Filed Pursuant to Rule 497(e)
Registration File No.: 33-37562
DEAN WITTER
MULTI-STATE MUNICIPAL
SERIES TRUST
PROSPECTUS--FEBRUARY 17, 1994
- -------------------------------------------------------------------------------
DEAN WITTER MULTI-STATE MUNICIPAL SERIES TRUST (THE "FUND") IS AN OPEN-END NON-
DIVERSIFIED MANAGEMENT INVESTMENT COMPANY CURRENTLY CONSISTING OF TEN SEPARATE
SERIES: THE ARIZONA SERIES, THE CALIFORNIA SERIES, THE FLORIDA SERIES, THE
MASSACHUSETTS SERIES, THE MICHIGAN SERIES, THE MINNESOTA SERIES, THE NEW JERSEY
SERIES, THE NEW YORK SERIES, THE OHIO SERIES AND THE PENNSYLVANIA SERIES (THE
"STATE SERIES"). THE INVESTMENT OBJECTIVE OF THE STATE SERIES IS TO PROVIDE A
HIGH LEVEL OF CURRENT INCOME EXEMPT FROM BOTH FEDERAL AND THE DESIGNATED STATE
INCOME TAXES CONSISTENT WITH THE PRESERVATION OF CAPITAL. EACH SERIES
("SERIES") SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING PRINCIPALLY
IN INVESTMENT GRADE TAX-EXEMPT SECURITIES OF MUNICIPAL ISSUERS IN THE
DESIGNATED STATE. (SEE "INVESTMENT OBJECTIVE AND POLICIES.")
The Fund, on behalf of each Series, is authorized to reimburse Dean Witter
Distributors Inc. ("DWD") for specific expenses incurred in promoting the
distribution of the Fund's shares pursuant to a Plan of Distribution pursuant
to Rule 12b-1 under the Investment Company Act of 1940 (the "Act").
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 each Series.
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 17, 1994, which has been filed with the
Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone number listed below. The
Statement of Additional Information is incorporated herein by reference.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary.............................. 2
Summary of Fund Expenses........................ 3
Financial Highlights............................ 4
The Fund and its Management..................... 8
Investment Objective and Policies............... 8
Investment Restrictions......................... 12
Purchase of Fund Shares......................... 13
Shareholder Services............................ 15
Redemptions and Repurchases..................... 16
Dividends, Distributions and Taxes.............. 17
Performance Information......................... 22
Additional Information.......................... 23
Appendix........................................ 24
</TABLE>
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
DEAN WITTER
MULTI-STATE MUNICIPAL SERIES TRUST
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 392-2550
(800) 526-3143
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Dean Witter Distributors Inc., Distributor
<PAGE>
PROSPECTUS SUMMARY
===============================================================================
THE
FUND The Fund is organized as a Trust, commonly known as a
Massachusetts business trust, and is an open-end, non-
diversified management investment company currently consisting
of ten separate series: the Arizona Series, the California
Series, the Florida Series, the Massachusetts Series, the
Michigan Series, the Minnesota Series, the New Jersey Series,
the New York Series, the Ohio Series and the Pennsylvania
Series. Each Series invests principally in investment grade,
tax-exempt securities of the designated State.
- -------------------------------------------------------------------------------
SHARES Shares of beneficial interest with $0.01 par value (see page
OFFERED 23).
- -------------------------------------------------------------------------------
OFFERING
PRICE The price of the shares offered by this prospectus varies with
the changes in the value of the Fund's investments. The offering
price, determined once daily as of 4:00 p.m., New York time, on
each day that the New York Stock Exchange is open, is equal to
the net asset value plus a sales charge of 4.0% of the offering
price, scaled down on purchases of $25,000 or over (see page
13).
- -------------------------------------------------------------------------------
MINIMUM
PURCHASE Minimum initial investment, $1,000. Minimum subsequent
investment, $100 (see page 13)
- -------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES The investment objective of each Series is to provide a high
level of current income exempt from both federal and the
designated state income taxes consistent with preservation of
capital.
- -------------------------------------------------------------------------------
INVESTMENT
MANAGER Dean Witter InterCapital Inc., ("InterCapital"), the Investment
Manager of the Fund, and its wholly-owned subsidiary, Dean
Witter Services Company Inc., serve in various investment
management, advisory, management and administrative capacities
to seventy-nine investment companies and other portfolios with
assets of approximately $71.2 billion at December 31, 1993 (see
page 8).
- -------------------------------------------------------------------------------
MANAGEMENT
FEE The Investment Manager receives a monthly fee at the annual rate
of 0.35% of daily net assets of each Series (see page 8).
- -------------------------------------------------------------------------------
DIVIDENDS AND
CAPITAL GAINS
DISTRIBUTIONS Income dividends are declared daily and paid monthly; capital
gains distributions, if any, may be distributed annually or
retained for reinvestment by the Fund. Dividends and
distributions are automatically reinvested in additional shares
at net asset value (without sales charge), unless the
shareholder elects to receive cash (see pages 15 and 17).
- -------------------------------------------------------------------------------
PLAN OF
DISTRIBUTION The Fund is authorized to reimburse Dean Witter Distributors
Inc. (the "Distributor") for specific expenses incurred in
promoting the distribution of the Fund's shares pursuant to a
Plan of Distribution 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 1% of
average daily net assets of each Series of the Fund (see page
14).
- -------------------------------------------------------------------------------
SALES CHARGE 4.0% of offering price (4.17% of amount invested); reduced
charges on purchases of $25,000 or more (see pages 13-14).
- -------------------------------------------------------------------------------
REDEMPTION Shares are redeemable by the shareholder at net asset value. An
account may be involuntarily redeemed if shares owned have a net
asset value of less than $100 (see page 17).
- -------------------------------------------------------------------------------
RISKS AND OTHER
CONSIDERATIONS
The value of each Series' portfolio securities, and therefore
the net asset value per share of each Series, may increase or
decrease due to various factors, principally changes in
prevailing interest rates and the ability of the issuers of the
portfolio securities of each Series to pay interest and
principal on such obligations. Additionally, because the Fund is
a non-diversified investment company, a relatively high
percentage of the assets of each Series may be invested in a
limited number of issuers within a single state, thereby causing
a greater fluctuation of the net asset value of each Series as a
result of changes in the financial condition or in the market's
assessment of the various issuers. Each Series, to the extent
permitted by applicable state law, also may invest in futures
and options which may be considered speculative in nature and
involve greater risks than those customarily assumed by certain
<PAGE>
other investment companies which do not invest in such
instruments. Since each Series concentrates its investments in
tax-exempt securities of a particular State, each Series is
affected by any political, economic or regulatory developments
affecting the ability of the issuers of that particular State to
pay interest or repay principal. During periods of significant
economic slowdowns, the securities of any particular State will
be subject to a greater degree of credit risk in which the
ratings of such securities have been or may be downgraded or
placed on a credit watch, thereby affecting their market value.
Investors should refer to the Appendix for specific information
regarding the economic situation of their particular State. (See
pages 8-12 and the Appendix on page 24). Certain of the tax-
exempt securities in which each Series may invest without limit
may subject certain investors to the federal, and any applicable
state, alternative minimum tax. (see pages 8-9).
- -------------------------------------------------------------------------------
The above is qualified in its entirety by the detailed information appearing
elsewhere in this Prospectus and in the Statement of Additional Information.
2
<PAGE>
<TABLE>
SUMMARY OF FUND EXPENSES
===================================================================================================================================
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 year ended November 30, 1993, except as otherwise noted.
<CAPTION>
Shareholder Transaction Expenses (for each Series)
<S> <C>
Maximum Sales Charge Imposed on Purchases....................... 4.0%
Maximum Sales Charge Imposed on Reinvested Dividends............ None
Deferred Sales Charge........................................... None
Redemption Fees................................................. None
Exchange Fee.................................................... None
<CAPTION>
Annual Operating Expenses (as a Percentage of Average Net Assets) *
Arizona California Florida Massachusetts Michigan Minnesota New Jersey New York Ohio Pennsylvania
Series Series Series Series Series Series Series Series Series Series
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees*
(after fee waiver)..... .1875% .2379% .2052% .0165% .0488% .0 % .1585% .0218% .0681% .1606%
12b-1 Fees**........... .1401 .1457 .1477 .1474 .1460 .1449 .1482 .1470 .1476 .1486
Other Expenses*
(after expense
assumption)........... .1492 .0922 .1249 .3143 .2824 .3353 .1719 .3093 .2623 .1684
Total Series Operating
Expenses*............. .4768% .4758% .4778% .4782% .4772% .4802% .4786% .4781% .4780% .4776%
- ----------
<FN>
**The 12b-1 fee is characterized as a service fee within the meaning of National Association of Securities Dealers, Inc. ("NASD")
guidelines.
<CAPTION>
Example
-------
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:
Arizona California Florida Massachusetts Michigan Minnesota New Jersey New York Ohio Pennsylvania
Series Series Series Series Series Series Series Series Series Series
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 year ............. $45 $45 $45 $45 $45 $45 $45 $45 $45 $45
3 years ............ 55 55 55 55 55 55 55 55 55 55
5 years ............ 66 66 66 66 66 66 66 66 66 66
10 years ............ 98 97 98 98 98 98 98 98 98 98
</TABLE>
*The annual Operating Expenses are based upon the actual expenses incurred by
the Fund during the fiscal year ended November 30, 1993. The Investment Manager
continued to waive management fees and assume expenses to the extent they
exceeded 0.50% of the daily net assets with respect to each Series of the Fund
until January 1, 1994. In addition, the Investment Manager has agreed to waive
management fees and assume expenses to the extent that they exceed 0.50% of the
daily net assets with respect to the Massachusetts Series, Michigan Series,
Minnesota Series, New York Series and Ohio Series for the period from January
1, 1994 through June 30, 1994.
Total operating expenses for each Series for the fiscal year of the Fund
ended November 30, 1993, assuming no waiver of the management fees and no
assumption of other expenses for the entire year, would have been:
<TABLE>
<CAPTION>
Arizona California Florida Massachusetts Michigan Minnesota New Jersey New York Ohio Pennsylvania
Series Series Series Series Series Series Series Series Series Series
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees..... .3500% .3500% .3500% .3500% .3500% .3500% .3500% .3500% .3500% .3500%
12b-1 Fees........... .1401 .1457 .1477 .1474 .1460 .1449 .1482 .1470 .1476 .1486
Other Expenses....... .1628 .1006 .1363 .3429 .3081 .5490 .1876 .3822 .2861 .1837
Total Series
Operating
Expenses*.......... .6529% .5963% .6340% .8403% .8041% 1.0439% .6858% .8792% .7837% .6823%
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF 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" in this Prospectus.
Long-term shareholders of the Fund may pay more in sales charges and
distribution fees than the economic equivalent of the maximum front-end sales
charges permitted by the NASD.
3
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
===================================================================================================================================
The following ratios and per share data for a share of beneficial interest outstanding throughout each period ended November 30
for each Series have been audited by Price Waterhouse, independent accountants. This data should be read in conjunction with the
financial statements, notes thereto, and the unqualified report of independent accountants which are contained in the Statement of
Additional Information. Further information about the performance of the Fund is contained in the Fund's Annual Report to
Shareholders, which may be obtained without charge upon request to the Fund.
<CAPTION>
Arizona Series California Series
------------------------------------ --------------------------------------
1993 1992 1991** 1993 1992 1991*
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.. $10.18 $ 9.77 $ 9.60 $10.32 $ 9.99 $ 9.60
------ ------ ------ ------ ------ ------
Investment income--net................ 0.58 0.64 0.36 0.61 0.67 0.60
Realized and unrealized gain on
investments.......................... 0.56 0.41 0.17 0.68 0.34 0.39
------ ------ ------ ------ ------ ------
Total from investment operations....... 1.14 1.05 0.53 1.29 1.01 0.99
------ ------ ------ ------ ------ ------
Less dividends and distributions:
Dividends from net investment
income.............................. (0.58) (0.64) (0.36) (0.61) (0.67) (0.60)
Distributions from net realized gain
on investments...................... (0.02) -0- -0- -0- (0.01) -0-
------ ------ ------ ------ ------ ------
Total dividends and distributions.... (0.60) (0.64) (0.36) (0.61) (0.68) (0.60)
------ ------ ------ ------ ------ ------
Net asset value, end of period....... $10.72 $10.18 $ 9.77 $11.00 $10.32 $ 9.99
====== ====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN +.............. 11.42% 11.08% 5.66%(1) 12.77% 10.23% 10.29%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)........................ $59,877 $38,812 $20,733 $139,308 $95,604 $41,568
Ratios to average net assets: (3)
Total expenses....................... 0.48% 0.15% 0.15%(2) 0.48% 0.15% 0.15%(2)
Investment income--net............... 5.40% 6.33% 6.32%(2) 5.57% 6.36% 6.53%(2)
Portfolio turnover rate................ 5% 15% 8% 11% 5% 24%
- ----------
<FN>
* January 15, 1991 (commencement of operations) through November 30, 1991.
** April 30, 1991 (commencement of operations) through November 30, 1991.
+ Does not reflect the deduction of sales load.
(1) Not annualized.
(2) Annualized.
(3) If the Fund had borne all its expenses that were assumed or waived by the Investment Manager, the above ratios to average
net assets, after application of the Fund's expense limitation, would have been:
Total expenses........................... 0.65% 0.74% 1.43%(2) 0.60% 0.67% 0.97%(2)
Investment income--net................... 5.22% 5.74% 5.04%(2) 5.45% 5.84% 5.71%(2)
See Notes to Financial Statements
</TABLE>
4
<PAGE>
<TABLE>
===================================================================================================================================
<CAPTION>
Florida Series Massachusetts Series Michigan Series
------------------------------------- ------------------------------------- -----------------------------------
1993 1992 1991* 1993 1992 1991* 1993 1992 1991*
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$10.29 $ 9.88 $ 9.60 $10.36 $ 9.98 $ 9.60 $10.41 $ 9.96 $ 9.60
------ ------ ------ ------ ------ ------ ------ ------ ------
0.59 0.64 0.55 0.60 0.66 0.54 0.61 0.65 0.54
0.64 0.41 0.28 0.72 0.42 0.38 0.64 0.46 0.36
------ ------ ------ ------ ------ ------ ------ ------ ------
1.23 1.05 0.83 1.32 1.08 0.92 1.25 1.11 0.90
------ ------ ------ ------ ------ ------ ------ ------ ------
(0.59) (0.64) (0.55) (0.60) (0.66) (0.54) (0.61) (0.65) (0.54)
-0- -0- -0- -0- (0.04) -0- -0- (0.01) -0-
------ ------ ------ ------ ------ ------ ------ ------ ------
(0.59) (0.64) (0.55) (0.60) (0.70) (0.54) (0.61) (0.66) (0.54)
------ ------ ------ ------ ------ ------ ------ ------ ------
$10.93 $10.29 $ 9.88 $11.08 $10.36 $ 9.98 $11.05 $10.41 $ 9.96
====== ====== ====== ====== ====== ====== ====== ====== ======
12.20% 10.92% 8.84%(1) 13.06% 11.19% 9.87%(1) 12.28% 11.78% 9.54%(1)
$84,494 $51,560 $17,719 $18,344 $10,113 $3,205 $22,083 $13,809 $6,630
0.48% 0.15% 0.15%(2) 0.48% 0.14% 0.15%(2) 0.48% 0.14% 0.15%(2)
5.39% 6.19% 6.45%(2) 5.47% 6.26% 6.50%(2) 5.53% 6.28% 6.54%(2)
3% 6% 10% 12% 10% 40% 15% 9% 46%
0.63% 0.73% 1.27%(2) 0.84% 1.25% 2.57%(2) 0.80% 1.01% 1.73%(2)
5.23% 5.62% 5.33%(2) 5.10% 5.16% 4.08%(2) 5.20% 5.42% 4.96%(2)
5
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
===================================================================================================================================
Selected data and ratios for a share of beneficial interest outstanding throughout each period for their respective years ended
November 30:
<CAPTION>
Minnesota Series New Jersey Series
----------------------------------- --------------------------------------
1993 1992 1991* 1993 1992 1991*
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period... $10.11 $ 9.79 $ 9.60 $ 10.35 $ 9.95 $ 9.60
------ ------ ------ ------- ------- -------
Investment income--net................. 0.58 0.63 0.51 0.60 0.66 0.55
Realized and unrealized gain on
investments........................... 0.67 0.32 0.19 0.62 0.44 0.35
------ ------ ------ ------- ------- -------
Total from investment operations........ 1.25 0.95 0.70 1.22 1.10 0.90
------ ------ ------ ------- ------- -------
Less dividends and distributions:
Dividends from net investment income... (0.58) (0.63) (0.51) (0.60) (0.66) (0.55)
Distributions from net realized gain on
investments........................... -0- -0- -0- (0.03) (0.04) -0-
------ ------ ------ ------- ------- -------
Total dividends and distributions...... (0.58) (0.63) (0.51) (0.63) (0.70) (0.55)
------ ------ ------ ------- ------- -------
Net asset value, end of period......... $10.78 $10.11 $ 9.79 $ 10.94 $ 10.35 $ 9.95
====== ====== ====== ======= ======= =======
TOTAL INVESTMENT RETURN +............... 12.64% 9.91% 7.42%(1) 12.03% 11.34% 9.59%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)......................... $11,538 $6,420 $3,131 $54,499 $32,123 $15,812
Ratios to average net assets: (3)
Total expenses......................... 0.48% 0.14% 0.15%(2) 0.48% 0.15% 0.15%(2)
Investment income--net................. 5.39% 6.16% 6.04%(2) 5.41% 6.36% 6.43%(2)
Portfolio turnover rate................. 8% 23% 4% 7% 19% 36%
- ----------
<FN>
* January 15, 1991 (commencement of operations) through November 30, 1991.
