund, amount to more than 10% of its total assets.
The Fund's investments in repurchase agreements may, at times, be substantial
when, in the view of the Investment Manager, liquidity or other considerations
warrant. During the fiscal year ended December 31, 1996, the Fund did not enter
into any repurchase agreements.
PUT OPTIONS. The Fund may purchase securities together with the right to
resell them to the seller at an agreed upon price or yield within a specified
period prior to the maturity date of such securities. Such a right to resell is
commonly known as a "put," and the aggregate price which the Fund pays for
securities with puts may be higher than the price which otherwise would be paid
for the securities. Consistent with the Fund's investment objectives and subject
to the supervision of the Board of Trustees, the primary purpose of this
practice is to permit the Fund to be fully invested in securities the interest
on which is exempt from Federal and California personal income tax, while
preserving the necessary flexibility and liquidity to purchase securities on a
when-issued basis, to meet unusually large redemptions and to purchase at a
later date securities other than those subject to the put. The Fund's policy is,
generally, to exercise the puts on their expiration date, when the exercise
price is higher than the current market price for the related securities. Puts
may be exercised prior to the expiration date in order to fund obligations to
purchase other securities or to meet redemption requests. These obligations may
arise during periods in which proceeds from sales of Fund shares and from recent
sales of portfolio securities
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are insufficient to meet such obligations or when the funds available are
otherwise allocated for investment. In addition, puts may be exercised prior to
their expiration date in the event the Investment Manager revises its evaluation
of the creditworthiness of the issuer of the underlying security. In determining
whether to exercise puts prior to their expiration date and in selecting which
puts to exercise in such circumstances, the Investment Manager considers, among
other things, the amount of cash available to the Fund, the expiration dates of
the available puts, any future commitments for securities purchases, the yield,
quality and maturity dates of the underlying securities, alternative investment
opportunities and the desirability of retaining the underlying securities in the
Fund's portfolio.
The Fund values securities which are subject to puts at their amortized cost
and values the put, apart from the security, at zero. Thus, the cost of the put
will be carried on the Fund's books as an unrealized loss from the date of
acquisition and will be reflected in realized gain or loss when the put is
exercised or expires. Since the value of the put is dependent on the ability of
the put writer to meet its obligation to repurchase, the Fund's policy is to
enter into put transactions only with municipal securities dealers who are
approved by the Fund's Board of Trustees. Each dealer will be approved on its
own merits and it is the Fund's general policy to enter into put transactions
only with those dealers which are determined to present minimal credit risks. In
connection with such determination, the Board of Trustees will review, among
other things, the ratings, if available, of equity and debt securities of such
municipal securities dealers, their reputations in the municipal securities
markets, the net worth of such dealers and their efficiency in consummating
transactions. Bank dealers normally will be members of the Federal Reserve
System, and other dealers will be members of the National Association of
Securities Dealers, Inc. or members of a national securities exchange. The Board
has directed the Investment Manager not to enter into put transactions with, and
to exercise outstanding puts of, any municipal securities dealer which, in the
judgment of the Investment Manager, ceases at any time to present a minimal
credit risk. In the event that a dealer should default on its obligation to
repurchase an underlying security, the Fund is unable to predict whether all or
any portion of any loss sustained could be subsequently recovered from such
dealer. During the fiscal year ended December 31, 1996, the Fund did not
purchase any put options.
In Revenue Ruling 82-144, the Internal Revenue Service stated that, under
certain circumstances, a purchaser of tax-exempt obligations which are subject
to puts will be considered the owner of the obligations for Federal income tax
purposes. In connection therewith, the Fund has received an opinion of counsel
to the effect that interest on Municipal Obligations subject to puts will be
tax-exempt to the Fund.
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, except as otherwise indicated. Under the Act, a
fundamental policy may not be changed without the vote of the holders of a
majority of the outstanding voting securities of the Fund, as defined in the
Act. Such a majority is defined in the Act as the lesser of (a) 67% or more of
the shares present at a Meeting of Shareholders of the Fund, if the holders of
more than 50% of the outstanding shares of the Fund are present or represented
by proxy at the meeting, or (b) more than 50% of the outstanding shares of the
Fund. For purposes of the following restrictions and those recited in the
Prospectus: (a) an "issuer" of a security is the entity whose assets and
revenues are committed to the payment of interest and principal on that
particular security, provided that the guarantee of a security will be
considered a separate security and provided further that a guarantee of a
security shall not be deemed to be a security issued by the guarantor if the
value of all securities issued or guaranteed by the guarantor and owned by the
Fund does not exceed 10% of the value of the total assets of the Fund; (b) a
"taxable security" is any security the interest on which is subject to federal
income tax; and (c) all percentage limitations apply immediately after a
purchase or initial investment, and any subsequent change in any applicable
percentage resulting from market fluctuations or other changes in total or net
assets does not require elimination of any security from the portfolio.
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The term "bank obligations" as referred to in Investment Restriction 3 in
the Prospectus refers to short-term obligations (including certificates of
deposit and bankers' acceptances) of banks subject to regulation by the U.S.
Government and having total assets of $1 billion or more, and instruments
secured by such obligations, not including obligations of foreign branches of
domestic banks.
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 any officer or director of the
Investment Manager owns more than 1/2 of 1% of the outstanding securities of
such issuer, and such officers, trustees and directors who own more than 1/2
of 1% own in the aggregate more than 5% of the outstanding securities of
such issuer.
3. Purchase or sell real estate or interests therein, although it may
purchase securities secured by real estate or interests therein.
4. Purchase or sell commodities or commodity futures contracts.
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
that it may acquire rights to resell Municipal Obligations at an agreed upon
price and at or within an agreed upon time.
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 borrowings effected within the limitations set forth in restriction
(8). To meet the requirements of regulations in certain states, the Fund, as
a matter of operating policy but not as a fundamental policy, will limit any
pledge of its assets to 10% of its net assets so long as shares of the Fund
are being sold in those states.
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)
purchasing any securities on a when-issued or delayed delivery basis; or (b)
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; and (b) by investment in repurchase agreements.
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.
14. Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security.
15. Invest for the purpose of exercising control or management of any
other issuer.
PORTFOLIO TRANSACTIONS AND BROKERAGE
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Subject to the general supervision of the Board of Trustees, the Investment
Manager is responsible for decisions to buy and sell securities 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.
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Securities are generally traded in the over-the-counter market on a "net" basis
with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. 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 Fund's
fiscal years ended December 31, 1994, 1995 and 1996, the Fund did not pay any
brokerage commissions on agency transactions.
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 may be 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 all cases 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 does 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 (not including Tax-Exempt Municipal
Paper). Such transactions will be effected with 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. In order for DWR to effect portfolio transactions for the
Fund, the commissions, fees or other remuneration received by DWR must be
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers in connection with comparable transactions involving similar
securities being purchased or sold on an exchange during a comparable period of
time. This standard would allow DWR to receive no more
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than the remuneration which would be expected to be received by an unaffiliated
broker in a commensurate arm's-length transaction. Furthermore, the Trustees of
the Fund, including a majority of the Trustees who are not "interested" Trustees
(as defined in the Act), have adopted procedures which are reasonably designed
to provide that any commissions, fees or other remuneration paid to DWR are
consistent with the foregoing standard. During the fiscal years ended December
31, 1994, 1995 and 1996, the Fund paid no brokerage commissions to DWR.
