AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 13, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
---------------------
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. [ ]
---------------------
MORGAN STANLEY DEAN WITTER
TAX-EXEMPT SECURITIES TRUST
(Exact Name of Registrant as Specified in Charter)
(formerly named Dean Witter Tax-Exempt Securities Trust)
TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
(Address of Principal Executive Offices)
212-392-1600
(Registrant's Telephone Number)
BARRY FINK, ESQ.
Two World Trade Center
New York, New York 10048
(Name and Address of Agent for Service)
---------------------
COPY TO:
STUART M. STRAUSS, ESQ.
Mayer, Brown & Platt
1675 Broadway
New York, New York 10019
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
The Exhibit Index is located on page [ ]
PURSUANT TO RULE 429, THIS REGISTRATION STATEMENT RELATES TO SHARES
PREVIOUSLY REGISTERED BY THE REGISTRANT ON FORM N-1A (REGISTRATION NOS.
2-66268; 811-2979).
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FORM N-14
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933
PART A OF FORM N-14 ITEM NO. PROXY STATEMENT AND PROSPECTUS HEADING
- - ------------------------------ -----------------------------------------------------------
1 (a) ........................ Cross Reference Sheet
(b) ........................ Front Cover Page
(c) ........................ *
2 (a) ........................ Available Information -- Back Cover Page
(b) ........................ Table of Contents
3 (a) ........................ Fee Table
(b) ........................ Synopsis
(c) ........................ Principal Risk Factors
4 (a) ........................ The Reorganization
(b) ........................ The Reorganization -- Capitalization Table (Unaudited)
5 (a) ........................ Registrant's Prospectus
(b) ........................ *
(c) ........................ *
(d) ........................ *
(e) ........................ Available Information
(f) ........................ Available Information
6 (a) ........................ Front Cover Page, Introduction Synopsis, Principal Risk
Factors, Comparison of Investment Objectives, Policies and
Restrictions, Additional Matters Regarding MIT III,
Additional Information About MIT III and Tax Exempt,
Available Information
(b) ........................ Available Information
(c) ........................ *
(d) ........................ *
7 (a) ........................ Introduction -- General, Record Date; Share Information,
Expenses of Solicitation, Proxies, Vote Required
(b) ........................ *
(c) ........................ Introduction; The Reorganization -- Appraisal Rights
8 (a) ........................ The Reorganization
(b) ........................ *
9 .......................... *
PART B OF FORM N-14 ITEM NO. STATEMENT OF ADDITIONAL INFORMATION HEADING
- - ------------------------------ --------------------------------------------------------
10(a) ........................ Cover Page
(b) ........................ *
11 .......................... Table of Contents
12(a) ........................ Additional Information about Morgan Stanley Dean Witter
Tax-Exempt Securities Trust
(b) ........................ *
(c) ........................ *
13(a) ........................ *
(b) ........................ Additional Information about MIT III
(c) ........................ *
14 ........................ Registrant's Annual Report for the fiscal year ended
December 31, 1999 and Registrant's Semi-Annual Report
for the six months ended June 30, 2000. Morgan Stanley
Dean Witter Municipal Income Trust III's Annual Report
for the fiscal year ended August 31, 2000.
PART C OF FORM N-14 ITEM NO. OTHER INFORMATION HEADING
- - ------------------------------ --------------------------
15 .......................... Indemnification
16 .......................... Exhibits
17 .......................... Undertakings
- - ----------
* Not Applicable or negative answer
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(800) 869-NEWS
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 23, 2001
TO THE SHAREHOLDERS OF MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III:
Notice is hereby given of a Special Meeting of the Shareholders of Morgan
Stanley Dean Witter Municipal Income Trust III ("MIT III"), to be held in the
Career Development Room, Sixty-First Floor, Two World Trade Center, New York,
New York 10048, at 9:00 A.M., New York time, on January 23, 2001, and any
adjournments thereof (the "Meeting"), for the following purposes:
1. To consider and vote upon an Agreement and Plan of Reorganization, dated
August 24, 2000 (the "Reorganization Agreement"), between MIT III and
Morgan Stanley Dean Witter Tax-Exempt Securities Trust ("Tax-Exempt"),
pursuant to which substantially all of the assets of MIT III would be
combined with those of Tax-Exempt and shareholders of MIT III would become
shareholders of Tax-Exempt receiving Class D shares of Tax-Exempt with a
value equal to the net asset value of their holdings in MIT III (the
"Reorganization"); and
2. To act upon such other matters as may properly come before the Meeting.
The Reorganization is more fully described in the accompanying Proxy
Statement and Prospectus and a copy of the Reorganization Agreement is attached
as Exhibit A thereto. Shareholders of record at the close of business on
October 16, 2000 are entitled to notice of, and to vote at, the Meeting. Please
read the Proxy Statement and Prospectus carefully before telling us, through
your proxy or in person, how you wish your shares to be voted. Alternatively,
if you are eligible to vote telephonically by touchtone telephone or
electronically on the Internet (as discussed in the enclosed Proxy Statement)
you may do so in lieu of attending the Meeting in person. THE BOARD OF TRUSTEES
OF MIT III RECOMMENDS YOU VOTE IN FAVOR OF THE REORGANIZATION. WE URGE YOU TO
SIGN, DATE AND MAIL THE ENCLOSED PROXY PROMPTLY.
By Order of the Board of Trustees,
BARRY FINK,
Secretary
October , 2000
- - -------------------------------------------------------------------------------
YOU CAN HELP AVOID THE NECESSITY AND EXPENSE OF SENDING FOLLOW-UP LETTERS
TO ENSURE A QUORUM BY PROMPTLY RETURNING THE ENCLOSED PROXY. IF YOU ARE
UNABLE TO BE PRESENT IN PERSON, PLEASE FILL IN, SIGN AND RETURN THE
ENCLOSED PROXY IN ORDER THAT THE NECESSARY QUORUM BE REPRESENTED AT THE
MEETING. THE ENCLOSED ENVELOPE REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES. AS DISCUSSED IN THE ENCLOSED PROXY STATEMENT, CERTAIN SHAREHOLDERS
WILL BE ABLE TO VOTE TELEPHONICALLY BY TOUCHTONE TELEPHONE OR
ELECTRONICALLY ON THE INTERNET BY FOLLOWING INSTRUCTIONS ON THEIR PROXY
CARDS OR ON THE ENCLOSED VOTING INFORMATION CARD.
- - -------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER
TAX-EXEMPT SECURITIES TRUST
TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
(800) 869-NEWS
ACQUISITION OF THE ASSETS OF
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
BY AND IN EXCHANGE FOR CLASS D SHARES OF
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
This Proxy Statement and Prospectus is being furnished to shareholders of
Morgan Stanley Dean Witter Municipal Income Trust III ("MIT III"), in
connection with an Agreement and Plan of Reorganization, dated August 24, 2000
(the "Reorganization Agreement"), pursuant to which substantially all the
assets of MIT III, a closed-end management investment company, will be combined
with those of Morgan Stanley Dean Witter Tax-Exempt Securities Trust
("Tax-Exempt"), an open-end management investment company, in exchange for
Class D shares of Tax-Exempt (the "Reorganization"). As a result of this
transaction, shareholders of MIT III will become shareholders of Tax-Exempt and
will receive Class D shares of Tax-Exempt with a value equal to the net asset
value of their holdings in MIT III. The terms and conditions of this
transaction are more fully described in this Proxy Statement and Prospectus and
in the Reorganization Agreement between MIT III and Tax-Exempt, attached hereto
as Exhibit A. The address of MIT III is that of Tax-Exempt set forth above.
This Proxy Statement also constitutes a Prospectus of Tax-Exempt, which is
dated October , 2000, filed by Tax-Exempt with the Securities and Exchange
Commission (the "Commission") as part of its Registration Statement on Form
N-14 (the "Registration Statement").
Tax-Exempt is an open-end diversified management investment company whose
investment objective is to provide a high level of current income exempt from
federal income tax consistent with preservation of capital. The fund seeks to
achieve its objective by investing at least 80% of its assets in securities
that pay interest exempt from federal income taxes.