+ Does not reflect the deduction of sales load.
(1) Not annualized.
(2) Annualized.
(3) If the Fund had borne all its expenses that were assumed or waived by the Investment Manager, the above ratios to average
net assets, after application of the Fund's expense limitation, would have been:
Total expenses........................... 1.04% 1.46% 2.65%(2) 0.69% 0.79% 1.21%(2)
Investment income--net................... 4.83% 4.85% 2.87%(2) 5.20% 5.71% 5.36%(2)
</TABLE>
6
<PAGE>
<TABLE>
===================================================================================================================================
<CAPTION>
New York Series Ohio Series Pennsylvania Series
----------------------------------- ------------------------------------ -----------------------------------
1993 1992 1991* 1993 1992 1991* 1993 1992 1991*
------- ------ ------ ------- ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.34 $10.06 $ 9.60 $ 10.25 $ 9.85 $ 9.60 $ 10.34 $ 9.90 $ 9.60
------- ------ ------ ------- ------- ------ ------- ------- -------
0.62 0.68 0.54 0.60 0.66 0.53 0.61 0.66 0.53
0.69 0.34 0.46 0.72 0.41 0.25 0.67 0.44 0.30
------- ------ ------ ------- ------- ------ ------- ------- -------
1.31 1.02 1.00 1.32 1.07 0.78 1.28 1.10 0.83
------- ------ ------ ------- ------- ------ ------- ------- -------
(0.62) (0.68) (0.54) (0.60) (0.66) (0.53) (0.61) (0.66) (0.53)
-0- (0.06) -0- -0- (0.01) -0- -0- -0- -0-
------- ------ ------ ------- ------- ------ ------- ------- -------
(0.62) (0.74) (0.54) (0.60) (0.67) (0.53) (0.61) (0.66) (0.53)
------- ------ ------ ------- ------- ------ ------- ------- -------
$ 11.03 $10.34 $10.06 $ 10.97 $ 10.25 $ 9.85 $ 11.01 $ 10.34 $ 9.90
======= ====== ====== ======= ======= ====== ======= ======= =======
12.91% 10.35% 10.73%(1) 13.19% 11.12% 8.35%(1) 12.64% 11.47% 8.77%(1)
$15,955 $9,604 $3,976 $24,849 $13,686 $6,267 $53,378 $31,509 $12,147
0.48% 0.15% 0.15%(2) 0.48% 0.15% 0.15%(2) 0.48% 0.15% 0.15%(2)
5.61% 6.45% 6.44%(2) 5.45% 6.41% 6.38%(2) 5.54% 6.31% 6.46%(2)
11% 21% 51% 20% 23% 22% 5% 3% 12%
0.88% 1.23% 2.22%(2) 0.78% 1.01% 2.04%(2) 0.68% 0.81% 1.54%(2)
5.21% 5.37% 4.37%(2) 5.14% 5.56% 4.48%(2) 5.33% 5.65% 5.07%(2)
7
</TABLE>
<PAGE>
THE FUND AND ITS MANAGEMENT
===============================================================================
Dean Witter Multi-State Municipal Series Trust (the "Fund") is an open-end,
non-diversified management investment company consisting of ten separate
series: the Arizona Series, the California Series, the Florida Series, the
Massachusetts Series, the Michigan Series, the Minnesota Series, the New Jersey
Series, the New York Series, the Ohio Series and the Pennsylvania Series. The
Fund is a trust of the type commonly known as a "Massachusetts business trust"
and was organized under the laws of Massachusetts on October 29, 1990.
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 seventy-nine investment companies, twenty-seven of
which are listed on the New York Stock Exchange, with combined assets of
approximately $69.2 at December 31, 1993. The Investment Manager also manages
and advises portfolios of pension plans, other institutions and individuals
which aggregated approximately $2.0 billion at such date.
The Fund has retained the Investment Manager to provide administrative
services, manage its business affairs and manage the investment of the Fund's
assets, including the placing of orders for the purchase and sale of portfolio
securities. InterCapital has retained Dean Witter Services Company Inc. to
perform the aforementioned administrative services for the Fund. The Fund's
Trustees review the various services provided by the Investment Manager to
ensure that the Fund's general investment policies and programs are being
properly carried out and that administrative services are being provided to the
Fund in a satisfactory manner.
As full compensation for the services and facilities furnished to the Fund
and for expenses of the Fund assumed by the Investment Manager, each Series of
the Fund pays the Investment Manager monthly compensation calculated daily by
applying the annual rate of 0.35% to the net assets of each Series. The
Investment Manager assumed all expenses (except for the 12b-1 and brokerage
fees) and waived the management fees with respect to each Series of the Fund
for the period November 30, 1992 to January 1, 1993; the Investment Manager
continued to waive management fees and assume expenses with respect to each
Series of the Fund to the extent they exceeded 0.50% of the daily net assets
from January 1, 1993 to January 1, 1994. For the fiscal year ended November 30,
1993, the Arizona Series, California Series, Florida Series, Massachusetts
Series, Michigan Series, Minnesota Series, New Jersey Series, New York Series,
Ohio Series and Pennsylvania Series accrued total compensation to the
Investment Manager of 0.18%, 0.23%, 0.20%, 0.01%, 0.04%, 0.0%, 0.15%, 0.20%,
0.06% and 0.16% respectively of average daily net assets. The total expenses of
each respective Series amounted to 0.47% of the average daily net assets of
each Series (0.48% for the Minnesota Series).
The Fund's expenses include: the fee of the Investment Manager; the fee
pursuant to the Plan of Distribution (see "Purchase of Fund Shares"); taxes;
certain legal, transfer agent, custodian and auditing fees; and printing and
other expenses relating to the Fund's operations which are not expressly
assumed by the Investment Manager under its Management Agreement with the Fund.
The Investment Manager has undertaken to waive management fees and assume any
expenses exceeding 0.50% of the daily net assets, with respect to the
Massachusetts Series, Michigan Series, Minnesota Series, New York Series and
Ohio Series, until June 30, 1994.
INVESTMENT OBJECTIVE AND POLICIES
===============================================================================
The investment objective of the State Series is to provide a high level of
current income exempt from both federal and the designated State income taxes
consistent with preservation of capital. It is a fundamental policy that under
normal conditions each Series will invest at least 80% of its total assets in
securities, the interest on which is exempt from federal income taxes and the
income taxes of the designated State. This policy and the investment objective
may not be changed with respect to any Series without the approval of the
holders of a majority of the shares of that Series. There is no assurance that
the investment objective of any Series will be achieved.
Each Series seeks to achieve its investment objective by investing
principally in tax-exempt, investment grade securities of municipal issuers in
that designated State as well as any debt obligations (such as debt obligations
of governmental entities and territories such as Puerto Rico, Guam and the
Virgin Islands) that generate interest income which is exempt from federal
income taxes and the income taxes of the
8
<PAGE>
designated State. Tax-exempt securities primarily consist of Municipal Bonds,
Municipal Notes and Municipal Commercial Paper. Each Series may only invest in
(a) Municipal Bonds which are rated at the time of purchase within the four
highest grades by either Moody's Investors Service Inc. ("Moody's") or Standard
& Poor's Corporation ("S&P"); (b) Municipal Notes which at the time of purchase
are rated in the two highest grades by either Moody's or S&P, or, if not rated,
have outstanding one or more issues of Municipal Bonds rated as set forth in
clause (a) above; (c) Municipal Commercial Paper which at the time of purchase
is rated P-1 by Moody's or A-1 by S&P; and (d) unrated securities which at the
time of purchase are judged by the Investment Manager to be of comparable
quality to the securities described in this paragraph. A description of the
ratings referred to above is contained in the Appendix to the Statement of
Additional Information. Certain of the tax-exempt securities in which each
Series may invest without limit may subject certain investors to the federal
alternative minimum tax or any applicable state alternative minimum tax and,
therefore, a substantial portion of the income produced by each Series may be
taxable to such investors under any federal or any applicable state alternative
minimum tax. The State Series, therefore, may not be a suitable investment for
investors who are subject to the alternative minimum tax. The suitability of
the State Series for these investors will depend upon a comparison of the
after-tax yield likely to be provided from each designated Series to comparable
tax-exempt investments not subject to such tax and also to comparable fully
taxable investments in light of each investor's tax position. See "Dividends,
Distributions and Taxes."
Up to 20% of the total assets of each Series may be invested in taxable money
market instruments, tax-exempt securities of other states and municipalities
and options and futures. With respect to tax-exempt securities of other states,
only investment grade securities which satisfy the standards enumerated above
for Municipal Bonds, Notes and Paper, will be purchased. (This investment
percentage is subject to applicable state laws and may be limited further by
specific requirements of certain states. It is the intention of each Series to
meet the applicable requirements of its respective State. See "Dividends,
Distributions and Taxes--State Taxation"). However, each Series may invest more
than 20% of its total assets in taxable money market instruments and the tax-
exempt securities of other states and municipalities in order to maintain a
temporary "defensive" position, when, in the opinion of the Investment Manager,
prevailing market or financial conditions (including unavailability of
securities of requisite quality) so warrant. (The types of investments in which
each Series may invest when maintaining a temporary "defensive" position may be
limited by applicable State requirements). With respect to the purchase of tax-
exempt securities of other states for defensive purposes, only the highest
grade Municipal Bonds, Notes and Paper, will be purchased. The types of taxable
money market instruments in which the State Series may invest are limited to
the following short-term fixed income securities (maturing in one year or less
from the time of purchase): (i) obligations of the United States Government,
its agencies, instrumentalities or authorities; (ii) commercial paper rated P-1
by Moody's or A-1 by S&P; (iii) certificates of deposit of domestic banks with
assets of $1 billion or more; and (iv) repurchase agreements with respect to
any of the securities in which each Series may invest.
Municipal Bonds and Municipal Notes are debt obligations of a state, and its
agencies and municipalities which generally have maturities, at the time of
their issuance, of either one year or more (Bonds) or from six months to three
years (Notes). Municipal Commercial Paper 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 Bond or Municipal Note which
depends directly or indirectly on the credit of the Federal Government, its
agencies or instrumentalities shall be considered to have a Moody's rating of
Aaa. An obligation shall be considered a Municipal Bond, Municipal Note or
Municipal Commercial Paper only if, in the opinion of bond counsel to the
issuer at the time of issuance, the interest payable therefrom is exempt from
both regular federal income tax and the regular personal income tax of a
designated State.
The foregoing percentage and rating limitations apply at the time of
acquisition of a security based on the last previous determination of the net
asset value of each respective Series. Any subsequent change in any rating by a
rating service or change in percentages resulting from market fluctuations or
other changes in total assets of a Series will not require elimination of any
security from the portfolio of such Series. Therefore, each Series may hold
securities which have been downgraded to ratings of Ba or BB or lower by
Moody's or S&P. However such investments may not exceed 5% of the total assets
of any Series. Any investments which exceed this limitation will be eliminated
from the portfolio within a reasonable period of time (such time as the
Investment Manager determines that it is practicable to sell the investment
without undue market or tax consequences to a Series). Municipal Obligations
rated below investment grade by Moody's or S&P are considered to be speculative
investments, some of which may not be currently paying any interest and may
have extremely poor prospects of ever attaining any real investment standing.
Investments in Municipal Bonds rated either BBB by S&P or Baa by Moody's
(investment grade bonds--the lowest rated
9
<PAGE>
permissible investments by the Fund) have speculative characteristics and,
therefore, changes in economic conditions or other circumstances are more
likely to weaken their capacity to make principal and interest payments than
would be the case with investments in securities with higher credit ratings.
The ratings assigned by Moody's and S&P 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.
There are no restrictions on the maturities of most of the tax-exempt
securities that may be purchased by each Series and therefore the average
portfolio maturity of each Series is not subject to any limit. As a general
matter, the longer the average portfolio maturity, the greater will be the
impact of fluctuations in interest rates on the values of the portfolio
securities of each Series and the respective net asset value per share of that
Series.
The Fund is classified as a non-diversified investment company under the
Investment Company Act of 1940 ("the Act") and as such is not limited by the
Act in the proportion of its assets that it may invest in the obligations of a
single issuer. However, each Series of the Fund intends to conduct its
operations so as to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code (the "Code"). See "Dividends,
Distributions and Taxes." In order to qualify, among other requirements, each
Series will limit its investments so that at the close of each quarter of the
taxable year, (i) not more than 25% of the market value of the total assets of
such Series will be invested in the securities of a single issuer, within a
single State, and (ii) with respect to 50% of the market value of its total
assets not more than 5% of the value of its total assets will be invested in
the securities of a single issuer within a single State, and each Series will
not own more than 10% of the outstanding voting securities of a single issuer.
(Since the types of securities ordinarily purchased by each Series are
nonvoting securities, there is generally no limit on the percentage of an
issuer's obligations that a Series may own). To the extent that these
requirements permit a relatively high percentage of each Series' assets to be
invested in the obligations of a limited number of issuers within a single
State, the value of the portfolio securities of each Series will be more
susceptible to any single economic, political or regulatory occurrence than the
portfolio securities of a diversified investment company. Additionally, each
Series' net asset value will fluctuate to a greater extent than that of a
diversified investment company as a result of changes in the financial
condition or in the market's assessment of the various issuers. The tax
limitations described in this paragraph are not fundamental policies and may be
revised to the extent applicable Federal income tax requirements are revised.
The Fund, on behalf of each Series, may invest more than 25% of the total
assets of each Series in Municipal Obligations known as private activity bonds.
Such Obligations include health facility obligations, housing obligations,
industrial revenue obligations (including pollution control obligations),
electric utility obligations and water and sewer obligations, provided that the
percentage of the total assets of any Series in private activity bonds in any
one category does not exceed 25% of the total assets of that Series. The
ability of issuers of such obligations to make timely payments of principal and
interest will be affected by events and conditions affecting these projects
such as cyclicality of revenues and earnings, regulatory and environmental
restrictions and economic downturns, 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 two principal classifications of 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 from the revenues derived from a particular
facility or class of facilities or, insome 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.
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 agencies or authorities
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
10
<PAGE>
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.
In addition, lease obligations represent a relatively new type of financing
that has not yet developed the depth of marketability associated with more
conventional municipal obligations, and, as a result, certain of such lease
obligations may be considered illiquid securities. To determine whether or not
the Fund will consider such securities to be illiquid (the Fund may not invest
more than ten percent of its net assets in illiquid securities), the Trustees
of the Fund have established guidelines to be utilized by the Fund in
determining the liquidity of a lease obligation. The factors to be considered
in making the determination include: 1) the frequency of trades and quoted
prices for the obligation; 2) the number of dealers willing to purchase or sell
the security and the number of other potential purchasers; 3) the willingness
of dealers to undertake to make a market in the security; and 4) the nature of
the marketplace trades, including, the time needed to dispose of the security,
the method of soliciting offers, and the mechanics of the transfer.