Subject to the principle of obtaining best price and execution, the
Investment Manager may consider a broker-dealer's sales of shares of the Fund as
a factor in selecting from among those broker-dealers qualified to provide
comparable prices and execution on the Fund's portfolio transactions. The Fund
does not, however, require a broker-dealer to sell shares of the Fund in order
for it to be considered to execute portfolio transactions, and will not enter
into any arrangement whereby a specific amount or percentage of the Fund's
transactions will be directed to a broker which sells shares of the Fund to
customers. The Board of Trustees reviews, periodically, the allocation of
brokerage orders to monitor the operation of these policies.
Portfolio turnover rate is defined as the lesser of the value of the
securities purchased or securities sold, excluding all securities whose
maturities at time of acquisition were one year or less, divided by the average
monthly value of such securities owned during the year. Because the Fund's
portfolio consists of municipal obligations maturing within one year, the Fund
is unable to calculate its turnover rate as so defined. However, because of the
short-term nature of the Fund's portfolio securities, it is anticipated that the
number of purchases and sales of maturities of such securities will be
substantial. Brokerage commissions are not normally charged on purchases and
sales of short-term municipal obligations, but such transactions may involve
transaction costs in the form of spreads between bid and asked prices.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA TAX-EXEMPT SECURITIES
The Fund will be affected by any political, economic or regulatory
developments affecting the ability of California issuers to pay interest or
repay principal. Various developments regarding the California Constitution and
State statutes which limit the taxing and spending authority of California
governmental entities may impair the ability of California issuers to maintain
debt service on their obligations.
In 1978, Proposition 13, an amendment to the California Constitution, was
approved, limiting real property valuation for property tax purposes and the
power of local governments to increase real property tax revenues and revenues
from other sources. Legislation adopted after Proposition 13 provided for
assistance to local governments, including the redistribution of the
then-existing surplus in the General Fund, reallocation of revenues to local
governments, and assumption by the State of certain local government
obligations. However, more recent legislation reduced such state assistance.
There can be no assurance that any particular level of State aid to local
governments will be maintained in future years. In NORDLINGER V. HAHN, the
United States Supreme Court upheld certain provisions of Proposition 13 against
claims that it violated the equal protection clause of the Constitution.
In 1979, an amendment was passed adding Article XIIIB to the State
Constitution. As amended in 1990, Article XIIIB imposes an "appropriations
limit" on the spending authority of the State and local government entities. In
general, the appropriations limit is based on certain 1978-1979 expenditures,
adjusted annually to reflect changes in the cost of living, population and
certain services provided by State and local government entities.
"Appropriations limit" does not include appropriations for qualified capital
outlay projects, certain increases in transportation-related taxes, and certain
emergency appropriations.
If a government entity raises revenues beyond its "appropriations limit" in
any year, a portion of the excess which cannot be appropriated within the
following year's limit must be returned to the entity's taxpayers within two
subsequent fiscal years, generally by a tax credit, refund or temporary
suspension of tax rates or fee schedules. "Debt service" is excluded from these
limitations, and is defined as "appropriations required to pay the cost of
interest and redemption charges, including the funding of any reserve or sinking
fund required in connection therewith, on indebtedness existing or legally
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authorized as of January 1, 1979 or on bonded indebtedness thereafter approved
[by the voters]." In addition, Article XIIIB requires the State Legislature to
establish a prudent State reserve, and to require the transfer of 50% of excess
revenue to the State School Fund; any amounts allocated to the State School Fund
will increase the appropriations limit.
In June 1982, the voters of California passed two initiative measures to
repeal the California gift and inheritance tax laws and to enact, in lieu
thereof, California death taxes. California voters also passed an initiative
measure to increase, for taxable years commencing on or after January 1, 1982,
the amount to account for the effects of inflation. Decreases in State and local
revenues in future fiscal years as a consequence of these initiatives may result
in reductions in allocations of state revenues to California issuers or in the
ability of California issuers to pay their obligations.
In 1986, California voters approved an initiative statute known as
Proposition 62. This initiative (i) requires that any tax for general
governmental purposes imposed by local governments be approved by resolution or
ordinance adopted by a two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental entity, (ii)
requires that any special tax (defined as tax levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction, (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed, (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by the
Proposition 13 amendment, (v) prohibits the imposition of transaction taxes and
sales taxes on the sale of real property by local governments, (vi) requires
that any tax imposed by a local government on or after August 1, 1985, be
ratified by a majority vote of the electorate within two years of the adoption
of the initiative or be terminated by November 15, 1989, (vii) requires that, in
the event a local government fails to comply with the provisions of this
measure, a reduction of the amount of property tax revenue allocated to such
local government occurs in an amount equal to the revenues received by such
entity attributable to the tax levied in violation of the initiative, and (viii)
permits these provisions to be amended exclusively by the voters of the State of
California.
In September 1995, the California Supreme Court upheld the constitutionality
of Proposition 62, creating uncertainty as to the legality of certain local
taxes enacted by non-charter cities in California without voter approval. It is
not possible to predict the impact of the decision.
In November 1996, California voters approved Proposition 218. The initiative
applied the provisions of Proposition 62 to all entities, including charter
cities. It requires that all taxes for general purposes obtain a simple majority
popular vote and that taxes for special purposes obtain a two-thirds majority
vote. Prior to the effectiveness of Proposition 218, charter cities could levy
certain taxes such as transient occupancy taxes and utility user's taxes without
a popular vote. Proposition 218 will also limit the authority of local
governments to impose property-related assessments, fees and charges, requiring
that such assessments be limited to the special benefit conferred and
prohibiting their use for general governmental services. Proposition 218 also
allows voters to use their initiative power to reduce or repeal
previously-authorized taxes, assessments, fees and charges.
In 1988, State voters approved Proposition 87, which amended Article XVI of
the State Constitution to authorize the State Legislature to prohibit
redevelopment agencies from receiving any property tax revenues raised by
increased property taxes to repay bonded indebtedness of local government which
is not approved by voters on or before January 1, 1989. It is not possible to
predict whether the State Legislature will enact such a prohibition, nor is it
possible to predict the impact of Proposition 87 on redevelopment agencies and
their ability to make payments on outstanding debt obligations.
In November 1988, California voters approved Proposition 98. This initiative
requires that (i) revenues in excess of amounts permitted to be spent and which
would otherwise be returned by revision of tax rates or fee schedules, be
transferred and allocated (up to a maximum of 40%) to the State School Fund and
be expended solely for purposes of instructional improvement and accountability.
No such transfer or allocation of funds will be required if certain designated
state officials determine that annual student expenditures and class size meet
certain criteria as set forth in Proposition 98. Any funds
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<PAGE>
allocated to the State School Fund shall cause the appropriation limits to be
annually increased for any such allocation made in the prior year. Proposition
98 also requires the State of California to provide a minimum level of funding
for public schools and community colleges. The initiative permits the enactment
of legislation, by a two-thirds vote, to suspend the minimum funding requirement
for one year.
On November 3, 1992, voters approved an initiative statute, Proposition 163,
which exempts certain food products, including candy and other snack foods, from
California's sales tax. The sales tax had been broadened to include those items
as part of the 1991-92 budget legislation. The State Legislative Analyst
estimates a resultant revenue reduction of $200 million for the remainder of the
1992-93 fiscal year and $300-330 million per year thereafter.