This Proxy Statement and Prospectus sets forth concisely information about
Tax-Exempt that shareholders of MIT III should know before voting on the
Reorganization Agreement. A copy of the Prospectus for Tax-Exempt dated
February 24, 2000, is attached as Exhibit B and incorporated herein by
reference. Also enclosed and incorporated herein by reference is Tax-Exempt's
Annual Report for the fiscal year ended December 31, 1999 and the succeeding
Semi-Annual Report for the six months ended June 30, 2000. A Statement of
Additional Information relating to the Reorganization, described in this Proxy
Statement and Prospectus (the "Additional Statement"), dated October , 2000,
has been filed with the Commission and is also incorporated herein by
reference. Also incorporated herein by reference is MIT III's Annual Report for
its fiscal year ended August 31, 2000. Such documents are available without
charge by calling (800) 869-NEWS (TOLL FREE).
Investors are advised to read and retain this Proxy Statement and Prospectus
for future reference.
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 ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THIS PROXY STATEMENT AND PROSPECTUS IS DATED OCTOBER , 2000.
TABLE OF CONTENTS
PROXY STATEMENT AND PROSPECTUS
PAGE
----
INTRODUCTION ............................................................................. 1
General ................................................................................ 1
Record Date; Share Information ......................................................... 1
Proxies ................................................................................ 2
Expenses of Solicitation ............................................................... 2
Vote Required .......................................................................... 3
SYNOPSIS ................................................................................. 3
The Reorganization ..................................................................... 3
Fee Table .............................................................................. 4
Tax Consequences of the Reorganization ................................................. 5
Reasons for the Reorganization ......................................................... 6
Comparison of MIT III and Tax-Exempt ................................................... 6
PRINCIPAL RISK FACTORS ................................................................... 8
THE REORGANIZATION ....................................................................... 9
The Proposal ........................................................................... 9
The Board's Consideration .............................................................. 10
The Reorganization Agreement ........................................................... 11
Tax Aspects of the Reorganization ...................................................... 12
Description of Shares of Tax-Exempt and MIT III and the Organization of the Two Funds... 14
Capitalization Table (unaudited) ....................................................... 15
Appraisal Rights ....................................................................... 16
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS ........................... 16
Investment Objectives and Policies ..................................................... 16
Investment Restrictions ................................................................ 19
ADDITIONAL MATTERS REGARDING MIT III ..................................................... 21
History of Public Trading of MIT III's Shares .......................................... 21
Investment Advisor ..................................................................... 21
Portfolio Management ................................................................... 22
Expenses Borne by MIT III .............................................................. 22
ADDITIONAL INFORMATION ABOUT MIT III AND TAX-EXEMPT ...................................... 23
General ................................................................................ 23
Financial Information .................................................................. 23
Management ............................................................................. 23
Description of Securities and Shareholder Inquiries .................................... 23
Custodian and Transfer Agent and Dividend Paying Agent ................................. 23
Dividends, Distributions and Taxes ..................................................... 23
Purchases, Repurchases and Redemptions ................................................. 24
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE .............................................. 24
FINANCIAL STATEMENTS AND EXPERTS ......................................................... 24
LEGAL MATTERS ............................................................................ 24
AVAILABLE INFORMATION .................................................................... 24
OTHER BUSINESS ........................................................................... 25
Exhibit A - Agreement and Plan of Reorganization, dated August 24, 2000, by and between
MIT III and Tax-Exempt .................................................................. A-1
Exhibit B - Prospectus of Tax-Exempt dated February 24, 2000 ............................. B-1
Exhibit C -- Description of Dividend Reinvestment Plan of MIT III ........................ C-1
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(800) 869-NEWS
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PROXY STATEMENT AND PROSPECTUS
--------------------
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 23, 2001
INTRODUCTION
GENERAL
This Proxy Statement and Prospectus is being furnished to the shareholders
of the Morgan Stanley Dean Witter Municipal Income Trust III ("MIT III"), a
closed-end diversified management investment company, in connection with the
solicitation by the Board of Trustees of MIT III (the "Board") of proxies to be
used at the Special Meeting of Shareholders of MIT III to be held in the Career
Development Room, Sixty-First Floor, Two World Trade Center, New York, New York
10048 at 9:00 A.M., New York time, on January 23, 2001, and any adjournments
thereof (the "Meeting"). It is expected that the mailing of this Proxy
Statement and Prospectus will be made on or about October , 2000.
