PROSPECTUS
MAY 19, 1994
Dean Witter National Municipal Trust (the "Fund") is an open-end
diversified management investment company whose investment objective is to
provide a high level of current income exempt from federal income tax,
consistent with the preservation of capital. The Fund invests principally in
tax-exempt fixed-income securities which are rated in the three highest
categories by Moody's Investors Service, Inc. or Standard & Poor's Corporation.
(See "Investment Objective and Policies.")
Shares of the Fund are continuously offered at net asset value.
However, redemptions and/or repurchases are subject in most cases to a
contingent deferred sales charge, scaled down from 3% to 1% of the amount
redeemed, if made within three years of purchase, which charge will be paid to
the Fund's Distributor, Dean Witter Distributors Inc. See "Redemptions and
Repurchases--Contingent Deferred Sales Charge." In addition, the Fund pays the
Distributor a distribution fee pursuant to a Plan of Distribution at the annual
rate of 0.60% of the lesser of the (i) average daily aggregate net sales or
(ii) average daily net assets of the Fund. See "Purchase of Fund Shares--Plan
of Distribution."
This Prospectus sets forth concisely the information you should know
before investing in the Fund. It should be read and retained for future
reference. Additional information about the Fund is contained in the Statement
of Additional Information, dated May 19, 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 numbers listed below. The
Statement of Additional Information is incorporated herein by reference.
Dean Witter
National Municipal Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 526-3143
TABLE OF CONTENTS
Prospectus Summary/ 2
Summary of Fund Expenses/ 3
The Fund and its Management/ 4
Investment Objective and Policies/ 4
Risk Considerations and Hedging Activities/ 7
Investment Restrictions/ 9
Purchase of Fund Shares/ 9
Shareholder Services/ 11
Redemptions and Repurchases/ 14
Dividends, Distributions and Taxes/ 15
Performance Information/ 17
Additional Information/ 17
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and the shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
DEAN WITTER DISTRIBUTORS INC.
DISTRIBUTOR
<PAGE>
PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------
The Fund
The Fund is organized as a Trust, commonly known as a
Massachusetts business trust, and is an open-end diversified
management investment company investing principally in
investment grade, tax-exempt fixed-income securities (see page
4).
- ------------------------------------------------------------------------------
Shares Offered
Shares of beneficial interest with $0.01 par value (see page
17).
- ------------------------------------------------------------------------------
Offering Price
At net asset value (see page 9). Shares redeemed within three
years of purchase are subject to a contingent deferred sales
charge under most circumstances (see pages 14-15).
- ------------------------------------------------------------------------------
Minimum
Purchase
Minimum initial purchase is $1,000; minimum subsequent purchase
is $100 (see page 9).
- ------------------------------------------------------------------------------
Investment
Objective
The investment objective of the Fund is to provide a high level
of current income exempt from federal income tax, consistent
with the preservation of capital (see page 4).
- ------------------------------------------------------------------------------
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 eighty-five investment companies and other portfolios with
assets of approximately $70.8 billion at April 30, 1994 (see
page 4).
- ------------------------------------------------------------------------------
Management Fee
The monthly fee is at an annual rate of 0.35% of average daily
net assets (see page 4).
- ------------------------------------------------------------------------------
Dividends and
Capital Gains
Distributions
Income dividends are declared daily and paid monthly; capital
gains, 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 page 15).
- ------------------------------------------------------------------------------
Distributor
Dean Witter Distributors Inc. (the "Distributor"). For its
services as Distributor, which include payment of sales
commissions to account executives and various other promotional
and sales related expenses, the Distributor receives from the
Fund a distribution fee accrued daily and payable monthly at the
rate of 0.60% per annum of the lesser of (i) the Fund's average
daily aggregate net sales or (ii) the Fund's average daily net
assets. This fee compensates the Distributor for the services it
provides in distributing shares of the Fund and for its sales
related expenses. The Distributor also receives the proceeds of
any contingent deferred sales charges (see pages 9-10).
<PAGE>
- ------------------------------------------------------------------------------
Redemption--
Contingent
Deferred
Sales
Charge
At net asset value; redeemable involuntarily if total value of
the account is less than $100. Although no commission or sales
load is imposed upon the purchase of shares, a contingent
deferred sales charge (scaled down from 3% to 1%) is imposed on
any redemption of shares if after such redemption the aggregate
current value of an account with the Fund falls below the
aggregate amount of the investor's purchase payments made during
the three years preceding the redemption. However, there is no
charge imposed on redemption of shares purchased through
reinvestment of dividends or distributions (see pages 14-15).
- ------------------------------------------------------------------------------
Risks
The value of the Fund's portfolio securities, and therefore the
Fund's net asset value per share, may increase or decrease due
to various factors, principally changes in prevailing interest
rates and the ability of the issuers of the Fund's portfolio
securities to pay interest and principal on such obligations.
The Fund may purchase when-issued and delayed delivery
securities (see page 7). The Fund may also invest in futures and
options, which may be considered speculative in nature and which
may involve greater risks than those customarily assumed by
certain other investment companies which do not invest in such
instruments (see pages 7-8).
- ------------------------------------------------------------------------------
The above is qualified in its entirety by the detailed information appearing
elsewhere in the Prospectus and in the Statement of Additional Information.
2
<PAGE>
SUMMARY OF FUND EXPENSES
- ------------------------------------------------------------------------------
The following table illustrates all expenses and fees that a
shareholder of the Fund will incur.
Shareholder Transaction Expenses
- -----------------------------
Maximum Sales Charge Imposed on Purchases................................ None
Maximum Sales Charge Imposed on Reinvested Dividends..................... None
Contingent Deferred Sales Charge......................................... None
(as a percentage of the lesser of original purchase price
or redemption proceeds)................................................ 3.0%
A contingent deferred sales charge is imposed at the following
declining rates:
Year Since Purchase Payment Made Percentage
-------------------------------- ----------
First..................................... 3.0%
Second.................................... 2.0%
Third..................................... 1.0%
Fourth and thereafter..................... None
Redemption Fees......................................................... None
Exchange Fee............................................................ None
Annual Fund Operating Expenses (as a Percentage of Average Net Assets)
- ----------------------------------------------------------------------
Management Fees*........................................................ 0.35%
12b-1 Fees**............................................................ 0.60%
Other Expenses*......................................................... 0.20%
Total Fund Operating Expenses*.......................................... 1.15%
"Management Fees" as shown above, are for the fiscal period ending September
30, 1994. "Other Expenses," as shown above, is based upon estimated amounts of
expenses of the Fund expected to be incurred during its current fiscal period
ending September 30, 1994.
- ------------
* The Investment Manager has undertaken to assume all expenses (except for any
brokerage and 12b-1 fees) and to waive the compensation provided for in its
Management Agreement until such time as the Fund has $50 million of net assets
or until six months from the date of commencement of the Fund's operations,
whichever occurs first. The fees and expenses disclosed above do not reflect
the assumption of any expenses or the waiver of any compensation by the
Investment Manager. "Total Fund Operating Expenses," as shown above, is based
upon the sum of the 12b-1 Fees, Management Fees and estimated "Other Expenses,"
which may be incurred by the Fund.
** The 12b-1 fee is accrued daily and payable monthly, at an annual rate of
0.60% of the lesser of: (a) the average daily aggregate gross sales of the
Fund's shares since the inception of the Fund (not including reinvestments of
dividends or distributions), less the average daily aggregate net asset value
of the Fund's shares redeemed since the Fund's inception upon which a
contingent deferred sales charge has been imposed or waived, or (b) the Fund's
average daily net assets. A portion of the 12b-1 fee equal to 0.15% of the
Fund's average daily net assets is characterized as a service fee within the
meaning of National Association of Securities Dealers, Inc. ("NASD")
guidelines.
Example 1 year 3 years
- ------- ------- -------
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............................ $ 42 $ 47
You would pay the following expenses on
the investment, assuming no redemption ..... $ 12 $ 37
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF THE FUND MAY BE GREATER OR LESS
THAN THOSE SHOWN.
The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"The Fund and its Management," "Plan of Distribution" and "Redemptions and
Repurchases."
Long-term shareholders of the Fund may pay more in sales charges and
distribution fees than the economic equivalent of the maximum front-end sales
charges permitted by the NASD.
3
<PAGE>
THE FUND AND ITS MANAGEMENT
- ------------------------------------------------------------------------------
Dean Witter National Municipal Trust (the "Fund") is an open-end diversified
management investment company. The Fund is a trust of the type commonly known
as a "Massachusetts business trust" and was organized under the laws of the
Commonwealth of Massachusetts on March 29, 1994.
Dean Witter InterCapital Inc. ("InterCapital" or the "Investment Manager"),
whose address is Two World Trade Center, New York, New York 10048, is the
Fund's Investment Manager. The Investment Manager, which was incorporated in
July, 1992, is a wholly-owned subsidiary of Dean Witter, Discover & Co.
("DWDC"), a balanced financial services organization providing a broad range of
nationally marketed credit and investment products.
InterCapital and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to a total of eighty-five investment companies,
thirty of which are listed on the New York Stock Exchange, with combined total
net assets of approximately $68.8 billion as of April 30, 1994. The Investment
Manager also manages portfolios of pension plans, other institutions and
individuals which aggregated approxi mately $2 billion at such date.
The Fund has retained the Investment Manager to provide administrative
services, manage its business affairs and manage the investment of the Fund's
assets, including the placing of orders for the purchase and sale of portfolio
securities. InterCapital has retained Dean Witter Services Company Inc. to
perform the aforementioned administrative services for the Fund. The Fund's
Trustees review the various services provided by or under the direction of the
Investment Manager to ensure that the Fund's general investment policies and
programs are being properly carried out and that administrative services are
being provided to the Fund in a satisfactory manner.
As full compensation for the services and facilities furnished to the Fund
and for expenses of the Fund assumed by the Investment Manager, the Fund pays
the Investment Manager monthly compensation calculated daily at the annual rate
of 0.35% of the daily net assets of the Fund.
The Fund's expenses include: the fee of the Investment Manager; 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 Investment Management Agreement
with the Fund. The Investment Manager has undertaken to assume all expenses
(except for brokerage and 12b-1 fees) and waive the compensation provided for
in its Investment Management Agreement until such time as the Fund has $50
million of net assets or until six months from the date of commencement of the
Fund's operations, whichever occurs first.
INVESTMENT OBJECTIVE AND POLICIES
- ------------------------------------------------------------------------------
The investment objective of the Fund is to provide a high level of current
income which is exempt from federal income tax, consistent with the
preservation of capital. There is no assurance that this objective will be
achieved. This objective is fundamental and may not be changed without
shareholder approval. The Fund seeks to achieve its investment objective by
investing its assets in accordance with the following policies:
1. At least 75% of the Fund's total assets will be invested in: (a)
Municipal Bonds which are rated at the time of purchase within the three
highest grades by 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 Moody's or S&P or, if not rated, have
outstanding one or more issues of Municipal Bonds rated as set forth in clause
(a) of this paragraph; and (c) Municipal Commercial Paper which at the time of
purchase are rated P-1 by Moody's and A-1 by S&P.
2. The Fund may invest up to 25% of its total assets in Municipal
Obligations which are unrated
4
<PAGE>
or, if rated, are not within the three highest Bond rating categories of
Moody's or S&P or the two highest Note rating categories of Moody's or S&P. The
Fund does not intend to invest in Municipal Bonds which are rated below either
Baa by Moody's or BBB by S&P (the lowest ratings considered investment grade)
or, if not rated, are deemed by the Investment Manager to be below investment
grade, in amounts exceeding 5% of its net assets.
Investments in Municipal Bonds rated either Baa by Moody's or BBB by S&P 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. Municipal Bonds rated below investment grade may
not currently be paying any interest and may have extremely poor prospects of
ever attaining any real investment standing. Any subsequent change in any
rating of any security below investment grade which causes the Fund to be
invested in such securities in an amount exceeding 5% of its net assets will
result in the elimination of that security from the Fund's portfolio as soon as
practicable without adverse market or tax consequences to the Fund.
3. Certain Municipal Obligations in which the Fund may invest without
limit may subject certain investors to the alternative minimum tax and,
therefore, a substantial portion of the income produced by the Fund may be
taxable for such investors under the alternative minimum tax. The Fund,
therefore, may not ordinarily be a suitable investment for investors who are
subject to the alternative minimum tax. The suitability of the Fund for these
investors will depend upon a comparison of the after-tax yield likely to be
provided from the Fund to comparable tax-exempt investments not subject to such
tax and also to comparable fully taxable investments in light of each such
investor's tax position. See "Dividends, Distributions and Taxes."
4. Up to 25% of the Fund's total assets may be invested in taxable money
market instruments under any one or more of the following circumstances: (a)
pending investment of proceeds of sale of Fund shares or of portfolio
securities; (b) pending settlement of purchases of portfolio securities; and
(c) to maintain liquidity for the purpose of meeting anticipated redemptions.
In addition, the Fund may temporarily invest more than 25% of its total assets
in taxable securities to maintain a "defensive" posture when, in the opinion of
the Investment Manager, it is advisable to do so because of market conditions.
The types of taxable securities in which the Fund may temporarily invest are
limited to the following short-term fixed-income securities (maturing in one
year or less from the time of purchase): (i) obligations of the United States
Government, its agencies, instrumentalities or authorities; (ii) commercial
paper rated P-1 by Moody's or A-1 by S&P; (iii) certificates of deposit of
domestic banks with assets of $1 billion or more; and (iv) repurchase
agreements with respect to any of the foregoing portfolio securities.
The average dollar weighted maturity of the Fund's portfolio under normal
circumstances is expected to be in excess of 20 years, but the average
maturity, as well as the emphasis on longer-term obligations, may vary
depending upon market conditions.
Municipal Obligations are debt obligations of states, cities, municipalities
and municipal agencies which generally have maturities, at the time of their
issuance, of either one year or more (Bonds) or from six months to three years
(Notes). Municipal Commercial Paper refers to short-term obligations of
municipalities. Any Municipal Obligation which depends directly or indirectly
on the credit of the Federal Government shall be considered to have a rating of
Aaa/AAA.
The two principal classifications of Municipal Obligations and Commercial
Paper are "general obligation" and "revenue" obligations 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 government units.
Revenue bonds, notes or commercial paper are payable from the revenues derived
from a particular facility or class of facilities or, in some cases, from
specific revenue
5
<PAGE>
sources. Revenue bonds, notes or commercial paper are issued for a wide variety
of purposes, including the financing of electric, gas, water and sewer systems
and other public utilities; industrial development and pollution control
facilities; single and multi-family housing units; public buildings and
facilities; air and marine ports; transportation facilities such as toll roads,
bridges and tunnels; and health and educational facilities such as hospitals
and dormitories. They rely primarily on user fees to pay debt service, although
the principal revenue source is often supplemented by additional security
features which are intended to enhance the creditworthiness of the issuer's
obligations. In some cases, particularly revenue bonds issued to finance
housing and public buildings, a direct or implied "moral obligation" of a
governmental unit may be pledged to the payment of debt service. In other
cases, a special tax or other charge may augment user fees.
Included within the revenue category are participations in lease obligations
or installment purchase contracts (hereinafter collectively called "lease
obligations") of municipalities. State and local governments issue lease
obligations to acquire equipment and facilities.
Lease obligations may have risks not normally associated with general
obligation or other revenue bonds. Leases and installment purchase or
conditional sale contracts (which may provide for title to the leased asset to
pass eventually to the issuer) have developed as a means for governmental
issuers to acquire property and equipment without the necessity of complying
with the constitutional and statutory requirements generally applicable for the
issuance of debt. Certain lease obligations contain "non-appropriation" clauses
that provide that the governmental issuer has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on an annual or other periodic
basis. Consequently, continued lease payments on those lease obligations
containing "non-appropriation" clauses are dependent on future legislative
actions. If such legislative actions do not occur, the holders of the lease
obligation may experience difficulty in exercising their rights, including
disposition of the property.
Lease obligations represent a relatively new type of financing that has not
yet developed the depth of marketability associated with more conventional
municipal obligations, and, as a result, certain of such lease obligations, may
be considered illiquid securities. To determine whether or not the Fund will
consider such securities to be illiquid (the Fund may not invest more than ten
percent of its net assets in illiquid securities), the Trustees of the Fund
have established guidelines to be utilized by the Fund in determining the
liquidity of a lease obligation. The factors to be considered in making the
determination include: (1) the frequency of trades and quoted prices for the
obligation; (2) the number of dealers willing to purchase or sell the security
and the number of other potential purchasers; (3) the willingness of dealers to
undertake to make a market in the security; and (4) the nature of the
marketplace trades, including the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of the transfer.
The foregoing percentage and rating policies apply at the time of acquisition
of a security based on the last previous determination of the Fund's net asset
value. Any subsequent change in any rating by a rating service or change in
percentages resulting from market fluctuations or other changes in the Fund's
total assets will not require elimination of any security from the Fund's
portfolio until such time as the Investment Manager determines that it is
practicable to sell the security without undue market or tax consequences to
the Fund.
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.
PORTFOLIO CHARACTERISTICS
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 ei-
6
<PAGE>
ther at predesignated periodic intervals or whenever there is a change in the
market rate of interest on which the interest rate payable is based.
When-Issued and Delayed Delivery Securities.
The Fund may purchase tax-exempt securities on a when-issued or delayed
delivery basis; i.e., delivery and payment can take place a month or more after
the date of the transaction. These securities are subject to market fluctuation
and no interest accrues to the purchaser prior to settlement. At the time the
Fund makes the commitment to purchase such securities, it will record the
transaction and thereafter reflect the value, each day, of such securities in
determining its net asset value. An increase in the percentage of the Fund's
assets committed to the purchase of securities on a when-issued or delayed
delivery basis may increase the volatility of the Fund's net asset value.
RISK CONSIDERATIONS AND HEDGING ACTIVITIES
The value of the Fund's portfolio securities and, therefore, the Fund's net
asset value per share may increase or decrease due to various factors,
principally changes in prevailing interest rates and the ability of the issuers
of the Fund's portfolio securities to pay interest and principal on such
obligations on a timely basis. Generally, a rise in interest rates will result
in a decrease in the Fund's net asset value per share, while a drop in interest
rates will result in an increase in the Fund's net asset value per share.
The Fund may enter into financial futures contracts ("futures contracts"),
options on such futures and municipal bond index futures contracts for hedging
purposes.
Futures Contracts and Options on Futures. The Fund may invest in futures
contracts and related options thereon. The Fund may sell a futures contract or
a call option thereon or purchase a put option on such futures contract, if the
Investment Manager anticipates interest rates to rise, as a hedge against a
decrease in the value of the Fund's portfolio securities. If the Investment
Manager anticipates that interest rates will decline, the Fund may purchase a
futures contract or a call option thereon or sell a put option on such futures
contract, to protect against an increase in the price of the securities the
Fund intends to purchase. These futures contracts and related options thereon
will be used only as a hedge against anticipated interest rate changes. A
futures contract sale creates an obligation by the Fund, as seller, to deliver
the specific type of instrument called for in the contract at a specified
future time for a specified price. A futures contract purchase creates an
obligation by the Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specified future time at a specified price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until or near that date. The determination would be in
accordance with the rules of the exhange on which the futures contract sale or
purchase was effected.
Although the terms of futures contracts specify actual delivery or receipt of
securities, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the securities.
Closing out of a futures contract is effected by entering into an offsetting
purchase or sale transaction.
Unlike a futures contract, which requires the parties to buy and sell a
security on a set date, an option on a futures contract entitles its holder to
decide on or before a future date whether to enter into such a contract (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 not daily payments of cash to reflect the
change in the value of the underlying contract as there are by a purchaser or
seller of a futures contract. The value of the option does change and is
reflected in the net asset value of the Fund.
A risk in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities subject to
futures contracts may correlate imperfectly with the behavior of the cash
prices of the Fund's portfolio securities. The risk of imperfect correlation
may be increased by the fact that the Fund will invest in futures contracts on
taxable securities and there is no guarantee that the prices of taxable
securities will move in a similar manner to the prices of tax-exempt
securities. The correlation may be
7
<PAGE>
distorted by the fact that the futures market is dominated by short-term
traders seeking to profit from the difference between a contract or security
price objective and their cost of borrowed funds. Such distortions are
generally minor and would diminish as the contract approached maturity.