The State is a party to numerous legal proceedings, many of which normally
occur in governmental operations and, if decided against the State, might
require the State to make significant future expenditures or impair future
revenue sources.
Although an improving economy and healthier tax revenues are anticipated,
the political environment and voter initiatives may constrain the State's
financial flexibility. For example, according to the Legislative Analyst's
Office the passage of Proposition 187 in the November 1994 election, which in
part denies certain social services to illegal immigrants, could jeopardize $15
billion in federal funding. In addition, the passage of Proposition 184 in the
November 1994 election, which imposes mandatory, lengthy prison sentences on
individuals convicted of three felonies, is expected to increase prison
operating costs by $3 billion annually and increase prison construction costs by
$20 billion.
On December 6, 1994, Orange County (California) became the largest
municipality in the United States to file for protection under the Federal
bankruptcy laws. The filing stemmed from approximately $1.7 billion in losses
suffered by the County's investment pool due to investments in high risk
"derivative" securities. On June 12, 1996, it emerged from bankruptcy after the
successful sale of $880 million in municipal bonds allowed the county to pay off
the last of its creditors. On January 7, 1997, Orange County returned to the
municipal bond market with a $136 million bond issue maturing in 13 years at an
insured yield of 7.23%.
Los Angeles County, the nation's largest county, is also experiencing
financial difficulty. In August 1995 the credit rating of the county's long-term
bonds was downgraded for the third time since 1992 as a result of, and among
other things, severe operating deficits for the county's health care system.
Also, the county has not yet recovered from the ongoing loss of revenue caused
by state property tax shift initiatives in 1993 through 1995. Entering the
1996-1997 fiscal year, the county faced a budgetary shortfall of approximately
$516 million. The county's budgetary difficulties have continued with their
effect on the 1997-1998 budget still uncertain.
The effect of these various constitutional and statutory amendments and
budget developments upon the ability of California issuers to pay interest and
principal on their obligations remains unclear and in any event may depend upon
whether a particular California tax-exempt security is a general or limited
obligation bond and on the type of security provided for the bond. It is
possible that other measures affecting the taxing or spending authority of
California or its political subdivisions may be approved or enacted in the
future.
PURCHASE OF FUND SHARES
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As discussed in of the Prospectus, the Fund offers its shares for sale to
the public on a continuous basis, without a sales charge. Pursuant to a
Distribution Agreement between the Fund and Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager, and a wholly-owned
subsidiary of DWDC, shares of the Fund are distributed by the Distributor and
through certain selected broker-dealers who have entered into agreements with
the Distributor ("Selected Broker-Dealers") at an offering price equal to the
net asset value per share next determined following receipt of an effective
purchase order (accompanied by Federal Funds). Dealers in the securities markets
in which the Fund will invest usually require immediate payment in federal
funds. Since the payment by a Fund shareholder
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for his or her other shares cannot be invested until it is converted into and
available to the Fund in federal funds, the Fund requires such payments to be so
available before a share purchase order can be considered effective. All checks
submitted for payment are accepted subject to collection at full face value in
United States funds and must be drawn in United States dollars in a United
States bank.
The Board of Trustees of the Fund, including a majority of the Trustees who
are not and were not at the time of their vote "interested persons" (as defined
in the Act) of either party to the Distribution Agreement (the "Independent
Trustees"), approved, at its meeting held on October 30, 1992, the current
Distribution Agreement appointing the Distributor exclusive distributor of the
Fund's shares and providing for the Distributor to bear distribution expenses
not borne by the Fund. The Distribution Agreement took effect on June 30, 1993
upon the spin-off by Sears, Roebuck and Co. of its remaining shares of DWDC. By
its terms, the Distribution Agreement had an initial term ending April 30, 1994,
and provides that it will remain in effect from year to year thereafter if
approved by the Board. At its meeting held on April 17, 1996, the Fund's Board
of Trustees, including all of the Independent Trustees, approved the most recent
continuation of the Distribution Agreement until April 30, 1997.
SHAREHOLDER INVESTMENT ACCOUNT. Upon the purchase of shares of the Fund, a
Shareholder Investment Account is opened for the investor on the books of the
Fund, maintained by the Fund's Transfer Agent, Dean Witter Trust Company (the
"Transfer Agent"). This is an open account in which shares owned by the investor
are credited by the Transfer Agent in lieu of issuance of a share certificate.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares and may be redeposited
in the account at any time. There is no charge to the investor for issuance of a
certificate. Whenever a shareholder instituted transaction takes place in the
Shareholder Investment Account, the shareholder will be mailed a written
confirmation of such transaction.
DIRECT INVESTMENTS THROUGH TRANSFER AGENT. A shareholder may make
additional investments in Fund shares at any time through the Shareholder
Investment Account by sending a check payable to Dean Witter California Tax-Free
Daily Income Trust in any amount, not less than $100, directly to the Transfer
Agent. The shares so purchased will be credited to the Shareholder Investment
Account.
ACCOUNT STATEMENTS. All purchases of Fund shares will be credited to the
shareholder in a Shareholder Investment Account maintained for the shareholder
by the Transfer Agent in full and fractional shares of the Fund (rounded to the
nearest 1/100 of a share with the exception of purchases made through
reinvestment of dividends, which are rounded to the last 1/100 of a share). A
statement of the account will be mailed to the shareholder after each purchase
or redemption transaction effected through the Transfer Agent. A quarterly
statement of the account is sent to all shareholders. Share certificates will
not be issued unless requested in writing by the shareholder. No certificates
will be issued for fractional shares or to shareholders who have elected the
checking account or predesignated bank account methods of withdrawing cash from
their accounts.
The Fund reserves the right to reject any order for the purchase of its
shares. In addition, the offering of Fund shares may be suspended at any time
and resumed at any time thereafter.
EXCHANGE PRIVILEGE. As discussed in the Prospectus under the caption
"Exchange Privilege," an Exchange Privilege exists whereby investors who have
purchased shares of any of the Dean Witter Funds sold with either a front-end
sales charge ("FESC funds") or a contingent deferred sales charge ("CDSC funds")
will be permitted, after the shares of the fund acquired by purchase (not by
exchange or dividend reinvestment) have been held for thirty days, to redeem all
or part of their shares in that fund, have the proceeds invested in shares of
the Fund, Dean Witter Liquid Asset Fund Inc., Dean Witter Tax-Free Daily Income
Trust, Dean Witter New York Municipal Money Market Trust, or Dean Witter U.S.
Government Money Market Trust (these five funds are hereinafter called "money
market funds") or, Dean Witter Limited Term Municipal Trust, Dean Witter
Short-Term Bond Fund, Dean Witter Short-Term U.S. Treasury Trust, Dean Witter
Balanced Income Fund, Dean Witter Balanced Growth Fund and Dean Witter
Intermediate Term U.S. Treasury Trust (these eleven funds, including the Fund,
are collectively referred to herein as the "Exchange Funds"). There is no
waiting period for shares acquired by exchange or dividend reinvestment.