At the Meeting, MIT III shareholders ("Shareholders") will consider and
vote upon an Agreement and Plan of Reorganization, dated August 24, 2000 (the
"Reorganization Agreement"), between MIT III and Morgan Stanley Dean Witter
Tax-Exempt Securities Trust ("Tax-Exempt") pursuant to which substantially all
of the assets of MIT III will be combined with those of Tax-Exempt in exchange
for Class D shares of Tax-Exempt. As a result of this transaction, Shareholders
will become shareholders of Tax-Exempt and will receive Class D shares of
Tax-Exempt equal to the net asset value of their holdings in MIT III on the
closing date of such transaction (the "Reorganization"). The Class D shares to
be issued by Tax-Exempt pursuant to the Reorganization (the "Tax-Exempt
Shares") will be issued at net asset value and will not be subject to any sales
charge. Further information relating to Tax-Exempt is set forth herein and in
Tax-Exempt's current Prospectus, dated February 24, 2000 ("Tax-Exempt's
Prospectus"), attached to this Proxy Statement and Prospectus and incorporated
herein by reference.
The information concerning MIT III contained herein has been supplied by
MIT III and the information concerning Tax-Exempt contained herein has been
supplied by Tax-Exempt.
RECORD DATE; SHARE INFORMATION
The Board has fixed the close of business on October 16, 2000 as the
record date (the "Record Date") for the determination of the Shareholders
entitled to notice of, and to vote at, the Meeting. As of the Record Date,
there were [ ] shares of MIT III issued and outstanding. There are no MIT
III shares held by MIT III. Shareholders on the Record Date are entitled to one
vote per share on each matter submitted to a vote at the Meeting. A majority of
the outstanding shares entitled to vote, represented in person or by proxy,
will constitute a quorum at the Meeting.
1
The following persons were known to own of record or beneficially 5% or
more of the outstanding shares of MIT III as of the Record Date:
[ ]. As of the Record Date, the trustees and officers of MIT III, as
a group, owned less than 1% of the outstanding shares of MIT III.
The following persons were known to own of record or beneficially 5% or
more of the outstanding shares of a Class of Tax-Exempt as of the Record Date:
Class A -- [ ]. Class C -- [ ]. As of the Record
Date, the trustees and officers of Tax-Exempt, as a group, owned less than 1%
of the outstanding shares of Tax-Exempt.
PROXIES
The enclosed form of proxy, if properly executed and returned, will be
voted in accordance with the choice specified thereon. The proxy will be voted
in favor of the Reorganization Agreement unless a choice is indicated to vote
against or to abstain from voting on the Reorganization Agreement. The Board
knows of no business, other than that set forth in the Notice of Special
Meeting of Shareholders, to be presented for consideration at the Meeting.
However, the proxy confers discretionary authority upon the persons named
therein to vote as they determine on other business, not currently
contemplated, which may come before the Meeting. Abstentions and, if
applicable, broker "non-votes" will not count as votes in favor of the
Reorganization Agreement, and broker "non-votes" will not be deemed to be
present at the meeting for purposes of determining whether the Reorganization
Agreement has been approved. Broker "non-votes" are shares held in street name
for which the broker indicates that instructions have not been received from
the beneficial owners or other persons entitled to vote and for which the
broker does not have discretionary voting authority. If a Shareholder executes
and returns a proxy but fails to indicate how the votes should be cast, the
proxy will be voted in favor of the Reorganization Agreement. The proxy may be
revoked at any time prior to the voting thereof by: (i) delivering written
notice of revocation to the Secretary of MIT III at Two World Trade Center, New
York, New York 10048; (ii) attending the Meeting and voting in person; or (iii)
completing and returning a new proxy (whether by mail or, as discussed below,
by touchtone telephone or the Internet) (if returned and received in time to be
voted). Attendance at the Meeting will not in and of itself revoke a proxy.