Another risk is that the 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 sold futures contracts for the sale of securities in anticipation of an
increase in interest rates, and then interest rates went down instead, causing
bond prices to rise, the Fund would lose money on the sale.
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 options on futures will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop or be maintained.
Municipal Bond Index Futures. The Fund may utilize municipal bond index
futures contracts and options thereon for hedging purposes. The Fund's
strategies in employing such contracts will be similar to that discussed above
with respect to financial futures and options thereon. A municipal bond index
is a method of reflecting in a single number the market value of many different
municipal bonds and is designed to be representative of the municipal bond
market generally. The index fluctuates in response to changes in the market
values of the bonds included within the index. Unlike futures contracts on
particular financial instruments, transactions in futures on a municipal bond
index will be settled in cash, if held until the close of trading in the
contract. However, like any other futures contract, a position in the contract
may be closed out by purchase or sale of an offsetting contract for the same
delivery month prior to expiration of the contract.
The Fund may not enter into futures contracts or purchase related options
thereon if immediately thereafter the amount committed to margin plus the
amount paid for premiums for unexpired options on futures contracts exceeds 5%
of the value of the Fund's total assets. The Fund may not purchase or sell
futures contracts or related options thereon if, immediately thereafter, more
than one-third of its net assets would be hedged.
PORTFOLIO MANAGEMENT
The Fund is actively managed by the Investment Manager with a view to
achieving the Fund's invest ment objective. In determining which securities to
purchase for the Fund or hold in the Fund's portfolio, the Investment Manager
will rely on information from various sources, including research, analysis and
appraisals of brokers and dealers, including Dean Witter Reynolds Inc. ("DWR"),
a broker-dealer affiliate of InterCapital, the views of Trustees of the Fund
and others regarding economic developments and interest rate trends, and the
Investment Manager's own analysis of factors it deems relevant. The Fund is
managed within InterCapital's Municipal Fixed Income Group, which manages 36
tax-exempt municipal funds and fund portfolios, with approximately $12 billion
in assets as of March 31, 1993. James F. Willison, Senior Vice President of
InterCapital and Manager of InterCapital's Municipal Fixed Income Group, is the
primary portfolio manager of the Fund and has been managing portfolios of
municipal securities at InterCapital for over five years.
Securities are purchased and sold principally in response to the Investment
Manager's cur rent evaluation of an issuer's ability to meet its debt
obligations in the future, and the Investment Manager's current assessment of
future changes in the levels of interest rates on tax-exempt securities of
varying maturities. Securities purchased by the Fund are, generally, sold by
dealers acting as principal for their own accounts. Pursuant to an order of the
Securities and Exchange Commission, the Fund may effect principal transactions
in certain money market instruments with DWR. In addition, the Fund may incur
brokerage commissions on transactions conducted through DWR.
The portfolio trading engaged in by the Fund may result in its portfolio
turnover rate exceeding 100%. The Fund will incur underwriting discount costs
(on
8
<PAGE>
underwritten securities) commensurate with its portfolio turnover rate.
Additionally, see "Dividends, Distributions and Taxes" for a discussion of the
tax policy of the Fund. A more extensive discussion of the Fund's portfolio
brokerage policies is set forth in the Statement of Additional Information.
Except as specifically noted, all investment objectives, policies and
practices discussed above are not fundamental policies of the Fund and, as
such, may be changed without shareholder approval.
INVESTMENT RESTRICTIONS
- ------------------------------------------------------------------------------
The investment restrictions listed below are among the restrictions which
have been adopted by the Fund as fundamental policies. Under the Investment
Company Act of 1940, as amended (the "Act"), a fundamental policy may not be
changed without the vote of a majority of the outstanding voting securities of
the Fund, as defined in the Act.
For purposes of the following restrictions: (a) an "issuer" of a security is
the entity whose assets and revenues are committed to the payment of interest
and principal on that particular security; (b) a "taxable security" is any
security the interest on which is subject to federal income tax; and (c) all
percentage limitations apply immediately after a purchase or initial
investment, and any subsequent change in any applicable percentage resulting
from market fluctuations or other changes in the Fund's total assets does not
require elimination of any security from the portfolio.
The Fund may not:
1. As to 75% of its total assets, invest more than 5% of the value of its
total assets in the securities of any one issuer (other than obligations issued
or guaranteed by the United States Government, its agencies or
instrumentalities).
2. As to 75% of its total assets, purchase more than 10% of all outstanding
voting securities or any one issuer (other than obligations issued, or
guaranteed as to principal and interest, by the United States Government, its
agencies or instrumentalities).
3. Invest 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 (industrial development and pollution control bonds are
grouped into industries based upon the business in which the issuers of such
obligations are engaged).
4. Invest more than 5% of the value of its total assets in taxable securities
of issuers having a record, together with predecessors, of less than three
years of continuous operation. This restriction shall not apply to any
obligation of the United States Government, its agencies or instrumentalities.
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 the Fund are distributed by the Distributor and offered by DWR and
other dealers who have entered into agreements with the Distributor ("Selected
Broker-Dealers"). The principal executive office of the Distributor is located
at Two World Trade Center, New York, New York 10048.
The minimum initial purchase is $1,000. Subsequent purchases of $100 or more
may be made by sending a check, payable to Dean Witter National Municipal
Trust, directly to Dean Witter Trust Company (the "Transfer Agent") at P.O. Box
1040, Jersey City, N.J. 07303 or by contacting a DWR or other Selected Broker-
Dealer account executive. In the case of purchases made pursuant to systematic
payroll deduction plans, the Fund, in its discretion, may accept such purchases
without regard to any minimum amounts which
9
<PAGE>
would otherwise be required if the Fund has reason to believe that additional
purchases will increase the amount of the purchase of shares in all accounts
under such plans to at least $1,000. Certificates for shares purchased will not
be issued unless a request is made by the shareholder in writing to the
Transfer Agent.
Shares of the Fund are sold through the Distributor on a normal five business
day settlement basis; that is payment generally is due on or before the fifth
business day (settlement date) after the order is placed with the Distributor.
Shares purchased through the Distributor are entitled to dividends beginning on
the next business day following settlement date. Since the Distributor forwards
investors' funds on settlement date, it will benefit from the temporary use of
the funds if payment is made prior thereto. Shares purchased through the
Transfer Agent are entitled to dividends beginning on the next business day
following receipt of an order. As noted above, orders placed directly with the
Transfer Agent must be accompanied by payment. Investors will be entitled to
receive capital gains distributions if their order is received by the close of
business on the day prior to the record date for such distributions. The
offering price will be the net asset value per share next determined following
receipt of an order (see "Determination of Net Asset Value" below). While no
sales charge is imposed at the time shares are purchased, a contingent deferred
sales charge may be imposed at the time of redemption (see "Redemptions and
Repurchases"). Sales personnel of a Selected Broker-Dealer are compensated for
selling shares of the Fund at the time of their sale by the Distributor or any
of its affiliates and/or the Selected Broker-Dealer. In addition, some sales
personnel of the Selected Broker-Dealer will receive non-cash compensation in
the form of trips to educational and/or business seminars and merchandise as
special sales incentives. The Fund and the Distributor reserve the right to
reject any purchase orders.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Act (the "Plan"), under which the Fund pays the Distributor a fee, which is
accrued daily and payable monthly, at an annual rate of 0.60% of the lesser of:
(a) the average daily aggregate gross sales of the Fund's shares since the
inception of the Fund (not including reinvestments of dividends or capital
gains distributions), less the average daily aggregate net asset value of the
Fund's shares redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or waived; or (b) the Fund's average
daily net assets. This fee is treated by the Fund as an expense in the year it
is accrued. A portion of 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.
Amounts paid under the Plan are paid to the Distributor to compensate it for
the services provided and the expenses borne by the Distributor and others in
the distribution of the Fund's shares, including the payment of commissions for
sales of the Fund's shares and incentive compensation to and expenses of DWR's
account executives and others who engage in or support distribution of shares,
including overhead and telephone expenses; printing and distribution of
prospectuses and reports used in connection with the offering of the Fund's
shares to other than current shareholders; and preparation, printing and
distribution of sales literature and advertising materials. In addition, the
Distributor may utilize fees paid pursuant to the Plan to compensate DWR and
other Selected Broker-Dealers for their opportunity costs in advancing such
amounts, which compensation would be in the form of a carrying charge on any
unreimbursed distribution expenses.
At any given time, the expenses in distributing shares of the Fund may be in
excess of the total of (i) the payyments made by the Fund pursuant to the Plan,
and (ii) the proceeds of contingent deferred sales charges paid by investors
upon the redemption of shares (see "Redemptions and Re pur chases--Contingent
Deferred Sales Charge"). For example, if $1 million in expenses in distributing
shares of the Fund had been incurred and $750,000 had been received as
described in (i) and (ii) above, the excess expense would amount to $250,000.
Because there is no requirement under the Plan that the Distributor be
reimbursed for all expenses or any requirement that the Plan be continued from
year to year, this excess
10
<PAGE>
amount does not constitute a liability of the Fund. Although there is no legal
obligation for the Fund to pay expenses incurred in excess of payments made to
the Distributor under the Plan, and the proceeds of contingent deferred sales
charges paid by investors upon redemption of shares, if for any reason the Plan
is terminated, the Trustees will consider at that time the manner in which to
treat such expenses. Any cumulative expenses incurred, but not yet recovered
through distribution fees or contingent deferred sales charges, may or may not
be recovered through future distribution fees or contingent deferred sales
charges.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is determined once daily at 4:00
p.m., New York time, on each day that the New York Stock Exchange is open by
taking the value of all assets of the Fund, subtracting its liabilities,
dividing by the number of shares outstanding and adjusting to the nearest cent.
The net asset value per share will not be determined on Good Friday and on such
other federal and non-federal holidays as are observed by the New York Stock
Exchange.
Portfolio securities (other than short-term taxable debt securities, futures
and options) are valued for theFund 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 services 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 time of purchase are valued at amortized cost, unless the Board
determines such does not reflect the securities' fair value, in which case
these securities will be valued at their market value as determined by the
Board of Trustees. Other taxable short-term debt securities with maturities of
more than sixty days will be valued on a mark to market basis until such time
as they reach a maturity of sixty days, whereupon they will be valued at
amortized cost using their value on the 61st day unless the Trustees
determine such does not reflect the securities' fair value, in which case these
securities will be valued at their fair market value as determined by the Board
of Trustees. Listed options on debt securities are valued at the latest sale
price on the exchange on which they are listed unless no sales of such options
have taken place that day, in which case, they will be valued at the mean
between their closing bid and asked prices. Unlisted options on debt securities
are valued at the mean between their latest bid and asked price. Futures are
valued at the latest sale price on the commodities exchange on which they trade
unless the Board of Trus tees determines that such price does not reflect their
market value, in which case they will be valued at their fair value as
determined by the Board of Trustees. All other securities and other assets are
valued at their fair value as determined in good faith under procedures
established by and under the supervision of the Board of Trustees.
SHAREHOLDER SERVICES
- -------------------------------------------------------------------------------
Automatic Investment of Dividends and Distributions. All income dividends and
capital gains distributions are automatically paid in full and fractional
shares of the Fund (or, if specified by the shareholder, any other open-end
investment company for which InterCapital serves as investment manager
(collectively, with the Fund, the "Dean Witter Funds")), unless the shareholder
requests that they be paid in cash. Shares so acquired are not subject to the
imposition of a contingent deferred sales charge upon their redemption (see
"Redemptions and Repurchases"). Such dividends and distributions will be paid,
at the net asset value per share, in shares of the Fund (or in cash if the
shareholder so requests) on the monthly payment date, which generally 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
11
<PAGE>
dividend check during the first ten days of the following month.
EasyInvestSM. Shareholders may subscribe to EasyInvest, an automatic purchase
plan which provides for any amount from $100 to $5,000 to be transferred
automatically from a checking or savings account, on a semi-monthly, monthly or
quarterly basis, to the Transfer Agent for investment in shares of the Fund.
Systematic Withdrawal Plan. A systematic withdrawal plan (the "Withdrawal
Plan") is available for shareholders who own or purchase shares of the Fund
having a minimum value of $10,000 based upon the then current net asset value.
The Withdrawal Plan provides for monthly or quarterly (March, June, September,
December) checks in any dollar amount, not less than $25, or in any whole
percentage of the account balance, on an annualized basis. Any applicable
contingent deferred sales charge will be imposed on shares redeemed under the
Withdrawal Plan (See "Redemptions and Repurchases--Contingent Deferred Sales
Charge"). Therefore, any shareholder participating in the Withdrawal Plan will
have sufficient shares redeemed from his or her account so that the proceeds
(net of any applicable contingent deferred sales charge) to the shareholder
will be the designated monthly or quarterly amount.
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.
Tax-Sheltered Retirement Plans. Retirement plans are available for use by
corporations, the self-employed, Individual Retirement Accounts and Custodial
Accounts under Section 403(b)(7) of the Internal Revenue Code. Adoption of such
plans should be on advice of legal counsel or tax adviser.
For further information regarding plan administration, custodial fees and
other details, investors should contact their account executive or the Transfer
Agent.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders an "Exchange Privilege" allowing
the exchange of shares of the Fund for shares of other Dean Witter Funds sold
with a contingent deferred sales charge ("CDSC funds"), and for shares of Dean
Witter Short-Term U.S. Treasury Trust, Dean Witter Limited Term Municipal
Trust, Dean Witter Short-Term Bond Fund and five Dean Witter Funds which are
money market funds (the foregoing eight non-CDSC funds are hereinafter referred
to as the "Exchange Funds"). Exchanges may be made after the shares of the Fund
acquired by purchase (not by exchange or dividend reinvestment) have been held
for thirty days. There is no waiting period for exchanges of shares acquired by
exchange or dividend reinvestment.
An exchange to another CDSC fund or any Exchange Fund that is not a money
market fund is on the basis of the next calculated net asset value per share of
each fund after the exchange order is received. When exchanging into a money
market fund from the Fund, shares of the Fund are redeemed out of the Fund at
their next calculated net asset value and the proceeds of the redemption are
used to purchase shares of the money market fund at their net asset value
determined the following day. Subsequent exchanges between any of the money
market funds and any of the CDSC funds can be effected on the same basis. No
contingent deferred sales charge ("CDSC") is imposed at the time of any
exchange, although any applicable CDSC will be imposed upon ultimate
redemption. Shares of the Fund which are exchanged for shares of another CDSC
fund having a higher CDSC schedule than the Fund will be subject to the CDSC
schedule of the other CDSC fund, even if shares are subsequently reexchanged
for shares of the Fund prior to redemption. During the period of time the
shareholder remains invested in the Exchange Fund (calculated from the last day
of the month in which the Exchange Fund shares were acquired), the holding
period (for the purpose of determining the rate of the CDSC) is frozen. If
those shares are subsequently reexchanged for shares of a CDSC fund, the
holding period previously frozen when the first exchange was made resumes on
the last day of the month in which shares of a CDSC fund are reacquired. Thus,
the CDSC is based upon the time (calculated as described above) the shareholder
was invested in shares of a CDSC fund (see "Redemptions and Repurchases--
Contingent Deferred Sales Charge"). However, in the case of shares of the Fund
exchanged into an Exchange Fund upon a redemption of shares which results in a
CDSC being imposed, a credit (not to exceed the amount of the
12
<PAGE>
CDSC) will be given in an amount equal to the Exchange Fund 12b-1 distribution
fees incurred on or after that date which are attributable to those shares.
(Exchange Fund 12b-1 distribution fees, if any, are described in the
prospectuses for those funds.)
In addition, shares of the Fund may be acquired in exchange for shares of
certain Dean Witter Funds sold with a front-end sales charge ("front-end sales
charge funds"), but shares of the Fund, however acquired, may not be exchanged
for shares of front-end sales charge funds. Shares of a CDSC fund acquired in
exchange for shares of a front-end sales charge fund (or in exchange for shares
of other Dean Witter Funds for which shares of a front-end sales charge fund
have been exchanged) are not subject to any CDSC upon their redemption.
Purchases and exchanges should be made for investment purposes only. A
pattern of frequent exchanges may be deemed by the Investment Manager
to be abusive and contrary to the best interests of the Fund's other
shareholders and, at the Investment Manager's discretion, may be limited by the
Fund's refusal to accept additional purchases and/or exchanges from the
investor. Although the Fund does not have any specific definition of what
constitutes a pattern of frequent exchanges, and will consider all relevant
factors in determining whether a particular situation is abusive and contrary
to the best interests of the Fund and its other shareholders, investors shoud
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 share holder's most recent exchange.
The Exchange Privilege may be terminated or revised at any time by the Fund
and/or any of such Dean Witter Funds for which shares of the Fund may be
exchanged, upon such notice as may be required by applicable regulatory
agencies. Shareholders main tain ing margin accounts with DWR or another
Selected Broker-Dealer are referred to their account executive regarding
restrictions on exchange of shares of the Fund pledged in their margin account.
The current prospectus for each fund describes its investment objectives and
policies, and shareholders should obtain one and read it carefully before
investing. Exchanges are subject to the minimum investment requirement and
other conditions imposed by each fund. In the case of any shareholder holding a
share certificate or certificates, no exchanges may be made until the share
certificate(s) have been received by the Transfer Agent and deposited in the
shareholder's account. An exchange will be treated for federal income tax
purposes as a redemption or repurchase of shares, on which the shareholder may
realize a capital gain or loss. However, the ability to deduct capital losses
on an exchange is limited in situations where there is an exchange of shares
within ninety days after the shares are purchased. There are also limits on the
deduction of losses after the payment of exempt-interest dividends for shares
held for less than six months (see "Dividends, Distributions and Taxes"). The
Exchange Privilege is only available in states where an exchange may legally be
made.
If DWR or another Selected Broker-Dealer is the current dealer of record and
its account numbers are part of the account information, shareholders may
initiate an exchange of shares of the Fund for shares of any of the Dean Witter
Funds (for which the Exchange Privilege is available) pursuant to this Exchange
Privilege by contacting their DWR or other Selected Broker-Dealer account
executive (no Exchange Privilege Authorization Form is required). Other
shareholders (and those share holders who are clients of DWR or another
Selected Broker-Dealer but who wish to make exchanges directly by writing or
telephoning the Transfer Agent) must complete and forward to the Transfer Agent
an Exchange Privilege Authorization form, copies of which may be obtained from
the Transfer Agent, to initiate an exchange. If the Authorization Form is
used, exchanges may be made 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
instruc-
13
<PAGE>
tions 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 (see "Redemptions and Repurchases"). 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 account executive or the Transfer Agent.
REDEMPTIONS AND REPURCHASES
- -------------------------------------------------------------------------------
Redemption. Shares of the Fund can be redeemed for cash at any time at the
net asset value per share next determined; however, such redemption proceeds
will be reduced by the amount of any applicable contingent deferred sales
charges (see below). If shares are held in a shareholder's account without a
share certificate, a written request for redemption to the Fund's Transfer
Agent at P.O. Box 983, Jersey City, NJ 07303 is required. If certificates are
held by the shareholder, the shares may be redeemed by surrendering the
certificates with a written request for redemption, along with any additional
information required by the Transfer Agent.
Contingent Deferred Sales Charge. Shares of the Fund which are held three
years or more after purchase (calculated from the last day of the month in
which the shares were purchased) will not be subject to any charge upon
redemption. Shares redeemed sooner than three years after purchase may,
however, be subject to a charge upon redemption. This charge is called a
"contingent deferred sales charge" ("CDSC"), which will be a percentage of the
dollar amount of shares redeemed and will be assessed on an amount equal to the
lesser of the current market value or the cost of the shares being redeemed.
The size of this percentage will depend upon how long the shares have been
held, as set forth in the table below:
CONTINGENT DEFERRED
YEAR SINCE SALES CHARGE
PURCHASE AS A PERCENTAGE OF
PAYMENT MADE AMOUNT REDEEMED
------------ ------------------
First........................... 3.0%
Second.......................... 2.0%
Third........................... 1.0%
Fourth and thereafter........... None
A CDSC will not be imposed on: (i) any amount which represents an increase in
value of shares purchased within the three years preceding the redemp-tion;
(ii) the current net asset value of shares purchased more than three years
prior to the redemption; and (iii) the current net asset value of shares
purchased through reinvestment of dividends or distributions and/or shares
acquired in exchange for shares of Dean Witter Funds sold with a front-end
sales charge or of other Dean Witter Funds acquired in exchange for such
shares. Moreover, in determining whether a CDSC is applicable it will be
assumed that amounts described in (i), (ii) and (iii) above (in that order)
are redeemed first.