Subsequently, shares of the Exchange Funds received in an
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exchange for shares of an FESC fund (regardless of the type of fund originally
purchased) may be redeemed and exchanged for shares of the other Exchange Funds,
FESC funds or CDSC funds (however, shares of CDSC funds, including shares
acquired in exchange for (i) shares of FESC funds or (ii) shares of the Exchange
Funds which were acquired in exchange for shares of FESC funds, may not be
exchanged for shares of FESC funds). Additionally, shares of the Exchange Funds
received in an exchange for shares of a CDSC fund (regardless of the type of
fund originally purchased) may be redeemed and exchanged for shares of the
Exchange Funds, or CDSC funds. Ultimately, any applicable contingent deferred
sales charge ("CDSC") will have to be paid upon redemption of shares originally
purchased from a CDSC fund. 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.)
When shares of any CDSC fund are exchanged for shares of the Fund or any
other Exchange Funds, the exchange is executed at no charge to the shareholder,
without the imposition of the CDSC at the time of the exchange. During the
period of time the shareholder remains in the Exchange Funds (calculated from
the last day of the month in which the Exchange Funds shares were acquired), the
holding period or "year since purchase payment made" is frozen. When shares are
redeemed out of the Exchange Funds, they will be subject to a CDSC which would
be based upon the period of time the shareholder held shares in a CDSC fund.
However, in the cases of shares of a CDSC fund exchanged into an Exchange Fund,
fund on or after April 23, 1990, upon 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 money market 12b-1 distribution fees incurred on
or after that date which are attributable to those shares. Shareholders
acquiring shares of Exchange Funds pursuant to this exchange privilege may
exchange those shares back into a CDSC fund from Exchange Funds, with no CDSC
being imposed on such exchange. The holding period previously frozen when shares
were first exchanged for shares of Exchange Funds resumes on the last day of the
month in which shares of a CDSC fund are reacquired. Thus, a CDSC is imposed
only upon an ultimate redemption, based upon the time (calculated as described
above) the shareholder was invested in a CDSC fund. Shares of a CDSC fund
acquired in exchange for shares of an FESC fund (or in exchange for shares of
other Dean Witter Funds for which shares of an FESC fund have been exchanged)
are not subject to any CDSC upon their redemption.
When shares initially purchased in a CDSC fund are exchanged for shares of
another CDSC fund or for shares of Exchange Funds, the date of purchase of the
shares of the fund exchanged into, for purposes of the CDSC upon redemption,
will be the last day of the month in which the shares being exchanged were
originally purchased. In allocating the purchase payments between funds for
purposes of the CDSC, the amount which represents the current net asset value of
shares at the time of the exchange which were (i) purchased more than three or
six years (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 FESC funds, or for
shares of other Dean Witter Funds for which shares of FESC funds have been
exchanged (all such shares called "Free Shares"), will be exchanged first.
Shares of Dean Witter Strategist Fund acquired prior to November 8, 1989, Dean
Witter American Value Fund acquired prior to April 30, 1984, and shares of Dean
Witter Dividend Growth Securities Inc. and Dean Witter Natural Resource
Development Securities Inc. acquired prior to July 2, 1984, are also considered
Free Shares and will be the first Free Shares to be exchanged. After an
exchange, all dividends earned on shares in the money market 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 if
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<PAGE>
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 exchange procedures described in the CDSC fund Prospectus
under the caption "Contingent Deferred Sales Charge", any applicable CDSC will
be imposed upon the ultimate redemption of shares of any fund, regardless of the
number of exchanges since those shares were originally purchased.
With respect to the repurchase of shares of the Fund, the application of
proceeds to the purchase of new shares in the Fund or any other of the funds and
the general administration of the Exchange Privilege, the Transfer Agent acts as
agent for the Distributor and for the shareholder's Selected Broker-Dealer, if
any, in the performance of such functions. With respect to exchanges,
redemptions or repurchases, the Transfer Agent shall be liable for its own
negligence and not for the default or negligence of its correspondents or for
losses in transit. The Fund shall not be liable for any default or negligence of
the Transfer Agent, Distributor or any Selected Broker-Dealer.
Exchange Privilege accounts may also be maintained for shareholders of the
money market funds who acquired their shares in exchange for shares of various
TCW/DW Funds, a group of funds distributed by the Distributor for which TCW
Funds Management, Inc. serves as Adviser, under the terms and conditions
described in the Prospectus and Statement of Additional Information of each
TCW/DW Fund.
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 the 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.
Shares of the Fund acquired pursuant to the Exchange Privilege will be held
by the Fund's transfer agent in an Exchange Privilege Account distinct from any
account of the same shareholder who may have acquired shares of the Fund
directly. A shareholder of the Fund will not be permitted to make additional
investments in such Exchange Privilege Account, except through the exchange of
additional shares of the fund in which the shareholder had initially invested,
and the proceeds of any shares redeemed from such Account may not thereafter be
placed back into that Account. If such a shareholder desires to make any
additional investments in the Fund, a separate account will be maintained for
receipt of such investments. The Fund will have additional costs for account
maintenance if a shareholder has more than one account with the Fund.
The Fund also maintains Exchange Privilege Accounts for shareholders who
acquired their shares of the Fund pursuant to exchange privileges offered by
other investment companies with which the Investment Manager is not affiliated.
The Fund also expects to make available such exchange privilege accounts to
other investment companies that may hereafter be managed by the Investment
Manager.
Exchanges are subject to the minimum investment requirement and any other
conditions imposed by each fund. (The minimum initial investment is $10,000 for
Dean Witter Short-Term U.S. Treasury Trust and $5,000 for the Fund, Dean Witter
Liquid Asset Fund Inc., Dean Witter Tax-Free Daily Income Trust,
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and Dean Witter New York Municipal Money Market Trust, although those funds may,
at their discretion, accept initial investments of as low as $1,000. The minimum
initial investment is $5,000 for Dean Witter Special Value Fund. The minimum
initial investment for all other Dean Witter Funds for which the Exchange
Privilege is available is $1,000.) Upon exchange into a money market fund, the
shares of that fund will be held in a special Exchange Privilege Account
separately from accounts of those shareholders who have acquired their shares
directly from that fund. As a result, certain services normally available to
shareholders of money market funds, including the check writing feature, will
not be available for funds held in that account.
The Fund and each of the other Dean Witter Funds may limit the number of
times this Exchange Privilege may be exercised by any investor within a
specified period of time. Also, the Exchange Privilege may be terminated or
revised at any time by the Fund and/or any of the Dean Witter Funds, upon such
notice as may be required by applicable regulatory agencies (presently sixty
days prior written notice for termination or material revision), provided that
six months prior written notice of termination will be given to the shareholders
who hold shares of the Exchange Funds, TCW/DW North American Government Income
Trust, TCW/DW Income and Growth Fund and TCW/DW Balanced Fund pursuant to this
Exchange Privilege, and provided further that the Exchange Privilege may be
terminated or materially revised 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(s),
policies and restrictions.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain a copy and examine it carefully
before investing. An exchange will be treated for federal income tax purposes
the same as a repurchase or redemption of shares, on which the shareholder may
realize a capital gain or loss. However, the ability to deduct capital losses on
an exchange may be limited in situations where there is an exchange of shares
within ninety days after the shares are purchased. The Exchange Privilege is
only available in states where an exchange may legally be made. For further
information regarding the Exchange Privilege, shareholders should contact their
DWR or other Selected Broker-Dealer account executive or the Transfer Agent.