Since each Series concentrates its investments in Municipal Obligations of a
particular State and its authorities and municipalities, each Series is
affected by any political, economic or regulatory developments affecting the
ability of issuers in that particular State to make timely payments of interest
and principal. For a more detailed discussion of the risks associated with
investments in a particular State, see the Appendix at the back of this
Prospectus.
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"
obligations. The interest rate payable on a variable rate obligation is
adjusted either at predesigned periodic intervals or whenever there is a change
in the market rate of interest on which the interest rate payable is based.
When-Issued and Delayed Delivery Securities. Each Series may purchase tax-
exempt securities on a when-issued or delayed delivery basis; i.e., 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 transaction. These securities are subject
to market fluctuation and no interest accrues to the purchaser prior to
settlement. At the time any Series makes the commitment to purchase such
securities, it will record the transaction and thereafter reflect the value
each day of such security in determining its net asset value.
HEDGING ACTIVITIES
Subject to applicable state law, the Fund, on behalf of each Series except
the New Jersey Series, may enter into financial futures contracts, options on
such futures and municipal bond index futures contracts for hedging purposes.
Financial Futures Contracts and Options on Futures. With respect to each
applicable Series, the Fund may invest in financial futures contracts and
related options thereon. Each Series may sell a financial futures contract or
purchase a put option on such futures contract, if the Investment Manager
anticipates interest rates to rise, as a hedge against a decrease in the value
of a particular Series' portfolio securities. If the Investment Manager
anticipates that interest rates will decline, a Series may purchase a financial
futures contract or a call option thereon to protect against an increase in the
price of the securities that Series intends to purchase. These futures
contracts and related options thereon will be used only as a hedge against
anticipated interest rate changes.
Unlike a financial futures contract, which requires the parties to buy and
sell a security on a set date, an option on such a futures contract entitles
its holder to decide on or before a future date whether to enter into such a
contract (a long position in the case of a call option and a short position in
the case of a put option). If the holder decides not to enter into the
contract, the premium paid for the option on the contract is lost. Since the
value of the option is fixed at the point of sale, there are no daily payments
of cash to reflect the change in the value of the underlying contract as there
is by a purchaser or seller of a futures contract. The value of the option does
change and is reflected in the net asset value of the Series for which it was
purchased.
A risk in employing futures contracts to protect against the price volatility
of portfolio securities is that the prices of securities subject to such
futures contracts may correlate imperfectly with the behavior of the cash
prices of each Series' portfolio securities. The risk of imperfect correlation
will be increased by the fact that the financial futures contracts in which a
Series may invest are on taxable securities rather than tax-exempt securities,
and there is no guarantee that the prices of taxable securities will move in a
similar manner to the prices of tax-exempt securities.
11
<PAGE>
Another risk is that the Investment Manager could be incorrect in its
expectations as to the direction or extent of various interest rate movements
or the time span within which the movements take place. For example, if the
Fund, on behalf of any Series, sold financial futures contracts for the sale of
securities in anticipation of an increase in interest rates, and then interest
rates went down instead, causing bond prices to rise, that Series would lose
money on the sale.
In addition to the risks that apply to all options transactions (see the
Statement of Additional Information for a description of the characteristics
of, and the risks of investing in, options on debt securities), there are
several special risks relating to options on futures. In particular, the
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid secondary market. It is not certain
that this market will develop or be maintained.
Municipal Bond Index Futures. Each applicable Series may utilize municipal
bond index futures contracts for hedging purposes. The strategies in employing
such contracts will be similar to that discussed above with respect to
financial futures and options thereon. A municipal bond index is a method of
reflecting in a single number the market value of many different municipal
bonds and is designed to be representative of the municipal bond market
generally. The index fluctuates in response to changes in the market values of
the bonds included within the index. Unlike futures contracts on particular
financial instruments, transactions in futures on a municipal bond index will
be settled in cash, if held until the close of trading in the contract.
However, like any other futures contract, a position in the contract may be
closed out by a purchase or sale of an offsetting contract for the same
delivery month prior to expiration of the contract.
No Series may enter into futures contracts or related options thereon if
immediately thereafter the amount committed to margin plus the amount paid
foroption premiums exceeds 5% of the value of that Series' total assets. The
Fund, on behalf of any Series, may not purchase or sell futures contracts or
related options if immediately thereafter more than one-third of the net assets
of that Series would be hedged.
Options. The Fund on behalf of any applicable Series, may purchase or sell
(write) options on debt securities as a means of achieving additional return or
hedging the value of a Series of the Fund's portfolio. The Fund, on behalf of a
Series, would only buy options listed on national securities exchanges. The
Fund, will not purchase options on behalf of any Series if, as a result, the
aggregate cost of all outstanding options exceeds 10% of the Fund's total
assets.
PORTFOLIO MANAGEMENT
The portfolio of each Series is managed by the Investment Manager with a view
to achieving its investment objective. The Fund is managed within
InterCapital's Municipal Fixed Income Group, which manages 36 tax-exempt
municipal funds and fund portfolios, with approximately $12 billion in assets
as of December 31, 1993. James F. Willison, Senior Vice President of
InterCapital and Manager of InterCapital's Municipal Fixed Income Group, has
been the primary portfolio manager of the Fund since its inception and has been
a portfolio manager at InterCapital for over five years. Securities are
purchased and sold principally in response to the Investment Man- ager's
current evaluation of an issuer's ability to meet its debt obligations in the
future, and the Investment Manager's current assessment of future changes in
the levels of interest rates on tax-exempt securities of varying maturities.
There are a number of state tax restrictions which limit the ability of the
Investment Manager to trade the portfolio securities of a particular Series and
which affect the composition of the portfolio of such Series. It is the policy
of the Investment Manager to adhere to any restrictions affecting a particular
Series. See "Dividends, Distributions and Taxes--State Taxation."
Securities purchased by each Series are, generally, sold by dealers acting as
principal for their own accounts. (Pursuant to an order issued by the
Securities and Exchange Commission, the Fund may effect principal transactions
in certain taxable money market instruments with Dean Witter Reynolds Inc.
("DWR"), a broker-dealer affiliate of the Investment Manager. In addition, the
Fund may incur brokerage commissions on transactions conducted through DWR.
Brokerage commissions are not normally charged on purchases and sales of
municipal obligations, but such transactions may involve transaction costs in
the form of spreads between bid and asked prices. It is anticipated that the
annual portfolio turnover rate of each Series will not exceed 100%.
INVESTMENT RESTRICTIONS
===============================================================================
The investment restrictions listed below are among the restrictions which
have been adopted by the Fund, on behalf of each Series, as fundamental
policies. Under the Act, a fundamental policy may not be changed without the
vote of a
12
<PAGE>
majority of the outstanding voting securities of each Series, as defined in the
Act.
For purposes of the investment policies and restrictions of the Fund: (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; (b) a
"taxable security" is any security the interest on which is subject to regular
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 assets
does not require elimination of any security from the portfolio.
Each Series may not:
1. Make loans of money or securities, except: (a) by the purchase of debt
obligations in which each Series may invest consistent with its investment
objective and policies; (b) by investment in repurchase agreements; and (c) by
lending its portfolio securities.
2. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry. This restriction does not apply to obligations
issued or guaranteed by the United States Government, its agencies or
instrumentalities or to municipal obligations, including those issued by the
designated State of each Series or its political subdivisions.
PURCHASE OF FUND SHARES
===============================================================================
The Fund offers its shares for sale to the public on a continuous basis.
Pursuant to a Distribution Agreement between the Fund and Dean Witter
Distributors Inc. (the "Distributor") an affiliate of the Investment Manager,
shares of each Series of the Fund are distributed by the Distributor and
offered by DWR and other dealers who have entered into selected dealer
agreements with the Distributor ("Selected Broker-Dealers"). The principal
executive office of the Distributor is located at Two World Trade Center, New
York, New York 10048.
The minimum initial purchase is $1,000. Minimum subsequent purchases of $100
or more may be made by sending a check, payable to Dean Witter Multi-State
Municipal Series Trust, (name of Series), directly to Dean Witter Trust Company
(the "Transfer Agent") at P.O. Box 1040, Jersey City, NJ 07303 or by contacting
an account executive of DWR or other Selected Broker-Dealer.
In the case of investments pursuant to systematic payroll deduction plans,
the Fund, in its discretion, may accept investments without regard to any
minimum amounts which would otherwise be required if the Fund has reason to
believe that additional investments will increase the investment in all
accounts under such plans to at least $1,000. Certificates for shares of each
Series purchased will not be issued unless a request is made by the shareholder
in writing to the Transfer Agent. The offering price for each Series will be
the net asset value per share of that Series next determined following receipt
of an order (see "Determination of Net Asset Value" below), plus a sales charge
(expressed as a percentage of the offering price) on a single transaction as
shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE
------------
PERCENTAGE APPROXIMATE
OF PERCENTAGE OF
AMOUNT OF PUBLIC AMOUNT
SINGLE TRANSACTION OFFERING PRICE INVESTED
------------------ -------------- -------------
<S> <C> <C>
Less than $25,000................... 4.00% 4.17%
$25,000 but less than $50,000....... 3.50 3.63
$50,000 but less than $100,000...... 3.25 3.36
$100,000 but less than $250,000..... 2.75 2.83
$250,000 but less than $500,000..... 2.50 2.56
$500,000 but less than $1,000,000... 1.75 1.78
$1,000,000 and over................. 0.50 0.50
</TABLE>
The above schedule of sales charges is applicable to purchases in a single
transaction by, among others: (a) an individual; (b) an individual, his or her
spouse and their children under the age of 21 purchasing shares for his or her
own accounts; (c) a trustee or other fiduciary purchasing shares for a single
trust estate or a single fiduciary account; (d) a pension, profit-sharing or
other employee benefit plan qualified or non-qualified under Section 401 of the
Internal Revenue Code, as amended (the "Code"); (e) tax-exempt organizations
enumerated in Section 501(c)(3) or (13) of the Code; (f) employee benefit plans
qualified under Section 401 of the Code of a single employer or of employers
who are "affiliated persons" of each other within the meaning of Section
2(a)(3)(c) of the Act; or (g) any other organized group of persons, whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. Shares of each
Series of the Fund may be sold at their net asset value per share, without the
imposition of a sales charge, to employee benefit plans established by DWR and
SPS Transaction Services, Inc. (an affiliate of DWR) for their
13
<PAGE>
employees as qualified under Section 401 (K) of the Internal Revenue Code.
Shares of each Series of the Fund are sold through the Distributor on a
normal five business day settlement basis; that is, payment is due on the fifth
business day (settlement date) after the order is placed with the Distributor.
Shares of each Series purchased through the Distributor are entitled to
dividends beginning on the next business day following settlement date. Since
DWR and other Selected Broker-Dealers forward investors' funds on settlement
date, they will benefit from the temporary use of the funds if paymentis made
prior thereto. Shares purchased through the Transfer Agent are entitled to
dividends beginning on the next business day following receipt of an order. As
noted above, orders placed directly with the Transfer Agent must be accompanied
by payment. Investors will be entitled to receive capital gains distributions
if their order is received by close of business on the day prior to the record
date for such distributions. The Fund and/or the Distributor reserve the right
to reject any purchase order.
REDUCED SALES CHARGES
Combined Purchase Privilege. Investors may have the benefit of reduced sales
charges in accordance with the above schedule by combining purchases of shares
of a Series of the Fund in single transactions with the purchase of shares of
another Series of the Fund. The sales charge payable on the purchase of shares
of a Series of the Fund and any other Series will be at the respective rate
applicable to the total amount of the combined concurrent purchases.
Right of Accumulation. The above persons and entities may also benefit from
a reduction of the sales charges in accordance with the above schedule if the
cumulative net asset value of shares of a Series purchased in a single
transaction, together with shares previously purchased (including shares of
another Series) which are held at the time of such transaction, amounts to
$25,000 or more.
The Distributor must be notified by the shareholder at the time a purchase
order is placed that the purchase qualifies for the reduced charge under the
Right of Accumulation. Similar notification must be made in writing by the
shareholder when such an order is placed by mail. The reduced sales charge will
not be granted if: (a) such notification is not furnished at the time of the
order; or (b) a review of the records of the Distributor or the Transfer Agent
fails to confirm the investor's represented holdings.
Letter of Intent. The foregoing schedule of reduced sales charges will also
be available to investors who enter into a written Letter of Intent providing
for the purchase, within a thirteen-month period, of shares of any Series of
the Fund from the Distributor. The cost of shares of any Series of the Fund
which were previously purchased at a price including a front-end sales charge
during the 90-day period prior to the date of receipt by the Distributor of the
Letter of Intent, which are still owned by the shareholder, may also be
included in determining the applicable reduction.
For further information concerning purchases of the Fund's shares, contact
the Distributor or consult the Statement of Additional Information.
PLAN OF DISTRIBUTION
The Fund has entered into a Plan of Distribution pursuant to Rule 12b-1 under
the Act, whereby the expenses of certain activities and services by DWR and
others who engage in or support distributions of Fund Shares or who service
shareholder accounts, including overhead and telephone expenses incurred in
connection with the distribution of the Fund's shares, are reimbursed.
Reimbursements for these expenses will be made in monthly payments by the Fund
to the Distributor, which will in no event exceed an amount equal to a payment
at the annual rate of 0.15 of 1% of the average daily net assets of each Series
of the Fund. 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. No interest or other financing charges will be incurred
on any distribution expense incurred by the Distributor under the Plan or on
any unreimbursed expenses due to the Distributor pursuant to the Plan. The fee
payable pursuant to the Plan, equal to 0.15% of the Fund's average daily net
assets, is characterized as a service fee within the meaning of NASD
guidelines. The Arizona Series, California Series, Florida Series,
Massachusetts Series, Michigan Series, Minnesota Series, New Jersey Series, New
York Series, Ohio Series and Pennsylvania Series accrued a total of $70,686,
$174,478, $105,940, $21,891, $27,507, $12,828, $67,391, $19,811, $28,529 and
$64,199, respectively under the Plan for the fiscal year ended November 30,
1993. This accrual is an amount equal to 0.15% of the daily net assets of each
respective Series of the Fund (0.14% of the daily net assets of the Arizona
Series and the Minnesota Series).
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Series of the Fund is determined
once daily at 4:00 p.m., New York time on each day that the New York Stock
Exchange is open by taking the value of all assets of each Series of the Fund,
subtracting all of their respective liabilities, dividing by the number of
shares of the respective Series outstanding and adjusting to the nearest cent.
The net asset value per share of each Series will not be
14
<PAGE>
determined on Good Friday and on such other federal and non-federal holidays as
are observed by the New York Stock Exchange.
Portfolio securities (other than short-term taxable debt securities, futures
and options) are valued for the Fund by an outside independent pricing service
approved by the Fund's Trustees. The service utilizes a computerized grid
matrix of tax-exempt securities and evaluations by its staff in determining
what it believes is the fair value of the Fund's portfolio securities. The
Board believes that timely and reliable market quotations are generally not
readily available to the Fund for purposes of valuing tax-exempt securities and
that the valuations supplied by the pricing service are more likely to
approximate the fair value of such securities.
Short-term taxable debt securities with remaining maturities of sixty days or
less at the time of purchase are valued at amortized cost, unless the Trustees
determine such does not reflect the securities' fair value, in which case these
securities will be valued at their fair value as determined by the Trustees.