In addition, the CDSC, if otherwise applicable, will be waived in the case
of: (i) redemptions of shares held at the time a shareholder dies or becomes
disabled, only if the shares are (a) registered either in the name of an
individual shareholder (not a trust), or in the names of such shareholder and
his or her spouse as joint tenants with right of survivorship, or (b) held in a
qualified corporate or self-employed retirement plan, Individual Retirement
Account or Custodial Account under Section 403(b)(7) of the Internal Revenue
Code, provided in either case that the redemption is requested within one year
of the death or initial determination of disability, and (ii) redemptions in
connection with the following retirement plan distributions: (a) lump-sum or
other distributions from a qualified corporate or self-employed retirement plan
following retirement (or in the case of a "key-employee" of a "top heavy" plan,
following attainment of age 59 1/2); (b) distributions from an Individual
Retirement Account or Custodial Account under Section
403(b)(7) of the Internal Revenue Code following attainment of age 59 1/2; and
(c) a tax-free return of an
14
<PAGE>
excess contribution to an IRA. For the purpose of determining disability, the
Distributor utilizes the definition of disability contained in Section 72(m)(7)
of the Internal Revenue Code, which relates to the inability to engage in
gainful employment. All waivers will be granted only following receipt by the
Distributor of confirmation of the investor's entitlement.
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") after such
repurchase order is received by DWR or other Selected Broker-Dealer, reduced by
the applicable CDSC.
The CDSC, if any, will be the only fee imposed by the Fund, the Distributor,
DWR or other Selected Broker-Dealers. The offers by DWR and other Selected
Broker-Dealers to repurchase shares may be suspended without notice by them at
any time. In that event, shareholders may redeem their shares through the
Fund's Transfer Agent as set forth above under "Redemption."
Payment for Shares Redeemed or Repurchased. Payment for shares presented for
repurchase or redemption will be made by check within seven days after receipt
by the Transfer Agent of the certificate and/or written request in good order.
Such payment may be postponed or the right of redemption suspended under
unusual circumstances. If the shares to be redeemed have recently been
purchased by check, payment of the redemption proceeds may be delayed for the
minimum time needed to verify that the check used for investment has been
honored (not more than fifteen days from the time of investment of the check by
the Transfer Agent). Shareholders maintaining 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 their net asset value next determined after
a reinstatement request, to gether with the proceeds, is received by the
Transfer Agent and receive a pro-rata credit for any CDSC paid in connection
with such redemption or repurchase.
Involuntary Redemption. The Fund reserves the right to redeem, on sixty
days' notice, and at net asset value, the shares of any shareholder (other than
shares held in an Individual Retirement Account or Custodial Account under
Section 403(b)(7) of the Code) whose shares have a value of less than $100 as a
result of redemptions or repurchases, or such lesser amount as may be fixed by
the Board of Trustees. However, before the Fund redeems such shares and sends
the proceeds to the shareholder, it will notify the shareholder that the value
of the shares is less than $100 and allow the shareholder to make an additional
investment in an amount which will increase the value of the account to $100 or
more before the redemption is processed. No CDSC will be imposed on any
involuntary redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
Dividends and Distributions. The Fund declares dividends from net investment
income on each day the New York Stock Exchange is open for business (see
"Purchase of Fund Shares"). Such dividends are paid monthly. The Fund intends
to distribute all of the Fund's net investment income on an annual basis.
The Fund will distribute at least once each year all net realized short-term
capital gains in excess of any realized net long-term capital losses, if any.
The Fund intends to distribute all of its realized net long-term capital gains,
if any, in excess of any realized net short-term capital losses and any
available net capital loss
15
<PAGE>
carryovers, at least once per fiscal year, although it may elect to retain all
or part of such gains for reinvestment. Taxable capital gains may be generated
by the sale of portfolio securities and by transactions in options and futures
contracts engaged in by the Fund. All dividends and capital gains distributions
will be paid in additional Fund shares (without sales charge) and automatically
credited to the shareholder's account without issuance of a share certificate
unless the shareholder requests in writing that all dividends be paid in cash
and such request is received by the close of business on the day prior to the
record date for such distributions (see "Shareholder Services--Automatic
Investment of Dividends and Distributions"). Any dividends declared in the last
quarter of any year which are paid in the following year prior to February 1
will be deemed received by the shareholder in the prior year.
Taxes. Because the Fund intends to distribute all of its net investment
income and capital gains to shareholders and intends to otherwise qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code,
it is not expected that the Fund will be required to pay any federal income
tax.
The Fund intends to qualify to pay "exempt-interest dividends" to its
shareholders by maintaining, as of the close of each quarter of its taxable
year, at least 50% of the value of its total assets in tax-exempt securities.
If the Fund satisfies such requirement, distributions from net investment
income to shareholders, whether taken in cash or reinvested in additional
shares, will be excludable from gross income for federal income tax purposes to
the extent net investment income is represented by interest on tax-exempt
securities. Exempt-interest dividends are included, however, in determining
what portion, if any, of a person's Social Security benefits are subject to
federal income tax. The Internal Revenue 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 certain
"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 government units (e.g., bonds
used for commercial or housing purposes). Income received on such bonds is
classified as a "tax preference item," under the alternative minimum tax, for
both individual and corporate investors. The Fund anticipates that a portion of
its investments will be made in such "private activity bonds," with the result
that a portion of the exempt-interest dividends paid by the Fund will be an
item of tax preference to shareholders subject to the alternative minimum tax.
In addition, certain corporations which are subject to the alternative minimum
tax may also have to include 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.
Within sixty days after the end of its fiscal year, the Fund will mail to its
shareholders a statement indicating the percentage of the dividend
distributions for such fiscal year which constitutes exempt-interest dividends
and the percentage, if any, that is taxable, and the percentage, if any, of the
exempt-interest dividends which constitutes an item of tax preference.
Shareholders will normally be subject to federal income tax on dividends paid
from interest income derived from taxable securities and on distributions of
net short-term capital gains, if any. Distributions of long-term capital gains,
if any, are taxable as long-term capital gains, regardless of how long the
shareholder has held the Fund shares and regardless of whether the distribution
is received in additional shares or in cash. To avoid being subject to a 31%
federal backup withholding tax on taxable dividends, capital gains
distributions and proceeds of redemptions or repurchases, shareholders'
taxpayer identification numbers must be furnished and certified as to
accuracy.
Any loss on the sale or exchange of shares of the Fund which are held for six
months or less is disallowed to the extent of the amount of any exempt-interest
dividend paid with respect to such shares. Treasury Regulations may provide for
a reduction in
16
<PAGE>
such required holding periods. If a shareholder receives a distribution that is
taxed as a long-term capital gain on shares held for six months or less and
sells those shares at a loss, the loss will be treated as a long-term capital
loss.
Interest on indebtedness incurred by shareholders to purchase or carry shares
of an investment company paying exempt-interest dividends, such as the Fund,
will not be deductible by the investor for federal income tax purposes.
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any state
or local taxing authority. Thus, shareholders of the Fund may be subject to
state and local taxes on exempt-interest dividends.
Shareholders should consult their tax advisers as to the applicability of the
above to their own tax situation.
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
From time to time the Fund may quote its "yield" and/or its "total return" in
advertisements and sales literature. Both the yield and the total return of the
Fund are based on historical earnings and are not intended to indicate future
performance. The yield of the Fund is computed by dividing the Fund's net
investment income over a 30-day period by an average value (using the average
number of shares entitled to receive dividends and the maximum offering price
per share at the end of the period), all in accordance with applicable
regulatory requirements. Such amount is compounded for six months and then
annualized for a twelve-month period to derive the Fund's yield. The Fund may
also quote tax-equivalent yield, which is calculated by determining the pre-
tax yield which, after being taxed at a stated rate, would be equivalent to the
yield determined as described above.
The "average annual total return" of the Fund refers to a figure reflecting
the average annualized percentage increase (or decrease) in the value of an
initial investment in the Fund of $1,000 over periods of one, five and ten
years, or over the life of the Fund if less than any of the foregoing. Average
annual total return reflects all income earned by the Fund, any appreciation or
depreciation of the Fund's assets, all expenses incurred by the Fund and all
sales charges which would be incurred by redeeming share holders, for the
stated periods. It also assumes re in vest ment of all dividends and
distributions paid by the Fund.
In addition to the foregoing, the Fund may advertise its total return over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. Such calculations may or may not reflect the
deduction of the contingent deferred sales charge which, if reflected, would
reduce the performance quoted. The Fund may also advertise the growth of
hypothetical investments of $10,000, $50,000 and $100,000 in shares of the
Fund. The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent organizations
(such as mutual fund performance rankings of Lipper Analytical Services, Inc.).
ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
Voting Rights. All shares of beneficial interest of the Fund are of $.01 par
value and are equal as to earnings, assets and voting privileges.
The Fund is not required to hold Annual Meetings of Shareholders and in
ordinary circumstances the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances the Trustees may be removed by action of the Trustees or by the
shareholders.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that Fund
obligations
17
<PAGE>
include such disclaimer, and provides for indemnification and reimbursement of
expenses out of the Fund's property for any share holder held personally
liable for the obligations of the Fund. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations.
Given the above limitations on shareholder personal liability and the nature of
the Fund's assets and operations the possibility of the Fund's being unable to
meet its obligations is remote and, in the opinion of Massachusetts counsel to
the Fund, the risk to Fund shareholders of personal liability is remote.
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.
The Investment Manager provided the initial capital for the Fund by
purchasing 10,000 shares of the Fund for $100,000 on May 10, 1994. As of the
date of this Prospectus, the Investment Manager owned 100% of the outstanding
shares of the Fund. The Investment Manager may be deemed to control the Fund
until such time as it owns less than 25% of the outstanding shares of the Fund.
18
<PAGE>
THE DEAN WITTER FAMILY OF FUNDS
MONEY MARKET FUNDS
Dean Witter Liquid Asset Fund Inc.
Dean Witter Tax-Free Daily Income Trust
Dean Witter U.S. Government Money Market Trust
Dean Witter California Tax-Free Daily Income Trust
Dean Witter New York Municipal Money Market Trust
EQUITY FUNDS
Dean Witter American Value Fund
Dean Witter Natural Resource Development Securities Inc.
Dean Witter Dividend Growth Securities Inc.
Dean Witter Developing Growth Securities Trust
Dean Witter World Wide Investment Trust
Dean Witter Value-Added Market Series
Dean Witter Utilities Fund
Dean Witter Capital Growth Securities
Dean Witter European Growth Fund Inc.
Dean Witter Precious Metals and Minerals Trust
Dean Witter Pacific Growth Fund Inc.
Dean Witter Health Sciences Trust
Dean Witter Global Dividend Growth Securities
Dean Witter Global Utilities Fund
FIXED-INCOME FUNDS
Dean Witter High Yield Securities Inc.
Dean Witter Tax-Exempt Securities Trust
Dean Witter U.S. Government Securities Trust
Dean Witter Federal Securities Trust
Dean Witter Convertible Securities Trust
Dean Witter California Tax-Free Income Fund
Dean Witter New York Tax-Free Income Fund
Dean Witter World Wide Income Trust
Dean Witter Intermediate Income Securities
Dean Witter Global Short-Term Income Fund Inc.
Dean Witter Multi-State Municipal Series Trust
Dean Witter Premier Income Trust
Dean Witter Short-Term U.S. Treasury Trust
Dean Witter Diversified Income Trust
Dean Witter Limited Term Municipal Trust
Dean Witter Short-Term Bond Fund
Dean Witter National Municipal Trust
Dean Witter High Income Securities
DEAN WITTER RETIREMENT SERIES
Liquid Asset Series
U.S. Government Money Market Series
U.S. Government Securities Series
Intermediate Income Securities Series
American Value Series
Capital Growth Series
Dividend Growth Series
Strategist Series
Utilities Series
Value-Added Market Series
Global Equity Series
ASSET ALLOCATION FUNDS
Dean Witter Managed Assets Trust
Dean Witter Strategist Fund
ACTIVE ASSETS ACCOUNT PROGRAM
Active Assets Money Trust
Active Assets Tax-Free Trust
Active Assets California Tax-Free Trust
Active Assets Government Securities Trust
<PAGE>
Dean Witter
National Municipal Trust
Two World Trade Center
New York, New York 10048
BOARD OF TRUSTEES
Jack F. Bennett
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. John E. Jeuck
Dr. Manuel H. Johnson
Paul Kolton
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
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.
DEAN WITTER
NATIONAL
MUNICIPAL
TRUST
[LOGO]
PROSPECTUS--MAY 19, 1994
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 19, 1994
DEAN WITTER
NATIONAL
MUNICIPAL TRUST
- -------------------------------------------------------------------------------
Dean Witter National Municipal Trust (the "Fund") is an open-end diversified
management investment company whose investment objective is to provide a high
level of current income exempt from federal income tax, consistent with the
preservation of capital. The Fund invests principally in tax-exempt fixed-
income securities which are rated in the three highest categories by Moody's
Investors Service, Inc. or Standard & Poor's Corporation. (See "Investment
Practices and Policies.")
A Prospectus for the Fund dated May 19, 1994, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge from the Fund at its address or telephone number listed below or
from the Fund's Distributor, Dean Witter Distributors Inc., or from Dean Witter
Reynolds Inc. at any of its branch offices. This Statement of Additional
Information is not a Prospectus. It contains information in addition to and
more detailed than that set forth in the Prospectus. It is intended to provide
additional information regarding the activities and operations of the Fund, and
should be read in conjunction with the Prospectus.
Dean Witter
National Municipal Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
<S> <C>
The Fund and its Management............................... 3
Trustees and Officers..................................... 6
Investment Practices and Policies......................... 8
Investment Restrictions................................... 14
Portfolio Transactions and Brokerage...................... 16
The Distributor........................................... 17
Determination of Net Asset Value.......................... 19
Shareholder Services...................................... 20
Redemptions and Repurchases............................... 24
Dividends, Distributions and Taxes........................ 27
Performance Information................................... 28
Description of Shares..................................... 29
Custodian and Transfer Agent.............................. 30
Independent Accountants................................... 30
Reports to Shareholders................................... 30
Legal Counsel............................................. 31
Experts................................................... 31
Registration Statement.................................... 31
Statement of Assets and Liabilities at May 10, 1994....... 32
Report of Independent Accountants......................... 34
Appendix.................................................. 35
</TABLE>
2
<PAGE>
THE FUND AND ITS MANAGEMENT
- -------------------------------------------------------------------------------
THE FUND
The Fund was organized as a Massachusetts business trust on March 29, 1994.
THE INVESTMENT MANAGER
Dean Witter InterCapital Inc. (the "Investment Manager" or "InterCapital"),
whose address is Two World Trade Center, New York, New York 10048, is the
Fund's Investment Manager. InterCapital is a wholly-owned subsidiary of Dean
Witter, Discover & Co. ("DWDC"), a Delaware corporation. In an internal
reorganization which took place in January, 1993, InterCapital assumed the
investment advisory, administrative and management activities previously
performed by the InterCapital Division of Dean Witter Reynolds Inc. ("DWR"), a
broker-dealer affiliate of InterCapital. (As hereinafter used in this Statement
of Additional Information, the terms "InterCapital" and "Investment Manager"
refer to DWR's InterCapital Division prior to the internal reorganization and
to Dean Witter InterCapital Inc. thereafter.) The daily management of the Fund
and research relating to the Fund's portfolio is conducted by or under the
direction of officers of the Fund and of the Investment Manager, subject to
periodic review by the Fund's Board of Trustees. In addition, Trustees of the
Fund provide guidance on economic factors and interest rate trends. Information
as to these trustees and officers is contained under the caption "Trustees and
Officers."
InterCapital is also the investment manager or investment adviser of the
following investment companies: Dean Witter Liquid Asset Fund Inc.,
InterCapital Income Securities Inc., Dean Witter High Yield Securities Inc.,
Dean Witter Tax-Free Daily Income Trust, Dean Witter Developing Growth
Securities Trust, Dean Witter American Value Fund, Dean Witter Dividend Growth
Securities Inc., Dean Witter Natural Resource Development Securities Inc., Dean
Witter U.S. Government Money Market Trust, Dean Witter California Tax-Free
Income Fund, Dean Witter Variable Investment Series, Dean Witter World Wide
Investment Trust, Dean Witter Select Municipal Reinvestment Fund, Dean Witter
U.S. Government Securities Trust, Dean Witter New York Tax-Free Income Fund,
Dean Witter Convertible Securities Trust, Dean Witter Federal Securities Trust,
Dean Witter Value-Added Market Series, High Income Advantage Trust, High Income
Advantage Trust II, High Income Advantage Trust III, Dean Witter Government
Income Trust, Dean Witter California Tax-Free Daily Income Trust, Dean Witter
Utilities Fund, Dean Witter Managed Assets Trust, Dean Witter Strategist Fund,
Dean Witter World Wide Income Trust, Dean Witter Intermediate Income
Securities, Dean Witter Capital Growth Securities, Dean Witter European Growth
Fund Inc., Dean Witter Pacific Growth Fund Inc., Dean Witter Precious Metals
and Minerals Trust, Dean Witter Global Short-Term Income Fund Inc., Dean Witter
Multi-State Municipal Series Trust, Dean Witter New York Municipal Money Market
Trust, InterCapital Quality Municipal Investment Trust, Dean Witter Premier
Income Trust, Dean Witter Short-Term U.S. Treasury Trust, InterCapital Insured
Municipal Bond Trust, InterCapital Insured Municipal Trust, InterCapital
Quality Municipal Income Trust, Dean Witter Diversified Income Trust, Dean
Witter Health Sciences Trust, Dean Witter Retirement Series, InterCapital
Quality Municipal Securities, InterCapital California Quality Municipal
Securities, InterCapital New York Quality Municipal Securities, Dean Witter
Global Dividend Growth Securities, Dean Witter Global Utilities Fund, Dean
Witter High Income Securities, Dean Witter Limited Term Municipal Trust, Dean
Witter Short-Term Bond Fund, InterCapital Insured Municipal Securities,
InterCapital Insured California Municipal Securities, InterCapital Insured
Municipal Income Trust, InterCapital California Insured Municipal Income Trust,
Active Assets Money Trust, Active Assets California Tax-Free Trust, Active
Assets Tax-Free Trust, Active Assets Government Securities Trust, Municipal
Income Trust, Municipal Income Trust II, Municipal Income Trust III, Municipal
Income Opportunities Trust, Municipal Income Opportunities Trust II, Municipal
Income Opportunities Trust III, Municipal Premium Income Trust and Prime Income
Trust. The foregoing investment companies, together with the Fund, are
collectively referred to as the Dean Witter Funds.
In addition, Dean Witter Services Company Inc. ("DWSC"), a wholly-owned
subsidiary of InterCapital, serves as manager for the following companies for
which TCW Funds Management, Inc. is
3
<PAGE>
the investment adviser: TCW/DW Core Equity Trust, TCW/DW North American
Government Income Trust, TCW/DW Latin American Growth Fund, TCW/DW Income and
Growth Fund, TCW/DW Small Cap Growth Fund, TCW/DW Balanced Fund, TCW/DW North
American Intermediate Income Trust, TCW/DW Term Trust 2000, TCW/DW Term Trust
2002, TCW/DW Term Trust 2003 and TCW/DW Emerging Markets Opportunities Trust
(the "TCW/DW Funds"). InterCapital also serves as: (i) sub-adviser to Templeton
Global Opportunities Trust, an open-end investment company; (ii) administrator
of The BlackRock Strategic Term Trust Inc., a closed-end investment company;
and (iii) sub-administrator of MassMutual Participation Investors and Templeton
Global Governments Income Trust, closed-end investment companies.
The Investment Manager also serves as an investment adviser for Dean Witter
World Wide Investment Fund, an investment company organized under the laws of
Luxembourg, shares of which are not available for purchase in the United States
or by American citizens outside of the United States.