PLAN OF DISTRIBUTION
In accordance with a Plan of Distribution pursuant to Rule 12b-1 under the
Act between the Fund and the Distributor, the Distributor provides certain
services and finances certain activities in connection with the distribution of
Fund shares. (The "Plan" refers to the Plan and Agreement of Distribution prior
to the reorganization and to the Plan of Distribution after the reorganization.)
A Plan was approved by the Board of Trustees on June 20, 1988 and by DWR, as the
Fund's then sole shareholder, on June 22, 1988, whereupon the Plan went into
effect. The vote of the Trustees, which was cast in person at a meeting called
for the purpose of voting on such Plan, included a majority of the Trustees who
are not and were not at the time of their voting interested persons of the Fund
(as defined in the Act) and who have and had at the time of their votes no
direct or indirect financial interest in the operation of the Plan (the
"Independent Trustees").
The Plan remained in effect until April 30, 1989, and will continue in
effect from year to year thereafter, provided such continuance is approved
annually by a vote of the Trustees, including a majority of the Independent
Trustees. An amendment to increase materially the maximum amount authorized to
be spent under the Plan must be approved by the shareholders of the Fund, and
all material amendments to the Plan must 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 the holders of a majority of the Independent Trustees
or by a vote of a majority of the outstanding voting securities of the Fund (as
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<PAGE>
defined in the Act) on not more than 30 days written notice to any other party
to the Plan. So long as the Plan is in effect, the selection or nomination of
the Independent 12b-1 Directors is committed to the discretion of the
Independent 12b-1 Directors.
Pursuant to the Plan, the Trustees were provided at their meeting held on
April 17, 1996, with all the information the Trustees deemed necessary to make
an informed determination on whether the Plan should be continued. In making
their determination to continue the Plan until April 30, 1997, the Trustees,
including all of the Independent 12b-1 Trustees, unanimously arrived at the
conclusion that the Plan had benefitted the Fund and also unanimously concluded
that, in their judgment, there is a reasonable likelihood that the Plan will
continue to benefit the Fund and its shareholders.
The Plan provides that the Distributor bears the expense of all promotional
and distribution related activities on behalf of the Fund, except for expenses
that the Trustees determine to reimburse, as described below. The following
activities and services may be provided by the Distributor under the Plan and
Agreement: (1) compensation to and expenses of DWR's and other Selected
Broker-Dealer account executives and other employees, including overhead and
telephone expenses; (2) sales incentives and bonuses to sales representatives
and to marketing personnel in connection with promoting sales of the Fund's
shares; (3) expenses incurred in connection with promoting sales of the Fund's
shares; (4) preparing and distributing sales literature; and (5) providing
advertising and promotional activities, including direct mail solicitation and
television, radio, newspaper, magazine and other media advertisements.
At their meeting held on October 30, 1992, the Trustees of the Fund,
including all of the Independent 12b-1 Trustees, approved certain amendments to
the Plan which took effect in January, 1993 and were designed to reflect the
fact that upon the reorganization described above, the share distribution
activities, theretofore performed by the Fund or 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 the Investment Manager 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.
DWR account executives are paid an annual residual commission, currently a
gross residual of up to 0.10 of 1% of the current value of the respective
accounts for which they are the account executives of record. The "gross
residual" is a charge which reflects residual commissions paid by DWR to its
account executives and DWR's expenses associated with the servicing of
shareholder's accounts, including the expenses of operating DWR's branch offices
in connection with the servicing of shareholders accounts, which expenses
include lease costs, the salaries and employee benefits of operations and sales
support personnel, utility costs, communications costs and the costs of
stationery and supplies and other expenses relating to branch office serving of
shareholder accounts.
The Fund is authorized to reimburse the Distributor for specific expenses
the Distributor incurs or plans to incur in promoting the distribution of the
Fund's shares. Reimbursement is made through monthly payments in amounts
determined in advance of each fiscal quarter by the Trustees, including a
majority of the Independent Trustees. The amount of each monthly payment may in
no event exceed an amount equal to a payment at the annual rate of 0.15 of 1% of
the Fund's average daily net assets during the month. No interest or other
financing charges will be incurred for which reimbursement payments under the
Plan will be made. In addition, no interest charges, if any, incurred on any
distribution expense incurred pursuant to the Plan, will be reimbursable under
the Plan. In making quarterly determinations of the amounts that may be expended
by the Fund, the Distributor provides and the Trustees review a quarterly budget
of projected incremental 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 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 shares.
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<PAGE>
The Fund reimbursed $263,178 to the Distributor, pursuant to the then
current Plan, for the fiscal year ended December 31, 1996. This is 0.10 of 1% of
the Fund's average daily net assets for its fiscal year ended December 31, 1996.
Based upon the total amounts spent by the Distributor during the period, it is
estimated that the amount paid by the Fund for distribution was spent in
approximately the following ways: (i) advertising--$-0-; (ii) printing and
mailing prospectuses to other than current shareholders--$-0-; (iii)
compensation to underwriters--$-0-; (iv) compensation to dealers--$-0-; (v)
compensation to sales personnel--$-0-; and (vi) other, which includes payments
to the Distributor for expenses substantially all of which relate to
compensation of sales personnel and associated overhead expenses--$263,178.
Under the Plan, the Distributor uses its best efforts in rendering services
to the Fund, but in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations, the Distributor is not
liable to the Fund or any of its shareholders for any error of judgment or
mistake of law or for any act or omission or for any losses sustained by the
Fund or its shareholders.
Under the Plan, the Distributor provides the Fund, for review by the
Trustees, and the Trustees review, promptly after the end of each calendar
quarter, a written report regarding the incremental distribution expenses
incurred by the Distributor on behalf of the Fund during such calendar quarter,
which report includes (1) an itemization of the types of expenses and the
purposes therefore; (2) the amounts of such expenses; and (3) a description of
the benefits derived by the Fund. In the Trustees' quarterly review of the Plan
they consider its continued appropriateness and the level of compensation
provided therein.
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, had any direct or indirect
financial interest in the operation of the Plan except to the extent that DWR,
the Distributor or the Investment Manager, 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.
DETERMINATION OF NET ASSET VALUE
As discussed in the Prospectus, the net asset value of the Fund is
determined as of the close of trading 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; Presidents' Day; Good Friday; Memorial Day;
Independence Day; Labor Day; Thanksgiving Day; and Christmas Day.
The Fund utilizes the amortized cost method in valuing its portfolio
securities for purposes of determining the net asset value of shares of the
Fund. The Fund utilizes the amortized cost method in valuing its portfolio
securities even though the portfolio securities may increase or decrease in
market value, generally, in connection with changes in interest rates. The
amortized cost method of valuation involves valuing a security at its cost at
the time of purchase adjusted by a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. While this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Fund would receive if it
sold the instrument. During such periods, the yield to investors in the Fund may
differ somewhat from that obtained in a similar company which uses mark to
market values for all its portfolio securities. For example, if the use of
amortized cost resulted in a lower (higher) aggregate portfolio value on a
particular day, a prospective investor in the Fund would be able to obtain a
somewhat higher (lower) yield than would result from investment in such a
similar company and existing investors would receive less (more) investment
income. The purpose of this method of calculation is to facilitate the
maintenance of a constant net asset value per share of $1.00.