SHAREHOLDER SERVICES
===============================================================================
Automatic Investment of Dividends and Distributions. All income dividends
and capital gains distributions are automatically paid in full and fractional
shares of each respective Series of the Fund, (or if specified by the
Shareholder, any other Series of the Fund or any other open-end investment
company for which InterCapital serves as Investment Manager (collectively with
the Fund, the "Dean Witter Funds")), unless the shareholder requests they be
paid in cash. Each purchase of shares of each Series of the Fund is made upon
the condition that the Transfer Agent is thereby automatically appointed as
agent of the investor to receive all dividends and capital gains distributions
on shares owned by the investor. Such dividends and distributions will be paid
in shares of each respective Series of the Fund at net asset value per share
(or in cash if the shareholder so requests) on the monthly payment date, which
will be no later than the last business day of the month for which the dividend
or distribution is payable. Processing of dividend checks begins immediately
following the monthly payment date. Shareholders who have requested to receive
dividends in cash will normally receive their monthly dividend check during the
first ten days of the following month.
EasyInvest(TM) . Shareholders may subscribe to EasyInvest, an automatic
purchase plan which provides for any amount from $100 to $5,000 to be
transferred automatically from a checking or savings account, on a semi-
monthly, monthly or quarterly basis, to the Transfer Agent for investment in
shares of the Fund.
Systematic Withdrawal Plan. A withdrawal plan is available for shareholders
who own or purchase shares of any Series of the Fund having a minimum value of
$10,000 based upon the then current offering price. The plan provides for
monthly or quarterly (March, June, September and December) checks in any dollar
amount, not less than $25, or in any whole percentage of the account balance,
on an annualized basis.
Shareholders should contact their DWR or other Selected Broker-Dealer account
executive or the Transfer Agent for further information about any of the above
services.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders an "Exchange Privilege" allowing
the exchange of shares of a Series of the Fund for shares of any other Series
of the Fund, shares of other Dean Witter Funds sold with a front-end (at time
of purchase) sales charge ("FESC Funds"), for shares of Dean Witter Funds sold
with a contingent deferred sales charge ("CDSC Funds"), and for shares of Dean
Witter Short-Term U.S. Treasury Trust, Dean Witter Limited Term Municipal
Trust, Dean Witter Short-Term Bond Fund and five Dean Witter Funds which are
money market funds (the foregoing eight non-FESC and non-CDSC funds are
hereinafter referred to as the "Exchange Funds"). Exchanges may be made after
the shares of a Series of the Fund acquired by purchase (not by exchange or
dividend reinvestment) have been held for thirty days. There is no waiting
period for exchanges of shares acquired by exchange or dividend reinvestment.
However, shares of CDSC funds, including shares acquired in exchange for shares
of FESC funds, may not be exchanged for shares of FESC funds. Thus,
shareholders who exchange their Fund shares for shares of CDSC funds may
subsequently exchange those shares for shares of other CDSC funds or Exchange
Funds but may not reacquire FESC fund shares by exchange.
An exchange to another FESC fund or to a CDSC fund or to an Exchange Fund is
on the basis of the next calculated net asset value per share of each fund
after the exchange order is received. When exchanging into a money market fund
from a Series of the Fund, shares of the Series are redeemed out of the Fund at
their next calculated net asset value and the proceeds of the redemption are
used to purchase shares of the money market fund at their net asset value
determined the following business day. Subsequent exchanges between any of the
Exchange Funds, FESC and CDSC funds can be effected
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on the same basis (except that CDSC fund shares may not be exchanged for shares
of FESC funds). 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 contingent
deferred sales charge upon their redemption.
Purchases and exchanges should be made for investment purposes only. A
pattern of frequent exchanges may be deemed by the Investment Manager to be
abusive and contrary to the best interests of a Series' 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
a Series and its other shareholders, investors should be aware that the Fund
and each of the other Dean Witter Funds may in their discretion limit or
otherwise restrict the number of times this Exchange Privilege may be exercised
by any investor. Any such restriction will be made by the Fund on a prospective
basis only, upon notice to the shareholder not later than ten days following
such shareholder's most recent exchange.
Also, the Exchange Privilege may be terminated or revised at any time by the
Fund and/or any of such Dean Witter Funds for which shares of a Series of the
Fund have been exchanged, upon such notice as may be required by applicable
regulatory agencies. Shareholders maintaining margin accounts with DWR or
another Selected Broker-Dealer are referred to their account executive
regarding restrictions on exchange of shares of any Series of the Fund pledged
in their margin account.
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 a Series of the Fund for shares of any other
Series of the Fund or for Shares of any of the Dean Witter Funds (for which the
Exchange Privilege is available) pursuant to this Exchange Privilege by
contacting their account executive (no Exchange Privilege Authorization Form is
required). Other shareholders (and those shareholders who are clients of DWR or
another Selected Broker-Dealer but who wish to make exchanges directly by
writing or telephoning the Transfer Agent) must complete and for- ward to the
Transfer Agent an Exchange Privilege Authorization Form, copies of which may be
obtained from the Transfer Agent, to initiate an exchange. If the Authorization
Form is used, exchanges may be made in writing or by contacting the Transfer
Agent at (800) 526-3143 (toll free). The Fund will employ reasonable procedures
to confirm that exchange instructions communicated over the telephone are
genuine. Such procedures may include requiring various forms of personal
identification such as name, mailing address, social security or other tax
identification number and DWR or other Selected 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 case
with the Dean Witter Funds in the past.
For further information regarding the Exchange Privilege, shareholders should
contact their DWR or other Selected Broker-Dealer account executive or the
Transfer Agent.
REDEMPTIONS AND REPURCHASES
===============================================================================
Redemption. Shares of each Series of the Fund can be redeemed for cash at
any time at their respective current net asset value per share (without any
redemption or other charge). If shares are held in a shareholder's account
without a share certificate, a written request for redemption is required. If
certificates are held by the shareholder(s), the shares may be redeemed by
surrendering the certificate(s) with a written request for redemption along
with any additional information required by the Transfer Agent.
Repurchase. DWR and other Selected Broker-Dealers are authorized to
repurchase shares represented by a share certificate which is delivered to any
of their offices. Shares held in a shareholder's account without a share
certificate may also be repurchased by DWR and other Selected Broker-Dealers
upon the telephonic request of the shareholder. The repurchase price is the net
asset value next determined (see "Purchase of Fund Shares--Determination of Net
Asset Value") after such repurchase order is received. Repurchase orders
received by DWR and other Selected Broker-Dealers by
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4:00 p.m., New York time, on any business day will be priced at the net asset
value per share that is based on that day's close. Selected Broker-Dealers may
charge for their services in connection with the repurchase, but the Fund, DWR
and the Distributor do not charge a fee. Payment for shares repurchased may be
made by the Fund to DWR and other Selected Broker-Dealers for the account of
the shareholder. The offer by DWR and other Selected Broker-Dealers to
repurchase shares from dealers or shareholders may be suspended by them at any
time. In that event, shareholders may redeem their shares through the Fund's
Transfer Agent as set forth above under "Redemption."
Payment for Shares Redeemed or Repurchased. Payment for shares presented for
repurchase or redemption will be made by check within seven days after receipt
by the Transfer Agent of the certificate and/or written request in good order.
Such payment may be postponed or the right of redemption suspended at times
when normal trading is not taking place on the New York Stock Exchange. If the
shares to be redeemed have recently been purchased by check, payment of the
redemption proceeds may be delayed for the minimum time needed to verify that
the check used for investment has been honored (not more than fifteen days from
the time of receipt of the check by the Transfer Agent). Shareholders maintain-
ing margin accounts with DWR or another Selected Broker-Dealer are referred to
their account executive regarding restrictions on redemption of shares of the
Fund pledged in the margin account.
Reinstatement Privilege. A shareholder who has had his or her shares
redeemed or repurchased and has not previously exercised this reinstatement
privilege may, within thirty days after the date of the redemption or
repurchase, reinstate any portion or all of the proceeds of such redemption or
repurchase in shares of the Fund at the net asset value (without a sales
charge) next determined after a reinstatement request, together with the
proceeds, is received by the Transfer Agent.
Involuntary Redemption. The Fund reserves the right to redeem, on sixty
days' notice and at net asset value, the shares of any shareholder whose shares
have a value of less than $100 as a result of redemptions or repurchases, or
such lesser amount as may be fixed by the Trustees. However, before the Fund
redeems such shares and sends the proceeds to the shareholder, it will notify
the shareholder that the value of the shares is less than $100 and allow the
shareholder sixty days in which to make an additional investment in an amount
which will increase the value of his or her account to $100 or more before the
redemption is processed.
DIVIDENDS, DISTRIBUTIONS AND TAXES
===============================================================================
Dividends and Distributions. The Fund declares, on behalf of each Series,
dividends from net investment income on each day the New York Stock Exchange is
open for business (see "Purchase of Fund Shares"). Such dividends are payable
monthly. Each Series intends to distribute substantially all of its net
investment income on an annual basis.
Each Series of the Fund will distribute at least once each year all net
short-term capital gains, if there are any, after utilization of any capital
loss carryovers. Each Series may, however, determine either to distrib- ute or
to retain all or part of any net long-term capital gains in any year for
reinvestment. All dividends and capital gains distributions will be paid in
additional Series' shares (without sales charge) and automatically credited to
the shareholder's account without issuance of a share certificate unless the
shareholder requests in writing that all dividends and distributions be paid in
cash. (See "Shareholder Services--Automatic Investment of Dividends and
Distributions.") Taxable capital gains may be generated by transactions in
options and futures contracts engaged in by any Series of the Fund. Any
dividends or distributions declared in the last quarter of any calendar year
which are paid in the following year prior to February 1, will be deemed
received by shareholders of record in the prior quarter in the prior year.
Taxes. Because each Series of the Fund intends to distribute substantially
all of its net investment income and capital gains to shareholders and intends
to otherwise remain qualified as a regulated investment company under
Subchapter M of the Internal Revenue Code as amended (the "Code"), it is not
expected that any Series will be required to pay any federal income tax (if any
Series does retain any net long-term capital gains it will pay federal income
tax thereon, and shareholders will be required to include such undistributed
gains in their taxable income and will be able to claim their share of the tax
paid by that Series as a credit against their individual federal income tax).
The Code may subject interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. This alternative minimum tax may be
incurred due to interest received on "private activity bonds" (in general,
bonds that benefit non-government entities) issued after August 7, 1986 which,
although tax-exempt, are used for purposes other than those generally performed
by governmental units (e.g., bonds used for commercial or housing purposes).
Income received on
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such bonds is classified as a "tax preference item", under the alternative
minimum tax, for both individual and corporate investors. A portion of each
Series' investments may be made in such "private activity bonds," with the
result that a portion of the exempt-interest dividends paid by each Series will
be an item of tax preference to shareholders of that Series subject to the
alternative minimum tax. In addition, certain corporations which are subject to
the alternative minimum tax may have to include a portion of exempt-interest
dividends in calculating their alternative minimum taxable income in situations
where the "adjusted current earnings" of the corporation exceeds its
alternative minimum taxable income.
Under the Revenue Reconciliation Act of 1993, all or a portion of the Fund's
gain from the sale or redemption of tax-exempt obligations purchased at a
market discount after April 30, 1993 will be treated as ordinary income rather
than capital gain. This rule may increase the amount of ordinary income
dividends received by shareholders.
After the end of the calendar year, shareholders will be sent full
information on their dividends and any capital gains distributions including
information indicating the percentage of the dividend distributions for such
fiscal year which constitutes exempt-interest dividends and the percentage, if
any, that is taxable, and the percentage, if any, of the exempt-interest
dividends which constitutes an item of tax preference.
Shareholders who are required to pay taxes on their income will normally be
subject to federal and state income tax on dividends paid from interest income
derived from taxable securities and on distributions of net capital gains they
receive from the Fund. For federal 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 shares of any Series of
the Fund and regardless of whether the distribution is received in additional
shares or in cash. If a shareholder receives a distribution that is taxed as a
long-term capital gain on shares held for six months or less and sells those
shares at a loss, the loss will be treated as a long-term capital loss to the
extent of the capital gains distribution. To avoid being subject to a 31%
federal backup withholding tax on taxable dividends and capital gains
distributions and the proceeds of redemptions and repurchases, shareholders'
taxpayer identification numbers must be furnished and certified as to accuracy.
The foregoing relates primarily to federal 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 state taxes in
states other than the state of each designated Series, and also to local taxes.
Shareholders should consult their tax advisors as to the applicability of the
above to their own tax situation and as to the tax consequences to them of an
investment in any Series of the Fund.
STATE TAXATION. The following general considerations are relevant to
investors in each Series of the Fund indicated below. Shareholders of each
designated Series should consult their tax advisers about other state and local
tax consequences of their investments in such Series.
Arizona. Under a ruling issued by the Arizona Department of Revenue in
1984, distributions from the Arizona Series that are received by shareholders
that are Arizona taxpayers will not be subject to Arizona income tax to the
extent that those distributions are attributable to interest on tax-exempt
obligations of the State of Arizona or interest on obligations of the United
States. Distributions from the Arizona Series attributable to obligations of
the governments of Puerto Rico, the Virgin Islands and Guam should also be
excludible from Arizona income tax. Other distributions from the Arizona
Series, including those related to short-term and long-term capital gains,
generally will be taxable under Arizona law when received by Arizona taxpayers.
Interest on indebtedness incurred (directly or indirectly) by a shareholder to
purchase or carry shares of the Arizona Series should not be deductible for
Arizona income tax purposes to the extent that the Arizona Series holds tax-
exempt obligations of the State of Arizona, obligations of the United States,
and obligations of Puerto Rico, the Virgin Islands and Guam.
The foregoing discussion assumes that in each taxable year the Arizona Series
qualifies and elects to be taxed as a regulated investment company for federal
income tax purposes. In addition, the following discussion assumes that in each
taxable year the Arizona Series qualifies to pay exempt-interest dividends by
complying with the requirement of the Code that at least 50% of its assets at
the close of each quarter of its taxable year is invested in state, municipal
or other obligations, the interest on which is excluded from gross income for
federal income tax purposes pursuant to section 103(a) of the Code.
California. In any year in which the Fund qualifies as a regulated investment
company under the Internal Revenue Code and is exempt from federal income tax,
(i) the California Series will also be exempt from the California corporate
income and franchise taxes to the extent it distributes its income and (ii),
provided 50% or more of the value of the total assets of the California Series
at the close of each quarter of its taxable year consists of obligations the
interest on which (when held by an individual) is exempt from personal income
taxation under California law. The California Series will be qualified under
California law to pay "exempt-interest" dividends which will be exempt from the
California personal income tax.
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<PAGE>
The portion of dividends constituting exempt-interest dividends is that
portion derived from interest on obligations which pay interest excludable from
California personal income under California law. The totalamount of California
exempt-interest dividends paid by the California Series to all of its
shareholders with respect to any taxable year cannot exceed the amount of
interest received by the California Series during such year on such obligations
less any expenses and expenditures (including dividends paid to corporate
shareholders) deemed to have been paid from such interest. Any dividends paid
to corporate shareholders subject to the California franchise or corporate
income tax will be taxed as ordinary dividends to such shareholders.
Individual shareholders of the California Series who reside in California
will not be subject to California personal income tax on distributions received
from the California Series to the extent such distributions are attributable to
interest received by the California Series during its taxable year on
obligations, the interest on which (when held by an individual) is exempt from
taxation under California law.
Because, unlike federal law, California law does not impose personal income
tax on an individual's Social Security benefits, the receipt of California
exempt-interest dividends will have no effect on an individual's California
personal income tax.
Individual shareholders will normally be subject to federal and California
personal income tax on dividends paid from interest income derived from taxable
securities and distributions of net capital gains. In addition, distributions
other than exempt-interest dividends to such shareholders are includable in
income subject to the California alternative minimum tax. 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 shares of the California Series
and regardless of whether the distribution is received in additional shares or
in cash. In addition, unlike federal law, the shareholders of the California
Series will not be subject to tax, or receive a credit for tax paid by the
California Series, on undistributed capital gains, if any.
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 California Series, generally will not be deductible by
the investor for federal or state personal income tax purposes. In addition, as
a result of California's incorporation of certain provisions of the Code, a
loss realized by a shareholder upon the sale of shares held for six months or
less may be disallowed to the extent of any exempt-interest dividends received
with respect to such shares. Moreover, any loss realized upon the redemption of
shares within six months from the date of purchase of such shares and following
receipt of a long-term capital gains distribution will be treated as long-term
capital loss to the extent of such long-term capital gains distribution.