Pursuant to an Investment Management Agreement (the "Agreement") with the
Investment Manager, the Fund has retained the Investment Manager to manage the
investment of the Fund's assets, including the placing of orders for the
purchase and sale of portfolio securities. The Investment Manager
obtains and evaluates such information and advice relating to the economy,
securities markets, and specific securities as it considers necessary or useful
to continuously manage the assets of the Fund in a manner consistent with its
investment objective and policies.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, such office space, facilities,
equipment, clerical help, bookkeeping and legal services as the Fund may
reasonably require in the conduct of its business, including the preparation of
prospectuses, proxy statements and reports required to be filed with federal
and state securities commissions (except insofar as the participation or
assistance of independent accountants and attorneys is, in the opinion of the
Investment Manager, necessary or desirable). In addition, the Investment
Manager pays the salaries of all personnel, including officers of the Fund, who
are employees of the Investment Manager. The Investment Manager also bears the
cost of telephone service, heat, light, power and other utilities provided to
the Fund. The Investment Manager has retained DWSC to perform its
administrative services under the Agreement.
Expenses not expressly assumed by the Investment Manager under the Agreement
or by the Distributor of the Fund's shares, Dean Witter Distributors Inc.
("Distributors" or the "Distributor") (see "Purchase of Fund Shares"), will be
paid by the Fund. The expenses borne by the Fund include, but are not limited
to: charges and expenses of any registrar, custodian, stock transfer and
dividend disbursing agent; brokerage commissions; taxes; engraving and printing
share certificates; registration costs of the Fund and its shares under federal
and state securities laws; the cost and expense of printing, including
typesetting, and distributing Prospectuses and Statements of Additional
Information of the Fund and supplements thereto to the Fund's shareholders; all
expenses of shareholders' and Trustees' meetings and of preparing, printing and
mailing of proxy statements and reports to shareholders; fees and travel
expenses of Trustees or members of any advisory board or committee who are not
employees of the Investment Manager or any corporate affiliate of the
Investment Manager; all expenses incident to any dividend, withdrawal or
redemption options; charges and expenses of any outside service used for
pricing of the Fund's shares; fees and expenses of legal counsel, including
counsel to the Trustees who are not interested persons of the Funds or of the
Investment Manager (not including compensation or expenses of attorneys who are
employees of the Investment Manager) and independent accountants; membership
dues of industry associations; interest on Fund borrowings; postage; insurance
premiums on property or personnel (including officers and trustees) of the Fund
which inure to its benefit; extraordinary expenses (including, but not limited
to, legal claims and liabilities and litigation costs and any indemnification
relating thereto); and all other costs of the Fund's operation. As full
compensation for the services and facilities furnished to the Fund and expenses
of the Fund assumed by the Investment Manager, the Fund pays the Investment
Manager monthly compensation calculated daily at the annual rate of 0.35% of
the daily net assets of the Fund. The Investment Manager has undertaken to
assume all expenses (except for brokerage and 12b-1 fees) and to waive the
compensation provided for in its Management Agreement until such time as the
Fund has $50 million of net assets or until six months from the date of
commencement of the Fund's operations, whichever occurs first.
4
<PAGE>
Pursuant to the Agreement, total operating expenses of the Fund are subject
to applicable limitations under rules and regulations of states where the Fund
is authorized to sell its shares. Therefore, operating expenses are effectively
subject to the most restrictive of such limitations as the same may be amended
from time to time. Presently, the most restrictive limitations are as follows:
if, in any fiscal year, the Fund's total operating expenses, including the
investment management fee but exclusive of taxes, interest, brokerage fees,
distribution fees and extraordinary expenses (to the extent permitted by
applicable state securities laws and regulations), exceed 2 1/2% of the first
$30,000,000 of the average daily net assets, 2% of the next $70,000,000 of
average daily net assets and 1 1/2% of any excess over $100,000,000, the
Investment Manager will reimburse the Fund for the amount of such excess. Such
amount, if any, will be calculated daily and credited on a monthly basis.
The Investment Manager will pay the organizational expenses of the Fund, in
the amount of approximately $200,000, incurred prior to the offering of the
Fund's shares. The Fund will reimburse the Investment Manager for such
expenses. The Fund will defer and will amortize the reimbursed expenses on the
straight line method over a period not to exceed five years from the date of
commencement of the Fund's operations.
The Agreement provides that in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations thereunder,
the Investment Manager is not liable to the Fund or any
of its investors for any act or omission by the Investment Manager or for any
losses sustained by the Fund or its investors. The Agreement in no way
restricts the Investment Manager from acting as investment manager or adviser
to others.
The Agreement was initially approved by the Trustees on May 10, 1994 and by
InterCapital as the sole Shareholder on May 10, 1994. The Agreement may be
terminated at any time, without penalty, on thirty days' notice, by the Board
of Trustees of the Fund, by the holders of a majority, as defined in the
Investment Company Act of 1940, as amended (the "Act"), of the outstanding
shares of the Fund, or by the Investment Manager. The Agreement will
automatically terminate in the event of its assignment (as defined in the Act).
Under its terms, the Agreement continues in effect until April 30, 1995, and
will continue from year to year thereafter, provided continuance of the
Agreement is approved at least annually by the vote of the holders of a
majority (as defined in the Act) of the outstanding shares of the Fund, or by
the Board of Trustees of the Fund; provided that in either event such
continuance is approved annually by the vote of a majority of the Independent
Trustees of the Fund who are not parties to the Agreement or "interested
persons" (as defined in the Act) of any such party (the "Independent
Trustees"), which vote must be cast in person at a meeting called for the
purpose of voting on such approval.
The Fund has acknowledged that the name "Dean Witter" is a property right of
DWR. The Fund has agreed that DWR or its parent company may use or, at any
time, permit others to use, the name "Dean Witter". The Fund has also agreed
that in the event the investment management contract between the Investment
Manager and the Fund is terminated, or if the affiliation between InterCapital
and its parent company is terminated, the Fund will eliminate the name "Dean
Witter" from its name if DWR or its parent shall so request.
5
<PAGE>
TRUSTEES AND OFFICERS
- -------------------------------------------------------------------------------
The Trustees and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with
InterCapital, and with the Dean Witter Funds and the TCW/DW Funds, are shown
below.
[CAPTION]
<TABLE>
NAME, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------ ----------------------------------------------------------------------
<S> <C>
Jack F. Bennett Greenwich, Connecticut Retired; Director or Trustee of the Dean
Director Witter Funds; formerly Senior Vice President and Director of Exxon
141 Taconic Road Corporation (1975-January, 1989) and Under Secretary of the U.S.
Treasury for Monetary Affairs (1974-1975); Director of Philips
Electronics N.V., Tandem Computers Inc. and Massachusetts Mutual
Insurance Company; director or trustee of various not-for-profit and
business organizations.
Michael Bozic President and Chief Executive Officer of Hills Department Stores
Director (since May, 1991); formerly Chairman and Chief Executive Officer
c/o Hills Stores Inc. (January, 1987-August, 1990) and President and Chief Operating Officer
15 Dan Road (August, 1990-February, 1991) of the Sears Merchandise Group of Sears,
Canton, Massachusetts Roebuck and Co.; Director or Trustee of the Dean Witter Funds;
Director of Harley Davidson Credit Inc., the United Negro College Fund
and Domain Inc. (home decor retailer).
Charles A. Fiumefreddo* Chairman, Chief Executive Officer and Director of InterCapital,
Trustee, Chairman, President and Chief Distributors and DWSC; Executive Vice President and Director of DWR;
Executive Officer Chairman, Director or Trustee, President and Chief Executive Officer
Two World Trade Center of the Dean Witter Funds; Chairman, Chief Executive Officer and
New York, New York Trustee of the TCW/DW Funds; Chairman and Director of Dean Witter
Trust Company; Director and/or officer of various DWDC subsidiaries;
formerly Executive Vice President and Director of DWDC (until
February, 1993).
Edwin J. Garn Director or Trustee of the Dean Witter Funds; formerly United States
Director Senator (R-Utah) (1974-1992) and Chairman, Senate Banking Committee
2000 Eagle Gate Tower (1980-1986); formerly Mayor of Salt Lake City, Utah (1971-1974);
Salt Lake City, Utah formerly Astronaut, Space Shuttle Discovery (April 12-19, 1985); Vice
Chairman, Huntsman Chemical Corporation (since January, 1993); member
of the board of various civic and charitable organizations.
John R. Haire Chairman of the Audit Committee and Chairman of the Committee of the
Director Independent Directors or Trustees and Director or Trustee of the Dean
439 East 51st Street Witter Funds; Trustee of the TCW/DW Funds; formerly President, Council
New York, New York for Aid to Education (1978-October, 1989) and Chairman and Chief
Executive Officer of Anchor Corporation, an Investment Adviser (1964-
1978); Director of Washington National Corporation (insurance) and
Bowne & Co. Inc. (printing).
6
<PAGE>
NAME, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------ ----------------------------------------------------------------------
<S> <C>
Dr. John E. Jeuck Retired; Director or Trustee of the Dean Witter Funds; formerly Robert
Director Law Professor of Business Administration, Graduate School of Business,
70 East Cedar Street University of Chicago (until July, 1989); Business consultant.
Chicago, Illinois
Dr. Manuel H. Johnson Senior Partner, Johnson Smick International, Inc., a consulting firm;
Director Koch Professor of International Economics and Director of the Center
7521 Old Dominion Drive for Global Market Studies at George Mason University (since September,
Maclean, Virginia 1990); Co-Chairman and a founder of the Group of Seven Council (G7C),
an international economic commission (since September, 1990); Director
or Trustee of the Dean Witter Funds; Trustee of the TCW/DW Funds;
Director of Greenwich Capital Markets Inc. (broker-dealer); formerly
Vice Chairman of the Board of Governors of the Federal Reserve System
(February, 1986-August, 1990) and Assistant Secretary of the U.S.
Treasury (1982-1986).
Paul Kolton Director or Trustee of the Dean Witter Funds; Chairman of the Audit
Director Committee and Chairman of the Committee of Independent Trustees and
9 Hunting Ridge Road Trustee of the TCW/DW Funds; formerly Chairman of the Financial
Stamford, Connecticut Accounting Standards Advisory Council and Chairman and Chief Executive
Officer of the American Stock Exchange; Director of UCC Investors
Holding Inc. (Uniroyal Chemical Company, Inc.); director or trustee of
various not-for-profit organizations.
Michael E. Nugent General Partner, Triumph Capital, LP., a private investment
Director partnership (since April, 1988); Director or Trustee of the Dean
237 Park Avenue Witter Funds; Trustee of the TCW/DW Funds; formerly Vice President,
New York, New York Bankers Trust Company and BT Capital Corporation (September, 1984-
March, 1988); Director of various business organizations.
Philip J. Purcell* Chairman of the Board of Directors and Chief Executive Officer of
Director DWDC, DWR and Novus Credit Services Inc.; Director of InterCapital,
Two World Trade Center DWSC and Distributors; Director or Trustee of the Dean Witter Funds;
New York, New York Director and/or officer of various DWDC subsidiaries.
John L. Schroeder Executive Vice President and Chief Investment Officer of the Home
Director Insurance Company (since August, 1991); Director or Trustee of the
Northgate 3A Dean Witter Funds; Director of Citizens Utilities Company; formerly
Alger Court Chairman and Chief Investment Officer of Axe-Houghton Management and
Bronxville, New York the Axe-Houghton Funds (April, 1983-June, 1991) and President of USF&G
Financial Services, Inc. (June 1990-June, 1991).
7
<PAGE>
NAME, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------ ----------------------------------------------------------------------
<S> <C>
Edward R. Telling* Retired; Director or Trustee of the Dean Witter Funds; formerly
Director Chairman of the Board of Directors and Chief Executive Officer (1978-
Sears Tower 1985) and President (from January, 1981-March, 1982 and from February,
Chicago, Illinois 1984-August, 1984) of Sears, Roebuck and Co.; formerly Director of
Sears, Roebuck and Co.
Sheldon Curtis Senior Vice President, Secretary and General Counsel of InterCapital
Vice President, Secretary and DWSC; Senior Vice President and Secretary of Dean Witter Trust
and General Counsel Company; Senior Vice President, Assistant Secretary and Assistant
Two World Trade Center General Counsel of Distributors; Assistant Secretary of DWDC and DWR;
New York, New York Vice President, Secretary and General Counsel of the Dean Witter Funds
and the TCW/DW Funds.
James F. Willison Senior Vice President of InterCapital; Vice President of various Dean
Vice President Witter Funds.
Two World Trade Center
New York, New York
Thomas F. Caloia First Vice President (since May, 1991) and Assistant Treasurer (since
Treasurer January, 1993) of InterCapital; First Vice President and Assistant
Two World Trade Center Treasurer of DWSC and Treasurer of the Dean Witter Funds and the
New York, New York TCW/DW Funds; previously Vice President of InterCapital.
<FN>
- ------------
* Denotes Trustees who are "interested persons" of the Fund, as defined in the Act.
</TABLE>
In addition, Robert M. Scanlan, President and Chief Operating Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWTC and
Director of DWTC, David A. Hughey, Executive Vice President and Chief
Administrative Officer of InterCapital, DWSC and Distributors and President and
Director of DWTC, Edmund C. Puckhaber, Executive Vice President of
InterCapital, and Peter M. Avelar and Jonathan R. Page, Senior Vice Presidents
of InterCapital, are Vice Presidents of the Fund, and Marilyn K. Cranney and
Barry Fink, First Vice Presidents and Assistant General Counsels of
InterCapital and DWSC, and Lawrence S. Lafer, Lou Anne D. McInnis and Ruth
Rossi, Vice Presidents and Assistant General Counsels of InterCapital and DWSC,
are Assistant Secretaries of the Fund.
The Fund pays each Trustee who is not an employee or retired employee of the
Investment Manager or an affiliated company an annual fee of $1,200 plus $50
for each meeting of the Board of Trustees, the Audit Committee or the Committee
of Independent Trustees attended by the Trustee in person (the Fund pays the
Chairman of the Audit Committee an additional annual fee of $1,000, and pays
the Chairman of the Committee of Independent Trustees an additional annual fee
of $2,400, in each case inclusive of the Committee meeting fees). The Fund also
reimburses Trustees for travel and other out-of-pocket expenses incurred by
them in connection with attending such meetings. Trustees and officers of the
Fund who are or have been employed by the Investment Manager or an affiliated
company receive no compensation or expense reimbursement from the Fund.
INVESTMENT PRACTICES AND POLICIES
- -------------------------------------------------------------------------------
PORTFOLIO SECURITIES
The payment of principal and interest by issuers of certain Municipal Bonds
and Notes ("Municipal Obligations") purchased by the Fund may be guaranteed by
letters of credit or other credit facilities offered by banks or other
financial institutions. Such guarantees will be considered in determining
whether a Municipal Obligation meets the Fund's investment quality
requirements. In addition, some issues may contain provisions which permit the
Fund to demand from the issuer repayment of principal at some specified
period(s) prior to maturity.
8
<PAGE>
Municipal Bonds. Municipal Bonds, as referred to in the Prospectus, are debt
obligations of a state, its cities, municipalities and municipal agencies (all
of which are generally referred to as "municipalities") which generally have a
maturity at the time of issuance of one year or more, and the interest from
which is, in the opinion of bond counsel, exempt from federal income tax. They
are issued to raise funds for various public purposes, such as construction of
a wide range of public facilities, to refund outstanding obligations and to
obtain funds for general operating expenses or to loan to other public
institutions and facilities. In addition, certain types of industrial
development bonds and pollution control bonds are issued by or on behalf of
public authorities to provide funding for various privately operated
facilities.
Municipal Notes. Municipal Notes are short-term obligations of
municipalities, generally with a maturity at the time of issuance ranging from
six months to three years, the interest from which is, in the opinion of bond
counsel, exempt from federal income tax. The principal types of Municipal Notes
include tax anticipation notes, bond anticipation notes, revenue anticipation
notes and project notes, although there are other types of Municipal Notes in
which the Fund may invest. Notes sold in anticipation of collection of taxes, a
bond sale or receipt of other revenues are usually general obligations of the
issuing municipality or agency. Project Notes are issued by local agencies and
are guaranteed by the United States Department of Housing and Urban
Development. Such notes are secured by the full faith and credit of the United
States Government. Project Notes are not currently being issued.
Municipal Commercial Paper. Municipal Commercial Paper refers to short-term
obligations of municipalities the interest from which is, in the opinion of
bond counsel, exempt from federal income tax, and which may be issued at a
discount and is sometimes referred to as Short-Term Discount Notes. Municipal
Commercial Paper is likely to be used to meet seasonal working capital needs of
a municipality or interim construction financing and to be paid from general
revenues of the municipality or refinanced with long-term debt. In most cases,
Municipal Commercial Paper is backed by letters of credit, lending agreements,
note repurchase agreements or other credit facility agreements offered by banks
or other institutions.
Obligations of issuers of Municipal Bonds, Municipal Notes and Municipal
Commercial Paper are subject to provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, which may be enacted by Congress or any state
extending the time for payment of principal or interest, or both, or imposing
other constraints upon enforcement of such obligations or upon municipalities
to levy taxes. There is also the possibility that, as a result of litigation or
other conditions, the power or ability of any one or more issuers to pay, when
due, principal of and interest on its, or their, Municipal Bonds, Municipal
Notes and Municipal Commercial Paper may be materially affected.
Special Investment Considerations. The percentage and rating policies in the
Prospectus apply at the time of acquisition of a security based upon the last
previous determination of the Fund's net asset value; any subsequent change in
any ratings by a rating service or change in percentages resulting from market
fluctuations or other changes in the amount of total assets will not require
elimination of any security from the Fund's portfolio until such time as the
Investment Manager determines that it is practicable to sell the security
without undue market or tax consequences to the Fund. Therefore, the Fund may
hold securities which have been downgraded to ratings of Ba or BB or lower by
Moody's or S&P. Such securities are considered to be speculative investments.
However, the Fund does not intend to invest in Municipal Obligations which are
rated below either Baa by Moody's or BBB by S&P (the lowest ratings considered
investment grade) or, if not rated, are deemed by the Investment Manager to be
below investment grade, in amounts exceeding 5% of its net assets. Any
subsequent change in any rating of any security below investment grade which
causes the Fund to be invested in such securities in an amount exceeding 5% of
its net assets will result in the elimination of that security from the Fund's
portfolio as soon as practicable without adverse market or tax consequences to
the Fund.
Furthermore, the Fund does not have any minimum quality rating standard for
its downgraded or lower-rated investments. As such, the Fund may invest in
securities rated as low as Caa, Ca or C by Moody's or CCC, CC, C, CI or D by
S&P. Bonds rated Caa or Ca by Moody's may already be in default on payment of
interest or principal, while bonds rated C by Moody's, their lowest bond
rating, can be regarded as having extremely poor prospects of ever attaining
any real investment standing. Bonds rated CI or D by S&P, their lowest bond
rating, are no longer making interest payments or are in default.
9
<PAGE>
Because of the special nature of securities which are rated below investment
grade by national credit rating agencies ("lower-rated securities"), the
Investment Manager must take account of certain special considerations in
assessing the risks associated with such investments. For example, as the lower
rated securities market is relatively new, its growth has paralleled a long
economic expansion and it has not weathered a recession in its present size and
form. Therefore, an economic downturn or increase in interest rates is likely
to have a negative effect on this market and on the value of the lower rated
securities held by the Fund, as well as on the ability of the securities'
issuers to repay principal and interest on their borrowings.
The prices of lower rated securities have been found to be less sensitive to
changes in prevailing interest rates than higher rated investments, but are
likely to be more sensitive to adverse economic changes or individual corporate
developments. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress which
would adversely affect their ability to service their principal and interest
payment obligations, to meet their projected business goals or to obtain
additional financing. If the issuer of a fixed-income security owned by the
Fund defaults, the Fund may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty and change can be expected to result
in an increased volatility of market prices of lower rated securities and a
concomitant volatility in the net asset value of a share of the Fund. Moreover,
the market prices of certain of the Fund's portfolio securities which are
structured as zero coupon securities are affected to a greater extent by
interest rate changes and thereby tend to be more volatile than securities
which pay interest periodically and in cash (see "Dividends, Distributions and
Taxes" for a discussion of the tax ramifications of investments in such
securities).
The secondary market for lower rated securities may be less liquid than the
markets for higher quality securities and, as such, may have an adverse effect
on the market prices of certain securities. The limited liquidity of the market
may also adversely affect the ability of the Fund's Trustees to arrive at a
fair value for certain lower rated securities at certain times and should make
it difficult for the Fund to sell certain securities.