In the event that the necessary quorum to transact business or the vote
required to approve or reject the Reorganization Agreement is not obtained at
the Meeting, the persons named as proxies may propose one or more adjournments
of the Meeting to permit further solicitation of proxies. Any such adjournment
will require the affirmative vote of the holders of a majority of shares of MIT
III present in person or by proxy at the Meeting. The persons named as proxies
will vote in favor of such adjournment those proxies which they are entitled to
vote in favor of the Reorganization Agreement and will vote against any such
adjournment those proxies required to be voted against the Reorganization
Agreement.
EXPENSES OF SOLICITATION
The expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement and Prospectus, are expected to approximate
$98,000 and will be borne by MIT III. MIT III and Tax-Exempt will bear all of
their respective other expenses associated with the Reorganization. In addition
to the solicitation of proxies by mail, proxies may be solicited by officers of
MIT III, and officers and regular employees of Morgan Stanley Dean Witter
Advisors Inc. ("MSDW Advisors" or the "Investment Manager" or the "Investment
Advisor") and Morgan Stanley Dean Witter Trust FSB ("MSDW Trust"), an affiliate
of MSDW Advisors, personally or by mail, telephone, telegraph or otherwise,
without compensation therefor. In addition, MIT III may retain Mackenzie
Partners, Inc. as proxy solicitor, at a cost to MIT III of approximately $7,500
plus reimbursement of reasonable expenses. Brokerage houses, banks and other
fiduciaries may be requested to forward soliciting material to the beneficial
owners of shares and to obtain authorization for the execution of proxies.
2
Shareholders whose shares are registered with MSDW Trust will be able to
vote their shares by touchtone telephone or by Internet by following the
instructions on the proxy card or on the Voting Information Card accompanying
this Proxy Statement and Prospectus. To vote by touchtone telephone,
Shareholders can call the toll-free number 1-800-690-6903. To vote by Internet,
Shareholders can access the websites www.msdwt.com or www.proxyvote.com.
Telephonic and Internet voting with MSDW Trust presently are not available to
Shareholders whose shares are held in street name.
In certain instances, MSDW Trust, an affiliate of MSDW Advisors, may call
Shareholders to ask if they would be willing to have their votes recorded by
telephone. The telephone voting procedure is designed to authenticate
Shareholders' identities, to allow Shareholders to authorize the voting of
their shares in accordance with their instructions and to confirm that their
instructions have been recorded properly. No recommendation will be made as to
how a Shareholder should vote on the Reorganization Agreement other than to
refer to the recommendation of the Board. MIT III has been advised by counsel
that these procedures are consistent with the requirements of applicable law.
Shareholders voting by telephone in this manner will be asked for their social
security number or other identifying information and will be given an
opportunity to authorize proxies to vote their shares in accordance with their
instructions. To ensure that the Shareholders' instructions have been recorded
correctly, they will receive a confirmation of their instructions in the mail.
A special toll-free number set forth in the confirmation will be available in
case the information contained in the confirmation is incorrect. Although a
Shareholder's vote may be taken by telephone, each Shareholder will receive a
copy of this Proxy Statement and Prospectus and may vote by mail using the
enclosed proxy card or by touchtone telephone or the Internet as set forth
above. The last proxy vote received in time to be voted, whether by proxy card,
touchtone telephone or Internet, will be the vote that is counted and will
revoke all previous votes by the Shareholder.
VOTE REQUIRED
Approval of the Reorganization Agreement by the Shareholders requires the
affirmative vote of a majority (i.e., more than 50%) of the shares of MIT III
represented in person or by proxy and entitled to vote at the Meeting, provided
a quorum is present at the Meeting. If the Reorganization Agreement is not
approved by Shareholders, MIT III will continue in existence and the Board will
consider alternative actions.
