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Filed Pursuant fo Rule 497(c)
Registration File No. 33-58175
PROSPECTUS -- JANUARY 31, 1997
Dean Witter Hawaii Municipal Trust (the "Fund") is an open-end,
non-diversified management investment company, whose investment objective is
to provide a high level of current income exempt from both federal and State
of Hawaii income taxes, consistent with the preservation of capital. The Fund
seeks to achieve its investment objective by investing principally in
tax-exempt, investment grade municipal obligations of issuers in the State of
Hawaii and in U.S. governmental territories and possessions. (See "Investment
Objective and Policies.")
Shares of the Fund are offered at net asset value plus a sales charge of 3.0%
of the offering price, scaled down on purchases of $100,000 or more. In
addition, pursuant to a Rule 12b-1 Plan of Distribution under the Investment
Company Act of 1940, the Fund may reimburse the Distributor, in an amount
equal to payments not exceeding the annual rate of 0.20 of 1% of the average
daily net assets of the Fund, for specific expenses incurred in promoting the
distribution of the Fund's shares.
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 January 31, 1997, which has been filed with the
Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone numbers listed on this page.
The Statement of Additional Information is incorporated herein by reference.
Dean Witter
Hawaii Municipal Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll free)
TABLE OF CONTENTS
Prospectus Summary .................................................... 2
Summary of Fund Expenses .............................................. 3
Financial Highlights .................................................. 4
The Fund and its Management ........................................... 4
Investment Objective and Policies ..................................... 5
Risk Considerations and
Investment Practices ................................................ 9
Investment Restrictions ............................................... 11
Purchase of Fund Shares ............................................... 11
Shareholder Services .................................................. 14
Redemptions and Repurchases ........................................... 16
Dividends, Distributions and Taxes .................................... 17
Performance Information ............................................... 19
Additional Information ................................................ 20
Appendix .............................................................. 21
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and the shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other agency.
THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
DEAN WITTER DISTRIBUTORS INC.
DISTRIBUTOR
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PROSPECTUS SUMMARY
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The The Fund is organized as a Trust, commonly known as a Massachusetts
Fund business trust, and is an open-end, non-diversified management investment
company investing principally in tax-exempt, investment grade municipal
obligations of issuers in the State of Hawaii and in U.S. governmental
territories and possessions (see page 4).
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Shares Shares of beneficial interest with $0.01 par value (see page 20).
Offered
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Offering The price of the shares offered by this prospectus varies with the changes
Price in the value of the Fund's investments. The offering price, determined once
daily as of 4:00 p.m., New York time, on each day that the New York Stock
Exchange is open, is equal to the net asset value plus a sales charge of
3.0% of the offering price, scaled down on purchases of $100,000 or over
(see pages 11-12).
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Minimum Minimum initial purchase is $1,000; minimum subsequent purchase is $100
Purchase (see page 11).
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Investment The investment objective of the Fund is to provide a high level of current
Objective income exempt from both federal and State of Hawaii income taxes,
consistent with the preservation of capital (see page 4).
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Investment Dean Witter InterCapital Inc. ("InterCapital"), the Investment Manager of
Manager the Fund, and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to 101 investment companies and other portfolios
with assets of approximately $90 billion at December 31, 1996 (see pages
4-5).
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Management The Investment Manager receives a monthly fee at the annual rate of 0.35%
Fee of average daily net assets of the Fund. (see page 5).
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Dividends and Income dividends are declared daily and paid monthly; capital gains, if
Capital Gains any, may be distributed annually or retained for reinvestment by the Fund.
Distributions 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 16).
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Plan of The Fund is authorized to reimburse Dean Witter Distributors Inc. (the
Distribution "Distributor") for specific expenses incurred in promoting the distribution
of the Fund's shares pursuant to a Plan of Distribution pursuant to Rule
12b-1 under the Investment Company Act of 1940. Reimbursement may in no
event exceed an amount equal to payments at the annual rate of 0.20 of 1%
of average daily net assets. (see page 12).
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Sales 3.0% of offering price (3.09% of amount invested); reduced charges on
Charge purchases of $100,000 or more (see page 10-11).
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Redemption Shares redeemable by the shareholder at net asset value. An account may be
involuntarily redeemed if shares owned have a net asset value of less than
$100 or, if the account was opened through EasyInvest (Service Mark), if
after twelve months the shareholder has invested less than $1,000 in the
account (see page 16).
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Risks The value of the Fund's portfolio securities, and therefore the Fund's net
asset value per share, may increase or decrease due to various factors,
principally changes in prevailing interest rates and the ability of the
issuers of the Fund's portfolio securities to pay interest and principal on
such obligations. Additionally, because the Fund is a non-diversified
investment company, a relatively high percentage of the Fund's assets may
be invested in a limited number of issuers within the State of Hawaii,
thereby causing a greater fluctuation of the Fund's net asset value as a
result of changes in the financial condition or in the market's assessment
of the various issuers. Also, since the Fund concentrates its investments
in tax-exempt securities of municipal issuers in the State of Hawaii, the
Fund will be affected by any political, economic or regulatory developments
affecting the ability of the issuers in the State to pay interest or repay
principal. During periods of significant economic slowdowns, the securities
of certain municipal issuers in the State may be subject to a greater
degree of credit risk in which the ratings of such securities have been or
may be downgraded or placed on a credit watch, thereby affecting their
market value (see page 6 and the Appendix). The Fund may purchase
when-issued and delayed delivery securities (see page 9). 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 8-9). Certain of the tax-exempt securities in which
the Fund may invest without limit may subject certain investors to the
federal and any State of Hawaii alternative minimum tax.
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</TABLE>
The above is qualified in its entirety by the detailed information appearing
elsewhere in the Prospectus
and in the Statement of Additional Information.
2
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SUMMARY OF FUND EXPENSES
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The following table illustrates all expenses and fees that a shareholder of
the Fund will incur. The expenses and fees set forth in the table are for the
fiscal year ended November 30, 1996.
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Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases ................................ 3.0%
(as a percentage of offering price)
Maximum Sales Charge Imposed on Reinvested Dividends ..................... None
Deferred Sales ........................................................... None
Redemption Fees .......................................................... None
Exchange Fee ............................................................. None
Annual Fund Operating Expenses (as a Percentage of Average Net Assets)
Management Fee* .......................................................... 0.00%
12-1 Fee** ............................................................... 0.19%
Other Expenses ........................................................... 0.00%
Total Fund Operating Expenses* ........................................... 0.19%
</TABLE>
"Management Fees" (after fee waiver), "12b-1 fees" and "Other Expenses"
(after expense assumptions) as shown above are based upon estimated amounts
of management fees, 12b-1 fees and other expenses of the Fund for the fiscal
year ending November 30, 1996.
* The Investment Manager had undertaken to assume all expenses (except
for any brokerage and 12b-1 fees) and to waive the compensation
provided for in its Management Agreement from the date of commencement
of the Fund's operations until December 31, 1996. The Investment
Manager has undertaken to continue to assume all expenses (except for
brokerage and 12b-1 fees) and to waive the compensation provided for in
its Management Agreement until June 30, 1997. "Total Fund Operating
Expenses," as shown above, is based upon the sum of the 12b-1 Fee,
Management Fee and estimated "Other Expenses," which may be incurred by
the Fund. For the fiscal period ended November 30, 1996, the Fund's
total operating expenses, consisting only of 12b-1 fees, amounted to
0.19% of the Fund's daily net assets.
** The 12b-1 fee is characterized as a service fee within the meaning of
National Association of Securities Dealers, Inc. ("NASD") guidelines
(see "Purchase of Fund Shares").
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EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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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: ....................................................... $32 $36 $40 $54
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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.
It is estimated that Total Fund Operating Expenses for the Fund for the
fiscal year ending November 30, 1996, assuming no waiver of management fees
or assumption of expenses would have been:
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MANAGEMENT FEES .............. 0.35%
12b-1 Fees ................... 0.19%
Other Expenses ............... 2.15%
Total Fund Operating Expenses 2.69%
</TABLE>
The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"The Fund and its Management" and "Purchase of Fund Shares." There are
reduced sales charges on purchases of $100,000 or more (see "Purchase of Fund
Shares").
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
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FINANCIAL HIGHLIGHTS
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The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by Price Waterhouse LLP,
independent accountants. The financial highlights should be read in
conjunction with the financial statements, notes thereto and the unqualified
report of independent accountants which are contained in the Statement of
Additional Information. Further information about the performance of the Fund
is contained in the Fund's Annual Report to Shareholders, which may be
obtained without charge upon request to the Fund.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JUNE 16, 1995*
ENDED THROUGH
NOVEMBER 30, 1996 NOVEMBER 30, 1995
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PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........................... $ 9.91 $ 9.70
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Net investment income .......................................... 0.50 0.19
Net realized and unrealized gain ............................... 0.04 0.21
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Total from investment operations ............................... 0.54 0.40
Less dividends from net investment income ...................... (0.50) (0.19)
----------------- -----------------
Net asset value, end of period ................................. $ 9.95 $ 9.91
================= =================
TOTAL INVESTMENT RETURN+ ...................................... 5.64% 4.21%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses before expense offset and after amounts waived/assumed 0.19%(4) 0.20%(2)(3)
Net investment income .......................................... 5.09%(4) 4.69%(2)(3)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........................ $3,225 $1,510
Portfolio turnover rate ........................................ 51% 14%(1)
</TABLE>
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* Commencement of operations.
+ Does not reflect the deduction of sales load. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) If the Investment Manager had not assumed expenses and waived the
management fee, the expense and net investment income ratios, after
application of the Fund's state expense limitation, would have been
2.70% and 2.19%, respectively, which reflect the effect of expense
offsets of 0.10%.
(4) If the Investment Manager had not assumed expenses and waived the
management fee, the expense and net investment income ratios, after
application of the Fund's state expense limitation, would have been
2.69% and 2.59%, respectively, which reflect the effect of expense
offsets of 0.03%.
THE FUND AND ITS MANAGEMENT
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Dean Witter Hawaii Municipal Trust (the "Fund") is an open-end,
non-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 14, 1995.
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 vari-
4
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ous investment management, advisory, management and administrative capacities
to a total of 101 investment companies, thirty of which are listed on the New
York Stock Exchange, with combined total net assets of approximately $86.9
billion as of December 31, 1996. The Investment Manager also manages
portfolios of pension plans, other institutions and individuals which
aggregated approximately $3.1 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 an 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 had undertaken to assume all expenses
(except for brokerage and 12b-1 fees) and waive the compensation provided for
in its Investment Management Agreement from the date of commencement of the
Fund's operations until December 31, 1996. The Investment Manager has
undertaken to continue to assume all expenses (except for brokerage and 12b-1
fees) and to waive the compensation provided from its Management Agreement
until June 30, 1997.
INVESTMENT OBJECTIVE AND POLICIES
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The investment objective of the Fund is to provide a high level of current
income exempt from both federal and State of Hawaii income taxes consistent
with preservation of capital. This investment objective may not be changed
without the approval of the holders of a majority of the shares of the Fund.
There is no assurance that the Fund's investment objective will be achieved.
The Fund seeks to achieve its investment objective by investing, under
normal circumstances, at least 80% of its total assets in tax-exempt,
investment grade securities the interest on which is exempt from both federal
and State of Hawaii income taxes. The Fund's assets will be principally
invested in investment grade municipal obligations of issuers in the State of
Hawaii and in U.S. governmental entities and territories such as Puerto Rico,
Guam, Northern Mariana Islands and the Virgin Islands, the interest on which
is exempt from both federal and State of Hawaii income taxes. Tax-exempt
Municipal Obligations primarily consist of Municipal Bonds, Municipal Notes
and Municipal Commercial Paper.
The Fund may only invest in (a) Municipal Bonds which are rated at the
time of purchase within the four highest grades by either Moody's Investors
Service Inc. ("Moody's") or Standard & Poor's Corporation ("S&P"); (b)
Municipal Notes which at the time of purchase are rated in the two highest
grades by either Moody's or S&P, or, if not rated, have outstanding one or
more issues of Municipal Bonds rated as set forth in clause (a) above; (c)
Municipal Commercial Paper which at the time of purchase is rated P-1 by
Moody's or A-1 by S&P; and (d) unrated securities which at the time of
purchase are judged by the Investment Manager to be of comparable quality to
the securities described in this paragraph.
5
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A description of the ratings referred to above is contained in the Appendix
to the Statement of Additional Information.
Certain of the tax-exempt securities in which the Fund may invest without
limit may subject certain investors to the federal alternative minimum tax or
any applicable state alternative minimum tax and, therefore, a substantial
portion of the income produced by the Fund may be taxable to such investors
under any federal or any applicable state alternative minimum tax. The Fund,
therefore, may not 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 investor's
tax position. See "Dividends, Distributions and Taxes."
Up to 20% of the total assets of the Fund may be invested in taxable money
market instruments, tax-exempt securities of other states and municipalities
and options and futures. With respect to tax-exempt securities of other
states, only investment grade securities which satisfy the standards
enumerated above for Municipal Bonds, Notes and Paper, will be purchased. The
Fund may invest more than 20% of its total assets in taxable money market
instruments and the tax-exempt securities of other states and municipalities
in order to maintain a temporary "defensive" position, when, in the opinion
of the Investment Manager, prevailing market or financial conditions
(including unavailability of securities of requisite quality) so warrant.
With respect to the purchase of tax-exempt securities of other states for
defensive purposes, only the highest grade Municipal Bonds, Notes and Paper,
will be purchased. The types of taxable money market instruments in which the
Fund may invest are limited to the following short-term fixed income
securities (maturing in one year or less from the time of purchase): (i)
obligations of the United States Government, its agencies, instrumentalities
or authorities (including zero coupon securities); (ii) commercial paper
rated P-1 by Moody's or A-1 by S&P; (iii) certificates of deposit of domestic
banks with assets of $1 billion or more; and (iv) repurchase agreements with
respect to any of the securities in which the Fund may invest.
Municipal Bonds and Municipal Notes are debt obligations of a state, and
its agencies and municipalities which generally have maturities, at the time
of their issuance, of either one year or more (Bonds) or from six months to
three years (Notes). Municipal Commercial Paper refers to short-term
obligations of municipalities which may be issued at a discount and are
sometimes referred to as Short-Term Discount Notes. Any Municipal Bond or
Municipal Note which depends directly or indirectly on the credit of the
Federal Government, its agencies or instrumentalities shall be considered to
have a Moody's rating of Aaa. An obligation shall be considered a Municipal
Bond, Municipal Note or Municipal Commercial Paper only if, in the opinion of
bond counsel to the issuer at the time of issuance, the interest payable
therefrom is exempt from both regular federal income tax and the regular
personal income tax of a designated State. The Fund may also purchase
Municipal Obligations which had originally been issued by the same issuer as
two separate series of the same issue with different interest rates, but
which are now linked together to form one series.
The foregoing percentage and rating limitations apply at the time of
acquisition of a security based on the last previous determination of the
Fund's net asset value. Any subsequent change in any rating by a rating
service or change in percentages resulting from market fluctuations or other
changes in total assets of the Fund will not require elimination of any
security from the Fund's portfolio. Therefore, the Fund may hold securities
which have been downgraded to ratings of Ba or BB or lower by Moody's or S&P.
However such investments may not exceed 5% of the Fund's net assets. Any
investments which exceed this limitation will be eliminated from the
portfolio within a reasonable period of time (such time as the Investment
Manager determines that it is practicable to sell the investment without
undue market or tax consequences to the Fund). Municipal
6
<PAGE>
Obligations rated below investment grade by Moody's or S&P are considered to
be speculative investments, some of which may not be currently paying any
interest and may have extremely poor prospects of ever attaining any real
investment standing.
Investments in Municipal Bonds rated either BBB by S&P or Baa by Moody's
(investment grade bonds--the lowest rated permissible investments by the
Fund) have speculative characteristics and, therefore, changes in economic
conditions or other circumstances are more likely to weaken their capacity to
make principal and interest payments than would be the case with investments
in securities with higher credit ratings.
The ratings assigned by Moody's and S&P represent their opinions as to the
quality of the securities which they undertake to rate (see the Appendix to
the Statement of Additional Information). It should be emphasized, however,
that the ratings are general and not absolute standards of quality.
There are no restrictions on the maturities of most of the tax-exempt
securities that may be purchased by the Fund and therefore the average
portfolio maturity of the Fund is not subject to any limit. As a general
matter, the longer the average portfolio maturity, the greater will be the
impact of fluctuations in interest rates on the value of the Fund's portfolio
securities and the Fund's net asset value per share.
The Fund is classified as a non-diversified investment company under the
Investment Company Act of 1940 ("the Act") and as such is not limited by the
Act in the proportion of its assets that it may invest in the obligations of
a single issuer. However, the Fund intends to conduct its operations so as to
qualify as a "regulated investment company" under Subchapter M of the
Internal Revenue Code (the "Code"). See "Dividends, Distributions and Taxes."
In order to qualify, among other requirements, the Fund will limit its
investments so that at the close of each quarter of the taxable year, (i) not
more than 25% of the market value of the total assets of the Fund will be
invested in the securities of a single issuer, and (ii) with respect to 50%
of the market value of its total assets not more than 5% of the value of its
total assets will be invested in the securities of a single issuer, and the
Fund will not own more than 10% of the outstanding voting securities of a
single issuer. (Since the types of securities ordinarily purchased by the
Fund are nonvoting securities, there is generally no limit on the percentage
of an issuer's obligations that the Fund may own.) To the extent that these
requirements permit a relatively high percentage of the Fund's assets to be
invested in the obligations of a limited number of issuers within the State
of Hawaii, the value of the Fund's portfolio securities will be more
susceptible to any single economic, political or regulatory occurrence than
the portfolio securities of a diversified investment company. Additionally,
the Fund's net asset value will fluctuate to a greater extent than that of a
diversified investment company as a result of changes in the financial
condition or in the market's assessment of the various issuers. The tax
limitations described in this paragraph are not fundamental policies and may
be revised to the extent applicable Federal income tax requirements are
revised.