New laws and proposed new laws may have a potentially negative impact on the
market for lower rated securities. For example, recent legislation requires
federally-insured savings and loan associations to divest their investments in
lower rated securities. This legislation and other proposed legislation may
have an adverse effect upon the value of lower rated securities and a
concomitant negative impact upon the net asset value of a share of the Fund.
PORTFOLIO CHARACTERISTICS
Variable Rate Obligations. As stated in the Prospectus, the Fund may invest
in obligations of the type called "variable rate obligations".
The interest rate payable on a variable rate obligation is adjusted either at
predesignated periodic intervals or whenever there is a change in the market
rate of interest on which the interest rate payable is based. Other features
may include the right whereby the Fund may demand prepayment of the principal
amount of the obligation prior to its stated maturity (a "demand feature") and
the right of the issuer to prepay the principal amount prior to maturity. The
principal benefit of a variable rate obligation is that the interest rate
adjustment minimizes changes in the market value of the obligation. The
principal benefit to the Fund of purchasing obligations with a demand feature
is that liquidity, and the ability of the Fund to obtain repayment of the full
principal amount of the obligation prior to maturity, is enhanced.
When-Issued and Delayed Delivery Securities. As stated in the Prospectus,
the Fund may purchase tax-exempt securities on a when-issued or delayed
delivery basis. When such transactions are negotiated, the price is fixed at
the time of the commitment, but delivery and payment can take place a month or
more after the date of the commitment. While the Fund will only purchase
securities on a when-issued or delayed delivery basis with the intention of
acquiring the securities, the Fund may sell the securities before the
settlement date, if it is deemed advisable. The securities so purchased or sold
are subject to market fluctuation and no interest accrues to the purchaser
during this period. At the time the Fund makes the commitment to purchase a
Municipal Obligation on a when-issued or delayed delivery
10
<PAGE>
basis, it will record the transaction and thereafter reflect the value, each
day, of the Municipal Obligation in determining its net asset value. The Fund
will also establish a segregated account with its custodian bank in which it
will maintain cash, cash equivalents or other high quality Municipal
Obligations equal in value to commitments for such when-issued or delayed
delivery securities. The Fund does not believe that its net asset value or
income will be adversely affected by its purchase of Municipal Obligations on a
when-issued or delayed delivery basis. The Fund may sell securities on a when-
issued or delayed delivery basis provided that the Fund owns the security at
the time of the sale.
Repurchase Agreements. When cash may be available for only a few days, it may
be invested by the Fund in repurchase agreements until such time as it may
otherwise be invested or used for payments of obligations of the Fund. These
agreements, which may be viewed as a type of secured lending by the Fund,
typically involve the acquisition by the Fund of debt securities from a selling
financial institution such as a bank, savings and loan association or broker-
dealer. The agreement provides that the Fund will sell back to the institution,
and that the institution will repurchase, the underlying security
("collateral"), which is held by the Fund's Custodian, at a specified price and
at a fixed time in the future, usually not more than seven days from the date
of purchase. The Fund will receive interest from the institution until the time
when the repurchase is to occur. Although such date is deemed by the Fund to be
the maturity date of a repurchase agreement, the maturities of securities
subject to repurchase agreements are not subject to any limits and may exceed
one year. While repurchase agreements involve certain risks not associated with
direct investments in debt securities, the Fund follows procedures designed to
minimize such risks. These procedures include effecting repurchase transactions
only with large, well-capitalized and well-established financial institutions,
whose financial condition will be continually monitored by the Investment
Manager. In addition, the value of the collateral underlying the repurchase
agreement will always be a least equal to the repurchase price, including any
accrued interest earned on the repurchase agreement. In the event of a default
or bankruptcy by a selling financial institution, the Fund will seek to
liquidate such collateral. However, the exercising of the Fund's right to li
quidate such collateral could involve certain costs or delays and, to the
extent that proceeds from any sale upon a default of the obligation to
repurchase were less than the repurchase price, the Fund could suffer a loss.
It is the current policy of the Fund not to invest in repurchase agreements
that do not mature within seven days if any such investment, together with any
other illiquid assets held by the Fund, amounts to more than 15% of its net
assets. The Fund's investments in repurchase agreements may at times be
substantial when, in the view of the Investment Manager, liquidity or other
considerations warrant.
FUTURES CONTRACTS AND OPTIONS ON FUTURES
As discussed in the Prospectus, the Fund may invest in financial futures
contracts ("futures contracts") and related options thereon. These futures
contracts and related options thereon will be used only as a hedge against
anticipated interest rate changes. A futures contract sale creates an
obligation by the Fund, as seller, to deliver the specific type of instrument
called for in the contract at a specified future time for a specified price. A
futures contract purchase would create an obligation by the Fund, as purchaser,
to take delivery of the specific type of financial instrument at a specified
future time at a specified price. The specific securities delivered or taken,
respectively, at settlement date, would not be determined until on or near that
date. The determination would be in accordance with the rules of the exchange
on which the futures contract sale or purchase was effected.
Although the terms of futures contracts specify actual delivery or receipt
of securities, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the securities.
Closing out of a futures contract is usually effected by entering into an
offsetting transaction. An offsetting transaction for a futures contract sale
is effected by the Fund entering into a futures contract purchase for the same
aggregate amount of the specific type of financial instrument at the same
delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is immediately paid the difference and thus realizes a gain.
If the offsetting purchase price exceeds the sale price, the
11
<PAGE>
Fund pays the difference and realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the Fund entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price the Fund
realizes a gain, and if the offsetting sale price is less than the purchase
price the Fund realizes a loss.
Unlike a futures contract, which requires the parties to buy and sell a
security on a set date, an option on a futures contract entitles its holder to
decide on or before a future date whether to enter into such a contract (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 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 discussed below for futures contracts. The value
of the option changes is reflected in the net asset value of the Fund.
The Fund is required to maintain margin deposits with brokerage firms
through which it effects futures contracts and options thereon. The initial
margin requirements vary according to the type of the underlying security. In
addition, due to current industry practice, daily variations in gains and
losses on open contracts are required to be reflected in cash in the form of
variation margin payments. The Fund may be required to make additional margin
payments during the term of the contract.
Currently, futures contracts can be purchased on debt securities such as
U.S. Treasury Bills and Bonds, U.S. Treasury Notes with maturities between 6
1/2 and 10 years, Certificates of the Government National Mortgage Association,
Bank Certificates of Deposit and on a municipal bond index (see below). The
Fund may invest in interest rate futures contracts covering these types of
financial instruments as well as in new types of contracts that become
available in the future.
Financial futures contracts are traded in an auction environment on the
floors of several Exchanges--principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. Each Exchange
guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the Exchange membership which
is also responsible for handling daily accounting of deposits or withdrawals of
margin.
A risk in employing futures contracts to protect against the price volatility
of portfolio securities is that the prices of securities subject to futures
contracts may correlate imperfectly with the behavior of the cash prices of the
Fund's portfolio securities. The correlation may be distorted by the fact that
the futures market is dominated by short-term traders seeking to profit from
the difference between a contract or security price objective and their cost of
borrowed funds. This would reduce the value of futures contracts for hedging
purposes over a short time period. The correlation may be further distorted
since the futures contracts that are being used to hedge are not based on
municipal obligations.
Another risk is that the Fund's 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 sold futures contracts for the sale of securities in anticipation of an
increase in interest rates, and then interest rates went down instead, causing
bond prices to rise, the Fund would lose money on the sale.
Put and call options on financial futures have characteristics similar to
Exchange traded options. For a further description of options, see below and
the Prospectus.
In addition to the risks associated in investing in options on securities,
there are particular risks associated with investing in options on futures. In
particular, the ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid secondary
market. It is not certain that such a market will develop.
In order to assure that the Fund is entering into transactions in futures
contracts for hedging purposes as such is defined by the Commodity Futures
Trading Commission either: 1) a substantial majority (i.e., approximately 75%)
of all anticipatory hedge transactions (transactions in which the Fund does not
own at the time of the transaction, but expects to acquire, the securities
underlying the relevant futures contract) involving the purchase of futures
contracts will be completed by the purchase of securities which are the subject
of the hedge or 2) the underlying value of all long positions in futures
contracts will
12
<PAGE>
not exceed the total value of a) all short-term debt obligations held by the
Fund; b) cash held by the Fund; c) cash proceeds due to the Fund on investments
within thirty days; d) the margin deposited on the contracts; and e) any
unrealized appreciation in the value of the contracts.
The Fund may not enter into futures contracts or related options theron if,
immediately thereafter, the amount committed to margin plus the amount paid for
option premiums exceeds 5% of the value of the Fund's total assets. In
instances involving the purchase of futures contracts by the Fund, an amount
equal to the market value of the futures contract will be deposited in a
segregated account of cash and cash equivalents to collateralize the position
and thereby ensure that the use of such futures is unleveraged. The Fund may
not purchase or sell futures contracts or related options if, immediately
thereafter, more than one-third of its net assets would be hedged.
Municipal Bond Index Futures--The Fund may utilize municipal bond index
futures contracts and options thereon for hedging purposes. The Fund's
strategies in employing such contracts will be similar to that discussed above
with respect to financial futures and options thereon. A municipal bond index
is a method of reflecting in a single number the market value of many different
municipal bonds and is designed to be representative of the municipal bond
market generally. The index fluctuates in response to changes in the market
values of the bonds included within the index. Unlike futures contracts on
particular financial instruments, futures contracts on a municipal bond index
will be settled in cash if held until the close of trading in the contract.
However, as in any other futures contract, a position in the contract may be
closed out by purchase or sale of an offsetting contract for the same delivery
month prior to expiration of the contract.
Options--The Fund may purchase or sell (write) options on debt securities as
a means of achieving additional return or hedging the value of the Fund's
portfolio. The Fund will only buy options listed on national securities
exchanges. The Fund will not purchase options if, as a result, the aggregate
cost of all outstanding options exceeds 10% of the Fund's total assets.
Presently there are no options on tax-exempt securities traded on national
securities exchanges and until such time as they become available, the Fund
will not invest in options on debt securities.
A call option is a contract that gives the holder of the option the right to
buy from the writer of the call option, in return for a premium, the security
underlying the option at a specified exercise price at any time during the term
of the option. The writer of the call option has the obligation, upon exercise
of the option, to deliver the underlying security upon payment of the exercise
price during the option period. A put option is a contract that gives the
holder of the option the right to sell to the writer, in return for a premium,
the underlying security at a specified price during the term of the option. The
writer of the put has the obligation to buy the underlying security upon
exercise, at the exercise price during the option period.
The Fund will only write covered call or covered put options listed on
national exchanges. The Fund may not write covered options in an amount
exceeding 20% of the value of its total assets. A call option is "covered" if
the Fund owns the underlying security covered by the call or has an absolute
and immediate right to acquire that security or futures contract without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the Fund
holds a call on the same security or futures contract as the call written,
where the exercise price of the call held is (i) equal to or less than the
exercise price of the call written or (ii) greater than the exercise price of
the call written if the difference is maintained by the Fund in cash, Treasury
bills or other high grade short-term obligations in a segregated account with
its custodian. A put option is "covered" if the Fund maintains cash, Treasury
bills or other high grade short-term obligations with a value equal to the
exercise price in a segregated account with its custodian, or else holds a put
on the same security or futures contract as the put written where the exercise
price of the put held is equal to or greater than the exercise price of the put
written.
If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing an
option of the same series as the option previously written. However, once the
Fund has been assigned an exercise notice, the Fund will be unable to effect a
closing purchase transaction. Similarly, if the Fund is the holder of an
option, it may liquidate its position by effecting a closing sale transaction.
This is accomplished by selling an option of the same series as
13
<PAGE>
the option previously purchased. There can be no assurance that either a
closing purchase or sale transaction can be effected when the Fund so desires.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Since call option prices generally reflect increases in
the price of the underlying security, any loss resulting from the purchase of a
call option may also be wholly or partially offset by unrealized appreciation
of the underlying security. If a put option written by the Fund is exercised,
the Fund may incur a loss equal to the difference between the exercise price of
the option and the sum of the sale price of the underlying security plus the
premiums received from the sale of the option. Other principal factors
affecting the market value of a put or a call option include supply and demand,
interest rates, the current market price and price volatility of the underlying
security and the time remaining until the expiration date.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although the Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market
on an exchange will exist for any particular option. In such event, it might
not be possible to effect closing transactions in particular options, so that
the Fund would have to exercise its options in order to realize any profit and
would incur brokerage commissions upon the exercise of call options and upon
the subsequent disposition of underlying securities for the exercise of put
options. If the Fund as a covered call option writer is unable to effect a
closing purchase transaction in a secondary market, it will not be able to sell
the underlying security until the option expires or it delivers the underlying
security upon exercise.
PORTFOLIO MANAGEMENT
The Fund may engage in short-term trading consistent with its investment
objective. Securities may be sold in anticipation of a market decline (a rise
in interest rates) or purchased in anticipation of a market rise (a decline in
interest rates). In addition, a security may be sold and another security of
comparable quality purchased at approximately the same time to take advantage
of what the Investment Manager believes to be a temporary disparity in the
normal yield relationship between the two securities. These yield disparities
may occur for reasons not directly related to the investment quality of
particular issues or the general movement of interest rates, such as changes in
the overall demand for, or supply of, various types of tax-exempt securities.
In general, purchases and sales may also be made to restructure the
portfolio in terms of average maturity, quality, coupon yield, or
diversification for any one or more of the following purposes: (a) to increase
income, (b) to improve portfolio quality, (c) to minimize capital depreciation,
(d) to realize gains or losses, or for such other reasons as the Investment
Manager deems relevant in light of economic and market conditions.
The Fund may invest in obligations customarily sold to institutional
investors in private transactions with the issuers thereof and up to 5% of its
total assets in securities for which a bona fide market does not exist at the
time of purchase. With respect to any securities as to which a bona fide market
does not exist, the Fund may be unable to dispose of such securities promptly
at reasonable prices.
The Fund does not generally intend to invest more than 25% of its total
assets in securities of any one governmental unit or in the securities of
governmental units located in any one state, territory or possession of the
United States. Subject to investment restriction number 3 disclosed in the
Prospectus under the Section "Investment Restrictions," the Fund may invest
more than 25% of its total assets in industrial development and pollution
control bonds (two kinds of tax-exempt Municipal Bonds).
INVESTMENT RESTRICTIONS
- -------------------------------------------------------------------------------
In addition to the investment restrictions enumerated in the Prospectus, the
investment restrictions listed below have been adopted by the Fund as
fundamental policies, which may not be changed without
14
<PAGE>
the vote of a majority of the outstanding voting securities of the Fund, as
defined in the Act. Such a majority is defined as the lesser of (a) 67% of the
shares present at a meeting of shareholders, if the holders of more than 50% of
the outstanding shares of the Fund are present or represented by proxy, or (b)
more than 50% of the outstanding shares of the Fund. For purposes of the
following restrictions: (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; (b) a "taxable security" is any security the interest
on which is subject to federal income tax; and (c) all percentage limitations
apply immediately after a purchase or initial investment, and any subsequent
change in any applicable percentage resulting from market fluctuations or other
changes in the amount of total or net assets does not require elimination of
any security from the portfolio.
The Fund may not:
1. Purchase or sell real estate or interests therein, although it may
purchase securities secured by real estate or interests therein. This shall not
prohibit the Trust from purchasing, holding and selling real estate acquired as
a result of the ownership of such securities.
2. Purchase or sell commodities except that the Fund may purchase or
sell financial futures contracts and related options thereon.
3. Purchase oil, gas or other mineral leases, rights or royalty
contracts, or exploration or development programs.
4. Write, purchase or sell puts, calls, or combinations thereof, except
for options on futures contracts or options on debt securities.
5. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
6. Borrow money, except that the Fund may borrow from a bank for
temporary or emergency purposes in amounts not exceeding 5% (taken at the lower
of cost or current value) of the value of its total assets (not including the
amount borrowed).
7. Pledge its assets or assign or otherwise encumber them except to
secure borrowing effected within the limitations set forth in Restriction 6.
However, for the purpose of this restriction, collateral arrangements with
respect to the writing of options and collateral arrangements with respect to
initial margin for futures are not deemed to be pledges of assets.
8. Issue senior securities as defined in the Act, except insofar as the
Fund may be deemed to have issued a senior security by reason of: (a) entering
into any repurchase agreement; (b) purchasing any securities on a when-issued
or delayed delivery basis; (c) purchasing or selling any financial futures
contracts; (d) borrowing money in accordance with restrictions described above;
or (e) lending portfolio securities.
9. Make loans of money or securities, except: (a) by the purchase of
debt obligations in which the Fund may invest consistent with its investment
objective and policies; and (b) by investment in repurchase agreements.
10. Make short sales of securities.
11. Purchase securities on margin, except for such short-term loans as
are necessary for the clearance of purchases of portfolio securities.
12. Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing of a
portfolio security.
13. Invest for the purpose of exercising control or management of any
other issuer.
In addition, as a nonfundamental policy, the Fund may not (i) invest in
securities of any issuer if, to the knowledge of the Fund, any officer or
trustee of the Fund or any officer or director of the Manager or the Adviser
owns more than 1/2 of 1% of the outstanding securities of such issuer, and
such officers, trustees and directors who own more than 1/2 of 1% own in the
aggregate more than 5% of the outstanding securities of such issuers; or (ii)
purchase securities of other investment companies, except in connection with a
merger, consolidation, reorganization or acquisition of assets or by purchase
in the open market of securities of closed-end investment companies where no
underwriter's or dealer's commission or profit, other than customary broker's
commissions, is involved and only if immediately thereafter not more than (a)
5% of the Fund's total assets, taken at market value, would be invested in any
one such company, (b) 10% of the Fund's total assets, taken at market value,
would be invested in such securities and (c) 3% of any one such company's
voting securities would be owned by the Fund.
15
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
- -------------------------------------------------------------------------------
Subject to the general supervision of the Board of Trustees, the Investment
Manager is responsible for decisions to buy and sell securities and futures
contracts for the Fund, the selection of brokers and dealers to effect the
transactions, and the negotiation of brokerage commissions, if any. The Fund
expects that the primary market for the securities in which it intends to
invest will generally be the over-the-counter market. Securities are generally
traded in the over-the-counter market on an "net" basis with dealers acting as
principal for their own account without charging a stated commission, although
the price of the security usually includes a profit to the dealer. Options and
futures transactions will usually be effected through a broker and a commission
will be charged. The Fund also expects that securities will be purchased at
times in underwritten offerings, where the price includes a fixed amount of
compensation, generally referred to as the underwriter's concession or
discount. On occasion, the Fund may also purchase certain money market
instruments directly from an issuer, in which case no commissions or discounts
are paid.
The Investment Manager currently serves as investment manager to a number of
clients, including other investment companies, and may in the future act as
investment manager or adviser to others. It is the practice of the Investment
Manager to cause purchase and sale transactions to be allocated among the Fund
and others whose assets it manages in such manner as it deems equitable. In
making such allocations among the Fund and other client accounts, the main
factors considered are the respective investment objectives, the relative size
of portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held and the
opinions of the persons responsible for managing the portfolios of the Fund and
other client accounts.
The policy of the Fund regarding purchases and sales of securities and
futures contracts for its portfolio is that primary consideration will be given
to obtaining the most favorable prices and efficient execution of transactions.
Consistent with this policy, when securities transactions are effected on a
stock exchange, the Fund's policy is to pay commissions which are considered
fair and reasonable without necessarily determining that the lowest possible
commissions are paid in all circumstances. The Fund believes that a requirement
always to seek the lowest commission cost could impede effective portfolio
management and preclude the Fund and the Investment Manager from obtaining a
high quality of brokerage and research services. In seeking to determine the
reasonableness of brokerage commissions paid in any transaction, the Investment
Manager relies upon its experience and knowledge regarding commissions
generally charged by various brokers and on its judgment in evaluating the
brokerage and research services received from the broker effecting the
transaction. Such determinations are necessarily subjective and imprecise, as
in most cases an exact dollar value for those services is not ascertainable.