Finally, any loss realized upon the redemption of shares within 30 days before
or after the acquisition of other shares of the Trust may be disallowed under
the "wash sale" rules.
Distributions from investment income and long-term and short-term capital
gains will not be excludable from taxable income in determining the California
corporate franchise tax for corporate shareholders. Such distributions may also
be includable in income subject to the alternative minimum tax. In addition,
distributions from investment income and long-term and short-term capital gains
may be subject to state taxes in states other than California, and to local
taxes.
Florida. Florida does not presently impose an income tax on individuals and
thus individual shareholders of the Florida Series will not be subject to any
Florida state income tax on distributions received from the Florida Series.
Florida does impose a tax on intangible personal property, but shareholders of
the Florida Series will not be required to include the value of their shares in
their taxable intangible personal property if, as is anticipated, all of the
Florida Series' investments on the annual assessment date are Florida tax-
exempt securities.
Massachusetts. Under existing Massachusetts law, provided the Massachusetts
Series qualifies as a "regulated investment company" under the Code, the
Massachusetts Series will not be subject to Massachusetts income or excise
taxation. Shareholders of the Massachusetts Series that are individuals,
estates or trusts and are subject to the Massachusetts personal income tax will
not be subject to such tax on distributions of the Massachusetts Series that
qualify as "exempt-interest dividends" under Section 852(b)(5) ofthe Code and
are attributable to interest received by the Massachusetts Series on
obligations issued by The Commonwealth of Massachusetts and its municipalities,
political subdivisions and governmental agencies and instrumentalities, or by
Puerto Rico, the U.S. Virgin Islands or Guam, which pay interest excludable
from gross income under the Code and exempt from Massachusetts personal income
taxation. Other distributions to such shareholders will generally be included
in income subject to the Massachusetts personal income tax, except for (1)
distributions, if any, attributable to interest received by the Massachusetts
Series on direct obligations of the United States and (2) distributions, if
any, attributable to gain realized by the Massachusetts Series on the sale of
certain Massachusetts obligations issued pursuant to Massachusetts statutes
that specifically exempt such gain from Massachusetts taxation. Dividends from
the Massachusetts Series that qualify as capital gain dividends under Section
852(b)(3)(C) of the Code, other than such dividends described in the second
clause of the
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<PAGE>
preceding sentence, will be treated as long-term capital gains for
Massachusetts personal income tax purposes.
In determining the Massachusetts excise tax on corporations subject to
Massachusetts taxation, distributions from the Massachusetts Series, whether
attributable to taxable or tax-exempt income or gain realized by the
Massachusetts Series, will not be excluded from a corporate shareholder's net
income and, in the case of a shareholder that is an intangible property
corporation, shares of the Massachusetts Series will not be excluded from net
worth.
Michigan. Under existing Michigan law, to the extent that the distributions
from the Michigan Series qualify as "exempt-interest dividends" of a regulated
investment company under Section 852(b)(5) of the Code which are attributable
to interest on tax-exempt obligations of the State of Michigan, its political
or governmental subdivisions, or its governmental agencies or instrumentalities
("Michigan Obligations"), or obligations of the United States or its agencies
or possessions that are exempt from state taxation, such distributions will
also not be subject to Michigan income tax or Michigan single business tax.
Under existing Michigan law, an owner of a share of an investment company (such
as the Michigan Series) will be considered the owner of a pro rata share of the
assets of the investment company. As such, yield from such shares, for
intangibles tax purposes, will not include the interest or dividends received
from Michigan Obligations or obligations of the United States or its agencies
or possessions. In addition, Michigan Series shares owned by certain financial
institutions or by certain other persons subject to the Michigan single
business tax are exempt from the Michigan intangibles tax.
To the extent that distributions of the Michigan Series are derived from
other income, including long- or short-term capital gains, the distributions
will not be exempt from Michigan income tax or Michigan single business tax.
Certain Michigan cities have adopted Michigan's uniform city income tax
ordinance, which under the Michigan city income tax act is the only income tax
ordinance that may be adopted by cities in Michigan. To the extent the
distributions on the Michigan Series are not subject to Michigan income tax,
they are not subject to any Michigan city's income tax.
Minnesota. Under existing Minnesota law, provided the Minnesota Series
qualifies as a "regulated investment company" under the Code, individual
shareholders of the Minnesota Series resident in Minnesota who are subject to
the regular Minnesota personal income tax will not be subject to such regular
Minnesota tax on Minnesota Series dividends to the extent that such
distributions qualify as exempt-interest dividends of a regulated investment
company under Section 852(b)(5) of the Code which are derived from interest on
tax-exempt obligations of the State of Minnesota, or its political or
governmental subdivisions, municipalities, governmental agencies or
instrumentalities. The foregoing will apply, however, only if the portion of
the exempt-interest dividends from such Minnesota sources that is paid to all
shareholders represents 95% or more of the exempt-interest dividends that are
paid by the Minnesota Series. If the 95% test is not met, all exempt-interest
dividends that are paid by the Minnesota Series will be subject to the regular
Minnesota personal income tax. Even if the 95% test is met, to the extent that
exempt-interest dividends that are paid by the Minnesota Series are notderived
from the Minnesota sources described in the first sentence of this paragraph,
such dividends will be subject to the regular Minnesota personal income tax.
Other distributions of the Minnesota Series, including distributions from net
short-term and long-term capital gains, are generally not exempt from the
regular Minnesota personal income tax.
Minnesota presently imposes an alternative minimum tax on resident
individuals that is based, in part, on their federal alternative minimum
taxable income, which includes federal tax preference items. The Code provides
that interest on specified private activity bonds is a federal tax preference
item, and that an exempt-interest dividend of a regulated investment company
constitutes a federal tax preference item to the extent of its proportionate
share of the interest on such private activity bonds. Accordingly, individual
shareholders of the Minnesota Series resident in Minnesota may be subject to
the Minnesota alternative minimum tax as a result of the receipt of exempt-
interest dividends that are attributable to such private activity bond
interest, even though they are also derived from the Minnesota sources
described in the paragraph above. In addition, the entire portion of exempt-
interest dividends that is derived from sources other than the Minnesota
sources described in the paragraph above is subject to the Minnesota
alternative minimum tax. Further, should the 95% test that is described in the
paragraph above fail to be met, all of the exempt-interest dividends that are
paid by the Minnesota Series, including all of those that are derived from the
Minnesota sources described in the paragraph above, will be subject to the
Minnesota alternative minimum tax.
Subject to certain limitations that are set forth in recently adopted
Minnesota rules, Minnesota Series dividends, if any, that are derived from
interest on certain United States obligations are not subject to the regular
Minnesota personal income tax or the Minnesota alternative minimum tax, in the
case of individual shareholders of the Minnesota Series who are resident in
Minnesota.
Minnesota Series distributions, including exempt-interest dividends, are not
excluded in determining the Minnesota franchise tax on corporations that is
measured by taxable income and alternative minimum taxable income. Minnesota
Series distributions may also be taken into account in certain
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<PAGE>
cases in determining the minimum fee that is imposed on corporations, S
corporations and partnerships.
Interest on indebtedness incurred or continued by a shareholder of the
Minnesota Series to purchase or carry shares of the Minnesota Series will
generally not be deductible for regular Minnesota personal income tax purposes
or Minnesota alternative minimum tax purposes, in the case of individual
shareholders of the Minnesota Series who are resident in Minnesota.
Shares of the Minnesota Series will not be subject to the Minnesota personal
property tax.
New Jersey. Under existing New Jersey law, as long as the New Jersey Series
qualifies as a "qualified investment fund," shareholders of the New Jersey
Series will not be required to include in their New Jersey gross income
distributions from the New Jersey investment fund to the extent that such
distributions are attributable to interest or gain from obligations (1) issued
by or on behalf of New Jersey or any county, municipality, school or other
district, agency, authority, commission, instrumentality, public corporation,
body corporate and politic or political subdivision of New Jersey, or (2)
statutorily free from New Jersey or local taxation under other acts of New
Jersey or under the laws of the United States.
A "qualified investment fund" is any investment company or trust registered
with the Securities Exchange Commission, or any series of such investment
company or trust, which, for the calendar year in which the distribution is
paid, (a) has no investments other than interest-bearing obligations,
obligations issued at a discount, and cash and cash items, including
receivables; and (b) has not less than 80% of the aggregate principal amount of
all its investments, excluding cash and cash items (including receivables), in
obligations of the types described in the preceding paragraph.
The foregoing exclusion applies only to shareholders who are individuals,
estates, and trusts, subject to the New Jersey gross income tax. That tax does
not apply to corporations, and while certain qualifying distributions are
exempt from corporation income tax, alldistributions will be reflected in the
net income tax base for purposes of computing the corporation business tax.
Gains resulting from the redemption or sale of shares of the New Jersey Series
will also be exempt from the New Jersey gross income tax.
At this time, the New Jersey Division of Taxation has taken the position that
financial futures contracts, options on futures contracts and municipal bond
index futures contracts do not constitute interest-bearing obligations,
obligations issued at a discount, or cash and cash items, including
receivables. Accordingly, the inclusion of such investments would cause all
distributions from the New Jersey Series for the taxable year to become
taxable. The Fund reserves the right to make such investments on behalf of the
New Jersey Series at such time as permitted under New Jersey law.
The regulations require that 80% of the aggregate principal amount of all
investments, excluding cash and cash items, must be in tax-exempt obligations
free from federal and New Jersey income taxes at the end of each quarter of the
taxable year. Failure to meet the New Jersey 80% aggregate principal amount
test, even if necessary to maintain a "defensive" position would cause all
distributions from the New Jersey Series for the taxable year to become
taxable.
The New Jersey Series will notify shareholders by February 15 of each
calendar year as to the portion of its distributions for the preceding calendar
year that is exempt from federal income and New Jersey income taxes.
New York. Under existing New York law, individual shareholders who are New
York residents will not incur any federal, New York State or New York City
income tax on the amount of exempt-interest dividends received by them from the
Series which represents a distribution of income from New York tax-exempt
securities whether taken in cash or reinvested in additional shares. Exempt-
interest dividends are included, however, in determining what portion, if any,
of a person's Social Security benefits are subject to federal income tax.
Interest on indebtedness incurred or continued to purchase or carry shares of
an investment company paying exempt-interest dividends, such as the Fund, may
not be deductible by the investor for State or City personal income tax
purposes.
Shareholders will normally be subject to federal, New York State or New York
City income tax on dividends paid from interest income derived from taxable
securities and on distributions of net capital gains. For federal and New York
State or New York City income tax purposes, distributions of net long-term
capital gains, if any, are taxable to shareholders as long-term capital gains,
regardless of how long the shareholder has held the Fund shares and regardless
of whether the distribution is received in additional shares or in cash.
Distributions from investment income and capital gains, including exempt-
interest dividends, may be subject to New York franchise taxes if received by a
corporation doing business in New York, to state taxes in states other then New
York and to local taxes.
Ohio. Under existing Ohio law, provided the Ohio Series qualifies as a
"regulated investment company" under the Code, the Ohio Series will not be
subject to the Ohio personal income tax, the Ohio corporation franchise tax, or
the Ohio dealer in intangibles tax or to income taxes imposed by municipalities
and other political subdivisions in Ohio. Individual shareholders of the Ohio
Series who are subject to
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the Ohio personal income taxes will not be subject to such taxes on
distributions with respect to shares of the Ohio Series to the extent that such
distributions are directly attributable to interest on obligations issued by
the State of Ohio, its counties and municipalities, authorities,
instrumentalities or other political subdivisions ("Ohio Obligations").
Corporate shareholders of the Ohio Series that are subject to the Ohio
corporation franchise tax computed on the net income basis will not be subject
to such tax on distributions with respect to shares of the Ohio Series to the
extent that such distributions either (a) are attributable to interest on Ohio
obligations, or (b) represent "exempt-interest dividends". Shares of the Ohio
Series will be included in a corporate shareholder's tax base for purposes of
computing the Ohio corporation franchise tax on the net worth basis.
Distributions with respect to the Ohio Series that are attributable to interest
on obligations of the United States or its territories or possessions, or of
any authority, commission or instrumentality of the United States that is
exempt from state income taxes under the laws of the United States, will not
be subject to the Ohio personal income tax, the Ohio corporation franchise tax
(to the extent computed on the net income basis), or to taxes imposed by
municipalities and other political subdivisions in Ohio.
Capital gains distributed by the Ohio Series attributable to profit made on
the sale, exchange or other disposition by the Ohio Series of Ohio Obligations
will not be subject to the Ohio personal income tax, the Ohio corporation
franchise tax (to the extent computed on the net income basis), or to taxes
imposed by municipalities and other political subdivisions in Ohio.
Interest on indebtedness incurred (directly or indirectly) by a shareholder
of the Ohio Series to purchase or carry shares of the Ohio Series will not be
deductible for Ohio personal income tax purposes.
Pennsylvania. Individual shareholders of the Pennsylvania Series resident in
the Commonwealth of Pennsylvania ("Commonwealth"/"Pennsylvania") will not be
subject to Pennsylvania personal income tax on distributions received from the
Pennsylvania Series to the extent such distributions are attributable to
interest on tax-exempt obligations of the Commonwealth, its agencies,
authorities and political subdivisions or obligations of the United States or
of the Governments of Puerto Rico, The Virgin Islands and Guam. Other
distributions from the Pennsylvania Series, including capital gains generally
and interest on securities not described in the preceding sentence, generally
will not be exempt from Pennsylvania Personal Income Tax.
Other than the School District of Philadelphia, political subdivisions of the
Commonwealth have not been authorized to impose an unearned income tax upon
resident individuals. Individual shareholders who reside in the Philadelphia
School District will not be subject to the School District Unearned Income Tax
on (i) distributions received from the Pennsylvania Series to the extent that
such distributions are exempt from Pennsylvania Personal Income Tax, or (ii)
distributions of capital gains income by the Pennsylvania Series.
Corporate shareholders who are subject to the Pennsylvania Corporate Net
Income Tax will not be subject to that tax on distributions by the Pennsylvania
Series that qualify as "exempt-interest dividends" under Section 852(b)(5) of
the U.S. Internal Revenue Code or are attributable to interest on obligations
of the United States or agencies or instrumentalities thereof. For Capital
Stock/Foreign Franchise Tax purposes, corporate shareholders must normally
reflect their investment in the Pennsylvania Series and the dividends received
thereon in the determination of the taxable value of their capital stock.
The Pennsylvania Series will not be subject to Corporate Net Income Tax or
other corporate taxation in Pennsylvania.
All Pennsylvania counties, the City of Pittsburgh, and the School District of
Pittsburgh are authorized to impose a tax on intangible personal property of
their residents, and most do so. Shares in the Pennsylvania Series constitute
intangible personal property. However, shares in the Pennsylvania Series will
not be subject to intangible personal property taxation in any Pennsylvania
county, the City of Pittsburgh, or the School District of Pittsburgh to the
extent that the intangible personal property owned in the portfolio of the
Pennsylvania Series would not be subject to such taxation if owned directly by
a resident of Pennsylvania. The Pennsylvania Series will invest predominantly
in obligations of the Commonwealth, its agencies, authorities and political
subdivisions, or obligations of the United States or the Governments of Puerto
Rico, the Virgin Islands or Guam, which obligations are not subject to
intangible personal property taxation in Pennsylvania. Only the fraction, if
any, of the value of the Pennsylvania Series' portfolio not invested in
securities described in the preceding sentence would be subject to any
applicable intangible personal property tax.
PERFORMANCE INFORMATION
===============================================================================
From time to time each Series of the Fund may quote its "yield" and/or its
"total return" in advertisements and sales literature. Both the yield and the
total return of each Series of the Fund are based on historical earnings and
are not intended to indicate future performance. The yield of each Series of
the Fund is computed by dividing the net investment income of
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that Series over a 30-day period by an average value (using the average number
of shares entitled to receive dividends and the net asset value per share at
the end of the period), all in accordance with applicable regulatory
requirements. Such amount is compounded for six months and then annualized for
a twelve-month period to derive the yield of that Series. Each Series may also
quote its tax-equivalent yield, which is calculated by determining the pre-tax
yield which, after being taxed at a stated rate, would be equivalent to the
yield determined as described above.