The Fund's use of the amortized cost method to value its portfolio
securities and the maintenance of the per share net asset value of $1.00 is
permitted pursuant to Rule 2a-7 of the Act (the "Rule"), and is conditioned on
its compliance with various conditions contained in the Rule including: (a) the
Fund's Trustees are obligated, as a particular responsibility within the overall
duty of care owed to the Fund's
26
<PAGE>
shareholders, to establish procedures reasonably designed, taking into account
current market conditions and the Fund's investment objectives, to stabilize the
net asset value per share as computed for the purpose of distribution and
redemption at $1.00 per share; (b)(i) the procedures include calculation, at
such intervals as are reasonable in light of current market conditions, of the
deviation, if any between net asset value per share using amortized cost to
value portfolio securities and net asset value per share based upon available
market quotations with respect to such portfolio securities (for the purpose of
determining market value, securities as to which the Fund has a "put" will be
valued at the higher of market value or exercise price); (ii) periodic review by
the Trustees of the amount of deviation as well as methods used to calculate it;
and (iii) maintenance of written records of the procedures, the Trustees'
considerations made pursuant to them and any actions taken upon such
consideration; (c) the Trustees will consider what steps should be taken, if
any, in the event of a difference of more than 1/2 of 1% between the two methods
of valuation; and (d) the Trustees should take such action as they deem
appropriate to eliminate or reduce, to the extent reasonably practicable,
material dilution or other unfair results to investors or existing shareholders.
Such action may include: selling portfolio instruments prior to maturity to
realize capital gains or losses or to shorten the average portfolio maturity of
the Fund; withholding dividends; utilizing a net asset value per share as
determined by using available market quotations or reducing the number of its
outstanding shares. Any reduction of outstanding shares will be effected by
having each shareholder proportionately contribute to the Fund's capital a
number of shares which represent the difference between the amortized cost
valuation and market valuation of the portfolio. Each shareholder will be deemed
to have agreed to such contribution by his or her investment in the Fund.
The Rule further requires that the Fund limit its investments to U.S.
dollar-denominated instruments which the Board of Trustees determines present
minimal credit risks and which are Eligible Securities (as defined below). The
Rule also requires the Fund to maintain a dollar-weighted average portfolio
maturity (not more than 90 days) appropriate to its objective of maintaining a
stable net asset value of $1.00 per share and precludes the purchase of any
instrument with a remaining maturity of more than 397 days. Should the
disposition of a portfolio security result in a dollar weighted average
portfolio maturity of more than 90 days, the Fund would be required to invest
its available cash in such a manner as to reduce such maturity to 90 days or
less as soon as is reasonably practicable.
The Rule further requires that the Fund limit its investments to U.S.
dollar-denominated instruments which the Trustees determine present minimal
credit risks and which are Eligible Securities (as defined below). The Rule also
requires the Fund to maintain a dollar-weighted average portfolio maturity (not
more than 90 days) appropriate to its objective of maintaining a stable net
asset value of $1.00 per share and precludes the purchase of any instrument with
a remaining maturity of more than 397 days. Should the disposition of a
portfolio security result in a dollar-weighted average portfolio maturity of
more than 90 days, the Fund will invest its available cash in such a manner as
to reduce such maturity to 90 days or less as soon as is reasonably practicable.
At the time the Fund makes the commitment to purchase a Municipal Obligation
on a when-issued or delayed delivery basis, it will record the transaction and
thereafter reflect the value, each day, of the Municipal Obligation in
determining its net asset value. Repurchase agreements are valued at the face
value of the repurchase agreement plus any accrued interest thereon to date.
Generally, for purposes of the procedures adopted under the Rule, the
maturity of a portfolio instrument is deemed to be the period remaining
(calculated from the trade date or such other date on which the Fund's interest
in the instrument is subject to market action) until the date noted on the face
of the instrument as the date on which the principal amount must be paid, or in
the case of an instrument called for redemption, the date on which the
redemption payment must be made.
A variable rate obligation that is subject to a demand feature is deemed to
have a maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining
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<PAGE>
until the principal amount can be recovered through demand. A floating rate
instrument that is subject to a demand feature is deemed to have a maturity
equal to the period remaining until the principal amount can be recovered
through demand.
An Eligible Security generally is defined in the Rule to mean (1) A security
with a remaining maturity of 397 calendar days or less that has received a
short-term rating (or that has been issued by an issuer that has received a
short-term rating with respect to a class of debt obligations, or any debt
obligation within that class, that is comparable in priority and security with
the security) by the Requisite NRSROs in one of the two highest short-term
rating categories (within which there may be sub-categories or gradations
indicating relative standing); or (ii) A security: (A) That at the time of
issuance had a remaining maturity of more than 397 calendar days but that has a
remaining maturity of 397 calendar days or less; and (B) Whose issuer has
received from the Requisite NRSROs a rating with respect to a class of debt
obligations (or any debt obligation within that class) that is now comparable in
priority and security with the security. In one of the two highest short-term
rating categories (within which there may be sub-categories or gradations
indicating relative standing); or (iii) An unrated Security that is of
comparable quality to a security meeting the requirements of (i) or (ii) above,
as determined by the money market fund's board of directors.
As permitted by the Rule, the Board has delegated to the Fund's Investment
Manager, subject to the Board's oversight pursuant to guidelines and procedures
adopted by the Board, the authority to determine which securities present
minimal credit risks and which unrated securities are comparable in quality to
rated securities.
Also, as required by the Rule, the Fund will limit its investments in
securities, other than Government securities, so that, at the time of purchase:
(a) except as further limited in (b) below with regard to certain securities, no
more than 5% (10% if a guarantee) of its total assets will be invested in the
securities of any one issuer; and (b) with respect to Eligible Securities that
have received a rating in less than the highest category by any one of the
NRSROs whose ratings are used to qualify the security as an Eligible Security,
or determined to be of comparable quality that are "Conduit Securities" as that
term is defined in the Rule: (i) no more than 5% will be invested in the
aggregate of the Fund's total assets in all such securities, and (ii) no more
than the greater of 1% of total assets, or $1 million, will be invested in the
securities of any one issuer.
If the Board determines that it is no longer in the best interests of the
Fund and its shareholders to maintain a stable price of $1 per share or if the
Board believes that maintaining such price no longer reflects a market-based net
asset value per share, the Board has the right to change from an amortized cost
basis of valuation to valuation based on market quotations. The Fund will notify
shareholders of any such changes.
The Fund will manage its portfolio in an effort to maintain a constant $1.00
per share price, but it cannot assure that the value of its shares will never
deviate from this price. Since dividends from net investment income are declared
and reinvested on a daily basis, the net asset value per share, under ordinary
circumstances, is likely to remain constant. Realized and unrealized gains and
losses will not be distributed on a daily basis but will be reflected in the
Fund's net asset value. The amounts of such gains and losses will be considered
by the Board of Trustees in determining the action to be taken to maintain the
Fund's $1.00 per share net asset value. Such action may include distribution at
any time of part or all of the then accumulated undistributed net realized
capital gains, or reduction or elimination of daily dividends by an amount equal
to part or all of the then accumulated net realized capital losses. However, if
realized losses should exceed the sum of net investment income plus realized
gains on any day, the net asset value per share on that day might decline below
$1.00 per share. In such circumstances, the Fund may reduce or eliminate the
payment of daily dividends for a period of time in an effort to restore the
Fund's $1.00 per share net asset value. A decline in prices of securities could
result in significant unrealized depreciation on a mark-to-market basis. Under
these circumstances the Fund may reduce or eliminate the payment of dividends
and utilize a net asset value per share as determined by using available market
quotations.