In seeking to implement the Fund's policies, the Investment Manager effects
transactions with those brokers and dealers who the Investment Manager believes
provide the most favorable prices and who are capable of providing efficient
executions. If the Investment Manager believes such price and execution are
obtainable from more than one broker or dealer, it may give consideration to
placing portfolio transactions with those brokers and dealers who also furnish
research and other services to the Fund or the Investment Manager. Such
services may include, but are not limited to, any one or more of the following:
information as to the availability of securities for purchase or sale;
statistical or factual information or opinions pertaining to investment; wire
services; and appraisals or evaluations of portfolio securities.
The information and services received by the Investment Manager from brokers
and dealers may be of benefit to the Investment Manager in the management of
accounts of some of its other clients and may not in all cases benefit the Fund
directly. While the receipt of such information and services is useful in
varying degrees and would generally reduce the amount of research or services
otherwise performed by the Investment Manager and thus reduce its expenses, it
is of indeterminable value and the management fee paid to the Investment
Manager is not reduced by any amount that may be attributable to the value of
such services.
16
<PAGE>
Pursuant to an order of the Securities and Exchange Commission, the Fund may
effect principal transactions in certain money market instruments with DWR. The
Fund will limit its transactions with DWR to U.S. Government and Government
Agency Securities, Bank Money Instruments (i.e., Certificates of Deposit and
Bankers' Acceptances) and Commercial Paper (not including Tax-Exempt Municipal
Paper). Such transactions will be effected with DWR only when the price
available from DWR is better than that available from other dealers.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may
be effected through DWR. In order for DWR to effect portfolio transactions for
the Fund, the commissions, fees or other remuneration received by DWR must be
reasonable and fair compared to the commissions, fees or other remuneration
paid to other brokers in connection with comparable transactions involving
similar securities being purchased or sold on an exchange during a comparable
period of time. This standard would allow DWR to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker
in a commensurate arm's-length transaction. Furthermore, the Trustees of the
Fund, including a majority of the Trustees who are not "interested" Trustees,
have adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to DWR are consistent with the
foregoing standard.
THE DISTRIBUTOR
- -------------------------------------------------------------------------------
As discussed in the Prospectus, shares of the Fund are distributed by Dean
Witter Distributors Inc. (the "Distributor"). The Distributor has entered into
a selected dealer agreement with DWR, which through its own sales organization
sells shares of the Fund. In addition, the Distributor may enter into selected
dealer agreements with other selected broker-dealers. The Distributor, a
Delaware corporation, is an indirect wholly-owned subsidiary of DWDC. The
Trustees of the Fund, including a majority of the Trustees who are not, and
were not at the time they voted, interested persons of the Fund, as defined in
the Act (the "Independent Trustees"), approved, at their meeting held on May
10, 1994, the current Distribution Agreement appointing the Distributor as
exclusive distributor of the Fund's shares and providing for the Distributor to
bear distribution expenses not borne by the Fund. By its terms, the
Distribution Agreement will continue in effect until April 30, 1995, and
provides that it will remain in effect from year to year thereafter if approved
by the Board.
The Distributor bears all expenses incurred in providing services under the
Distribution Agreement. Such expenses include the payment of commissions for
sales of the Fund's shares and incentive compensation to account executives.
The Distributor also pays certain expenses in connection with the distribution
of the fund's shares, including the costs of preparing, printing and
distributing advertising or promotional materials, and the costs of printing
and distributing prospectuses and supplements thereto used in connection with
the offering and sale of the Fund's shares. The Fund bears the costs of initial
typesetting, printing and distribution of prospectuses and supplements thereto
to shareholders. The Fund also bears the costs of registering the Fund and its
shares under federal and state securities laws. The Fund and the Distributor
have agreed to indemnify each other against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. Under the
Distribution Agreement, the Distributor uses its best efforts in rendering
services to the Fund, but in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations, the Distributor is
not liable to the fund or any of its shareholders for any error of judgment or
mistake of law or for any act or omission or for any losses sustained by the
Fund or its shareholders.
PLAN OF DISTRIBUTION
To compensate the Distributor for the services provided and for the expenses
borne by the Distributor or any selected dealer under the Distribution
Agreement, the fund has adopted a Plan of Distribution pursuant to Rule 12b-1
under the Act (the "Plan") pursuant to which the Fund pays the Distributor
compensation accrued daily and payable monthly at the annual rate of 0.60% of
the lesser of: (a) the
17
<PAGE>
average daily aggregate gross sales of the Fund's shares since the inception of
the Fund (not including reinvestments of dividends or capital gains
distributions), less the average daily aggregate net asset value of the Fund's
shares redeemed since the Fund's inception upon which a contingent deferred
sales charge has been imposed or upon which such charge has been waived; or (b)
the Fund's average daily net assets. The Distributor also receives the proceeds
of contingent deferred sales charges imposed on certain redemptions of shares,
which are separate and apart from payments made pursuant to the Plan (see
"Redemption and Repurchases--Contingent Deferred Sales Charge" in the
Prospectus).
The Distributor has informed the Fund that an amount of the fees payable by
the Fund each year pursuant to the Plan of Distribution equal to 0.15% of the
Fund's average daily net assets is characterized as a "service fee" under the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
(of which the Distributor is a member). Such fee is a payment made for personal
service and/or the maintenance of shareholder accounts. The remaining portion
of the Plan of Distribution fee payments made by the Fund is characterized as
an "asset-based sales charge" as such is defined by the aforementioned Rules of
Fair Practice.
The Plan was adopted by a vote of the Trustees of the Fund on May 10, 1994,
at a meeting of the Trustees called for the purpose of voting on such Plan. The
vote included the vote of a majority of the Trustees of the Fund who are not
"interested persons" of the Fund (as defined in the Act) and who have no direct
or indirect financial interest in the operation of the Plan (the "Independent
12b-1 Trustees"). In making their decision to adopt the Plan, the Trustees
requested from the Distributor and received such information as they deemed
necessary to make an informed determination as to whether or not adoption of
the Plan was in the best interests of the shareholders of the Fund. After due
consideration of the information received, the Trustees, including the
independent 12b-1 Trustees, determined that adoption of the Plan would benefit
the shareholders of the Fund. InterCapital, as sole shareholder of the Fund,
approved the Plan on May 10, 1994, whereupon the Plan went into effect.
Under its terms, the Plan will continue until April 30, 1995 and will remain
in effect from year to year thereafter, provided such continuance is approved
annually by a vote of the Trustees in the manner described above. Under the
Plan and as required by Rule 12b-1, the Trustees will receive and review
promptly after the end of each fiscal quarter a written report provided by the
Distributor of the amounts expended by the Distributor under the Plan and the
purpose for which such expenditures were made.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method shares of the Fund are
sold without a sales load being deducted at the time of purchase, so that the
full amount of an investor's purchase payment will be invested in shares
without any deduction for sales charges. Shares of the Fund may be subject to a
contingent deferred sales charge, payable to the Distributor, if redeemed
during the three years after their purchase. DWR compensates its account
executives by paying them, from its own funds, commissions for the sale of the
Fund's shares, currently a gross sales credit of up to 3% of the amount sold
and an annual residual commission of up to .15 of 1% of the current value of
the amount sold. The gross sales credit is a charge which reflects commissions
paid by DWR to its account executives and DWR's Fund associated distribution-
related expenses, including sales compensation, and overhead and other branch
office distribution-related expenses including: (a) the expenses of operating
DWR's branch offices in connection with the sale of Fund shares, including
lease costs, the salaries and employee benefits of operations and sales support
personnel, utility costs, communications costs and the costs of stationery and
supplies; (b) the costs of client sales seminars; (c) travel expenses of mutual
fund sales coordinators to promote the sale of Fund shares; and (d) other
expenses relating to branch promotion of Fund share sales. The distribution fee
that the Distributor receives from the Fund under the Plan, in effect, offsets
distribution expenses incurred under the Plan on behalf of the Fund and its
opportunity costs, such as the gross sales credit and an assumed interest
charge thereon ("carrying charge"). In the Distributor's reporting of the
distribution expenses to the Fund, such assumed interest (computed at the
"broker's call rate") has been calculated on the gross sales credit as it is
reduced by amounts received by the Distributor under the Plan and any
contingent deferred sales charges received by the Distributor upon redemption
of shares of the Fund. No other interest charge is included as a distribution
expense in the Distributor's calculation of
18
<PAGE>
its distribution costs for this purpose. The broker's call rate is the interest
rate charged to securities brokers on loans secured by exchange-listed
securities.
At any given time, the expenses of distributing shares of the Fund may be
more or less than the total of (i) the payments made by the Fund pursuant to
the Plan and (ii) the proceeds of contingent deferred sales charges paid by
investors upon redemption of shares. Because there is no requirement under the
Plan that the Distributor be reimbursed for all its expenses or any requirement
that the Plan be continued from year to year, this excess amount does not
constitute a liability of the Fund. Although there is no legal obligation for
the Fund to pay expenses incurred in excess of payments made to the Distributor
under the Plan and the proceeds of contingent deferred sales charges paid by
investors upon redemption of shares, if for any reason the Plan is terminated,
the Directors will consider at that time the manner in which to treat such
expenses. Any cumulative expenses incurred but not yet recovered through
distribution fees or contingent deferred sales charges, may or may not be
recovered through future distribution fees or contingent deferred sales
charges.
No interested person of the Fund, nor any Trustee of the Fund who is not an
interested person of the Fund, as defined in the Act, has any direct or
indirect financial interest in the operation of the Plan except to the extent
that the Distributor, InterCapital, DWR or certain of their employees may be
deemed to have such an interest as a result of benefits derived from the
successful operation of the Plan or as a result of receiving a portion of the
amounts expended thereunder by the Fund.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval of the shareholders of the
Fund, and all material amendments of the Plan must also be approved by the
Director in the manner described above. The Plan may be terminated at any time,
without payment of any penalty, by vote of a majority of the Independent 12b-1
Directors or by a vote of a majority of the outstanding voting securities of
the Fund (as defined in the Act) on not more than thirty days' written notice
to any other party to the Plan. So long as the Plan is in effect, the election
and nomination of Independent Directors shall be committed to the discretion of
the Independent Directors.
DETERMINATION OF NET ASSET VALUE
- -------------------------------------------------------------------------------
As stated in the Prospectus, short-term securities with remaining maturities
of sixty days or less at the time of purchase are valued at amortized cost,
unless the Directors determine such does not reflect the securities' market
value, in which case these securities will be valued at their fair value as
determined by the Directors. Other short-term debt securities will be valued on
a mark-to-market basis until such time as they reach a remaining maturity of
sixty days, whereupon they will be valued at amortized cost using their value
on the 61st day unless the Directors determine such does not reflect the
securities' market value, in which case these securities will be valued at
their fair market value as determined by the Directors. All other securities
and other assets are valued at their fair value as determined in good faith
under procedures established by and under the supervision of the Directors.
The net asset value per share of the Fund is determined once daily at 4:00
p.m., New York time on each day that the New York Stock Exchange is open by
taking the value of all assets of the Fund, substracting its liabilities,
dividing by the number of shares outstanding and adjusting to the nearest cent.
The New York Stock Exchange currently observes the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
Portfolio securities (other than short-term debt securities and futures and
options) are valued for the Fund by an outside independent pricing service
approved by the Board of Trustees. The pricing service has informed the Fund
that in valuing the Fund's portfolio securities it uses both a computerized
grid matrix of tax-exempt securities and evaluations by its staff, in each case
based on information concerning market transactions and quotations from dealers
which reflect the bid side of the market each day. The Fund's portfolio
securities are thus valued by reference to a combination of transactions and
quotations for the same or other securities believed to be comparable in
quality, coupon, maturity, type of issue, call provisions, trading
characteristics and other features deemed to be relevant. The Board of Trustees
believes that timely and reliable market quotations are generally not readily
available to the Fund for purposes of valuing tax-exempt securities and that
the valuations supplied by the pricing service, using the procedures outlined
above and subject to periodic review, are more likely to approximate the fair
value of such securities. The Investment Manager will periodically review and
evaluate the procedures, methods and quality of services provided by the
pricing service then being used by the Fund and
19
<PAGE>
may, from time to time, recommend to the Board of Trustees the use of other
pricing services or discontinuance of the use of any pricing service in whole
or part. The Board may determine to approve such recommendation or take other
provisions for pricing of the Fund's portfolio securities.
SHAREHOLDER SERVICES
- -------------------------------------------------------------------------------
Upon the purchase of shares of the Fund, a Shareholder Investment Account is
opened for the investor on the books of the Fund, maintained by the Fund's
Transfer Agent, Dean Witter Trust Company (the "Transfer Agent"). This is an
open account in which shares owned by the investor are credited by the Transfer
Agent in lieu of issuance of a share certificate. If a share certificate is
desired, it must be requested in writing for each transaction. Certificates are
issued only for full shares and may be redeposited in the account at any time.
There is no charge to the investor for issuance of a certificate. Whenever a
shareholder instituted transaction takes place in the Shareholder Investment
Account, the shareholder will be mailed a confirmation of the transaction from
the Fund or DWR or other selected broker-dealer.
Automatic Investment of Dividends and Distributions. As stated in the
Prospectus, all income dividends and capital gains distributions are
automatically paid in full and fractional shares of the Fund, unless the
shareholder requests that they be paid in cash. Each purchase of shares of the
Fund is made upon the condition that the Transfer Agent is thereby
automatically appointed as agent of the investor to receive all dividends and
capital gains distributions on shares owned by the investor. Such dividends and
distributions will be paid, at the net asset value per share, in shares of the
Fund (or in cash if the shareholder so requests) 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. At any time an investor may
request the Transfer Agent, in writing, to have subsequent dividends and/or
capital gains distributions paid to him or her in cash rather than shares. To
assure sufficient time to process the change, such request should be received
by the Transfer Agent at least five business days prior to the record date of
the dividend or distribution. In the case of recently purchased shares for
which registration instructions have not been received on the record date, cash
payments will be made to DWR or other selected broker-dealer, and will be
forwarded to the shareholder, upon the receipt of proper instructions.
Targeted Dividends.(SM) In states where it is legally permissible,
shareholders may also have all income dividends and capital gains distributions
automatically invested in shares of an open-end Dean Witter Fund other than
Dean Witter National Municipal Trust. Such investment will be made as described
above for automatic investment in shares of the Fund, at the net asset value
per share of the selected Dean Witter Fund as of the close of business on the
Fund's payment date and will begin to earn dividends, if any, in the selected
Dean Witter Fund the next business day. To participate in the Targeted
Dividends program, shareholders should contact their DWR or other selected
broker-dealer account executive or the Transfer Agent. Shareholders of the Fund
must be shareholders of the Dean Witter Fund targeted to receive investments
from dividends at the time they enter the Targeted Dividends program. Investors
should review the prospectus of the targeted Dean Witter Fund before entering
the program.
EasyInvest.(SM) Shareholders may subscribe to EasyInvest, an automatic
purchase plan which provides for any amount from $100 to $5,000 to be
transferred automatically from a checking or savings account, on a semi-
monthly, monthly or quarterly basis, to the Transfer Agent for investment in
shares of the Fund. Shares purchased through EasyInvest will be added to the
shareholder's existing account at the net asset value calculated the same
business day the transfer of funds is effected. For further information or to
subscribe to EasyInvest, shareholders should contact their DWR or other
selected broker-dealer account executive or the Transfer Agent.
Investment of Dividends or Distributions Received in Cash. Any shareholder
who receives a cash payment representing a dividend or capital gains
distribution may invest such dividend or distribution at the net asset value
next determined by returning the check or the proceeds to the Transfer Agent
within thirty days after the payment date. If the shareholder returns the
proceeds of a dividend or distribution,
20
<PAGE>
such funds must be accompanied by a signed statement indicating that the
proceeds constitute a dividend or distribution to be invested. Such investment
will be made at the net asset value per share next determined after receipt of
the proceeds by the Transfer Agent.
Direct Investments through Transfer Agent. A shareholder may make additional
investments in Fund shares at any time by sending a check in any amount, not
less than $100, payable to Dean Witter National Municipal Trust, directly to
the Fund's Transfer Agent. Such amounts will be applied to the purchase of Fund
shares at the net asset value per share next determined after receipt of the
check or purchase payment by the Transfer Agent. The shares so purchased will
be credited to the investor's account.
Systematic Withdrawal Plan. As discussed in the Prospectus, a withdrawal
plan (the "Withdrawal Plan") is available for shareholders who own or purchase
shares of the Fund having a minimum value of $10,000 based upon their current
net asset value. The Withdrawal Plan provides for monthly or quarterly (March,
June, September and December) checks in any dollar amount, not less than $25,
or in any whole percentage of the account balance, on an annualized basis. Any
applicable contingent deferred sales charge will be imposed on shares redeemed
under the Withdrawal Plan (see "Redemptions and Repurchases--Contingent
Deferred Sales Charge" in the Prospectus). Therefore, any shareholder
participating in the Withdrawal Plan will have sufficient shares redeemed from
his or her account so that the proceeds (net of any applicable contingent
deferred sales charge) to the shareholder will be the designated monthly or
quarterly amount.
Dividends and capital gains distributions on shares held under the
Withdrawal Plan will be invested in additional full and fractional shares at
net asset value. Shares will be credited to an open account for the investor by
the Transfer Agent; no share certificates will be issued. A shareholder is
entitled to a share certificate upon written request to the Transfer Agent,
although in that event the shareholder's Withdrawal Plan will be terminated.
The Transfer Agent acts as agent for the shareholder in tendering to the
Fund for redemption sufficient full and fractional shares to provide the amount
of the periodic withdrawal payment designated in the application. The shares
will be redeemed at their net asset value determined on the tenth or twenty-
fifth day (or next following business day) of the relevant month or quarter and
normally a check for the proceeds will be mailed by the Transfer Agent within
five days after the date of redemption. The Systematic Withdrawal Plan may be
terminated at any time by the Transfer Agent.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted.
Each withdrawal constitutes a redemption of shares and any gain or loss
realized must be recognized for federal income tax purposes. Although the
shareholder may make additional investments of $2,500 or more under the
Withdrawal Plan, withdrawals made concurrently with purchases of additional
shares may be inadvisable because of the contingent deferred sales charge
applicable to the redemption of shares purchased during the preceding six years
(see "Redemptions and Repurchases--Contingent Deferred Sales Charge").
Any shareholder who wishes to have payments under the Withdrawal Plan made
to a third party or sent to an address other than the one listed on the account
must send complete written instructions to the Transfer Agent to enroll in the
Withdrawal Plan. The shareholder's signature on such instructions must be
guaranteed by an eligible guarantor acceptable to the Transfer Agent
(shareholders should contact the Transfer Agent for a determination as to
whether a particular institution is such an eligible guarantor). A shareholder
may, at any time, change the amount and interval of withdrawal payments and the
address to which checks are mailed by written notification to the Transfer
Agent. In addition, the party and/or the address to which checks are mailed may
be changed by written notification to the Transfer Agent, with signature
guarantees required in the manner described above. The shareholder may also
terminate the Systematic Withdrawal Plan at any time by written notice to the
Transfer Agent. In the event of such termination, the account will be continued
as a Shareholder Investment Account. The shareholder may also redeem all or
part of the shares held in the Withdrawal Plan Account (see "Redemptions and
Repurchases" in the Prospectus) at any time.
21
<PAGE>
EXCHANGE PRIVILEGE
As discussed in the Prospectus, the Fund makes available to its shareholders
an Exchange Privilege whereby shareholders of the Fund may exchange their
shares for shares of other Dean Witter Funds sold with a contingent deferred
sales charge ("CDSC funds"), for shares of Dean Witter Short-Term Bond Fund,
Dean Witter Short-Term U.S. Treasury Trust, Dean Witter Limited Term Municipal
Trust and for shares of five Dean Witter Funds which are money market funds
(the foregoing eight non-CDSC funds are hereinafter referred to as the
"Exchange Funds"). Exchanges may be made after the shares of the Fund acquired
by purchase (not by exchange or dividend reinvestment) have been held for
thirty days. There is no waiting period for exchanges of shares acquired by
exchange or dividend reinvestment. An exchange will be treated for federal
income tax purposes the same as a repurchase or redemption of shares, on which
the shareholder may realize a capital gain or loss.
Any new account established through the Exchange Privilege will have the
same registration and cash dividend or dividend reinvestment plan as the
present account, unless the Transfer Agent receives written notification to the
contrary. For telephone exchanges, the exact registration of the existing
account and the account number must be provided.
Any shares held in certificate form cannot be exchanged but must be
forwarded to the Transfer Agent and deposited into the shareholder's account
before being eligible for exchange. (Certificates mailed in for deposit should
not be endorsed).