The Fund may invest more than 25% of the total assets in Municipal
Obligations known as private activity bonds. Such Obligations include health
facility obligations, housing obligations, industrial revenue obligations
(including pollution control obligations), electric utility obligations and
water and sewer obligations, provided that the percentage of the Fund's total
assets in private activity bonds in any one category does not exceed 25% of
the total assets of the Fund. The ability of issuers of such obligations to
make timely payments of principal and interest will be affected by events and
conditions affecting these projects such as cyclicality of revenues and
earnings, regulatory and environmental restrictions and economic downturns,
which may result generally in a lowered need for such facilities and a
lowered ability of such users to pay for the use of such facilities. The Fund
may purchase Municipal Obligations which had originally been issued by the
7
<PAGE>
same issuer as two separate series of the same issue with different interest
rates, but which are now linked together to form one series.
The two principal classifications of Municipal Obligations are "general
obligation" and "revenue" bonds, notes or commercial paper. General
obligation bonds, notes or commercial paper are secured by the issuer's
pledge of its faith, credit and taxing power for the payment of principal and
interest. Issuers of general obligation bonds, notes or commercial paper
include a state, its counties, cities, towns and other governmental units.
Revenue bonds, notes or commercial paper are payable from the revenues
derived from a particular facility or class of facilities or, in some cases,
from specific revenue sources. Revenue bonds, notes or commercial paper are
issued for a wide variety of purposes, including the financing of electric,
gas, water and sewer systems and other public utilities; industrial
development and pollution control facilities; single and multi-family housing
units; public buildings and facilities; air and marine ports, transportation
facilities such as toll roads, bridges and tunnels; and health and
educational facilities such as hospitals and dormitories. They rely primarily
on user fees to pay debt service, although the principal revenue source is
often supplemented by additional security features which are intended to
enhance the creditworthiness of the issuer's obligations.
Included within the revenue bonds category are participations in lease
obligations or installment purchase contracts (hereinafter collectively
called "lease obligations") of municipalities. State and local agencies or
authorities issue lease obligations to acquire equipment and facilities.
Lease obligations may have risks not normally associated with general
obligation or other revenue bonds. Leases, and installment purchase or
conditional sale contracts (which may provide for title to the leased asset
to pass eventually to the issuer), have developed as a means for governmental
issuers to acquire property and equipment without the necessity of complying
with the constitutional and statutory requirements generally applicable for
the issuance of debt. Certain lease obligations contain "non-appropriation"
clauses that provide that the governmental issuer has no obligation to make
future payments under the lease or contract unless money is appropriated for
such purpose by the appropriate legislative body on an annual or other
periodic basis. Consequently, continued lease payments on those lease
obligations containing "non-appropriation" clauses are dependent on future
legislative actions. If such legislative actions do not occur, the holders of
the lease obligation may experience difficulty in exercising their rights,
including disposition of the property.
In addition, lease obligations represent a relatively new type of
financing that has not yet developed the depth of marketability associated
with more conventional municipal obligations, and, as a result, certain of
such lease obligations may be considered illiquid securities. To determine
whether or not the Fund will consider such securities to be illiquid (the
Fund may not invest more than 15% 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.
Variable Rate Obligations. The interest rates payable on certain Municipal
Bonds and Municipal Notes are not fixed and may fluctuate based upon changes
in market rates. Municipal obligations of this type are called "variable
rate" obligations. The interest rate payable on a variable rate obligation is
adjusted either at predesigned periodic intervals or whenever there is a
change in the market rate of interest on which the interest rate payable is
based.
Since the Fund concentrates its investments in Municipal Obligations of
the State of Hawaii and its
8
<PAGE>
authorities and municipalities, the Fund is affected by any political,
economic or regulatory developments affecting the ability of issuers in the
State of Hawaii to make timely payments of interest and principal. For a more
detailed discussion of the risks associated with investments in the State of
Hawaii, see "Special Considerations Relating to the State of Hawaii" in the
Appendix at the back of this Prospectus and in the Statement of Additional
Information.
RISK CONSIDERATIONS AND INVESTMENT PRACTICES
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's yield will also vary based on the yield of the Fund's
portfolio securities.
When-Issued and Delayed Delivery Securities. The Fund may purchase
tax-exempt securities on a when-issued or delayed delivery basis; i.e., the
price is fixed at the time of commitment but delivery and payment can take
place a month or more after the date of the transaction. These securities are
subject to market fluctuation and no interest accrues to the purchaser prior
to settlement. At the time the Fund makes the commitment to purchase such
securities, it will record the transaction and thereafter reflect the value
each day of such security in determining its net asset value. There is no
overall limit on the percentage of the Fund's assets which may be committed
to the purchase of securities on a when-issued, delayed delivery or forward
commitment basis. An increase in the percentage of the Fund's assets
committed to the purchase of securities on a when-issued, delayed delivery or
forward commitment basis may increase the volatility of the Fund's net asset
value.
Zero Coupon Securities. A portion of the fixed-income securities purchased
by the Fund may be zero coupon securities. Such securities are purchased at a
discount from their face amount, giving the purchaser the right to receive
their full value at maturity. The interest earned on such securities is,
implicitly, automatically compounded and paid out at maturity. While such
compounding at a constant rate eliminates the risk of receiving lower yields
upon reinvestment of interest if prevailing interest rates decline, the owner
of a zero coupon security will be unable to participate in higher yields upon
reinvestment of interest received on interest-paying securities if prevailing
interest rates rise.
A zero coupon security pays no interest to its holder during its life.
Therefore, to the extent the Fund invests in zero coupon securities, it will
not receive current cash available for distribution to shareholders. In
addition, zero coupon securities are subject to substantially greater price
fluctuations during periods of changing prevailing interest rates than are
comparable securities which pay interest on a current basis. Current federal
tax law requires that a holder (such as the Fund) of a zero coupon security
accrue a portion of the discount at which the security was purchased as
income each year even though the Fund receives no interest payments in cash
on the security during the year.
Financial Futures Contracts and Options on Futures. The Fund may enter
into financial futures contracts ("futures contracts"), options on such
futures and municipal bond index futures contracts for hedging purposes. 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.
Unlike a futures contract, which requires the parties to buy and sell a
security on a set date, an
9
<PAGE>
option on such a futures contract entitles its holder to decide on or before
a future date whether to enter into such a contract (a long position in the
case of a call option and a short position in the case of a put option). If
the holder decides not to enter into the contract, the premium paid for the
option on the contract is lost. Since the value of the option is fixed at the
point of sale, there are no daily payments of cash to reflect the change in
the value of the under-lying contract as there is by a purchaser or seller of
a futures contract. The value of the option does change and is reflected in
the Fund's net asset value.
A risk in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities subject
to such futures contracts may correlate imperfectly with the behavior of the
cash prices of the Fund's portfolio securities. The risk of imperfect
correlation will be increased by the fact that the futures contracts in which
the Fund may invest are on taxable securities rather than tax-exempt
securities, and there is no guarantee that the prices of taxable securities
will move in a similar manner to the prices of tax-exempt securities.
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 such options will be subject
to the development and maintenance of a liquid secondary market. It is not
certain that this market will develop or be maintained.
Municipal Bond Index Futures. The Fund may utilize municipal bond index
futures contracts for hedging purposes. The strategies in employing such
contracts will be similar to that discussed above with respect to financial
futures and options thereon. A municipal bond index is a method of reflecting
in a single number the market value of many different municipal bonds and is
designed to be representative of the municipal bond market generally. The
index fluctuates in response to changes in the market values of the bonds
included within the index. Unlike futures contracts on particular financial
instruments, transactions in futures on a municipal bond index will be
settled in cash, if held until the close of trading in the contract. However,
like any other futures contract, a position in the contract may be closed out
by a purchase or sale of an offsetting contract for the same delivery month
prior to expiration of the contract.
The Fund may not enter into futures contracts or related options thereon
if immediately thereafter the amount committed to margin plus the amount paid
for option premiums exceeds 5% of the value of the Fund's total assets. The
Fund may not purchase or sell futures contracts or related options if
immediately thereafter more than one-third of the Fund's net assets would be
hedged.
PORTFOLIO MANAGEMENT
The Fund's portfolio is managed by the Investment Manager with a view to
achieving its investment objective. The Fund is managed within InterCapital's
Tax-Exempt Fixed Income Group, which manages 40 tax-exempt municipal funds
and fund portfolios, with approximately $10.6 billion in assets as of
December 31, 1996. James F. Willison, Senior Vice President of InterCapital
and Manager of InterCapital's Tax-Exempt Fixed Income Group, has been the
primary portfolio manager of the Fund since its inception and has been a
portfolio manager at InterCapital for over five years. Securities are
purchased and sold principally in response to the Investment Manager's
current evaluation of an issuer's ability to meet its debt obligations in the
future, and the Investment Manager's current assessment of future changes in
the levels of interest rates on tax-exempt securities of varying maturities.
10
<PAGE>
Securities purchased by the Fund are, generally, sold by dealers acting as
principal for their own accounts. Pursuant to an order issued by the
Securities and Exchange Commission, the Fund may effect principal
transactions in certain taxable money market instruments with Dean Witter
Reynolds Inc. ("DWR"), a broker-dealer affiliate of the Investment Manager.
In addition, the Fund may incur brokerage commissions on transactions
conducted through DWR. Brokerage commissions are not normally charged on
purchases and sales of municipal obligations, but such transactions may
involve transaction costs in the form of spreads between bid and asked
prices. It is anticipated that the Fund's annual portfolio turnover rate will
not exceed 100%.
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 investment policies and restrictions of the Fund: (a)
an "issuer" of a security is the entity whose assets and revenues are
committed to the payment of interest and principal on that particular
security, provided that the guarantee of a security will be considered a
separate security; (b) a "taxable security" is any security the interest on
which is subject to regular federal income tax; and (c) all percentage
limitations apply immediately after a purchase or initial investment, and any
subsequent change in any applicable percentage resulting from market
fluctuations or other changes in total assets does not require elimination of
any security from the portfolio.
The Fund may not:
1. Make loans of money or securities, except: (a) by the purchase of debt
obligations in which the Fund may invest consistent with its investment
objective and policies; (b) by investment in repurchase agreements; and
(c) by lending its portfolio securities.
2. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry. This restriction does not apply to
obligations issued or guaranteed by the United States Government, its
agencies or instrumentalities or to municipal obligations, including those
issued by the State of Hawaii or its political subdivisions.
PURCHASE OF FUND SHARES
- -----------------------------------------------------------------------------
The Fund offers its shares for sale to the public on a continuous basis.
Pursuant to a Distribution Agreement between the Fund and Dean Witter
Distributors Inc. (the "Distributor"), an affiliate of the Investment
Manager, shares of 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 Hawaii 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 (including individual retirement plans), the Fund, in its discretion,
may accept such purchases without regard to any minimum amounts which would
otherwise be required if the Fund has reason to believe that additional
purchases will increase the amount of the purchase of shares in all accounts
under such plans to at least $1,000. Certificates for shares purchased will
not be issued unless a request is made by the shareholder in writing to the
Transfer Agent. The
11
<PAGE>
offering price will be the net asset value per share next determined
following receipt of an order (see "Determination of Net Asset Value" below),
plus a sales charge (expressed as a percentage of the offering price) on a
single transaction as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE
-------------------------------
PERCENTAGE APPROXIMATE
OF PERCENTAGE OF
AMOUNT OF PUBLIC AMOUNT
SINGLE TRANSACTION OFFERING PRICE INVESTED
- ------------------------ -------------- ---------------
<S> <C> <C>
Less than $100,000 ...... 3.00% 3.09%
$100,000 but less than
$250,000 ............... 2.50 2.56
$250,000 but less than
$500,000 ............... 2.00 2.04
$500,000 but less than
$1,000,000 ............. 1.25 1.27
$1,000,000 but less than
$2,500,000 ............. 0.50 0.50
$2,500,000 but less than
$5,000,000 ............. 0.25 0.25
$5,000,000 and over .... -0- -0-
</TABLE>
Upon notice to all Selected Broker-Dealers, the Distributor may reallow up
to the full applicable sales charge as shown in the above schedule during
periods specified in such notice. During periods when substantially the
entire sales charge is reallowed, such Selected Broker-Dealers may be deemed
to be underwriters as that term is defined in the Securities Act of 1933, as
amended.
The above schedule of sales charges is applicable to purchases in a single
transaction by, among others: (a) an individual; (b) an individual, his or
her spouse and their children under the age of 21 purchasing shares for his
or her own accounts; (c) a trustee or other fiduciary purchasing shares for a
single trust estate or a single fiduciary account; (d) a pension,
profit-sharing or other employee benefit plan qualified or non-qualified
under Section 401 of the Internal Revenue Code; (e) tax-exempt organizations
enumerated in Section 501(c)(3) or (13) of the Internal Revenue Code; (f)
employee benefit plans qualified under Section 401 of the Internal Revenue
Code of a single employer or of employers who are "affiliated persons" of
each other within the meaning of Section 2(a)(3)(c) of the Act; or (g) any
other organized group of persons, whether incorporated or not, provided the
organization has been in existence for at least six months and has some
purpose other than the purchase of redeemable securities of a registered
investment company at a discount.
Sales personnel are compensated for selling shares of the Fund at the time
of their sale by the Distributor and/or Selected Broker-Dealer. In addition,
some sales personnel of the Selected Broker-Dealer will receive various types
of non-cash compensation as special sales incentives, including trips,
educational and/or business seminars and merchandise.
Shares of the Fund are sold through the Distributor on a normal three
business day settlement basis; that is, payment generally is due on or before
the third business day after the order is placed with the Distributor. Shares
of the Fund purchased through the Distributor are entitled to dividends
beginning on the next business day following settlement date. Since DWR and
other Selected Broker-Dealers forward investors' funds on settlement date,
they will benefit from the temporary use of the funds where 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 Fund and/or the
Distributor reserve the right to reject any purchase order.
REDUCED SALES CHARGES
Combined Purchase Privilege. Investors may have the benefit of reduced
sales charges in accordance with the above schedule by combining purchases of
shares of the Fund in single transactions with the purchase of shares of Dean
Witter Tax-Exempt Securities Trust, Dean Witter High Yield Securities Inc.
and of Dean Witter Funds which are sold with a contingent deferred sales
charge ("CDSC funds"). The sales charge payable on the purchase of shares of
the Fund, Dean Witter Tax-Exempt Securities Trust, and Dean Witter High Yield
Secu-
12
<PAGE>
rities Inc. will be at their respective rates applicable to the total amount
of the combined concurrent purchases of the Fund, Dean Witter Tax-Exempt
Securities Trust, Dean Witter High Yield Securities Inc. and CDSC funds.
Right of Accumulation. Investors may benefit from a reduction of the sales
charges in accordance with the above schedule if the cumulative net asset
value of shares of the Fund purchased in a single transaction, together with
shares previously purchased which are held at the time of such transaction,
amounts to $100,000 or more.
The Distributor must be notified by the shareholder at the time a purchase
order is placed that the purchase qualifies for the reduced charge under the
Right of Accumulation. Similar notification must be made in writing by the
shareholder when such an order is placed by mail. The reduced sales charge
will not be granted if: (a) such notification is not furnished at the time of
the order; or (b) a review of the records of the Distributor or the Transfer
Agent fails to confirm the investor's represented holdings.
Letter of Intent. The foregoing schedule of reduced sales charges will
also be available to investors who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of shares of the
Fund from the Distributor. The cost of shares of the Fund which were
previously purchased at a price including a front-end sales charge during the
90-day period prior to the date of receipt by the Distributor of the Letter
of Intent, which are still owned by the shareholder, may also be included in
determining the applicable reduction.
PLAN OF DISTRIBUTION
The Fund has entered into a Plan of Distribution pursuant to Rule 12b-1
under the Act, whereby the expenses of certain activities and services by DWR
and others who engage in or support distribution of Fund Shares or who
service shareholder accounts, including overhead and telephone expenses
incurred in connection with the distribution of the Fund's shares, are
reimbursed. Reimbursements for these expenses will be made in monthly
payments by the Fund to the Distributor, which will in no event exceed an
amount equal to a payment at the annual rate of 0.20 of 1% of the average
daily net assets of the Fund. Expenses incurred by the Distributor pursuant
to the Plan in any fiscal year will not be reimbursed by the Fund through
payments accrued in any subsequent fiscal year. No interest or other
financing charges will be incurred on any distribution expense incurred by
the Distributor under the Plan or on any unreimbursed expenses due to the
Distributor pursuant to the Plan. The fee payable pursuant to the Plan, equal
to 0.20% of the Fund's average daily net assets, is characterized as a
service fee within the meaning of NASD guidelines. The service fee is a
payment made for personal service and/or the maintenance of shareholder
accounts. For the fiscal year ended November 30, 1996, the Fund accrued a
total of $4,594 under the Plan. This accrual is an amount equal to 0.19% of
the daily net assets of the Fund.
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 (or, on days when the New York Stock Exchange closes
prior to 4:00 p.m., at such earlier time), on each day that the New York
Stock Exchange is open 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 the Fund by an outside independent
pricing service approved by the Fund's Trustees. The service may utilize 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 valua-
13
<PAGE>
tions 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 60 days or
less at time of purchase are valued at amortized cost, unless the Board
determines such does not reflect the securities' market value, in which case
these securities will be valued at their fair value as determined by the
Board of Trustees. Other taxable short-term debt securities with maturities
of more than 60 days will be valued on a mark to market basis until such time
as they reach a maturity of 60 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 Trustees determines that such price does
not reflect their fair value, in which case they will be valued at their fair
market 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. 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 in shares of the Fund (or in cash if the
shareholder so requests) at the net asset value per share (without sales
charge) 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 checks during the first ten days
of the following month.
EasyInvest. (Service Mark) Shareholders may subscribe to EasyInvest, an
automatic purchase plan which provides for any amount from $100 to $5,000 to
be transferred automatically from a checking or savings account, on a
semi-monthly, monthly or quarterly basis, to the Transfer Agent for
investment in shares of the Fund.
Systematic Withdrawal Plan. A withdrawal plan is available for
shareholders who own or purchase shares of the Fund having a minimum value of
$10,000 based upon the then current net asset value. The plan provides for
monthly or quarterly (March, June, September, December) checks in any dollar
amount, not less than $25, or in any whole percentage of the account balance,
on an annualized basis.
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 invest-
14
<PAGE>
ments of $2,500 or more under the Systematic Withdrawal Plan, withdrawals
made concurrently with purchases of additional shares are inadvisable because
of the sales charges applicable to the purchase of additional shares.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about any of
the above services.