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REDEMPTION OF FUND SHARES
- --------------------------------------------------------------------------------
As discussed in the Prospectus, shares of the Fund may be redeemed at net
asset value at any time. When a redemption is made by check and a check is
presented to the Transfer Agent for payment, the Transfer Agent will redeem a
sufficient number of full and fractional shares in the shareholder's account to
cover the amount of the check. This enables the shareholder to continue earning
daily income dividends until the check has cleared.
A check drawn by a shareholder against his or her account in the Fund
constitutes a request for redemption of a number of shares sufficient to provide
proceeds equal to the amount of the check. Payment of the proceeds of a check
will normally be made on the next business day after receipt by the Transfer
Agent of the check in proper form. Subject to the foregoing, if a check is
presented for payment to the Transfer Agent by a shareholder or payee in person,
the Transfer Agent will make payment by means of a check drawn on the Fund's
account or, in the case of a shareholder payee, to the shareholder's
predesignated bank account, but will not make payment in cash.
The Fund reserves the right to suspend redemptions or postpone the date of
payment (1) for any periods during which the New York Stock Exchange is closed
(other than for customary weekend and holiday closings), (2) when trading on
that Exchange is restricted or an emergency exists, as determined by the
Securities and Exchange Commission, so that disposal of the Fund's investments
or determination of the Fund's net asset value is not reasonably practicable, or
(3) for such other periods as the Commission by order may permit for the
protection of the Fund's investors.
As discussed in the Prospectus, due to the relatively high cost of handling
small investments, the Fund reserves the right to redeem, at net asset value,
the shares of any shareholder (other than shares held in an Individual
Retirement Account or custodial account under Section 403(b)(7) of the Internal
Revenue Code) whose shares due to redemptions by the shareholders have a value
of less than $1,000 or such lesser amounts as may be fixed by the Board of
Trustees. However, before the Fund redeems such shares and sends the proceeds to
the shareholder, it will notify the shareholder that the value of his or her
shares is less than $1,000 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
$1,000 or more before the redemption is processed.
SYSTEMATIC WITHDRAWAL PLAN. As discussed in the Prospectus, a systematic
withdrawal plan is available for shareholders who own or purchase shares of the
Fund having a minimum value of at least $5,000, which provides for monthly or
quarterly checks in any dollar amount not less than $25 or in any whole
percentage of the account balance, on an annualized basis. 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 business day) of the relevant month or quarter and
normally a check for the proceeds will be mailed by the Transfer Agent within
five days after the date of redemption. The withdrawal plan may be terminated at
any time by the Fund.
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 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
share-
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holder may also redeem all or part of the shares held in the withdrawal plan
account (see "Redemption of Fund Shares" in the Prospectus) at any time. If the
number of shares redeemed is greater than the number of shares paid as
dividends, such redemptions may, of course, eventually result in liquidation of
all the shares in the account. The automatic cash withdrawal method of
redemption is not available for shares held in an Exchange Privilege Account.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
As discussed in the Prospectus, the Fund intends to declare dividends on
each day the New York Stock Exchange is open for business and distribute all of
its daily net investment income to shareholders of record as of the close of
business the preceding business day.
In computing net investment income, the Fund will amortize any premiums and
original issue discounts on securities owned, if applicable. Capital gains or
losses realized upon sale or maturity of such securities will be based on their
amortized cost.
The Fund has qualified and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). If so qualified, the Fund will not be subject to federal
income tax on its net investment income and capital gains, if any, realized
during any fiscal year in which it distributes such income and capital gains to
its shareholders.
As discussed in the Prospectus, the Fund intends to qualify to pay
"exempt-interest dividends" to its shareholders by maintaining, as of the close
of each quarter of its taxable years, at least 50% of the value of its total
assets in tax-exempt securities. An exempt-interest dividend is that part of a
dividend distribution 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. Exempt-interest dividends are included, however, in determining
what portion, if any, of a person's Social Security benefits are subject to
federal income tax.
The Trustees may revise the dividend policy, or postpone the payment of
dividends, if the Fund should have or anticipate any large unexpected expense,
loss or fluctuation in net assets which, in the opinion of the Trustees, might
have a significant adverse effect on shareholders. On occasion, in order to
maintain a constant $1.00 per share net asset value, the Trustees may direct
that the number of outstanding shares be reduced in each shareholder's account.
Such reduction may result in taxable income, if any, to a shareholder in excess
of the net increase (i.e., dividends, less such reductions), if any, in the
shareholder's account for a period. Furthermore, such reduction may be realized
as a capital loss when the shares are liquidated.
Alternative minimum taxable income is generally equal to taxable income with
certain adjustments and increased by certain "tax preference items" which may
include a portion of the Fund's dividends as described above. In addition, the
Code further provides that for taxable years beginning in 1990 and thereafter,
corporations are subject to an alternative minimum tax based, in part, on 75% of
any excess of "adjusted current earnings" over taxable income as adjusted for
other tax preferences. Because an exempt-interest dividend paid by the Fund will
be included in adjusted current earnings, a corporate shareholder may therefore
be required to pay an increased alternative minimum tax as the result of
receiving exempt-interest dividends paid by the Fund.
In determining amounts to be distributed, capital gains will be offset by
any capital loss carryovers incurred in prior years. To the extent that these
carryover losses are used to offset future capital gains, it is probable that
the gains so offset will not be distributed to shareholders since any such
distributions may be taxable to shareholders as ordinary income.
The Code provides that every person required to file a tax return must
include on such return the amount of exempt-interest dividends received from the
Fund during the taxable year.
The Superfund Amendments and Reauthorization Act of 1986 (the "Superfund
Act") imposes a deductible tax on a corporation's alternative minimum taxable
income (computed without regard to the
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alternative tax net operating loss deduction) at a rate of $12 per $10,000
(0.12%) of alternative minimum taxable income in excess of $2,000,000. The tax
will be imposed for taxable years beginning after December 31, 1986 and before
January 1, 1996. The tax will be imposed even if the corporation is not required
to pay an alternative minimum tax because the corporation's regular income tax
liability exceeds its minimum tax liability. Exempt-interest dividends paid by
the Fund that create alternative minimum tax preferences for corporate
shareholders under the Code (as described above) may be subject to the tax.
After the end of the calendar year, the Fund will mail to shareholders a
statement indicating the percentage of the dividend distributions for such
calendar year which constitutes exempt-interest dividends and the percentage, if
any, that is taxable, and to what extent the taxable portion is short-term
capital gains or ordinary income. This percentage should be applied uniformly to
all monthly distributions made during the fiscal year to determine what
proportion of the dividends paid is tax-exempt. The percentage 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 interest and realized net short-term capital
gains 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 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 cash. Since the Fund's income
is expected to be derived entirely from interest rather than dividends, it is
anticipated that none of such dividend distributions will be eligible for the
federal dividends received deduction available to corporations.
Any loss on the sale or exchange of shares of the Fund which are held for 6
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.