As described below, and in the Prospectus under the captions "Exchange
Privilege" and "Contingent Deferred Sales Charge", a contingent deferred sales
charge ("CDSC") may be imposed upon a redemption, depending on a number of
factors, including the number of years from the time of purchase until the time
of redemption or exchange ("holding period"). When shares of the Fund or any
other CDSC fund are exchanged for shares of an Exchange Fund, without the
imposition of the CDSC at the time of the exchange. During the period of time
the shareholder remains in the Exchange Fund (calculated from the last day of
the month in which the Exchange Fund shares were acquired) the holding period
or "year since purchase payment made" is frozen. When shares are redeemed out
of an Exchange Fund, they will be subject to a CDSC which would be based upon
the period of time the shareholder held shares in a CDSC fund. However, in the
case of shares exchanged for shares of an Exchange Fund, upon a redemption of
shares which results in a CDSC being imposed, a credit (not to exceed the
amount of the CDSC) will be given in an amount equal to the Exchange Fund 12b-1
distribution fees which are attributable to those shares. Shareholders
acquiring shares of an Exchange Fund pursuant to this exchange privilege may
exchange those shares back into a CDSC fund from the Exchange Fund, with no
CDSC being imposed on such exchange. The holding period previously frozen when
shares were first exchanged for shares of the Exchange Fund resumes on the date
shares of a CDSC fund are reacquired. Thus, a CDSC is imposed only upon an
ultimate redemption, based upon the time (calculated as described above) the
shareholder was invested in a CDSC fund.
If shares of the Fund are exchanged for shares of another CDSC fund having a
CDSC which is imposed at a higher rate or is subject to a different time
schedule than the CDSC imposed upon a redemption of a share of the Fund, the
higher CDSC will be imposed upon redemption of shares of the fund exchanged
into. Likewise, if shares of another CDSC fund are exchanged for shares of the
Fund, upon redemption of shares of the Fund, a CDSC will be imposed in
accordance with the CDSC schedule applicable to the fund with the higher CDSC.
Moveover, if shares of the Fund are exchanged for shares of another CDSC fund
with a different CDSC schedule imposing a higher CDSC and are subsequently
exchanged again for shares of the Fund, the higher CDSC will still apply upon
ultimate redemption of shares of the Fund.
In addition, shares of the Fund may be acquired in exchange for shares of
Dean Witter Funds sold with a front-end sales charge ("front-end sales charge
funds"), but shares of the Fund, however acquired, may not be exchanged for
shares of front-end sales charge funds. Shares of a CDSC fund acquired in
exchange for shares of a front-end sales charge fund (or in exchange for shares
of other Dean Witter Funds for which shares of a front-end sales charge fund
have been exchanged) are not subject to any CDSC upon their redemption.
22
<PAGE>
When shares initially purchased in a CDSC fund are exchanged for shares of
another CDSC fund, or for shares of an Exchange Fund, the date of purchase of
the shares of the fund exchanged into, for purposes of the CDSC upon
redemption, will be the last day of the month in which the shares being
exchanged were originally purchased. In allocating the purchase payments
between funds for purposes of the CDSC, the amount which represents the current
net asset value of shares at the time of the exchange which were (i) purchased
more than three or six years (depending on the CDSC schedule applicable to the
shares) prior to the exchange, (ii) originally acquired through reinvestment of
dividends or distributions (of the Fund or another Dean Witter Fund) and (iii)
acquired in exchange for shares of front-end sales charge funds, or for shares
of other Dean Witter Funds for which shares of front-end sales charge funds
have been exchanged (all such shares called "Free Shares"), will be exchanged
first. Shares of Dean Witter Strategist Fund acquired prior to November 8,
1989, shares of Dean Witter American Value Fund acquired prior to April 30,
1984, and shares of Dean Witter Dividend Growth Securities Inc. and Dean Witter
Natural Resource Development Securities Inc. acquired prior to July 2, 1984,
are also considered Free Shares and will be the first Free Shares to be
exchanged. After an exchange, all dividends earned on shares in an Exchange
Fund will be considered Free Shares. If the exchanged amount exceeds the value
of such Free Shares, an exchange is made, on a block-by-block basis, of non-
Free Shares held for the longest period of time (except that if shares held for
identical periods of time but subject to different CDSC schedules are held in a
block in the same Exchange Privilege account, the shares of that block that are
subject to a lower CDSC rate will be exchanged prior to the shares of that
block that are subject to a higher CDSC rate). Shares equal to any appreciation
in the value of non-Free shares exchanged will be treated as Free Shares, and
the amount of the purchase payments for the non-Free Shares of the fund
exchanged into will be equal to the lesser of (a) the purchase payments for, or
(b) the current net asset value of, the exchanged non-Free Shares. If an
exchange between funds would result in exchange of only part of a particular
block of non-Free Shares, then shares equal to any appreciation in the value of
the block (up to the amount of the exchange) will be treated as Free Shares and
exchanged first, and the purchase payment for that block will be allocated on a
pro rata basis between the non-Free Shares of that block to be retained and the
non-Free Shares to be exchanged. The prorated amount of such purchase payment
attributable to the retained non-Free Shares will remain as the purchase
payment for such shares, and the amount of purchase payment for the exchanged
non-Free Shares will be equal to the lesser of (a) the prorated amount of the
purchase payment for, or (b) the current net asset value of, those exchanged
non-Free Shares. Based upon the procedures described in the Prospectus under
the caption "Contingent Deferred Sales Charge", any applicable CDSC will be
imposed upon the ultimate redemption of shares of any fund, regardless of the
number of exchanges since those shares were originally purchased.
The Transfer Agent acts as agent for shareholders of the Fund in effecting
redemptions of Fund shares and in applying the proceeds to the purchase of
other fund shares. In the absence of negligence on its part, neither the
Transfer Agent nor the Fund shall be liable for any redemption of Fund shares
caused by unauthorized telephone instructions. Accordingly, in such event the
investor shall bear the risk of loss. The staff of the Securities and Exchange
Commission is currently considering the propriety of such a policy.
With respect to the repurchase of shares of the Fund, the application of
proceeds to the purchase of new shares in the Fund or any other of the funds
and the general administration of the Exchange Privilege, the Transfer Agent
acts as agent for the Distributor and for the shareholder's selected broker-
dealer, if any, in the performance of such functions.
With respect to exchanges, redemptions or repurchases, the Transfer Agent
shall be liable for its own negligence and not for the default or negligence of
its correspondents or for losses in transit. The Fund shall not be liable for
any default or negligence of the Transfer Agent, the Distributor or any
selected broker-dealer.
The Distributor and any selected broker-dealer have authorized and appointed
the Transfer Agent to act as their agent in connection with the application of
proceeds of any redemption of Fund shares to the purchase of shares of any
other fund and the general administration of the Exchange Privilege. No
commission or discounts will be paid to the Distributor or any selected broker-
dealer for any transactions pursuant to this Exchange Privilege.
23
<PAGE>
Exchanges are subject to the minimum investment requirement and any other
conditions imposed by each fund. (The minimum initial investment is $5,000 for
Dean Witter Liquid Asset Fund Inc., Dean Witter Tax-Free Daily Income Trust,
Dean Witter New York Municipal Money Market Trust and Dean Witter California
Tax-Free Daily Income Trust although those funds may, at their discretion,
accept initial investments of as low as $1,000. The minimum initial investment
for Dean Witter Short-Term U.S. Treasury Trust is $10,000 although that fund
may, at its discretion, accept initial investments of as low as $5,000. The
minimum initial investment for all other Dean Witter Funds for which the
Exchange Privilege is available is $1,000.) Upon exchange into an Exchange
Fund, the shares of that fund will be held in a special Exchange Privilege
Account separately from accounts of those shareholders who haved acquired their
shares directly from that fund. As a result, certain services normally
available to shareholders of Exchange Funds, including the check writing
feature, will not be available for funds held in that account.
The Fund and each of the other Dean Witter Funds may limit the number of
times this Exchange Privilege may be exercised by any investor within a
specified period of time. Also, the Exchange Privilege may be terminated or
revised at any time by the Fund and/or any of the Dean Witter Funds for which
shares of the Fund have been exchanged, upon such notice as may be required by
applicable regulatory agencies (presently sixty days prior written notice for
termination or material revision), provided that six months prior written
notice of termination will be given to the shareholders who hold shares of
Exchange Funds, pursuant to the Exchange Privilege and provided further that
the Exchange Privilege may be terminated or materially revised without notice
at times (a) when the New York Stock Exchange is closed for other than
customary weekends and holidays, (b) when trading on that Exchange is
restricted, (c) when an emergency exists as a result of which disposal by the
Fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets, (d) during any other period when the Securities and Exchange Commission
by order so permits (provided that applicable rules and regulations of the
Securities and Exchange Commission shall govern as to whether the conditions
prescribed in (b) or (c) exist), or (e) if the Fund would be unable to invest
amounts effectively in accordance with its investment objective(s), policies
and restrictions.
The Exchange Privilege may be terminated or revised at any time by the Fund
and/or any of such Dean Witter Funds for which shares of the Fund may be
exchanged, upon such notice as may be required by applicable regulatory
agencies (presently sixty days' prior written notice for termination or
material revision), provided that six months' prior notice of termination will
be given to shareholders who hold shares of Exchange Funds pursuant to the
Exchange Privilege, and provided further that the Exchange Privilege may be
terminated or materially revised without notice under certain unusual
circumstances. Shareholders maintaining margin accounts with DWR or another
selected broker-dealer are referred to their account executive regarding
restrictions on exchange of shares of the Fund pledged in the margin account.
The current prospectus for each of the Dean Witter Funds describes its
investment objective(s) and policies. Shareholders should obtain a copy and
read it carefully before investing. Exchange Funds are subject to the minimum
investment requirement and any other conditions imposed by each Fund. In the
case of any shareholder holding a share certificate or certificates, no
exchanges may be made until all applicable share certificates have been
received by the Transfer Agent and deposited in the shareholder's account. An
exchange will be treated for federal income tax purposes the same as a
repurchase or redemption of shares on which the shareholder will realize a
capital gain or loss. However, the ability to deduct capital losses on an
exchange may be limited in situations where there is an exchange of shares
within ninety days after the shares are purchased. The Exchange Privilege is
only available in states where an exchange may legally be made.
For further information regarding the Exchange Privilege, shareholders
should contact their DWR or other selected broker-dealer account executive or
the Transfer Agent.
REDEMPTIONS AND REPURCHASES
- -------------------------------------------------------------------------------
Redemption. As stated in the Prospectus, shares of the Fund can be redeemed
for cash at any time at the net asset value per share next determined; however,
such redemption proceeds may be reduced
24
<PAGE>
by the amount of any applicable contingent deferred sales charges (see below).
If shares are held in a shareholder's account without a share certificate, a
written request for redemption to the Fund's Transfer Agent at P.O. Box 983,
Jersey City, NJ 07303 is required. If certificates are held by the shareholder,
the shares may be redeemed by surrendering the certificates with a written
request for redemption. The share certificate, or an accompanying stock power,
and the request for redemption, must be signed by the shareholder or
shareholders exactly as the shares are registered. Each request for redemption,
whether or not accompanied by a share certificate, must be sent to the Fund's
Transfer Agent, which will redeem the shares at their net asset value next
computed (see "Purchase of Fund Shares" in the Prospectus) after it receives
the request, and certificate, if any, in good order. Any redemption request
received after such computation will be redeemed at the next determined net
asset value. The term "good order" means that the share certificate, if any,
and request for redemption are properly signed, accompanied by any
documentation required by the Transfer Agent, and bear signature guarantees
when required by the Fund or the Transfer Agent. If redemption is requested by
a corporation, partnership, trust or fiduciary, the Transfer Agent may require
that written evidence of authority acceptable to the Transfer Agent be
submitted before such request is accepted.
Whether certificates are held by the shareholder or shares are held in a
shareholder's account, if the proceeds are to be paid to any person other than
the record owner, or if the proceeds are to be paid to a corporation (other
than the Distributor or a selected broker-dealer for the account of the
shareholder), partnership, trust or fiduciary, or sent to the shareholder at an
address other than the registered address, signatures must be guaranteed by an
eligible guarantor acceptable to the Transfer Agent (shareholders should
contact the Transfer Agent for a determination as to whether a particular
institution is such an eligible guarantor). A stock power may be obtained from
any dealer or commercial bank. The Fund may change the signature guarantee
requirements from time to time upon notice to shareholders, which may be by
means of a revised prospectus.
Contingent Deferred Sales Charge. As stated in the Prospectus, a contingent
deferred sales charge ("CDSC") will be imposed on any redemption by an investor
if after such redemtpion the current value of the investor's shares of the Fund
is less than the dollar amount of all payments by the shareholder for the
purchase of Fund shares during the preceding three years. However, no CDSC will
be imposed to the extent that the net asset value of the shares redeemed does
not exceed: (a) the current net asset value of shares purchased more than three
years prior to the redemption, plus (b) the current net asset value of shares
purchased through reinvestment of dividends or distributions of the Fund or
another Dean Witter Fund (see "Shareholder Services--Targeted Dividends"), plus
(c) the current net asset value of shares acquired in exchange for (i) shares
of Dean Witter front-end sales charge funds, or (ii) shares of other Dean
Witter Funds for which shares of front-end sales charge funds have been
exchanged (see "Shareholder Services--Exchange Privilege"), plus (d) increases
in the net asset value of the investor's shares above the total amount of
payments for the purchase of Fund shares made during the preceding three years.
The CDSC will be paid to the Distributor. In addition, no CDSC will be imposed
on redemptions of shares which were purchased by certain Unit Investment Trusts
(on which a sales charge has been paid) or which are attributable to
reinvestment of dividends or distributions from, or the proceeds of, such Unit
Investment Trusts.
In determining the applicability of the CDSC to each redemption, the amount
which represents an increase in the net asset value of the investor's shares
above the amount of the total payments for the purchase of shares within the
last three years will be redeemed first. In the event the redemption amount
exceeds such increase in value, the next portion of the amount redeemed will be
the amount which represents the net asset value of the investor's shares
purchased more than three years prior to the redemption and/or shares purchased
through reinvestment of dividends or distributions and/or shares acquired in
exchange for shares of Dean Witter front-end sales charge funds, or for shares
of other Dean Witter funds for which shares of front-end sales charge funds
have been exchanged. A portion of the amount redeemed which exceeds an amount
which represents both such increase in value and the value of shares purchased
more than three years prior to the redemption and/or shares purchased through
reinvestment of dividends or distributions and/or shares acquired in the above-
described exchanges will be subject to a CDSC.
25
<PAGE>
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Fund shares until the time of
redemption of such shares. For purposes of determining the number of years from
the time of any payment for the purchase of shares, all payments made during a
month will be aggregated and deemed to have been made on the last day of the
month. The following table sets forth the rates of the CDSC:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR SINCE SALES CHARGE AS A
PURCHASE PERCENTAGE OF
PAYMENT MADE AMOUNT REDEEMED
------------ -------------------
<S> <C>
First.................................... 3.0%
Second................................... 2.0%
Third.................................... 1.0%
Fourth and thereafter.................... None
</TABLE>
In determining the rate of the CDSC, it will be assumed that a redemption is
made of shares held by the investor for the longest period of time within the
applicable three year period. This will result in any such CDSC being imposed
at the lowest possible rate. Accordingly, shareholders may redeem, without
incurring any CDSC, amounts equal to any net increase in the value of their
shares above the amount of their purchase payments made within the past three
years and amounts equal to the current value of shares purchased more than
three years prior to the redemption and shares purchased through reinvestment
of dividends or distributions or acquired in exchange for shares of Dean Witter
front-end sales charge funds, or for shares of other Dean Witter Funds for
which shares of front-end sales charge funds have been exchanged. The CDSC will
be imposed in accordance with the table shown above, on any redemptions within
three years of purchase which are in excess of these amounts and which
redemptions are not (a) requested within one year of death or initial
determination of disability of a shareholder, or (b) made pursuant to certain
taxable distributions from retirement plans or retirement accounts, as
described in the Prospectus.
Payment for Shares Redeemed or Repurchased. As discussed in the Prospectus,
payment for shares presented for repurchase or redemption will be made by check
within seven days after receipt by the Transfer Agent of the certificate and/or
written request in good order. The term good order means that the share
certificate, if any, and request for redemption are properly signed,
accompanied by any documentation required by the Transfer Agent, and bear
signature guarantees when required by the Fund or the Transfer Agent. Such
payment may be postponed or the right of redemption suspended at times (a) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (b) when trading on that Exchange is restricted, (c) when an
emergency exists as a result of which disposal by the Fund of securities owned
by it is not reasonably practicable or it is not reasonably practicable for the
Fund fairly to determine the value of its net assets, or (d) during any other
period when the Securities and Exchange Commission by order so permits;
provided that applicable rules and regulations of the Securities and Exchange
Commission shall govern as to whether the conditions prescribed in (b) or (c)
exist. If the shares to be redeemed have recently been purchased by check
(including a certified or bank cashier's check), payment of redemption proceeds
may be delayed for the minimum time needed to verify that the check used for
investment has been honored (not more than fifteen days from the time of
investment of the proceeds of the check by the Transfer Agent). Shareholders
maintaining 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.
Transfers of Shares. In the event a shareholder requests a transfer of any
shares to a new registration, such shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the contingent deferred sales charge or free of such charge
(and with regard to the length of time shares subject to the charge have been
held), any transfer involving less than all of the shares in an account will be
made on a pro-rata basis (that is, by transferring shares in the same
proportion that the transferred shares bear to the total shares in the account
immediately prior to the transfer). The transferred shares will continue to be
subject to any applicable contingent deferred sales charge as if they had not
been so transferred.
26
<PAGE>
Reinstatement Privilege. As described in the Prospectus, a shareholder who
has had his or her shares redeemed or repurchased and has not previously
exercised this reinstatement privilege may, within 30 days after the date of
the redemption or repurchase, reinstate any portion or all of the proceeds of
such redemption or repurchase in shares of the Fund at the net asset value next
determined after a reinstatement request, together with such proceeds, is
received by the Transfer Agent.
Exercise of the reinstatement privilege will not affect the federal income
tax treatment of any gain or loss realized upon the redemption or repurchase,
except that if the redemption or repurchase resulted in a loss and
reinstatement is made in shares of the Fund, some or all of the loss, depending
on the amount reinstated, will not be allowed as a deduction for federal income
tax purposes but will be applied to adjust the cost basis of the shares
acquired upon reinstatement.
Involuntary Redemption. As described in the Prospectus, due to the
relatively high cost of handling small investments, the Fund reserves the right
to redeem, at net asset value, the shares of any shareholder whose shares have
a value of less than $100, or such lesser amount as may be fixed by the Board
of Trustees. However, before the Fund redeems such shares and sends the
proceeds to the shareholder, it will notify the shareholder that the value of
the shares is less than $100 and allow him or her sixty days to make an
additional investment in an amount which will increase the value of his or her
account to $100 or more before the redemption is processed.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
Each shareholder will receive at least a quarterly summary of his or her
account, including information as to reinvested dividends and capital gains
distributions. Share certificates for dividends or distributions will not be
issued unless a shareholder requests in writing that a certificate be issued
for a specific number of shares.
In computing net investment income, the Fund will amortize any premiums and
original issue discounts on securities owned, if applicable. Capital gains or
losses realized upon sale or maturity of such securities will be based on their
amortized cost.
Gains or losses on the sales of securities by the Fund will be long-term
capital gains or losses if the securities have been held by the Fund for more
than twelve months. Gains or losses on the sale of securities held for twelve
months or less will be short-term capital gains or losses.
The Fund has qualified and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code. If so
qualified, the Fund will not be subject to federal income tax on its net
investment income and capital gains, if any, realized during any fiscal year to
the extent that it distributes such income and capital gains to its
shareholders.
With respect to the Fund's investments in zero coupon bonds, the Fund
accrues income prior to any actual cash payments by their issuers. In order to
continue to comply with Subchapter M of the Internal Revenue Code and remain
able to forego payment of federal income tax on its income and capital gains,
the Fund must distribute all of its net investment income, including income
accrued from zero coupon bonds. As such, the Fund may be required to dispose of
some of its portfolio securities under disadvantageous circumstances to
generate the cash required for distribution.