Exchange Privilege. The Fund makes available to its shareholders an
"Exchange Privilege" allowing the exchange of shares of the Fund for shares
of other Dean Witter Funds sold with a front-end (at time of purchase) sales
charge ("FESC" funds), Dean Witter Funds sold with a contingent deferred
sales charge ("CDSC funds"), five Dean Witter Funds which are money market
funds and Dean Witter Short-Term U.S. Treasury Trust, Dean Witter Short-Term
Bond Fund, Dean Witter Limited Term Municipal Trust, Dean Witter Balanced
Income Fund, Dean Witter Balanced Growth Fund and Dean Witter Intermediate
Term U.S. Treasury Trust (the foregoing eleven non-CDSC or FESC funds are
hereinafter collectively referred to in this section as the "Exchange
Funds"). Exchanges may be made after the shares of the Fund acquired by
purchase (not by exchange or dividend reinvestment) have been held for thirty
days. There is no holding period for exchanges of shares acquired by exchange
or dividend reinvestment. However, shares of CDSC funds, including shares
acquired in exchange for shares of FESC funds, may not be exchanged for
shares of FESC funds. Thus, shareholders who exchange their Fund shares for
shares of CDSC funds may subsequently exchange those shares for shares of
other CDSC funds or money market funds but may not reacquire FESC fund shares
by exchange.
An exchange to another FESC fund, to a CDSC fund, or to any Exchange Fund
that is not a money market fund is on the basis of the next calculated net
asset value per share of each fund after the exchange order is received. When
exchanging into a money market fund from the Fund, shares of the Fund are
redeemed out of the Fund at their next calculated net asset value and the
proceeds of the redemption are used to purchase shares of the money market
fund at their net asset value determined the following business day.
Subsequent exchanges between any of the Exchange Funds, FESC funds and CDSC
funds can be effected on the same basis (except that CDSC fund shares may not
be exchanged for shares of FESC funds). Shares of a CDSC fund acquired in
exchange for shares of an FESC fund (or in exchange for shares of other Dean
Witter Funds for which shares of an FESC fund have been exchanged) are not
subject to any contingent deferred sales charge upon their redemption.
Purchases and exchanges should be made for investment purposes only. A
pattern of frequent exchanges may be deemed by the Investment Manager to be
abusive and contrary to the best interests of the Fund's other shareholders
and, at the Investment Manager's discretion, may be limited by the Fund's
refusal to accept additional purchases and/or exchanges from the investor.
Although the Fund does not have any specific definition of what constitutes a
pattern of frequent exchanges, and will consider all relevant factors in
determining whether a particular situation is abusive and contrary to the
best interests of the Fund and its other shareholders, investors should be
aware that the Fund and each of the other Dean Witter Funds may in their
discretion limit or otherwise restrict the number of times this Exchange
Privilege may be exercised by any investor. Any such restriction will be made
by the Fund on a prospective basis only, upon notice to the shareholder not
later than ten days following such shareholder's most recent exchange.
The Exchange Privilege may be terminated or revised at any time by the
Fund and/or any of such Dean Witter Funds for which shares of the Fund may be
exchanged, upon such notice as may be required by applicable regulatory
agencies. Shareholders maintaining margin accounts with DWR or another
Selected Broker-Dealer are referred to their account executive regarding
restrictions on exchange of shares of the Fund pledged in their margin
account.
15
<PAGE>
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 shareholders who are clients of DWR or another
Selected Broker-Dealer but who wish to make exchanges directly by writing or
telephoning the Transfer Agent) must complete and forward to the Transfer
Agent an Exchange Privilege Authorization form, copies of which may be
obtained from the Transfer Agent, to initiate an exchange. If the
Authorization Form is used, exchanges may be made by contacting the Transfer
Agent at (800) 869-NEWS (toll-free). The Fund will employ reasonable
procedures to confirm that exchange instructions communicated over the
telephone are genuine. Such procedures may include requiring various forms of
personal identification such as name, mailing address, social security or
other tax identification number and DWR or other Selected Broker-Dealer
account number (if any). Telephone instructions may also be recorded. If such
procedures are not employed, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions.
Telephone exchange instructions will be accepted if received by the
Transfer Agent between 9:00 a.m. and 4:00 p.m. New York time, on any day the
New York Stock Exchange is open. Any shareholder wishing to make an exchange
who 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 DWR or other Selected Broker-Dealer account executive or
the Transfer Agent.
REDEMPTIONS AND REPURCHASES
- -----------------------------------------------------------------------------
Redemption. Shares of the Fund can be redeemed for cash at any time at the
net asset value per share next determined (without any redemption or other
charge). If shares are held in a shareholder's account without a share
certificate, a written request for redemption is required. If certificates
are held by the shareholder(s), the shares may be redeemed by surrendering
the certificate(s) with a written request for redemption, along with any
additional information required by the Transfer Agent.
Repurchase. DWR and other Selected Broker-Dealers are authorized to
repurchase shares represented by a share certificate which is delivered to
any of their offices. Shares held in a shareholder's
16
<PAGE>
account without a share certificate may also be repurchased by DWR and other
Selected Broker-Dealers upon the telephonic request of the shareholder. The
repurchase price is the net asset value next determined (see "Purchase of
Fund Shares--Determination of Net Asset Value") after such repurchase order
is received by DWR or other Selected Broker-Dealer. Payment for shares
repurchased may be made by the Fund to the Distributor for the account of the
shareholder. The offers by DWR and other Selected Broker-Dealers to
repurchase shares from shareholders may be suspended by them at any time. In
that event, shareholders may redeem their shares through the Fund's Transfer
Agent as set forth above under "Redemption."
Payment for Shares Redeemed or Repurchased. Payment for shares presented
for repurchase or redemption will be made by check within seven days after
receipt by the Transfer Agent of the certificate and/or written request in
good order. Such payment may be postponed or the right of redemption
suspended at times when normal trading is not taking place on the New York
Stock Exchange. If the shares to be redeemed have recently been purchased by
check, payment of the redemption proceeds may be delayed for the minimum time
needed to verify that the check used for investment has been honored (not
more than fifteen days from the time of 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 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 their net asset value (without a sales charge) next
determined after a reinstatement request, together with the proceeds, is
received by the Transfer Agent.
Involuntary Redemption. The Fund reserves the right, on sixty days notice,
to redeem at their net asset value, the shares of any shareholder whose
shares have a value of less than $100 as a result of redemptions or
repurchases, or such lesser amount as may be fixed by the Board of Trustees
or, in the case of an account opened through EasyInvest (Service Mark), if
after twelve months the shareholder has invested less than $1,000 in the
account. However, before the Fund redeems such shares and sends the proceeds
to the shareholder, it will notify the shareholder that the value of the
shares is less than the applicable amount and allow the shareholder to make
an additional investment in an amount which will increase the value of the
account to at least the applicable amount or more before the redemption is
processed. No charge 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 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
17
<PAGE>
Investment of Dividends and Distributions"). Any dividends declared in the
last quarter of any calendar year which are paid in the following calendar
year prior to February 1 will be deemed received by the shareholder in the
prior year.
Taxes--Federal. Because the Fund intends to distribute all of its net
investment income and capital gains to shareholders and intends to otherwise
continue to qualify as a regulated investment company under Subchapter M of
the Internal Revenue Code, it is not expected that the Fund will be required
to pay any federal income tax.
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.
The Fund may at times make payments from sources other than income or net
capital gains. Payments from such sources will, in effect, represent a return
of a portion of each shareholder's investment. All, or a portion, of such
payments will not be taxable to shareholders.
Any loss on the sale or exchange of shares of the Fund which are held for
six months or less is disallowed to the extent of the amount of any
18
<PAGE>
exempt-interest dividend paid with respect to such shares. Treasury
Regulations may provide for a reduction in such required holding periods. If
a shareholder receives a distribution that is taxed as a long-term capital
gain on shares held for six 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.
Taxes--State of Hawaii.
The Fund, and dividends and distributions made by the Fund to Hawaii
residents, will generally be treated for Hawaii income tax purposes in the
same manner as they are treated under the Code for Federal income tax
purposes. Under Hawaii law, however, interest derived from obligations of
states (and their political subdivisions) other than Hawaii will not be
exempt from Hawaii income taxation. (Interest derived from bonds or
obligations issued by or under the authority of the following is exempt from
Hawaii income taxation: Guam, Northern Mariana Islands, Puerto Rico, and the
Virgin Islands).
Interest on Hawaii obligations, tax-exempt obligations of states other
than Hawaii and their political subdivisions, and obligations of the United
States or its possessions is not exempt from the Hawaii Franchise Tax, which
applies to banks, building and loan associations, financial services loan
companies, financial corporations, and small business investment companies.
Persons or entities who are not Hawaii residents should not be subject to
Hawaii income taxation on dividends and distributions made by the Fund but
may be subject to other state and local taxes.
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 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 incurred by shareholders, for the stated
periods. It also assumes reinvestment of all dividends and distributions paid
by the Fund.
In addition to the foregoing, the Fund may advertise its total return over
different periods of time by means of aggregate, average, year-by-year or
other types of total return figures. Such calculations may or may not reflect
the imposition of the front-end sales charge which, if reflected, would
19
<PAGE>
reduce the performance quoted. The Fund may also advertise the growth of
hypothetical investments of $10,000, $50,000 or $100,000 in shares of the
Fund by adding 1 to the Fund's aggregate total return to date and multiplying
by $9,700, $48,500 or $97,500 ($10,000, $50,000 or $100,000 adjusted for
3.00%, 3.00% and 2.50% sales charges, respectively). The Fund from time to
time may also advertise its performance relative to certain performance
rankings and indexes compiled by independent organizations (such as mutual
fund performance rankings of Lipper Analytical Services, Inc.).
ADDITIONAL INFORMATION
- -----------------------------------------------------------------------------
Voting Rights. All shares of beneficial interest of the Fund are of $0.01
par value and are equal as to earnings, assets and voting privileges.
The Fund is not required to hold Annual Meetings of Shareholders and in
ordinary circumstances the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances the Trustees may be removed by action of the Trustees or by the
shareholders.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the
obligations of the Fund. However, the Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of the
Fund, requires that Fund obligations include such disclaimer, and provides
for indemnification and reimbursement of expenses out of the Fund's property
for any shareholder held personally liable for the obligations of the Fund.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund itself
would be unable to meet its obligations. Given the above limitations on
shareholder personal liability and the nature of the Fund's assets and
operations, the possibility of the Fund's being unable to meet its
obligations is remote and, in the opinion of Massachusetts counsel to the
Fund, the risk to Fund shareholders of personal liability is remote.
Code of Ethics. Directors, officers and employees of InterCapital, Dean
Witter Services Company Inc. and the Distributor are subject to a strict Code
of Ethics adopted by those companies. The Code of Ethics is intended to
ensure that the interests of shareholders and other clients are placed ahead
of any personal interest, that no undue personal benefit is obtained from a
person's employment activities and that actual and potential conflicts of
interest are avoided. To achieve these goals and comply with regulatory
requirements, the Code of Ethics requires, among other things, that personal
securities transactions by employees of the companies be subject to an
advance clearance process to monitor that no Dean Witter Fund is engaged at
the same time in a purchase or sale of the same security. The Code of Ethics
bans the purchase of securities in an initial public offering, and also
prohibits engaging in futures and options transactions and profiting on
short-term trading (that is, a purchase within 60 days of a sale or a sale
within 60 days of a purchase) of a security. In addition, investment
personnel may not purchase or sell a security for their personal account
within 30 days before or after any transaction in any Dean Witter Fund
managed by them. Any violations of the Code of Ethics are subject to
sanctions, including reprimand, demotion or suspension or termination of
employment. The Code of Ethics comports with regulatory requirements and the
recommendations in the 1994 report by the Investment Company Institute
Advisory Group on Personal Investing.
Shareholder Inquiries. All inquiries regarding the Fund should be directed
to the Fund at the telephone numbers or address set forth on the front cover
of this Prospectus.
20
<PAGE>
APPENDIX
- -----------------------------------------------------------------------------
Special Considerations Relating to the
State of Hawaii
- -----------------------------------------------------------------------------
The Fund will be affected by any political, economic, or regulatory
developments having a bearing on the ability of Hawaii issuers to pay
interest or repay principal on their obligations.
The information set forth herein is derived from official statements
prepared in connection with the issuance of obligations of the State of
Hawaii ("State") and its political subdivisions and other sources that are
generally available to investors. The information is provided as general
information intended to give a recent historical description and is not
intended to indicate further or continuing trends in the financial or other
positions of the State and its political subdivisions.
Hawaii was admitted as the 50th state on August 21, 1959 and is an
archipelago of eight major islands, seven of which are inhabited, plus 124
named islets, totalling 6,425 square miles in land area. It is located in the
Pacific Ocean in the northern hemisphere about 2,400 statute miles from San
Francisco. In terms of area, Hawaii is the 47th of the 50 states. According
to the 1990 U.S. Census, the total population was 1,115,274, making Hawaii
the 41st most populous state of the United States. According to the 1990 U.S.
Census, about 75% of the population of Hawaii lives on the island of Oahu.
The City and County of Honolulu consists of the island of Oahu, plus some
minor islets; its land area is 596.3 square miles; and it is the capital of
the State and its principal port.
Hawaii's economy experienced an expansion in the latter part of the 1980s
due in part to extensive Japanese investment. Since 1990, however, Hawaii's
economy has experienced marginal growth. As a result, construction spending
has decreased, real estate prices have dropped, and personal income in 1995
after adjusting for inflation was just 1.4% higher than that for 1991.
The State Constitution empowers the Legislature to authorize the issuance
of four types of bonds: general obligation bonds; bonds issued under special
improvement statutes; revenue bonds; and special purpose revenue bonds.
Under the Constitution general obligation bonds may be issued by the State
if such bonds at the time of issuance would not cause the total amount of
principal and interest payable on such bonds to exceed a level that is
related to the General Fund revenues of the State in the three fiscal years
immediately preceding such issuance. The Constitution provides that the
Legislature must establish a General Fund expenditure ceiling that limits the
rate of growth of General Fund appropriations to the estimated rate of growth
of the State's economy. Appropriations from the General Fund for each year of
the fiscal biennium or each supplementary budget fiscal year are not to
exceed the expenditure ceiling for the fiscal year.
Maximum limits for operating expenditures are established for each fiscal
year by legislative appropriations, but monies can be withheld by the
Department of Budget and Finance to insure solvency.
The Constitution requires a Council of Revenues to prepare revenue
estimates for State government and report such estimates to the Governor and
the Legislature.
In a report dated September 6, 1996, the Council on Revenues forecast a
2.1% increase in General Fund tax revenues for fiscal year 1997 over that of
fiscal year 1996, but subsequently, on December 12, 1996, the Council on
Revenues revised its estimate down to an increase of 1.2%. From September
1994 through December 1995, the Council on Revenues had reduced General Fund
revenue forecasts by a total of $619 million for the period from December
1994 through June 1997. The impact of the revised revenue estimates on the
budget prompted the State administration to pursue additional measures to
reduce expenditures and enhance revenues. Executive departments were required
to cut $139 million in fiscal year 1996. A permanent reduction in the size of
the State govern-
21
<PAGE>
ment was undertaken in fiscal year 1996, which included employee layoffs,
elimination of vacant permanent and temporary positions, and abolition of
certain state programs. The State administration has indicated that
additional savings and revenues may be realized from an early retirement
program instituted in fiscal year 1995, transfers of excess funds from
special and revolving funds, and the resolution of protested insurance
premium taxes. At the end of fiscal year 1996, revenue collections totaled
$3.194 billion and exceeded expenditures by $70 million. For fiscal year 1997
the State administration has proposed that Executive departments carry their
fiscal year 1996 cuts over to fiscal year 1997. The cuts, together with other
reductions to the fiscal year 1997 budget, have resulted in the fiscal year
1997 General Fund budget being reduced by $172 million from $3.247 billion to
$3.075 billion.
The Legislature convened on January 15, 1997. It is uncertain what form of
budget and what revenue measures or combination of measures will ultimately
be enacted. The State administration has indicated that it is committed to
developing and maintaining financial policies and budgetary action to insure
a positive General Fund balance and financial plan.
Funds for State expenditures are also affected by State obligations for
the benefit of native Hawaiians.
The State has agreed to resolve a dispute concerning the wrongful use or
withdrawal by Territorial and State Executive actions of lands set aside
originally for the rehabilitation of native Hawaiians by the transfer of
certain usable State-owned lands to the Department of Hawaiian Home Lands and
the funding of $600 million in equal amounts over a period of 20 years to
allow for the appropriate planning and development of such lands. Legislation
has been enacted to implement the settlement, with funds authorized and
appropriated for the first two years of the settlement.
In a separate process to resolve claims unique to individual beneficiaries
of such Hawaiian Home Lands, a panel is reviewing such claims and rendering
advisory opinions to the Legislature thereon. Claimants not satisfied with
the advisory opinions or the Legislature's response thereto may file civil
actions between October 1, 1997 and September 30, 1998. It is uncertain what
monetary amounts may ultimately be recommended by the panel, proffered by the
Legislature, or awarded by any court.
In addition, 20 percent of the gross proprietary revenues derived from
"ceded lands" (defined below) that are utilized by the State are required by
State law to be paid to the Office of Hawaiian Affairs, which administers
such funds for the benefit of native Hawaiians. "Ceded lands" are those
portions of lands now constituting State-owned lands that were ceded by the
Republic of Hawaii to the United States and subsequently conveyed by the
United States to the State following the State's admission to the Union. The
payments to the Office of Hawaiian Affairs are made directly out of State
revenues, including revenues from revenue producing activities such as the
Harbors and Airports Divisions of the Department of Transportation.
The Office of Hawaiian Affairs has initiated litigation against the State
alleging that the State has failed to account for and pay to the Office of
Hawaiian Affairs its proper pro rata share of proceeds and income. The trial
court has initially ruled in favor of the Office of Hawaiian Affairs.
Although it is unclear what dollar amount of claims may be involved, the
State has conceded that an ultimate decision against the State could have a
material adverse effect on the State's financial condition.
The Office of Inspector General of the U.S. Department of Transportation
has questioned the use of airport revenues to make payments to the Office of
Hawaiian Affairs. The State has defended its action on the basis that the
payments represent airport operating expenses, but it has placed all such
payments since June 1996 into an escrow account pending resolution of this
dispute.
For further discussion of special considerations relating to the State of
Hawaii, see the Statement of Additional Information.