The "average annual total return" of each Series of the Fund refers to a
figure reflecting the average annualized percentage increase (or decrease) in
the value of an initial investment in a Series of the Fund of $1,000 over the
life of such Series of the Fund. Average annual total return reflects all
income earned by such Series, any appreciation or depreciation of the assets of
such Series, all expenses incurred by such Series and all sales charges
incurred by shareholders redeeming shares, for the the stated periods. It also
assumes reinvestment of all dividends and distributions paid by such Series.
In addition to the foregoing, each Series of the Fund may advertise its total
return over different periods of time by means of aggregate, average, year-by-
year or other types of total return figures. Such calculations may or may not
reflect the imposition of the front-end sales charge which, if reflected, would
reduce the performance quoted. Each Series may also advertise the growth of
hypothetical investments of $10,000, $50,000 and $100,000 in shares of that
Series by adding 1 to that Series' aggregate total return to date and
multiplying by $9,600, $48,375 and $97,250 ($10,000, $50,000 and $100,000
adjusted for 4.00%, 3.25% and 2.75% sales charges, respectively). Each Series
of the Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent organizations
(such as Lipper Analytical Services Inc.)
ADDITIONAL INFORMATION
===============================================================================
Voting Rights. All shares of beneficial interest of a Series of the Fund
are of $0.01 par value and are equal as to earnings, assets and voting
privileges with respect to such Series.
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.
Presently, there are ten Series of the Fund. The Declaration of Trust permits
the Trustees to authorize the creation of additional series 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).
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund and requires that
notice of such disclaimer be given in each instrument entered into or executed
by the Fund and provides for indemnification out of the Fund's property for any
shareholder held personally liable for the obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund itself would be unable
to meet its obligations. Given the above limitations on shareholder personal
liability and the nature of the Fund's assets and operations, the possibility
of the Fund being unable to meet its obligations is remote and, in the opinion
of Massachusetts counsel to the Fund, the risk to Fund shareholders of personal
liability is remote.
Shareholder Inquiries. All inquiries regarding the Fund should be directed to
the Fund at the telephone numbers or address set forth on the front cover of
this Prospectus.
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APPENDIX
SPECIAL INVESTMENT CONSIDERATIONS OF EACH STATE SERIES
===============================================================================
ARIZONA SERIES
The Arizona Series will invest principally in securities of political
subdivisions and other issuers of the State of Arizona the interest on which is
exempt from federal and Arizona income taxes. As a result, the ability of such
Arizona issuers to meet their obligations with respect to such securities
generally will be influenced by the political, economic and regulatory
developments affecting the state of Arizona and the particular revenue streams
supporting such issuers' obligations. If any of such political subdivisions are
unable to meet their financial obligations, the income derived by the Arizona
Series, the ability to preserve or realize appreciation of the Arizona Series'
capital, and the liquidity of the Arizona Series could be adversely affected.
The following summary respecting the State of Arizona is only general in nature
and does not purport to be a description of the investment considerations and
factors which may have an effect on the obligations of a particular issuer in
which the Arizona Series may invest.
Arizona's population increased by approximately 35% during the 10-year period
from 1980 to 1990, ranking Arizona as the third fastest growing state in the
country for the period. The rate of growth, however, has slowed substantially
in recent years, although it remains above the national average. This growth in
population will require corresponding increases in revenues of Arizona issuers
to meet increased demands for infrastructure development and various services,
and the performance of the State's economy will be critical to providing such
increased revenues.
The State's principal economic sectors include services, manufacturing
dominated by electrical, transportation and military equipment, government,
tourism and the military. State unemployment rates have remained generally
comparable to the national average in recent years. Arizona's economy appears
to have begun to recover from the difficulties caused in the late eighties by
the severe drop in real estate values and the lack of stability of Arizona-
based financial institutions which caused many of such institutions to be
placed under control of the Resolution Trust Corporation. Arizona's economy is
beginning to expand at a moderate but consistent rate. Restrictive government
spending, weak export markets, resizing of the defense industry and layoffs in
the private sector are expected to continue to restrain the pace of expansion.
Arizona is required by law to maintain a balanced budget. To achieve this
objective, the State has, in the past, utilized a combination of spending
reductions and tax increases. Arizona's budget was balanced for the two fiscal
years ended June 30, 1992 and 1993. The Arizona legislature has enacted a
budget for the fiscal year ending June 30, 1994 which purports to end the
fiscal year with a significant surplus and Governor Fife Symington has proposed
a $100 million tax relief package effective for the 1994 tax year. However, the
condition of the national economy will continue to be a significant factor
influencing Arizona's budget during the upcoming fiscal year.
For additional information relating to State imposed restrictions on
indebtedness of certain Arizona issuers, see the Statement of Additional
Information.
CALIFORNIA SERIES
Because the California Series will concentrate its investments in California
tax-exempt securities, it 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, population rose 20%. The State now comprises 12% of the
nation's population and 13.3% 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 is now being adversely affected by both the national recession
and the cutbacks in aerospace and defense spending which have had a severe
impact on the economy in Southern California. This recession has been the
deepest and longest-lasting in the post World War II era. In the past three
years, California has lost nearly six percent of its job base.
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
24
<PAGE>
deficits in four of the past five 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 1991, California increased taxes by adding two new marginal tax
rates, at 10% and 11%, effective for tax years 1991 through 1995. After 1995,
the maximum personal income tax rate is scheduled to return to 9.3%, and the
alternative minimum tax rate is scheduled to drop from 8.5% to 7%. In addition,
legislation in July 1991 raised the sales tax by 1.25%. 0.5% was a permanent
addition to counties, but with the money earmarked to trust funds to pay for
health and welfare programs whose administration was transferred to counties.
This tax increase will be cancelled if a court rules that such transfer and tax
increase violate any constitutional requirements. 0.5% of the State tax rate
was scheduled to expire on June 30, 1993, but was extended for six months for
the benefit of counties and cities. On November 2, 1993, voters made this half-
percent levy a permanent source of funding for local government.
The State's General Fund revenues for the 1992-93 fiscal year totalled nearly
$2.5 billion less than the $43.4 billion that Governor Wilson has projected. It
is anticipated that revenues and transfers in the 1993-94 fiscal year will be
lower than those in 1992-93 fiscal year. This represents the second consecutive
year of actual decline.
On June 30, 1993, the Governor signed into law a $52.1 billion budget which,
among other things, (a) shifts $2.6 billion of property taxes from cities,
counties, special districts and redevelopment agencies to schools and community
college districts, (b) reduces higher education and community college funding,
forcing higher student fees, and (c) reduces welfare grants and aid to the
aged, blind, and disabled. In addition, related legislation (a) suspends the
renters' tax credit for two years and (b) allows counties to reduce general
assistance welfare payments by as much as 27%. The stability of the budget
would be jeopardized if the property tax transfer were invalidated by the
courts in current and future cases between the State and its counties.
The current budget includes General Fund spending of $38.5 billion, down $2.6
billion, or 6.3%, from the amount budgeted for the 1992-1993 fiscal year. The
Commission Staff estimates that the two-year budget plan adopted last June is
out of balance by at least $3.8 billion, due to continued economic weakness and
cost overruns in key State programs. The shortfall could grow to $5.6 billion
if a recent Superior Court decision, California Teachers Association v. Gould,
is upheld on appeal and the $1.8 billion in "off-book" loans to schools are
reclassified as "on-book" General Fund appropriations. Furthermore, the
Commission Staff cautions that the shortfall could grow by an additional
several billion dollars if the economy falters or if the State loses other key
cases pending before the courts.
Because of the State of California's continuing budget problems, the State's
General Obligation bonds were downgraded in 1992 by Moody's from Aa1 to Aa and
by Standard & Poor's from AA to A+.
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.
FLORIDA SERIES
Under current law, the State of Florida is required to maintain a balanced
budget such that current expenses are met from current revenues. Florida does
not currently impose an individual income tax, however, it does impose taxes on
corporate income which is allocable to the State. In addition, Florida imposes
an ad valorem tax on intangible personal property as well as sales and use tax.
These taxes are a major source of funds to meet State expenses, including
repayment of, and interest on, obligations backed solely by the full faith and
credit of the State, without recourse to any specific project.
Florida has experienced substantial populuation increases as a result of
migration to Florida from other areas of the United States and from foreign
countries. This population growth is expected to continue and it is anticipated
that corresponding increases in state revenues will be necessary during the
next decade to meet increased burdens on the various public and social services
provided by the State.
Florida's ability to meet these increasing expenses will be dependent in part
upon the State's ability to foster business and economic growth. During the
past decade, Florida has experienced significant increases in the technology-
based and other light industries and in the service sector. This growth has
diversified the State's overall economy, which at one time was dominated by the
citrus and tourism industries. The State's economic and business growth could
be restricted, however, by the natural limitations of environmental resources
and the State's ability to finance adequate public facilities such as roads and
schools.
25
<PAGE>
MASSACHUSETTS SERIES
Between 1982 and 1988 The Commonwealth of Massachusetts had a strong economy
which was evidenced by low unemployment and high personal income growth as
compared to national trends. Since such time, the Commonwealth experienced a
significant economic slowdown from 1988 through 1992, with particular
deterioration recently in the construction, real estate, insurance, financial
and manufacturing sectors, including certain high technology areas. Economic
activity has since improved and led to improvements in the housing industry and
employment rates. Unemployment had risen to 8.5% in 1992, as compared to a
national average of 7.4%; but in the last quarter of 1993 decreased to 6.6% as
compared to the national rate of 6.4%.
The recent economic growth has resulted in the growth of state tax revenues
in 1993 and expected growth in 1994. The Commonwealth had a budgetary deficit
for fiscal year 1989 and 1990 of $466.4 million and $1,362.7 billion
respectively. Deficits were avoided in fiscal 1991 and 1992, and a surplus was
achieved in 1993 and expected in 1994. In 1992, Standard & Poor's and Moody's
raised their ratings of the Commonwealth's general obligation bonds from BBB
and Baa1, respectively, to A and A, respectively and Standard & Poor's further
raised such ratings to A+ in 1993. From time to time, the rating agencies may
further change their ratings in response to budgetary matters or other economic
indicators. Growth of tax revenues in the Commonwealth is limited by law.
Effective July 1, 1990, limitations were placed on the amount of direct bonds
the Commonwealth could have outstanding in a fiscal year, and the amount of the
total appropriation in any fiscal year that may be expended for debt service on
general obligation debt of the Commonwealth (other than certain debt incurred
to pay the fiscal 1990 deficit and certain Medicaid reimbursement payments for
prior fiscal years) was limited to ten percent. Moreover, Massachusetts local
governmental entities are subject to certain limitations on their taxing power
that could affect their ability or the ability of the Commonwealth to meet
their respective financial obligations.
If either Massachusetts or any of its local governmental entities is unable
to meet its financial obligations, the income derived by the Massachusetts
Series, the Series' net asset value, the Series' ability to preserve or realize
capital appreciation or the Series' liquidity could be adversely affected.
For a more detailed discussion of the Commonwealth of Massachusetts economic
factors, see the Statement of Additional Information.
MICHIGAN SERIES
The information set forth below is derived from official statements prepared
in connection with the issuance of obligations of the State of Michigan and
other sources that are generally available to investors. The information is
provided as general information intended to give a recent historical
description and is not intended to indicate further or continuing trends in the
financial or other positions of the State of Michigan. Such information
constitutes only a brief summary, relates primarily to the State of Michigan,
does not purport to include details relating to all potential issuers within
the State of Michigan whose securities may be purchased by the Michigan Series
and does not purport to be a complete description.
The principal sectors of Michigan's economy are manufacturing of durable
goods (including automobiles and components and office equipment), tourism and
agriculture. Employment of Michigan's work force in durable goods manufacturing
has dropped from 33% in 1960 to 17.3% in 1991. However, manufacturing
(including auto-related manufacturing) continues to be an important part of
Michigan's economy and announced and contemplated layoffs and plant closings in
the automobile industry are expected to adversely affect tax revenue of the
State and its political subdivisions. The State reports its financial condition
using generally accepted accounting principles and, beginning with Fiscal Year
1986-87, Michigan has received an unqualified opinion from its auditors on its
financial statements. Michigan's Fiscal Year begins on October 1 and ends on
September 30 of the following year.
Michigan ended Fiscal Years 1986-87, 1987-88 and 1988-89 with surpluses of
$11.0 million, $21.5 million and $61.1 million, respectively. In Fiscal Years
1989-90 and 1990-91, Michigan had negative General Fund balances of $310.3
million and $169.4 million, respectively. As required by the Michigan
Constitution, each of those deficits were included in the succeeding year's
budget. As of December 4, 1992, the State of Michigan estimated that Fiscal
Year 1991-92 ended with a zero balance in its General Fund. For Fiscal Year
1990-91, Michigan utilized $230 million from its Budget and Economic
Stabilization Fund (BSF) to reduce the negative General Fund balance in that
year. The unreserved balance for the BSF as of the end of Fiscal Year 1990-91
was $182.2 million. The State of Michigan, as of December 4, 1992, estimated
that for Fiscal Year 1991-92 it utilized $150 million from its BSF to end that
year with a zero balance in its General Fund. In July 1992, the Michigan
legislature adopted the budget for Fiscal Year 1992-93. As of October 20, 1992,
the State of Michigan estimated that Fiscal Year 1992-93 would end with a
deficit of up to approximately $35.4 million in its General Fund in the absence
of any further action. As of January 27, 1993, general obligation bonds of the
State of Michigan were rated "AA" by Standard & Poor's Corporation, "A1" by
Moody's Investors Service and "AA" by Fitch Investor Service.
26
<PAGE>
To the extent that the portfolio of the Michigan Series is comprised of
revenue obligations of the State of Michigan or revenue or general obligations
of local governments or state or local authorities, rather than general
obligations of the State of Michigan, itself, ratings on such components of the
Michigan Series will be different from those given to the general obligations
of the State of Michigan and their value may be independently affected by
economic factors not directly impacting the State.
For a more detailed discussion of the State of Michigan economic factors, see
the Statement of Additional Information.
MINNESOTA SERIES
The information set forth below is derived from official statements prepared
in connection with the issuance of obligations of the State of Minnesota and
other sources that are generally available to investors. The information is
provided as general information intended to give a recent historical
description and is not intended to indicate further or continuing trends in the
financial or other positions of the State of Minnesota. Such information
constitutes only a brief summary, relates primarily to the State of Minnesota,
does not purport to include details relating to all potential issuers within
the State of Minnesota whose securities may be purchased by the Minnesota
Series, and does not purport to be a complete description.
The State of Minnesota has experienced certain budgeting and financial
problems since 1980.
The State Accounting General Fund balance at June 30, 1987, was positive
$168.5 million. The Commissioner of Finance, in his November 1986 reforecast,
estimated an Accounting General Fund balance at June 30, 1989, of negative $800
million. The Legislature in May 1987 enacted measures expected to yield
approximately $700 million in additional revenues for the 1987-1989 biennium by
broadening the bases of corporate income and sales taxes and raising the rate
of the cigarette excise tax to 38 cents a pack from 23 cents. The corporate tax
rate was lowered to 9.5% from 12%, and a minimum tax was imposed.
Accounting General Fund appropriations for the 1987-1989 biennium were $11.35
billion, an increase of 9.4%. A $250 million budget reserve also was approved.
The 1988 Legislature increased 1987-1989 expenditures a total of $223.8
million. Of that amount, $71.6 million was appropriated for highways/transit
and $62.1 million for education. Taxes were reduced a total of $108.1 million
for the remainder of the biennium, $53.8 million of that in the form of
increases in the individual income tax rent credit and property tax refunds.
The Legislature increased 1987-1989 revenues a total of $125.5 million. Of
that, $74.9 million was from federal tax conformity and compliance.
The Accounting General Fund balance, at June 30, 1989, was positive $360
million.
The 1989 Legislature authorized $13.35 billion in spending for the 1989-1991
biennium, a 16.2% increase over the previous biennium, after excluding
intergovernmental fund transfers. In addition, the Legislature approved a $550
million budget reserve.