As discussed in the Prospectus, the Fund intends to qualify to pay "exempt-
interest dividends" to its shareholders by maintaining, as of the close of each
of its taxable years, at least 50% of the value of its assets in tax-exempt
securities. An exempt-interest dividend is that part of the dividend
distributions made by the Fund which consists of interest received by the Fund
on tax-exempt securities upon which the shareholder incurs no federal income
taxes. 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.
As also discussed in the Prospectus, the Fund intends to invest a portion of
its assets in certain "private activity bonds" issued after August 7, 1986. As
a result, a portion of the exempt-interest dividends paid by the Fund will be
an item of tax preference to shareholders subject to the alternative minimum
tax. Certain corporations which are subject to the alternative minimum tax may
also have to include
27
<PAGE>
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.
Within sixty days after the end of its fiscal year, the Fund will mail to
shareholders a statement indicating the percentage of the dividend
distributions for each fiscal year which constitutes exempt-interest dividends,
the percentage, if any, that is taxable, and the percentage, if any, of the
exempt-interest dividends which constitutes an item of tax preference, and to
what extent the taxable portion is long-term capital gain, short-term capital
gain or ordinary income. This percentage should be applied uniformly to all
monthly distributions made during the fiscal year to determine the proportion
of dividends that is tax-exempt. The percentage may differ from the percentage
of tax-exempt dividend distributions for any particular month.
Shareholders will be subject to federal income tax on dividends paid from
interest income derived from taxable securities and on distributions of net
short-term capital gains. Such dividends and distributions are taxable to the
shareholder as ordinary dividend income regardless of whether the shareholder
receives such distributions in additional shares or in cash. Distributions of
long-term capital gains, if any, are taxable as long-term capital gains,
regardless of how long the shareholder has held the Fund shares and regardless
of whether the distribution is received in additional shares or in cash. Since
the Fund's income is expected to be derived entirely from interest rather than
dividends, it is anticipated that no portion of such dividend distributions
will be eligible for the federal dividends received deduction available to
corporations.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of the Fund is not deductible. Furthermore, entities or persons who are
"substantial users" (or related persons) of facilities financed by industrial
development bonds should consult their tax advisers before purchasing shares of
the Fund. "Substantial user" is defined generally by Income Tax Regulation
1.103-11(b) as including a "non-exempt person" who regularly uses in a trade or
business a part of a facility financed from the proceeds of industrial
development bonds.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities. Similar proposals may be introduced in the
future. If such a proposal were enacted, the availability of municipal
securities for investment by the Fund could be affected. In that event, the
Fund would re-evaluate its investment objective and policies.
Any dividends or capital gains distributions received by a shareholder from
any investment company will have the effect of reducing the net asset value of
the shareholder's shares in that fund by the exact amount of the dividend or
capital gains distribution. Furthermore, capital gains distributions are, and
some portion of the dividends may be, subject to income tax. If the net asset
value of the shares should be reduced below a shareholder's cost as a result of
the payment of taxable dividends or the distribution of capital gains, such
payment or distribution would be in part a return of capital but nonetheless
taxable to the shareholder. Therefore, an investor should consider the tax
implications of purchasing Fund shares immediately prior to a distribution
record date.
Shareholders should consult their tax advisers regarding specific questions
as to state or local taxes.
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
As discussed in the Prospectus, from time to time the Fund may quote its
"yield" and/or its "total return" in advertisements and sales literature. Yield
is calculated for any 30-day period as follows: the amount of interest income
for each security in the Fund's portfolio is determined as described below; the
total for the entire portfolio constitutes the Fund's gross income for the
period. Expenses accrued during the period are subtracted to arrive at "net
investment income". The resulting amount is divided by the product of the
maximum offering price per share on the last day of the period (reduced by any
undeclared earned income per share that is expected to be declared shortly
after the end of the period) multiplied by the average number of Fund shares
outstanding during the period that were entitled to dividends. This
28
<PAGE>
amount is added to 1 and raised to the sixth power. 1 is then subtracted from
the result and the difference is multiplied by 2 to arrive at the annualized
yield.
To determine interest income from debt obligations, a yield-to-maturity,
expressed as a percentage, is determined for obligations held at the beginning
of the period, based on the current market value of the security plus accrued
interest, generally as of the end of the month preceding the 30-day period, or,
for obligations purchased during the period, based on the cost of the security
(including accrued interest). The yield-to-maturity is multiplied by the market
value (plus accrued interest) for each security and the result is divided by
360 and multiplied by 30 days or the number of days the security was held
during the period, if less. Modifications are made for determining yield-to-
maturity on certain tax-exempt securities.
The Fund may also quote a "tax-equivalent yield" determined by dividing the
tax-exempt portion of quoted yield by 1 minus the stated income tax rate and
adding the result to the portion of the yield that is not tax-exempt.
The Fund's "average annual total return" represents an annualization of the
Fund's total return over a particular period and is computed by finding the
annual percentage rate which will result in the ending redeemable value of a
hypothetical $1,000 investment made at the beginning of a one, five or ten year
period, or for the period from the date of commencement of the Fund's
operations, if shorter than any of the foregoing. The ending redeemable value
is reduced by any contingent deferred sales charge at the end of the one, five
or ten or other period. For the purpose of this calculation, it is assumed that
all dividends and distributions are reinvested. The formula for computing the
average annual total return involves a percentage obtained by dividing the
ending redeemable value by the amount of the initial investment, taking a root
of the quotient (where the root is equivalent to the number of years in the
period) and subtracting 1 from the result.
In addition to the foregoing, the Fund may advertise its total return over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. Such calculation may or may not reflect the
deduction of the contingent deferred sales charge which, if reflected, would
reduce the performance quoted. For example, the average annual total return of
the Fund may be calculated in the manner described in the preceding paragraph,
but without the deduction for any applicable contingent deferred sales charge.
In addition, the Fund may compute its aggregate total return for specified
periods by determining the aggregate percentage rate which will result in the
ending value of a hypothetical $1,000 investment made at the beginning of the
period. For the purpose of this calculation, it is assumed that all dividends
and distributions are reinvested. The formula for computing aggregate total
return involves a percentage obtained by dividing the ending value (without
reduction for any contingent deferred sales charge) by the initial $1,000
investment and subtracting 1 from the result.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in shares of the Fund by adding 1 to the Fund's
aggregate total return to date (expressed as a decimal and without taking into
account the effect of any applicable contingent deferred sales charge) and
multiplying by $10,000, $50,000 or $100,000 as the case may be. The Fund from
time to time may also advertise its performance relative to certain performance
rankings and indexes compiled by independent organizations.
DESCRIPTION OF SHARES
- -------------------------------------------------------------------------------
The Shareholders of the Fund are entitled to a full vote for each full share
of beneficial interest held. The Fund is authorized to issue an unlimited
number of shares of beneficial interest. The Trustees themselves have the power
to alter the number and the terms of office of the Trustees (as provided for in
the Declaration of Trust), and they may at any time lengthen or shorten their
own terms or make their terms of unlimited duration and appoint their own
successors, provided that always at least a majority of the Trustees has been
elected by the shareholders of the Fund. Under certain circumstances the
Trustees may be removed by action of the Trustees. The shareholders also have
the right under certain circumstances to remove the Trustees. The voting rights
of shareholders are not cumulative, so that holders of
29
<PAGE>
more than 50 percent of the shares voting can, if they choose, elect all
Trustees being selected, while the holders of the remaining shares would be
unable to elect any Trustees.
The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares (the managed portfolios) and additional classes of
shares within any series (which would be used to distinguish among the rights
of different categories of shareholders, as might be required by future
regulations or other unforeseen circumstances). However, the Trustees have not
authorized any such additional series or classes of shares and the Fund has no
present intention to add additional classes or series of shares.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his/her
or its own bad faith, willful misfeasance, gross negligence, or reckless
disregard of his duties. It also provides that all third persons shall look
solely to the Fund property for satisfaction of claims arising in connection
with the affairs of the Fund. With the exceptions stated above, the Declaration
of Trust provides that a Trustee, officer, employee or agent is entitled to be
indemnified against all liability in connection with the affairs of the Fund.
The Fund shall be of unlimited duration subject to the provisions in the
Declaration of Trust concerning termination by action of the shareholders or
the Trustees.
CUSTODIAN AND TRANSFER AGENT
- -------------------------------------------------------------------------------
The Bank of New York, 110 Washington Street, New York, New York 10286, is the
Custodian of the Fund's assets. The Custodian has no part in deciding the
Fund's investment policies or which securities are to be purchased or sold for
the Fund's portfolio. Any of the Fund's cash balances with the Custodian in
excess of $100,000 are unprotected by Federal deposit insurance. Such balances
may, at times, be substantial.
Dean Witter Trust Company, Harborside Financial Center, Plaza Two, Jersey
City, New Jersey 07311 is the Transfer Agent of the Fund's shares and Dividend
Disbursing Agent for payment of dividends and distributions on Fund shares and
Agent for shareholders under various investment plans described herein. Dean
Witter Trust Company is an affiliate of Dean Witter InterCapital Inc., the
Fund's Investment Manager, and Dean Witter Distributors Inc., the Fund's
Distributor. As Transfer Agent and Dividend Disbursing Agent, Dean Witter Trust
Company's responsibilities include maintaining shareholder accounts; disbursing
cash dividends and reinvesting dividends; processing account registration
changes; handling purchase and redemption transactions; mailing prospectuses
and reports; mailing and tabulating proxies; processing share certificate
transactions; and maintaining shareholder records and lists. For these services
Dean Witter Trust Company receives a per shareholder account fee from the Fund.
INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
Price Waterhouse serves as the independent accountants of the Fund. The
independent accountants are responsible for auditing the annual financial
statements of the Fund.
REPORTS TO SHAREHOLDERS
- -------------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports showing
the Fund's portfolio and other information. An annual report, containing
financial statements audited by independent accountants, will be sent to
shareholders each year.
The Fund's fiscal year is September 30. The financial statements of the Fund
must be audited at least once a year by independent accountants whose selection
is made annually by the Fund's Board of Trustees.
30
<PAGE>
LEGAL COUNSEL
- -------------------------------------------------------------------------------
Sheldon Curtis, Esq., who is an officer and the General Counsel of the
Investment Manager, is an officer and the General Counsel of the Fund.
EXPERTS
- -------------------------------------------------------------------------------
The Statement of Assets and Liabilities of the Fund are included in this
Statement of Additional Information and incorporated by reference in the
Prospectus, have been so included and incorporated in reliance on the report of
Price Waterhouse, independent accountants, given on the authority of said firm
as experts in auditing and accounting.
REGISTRATION STATEMENT
- -------------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
31
<PAGE>
DEAN WITTER NATIONAL MUNICIPAL TRUST
STATEMENT OF ASSETS AND LIABILITIES AT MAY 10, 1994
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Cash.......................................................... $100,000
Deferred organizational expenses (Note 1)..................... 154,000
--------
Total Assets................................................ 254,000
LIABILITIES:
Organizational expenses payable (Note 1)...................... 154,000
Commitments (Note 1 and 2)....................................
--------
Net Assets.................................................. $100,000
========
Net Asset Value Per Share (10,000 shares of beneficial
interest outstanding; unlimited authorized shares of
beneficial interest of $.01 par value)....................... $10.00
======
</TABLE>
- ------------
NOTE 1--Dean Witter National Municipal Trust (the "Fund") was organized as a
Massachusetts business trust on March 29, 1994. To date the Fund has had no
transactions other than those relating to organizational matters and the sale
of 10,000 shares of beneficial interest for $100,000 to Dean Witter
InterCapital Inc. (the "Investment Manager"). The Fund is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-
end management investment company. Organizational expenses of the Fund incurred
prior to the offering of the Fund's shares will be paid by the Investment
Manager. It is currently estimated that the Investment Manager will incur, and
be reimbursed by the Fund for approximately $154,000 in organizational
expenses. These expenses will be deferred and amortized by the Fund on the
straight-line method over a period not to exceed five years from the date of
commencement of the Fund's operations. In the event that, at any time during
the five year period beginning with the date of the commencement of operations,
the initial shares acquired by the Investment Manager prior to such date are
redeemed, by any holder thereof, the redemption proceeds payable in respect of
such shares will be reduced by the pro rata share (based on the proportionate
share of the original shares redeemed to the total number of original shares
outstanding at the time of redemption) of the then unamortized deferred
organizational expenses as of the date of such redemption. In the event that
the Fund liquidates before the deferred organizational expenses are fully
amortized, the Investment Manager shall bear such unamortized deferred
organizational expenses.
NOTE 2--The Fund has entered into an investment management agreement with
the Investment Manager. Certain officers and/or trustees of the Fund are
officers and/or directors of the Investment Manager. The Fund has retained the
Investment Manager to manage the investment of the Fund's assets, including the
placing of orders for the purchase and sale of portfolio securities. Under the
terms of the Investment Management Agreement, the Investment Manager maintains
certain of the Fund's books and furnishes, at its own expense, such office
space, facilities, equipment, supplies, clerical help and bookkeeping and
certain legal services as the Fund may reasonably require in the conduct of its
business. In addition, the Investment Manager pays the salaries of all
personnel, including officers of the Fund, who are employees of the Investment
Manager, the Investment Manager also bears the cost of the Fund's telephone
service, heat, light, power and other utilities.
As full compensation for services and facilities furnished to the Fund and
expenses of the Fund assumed by the Investment Manager, the Fund will pay the
Investment Manager monthly compensation calculated daily by applying the annual
rate of 0.35% to the Fund's daily net assets.
Shares of the Fund will be distributed by Dean Witter Distributors Inc. (the
"Distributor"), a wholly-owned subsidiary of Dean Witter Reynolds Inc. ("DWR")
and an affiliate of the Investment Manager. The Fund has adopted a Plan of
Distribution pursuant to Rule 12b-1 under the Act (the "Plan"). The Plan
provides that the Distributor will bear the expense of all promotional and
distribution related activities on behalf of the Fund, including the payment of
commissions for sales of the Fund's shares and incentive
32
<PAGE>
compensation to and expenses of DWR account executives and others who engage in
or support distribution of shares or who service shareholder accounts,
including overhead and telephone expenses; printing and distribution of
prospectuses and reports used in connection with the offering of the Fund's
shares to other than current shareholders; and preparation, printing and
distribution of sales literature and advertising materials. In addition, the
Distributor may utilize fees paid pursuant to the Plan to compensate DWR and
others for their opportunity costs in advancing such amounts, which
compensation would be in the form of a carrying charge on any unreimbursed
distribution expenses incurred.
To compensate the Distributor for the services provided and for the expenses
borne by the Distributor and others under the Plan, the Fund will pay the
Distributor compensation accrued daily and payable monthly at the annual rate
of 0.60% of the lesser of: (a) the average daily aggregate gross sales of the
Fund's shares since the inception of the Fund (not including reinvestments of
dividends or capital gains distributions), less the average daily aggregate net
asset value of the Fund's shares redeemed since the Fund's inception upon which
a contingent deferred sales charge has been imposed or waived; or (b) the
Fund's average daily net assets.
Dean Witter Trust Company (the "Transfer Agent"), an affiliate of the
Investment Manager and the Distributor, is the transfer agent of the Fund's
shares, dividend disbursing agent for payment of dividends and distributions on
Fund shares and agent for shareholders under various investment plans.
The Investment Manager has undertaken to assume all operating expenses
(except for the Plan fee and brokerage fees) and waive the compensation
provided for in its investment management agreement for services rendered until
such time as the Fund has $50 million of net assets or until six months from
the date of commencement of the Fund's operations, whichever occurs first.
33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Shareholder and Trustees of
Dean Witter National Municipal Trust
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of Dean Witter
National Municipal Trust (the "Fund") at May 10, 1994, in conformity with
generally accepted accounting principles. This financial statement is the
responsibility of the Fund's management; our responsibility is to express an
opinion on this financial statement based on our audit. We conducted our audit
of this financial statement in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
1177 Avenue of the Americas
New York, New York
May 11, 1994
34
<PAGE>
APPENDIX
RATINGS OF INVESTMENTS
- -------------------------------------------------------------------------------
Moody's Investors Service Inc. ("Moody's")
MUNICIPAL BOND RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not
well safeguarded during both good and bad times in the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca present obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Conditional Rating: Bonds for which the security depends upon the completion
of some act or thefulfillment of some condition are rated conditionally. These
bonds are secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2, and 3 in
each generic rating classification from Aa though B in its municipal bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and a modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
35
<PAGE>
MUNICIPAL NOTE RATINGS
Moody's ratings for state and municipal note and other short-term loans are
designated Moody's Investment Grade (MIG). MIG 1 denotes best quality and means
there is present strong protection from established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing. MIG 2 denotes high quality and means that margins of protection
are ample although not as large as in MIG 1. MIG 3 denotes favorable quality
and means that all security elements are accounted for but that the undeniable
strength of the previous grades, MIG 1 and MIG 2, is lacking. MIG 4 denotes
adequate quality and means that the protection commonly regarded as required of
an investment security is present and that while the notes are not distinctly
or predominantly speculative, there is specific risk.
VARIABLE RATE DEMAND OBLIGATIONS
A short-term rating, in addition to the Bond or MIG ratings, designated VMIG
may also be assigned to an issue having a demand feature. The assignment of the
VMIG symbol reflects such characteristics as payment upon periodic demand
rather than fixed maturity dates and payment relying on external liquidity. The
VMIG rating criteria are identical to the MIG criteria discussed above.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess of
nine months. These ratings apply to Municipal Commercial Paper as well as
taxable Commercial Paper. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers: Prime-1, Prime-2, Prime-3.
Issuers rated Prime-1 have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 have a strong capacity for
repayment of short-term promissory obligations; and Issuers rated Prime-3 have
an acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S")
MUNICIPAL BOND RATINGS
A Standard & Poor's municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers or
lessees.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. The
ratings are based, in varying degrees, on the following considerations: (1)
likelihood of default-capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion,rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or for other reasons.
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories.
36
<PAGE>
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.
Bonds rated AAA, AA, A and BBB are considered investment grade bonds.
BB Debt rated "BB" has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
would lead to inadequate capacity or willingness to pay interest and
repay principal.
B Debt rated "B" has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity
or willingness to pay interest and repay principal.
CCC Debt rated "CCC" has a current identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions
to meet timely payments of interest and repayments of principal. In the
event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal.
CC The rating "CC" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC" rating.
C The rating "C" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC\" debt rating.
Cl The rating "Cl" is reserved for income bonds on which no interest is
being paid.
D Debt rated "D" is in payment default. The `D' rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The
`D' rating also will be used upon the filing of a bankruptcy petition if
debt service payments are jeopardized.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not
rate a particular type of obligation as a matter of policy.
Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded as having
predominantly speculative characteristics with respect to capacity to
pay interest and repay principal. "BB" indicates the least degree of
speculation and "C" the highest degree of speculation. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
Plus (+) or minus(-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within
the major ratings categories.
The foregoing ratings are sometimes followed by a "p" which indicates
that the rating is provisional. A provisional rating assumes the
successful completion of the project being financed by the bonds being
rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion.
MUNICIPAL NOTE RATINGS
Commencing on July 27, 1984, Standard & Poor's instituted a new rating
category with respect to certain municipal note issues with a maturity of less
than three years. The new note ratings denote thefollowing:
SP-1 denotes a very strong or strong capacity to pay principal and
interest. Issues determined to possess overwhelming safety characteristics are
given a plus (+) designation (SP-1+).
37
<PAGE>
SP-2 denotes a satisfactory capacity to pay principal and interest.
SP-3 denotes a speculative capacity to pay principal and interest.
COMMERCIAL PAPER RATINGS
Standard and Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. The commercial paper rating is not a recommendation to purchase
or sell a security. The ratings are based upon current information furnished by
the issuer or obtained by S&P from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information. Ratings are graded into group categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Ratings are applicable to both taxable and tax-exempt commercial paper. The
categories are as follows:
Issues assigned A ratings are regarded as having the greatest capacity for
timely payment. Issues in this category are further refined with the
designation 1, 2 and 3 to indicate the relative degree of safety.
A-1 indicates that the degree of safety regarding timely payments is very
strong.
A-2 indicates capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as overwhelming as for
issues designated "A-1".
A-3 indicates a satisfactory capacity for timely payment. Obligations
carrying this designation are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
38