22
<PAGE>
THE DEAN WITTER FAMILY OF FUNDS
MONEY MARKET FUNDS
Dean Witter Liquid Asset Fund Inc.
Dean Witter U.S. Government Money Market Trust
Dean Witter Tax-Free Daily Income Trust
Dean Witter California Tax-Free Daily Income Trust
Dean Witter New York Municipal Money Market Trust
EQUITY FUNDS
Dean Witter American Value Fund
Dean Witter Natural Resource Development
Securities Inc.
Dean Witter Dividend Growth Securities Inc.
Dean Witter Developing Growth Securities Trust
Dean Witter World Wide Investment Trust
Dean Witter 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
Dean Witter International Small Cap Fund
Dean Witter Balanced Growth Fund
Dean Witter Mid-Cap Growth Fund
Dean Witter Information Fund
Dean Witter Japan Fund
Dean Witter Income Builder Fund
Dean Witter Special Value Fund
Dean Witter Financial Services Trust
FIXED-INCOME FUNDS
Dean Witter High Yield Securities Inc.
Dean Witter Tax-Exempt Securities Trust
Dean Witter U.S. Government Securities Trust
Dean Witter Federal Securities Trust
Dean Witter Convertible Securities Trust
Dean Witter California Tax-Free Income Fund
Dean Witter New York Tax-Free Income Fund
Dean Witter World Wide Income Trust
Dean Witter Intermediate Income Securities
Dean Witter Global Short-Term Income Fund Inc.
Dean Witter Multi-State Municipal Series Trust
Dean Witter Premier Income Trust
Dean Witter Short-Term U.S. Treasury Trust
Dean Witter Diversified Income Trust
Dean Witter Limited Term Municipal Trust
Dean Witter Short-Term Bond Fund
Dean Witter High Income Securities
Dean Witter National Municipal Trust
Dean Witter Balanced Income Fund
Dean Witter Hawaii Municipal Trust
Dean Witter Intermediate-Term
U.S. Treasury Trust
ASSET ALLOCATION FUNDS
Dean Witter Global Asset Allocation Fund
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
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
Stategist Series
Utilities Series
Value-Added Market Series
Global Equity Series
<PAGE>
Dean Witter
Hawaii Municipal Trust
Two World Trade Center
New York, New York 10048
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
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
90 Washington Street
New York, New York 10286
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Dean Witter Trust Company
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
DEAN WITTER
HAWAII
MUNICIPAL TRUST
PROSPECTUS--JANUARY 31, 1997
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 31, 1997
DEAN WITTER
HAWAII MUNICIPAL
TRUST
- -----------------------------------------------------------------------------
Dean Witter Hawaii Municipal Trust (the "Fund") is an open-end,
non-diversified management investment company whose investment objective is
to provide a high level of current income exempt from both federal and State
of Hawaii income taxes, consistent with the preservation of capital. The Fund
invests principally in tax-exempt, investment grade municipal obligations of
issuers in the State of Hawaii and in U.S. governmental territories and
possessions. (See "Investment Practices and Policies.")
A Prospectus for the Fund dated January 31, 1997, 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 numbers listed below
or from the Fund's Distributor, Dean Witter Distributors Inc., or from Dean
Witter Reynolds Inc. at any of its branch offices. This Statement of
Additional Information is not a Prospectus. It contains information in
addition to and more detailed than that set forth in the Prospectus. It is
intended to provide additional information regarding the activities and
operations of the Fund, and should be read in conjunction with the
Prospectus.
Dean Witter
Hawaii Municipal Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll free)
<PAGE>
TABLE OF CONTENTS
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
The Fund and its Management .............. 3
Trustees and Officers .................... 6
Investment Practices and Policies ....... 11
Investment Restrictions .................. 21
Portfolio Transactions and Brokerage .... 22
Purchase of Fund Shares .................. 24
Shareholder Services ..................... 27
Redemptions and Repurchases .............. 30
Dividends, Distributions and Taxes ...... 31
Performance Information .................. 32
Shares of the Fund ....................... 34
Custodian and Transfer Agent ............. 34
Independent Accountants .................. 35
Reports to Shareholders .................. 35
Legal Counsel ............................ 35
Experts .................................. 35
Registration Statement ................... 35
Financial Statements -November 30, 1996 . 36
Report of Independent Accountants ....... 46
Appendix ................................. 47
</TABLE>
2
<PAGE>
THE FUND AND ITS MANAGEMENT
- -----------------------------------------------------------------------------
THE FUND
The Fund is a Trust of the type commonly known as a "Massachusetts
business trust" and was organized under the laws of the Commonwealth of
Massachusetts on March 14, 1995.
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. 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 Strategist Fund,
Dean Witter World Wide Income Trust, Dean Witter Intermediate Income
Securities, Dean Witter Capital Growth Securities, Dean Witter European
Growth Fund Inc., Dean Witter Pacific Growth Fund Inc., Dean Witter Precious
Metals and Minerals Trust, Dean Witter Global Short-Term Income Fund Inc.,
Dean Witter Multi-State Municipal Series Trust, Dean Witter New York
Municipal Money Market Trust, InterCapital Quality Municipal Investment
Trust, Dean Witter Premier Income Trust, Dean Witter Short-Term U.S. Treasury
Trust, InterCapital Insured Municipal Bond Trust, InterCapital Insured
Municipal Trust, InterCapital Quality Municipal Income Trust, Dean Witter
Diversified Income Trust, Dean Witter Health Sciences Trust, Dean Witter
Retirement Series, InterCapital Quality Municipal Securities, InterCapital
California Quality Municipal Securities, InterCapital New York Quality
Municipal Securities, Dean Witter Global Dividend Growth Securities, Dean
Witter Limited Term Municipal Trust, Dean Witter Short-Term Bond Fund, Dean
Witter Global Utilities Fund, Dean Witter National Municipal Trust, Dean
Witter High Income Securities, Dean Witter International SmallCap Fund, Dean
Witter Mid-Cap Growth Fund, Dean Witter Global Asset Allocation Fund, Dean
Witter Select Dimensions Investment Series, Dean Witter Balanced Income Fund,
Dean Witter Balanced Growth Fund, Dean Witter Global Asset Allocation Fund,
Dean Witter Capital Appreciation Fund, Dean Witter Intermediate Term U.S.
Treasury Trust, Dean Witter Information Fund, Dean Witter Japan Fund, Dean
Witter Income Builder Fund, Dean Witter Special Value Fund, Dean Witter
Financial Services Trust, InterCapital Insured Municipal Securities,
InterCapital Insured California Municipal Securities, InterCapital Insured
Municipal Income Trust, InterCapital California Insured Municipal Income
Trust, Active Assets Money Trust, Active Assets California Tax-Free Trust,
Active Assets Tax-Free Trust, Active Assets Government Securities Trust,
Municipal Income Trust, Municipal Income Trust II, Municipal Income Trust
III, Municipal Income Opportunities Trust, Municipal Income Opportunities
Trust II, Municipal Income Opportunities Trust III, Municipal Premium Income
Trust and Prime Income Trust. The foregoing investment companies, together
with the Fund, are collectively referred to as the Dean Witter Funds.
In addition, Dean Witter Services Company Inc. ("DWSC"), a wholly-owned
subsidiary of InterCapital, serves as manager for the following companies for
which TCW Funds Management, Inc. is the
3
<PAGE>
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
Mid-Cap Equity Trust, TCW/DW Global Telecom Trust, TCW/DW Strategic Income
Trust, TCW/DW Term Trust 2000, TCW/DW Term Trust 2002, TCW/DW Term Trust
2003, TCW/DW Emerging Markets Opportunities Trust and TCW/DW Total Return
Trust (the "TCW/DW Funds"). InterCapital also serves as: (i) sub-adviser to
Templeton Global Opportunities Trust, an open-end investment company; (ii)
administrator of The BlackRock Strategic Term Trust Inc., a closed-end
investment company; and (iii) sub-administrator of MassMutual Participation
Investors and Templeton Global Governments Income Trust, closed-end
investment companies.
Pursuant to an Investment Management Agreement (the "Agreement") with the
Investment Manager, the Fund has retained the Investment Manager to manage
the investment of the Fund's assets, including the placing of orders for the
purchase and sale of portfolio securities. The Investment Manager obtains and
evaluates such information and advice relating to the economy, securities
markets, and specific securities as it considers necessary or useful to
continuously manage the assets of the Fund in a manner consistent with its
investment objective 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.
Pursuant to a Services Agreement between InterCapital and DWSC,
InterCapital has retained DWSC to provide administrative services to the
Fund.
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 by applying the
following annual rate of 0.35% to the net assets of the Fund determined as of
the close of each business day. The Investment Manager initially had
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 had $50 million of net assets or until six months from the
date of commencement of the Fund's operations, whichever occurred first. The
Investment Manager had undertaken to continue to assume expenses (except
brokerage and 12b-1 fees) and to waive the compensation provided for in its
Management Agreement until December 31, 1996 and has undertaken to continue
such fee waiver and expense assumption until June 30, 1997. During the fiscal
4
<PAGE>
period June 16, 1995 (commencement of operations) through November 30, 1995
and during the fiscal year ended November 30, 1996, the fee payable ($1,644
and $8,265, respectively) under the Management Agreement was waived by the
Investment Manager pursuant to the undertakings set forth above.
The Investment Manager has paid the organizational expenses of the Fund,
in the amount of approximately $60,000, incurred prior to the offering of the
Fund's shares. The Fund has reimbursed the Investment Manager for such
expenses exclusive of any amounts assumed by the Investment Manager. The Fund
has deferred and is amortizing 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 April 20, 1995.
The Agreement may be terminated at any time, without penalty, on thirty days
notice, by the Board of Trustees of the Fund, by the holders of a majority,
as defined in the Investment Company Act of 1940, as amended (the "Act"), of
the outstanding shares of the Fund, or by the Investment Manager. The
Agreement will automatically terminate in the event of its assignment (as
defined in the Act).
Under its terms, the Agreement had an initial term ending April 30, 1996,
and will remain in effect from year to year thereafter, provided continuance
of the Agreement is approved at least annually by the vote of the holders of
a majority (as defined in the Act) of the outstanding shares of the Fund, or
by the Board of Trustees of the Fund; provided that in either event such
continuance is approved annually by the vote of a majority of the Independent
Trustees, which vote must be cast in person at a meeting called for the
purpose of voting on such approval. At their meeting held on April 17, 1996,
the Fund's Trustees, including all of the Independent Trustees, approved the
continuation of the Agreement until April 30, 1997.
The Fund has acknowledged that the name "Dean Witter" is a property right
of DWR. The Fund has agreed that DWR or its parent company may use or, at any
time, permit others to use, the name "Dean Witter". The Fund has also agreed
that in the event the 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 company shall so
request.
5
<PAGE>
TRUSTEES AND OFFICERS
- -----------------------------------------------------------------------------
The Trustees and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with
InterCapital, and with the 83 Dean Witter Funds and the 14 TCW/DW Funds, are
shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- -------------------------------------------- --------------------------------------------------------
<S> <C>
Michael Bozic (56) Chairman and Chief Executive Officer of Levitz Furniture
Trustee Corporation (since November 1995); Director or Trustee
c/o Levitz Furniture Corporation of the Dean Witter Funds; formerly President and Chief
6111 Broken Sound Parkway, N.W. Executive Officer of Hills Department Stores (May,
Boca Raton, Florida 1991-July, 1995); formerly variously Chairman, Chief
Executive Officer, President and Chief Operating Officer
(1987-1991) of the Sears Merchandise Group of Sears,
Roebuck and Co.; Director of Eaglemark Financial
Services, Inc., the United Negro College Fund and
Weirton Steel Corporation.
Charles A. Fiumefreddo* (63) Chairman, Chief Executive Officer and Director of
Chairman of the Board, President, Chief InterCapital, Distributors and DWSC; Executive Vice
Executive Officer and Trustee President and Director of DWR; Chairman, Director or
Two World Trade Center Trustee, President and Chief Executive Officer of the
New York, New York Dean Witter Funds; Chairman, Chief Executive Officer and
Trustee of the TCW/DW Funds; Chairman and Director of
Dean Witter Trust Company ("DWTC"); Director and/or
officer of various DWDC subsidiaries; formerly Executive
Vice President and Director of DWDC (until February,
1993).
Edwin J. Garn (64) Director or Trustee of the Dean Witter Funds; formerly
Trustee United States Senator (R-Utah) (1974-1992) and Chairman,
c/o Huntsman Chemical Corporation Senate Banking Committee (1980-1986); formerly Mayor of
500 Huntsman Way Salt Lake City, Utah (1971-1974); formerly Astronaut,
Salt Lake City, Utah Space Shuttle Discovery (April 12-19, 1985); Vice
Chairman, Huntsman Chemical Corporation (since January,
1993); Director of Franklin Quest (time management
systems) and John Alden Financial Corporation; member of
the board of various civic and charitable organizations.
John R. Haire (71) Chairman of the Audit Committee and Chairman of the
Trustee Committee of the Independent Directors or Trustees and
Two World Trade Center Director or Trustee of the Dean Witter Funds; Chairman
New York, New York of the Audit Committee and Chairman of the Committee of
the Independent Trustees and Trustee of the TCW/DW
Funds; formerly President, Council for Aid to Education
(1978-1989) and Chairman and Chief Executive Officer of
Anchor Corporation, an Investment Adviser (1964-1978);
Director of Washington National Corporation (insurance).
6
<PAGE>
Dr. Manuel H. Johnson (47) Senior Partner, Johnson Smick International, Inc., a
Trustee consulting firm; Koch Professor of International
c/o Johnson Smick International, Inc. Economics and Director of the Center for Global Market
1133 Connecticut Avenue, N.W. Studies at George Mason University (since September,
Washington, D.C. 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
NASDAQ (since June, 1995); Director of Greenwich Capital
Markets Inc. (broker-dealer); formerly Vice Chairman of
the Board of Governors of the Federal Reserve System
(February, 1986-August, 1990) and Assistant Secretary of
the U.S. Treasury (1982-1986).
Michael E. Nugent (60) General Partner, Triumph Capital, L.P., a private
Trustee investment partnership (since April, 1988); Director or
c/o Triumph Capital, L.P. Trustee of the Dean Witter Funds; Trustee of the TCW/DW
237 Park Avenue Funds; formerly Vice President, Bankers Trust Company
New York, New York and BT Capital Corporation (1984-1988); Director of
various business organizations.
Philip J. Purcell* (53) Chairman of the Board of Directors and Chief Executive
Trustee Officer of DWDC, DWR and Novus Credit Services Inc.;
Two World Trade Center Director of InterCapital, DWSC and Distributors;
New York, New York Director or Trustee of the Dean Witter Funds; Director
and/or officer of various DWDC subsidiaries.
John L. Schroeder (66) Retired; Director or Trustee of the Dean Witter Funds;
Trustee Trustee of the TCW/DW Funds; Director of Citizens
c/o Gordon Altman Butowsky Utilities Company; formerly Executive Vice President and
Weitzen Shalov & Wein Chief Investment Officer of the Home Insurance Company
Counsel to the Independent Trustees (August, 1991- September, 1995); formerly Chairman and
114 West 47th Street Chief Investment Officer of Axe-Houghton Management and
New York, New York the Axe-Houghton Funds (1983-1991).
Sheldon Curtis (64) Senior Vice President, Secretary and General Counsel of
Vice President, Secretary InterCapital and DWSC; Senior Vice President and
and General Counsel Secretary of DWTC; Senior Vice President, Assistant
Two World Trade Center Secretary and Assistant General Counsel of Distributors;
New York, New York Assistant Secretary of DWR; Vice President, Secretary
and General Counsel of the Dean Witter Funds and the
TCW/DW Funds.
James F. Willison (53) Senior Vice President of InterCapital; Vice President of
Vice President various Dean Witter Funds.
Two World Trade Center
New York, New York
Thomas F. Caloia (50) First Vice President and Assistant Treasurer (since
Treasurer January, 1993) of InterCapital and DWSC and Treasurer of
Two World Trade Center the Dean Witter Funds and the TCW/DW Funds.
New York, New York
</TABLE>
- ------------
* Denotes Trustees who are "interested persons" of the Fund, as defined in
the Act.
7
<PAGE>
In addition, Robert M. Scanlan, President and Chief Operating Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWTC and
Director of DWTC, Joseph J. McAlinden, Executive Vice President and Chief
Investment Officer of InterCapital, DWSC, Distributors and DWTC and Director
of DWTC, Robert S. Giambrone, Senior Vice President of InterCapital, DWSC,
Distributors and DWTC and Director of DWTC and Peter M. Avelar, Kevin Hurley
and Jonathan R. Page, Senior Vice Presidents of InterCapital, and Joseph R.
Arcieri, Gerard J. Lian and Katherine H. Stromberg, Vice Presidents of
InterCapital, are Vice Presidents of the Fund. In addition, Marilyn K.
Cranney and Barry Fink, First Vice Presidents and Assistant General Counsels
of InterCapital and DWSC, and Lou Anne D. McInnis and Ruth Rossi, Vice
Presidents and Assistant General Counsels of InterCapital and DWSC, and
Carsten Otto and Frank Bruttomesso, Staff Attorneys with InterCapital and
DWSC, are Assistant Secretaries of the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees consists of eight (8) trustees. These same
individuals also serve as directors or trustees for all of the Dean Witter
Funds, and are referred to in this section as Trustees. As of the date of
this Statement of Additional Information, there are a total of 83 Dean Witter
Funds, comprised of 126 portfolios. As of December 31, 1996, the Dean Witter
Funds had total net assets of approximately $81.2 billion and more than five
million shareholders.
Six Trustees (75% of the total number) have no affiliation or business
connection with InterCapital or any of its affiliated persons and do not own
any stock or other securities issued by InterCapital's parent company, DWDC.
These are the "disinterested" or "independent" Trustees. The other two
Trustees (the "management Trustees") are affiliated with InterCapital. Four
of the six independent Trustees are also Independent Trustees of the TCW/DW
Funds.
Law and regulation establish both general guidelines and specific duties
for the Independent Trustees. The Dean Witter Funds seek as Independent
Trustees individuals of distinction and experience in business and finance,
government service or academia; these are people whose advice and counsel are
in demand by others and for whom there is often competition. To accept a
position on the Funds' Boards, such individuals may reject other attractive
assignments because the Funds make substantial demands on their time. Indeed,
by serving on the Funds' Boards, certain Trustees who would otherwise be
qualified and in demand to serve on bank boards would be prohibited by law
from doing so.