The 1989 Legislature passed an omnibus tax bill that included $272 million in
property tax relief and a $72 million increase in tax revenues. The Governor
vetoed the omnibus tax bill, demanding that a larger share of property tax
relief go to business and that the state-subsidized property tax system be
reformed. At a special session in the fall of 1989, a bill was enacted that
included $267 million in property tax relief and a $79 million increase in tax
revenues.
The Commissioner of Finance, in his November 1989 forecast, estimated the
Accounting General Fund balance at June 30, 1991, at negative $161 million. The
Commissioner forecast an $89 million decline in revenues, a $60 million
increase in human services expenditures and a net $29 million decrease due to
other fiscal changes.
The 1990 Legislature enacted budget changes that resulted in a $127 million
net savings for the 1989-1991 biennium. A total of $178 million in spending
reductions were enacted, and increased fees and other revenue changes accounted
for a $12 million gain. New spending totaling $63 million was approved.
A November 1990 forecast estimated a $197 million shorfall for the biennium
ending June 30, 1991, and a $1.2 billion shortfall for the biennium ending June
30, 1993 due to spending pressures and reduced revenues. A March 1991 forecast
reduced the estimated shortfall for the biennium ending June 30, 1993, to $1.1
billion.
In January 1991 the Legislature made $197 million in spending reductions for
the biennium ended June 30, 1991. The State Accounting General Fund balance at
June 30, 1991, was $31 million.
The 1991 Legislature authorized $13.886 billion in spending for the 1991-1993
biennium. Giving effect to inclusion in the Accounting General Fund of $70
million in dedicated revenues previously budgeted in other funds and dedication
of 1.5 percent of existing sales tax as well as a new .5 percent local option
sales tax to a Local Government Trust Fund, the total increase in authorized
spending was 9.2 percent.
27
<PAGE>
Tax law changes enacted by the 1991 Legislature were expected to yield $590
million in additional revenues for the 1991-1993 biennium. Federal conformity
on individual and corporate income taxes was expected to raise $82 million;
changes in top individual income tax rates and elimination of some deductions
and exemptions were expected to yield an additional $89 million; extension of
the sales tax to kennel services, telephone paging services and some business-
to-business phone services $38 million; a 5 cents a pack cigarette tax increase
to 43 cents $37.2 million; and the .5 percent sales tax increase $370 million.
After the Legislature adjourned in May 1991, the Commissioner of Finance
estimated that at June 30, 1993, the State would have a $400 million budget
reserve, the amount approved by the 1991 Legislature, and a $103.2 million
Accounting General Fund balance.
In February 1992 the Commissioner of Finance estimated the Accounting General
Fund balance at June 30, 1993, at negative $569 million. The balance at June
30, 1995, was projected at negative $1.75 billion.
The 1992 Legislature reduced expenditures by $262 million for the biennium
ending June 30, 1993, enacted revenue measures expected to increase revenue by
$149 million, and reduced the budget reserve by $160 million to $240 million.
Of the $262 million in spending reductions, $183 million was a one-time
reduction for K-12 education aids, reflecting a change in the way schools
account for property tax collections. The change requires schools to recognize
100% of the school portion of property tax collections as revenue in the fiscal
year in which they receive them, thereby permitting a one-time reduction in
state education aids. Reductions to post-secondary education, state agencies,
the Legislature, and constitutional officers accounted for $94 million in
budget savings. New spending for crime prevention, corrections, and additional
debt service added $15 million to expenditures.
Included in new revenue raising measures of $149 million was the extension of
a broad-based health care provider tax which was expected to generate $51
million of additional revenue, removal of the sales tax exemption for most
purchases by cities, counties, towns and townships which was expected to
generate $67 million of additional revenue, and federal tax conformity which
was expected to generate $21 million of additional revenue. The provider tax
changes restructured the State's current provider surcharge program to bring it
into compliance with federal law and Health Care Financing Administration
regulations. Other changes accounted for a $10 million increase in revenues.
After the Legislature adjourned in April 1992, the Commissioner of Finance
estimated the Accounting General Fund balance at June 30, 1993, at $2.4
million, and projected the balance at June 30, 1995, at negative $837 million.
A November 1992 forecast estimated the balance at June 30, 1993, at positive
$217 million and projected the balance at June 30, 1995, at negative $769
million.
A March 1993 forecast projected an Accounting General Fund balance at June
30, 1995, at negative $163 million out of a budget for the biennium of
approximately $16.7 billion, and estimated a balance at June 30, 1997, at
negative $1.6 billion out of a budget of approximately $18.7 billion.
The 1993 Legislature authorized $16.519 billion in spending for the 1993-1995
biennium, an increase of 13.0 percent from 1991-1993 expenditures. Resources
for the 1993-1995 biennium were projected to be $16.895 billion, including $657
million carried forward from the previous biennium. The $16.238 billion in
projected non-dedicated and dedicated revenues was 10.3 percent greater than in
the previous biennium and included $175 million from revenue measures enacted
by the 1993 Legislature. The Legislature increased the health care provider tax
to raise $79 million, transferred $39 million into the Accounting General Fund
and improved collection of accounts receivable to generate $41 million.
After the Legislature adjourned in May 1993, the Commissioner of Finance
estimated that at June 30, 1995, the Accounting General Fund balance would be
$16 million and the budget reserve, as approved by the 1993 Legislature, would
be $360 million. The Accounting General Fund balance at June 30, 1993, was $463
million.
The Commissioner of Finance, in a November 1993 forecast, estimated the
Accounting General Fund balance at June 30, 1995, at $430 million, due to
projected increases in revenues and reductions in expenditures, and the balance
at June 30, 1997, at $389 million. The Commissioner recommended that the budget
reserve be increased to $500 million. He estimated that if current laws and
policies continue unchanged, revenue will grow 7.7 percent and expenditures 6.0
percent in the 1995-1997 biennium.
The State of Minnesota has no obligation to pay any bonds of its political or
governmental subdivisons, municipalities, governmental agencies, or
instrumentalities. The creditworthiness of local general obligation bonds is
dependent upon the financial condition of the local government issuer, and the
creditworthiness of revenue bonds is dependent upon the availability of
particular designated revenue sources or the financial conditions of the
underlying obligors. Although most of the bonds owned by the Minnesota Series
are expected to be obligations other than general obligations of the State of
Minnesota itself, there can be no assurance that the same factors that
adversely affect the economy of the State generally will not also affect
adversely the market value or marketability of such other obligations, or the
ability of the obligors to pay the principal of or interest on such
obligations.
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At the local level, growth in the property tax base of many communities is
being slowed by an overcapacity in certain segments of the commercial real
estate market. In addition, local finances are affected by the amount of State
aid that is made available. Further, various of the issuers within the State of
Minnesota, as well as the State of Minnesota itself, whose securities may be
purchased by the Minnesota Series, may now or in the future be subject to
lawsuits involving material amounts. It is impossible to predict the outcome of
these lawsuits. Any losses with respect to these lawsuits may have an adverse
impact on the ability of these issuers to meet their obligations.
The State's bond ratings in October 1993 were Aa and AA+. Economic
difficulties and the resultant impact on State and local government finances
may adversely affect the market value of obligations in the portfolio of the
Minnesota Series or the ability of respective obligors to make timely payment
of the principal and interest on such obligations.
NEW JERSEY SERIES
The economic base of New Jersey is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural areas
with selective commercial agriculture. After enjoying an extraordinary boom
during the mid-1980s, New Jersey along with the rest of the Northeast slipped
into a slowdown well before the onset of the national recession which
officially began in July 1990 (according to the National Bureau of Economic
Research).
By the beginning of the national recession, construction activity had already
been declining in New Jersey for nearly two years. As the rapid acceleration of
real estate prices forced many would-be homeowners out of the market and high
non-residential vacancy rates reduced new commitments for offices and
commercial facilities, construction employment began to decline; also growth
had tapered off partly because of a leveling off of industrial demand
nationally. The onset of recession caused an acceleration of New Jersey's job
losses in construction and manufacturing, as well as an employment downturn in
such previously growing sectors as wholesale trade, retail trade, finance,
utilities and trucking and warehousing.
Reflecting the downturn, the rate of unemployment in the State rose from a
low of 3.6 percent during the first quarter of 1989 to an estimated 6.7 percent
in August 1991, according to figures from the U.S. Bureau of Labor Statistics
and the New Jersey Department of Labor. In 1992, the State's unemployment rate
moved ahead of the nation's for the first time in a decade to an annual average
of 8.4% versus 7.4% in the nation.
Just as New Jersey was hurt by the national recession, the State should
benefit by national recovery as rising consumer and business spending generate
increased factory orders, building activity and a flow of commerce without
regard to state lines. Total construction contracts awarded in New Jersey have
turned around, rising by 5.0% in the January-to-May 1993 period compared with
the same time period in 1992. By far, the largest boost came from residential
construction awards which increased robustly by 44.0% in the first five months
of the year compared with the same period in 1992. Similarly, building permit
data available through April reveal that planned new housing units were 23%
ahead of last year and double their pace of early 1991. These large percentage
increases are, of course, measured from a very low base. In addition,
nonresidential building construction awards have turned around, posting a 6.0%
gain, albeit once again from a very low base. Nonbuilding construction awards
have been at high levels since 1991 due to substantial outlays for roads,
bridges and other infrastructure projects. Although nonbuilding construction
awards declined in the first five months of 1993 compared with the same period
in 1992, this was due to an unusually large amount of contracts in May 1992 and
as stated earlier, spending on infrastructure projects remains strong.
In the labor market there are signs of recovery. Due to a reduced layoff rate
and the reappearance of job opportunities in some parts of the economy,
unemployment in the State has been receding since July 1992, when it peaked at
9.6% according to U.S. Bureau of Labor Statistics estimates.
Prospects for New Jersey appear to be favorable, although a return to the
pace of the 1980s is highly unlikely. Although growth is likely to be slower
than in the nation, the locational advantages that have served New Jersey well
for many years will still be there. Structural changes that have been going on
for years can be expected to continue, with job creation concentrated most
heavily in the service sectors.
General obligation bonds of the State are the primary method for State
financing of capital projects. These bonds are backed by the full faith and
credit of the State. State tax revenues and certain other fees are pledged to
meet the principal and interest payments required to fully pay the debt to the
extent that other moneys are not available therefor. No general obligation debt
can be issued by the State without prior voter approval, except that, pursuant
to a constitutional amendment, no voter approval is required for any law
authorizing the creation of a debt for the purpose of refinancing all or a
portion of the outstanding debt of the State, so long as such law requires that
the refinancing provided debt service savings. The State Constitution also
provides that no voter approval is required for
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debt issued for purposes of war, to repel invasion, to suppress insurrection or
to meet an emergency caused by disaster or act of God. Capital construction can
also be funded by appropriation of current revenues on a pay-as-you-go basis.
All appropriations for capital projects and all proposals for State bond
authorizations are subject to the review and recommendation of the New Jersey
Commission on Capital Budgeting and Planning. This permanent commission was
established in November 1975 and was charged with the preparation of the State
Capital Improvement Plan, which contains proposals for state spending for
capital projects.
Other State-related obligations include those issued by the New Jersey
Building Authority, which is empowered to construct facilities for leasing to
the State. The rental for such buildings is equal to the debt service relating
thereto plus payments in lieu of real estate taxes. Legislation provides for
future appropriations for State aid to local school districts equal to debt
service on a maximum principal amount of $280,000,000 of bonds issued by such
local school districts for construction and renovation of school facilities and
for State aid to counties equal to debt service on up to $80,000,000 of bonds
issued by counties for construction of county college facilities. The State
Legislature is not legally bound to make such future appropriations, but has
done so to date on all outstanding obligations issued under such legislation.
The authorizing legislation for various State entities provides for specific
budgetry procedures with respect to certain obligations issued by such
entities. Pursuant to such legislation, a designated official is required to
certify any deficiency in a debt service reserve fund maintained to meet
payments of principal and interest on the obligations, and a State
appropriation in the amount of the deficiency is to be made. However, the State
Legislature is not legally bound to make such an appropriation. Bonds issued
pursuant to authorizing legislation of this type are sometimes referred to as
"moral obligation" bonds. There is no statutory limitation on the amount of
moral obligation bonds which may be issued by eligible State entities.
Currently, there are three such entities (the New Jersey Housing and Mortgage
Finance Agency ("Agency"), the South Jersey Port Corporation ("Corporation"),
and the Higher Education Assistance Authority) available for State
appropriations to meet moral obligations. The Agency has not had a deficiency
in a debt service reserve which required the State to appropriate funds. It is
anticipated that the Agency's revenues will continue to be sufficient to cover
debt service on its bonds. The State provides the Corporation with funds to
cover all debt service and property tax requirements, when earned revenues are
anticipated to be insufficient to cover these obligations. In the past, the
State has had to appropriate funds to cover deficiencies in the Corporation's
debt service reserve fund as well as deficiencies in tax payments. For calendar
years 1985 through 1988, anticipated revenues were sufficient to cover debt
service, but were insufficient to cover all property tax requirements and an
appropriation of $1,647,216 for each year was required and was subsequently
received. For the calendar year 1989 anticipated revenues were insufficient to
cover property tax requirements and an appropriation of $1,745,917 was
required. In addition to the property tax shortfall for calendar year 1989,
revenues for calendar year 1989 were insufficient to cover debt service and an
appropriation of $1,281,793.58 was required. For calendar year 1990 anticipated
revenues were insufficient to cover property tax and debt service requirements
and appropriations of $1,850,000 and $2,362,850.67, respectively, were
required.
There are numerous other State-created entities with outstanding debt. This
debt is supported by revenues derived from or assets of the various projects
financed by such entities.
The Local Budget Law imposes specific budgetary procedures upon counties and
municipalities, subject to review by the Director of the Division of Local
Government Services. State law also regulates the issuance of debt by counties
and municipalities by limiting the amount of tax anticipation notes that may be
issued and requiring their repayment within three months of the end of the
fiscal year in which they are issued. The Local Bond Law governs the issuance
of bonds and notes and bars the issuance of bonds for the payment of current
expenses or to pay outstanding obligations, except where permitted by the Local
Finance Board. State law also authorizes State officials to supervise fiscal
administration in any municipality facing financial difficulties.
General obligations of the State are currently rated "AA+" and "Aaa" by S&P
and Moody's, respectively. There can be no assurance that the economic
conditions on which these ratings are based will continue or that particular
bond issues may not be adversely affected by changes in economic, political or
other conditions.
NEW YORK SERIES
Since the New York Series concentrates its investments in New York tax-exempt
securities, the Fund is affected by any political, economic or regulatory
developments affecting the ability of New York tax-exempt issuers to pay
interest or repay principal. Investors should be aware that certain issuers of
New York tax-exempt securities have experienced serious financial difficulties
in recent years. A reoccurrence of these difficulties may impair the ability of
certain New York issuers to maintain debt service on their obligations.
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The fiscal stability of New York State (the "State") is related to the
fiscal stability of the State's municipalities, its Agencies and Authorities
(which generally finance, construct and operate revenue-producing public
benefit facilities). This is due in part to the fact that Agencies, Authorities
and local governments in financial trouble often seek State financial
assistance. The experience has been that if New York City (the "City") or any
of the Agencies or Authorities suffers serious financial difficulty, both the
ability of the State, the City, the State's political subdivisions, the
Agencies and the Authorities to obtain financing in the public credit markets
and the market price of outstanding New York tax-exempt securities are
adversely affected.
Over the long term, the State and City face serious potential economic
problems. The City accounts for approximately 41% of the State's population and
personal income, and the City's financial health affects the State in numerous
ways. The State has historically been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation
as a whole, gradually eroding its relative economic affluence. The causes of
this relative decline are varied and complex, in many cases involving national
and international developments beyond the State's control. Statewide, urban
centers have experienced significant changes involving migration of the more
affluent to the suburbs and an influx of generally less affluent residents.
Regionally, the older Northeast cities have suffered because of the relative
success that the South and the West have had in attracting people and business.
The City has also had to face greater competition as other major Cities have
developed financial and business capabilities which make them less dependent on
the specialized services traditionally available almost exclusively in the
City.
The State has for many years had a very high State and local tax burden
relative to other states. The existence of this tax burden limits the State's
ability to impose higher taxes in the event of future financial difficulties.