The Code requires each regulated investment company to pay a nondeductible
4% excise tax to the extent the company does not distribute, during each
calendar year, 98% of its ordinary income, determined on a calendar year basis,
and 98% of its capital gains, determined in general on an October 31 year end,
plus certain undistributed amounts from previous years. The required
distributions, however, are based only on the taxable income of a regulated
investment company. The excise tax, therefore, will generally not apply to the
tax-exempt income of a regulated investment company such as the Fund that pays
exempt-interest dividends. The Fund anticipates that it will make sufficient
timely distributions to avoid imposition of the excise tax.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry shares of the Fund is not deductible. 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
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. 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 that event, the Fund
would re-evaluate its investment objective and policies.
To the extent that dividends are derived from interest on California
tax-exempt securities and on certain U.S. government securities, such dividends
will also be exempt from California personal income taxes. Under California law,
a fund which qualifies as a regulated investment company must have at least 50%
of its total assets invested in California state and local issues or in U.S.
obligations which pay interest excludable from income or in a combination of
such obligations at the end of each quarter of its
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<PAGE>
taxable year in order to be eligible to pay dividends to California residents
which will be exempt from California personal income taxes. Unlike federal law,
California law provides that no portion of the exempt-interest dividends will
constitute an item of tax preference for California personal income alternative
minimum tax purposes.
For California personal income tax purposes, the shareholders of the Fund
will not be subject to tax, or receive a credit for taxes paid by the Fund, on
undistributed capital gains, if any. Under the California Revenue and Taxation
Code, interest on indebtedness incurred or continued 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 state personal income tax purposes.
The foregoing relates to federal income taxation and to California personal
income taxation as in effect as of the date of the Prospectus. Distributions
from interest income and capital gains, including exempt-interest dividends, may
be subject to California franchise taxes if received by a corporation doing
business in California, to state taxes in states other than California and to
local taxes.
Any dividends or capital gains distributions received by a shareholder from
any investment company will have the effect of reducing the net asset value of
the shareholder's shares 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 dividends, such payment or distribution would be in part a return
of the shareholder's investment to the extent of such reduction below the
shareholder's cost but nonetheless would be fully taxable at ordinary rates.
Therefore, an investor should consider the tax implications of purchasing Fund
shares immediately prior to a distribution record date.
Shareholders are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, state or local taxes.
INFORMATION ON COMPUTATION OF YIELD
The Fund's current yield for the seven days ending December 31, 1996 was
2.89%. The effective annual yield on December 31, 1996 was 2.93%, assuming daily
compounding.
The Fund's annualized current yield, as may be quoted from time to time in
advertisements and other communications to shareholders and potential investors,
is computed by determining, for a stated seven-day period, the net change,
exclusive of capital changes and including the value of additional shares
purchased with dividends and any dividends declared therefrom (which reflect
deductions of all expenses of the Fund such as management fees), in the value of
a hypothetical pre-existing account having a balance of one share at the
beginning of the period, and dividing the difference by the value of the account
at the beginning of the base period to obtain the base period return, and then
multiplying the base period to obtain the base period return by (365/7).
The Fund's annualized effective yield, as may be quoted from time to time in
advertisements and other communications to shareholders and potential investors,
is computed by determining (for the same stated seven-day period as for the
current yield), the net change, exclusive of capital changes and including the
value of additional shares purchased with dividends and any dividends declared
therefrom (which reflect deductions of all expenses of the Fund such as
management fees), in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, and dividing the difference
by the value of the account at the beginning of the base period to obtain the
base period return, and then compounding the base period return by adding 1,
raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the
result.
The yields quoted in any advertisement or other communication should not be
considered a representation of the yields of the Fund in the future since the
yield is not fixed. Actual yields will depend not only on the type, quality and
maturities of the investments held by the Fund and changes in interest rates on
such investments, but also on changes in the Fund's expenses during the period.
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<PAGE>
Yield information may be useful in reviewing the performance of the Fund and
for providing a basis for comparison with other investment alternatives.
However, unlike bank deposits or other investments which typically pay a fixed
yield for a stated period of time, the Fund's yield fluctuates.
Based upon a combined Federal and California personal income tax bracket of
46.24%, the Fund's tax-equivalent yield for the seven days ending December 31,
1996 was 5.38%.
Tax-equivalent yield is computed by dividing that portion of the current
yield (calculated as described above) which is tax-exempt by 1 minus a stated
tax rate and adding the quotient to that portion, if any, of the yield of the
Fund that is not tax-exempt.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in shares of the Fund by adding the sum of all
distributions on 10,000, 50,000 or 100,000 shares of the Fund since inception to
$10,000, $50,000 and $100,000, as the case may be. Investments of $10,000,
$50,000 and $100,000 in the Fund at inception would have grown to $13,293,
$66,465 and $132,930, respectively, at December 31, 1996.
DESCRIPTION OF SHARES
- --------------------------------------------------------------------------------
The shareholders of the Fund are entitled to a full vote for each full share
held. All of the Trustees, except for Messrs. Bozic, Purcell and Schroeder, have
been elected by the shareholders of the Fund, most recently at a Special Meeting
of Shareholders held on January 12, 1993. Messrs. Bozic, Purcell and Schroeder
were elected by the other Trustees of the Fund on April 8, 1994. 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 fifty percent of the shares voting can, if they
choose, elect all Trustees being selected, while the holders of the remaining
shares would be unable to elect any Trustees.
The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios) and additional classes of shares
within any series (which would be used to distinguish among the rights of
different categories of shareholders, as might be required by future regulations
or other unforeseen circumstances). The Trustees have not presently authorized
any such additional series or classes of shares.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his/her or
its own bad faith, willful misfeasance, gross negligence, or reckless disregard
of his 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, the Declaration of Trust provides that
a Trustee, officer, employee or agent is entitled to be indemnified against
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. The Custodian has no part in deciding the Fund's
investment policies or which securities
33
<PAGE>
are to be purchased or sold for the Fund's portfolios. Any of the Fund's cash
balances with the Custodian in excess of $100,000 are unprotected by Federal
deposit insurance. Such balances may, at times, be substantial.
Dean Witter Trust Company, Harborside Financial Center, Plaza Two, Jersey
City, New Jersey 07311 is the Transfer Agent of the Fund's shares and Dividend
Disbursing Agent for payment of dividends and distributions on Fund shares and
Agent for shareholders under various investment plans described herein. Dean
Witter Trust Company is an affiliate of Dean Witter InterCapital Inc., the
Fund's Investment Manager and Dean Witter Distributors Inc., the Fund's
Distributor. 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.
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 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 Board of Trustees.
LEGAL COUNSEL
- --------------------------------------------------------------------------------
Barry Fink, Esq., who is an officer and the General Counsel of the
Investment Manager, is an officer and the General Counsel of the Fund.
EXPERTS
- --------------------------------------------------------------------------------
The financial statements of the Fund included in the Prospectus and
incorporated by reference in this Statement of Additional Information 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.
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The audited financial statements of the Fund for the fiscal year ended
December 31, 1996, and the report of the independent accountants thereon, are
set forth in the Fund's Prospectus, and are incorporated herein by reference.
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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.
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<PAGE>
RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2, and 3 in
each generic rating classification from Aa through B in its municipal bond
rating system. The modifier 1 indicates 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.
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.
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<PAGE>
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.
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.
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.
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<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 and 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.
A-1 indicates that the degree of safety regarding timely payment is very
strong.
A-2 indicates capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming as
for issues designated "A-1."
A-3 indicates a satisfactory capacity for timely payment. Obligations carrying
this designation are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
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