All of the Independent Trustees serve as members of the Audit Committee
and the Committee of the Independent Trustees. Three of them also serve as
members of the Derivatives Committee. During the calendar year ended December
31, 1996, the three Committees held a combined total of sixteen meetings. The
Committees hold some meetings at InterCapital's offices and some outside
InterCapital. Management Trustees or officers do not attend these meetings
unless they are invited for purposes of furnishing information or making a
report.
The Committee of the Independent Trustees is charged with recommending to
the full Board approval of management, advisory and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing Fund performance; checking on the pricing of portfolio securities,
brokerage commissions, transfer agent costs and performance, and trading
among Funds in the same complex; and approving fidelity bond and related
insurance coverage and allocations, as well as other matters that arise from
time to time. The Independent Trustees are required to select and nominate
individuals to fill any Independent Trustee vacancy on the Board of any Fund
that has a Rule 12b-1 plan of distribution. Most of the Dean Witter Funds
have such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing
engagement; approving professional services provided by the independent
accountants and other accounting firms prior to the performance
8
<PAGE>
of such services; reviewing the independence of the independent accountants;
considering the range of audit and non-audit fees; reviewing the adequacy of
the Fund's system of internal controls; and preparing and submitting
Committee meeting minutes to the full Board.
Finally, the Board of each Fund has formed a Derivatives Committee to
establish parameters for and oversee the activities of the Fund with respect
to derivative investments, if any, made by the Fund.
DUTIES OF CHAIRMAN OF COMMITTEE OF THE INDEPENDENT TRUSTEES AND AUDIT
COMMITTEE
The Chairman of the Committee of the Independent Trustees and the Audit
Committee maintains an office at the Funds' headquarters in New York. He is
responsible for keeping abreast of regulatory and industry developments and
the Funds' operations and management. He screens and/or prepares written
materials and identifies critical issues for the Independent Trustees to
consider, develops agendas for Committee meetings, determines the type and
amount of information that the Committees will need to form a judgment on
various issues, and arranges to have that information furnished to Committee
members. He also arranges for the services of independent experts and
consults with them in advance of meetings to help refine reports and to focus
on critical issues. Members of the Committees believe that the person who
serves as Chairman of both Committees and guides their efforts is pivotal to
the effective functioning of the Committees.
The Chairman of the Committees also maintains continuous contact with the
Funds' management, with independent counsel to the Independent Trustees and
with the Funds' independent auditors. He arranges for a series of special
meetings involving the annual review of investment advisory, management and
other operating contracts of the Funds and, on behalf of the Committees,
conducts negotiations with the Investment Manager and other service
providers. In effect, the Chairman of the Committees serves as a combination
of chief executive and support staff of the Independent Trustees.
The Chairman of the Committee of the Independent Trustees and the Audit
Committee is not employed by any other organization and devotes his time
primarily to the services he performs as Committee Chairman and Independent
Trustee of the Dean Witter Funds and as an Independent Trustee and, since
July 1, 1996, as Chairman of the Committee of the Independent Trustees and
the Audit Committee of the TCW/DW Funds. The current Committee Chairman has
had more than 35 years experience as a senior executive in the investment
company industry.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL DEAN
WITTER FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the Dean Witter Funds avoids the
duplication of effort that would arise from having different groups of
individuals serving as Independent Trustees for each of the Funds or even of
sub-groups of Funds. They believe that having the same individuals serve as
Independent Trustees of all the Funds tends to increase their knowledge and
expertise regarding matters which affect the Fund complex generally and
enhances their ability to negotiate on behalf of each Fund with the Fund's
service providers. This arrangement also precludes the possibility of
separate groups of Independent Trustees arriving at conflicting decisions
regarding operations and management of the Funds and avoids the cost and
confusion that would likely ensue. Finally, having the same Independent
Trustees serve on all Fund Boards enhances the ability of each Fund to
obtain, at modest cost to each separate Fund, the services of Independent
Trustees, and a Chairman of their Committees, of the caliber, experience and
business acumen of the individuals who serve as Independent Trustees of the
Dean Witter Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Fund intends to pay each Independent Trustee an annual fee of $1,000
plus a per meeting fee of $50 for meetings of the Board of Trustees or
committees of the Board of Trustees attended by the Trustee (the Fund intends
to pay the Chairman of the Audit Committee an annual fee of $750 and the
Chairman of the Committee of the Independent Trustees an additional annual
fee of $1,200). The Fund will also reimburse such Trustees for travel and
other out-of-pocket expenses incurred by them in connection with attending
such meetings. Trustees and officers of the Fund who are or have been
9
<PAGE>
employed by the Investment Manager or an affiliated company will receive no
compensation or expense reimbursement from the Fund. The Fund commenced
operations on June 16, 1995 and paid no compensation to the Independent
Trustees for the fiscal year ended November 30, 1996. Payments will commence
as of the time the Fund begins paying management fees.
At such time as the Fund has been in operation, and has paid fees to the
Independent Trustees, for a full fiscal year, and assuming that during such
fiscal year the Fund holds the same number of Board and committee meetings as
were held by the other Dean Witter Funds during the calendar year ended
December 31, 1996, it is estimated that the compensation paid to each
Independent Trustee during such fiscal year will be the amount shown in the
following table:
FUND COMPENSATION (ESTIMATED)
<TABLE>
<CAPTION>
AGGREGATE
NAME OF INDEPENDENT COMPENSATION
TRUSTEE FROM THE FUND
- -------------------------- ---------------
<S> <C>
Michael Bozic ............. $1,900
Edwin J. Garn ............. 1,900
John R. Haire ............. 3,850
Dr. Manuel H. Johnson .... 1,900
Michael E. Nugent ......... 1,900
John L. Schroeder ......... 1,900
</TABLE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1996 for
services to the 82 Dean Witter Funds and, in the case of Messrs. Haire,
Johnson, Nugent and Schroeder, the 14 TCW/DW Funds that were in operation at
December 31, 1996. With respect to Messrs. Haire, Johnson, Nugent and
Schroeder, the TCW/DW Funds are included solely because of a limited exchange
privilege between those Funds and five Dean Witter Money Market Funds.
COMPENSATION FROM DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
FOR SERVICE AS
CHAIRMAN OF
COMMITTEES OF FOR SERVICE AS
INDEPENDENT CHAIRMAN OF TOTAL
FOR SERVICE DIRECTORS/ COMMITTEES OF COMPENSATION
AS DIRECTOR OR FOR SERVICE AS TRUSTEES AND INDEPENDENT PAID
TRUSTEE AND TRUSTEE AND AUDIT TRUSTEES FOR SERVICES TO
COMMITTEE MEMBER COMMITTEE MEMBER COMMITTEES OF 82 AND AUDIT 82 DEAN WITTER
NAME OF OF 82 DEAN WITTER OF 14 TCW/DW DEAN WITTER COMMITTEES OF 14 FUNDS AND 14
INDEPENDENT TRUSTEE FUNDS FUNDS FUNDS TCW/DW FUNDS TCW/DW FUNDS
- ---------------------- ----------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Michael Bozic ......... $138,850 -- -- -- $138,850
Edwin J. Garn ......... 140,900 -- -- -- 140,900
John R. Haire ......... 106,400 $64,283 $195,450 $12,187 378,320
Dr. Manuel H. Johnson 137,100 66,483 -- -- 203,583
Michael E. Nugent .... 138,850 64,283 -- -- 203,133
John L. Schroeder .... 137,150 69,083 -- -- 206,233
</TABLE>
As of the date of this Statement of Additional Information, 57 of the Dean
Witter Funds, not including the Fund, have adopted a retirement program under
which an Independent Trustee who retires after serving for at least five
years (or such lesser period as may be determined by the Board) as an
Independent Director or Trustee of any Dean Witter Fund that has adopted the
retirement program (each such Fund referred to as an "Adopting Fund" and each
such Trustee referred to as an "Eligible Trustee") is entitled to retirement
payments upon reaching the eligible retirement age (normally, after attaining
age 72). Annual payments are based upon length of service. Currently, upon
retirement, each Eligible Trustee is entitled to receive from the Adopting
Fund, commencing as of his or her retirement date and continuing for the
remainder of his or her life, an annual retirement benefit (the "Regular
Benefit") equal to 25.0% of his or her Eligible Compensation plus 0.4166666%
of such Eligible Compensation for each full month of service as an
Independent Director or Trustee of any Adopting Fund in excess of five years
up to a maximum of 50.0% after ten years of service. The foregoing
percentages may be changed by the
10
<PAGE>
Board.(1) "Eligible Compensation" is one-fifth of the total compensation
earned by such Eligible Trustee for service to the Adopting Fund in the five
year period prior to the date of the Eligible Trustee's retirement. Benefits
under the retirement program are not secured or funded by the Adopting Funds.
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the 57 Dean Witter Funds (not including the
Fund) for the year ended December 31, 1996, and the estimated retirement
benefits for the Fund's Independent Trustees, to commence upon their
retirement, from the 57 Dean Witter Funds as of December 31, 1996.
RETIREMENT BENEFITS FROM ALL DEAN WITTER FUNDS
<TABLE>
<CAPTION>
ESTIMATED
RETIREMENT ANNUAL
ESTIMATED BENEFITS BENEFITS
CREDITED ACCRUED AS UPON
YEARS ESTIMATED EXPENSES RETIREMENT
OF SERVICE AT PERCENTAGE OF BY ALL FROM ALL
NAME OF INDEPENDENT RETIREMENT ELIGIBLE ADOPTING ADOPTING
TRUSTEE (MAXIMUM 10) COMPENSATION FUNDS FUNDS (2)
- -------------------------- --------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Michael Bozic ............. 10 50.0% $20,147 $ 51,325
Edwin J. Garn ............. 10 50.0 27,772 51,325
John R. Haire ............. 10 50.0 46,952 129,550
Dr. Manuel H. Johnson .... 10 50.0 10,926 51,325
Michael E. Nugent ......... 10 50.0 19,217 51,325
John L. Schroeder ......... 8 41.7 38,700 42,771
</TABLE>
(1) An Eligible Trustee may elect alternate payments of his or her
retirement benefits based upon the combined life expectancy of such
Eligible Trustee and his or her spouse on the date of such Eligible
Trustee's retirement. The amount estimated to be payable under this
method, through the remainder of the later of the lives of such
Eligible Trustee and spouse, will be the actuarial equivalent of the
Regular Benefit. In addition, the Eligible Trustee may elect that the
surviving spouse's periodic payment of benefits will be equal to either
50% or 100% of the previous periodic amount, an election that,
respectively, increases or decreases the previous periodic amount so
that the resulting payments will be the actuarial equivalent of the
Regular Benefit.
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1)
above.
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's
officers and Trustees as a group was less than 1 percent of the Fund's shares
of beneficial interest outstanding.
INVESTMENT PRACTICES AND POLICIES
- -----------------------------------------------------------------------------
PORTFOLIO SECURITIES
Taxable Securities. As discussed in the Prospectus, the Fund may invest up
to 20% of its total assets in taxable money market instruments, tax-exempt
securities of other states and municipalities and futures and options. (This
investment percentage is subject to applicable state law.) Investments in
taxable money market instruments would generally be made under any one of the
following circumstances: (a) pending investment of proceeds of the sale of
each of the Fund's shares or of portfolio securities, (b) pending settlement
of purchases of portfolio securities and (c) to maintain liquidity for the
purpose of meeting anticipated redemptions. Only those tax-exempt securities
of other states which satisfy the standards established for the tax-exempt
securities of the State of Hawaii may be purchased by the Fund.
In addition, the Fund may temporarily invest more than 20% of its total
assets in tax-exempt securities of other states and municipalities and
taxable money market instruments, in order to maintain a temporary
"defensive" posture when, in the opinion of the Investment Manager, it is
advisable to do so because of market conditions (the types of investments in
which the Fund may invest when maintaining a temporary "defensive" position
may be limited by applicable State requirements). The types of taxable money
market instruments in which the Fund may invest are limited to the following
short-term
11
<PAGE>
fixed-income securities (maturing in one year or less from the time of
purchase): (i) obligations of the United States Government, its agencies,
instrumentalities or authorities; (ii) commercial paper rated P-1 by Moody's
Investors Service, Inc. ("Moody's") or A-1 by Standard & Poor's Corporation
("S&P"); (iii) certificates of deposit of domestic banks with assets of $1
billion or more; and (iv) repurchase agreements with respect to portfolio
securities.
Tax-Exempt Securities. As discussed in the Prospectus, under normal
conditions, at least 80% of the total assets of the Fund will be invested in
securities, the interest on which is exempt from both federal and State of
Hawaii income taxes. The tax-exempt securities in which the Fund will invest
include Municipal Bonds, Municipal Notes and Municipal Commercial Paper. In
regard to the Moody's and S&P ratings discussed in the Prospectus, it should
be noted that the ratings represent the organizations' opinions as to the
quality of the securities which they undertake to rate and that the ratings
are general and not absolute standards of quality. For a description of
Municipal Bond, Municipal Note and Municipal Commercial Paper ratings by
Moody's and S&P, see the Appendix to this Statement of Additional
Information.
The 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.
Although certain quality standards are applicable at the time of purchase,
the Fund does not have any minimum quality rating standard for its downgraded
investments. As such, the Fund may continue to hold securities rated as low
as Caa, Ca or C by Moody's or CCC, CC, C or CI by S&P. However, such
investments may not exceed more than 5% of the total assets of the Fund.
Bonds rated Caa or Ca by Moody's may already be in default on payment of
interest or principal, while bonds rated C by Moody's, their lowest bond
rating, can be regarded as having extremely poor prospects of ever attaining
any real investment standing. Bonds rated CI by S&P, their lowest Bond
rating, are no longer making interest payments.
The payment of principal and interest by issuers of certain Municipal
Obligations purchased by the Fund may be guaranteed by letters of credit or
other credit facilities offered by banks or other financial institutions.
Such guarantees will be considered in determining whether a Municipal
Obligation meets the investment quality requirements of each Series. In
addition, some issues may contain provisions which permit the Fund to demand
from the issuer repayment of principal at some specified period(s) prior to
maturity.
Municipal Bonds. Municipal Bonds, as referred to in the Prospectus, are
debt obligations of a state, its cities, municipalities and municipal
agencies (all of which are generally referred to as "municipalities") which
generally have a maturity at the time of issue of one year or more, and the
interest from which is, in the opinion of bond counsel to the issuer at time
of original issuance, exempt from regular federal income tax. In addition to
these requirements, the interest from Municipal Bonds of the State of Hawaii
must be, in the opinion of bond counsel to the issuer at time of original
issuance, exempt from the regular personal income tax of the State. These
obligations 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 to the issuer at time of original issuance, exempt from regular
federal income tax. In addition to those requirements, the interest from
Municipal Notes of the State of Hawaii must be,
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in the opinion of bond counsel to the issuer at time of original issuance,
exempt from the regular personal income tax of the State. The principal types
of Municipal Notes include tax anticipation notes, bond anticipation notes,
revenue anticipation notes and project notes, although there are other types
of Municipal Notes, in which the Fund may invest. Notes sold in anticipation
of collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuing municipality or agency. Project Notes are
issued by local agencies and are guaranteed by the United States Department
of Housing and Urban Development. Such notes are secured by the full faith
and credit of the United States Government.
Municipal Commercial Paper. Municipal Commercial Paper refers to
short-term obligations of municipalities the interest from which is, in the
opinion of bond counsel to the issuer at time of original issuance, exempt
from regular federal income tax. In addition to those requirements, the
interest from the Municipal Commercial Paper of the State of Hawaii must be,
in the opinion of bond counsel to the issuer at time of original issuance,
exempt from the regular personal income tax of the State. Municipal
Commercial Paper may be issued at a discount and is sometimes referred to as
Short-Term Discount Notes. Municipal Commercial Paper is likely to be used to
meet seasonal working capital needs of a municipality or interim construction
financing and to be paid from general revenues of the municipality or
refinanced with long-term debt. In most cases Municipal Commercial Paper is
backed by letters of credit, lending agreements, note repurchase agreements
or other credit facility agreements offered by banks or other institutions.
The two principal classifications of Municipal Bonds, Notes and Commercial
Paper are "general obligation" and "revenue" bonds, notes or commercial
paper. General obligation bonds, notes or commercial paper are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Issuers of general obligation bonds, notes or
commercial paper include a state, its counties, cities, towns and other
governmental units. Revenue bonds, notes or commercial paper are payable from
the revenues derived from a particular facility or class of facilities or, in
some cases, from specific revenue sources. Revenue bonds, notes or commercial
paper are issued for a wide variety of purposes, including the financing of
electric, gas, water and sewer systems and other public utilities; industrial
development and pollution control facilities; single and multi-family housing
units; public buildings and facilities; air and marine ports; transportation
facilities such as toll roads, bridges and tunnels; and health and
educational facilities such as hospitals and dormitories. They rely primarily
on user fees to pay debt service, although the principal revenue source is
often supplemented by additional security features which are intended to
enhance the creditworthiness of the issuer's obligations. In some cases,
particularly revenue bonds issued to finance housing and public buildings, a
direct or implied "moral obligation" of a governmental unit may be pledged to
the payment of debt service. In other cases, a special tax or other charge
may augment user fees.
Issuers of Municipal Obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Act, and laws, if any, which may be
enacted by Congress or any state extending the time for payment of principal
or interest, or both, or imposing other constraints upon enforcement of such
obligations or upon municipalities to levy taxes. There is also the
possibility that as a result of litigation or other conditions the power or
ability of any one or more issuers to pay, when due, principal of and
interest on its, or their, Municipal Bonds, Municipal Notes and Municipal
Commercial Paper may be materially affected.
SPECIAL INVESTMENT CONSIDERATIONS
Because of the special nature of securities which are rated below
investment grade by national credit rating agencies ("lower-rated
securities"), the Investment Manager must take into account certain special
considerations in assessing the risks associated with such investments. For
example, as the lower-rated securities market is relatively new, its growth
has paralleled a long economic expansion and it has not weathered a recession
in its present size and form. Therefore, an economic downturn or increase in
interest rates is likely to have a negative effect on this market and on the
value of the lower-rated securities held by the Fund, as well as on the
ability of the securities' issuers to repay principal and interest on their
borrowings.