The State and its localities have used these taxes to develop and maintain
their transportation network, public schools and colleges, public health
systems, other social services and recreational facilities. Despite these
benefits, the burden of State and local taxation, in combination with the many
other causes of regional economic dislocation, has contributed to the decisions
of some business and individuals to relocate outside, or not to locate within,
the State. Certain manufacturing facilities have re-located to other states.
This trend has been partially offset by the location of some manufacturing
facilities in the State and by the expansion of existing facilities in the
State. While no sustained reversal of the State's relative economic position
has been projected, the actions taken to date, in combination with many other
causes of regional economic changes, have slowed this trend. Further reduction
in Federal spending could materially and adversely affect the financial
condition and budget projections of the State's localities.
On January 6, 1992, Moody's lowered to Baa-1 from A its ratings on
about $14.2 billion of New York State appropriations backed debt. Moody's also
announced that it had put New York State general obligation debt rated A under
review for possible downgrade in the coming months. On November 16, 1992,
Moody's reconfirmed its A rating on the State's general long-term indebtedness.
On January 13, 1992, S&P lowered its rating on New York State's general
obligation bonds from A to A-. On November 12, 1992, S&P continued its January
rating and reiterated its negative rating outlook assessment on the State's
general obligation debt.
For a more detailed discussion of New York economic factors, see the
Statement of Additional Information.
The summary information furnished above and in the Statement of
Additional Information is based on official statements prepared by the State of
New York and the City of New York and their authorities in connection with
their borrowings and contains such information as the Fund deems relevant in
considering an investment in the Fund. It does not purport to be a complete
description of the considerations contained therein.
OHIO SERIES
Although manufacturing (including motor vehicles and equipment, steel,
rubber products and household appliances) in Ohio remains an important part of
the State's economy, the greatest growth in employment in Ohio in recent years,
consistent with national trend, has been in the non-manufacturing area. Ohio
ranked fourth in the nation in 1990 personal income derived from manufacturing.
That income was 20.9% of total Ohio personal income, compared to 17.6% of that
total being from "services". As a result, economic activity in Ohio, as in many
other industrially developed states, tends to be more cyclical than in some
other states and in the nation as a whole. Agriculture also is an important
segment of the economy in the State. With 15.7 million acres (of a total land
area of 26.4 million acres) in farm land and an estimated 78,000 individual
farms, it is by many measures Ohio's leading industry, contributing nearly $4.1
billion to the state's economy each year. This represents 12% of the total
output, 15% of the total employment (approximately 750,000 jobs) and 10% of the
value added products produced in the state. Farm income alone amounts to just
over $4 billion. In 1992, Ohio exported over $1 billion in farm products
(primarly soybeans and related soy products, and feed grains). The State has
instituted several programs to provide financial assistance to farmers.
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Ohio continues as a major "headquarters" state. Of the top 500
individual corporations (based on 1992 sales as reported in 1993 by Fortune
magazine), 33 had headquarters in Ohio, placing Ohio tied for fourth as a
"headquarters" state for industrial corporations and of the top 500 service
corporations, 24 had headquarters in Ohio, placing Ohio sixth as a
"headquarters" state for service corporations.
Payroll employment in Ohio, in the diversifying employment base, showed
a steady upward trend until 1979, then decreased until 1982. It has reached an
all-time high in the summer of 1992 after a slight decrease early in 1991 and
has since decreased slightly. Growth in recent years has been concentrated
among non-manufacturing industries, with manufacturing employment tapering off
since its 1969 peak. Non-manufacturing industries now employ more than three-
fourths of all payroll workers (non-agricultural) in Ohio.
Consistent with the consitutional provision that no appropriation may
be made for a period longer than two years, the State operates on the basis of
a fiscal biennium for its appropriations and expenditures. Under current law
that biennium for operating purposes runs from July 1 in an odd-numbered year
to June 30 in the next odd-numbered year; for example, the current fiscal
biennium began July 1, 1993 and ends June 30, 1995.
The Constitution imposes a duty on the General Assembly to "provide for
raising revenue, sufficient to defray the expenses of the state, for each year,
and also a sufficient sum to pay the principal and interest as they become due
on the state debt." The State is effectively precluded by law from ending a
Fiscal Year or a biennium in a "deficit" position. State borrowing to meet
casual deficits or failures in revenues or to meet expenses not otherwise
provided for is limited by the Constitution to $750,000.
Most State operations are financed through the general revenue fund
(GRF), with personal income and sales-use taxes being the major GRF sources.
The Revised Code provides that if the Governor ascertains that the
available revenue receipts and balances for the GRF or other funds for the then
current Fiscal Year will in all probability be less than the appropriations for
the year, he shall issue such orders to State agencies as will prevent their
expenditures and incurred obligations from exceeding those revenue receipts and
balances. The Governor implemented this directive in some prior years,
including Fiscal Years 1992 and 1993. The major categories of the State revenue
sources, including taxes and excises, and the amounts received from those
categories. There is no present constitutional limit on the rates of those
State-levied taxes and excises, except for taxes on intangible property. At
present the State itself does not levy any ad valorem taxes on real or tangible
personal property. Those taxes are levied by political subdivisions and local
taxing districts.
The GRF ending (June 30) fund balance is reduced during less favorable
national economic periods and then increases during more favorable economic
periods. For example, following the 1974-75 nationwide recession the 1977 GRF
ending fund balance was $21,600,000. The balance (without assistance from any
significant tax rate increases) was $245,700,000 in 1979, and then, paralleling
the national economic situation, was at the significantly lower amount of
$200,000 in 1981. Aided by tax increases and other actions, the 1983 GRF ending
fund balance was $43,600,000. Recent biennium GRF ending fund balances were
$226,300,000 in 1987, $475,100,000 in 1989, $135,365,000 in 1991 and
$111,013,000 in 1993.
The GRF appropriations bill for the 1994-1995 biennium was passed on
June 30, 1993, and promtly signed, with selective vetoes, by the Governor. The
act provides for total GRF biennial expenditures of approximately $30.7
billion, an increase over those for the 1992-93 fiscal biennium. Authorized
expenditures in Fiscal Year 1994 are 9.2% higher than in Fiscal Year 1993 and
for Fiscal Year 1995 are 6.6% higher than in Fiscal Year 1994. The following
are examples of higher authorized GRF biennial expenditures in major programs:
mental health and mental retardation 8.5%; primary and secondary education
4.1%; human service 15.8%; justice and corrections 31.8%; and higher educations
13.2%.
Necessary GRF debt service and lease-rental appropriations for the
entire biennium were requested in the Governor's budget proposal and
incorporated in the related appropriations bill as introduced, and in the
bill's versions as passed by the House and the Senate and in the act as passed
and signed. The same is true for the separate Department of Transportation and
Bureau of Workers' Compensation appropriations acts, containing lease-rental
appropriations for certain OBA-financed DOT and BWC projects.
Although revenue obligations of the State or its political subdivisions
may be payable from a specific project or source, including lease rentals,
there can be no assurance that, as in any state, future economic difficulties
and the resulting impact on State and local government finances will not
adversely affect the market value of the Bonds in the portfolio of the Ohio
Series or the ability of the respective obligors to make timely payments of
principal and interest on such Bonds.
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PENNSYLVANIA SERIES
Presented below and in the Statement of Additional Information is
information concerning the Commonwealth of Pennsylvania (the "Commonwealth")
and certain issuers within the Commonwealth. Such information is based
principally on information drawn from recent official statements relating to
securities offerings by the Commonwealth and does not purport to be a complete
description of such issuers or factors that could adversely affect them. The
Investment Manager has not independently verified such information; however, it
has no reason to believe that such information is not correct in all material
respects. This information does not cover all municipal issuers within the
Commonwealth whose securities may be purchased by the Fund.
Investment Securities
The Pennsylvania Series will invest principally in Commonwealth and
Commonwealth-related obligations and obligations of local government units in
the Commonwealth and obligations of related authorities. Some additional
information regarding such issuers is set forth in the Statement of Additional
Information. The market value and marketability of the obligations of the
Commonwealth and, though generally to a lesser extent, the Commonwealth-related
obligations and the local governmental unit and related authority obligations
generally will be affected by economic conditions affecting the Commonwealth
and litigation matters which may adversely affect the Commonwealth. The market
value and marketability of obligations of issuers other than the Commonwealth
may also be affected by more localized economic changes, changes affecting the
particular revenue stream supporting such obligations and related litigation
matters.
The City of Philadelphia has been experiencing financial difficulties
recently, as a result of which Moody's and S&P lowered their ratings of City of
Philadelphia general obligations below investment grade. City of Philadelphia
general obligations will not be purchased as an investment security for the
Pennsylvania Series until the ratings of such obligations meet the criteria for
the Pennsylvania Series.
General Socio-Economic and Economic Information Regarding the Commonwealth
The Commonwealth is the fifth most populous state (ranking behind
California, New York, Texas and Florida) with a population of approximately
11.9 million for the last ten years. The Commonwealth is the headquarters for
64 major corporations and the home for more than 268,600 businesses. It has
been historically identified as a heavy industry state although that reputation
has changed recently as the industrial composition of the Commonwealth
diversified when the coal, steel and railroad industries began to decline. The
major new sources of growth in the Commonwealth are in the service sector,
including trade, medical and health services, education and financial
institutions. Manufacturing employment has fallen from 23.0% of non-
agricultural employment in 1985 to 18.7% in 1992, while service sector
employment has increased from 24.6% of non-agricultural employment in 1985 to
29.3% in 1992. From 1983 to 1990, the Commonwealth's annual average
unemployment rate dropped from 11.8% to 5.4% (below the national average for
each of the years from 1986). In 1991 and 1992, the average annual unemployment
rates for the Commonwealth were 6.9% and 7.5% respectively, compared to rates
of 6.7% and 7.4% for the United States for such years.
The Commonwealth utilizes the fund method of accounting. For purposes
of governmental accounting, a "fund" is defined as an independent fiscal and
accounting entity with a self-balancing set of accounts, for the purpose of
carrying on specific activities or attaining certain objectives in accordance
with the fund's special regulations, restrictions or limitations. In the
Commonwealth, funds are established by legislative enactment or in certain
cases by administrative action.
The General Fund, the Commonwealth's largest fund, receives all tax
revenues, non-tax revenues and federal grants and entitlements that are not
specified by law to be deposited elsewhere. The majority of the Commonwealth's
operating and administrative expenses are payable from the General Fund. Debt
service on all Commonwealth obligations, except those issued for highway
purposes or for the benefit of other special revenue funds, is payable from the
General Fund.
Revenues in the General Fund include all tax receipts, license and fee
payments, fines, penalties, interest and other revenues of the Commonwealth not
specified to be deposited elsewhere or not restricted to a specific program or
expenditure and federal revenues. Taxes levied by the Commonwealth are the most
significant source of revenues in the General Fund constituting over 98 percent
of such revenues in fiscal 1993. The major tax sources for the General Fund are
the sales tax, which accounted for $4.8 billion or 33.6% of tax revenues in
fiscal 1993, the personal income tax, which accounted for $4.8 billion or 33.3%
of tax revenues, and the corporate taxes which accounted for $2.3 billion or
16.2% of tax revenues. Federal revenues are those federal receipts which pay or
reimburse the Commonwealth for funds disbursed for federally assisted programs.
The primary expenditures of the General Fund are for education (41% of
total General Fund expenditures in fiscal 1992) and public health and welfare
(38%).
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The Constitution and laws of the Commonwealth require all payments from
the General Fund, with the exception of refunds of taxes, licenses, fees and
other charges, to be made only by duly enacted appropriations. Amounts
appropriated from the General Fund may not exceed its actual and estimated
revenues for the fiscal year plus any surplus available. Appropriations are
generally made for one fiscal year and are returned to the unappropriated
surplus of the fund (a lapse) if not spent or encumbered by the end of the
fiscal year. The Commonwealth's fiscal year begins July 1 and ends June 30.
(Fiscal 1992 refers to the fiscal year ending June 30, 1992.)
The five-year period from fiscal 1988 through 1992 was a period of
slowing revenue growth and accelerating expenditure increases as the economy
slowed and the national recession brought a halt to economic growth. Tax
revenues during the five-year period, led by a 29.2 percent increase in fiscal
1992 due to a $2.7 billion increase from enacted rate increases and base
changes, grew at a compounded annual growth rate of 9.3 percent. The effect of
the economic recession on tax revenue growth is evident in a 2.7 precent
increase in fiscal 1990 and a 0.5 percent decline in fiscal 1991. Low growth of
tax revenues led to the development of other sources of revenues such as
transfers from other state funds. The higher amounts of operating transfers in
fiscal 1989, 1990 and 1991 are the result of higher transfers form other funds
such as the State Workmen's Insurance Fund to the General Fund to support
current expenses.
Expenditures for the five-year period increased at the compounded
annual growth rate of 13.6 percent, led by public health and welfare costs
through the medical assistance and cash assistance programs and the corrections
program. Public health and welfare costs were rising from growing caseloads,
expanding client utilization and cost increases. Correction program costs were
increasing from rapid population increases and the development of new
facilities.
The Constitution requires tax and fee revenues relating to motor fuels
and vehicles to be used for highway purposes, and the tax revenues relating to
aviation fuels to be used for aviation purposes. Accordingly, all such
revenues, except the revenues from one-half cent per gallon of the liquid fuels
tax which are deposited in the Liquid Fuels Tax Fund for distribution to local
municipalities, are placed in the Motor License Fund, as are most federal aid
revenues designated for transportation programs. Operating and administrative
costs for the Department of Transportation and other Commonwealth departments
conducting transportation related programs, including the highway patrol
activities of the Pennsylvania State Police, are also paid from the Motor
License Fund. Debt service on bonds issued by the Commonwealth for highway
purposes is payable from the Motor License Fund.
Other special revenue funds have been established by law to receive
specified revenues that are appropriated to specific departments, boards and/or
commissions for payment of their operating and administrative costs. Such funds
include the Game, Fish, Boating, Banking Department, Milk Marketing, State Farm
Products Show, State Racing and State Lottery Funds. Some of these special
revenue funds are required to transfer excess revenues to the General Fund and
some receive funding, in addition to their specified revenues, through
appropriations from the General Fund. The Fish and Boating Funds annually pay
debt service on Commonwealth bonds issued for projects constructed for the
benefit of these funds.
In 1986, the General Assembly created the Tax Stabilization Reserve
Fund and the Sunny Day Fund and provided for their initial funding from General
Fund appropriations. Income for both of these funds comes from annual
appropriations of money from other Commonwealth funds and investment earnings.
The Tax Stabilization Reserve Fund is to be used for emergencies threatening
the health, safety or welfare of citizens or to offset unanticipated revenue
shortfalls due to economic downturns. The Sunny Day Fund is available to
attract new business enterprises to the Commonwealth. Assets of each fund may
be used upon recommendation by the Governor and an approving vote by two-thirds
of the members of each house of the General Assembly.
The State Lottery Fund is a special revenue fund for the receipt of
lottery ticket sales and lottery licenses and fees. Its revenues, after payment
of prizes, are dedicated to paying the operational and administrative costs of
the lottery and the costs of programs benefiting the elderly in Pennsylvania.
The Commonwealth maintains trust and agency funds which are used to
administer funds received pursuant to a specific bequest or as an agent for
other governmental units or individuals.
Enterprise funds are maintained for departments or programs operated
like private enterprises. The largest of these funds is the State Stores Fund
which is used for the receipts and disbursements of the Commonwealth's liquor
store system. Sale and distribution of all liquor within Pennsylvania is a
government enterprise.
For a more detailed discussion of certain Commonwealth of Pennsylvania
economic factors, see the Statement of Additional Information.
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DEAN WITTER
MULTI-STATE MUNICIPAL SERIES TRUST
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
TRUSTEES
Jack F. Bennett
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. John E. Jeuck
Dr. Manuel H. Johnson
Paul Kolton
Michael E. Nugent
Albert T. Sommers
Edward R. Telling
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Sheldon Curtis
Vice President, Secretary and
General Counsel
James F. Willison
Vice President
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
110 Washington Street
New York, New York 10286
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Dean Witter Trust Company
Harborside Financial Center,
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