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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 per 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
investment 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 could 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 per
share of the Fund.
Variable Rate Obligations. As stated in the Prospectus, the Fund may
invest in obligations of the type called "variable rate obligations". The
interest rate payable on a variable rate obligation is adjusted either at
predesignated periodic intervals or whenever there is a change in the market
rate of interest on which the interest rate payable is based. Other features
may include the right whereby the Fund may demand prepayment of the principal
amount of the obligation prior to its stated maturity (a "demand feature")
and the right of the issuer to prepay the principal amount prior to maturity.
The principal benefit of a variable rate obligation is that the interest rate
adjustment minimizes changes in the market value of the obligation. The
principal benefit to the Fund of purchasing obligations with a demand feature
is that liquidity, and the ability of the Fund to obtain repayment of the
full principal amount of the obligation prior to maturity, is enhanced.
Lending of Portfolio Securities. The Fund may lend portfolio securities to
brokers, dealers and financial institutions provided that cash equal to at
least 100% of the market value of the securities loaned is deposited by the
borrower with the Fund and is maintained each business day in a segregated
account pursuant to applicable regulations. The collateral value of the
loaned securities will be marked-to-market daily. While such securities are
on loan, the borrower will pay the Fund any income accruing thereon, and the
Fund may invest the cash collateral in portfolio securities, thereby earning
additional income. The Fund will not lend its portfolio securities if such
loans are not permitted by the laws or regulations of any state in which its
shares are qualified for sale and will not lend more than 25% of the value of
its total assets. Loans will be subject to termination by the Fund, in the
normal settlement time, currently five business days after notice, or by the
borrower on one day's notice. Borrowed securities must be returned when the
loan is terminated. Any gain or loss in the market price of the borrowed
securities which occurs during the term of the loan inures to the Fund and
its shareholders. The Fund may pay reasonable finders, borrowers,
administrative, and custodial fees in connection with a loan. The
creditworthiness of firms to which the Fund lends its portfolio securities
will be monitored on an ongoing basis. During the fiscal year ended November
30, 1996, the Fund did not lend any of its portfolio securities.
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
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negotiated, the price is fixed at the time of the commitment, but delivery
and payment can take place a month or more after the date of the commitment.
While the Fund will only purchase securities on a when-issued or delayed
delivery basis with the intention of acquiring the securities, the Fund may
sell the securities before the settlement date, if it is deemed advisable.
The securities so purchased or sold are subject to market fluctuation and no
interest accrues to the purchaser during this period. At the time the Fund
makes the commitment to purchase a Municipal Obligation on a when-issued or
delayed delivery basis, it will record the transaction and thereafter reflect
the value, each day, of the Municipal Obligation in determining its net asset
value. The Fund will also establish a segregated account with its custodian
bank in which it will maintain cash, cash equivalents or other liquid
portfolio securities equal in value to commitments for such when-issued or
delayed delivery securities. 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. During the fiscal year ended November 30, 1996, the Fund did not
purchase securities on a when-issued or delayed delivery basis in an amount
which exceeded 5% of its total net assets.
Repurchase Agreements. When cash may be available for only a few days, it
may be invested by the Fund in repurchase agreements until such time as it
may otherwise be invested or used for payments of obligations of the Fund.
These agreements, which may be viewed as a type of secured lending by the
Fund, typically involve the acquisition by the Fund of debt securities from a
selling financial institution such as a bank, savings and loan association or
broker-dealer. The agreement provides that the Fund will sell back to the
institution, and that the institution will repurchase, the underlying
security ("collateral"), which is held by the Fund's Custodian, at a
specified price and at a fixed time in the future, 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 at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. In the event of a default or bankruptcy by a selling
financial institution, the Fund will seek to liquidate such collateral.
However, the exercising of the Fund's right to liquidate such collateral
could involve certain costs or delays and, to the extent that proceeds from
any sale upon a default of the obligation to repurchase were less than the
repurchase price, the Fund could suffer a loss. It is the current policy of
the Fund not to invest in repurchase agreements that do not mature within
seven days if any such investment, together with any other illiquid assets
held by the Fund, amounts to more than 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.
During the fiscal period ended November 30, 1996, the Fund did not enter into
any repurchase agreements.
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
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transaction. An offsetting transaction for a futures contract sale is
effected by the Fund entering into a futures contract purchase for the same
aggregate amount of the specific type of financial instrument at the same
delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is immediately paid the difference and thus realizes a
gain. If the offsetting purchase price exceeds the sale price, the Fund pays
the difference and realizes 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.
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
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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 or other
liquid portfolio securities 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. The Fund will not invest in options on debt securities
in the coming year or until such time as they become available on national
securities exchanges.
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 liquid portfolio securities in a segregated account
with its custodian. A put option is "covered" if the Fund maintains cash,
Treasury bills or other liquid portfolio securities with a value equal to the
exercise price in a segregated account with its custodian, or else holds a
put on the same security or futures contract as the put written where the
exercise price of the put held is equal to or greater than the exercise price
of the put written.
If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing
an option of the same series as the option previously written. However, once
the Fund has been assigned an exercise notice, the Fund will be unable to
effect a closing purchase transaction. Similarly, if the Fund is the holder
of an option, it may liquidate its position by effecting a closing sale
transaction. This is accomplished by selling an option of the same series as
the option previously purchased. There can be no assurance that either a
closing purchase or sale transaction can be effected when the Fund so
desires.
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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 equality 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 15% of
its net 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.
Since the Fund concentrates its investments in municipal obligations of
the State of Hawaii and its authorities and municipalities, the Fund is
affected by any political, economic or regulatory developments affecting the
ability of issuers in the State of Hawaii to make timely payments of interest
and principal. For a more detailed discussion of investing in the State of
Hawaii, see "Special Considerations Relating to the State of Hawaii" below
and in the Prospectus. Subject to investment restriction number 2 disclosed
in the Prospectus under the Section "Investment Restrictions," the Fund may
invest more than 25% of its total assets in private activity bonds (a certain
type of tax-exempt Municipal Obligation).
SPECIAL CONSIDERATIONS RELATING TO THE STATE OF HAWAII
The Fund will be affected by any political, economic, or regulatory
developments having a bearing on the ability of Hawaii issuers to pay
interest or repay principal on their obligations.
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The information set forth herein is derived from official statements
prepared in connection with the issuance of obligations of the State of
Hawaii ("State") and its political subdivisions and other sources that are
generally available to investors. The information is provided as general
information intended to give a recent historical description and is not
intended to indicate further or continuing trends in the financial or other
positions of the State and its political subdivisions.
The State Constitution empowers the Legislature to authorize the issuance
of four types of bonds: general obligation bonds; bonds issued under special
improvement statutes; revenue bonds; and special purpose revenue bonds. Under
the Constitution, special purpose revenue bonds can only be authorized or
issued to finance facilities of or for, or to lend the proceeds of such bonds
to assist, manufacturing, processing, or industrial enterprises; utilities
serving the general public; health care facilities provided to the general
public by not-for-profit corporations; or low and moderate income government
housing programs.
Under the Constitution, general obligation bonds may be issued by the
State if such bonds at the time of issuance would not cause the total amount
of principal and interest payable on such bonds and on all outstanding
general obligation bonds in the current or any future fiscal year, whichever
is higher, to exceed a sum equal to 18.5% of the average of the General Fund
revenues of the State in the three fiscal years immediately preceding such
issuance.
The Constitution provides that the Legislature must establish a General
Fund expenditure ceiling that limits the rate of growth of General Fund
appropriations to the estimated rate of growth of the State's economy.
Appropriations from the General Fund for each year of the fiscal biennium or
each supplementary budget fiscal year are not to exceed the expenditure
ceiling for that fiscal year. The expenditure ceiling is determined by
considering the fiscal year 1978-1979 General Fund appropriations as the base
appropriation amount and adjusting such amount by the applicable "state
growth." State growth is established by averaging the annual percentage
change in total State personal income for the three calendar years
immediately preceding the fiscal year for which appropriations from the
General Fund are to be made.
Maximum limits for operating expenditures are established for each fiscal
year by legislative appropriations, but monies can be withheld by the
Department of Budget and Finance to insure solvency. Expenditure plans are
prepared at the beginning of each fiscal year by the respective State
departments. After the expenditure plans are evaluated by the Department of
Budget and Finance, quarterly allotments are made to each department.
Although the State has a biennial budget, appropriations are made for
individual fiscal years and may not be expended interchangeably.
The Constitution requires the establishment of a Council on Revenues to
prepare revenue estimates to be used by the Governor in budget preparation
and by the Legislature in appropriating funds and enacting revenue measures.
The Council consists of three members appointed by the Governor and two
members each appointed by the President of the Senate and the Speaker of the
House. The Council reports its estimates and revisions each June 1, September
10, January 10, and March 15. The Council also revises its estimates when it
determines that such revisions are necessary or upon request of the Governor
or the Legislature.
In a report dated September 6, 1996, the Council on Revenues forecast a
2.1% increase in General Fund tax revenues for fiscal year 1997 over that of
fiscal year 1996, but subsequently, on December 12, 1996, the Council on
Revenues revised its estimate down to an increase of 1.2%. From September
1994 through December 1995, the Council on Revenues had reduced General Fund
revenue forecasts by a total of $619 million for the period from December
1994 through June 1997. The impact of the revised revenue estimates on the
budget prompted the State administration to pursue additional measures to
reduce expenditures and enhance revenues. Executive departments were required
to cut $139 million in fiscal year 1996. A permanent reduction in the size of
the State government was undertaken in fiscal year 1996, which included
employee layoffs, elimination of vacant permanent and temporary positions,
and abolition of certain state programs. The State administration has
indicated that additional savings and revenues may be realized from an early
retirement program instituted in fiscal year 1995, transfers of excess funds
from special and revolving funds, and the resolution of protested insurance
premium
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taxes. At the end of fiscal year 1996, revenue collections totaled $3.194
billion and exceeded expenditures by $70 million. For fiscal year 1997 the
State administration has proposed that Executive departments carry their
fiscal year 1996 cuts over to fiscal year 1997. The cuts, together with other
reductions to the fiscal year 1997 budget, have resulted in the fiscal year
1997 General Fund budget being reduced by $172 million from $3.247 billion to
$3.075 billion.
Funds for State expenditures are also affected by State obligations for
the benefit of native Hawaiians.
The State has agreed to resolve a dispute concerning the wrongful use or
withdrawal by Territorial and State Executive actions of lands set aside
originally for the rehabilitation of native Hawaiians by the transfer of
certain usable State-owned lands to the Department of Hawaiian Home Lands and
the funding of $600 million in equal amounts over a period of 20 years to
allow for the appropriate planning and development of such lands.
Under the Hawaiian Home Commission Act of 1920, Congress set aside
approximately 203,500 acres of public lands as "Hawaiian home lands" for the
rehabilitation of native Hawaiians, and the State undertook the trust
responsibility under the Hawaii Admission Act to carry out the mandate of the
Hawaiian Home Commission Act. Since 1920 several thousand acres of lands
subject to the trust created by the Hawaiian Home Commission Act were either
wrongfully used or withdrawn by Territorial and State Executive actions. The
State waived sovereign immunity for breaches of such trust for the period
from and after July 1, 1988. In 1992 the Legislature approved settlement of
initial claims for such breaches and provided for compensation in the form of
fair market rent and interest on the amount past due for public use of all
such lands. The State has cancelled all wrongfully set aside Hawaiian home
lands that remain in the control of the State and paid compensation for most
uncompensated use of Hawaiian home lands for the period from statehood
through October 28, 1992; paid fair market rent for continuing uses for the
period October 28, 1992 through July 1, 1995; paid fair market rent for
certain other lands through April 4, 1996; initiated land exchanges for
Hawaiian home lands held by the Federal government under lease for nominal
rents for a period of 65 years; and initiated actions against the Federal
government through claims filed with the U.S. Department of Interior.
Because of continuing controversy over such claims, however, the State has
agreed to a final resolution of all disputes by the transfer of 16,500 acres
of additional usable State-owned lands to the Department of Hawaiian Home
Lands and the $600 million cash compensation described above.
Legislation has been enacted to implement the above described settlement
by the establishment of the Hawaiian Home Lands Trust Fund into which the
$600 million must be paid by annual payments of $30 million for 20 years
beginning in fiscal year 1995-1996. The Legislature authorized the transfer
of $30 million from the Homes Revolving Fund to satisfy the State's
obligation for fiscal year 1995-1996 and authorized and appropriated $30
million in general obligation bonds to satisfy the State's obligation for
fiscal year 1996-1997. No determination as to the source of future payments
has been made, and such payments could be made from the General Fund,
proceeds from the issuance of general obligation bonds, and/or transfer of
land or other consideration valued at fair market value at time of transfer.
In addition, the Legislature established a separate process for resolving
claims unique to individual beneficiaries of the Hawaiian Home Lands Trust
Fund for actual economic damages arising from breaches of trust caused by the
State between the date Hawaii became a State (August 21, 1959) through June
30, 1988. The Hawaiian Home Lands Trust Individual Claims Review Panel is to
provide the Legislature with findings and advisory opinions concerning such
claims, and claimants who are not satisfied with such advisory opinions or
the Legislature's response thereto may file civil actions between October 1,
1997 and September 30, 1998. A total of 3,792 claims is being considered, and
a number of those involve claims of economic damage suffered by individuals
while waiting to receive a homestead lease. The State Attorney General has
taken the position that such claims were resolved and fully compensated by
the Legislature's appropriation and 20-year commitment to make annual
deposits of $30 million in the Hawaiian Home Lands Trust Fund and therefore
are not compensable. The Legislature has received reports on fewer than 3% of
the claims filed and has not acted upon any advisory opinion recommending a
monetary award. It is uncertain what monetary amounts may ultimately be
recommended, proffered by the Legislature, or awarded by any court.
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Portions of lands now constituting State-owned lands that were ceded by
the Republic of Hawaii to the United States in 1898 and subsequently conveyed
by the United States to the State following the State's admission into the
Union are commonly referred to as "ceded lands." Twenty percent of gross
proprietary revenues derived from ceded lands that are utilized by the State
are required by State law to be paid to the Office of Hawaiian Affairs. The
Office of Hawaiian Affairs administers such funds for the benefit of native
Hawaiians. The payments are made directly out of State revenues, including
revenues from revenue producing activities such as the Harbors and Airports
Divisions of the Department of Transportation.
The Office of Hawaiian Affairs has initiated litigation against the State
alleging that the State has failed to account for and pay to the Office of
Hawaiian Affairs its proper pro rata share of proceeds and income. On October
24, 1996, the trial court hearing the action denied the State's motion to
dismiss and granted the Office of Hawaiian Affairs' four motions for partial
summary judgment. Because the action does not specify the dollar amount of
the claims and because the trial court's orders expressly did not rule as to
such amounts, the State has indicated that it is unable to predict with
reasonable certainty the potential magnitude of its liability, if any.
Nevertheless, the State concedes that an ultimate decision against the State
could have a material adverse effect on the State's financial condition. The
actual amount, if any, of the State's potential liability will not be
determined until after trial and appeals have been concluded; a process that
may take many years.
In an audit report dated September 19, 1996, the Office of Inspector
General of the U.S. Department of Transportation questioned, among other
matters, the use of $28.2 million in airport revenue to make payments to the
Office of Hawaiian Affairs since fiscal year 1992 and the loss of at least
$1.7 million in interest income as a result of such payments. The State has
defended its action by asserting that the payments represents airport
operating expenses, but it has placed all such payments since June 1996 into
an escrow account pending final resolution of this dispute.
INVESTMENT RESTRICTIONS
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In addition to the investment restrictions enumerated in the Prospectus,
the investment restrictions listed below have been adopted by the Fund as
fundamental policies, which may not be changed without the vote of a majority
of the outstanding voting securities of the Fund, as defined in the Act. Such
a majority is defined as the lesser of (a) 67% of the shares present at a
meeting of shareholders, if the holders of more than 50% of the outstanding
shares of the Fund are present or represented by proxy, or (b) more than 50%
of the outstanding shares of the Fund. For purposes of the following
restrictions: (a) an "issuer" of a security is the entity whose assets and
revenues are committed to the payment of interest and principal on that
particular security, provided that a security guaranteed by a separate entity
will be considered a separate 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. Invest in common stock.
2. Invest in securities of any issuer if, to the knowledge of the Fund,
any officer or trustee/director of the Fund or of the Investment Manager
owns more than 1/2 of 1% of the outstanding securities of such issuer, and
such officers and trustees/directors who own more than 1/2 of 1% own in
the aggregate more than 5% of the outstanding securities of such issuer.
3. Purchase or sell real estate or interests therein, although it may
purchase securities secured by real estate or interests therein.
4. Purchase or sell commodities except that the Fund may purchase or sell
financial futures contracts and related options thereon.
5. Purchase oil, gas or other mineral leases, rights or royalty
contracts, or exploration or development programs.
21
<PAGE>
6. Write, purchase or sell puts, calls, or combinations thereof, except
for options on futures contracts or options on debt securities.
7. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
8. Borrow money, except that the Fund may borrow from a bank for
temporary or emergency purposes in amounts not exceeding 5% (taken at the
lower of cost or current value) of the value of its total assets (not
including the amount borrowed).
9. Pledge its assets or assign or otherwise encumber them except to
secure borrowing effected within the limitations set forth in Restriction
8. 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.
10. Issue senior securities as defined in the Act, except insofar as the
Fund may be deemed to have issued a senior security by reason of: (a)
entering into any repurchase agreement; (b) purchasing any securities on a
when-issued or delayed delivery basis; (c) purchasing or selling any
financial futures contracts; (d) borrowing money in accordance with
restrictions described above; or (e) lending portfolio securities.
11. Make loans of money or securities, except: (a) by the purchase of
debt obligations in which the Fund may invest consistent with its
investment objective and policies; (b) by investment in repurchase
agreements; and (c) by lending its portfolio securities.
12. Make short sales of securities.
13. Purchase securities on margin, except for such short-term loans as
are necessary for the clearance of purchases of portfolio securities.
14. Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security.
15. Invest for the purpose of exercising control or management of any
other issuer.
PORTFOLIO TRANSACTIONS AND BROKERAGE
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Subject to the general supervision of the Board of Trustees, the
Investment Manager is responsible for decisions to buy and sell securities
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. During the fiscal period June 16, 1995
through November 30, 1995, and during the fiscal year ended November 30,
1996, the Fund paid no brokerage commissions.
The Investment Manager currently serves as investment manager to a number
of clients, including other investment companies, and may in the future act
as investment manager or adviser to others. It is the practice of the
Investment Manager to cause purchase and sale transactions to be allocated
among the Fund and others whose assets it manages in such manner as it deems
equitable. In making such allocations among the Fund and other client
accounts, various factors may be considered including the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the Fund and other client
accounts.
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<PAGE>
In the case of certain initial and secondary public offerings, the Investment
Manager may utilize a pro-rata allocation process based on the size of the
Dean Witter Funds involved and the number of shares available from the public
offering.
The policy of the Fund regarding purchases and sales of securities 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.
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.
23
<PAGE>
PURCHASE OF FUND SHARES
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As discussed in the Prospectus, shares of the Fund are distributed by Dean
Witter Distributors Inc. (the "Distributor"). The Distributor, a Delaware
corporation, is a wholly-owned subsidiary of DWDC. 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
Board of Trustees of the Fund, including a majority of the Trustees who are
not, and were not at the time of their vote "interested persons" (as defined
in the Act) of either party to the Distribution Agreement (the "Independent
Trustees"), approved, at its meeting held on April 20, 1995, a Distribution
Agreement appointing the Distributor exclusive distributor of the Fund's
shares and providing for the Distributor to bear distribution expenses not
borne by the Fund. By its terms, the Distribution Agreement continued in
effect until April 30, 1996, and will remain in effect from year to year
thereafter if approved by the Board. At their meeting held on April 17, 1996,
the Trustees, including all of the Independent Trustees, approved the most
recent continuation of the Distribution Agreement until April 30, 1997.
The Distributor bears all expenses it may incur in providing services
under the Distribution Agreement. Such expenses include the payment of
commissions for sales of the Fund's shares and incentive compensation to
account executives. The Distributor will also pay certain expenses in
connection with the distribution of the shares of the Fund, 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 will bear 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
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under
the Act (the "Plan") with the Distributor whereby the expenses of certain
activities in connection with the distribution of shares of the Fund are
reimbursed. The Plan was initially approved by the Trustees on April 20,
1995, and by InterCapital as the Fund's then sole shareholder on April 28,
1995, whereupon the Plan went into effect. The vote of the Trustees, which
was cast in person at a meeting called for the purpose of voting on such
Plan, included a majority of the Trustees who are not and were not at the
time of their voting interested persons of the Fund and who have and had at
the time of their votes no direct or indirect financial interest in the
operation of the Plan (the "Independent 12b-1 Trustees"). In making their
decision to adopt the Plan, the Trustees requested from DWR 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.
The Fund is authorized to reimburse the Distributor for specific expenses
the distributor incurs or plans to incur in promoting the distribution of the
Fund's shares. Reimbursement is made through monthly payments in amounts
determined in advance of each fiscal quarter by the Trustees, including a
majority of the Independent 12b-1 Trustees. The amount of each monthly
payment may in no event exceed an amount equal to a payment at the annual
rate of 0.20 of 1% of the average daily net assets of the Fund during the
month. Such payment is treated by the Fund as an expense in the year it is
accrued. No interest or other financing charges will be incurred by the
Distributor for which reimbursement payments under the Plan will be made. In
addition, no interest charges, if any, incurred on any distribution expense
incurred by the Distributor pursuant to the Plan, will be reimbursable under
the Plan.
24
<PAGE>
The fee payable by the Fund each year pursuant to the Plan 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). The fee is a payment made for personal service and/or the
maintenance of shareholder accounts.
Under the Plan, the Distributor uses its best efforts in rendering
services to the Fund, but in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations, the Distributor is
not liable to the Fund or any of its shareholders for any error of judgment
or mistake of law or for any act or omission or for any losses sustained by
the Fund or its shareholders.
The Fund accrued a total of $4,594 pursuant to the Plan of Distribution
for the fiscal year ended November 30, 1996. Such payment amounted to an
annual rate of 0.19 of 1% of the average daily net assets of the Fund. It is
estimated that the amount paid by the Fund for distribution was for expenses
which relate to compensation of sales personnel and associated overhead
expenses. The Distributor has informed the Fund that it has received
approximately $38,000 and $58,000, respectively in sales charges on sales of
the Fund's shares for the fiscal period ended November 30, 1995 and for the
fiscal year ended November 30, 1996.
The Plan had an initial term ending April 30, 1996 and will continue in
effect, from year to year thereafter, provided such continuance is approved
annually by a vote of the Trustees, including a majority of the Independent
12b-1 Trustees. At their meeting held on April 17, 1996, the Trustees,
including a majority of the Independent 12b-1 Trustees, approved the
continuation of the Plan until April 30, 1997. An amendment to increase
materially the maximum amount authorized to be spent under the Plan and
Agreement must be approved by the shareholders of the Fund, and all material
amendments to the Plan must be approved by the Trustees in the manner
described above. The Plan may be terminated at any time, without payment of
any penalty, by vote of the holders of a majority of the Independent 12b-1
Trustees or by a vote of a majority of the outstanding voting securities of
the Fund (as defined in the Act) on not more than 30 days written notice to
any other party to the Plan. The authority to make reimbursement payments to
the Distributor automatically terminates in the event of an assignment (as
defined in the Act); however the Trustees' authority under the Plan to
utilize its assets to finance the distribution of its shares would continue.
After such an assignment, the Fund's authority to make payments to its
Distributor would resume, subject to certain conditions. So long as the Plan
is in effect, the selection or nomination of the Independent 12b-1 Trustees
is committed to the discretion of the Independent 12b-1 Trustees.
Under the Plan, the Distributor provides the Fund, for review by the
Trustees, and the Trustees review, promptly after the end of each fiscal
quarter, a written report regarding the incremental distribution expenses
incurred by the Distributor on behalf of the Fund during such fiscal quarter,
which report includes (1) an itemization of the types of expenses and the
purposes therefor; (2) the amounts of such expenses; and (3) a description of
the benefits derived by the Fund. In the Trustees' quarterly review of the
Plan they consider its continued appropriateness and the level of
compensation provided therein.
No interested person of the Fund nor any Trustee of the Fund who is not an
interested person of the Fund, as defined in the Act, had any direct or
indirect financial interest in the operation of the Plan except to the extent
that the Distributor or certain of its employees may be deemed to have such
an interest as a result of benefits derived from the successful operation of
the Plan or as a result of receiving a portion of the amounts expended
thereunder by the Fund.
REDUCED SALES CHARGES
Combined Purchase Privilege. As discussed in the Prospectus, investors may
combine the current value of shares of the Fund with the purchase of Shares
of Dean Witter Tax-Exempt Securities Trust, Dean Witter High Yield Securities
Inc. and of Dean Witter Funds which are sold with a contingent deferred sales
charge ("CDSC funds") purchased in single transactions for purposes of
benefiting from the reduced sales charges. The sales charge payable on the
purchase of Shares of the Fund, Dean Witter Tax-Exempt Securities Trust and
Dean Witter High Yield Securities Inc. will be at their respective
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<PAGE>
rates applicable to the total amount of the combined concurrent purchases of
the Fund, Dean Witter Tax-Exempt Securities Trust, Dean Witter High Yield
Securities Trust Inc. and CDSC funds.
Right of Accumulation. As discussed in the Prospectus, investors may
combine the current value of shares purchased in separate transactions for
purposes of benefitting from the reduced sales charges available for
purchases of shares of the Fund totalling at least $100,000 in net asset
value. For example, if any person or entity who qualifies for this privilege
holds shares of the Fund having a current value of $25,000 and purchases
$75,000 of additional shares of the Fund, the sales charge applicable to the
$75,000 purchase would be 2.50% of the offering price.
The Distributor must be notified by the dealer or the shareholder at the
time a purchase order is placed that the purchase qualifies for the reduced
charge under the Right of Accumulation. Similar notification must be made in
writing by the dealer or shareholder when such an order is placed by mail.
The reduced sales charge will not be granted if: (a) such notification is not
furnished at the time of the order; or (b) a review of the records of the
Distributor or Dean Witter Trust Company (the "Transfer Agent") fails to
confirm the investor's represented holdings.
Letter of Intent. As discussed in the prospectus under the caption
"Reduced Sales Charges," reduced sales charges are available to investors who
enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund from the Distributor or from a
single dealer which has entered into a Selected Dealer Agreement with the
Distributor.
A Letter of Intent permits an investor to establish a total investment
goal to be achieved by any number of purchases over a thirteen-month period.
Each purchase made during the period will receive the reduced sales
commission applicable to the amount represented by the goal, as if it were a
single purchase. A number of shares equal in value to 5% of the dollar amount
of the Letter of Intent will be held in escrow by the Transfer Agent, in the
name of the shareholder. The initial purchase under a Letter of Intent must
be equal to at least 5% of the stated investment goal.
The Letter of Intent does not obligate the Investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the investor is required to
pay the difference between the sales charge otherwise applicable to the
purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the
Distributor is authorized by the shareholder to liquidate a sufficient number
of his or her escrowed shares to obtain such difference.
If the goal is exceeded and purchases pass the next sales charge level,
the sales charge on the entire amount of the purchase that results in passing
that level and on subsequent purchases will be subject to further reduced
sales charges in the same manner as set forth above under Right of
Accumulation, but there will be no retroactive reduction of sales charges on
previous purchases.
At any time while a Letter of Intent is in effect, a shareholder may, by
written notice to the Distributor, increase the amount of the stated goal. In
that event, only shares purchased during the previous 90-day period and still
owned by the shareholder will be included in the new sales charge reduction.
The 5% escrow and minimum purchase requirements will be applicable to the new
stated goal. Investors electing to purchase shares of the Fund pursuant to a
Letter of Intent should carefully read such Letter of Intent.
Acquisition of Certain Investment Companies. The public offering price of
a share of the Fund may be reduced to the net asset value per share in
connection with the acquisition of the assets of, or merger or consolidation
with, a personal holding company or public or private investment company. The
value of the assets or company acquired in a tax-free transaction may, in
appropriate cases, be adjusted to reduce possible adverse tax consequences to
the Fund which might result from an acquisition of assets having net
unrealized appreciation which is disproportionately higher at the time of
acquisition than the realized or unrealized appreciation of the Fund.
DETERMINATION OF NET ASSET VALUE
As discussed in the Prospectus, the net asset value of a share of the Fund
is determined once daily at 4:00 p.m. (or, on days when the New York Stock
Exchange closes prior to 4:00 p.m., at such earlier
26
<PAGE>
time), New York time on each day that the New York Stock Exchange is open.
The New York Stock Exchange currently observes the following holidays: New
Year's Day; 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 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
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.
Targeted Dividends. (Service Mark) 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 Hawaii 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 (without sales charge) of the selected
Dean Witter Fund as of the close of business on the monthly payment date and
will begin to earn dividends, if any, in the selected Dean Witter Fund the
next business day. To participate in the Targeted Dividends program,
shareholders should contact their DWR or other selected broker-dealer account
executive or the Transfer Agent. Shareholders of the Fund must be
shareholders of the Dean Witter Fund targeted to receive investments from
dividends at the time they enter the Targeted Dividends program. Investors
should review the prospectus of the targeted Dean Witter Fund before entering
the program.
EasyInvest. (Service Mark) 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
(without sales charge) next determined by returning the check or the proceeds
to the Transfer Agent within 30 days after the payment date. If the
shareholder returns the proceeds of a
27
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dividend or distribution, such funds must be accompanied by a signed
statement indicating that the proceeds constitute a dividend or distribution
to be invested. Such investment will be made at the net asset value per share
(without sales charge) 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 through the Shareholder
Investment Account by sending a check in any amount, not less than $100,
payable to Dean Witter Hawaii Municipal Trust, directly to the Fund's
Transfer Agent. After deduction of the applicable sales charge, the balance
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 investment
account.
Systematic Withdrawal Plan. As discussed in the Prospectus, a 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 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.
Dividends and capital gains distributions on shares held under the
Systematic Withdrawal Plan will be invested in additional full and fractional
shares at net asset value (without a sales charge). 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 Systematic 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.
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 Systematic Withdrawal Plan Account (see "Redemptions and Repurchases") at
any time.
EXCHANGE PRIVILEGE
As discussed in the Prospectus, the Fund makes available to its
shareholders an Exchange Privilege whereby shareholders of the Fund may
exchange their shares for shares of other Dean Witter Funds sold with a
front-end (at the time of purchase) sales charge ("FESC funds"), for shares
of Dean Witter Funds sold with a contingent deferred sales charge ("CDSC
funds"), for shares of five Dean Witter Funds which are money market funds,
and for shares of Dean Witter Limited Term Municipal Trust, Dean Witter
Short-Term Bond Fund, Dean Witter Short-Term U.S. Treasury Trust, Dean Witter
Balanced Income Fund, Dean Witter Balanced Growth Fund and Dean Witter
Intermediate Term U.S. Treasury Trust (the foregoing eleven non-FESC or CDSC
funds are hereinafter referred to for purposes of this section as the
"Exchange Funds"). Exchanges may be made after the shares of the CDSC fund or
FESC fund acquired by purchase (not by exchange or dividend reinvestment)
have been held for thirty days.
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There is no holding period for exchanges of shares acquired by exchange or
dividend reinvestment. However, shares of CDSC funds, including shares
acquired in exchange for shares of FESC funds, may not be exchanged for
shares of FESC funds. Thus, shareholders who exchange their Fund shares for
shares of CDSC funds may subsequently exchange those shares for shares of
other CDSC funds or for shares of Exchange Funds, but may not reacquire FESC
fund shares by exchange. 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).
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.
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 is $5,000 for Dean Witter
Special Value Fund. The minimum initial investment for all other Dean Witter
Funds for which the Exchange Privilege is available is $1,000.) Upon exchange
into an Exchange Fund, the shares of that fund will be held in a special
Exchange Privilege Account separately from accounts of those shareholders who
have acquired their shares directly from that fund. As a result, certain
services normally available to shareholders of 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
29
<PAGE>
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.
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. 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.
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.
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<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 thirty days after the date
of the redemption or repurchase, reinstate any portion or all of the proceeds
of such redemption or repurchase in shares of the Fund at the net asset value
(without sales charge) 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
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minimum tax. 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.
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
32
<PAGE>
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 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. For the
30-day period ended November 30, 1996, the Fund's yield, calculated pursuant
to the formula described above was 5.06%. During this period, InterCapital
waived its management fee and assumed certain expenses of the Fund. Had the
Fund borne these expenses and paid the management fee for the period, the
yield for the 30-day period would have been 2.60%.
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 tax-equivalent yield, based upon a Federal personal income tax bracket
of 45.6% for the 30-day period ended November 30, 1996 was 9.31% based upon
the yield calculated above. Without the waiver of the management fee or the
assumption of certain expenses, the Fund's tax-equivalent yield for the
period would have been 4.80%.
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. For the purpose of
this calculation, it is assumed that all dividends and distributions are
reinvested. The formula for computing the average annual total return
involves a percentage obtained by dividing the ending redeemable value by the
amount of the initial investment, taking a root of the quotient (where the
root is equivalent to the number of years in the period) and subtracting 1
from the result. The average annual total return of the Fund for the fiscal
year ended November 30, 1996 and for the period June 16, 1995 (commencement of
operations) through November 30, 1996 was 2.47% and 4.60%, respectively.
During this period, InterCapital waived its management fee and assumed
certain expenses of the Fund. Had the fund borne these expenses and paid
these fees during the stated periods, the average annual total return for the
periods would have been 0.72% and 3.08%, respectively.
In addition to the foregoing, the Fund may advertise its total return over
different periods of time by means of aggregate, average, year-by-year or
other types of total return figures. Such calculation may or may not reflect
the imposition of the maximum front-end 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 sales charge. Based
on this calculation, the Fund's total return for the fiscal year ended
November 30, 1996 and for the period June 16, 1995 (commencement of
operations) through November 30, 1996 was 5.64% and 6.81%, respectively.
In addition, the Fund may compute its aggregate total return for specified
periods by determining the aggregate percentage rate which will result in the
ending value of a hypothetical $1,000 investment made at the beginning of the
period. For the purpose of this calculation, it is assumed that all dividends
and distributions are reinvested. The formula for computing aggregate total
return involves a percentage obtained by dividing the ending value (without
reduction for any sales charge) by the initial $1,000 investment and
subtracting 1 from the result. Based on the foregoing calculation, the Fund's
total return for the fiscal year ended November 30, 1996 and for the period
June 16, 1995 (commencement of operations) through November 30, 1996 was
5.64% and 10.08%, respectively.
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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 and multiplying by $9,700, $48,500 or $97,500
($10,000, $50,000 or $100,000 adjusted for a 3.0%, 3.0% or 2.50% sales
charge, respectively). Investments of $10,000, $50,000 and $100,000 in the
Fund since inception would have grown to $10,678, $53,389, and $106,778,
respectively, at November 30, 1996.
SHARES OF THE FUND
- -----------------------------------------------------------------------------
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 shareholders of the
Fund are entitled to a full vote for each full share held. 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 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). The Trustees have not
presently authorized any such additional series or classes of shares.
The Declaration of Trust further provides that no Trustee, officer,
employee or agent of the Fund is liable to the Fund or to a shareholder, nor
is any Trustee, officer, employee or agent liable to any third persons in
connection with the affairs of the Fund, except as such liability may arise
from his/her or its own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his duties. It also provides that all third persons
shall look solely to the Fund property for satisfaction of claims arising in
connection with the affairs of the Fund. With the exceptions stated 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, 90 Washington Street, New York, New York 10286 is
the Custodian of the Fund's assets. The Custodian has no part in deciding the
Fund's investment policies or which securities 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.
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INDEPENDENT ACCOUNTANTS
- -----------------------------------------------------------------------------
Price Waterhouse LLP serves as the independent accountants of the Fund.
The independent accountants are responsible for auditing the annual financial
statements of the Fund.
REPORTS TO SHAREHOLDERS
- -----------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports
showing the Fund's portfolio and other information. An annual report,
containing financial statements audited by independent accountants, will be
sent to shareholders each year.
The Fund's fiscal year is November 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.
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 financial statements of the Fund for the year ended November 30, 1996
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 LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
REGISTRATION STATEMENT
- -----------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
35
<PAGE>
DEAN WITTER HAWAII MUNICIPAL TRUST
PORTFOLIO OF INVESTMENTS November 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------- ---------------------------------------------------------------- -------- ---------- -----------
<S> <C> <C> <C> <C>
HAWAII TAX-EXEMPT MUNICIPAL BONDS+ (93.9%)
General Obligations (17.5%)
$ 100 Hawaii, 1993 Ser CH ............................................ 6.00 % 11/01/10 $108,680
150 Honolulu City & County, Ser 1996 A (FGIC) ...................... 5.50 09/01/15 151,020
100 Kauai County, Refg 1992 Ser C (AMBAC) .......................... 5.15 08/01/00 103,059
100 Maui County, 1996 Ser A (MBIA) ................................. 5.75 06/01/13 103,577
100 Puerto Rico, Public Improvement Ser 1996 ....................... 5.50 07/01/17 98,781
- ----------- -----------
550 565,117
- ----------- -----------
Educational Facilities Revenue (4.6%)
150 University of Puerto Rico, Ser M (MBIA) ........................ 5.25 06/01/25 148,467
- ----------- -----------
Hospital Revenue (12.1%)
Hawaii Department of Budget & Finance,
200 Kapiolani Health Care Ser 1996 ................................ 6.25 07/01/21 207,504
100 Queens Health 1996 Ser A ...................................... 5.875 07/01/11 102,573
75 Puerto Rico Industrial, Tourist, Educational, Medical &
Environmental Control Facilities Financing Authority, Hospital
Auxilio Mutuo
1995 Ser A (MBIA) ............................................. 6.25 07/01/24 80,085
- ----------- -----------
375 390,162
- ----------- -----------
Industrial Development/Pollution Control Revenue (13.1%)
Hawaii Department of Budget & Finance,
100 Hawaiian Electric Co Ser 1995 A (AMT) (MBIA) .................. 6.60 01/01/25 109,456
200 Hawaiian Electric Co Ser 1996 A (AMT) (MBIA) .................. 6.20 05/01/26 209,834
100 Puerto Rico Ports Authority, American Airlines Inc 1996 Ser A
(AMT) ......................................................... 6.25 06/01/26 102,473
- ----------- -----------
400 421,763
- ----------- -----------
Mortgage Revenue -Multi-Family (7.1%)
Hawaii Housing Finance & Development Corporation,
100 Affordable Rental 1995 Ser A .................................. 6.10 07/01/30 101,081
125 University of Hawaii Faculty Ser 1995 (AMBAC) ................. 5.65 10/01/16 127,077
- ----------- -----------
225 228,158
- ----------- -----------
Mortgage Revenue -Single Family (10.7%)
300 Hawaii Housing Finance & Development Corporation, Purchase
1994 Ser B (MBIA) ............................................. 5.90 07/01/27 305,031
40 Puerto Rico Housing Bank & Finance Agency, GNMA/FNMA
Collateralized Portfolio I (AMT) .............................. 6.10 10/01/15 40,826
- ----------- -----------
340 345,857
- ----------- -----------
Transportation Facilities Revenue (16.5%)
Hawaii,
275 Airports Third Refg Ser of 1994 (AMT) (AMBAC) ................. 5.75 07/01/09 284,614
150 Highway Ser 1996 .............................................. 5.25 07/01/16 147,116
100 Puerto Rico Highway & Transportation Authority, Refg Ser V ..... 5.75 07/01/18 100,041
- ----------- -----------
525 531,771
- ----------- -----------
SEE NOTES TO FINANCIAL STATEMENTS
36
<PAGE>
DEAN WITTER HAWAII MUNICIPAL TRUST
PORTFOLIO OF INVESTMENTS November 30, 1996, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------- ---------------------------------------------------------------- -------- ---------- -----------
Water & Sewer Revenue (9.2%)
$ 200 Honolulu Board of Water Supply, Ser 1996 ....................... 5.80% 07/01/16 $ 204,908
100 Puerto Rico Aqueduct & Sewer Authority, Refg Ser 1995 .......... 5.00 07/01/19 92,720
- ----------- -----------
300 297,628
- ----------- -----------
Other Revenue (3.1%)
100 Puerto Rico Industrial, Tourist, Educational, Medical &
Environmental Control Facilities Financing Authority, Teachers
Retirement 1996 Ser B ......................................... 5.50 07/01/16 100,420
- ----------- -----------
$2,965 TOTAL HAWAII TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $2,938,569) (a) 93.9% 3,029,343
===========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES .......................... 6.1 195,642
---------- -----------
NET ASSETS .............................................................. 100.0% $3,224,985
========== ===========
</TABLE>
- ------------
AMT Alternative Minimum Tax.
+ Puerto Rico issues represent 23.7% of net assets.
(a) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross and net unrealized
appreciation is $90,774.
Bond Insurance:
AMBAC AMBAC Indemnity Corporation.
FGIC Financial Guaranty Insurance Company.
MBIA Municipal Bond Investors Assurance Corporation.
SEE NOTES TO FINANCIAL STATEMENTS
37
<PAGE>
DEAN WITTER HAWAII MUNICIPAL TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $2,938,569) ......................... $3,029,343
Cash .................................................. 132,971
Interest receivable ................................... 64,671
Deferred organizational expenses ...................... 42,505
Receivable from affiliate ............................. 30,790
------------
TOTAL ASSETS ........................................ 3,300,280
------------
LIABILITIES:
Payable for:
Dividends to shareholders ............................ 1,347
Plan of distribution fee ............................. 522
Organizational expenses ............................... 42,539
Accrued expenses and other payables ................... 30,887
------------
TOTAL LIABILITIES ................................... 75,295
------------
NET ASSETS:
Paid-in-capital ....................................... 3,151,505
Net unrealized appreciation ........................... 90,774
Accumulated undistributed net investment income ...... 919
Accumulated net realized loss ......................... (18,213)
------------
NET ASSETS .......................................... $3,224,985
============
NET ASSET VALUE PER SHARE,
324,125 shares outstanding (unlimited shares
authorized
of $.01 par value) ................................... $9.95
============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 3.09% of net asset value)* .... $10.26
============
</TABLE>
- ------------
* On sales of $100,000 or more, the offering price is reduced.
SEE NOTES TO FINANCIAL STATEMENTS
38
<PAGE>
DEAN WITTER HAWAII MUNICIPAL TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1996
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME .......................... $ 125,108
-----------
EXPENSES
Professional fees ........................ 58,357
Shareholder reports and notices .......... 32,587
Organizational expenses .................. 12,027
Investment management fee ................ 8,265
Plan of distribution fee ................. 4,594
Registration fees ........................ 3,628
Transfer agent fees and expenses ........ 2,487
Custodian fees ........................... 670
Other .................................... 4,506
-----------
TOTAL EXPENSES BEFORE EXPENSE OFFSET
AND
AMOUNTS WAIVED/ASSUMED ................ 127,121
LESS: AMOUNTS WAIVED/ASSUMED .......... (121,862)
LESS: EXPENSE OFFSET .................. (665)
-----------
TOTAL EXPENSES AFTER EXPENSE OFFSET AND
AMOUNTS WAIVED/ASSUMED ................ 4,594
-----------
NET INVESTMENT INCOME .................. 120,514
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss ........................ (18,128)
Net change in unrealized appreciation ... 55,522
-----------
NET GAIN ............................... 37,394
-----------
NET INCREASE ............................. $ 157,908
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
39
<PAGE>
DEAN WITTER HAWAII MUNICIPAL TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JUNE 16, 1995*
ENDED THROUGH
NOVEMBER 30, 1996 NOVEMBER 30, 1995
- ------------------------------------------------------ ----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................. $ 120,514 $ 22,031
Net realized gain (loss) .............................. (18,128) 385
Net change in unrealized appreciation ................. 55,522 35,252
----------------- ------------------
NET INCREASE ........................................ 157,908 57,668
Dividends from net investment income .................. (120,065) (22,031)
Net increase from transactions in shares of beneficial
interest ............................................. 1,676,974 1,374,524
----------------- ------------------
NET INCREASE ........................................ 1,714,817 1,410,161
NET ASSETS:
Beginning of period ................................... 1,510,168 100,007
----------------- ------------------
END OF PERIOD
(Including undistributed net investment income of
$919 and $0, respectively) .......................... $3,224,985 $1,510,168
================= ==================
</TABLE>
- ------------
* Commencement of operations.
SEE NOTES TO FINANCIAL STATEMENTS
40
<PAGE>
DEAN WITTER HAWAII MUNICIPAL TRUST
NOTES TO FINANCIAL STATEMENTS November 30, 1996
1. Organization and Accounting Policies
Dean Witter Hawaii Municipal Trust (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a non-diversified,
open-end management investment company. The Fund's investment objective is to
provide a high level of current income which is exempt from both federal and
State of Hawaii income taxes consistent with the preservation of capital. The
Fund was organized as a Massachusetts business trust on March 14, 1995 and
had no operations other than those relating to organizational matters and the
issuance of 10,310 shares of beneficial interest for $100,007 to Dean Witter
InterCapital Inc. (the "Investment Manager") to effect the Fund's initial
capitalization. The Fund commenced operations on June 16, 1995.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates. The following is a summary of significant accounting
policies:
A. VALUATION OF INVESTMENTS -- Portfolio securities are valued by an outside
independent pricing service approved by the Trustees. The pricing service has
informed the Fund that in valuing the portfolio securities, it uses both a
computerized matrix of tax-exempt securities and evaluations by its staff, in
each case based on information concerning market transactions and quotations
from dealers which reflect the bid side of the market each day. The portfolio
securities are thus valued by reference to a combination of transactions and
quotations for the same or other securities believed to be comparable in
quality, coupon, maturity, type of issue, call provisions, trading
characteristics and other features deemed to be relevant. Short-term debt
securities having a maturity date of more than sixty days at time of purchase
are valued on a mark-to-market basis until sixty days prior to maturity and
thereafter at amortized cost based on their value on the 61st day. Short-term
debt securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on
the trade date (date the order to buy or sell is executed). Realized gains
and losses on security transactions are determined by the identified cost
method. Discounts are accreted and premiums are amortized over the life of
the respective securities. Interest income is accrued daily.
C. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable and nontaxable income to its
shareholders. Accordingly, no federal income tax provision is required.
41
<PAGE>
DEAN WITTER HAWAII MUNICIPAL TRUST
NOTES TO FINANCIAL STATEMENTS November 30, 1996, continued
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized
capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends
and distributions which exceed net investment income and net realized capital
gains for financial reporting purposes but not for tax purposes are reported
as dividends in excess of net investment income or distributions in excess of
net realized capital gains. To the extent they exceed net investment income
and net realized capital gains for tax purposes, they are reported as
distributions of paid-in-capital.
E. ORGANIZATIONAL EXPENSES -- The Investment Manager paid the organizational
expenses of the Fund in the amount of approximately $60,000 which will be
reimbursed for the full amount thereof, exclusive of amounts assumed of
$17,495. Such expenses have been deferred and are being amortized on the
straight-line method over a period not to exceed five years from the
commencement of operations.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, calculated daily and payable monthly, by applying
the annual rate of 0.35% to the Fund's average daily net assets.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities,
equipment, clerical, bookkeeping and certain legal services and pays the
salaries of all personnel, including officers of the Fund who are employees
of the Investment Manager. The Investment Manager also bears the cost of
telephone services, heat, light, power and other utilities provided to the
Fund.
The Investment Manager has undertaken to assume all operating expenses
(except 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 June 30, 1997, whichever occurs first.
42
<PAGE>
DEAN WITTER HAWAII MUNICIPAL TRUST
NOTES TO FINANCIAL STATEMENTS November 30, 1996, continued
3. PLAN OF DISTRIBUTION
Dean Witter Distributors Inc. (the "Distributor"), an affiliate of the
Investment Manager, is the distributor of the Fund's shares and in accordance
with a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the
Act, finances certain expenses in connection therewith.
Under the Plan, the Distributor bears the expense of all promotional and
distribution related activities on behalf of the Fund, except for expenses
that the Trustees determine to reimburse, as described below. The following
activities and services may be provided by the Distributor, Dean Witter
Reynolds Inc. ("DWR"), an affiliate of the Investment Manager and
Distributor, its affiliates and other dealers who have entered into selected
dealer agreements with the Distributor under the Plan: (1) compensation to,
and expenses of, account executives of DWR, other employees and selected
broker-dealers, including overhead and telephone expenses; (2) sales
incentives and bonuses to sales representatives and to marketing personnel in
connection with promoting sales of the Fund's shares; (3) expenses incurred
in connection with promoting sales of the Fund's shares; (4) preparation,
printing and distributing sales literature; and (5) providing advertising and
promotional activities, including direct mail solicitation and television,
radio, newspaper, magazine and other media advertisements.
The Fund is authorized to reimburse the Distributor for specific expenses the
Distributor incurs or plans to incur in promoting the distribution of the
Fund's shares. The amount of each monthly reimbursement payment may in no
event exceed an amount equal to a payment at the annual rate of 0.20% of the
Fund's average daily net assets during the month. Expenses incurred by the
Distributor pursuant to the Plan in any fiscal year will not be reimbursed by
the Fund through payments accrued in any subsequent fiscal year. For the year
ended November 30, 1996, the distribution fee was accrued at the annual rate
of 0.19%.
The Distributor has informed the Fund that for the year ended November 30,
1996, it received approximately $58,000 in commissions from the sale of
shares of the Fund's beneficial interest. Such commissions are deducted from
the proceeds of sales of beneficial interest and are not an expense of the
Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities,
excluding short-term investments, for the year ended November 30, 1996
aggregated $2,727,943 and $1,126,939 respectively.
Dean Witter Trust Company, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At November 30, 1996, the Fund had
transfer agent fees and expenses payable of approximately $200.
43
<PAGE>
DEAN WITTER HAWAII MUNICIPAL TRUST
NOTES TO FINANCIAL STATEMENTS November 30, 1996, continued
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JUNE 16, 1995*
ENDED THROUGH
NOVEMBER 30, NOVEMBER 30,
1996 1995
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Sold ...................... 221,179 $2,156,449 141,805 $1,371,598
Reinvestment of dividends 7,541 73,494 1,510 14,596
---------- ------------ ---------- ------------
228,720 2,229,943 143,315 1,386,194
Repurchased ............... (57,016) (552,969) (1,204) (11,670)
---------- ------------ ---------- ------------
Net increase .............. 171,704 $1,676,974 142,111 $1,374,524
========== ============ ========== ============
</TABLE>
* Commencement of operations.
6. FEDERAL INCOME TAX STATUS
At November 30, 1996, the Fund had a net capital loss carryover of
approximately $18,200 which will be available through November 30, 2004 to
offset future capital gains to the extent provided by regulations.
44
<PAGE>
Dean Witter Hawaii Municipal Trust
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JUNE 16, 1995*
ENDED THROUGH
NOVEMBER 30, 1996 NOVEMBER 30, 1995
- --------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........................... $ 9.91 $ 9.70
----------------- -----------------
Net investment income .......................................... 0.50 0.19
Net realized and unrealized gain ............................... 0.04 0.21
----------------- -----------------
Total from investment operations ............................... 0.54 0.40
Less dividends from net investment income ...................... (0.50) (0.19)
----------------- -----------------
Net asset value, end of period ................................. $ 9.95 $ 9.91
================= =================
TOTAL INVESTMENT RETURN+ ...................................... 5.64% 4.21%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses before expense offset and after amounts waived/assumed 0.19%(4) 0.20%(2)(3)
Net investment income .......................................... 5.09%(4) 4.69%(2)(3)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........................ $3,225 $1,510
Portfolio turnover rate ........................................ 51% 14%(1)
</TABLE>
- ------------
* Commencement of operations.
+ Does not reflect the deduction of sales load. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) If the Investment Manager had not assumed expenses and waived the
management fee, the expense and net investment income ratios, after
application of the Fund's state expense limitation, would have been
2.70% and 2.19%, respectively, which reflect the effect of expense
offsets of 0.10%.
(4) If the Investment Manager had not assumed expenses and waived the
management fee, the expense and net investment income ratios, after
application of the Fund's state expense limitation, would have been
2.69% and 2.59%, respectively, which reflect the effect of expense
offsets of 0.03%.
SEE NOTES TO FINANCIAL STATEMENTS
45
<PAGE>
DEAN WITTER HAWAII MUNICIPAL TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER HAWAII MUNICIPAL TRUST
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Dean Witter
Hawaii Municipal Trust (the "Fund") at November 30, 1996, the results of its
operations for the year then ended, and the changes in its net assets and the
financial highlights for the year then ended and for the period June 16, 1995
(commencement of operations) through November 30, 1995, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at
November 30, 1996 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
January 10, 1997
1996 FEDERAL TAX NOTICE (unaudited)
During the year ended November 30, 1996, the Fund paid to shareholders
$0.50 per share from net investment income. All of the Fund's dividends
from net investment income were exempt interest dividends, excludable
from gross income for Federal income tax purposes.
<PAGE>
APPENDIX
RATINGS OF INVESTMENTS
- -----------------------------------------------------------------------------
Moody's Investors Service Inc. ("Moody's")
MUNICIPAL BOND RATINGS
<TABLE>
<CAPTION>
<S> <C>
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 a 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.
</TABLE>
Conditional Rating: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These bonds 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.
47
<PAGE>
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.
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.
48
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay principal and
differs from the highest-rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal although they
are somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than for debt
in higher-rated categories.
Bonds rated AAA, AA, A and BBB are considered investment grade bonds.
BB Debt rated "BB" has less near-term vulnerability to default than other speculative
grade debt. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which would lead to inadequate capacity or
willingness to pay interest and repay principal.
B Debt rated "B" has a greater vulnerability to default but presently has the capacity
to meet interest payments and principal repayments. Adverse business, financial or
economic conditions would likely impair capacity or willingness to pay interest and
repay principal.
CCC Debt rated "CCC" has a current identifiable vulnerability to default, and is dependent
upon favorable business, financial and economic conditions to meet timely payments of
interest and repayments of principal. In the event of adverse business, financial or
economic conditions, it is not likely to have the capacity to pay interest and repay
principal.
CC The rating "CC" is typically applied to debt subordinated to senior debt which is
assigned an actual or implied "CCC" rating.
C The rating "C" is typically applied to debt subordinated to senior debt which is
assigned an actual or implied "CCC-" debt rating.
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.
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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.
</TABLE>
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+).
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.
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