SYNOPSIS
The following is a synopsis of certain information contained in or
incorporated by reference in this Proxy Statement and Prospectus. This synopsis
is only a summary and is qualified in its entirety by the more detailed
information contained or incorporated by reference in this Proxy Statement and
Prospectus and the Reorganization Agreement. Shareholders should carefully
review this Proxy Statement and Prospectus and Reorganization Agreement in
their entirety and, in particular, Tax-Exempt's Prospectus, which is attached
to this Proxy Statement and incorporated herein by reference.
THE REORGANIZATION
The Reorganization Agreement provides for the transfer of substantially
all the assets of MIT III, subject to stated liabilities, to Tax-Exempt in
exchange for the Tax-Exempt Shares. The aggregate net asset value of the
Tax-Exempt Shares issued in the exchange will equal the aggregate value of the
net assets of MIT III received by Tax-Exempt. On or after the closing date of
the Reorganization, currently anticipated to be January 29, 2001, (the "Closing
Date"), MIT III will distribute the Tax-Exempt Shares received by MIT III to
Shareholders as of the Valuation Date (as defined below under "The
Reorganization Agreement") in complete liquidation of MIT III and MIT III will
thereafter be de-registered as an investment company under the
3
Investment Company Act of 1940 (the "1940 Act") and dissolved under
Massachusetts law. As a result of the Reorganization, each Shareholder will
receive that number of full and fractional Tax-Exempt Shares equal in value to
such Shareholder's pro rata interest in the net assets of MIT III transferred
to Tax-Exempt. Accordingly, as a result of the Reorganization, each Shareholder
of MIT III will become a holder of Class D shares of Tax-Exempt. Shareholders
holding their shares of MIT III in certificate form will be asked to surrender
their certificates in connection with the Reorganization. Shareholders who do
not surrender their certificates prior to the Closing Date will still receive
their shares of Tax-Exempt; however, such Shareholders will not be able to
redeem, transfer or exchange the Tax-Exempt Shares received until the old
certificates have been surrendered. The Board has determined that the interests
of Shareholders will not be diluted as a result of the Reorganization.
FOR THE REASONS SET FORTH BELOW UNDER "THE REORGANIZATION -- THE BOARD'S
CONSIDERATION," THE BOARD, INCLUDING THE TRUSTEES WHO ARE NOT "INTERESTED
PERSONS" OF MIT III ("INDEPENDENT TRUSTEES"), AS THAT TERM IS DEFINED IN THE
INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE "1940 ACT"), HAS CONCLUDED THAT
THE REORGANIZATION IS IN THE BEST INTERESTS OF MIT III AND ITS SHAREHOLDERS AND
RECOMMENDS APPROVAL OF THE REORGANIZATION AGREEMENT.
FEE TABLE
MIT III and Tax-Exempt each pay a variety of expenses for management of
their assets, distribution of their shares (Tax-Exempt) and other services, and
those expenses are reflected in the net asset value per share of each fund.
Class D shares of Tax-Exempt do not pay distribution-related fees; however, the
other three Classes offered by Tax-Exempt pay fees for the distribution of
their shares. The following table briefly describes the fees and expenses that
a shareholder of MIT III and a Class D shareholder of Tax-Exempt may pay if
they buy and hold shares of each respective fund. These expenses are deducted
from each respective fund's assets and are based on expenses paid by MIT III
for its fiscal year ended August 31, 2000 and on expenses paid by Class D
shares of Tax-Exempt for its fiscal year ended December 31, 1999. The table
also sets forth pro forma fees for the surviving combined fund (Tax-Exempt)
reflecting what the fee schedule would have been on June 30, 2000, if the
Reorganization had been consummated twelve (12) months prior to that date and
assuming Class D fees and expenses.
Shareholder Fees
- - ----------------
PRO FORMA
TAX-EXEMPT COMBINED
MIT III (CLASS D) (CLASS D)
--------- ------------ ----------
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON PURCHASES
(AS A PERCENTAGE OF OFFERING PRICE) none(1) none none
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON REINVESTED
DIVIDENDS none none none
MAXIMUM CONTINGENT DEFERRED SALES CHARGE (LOAD) (AS A
PERCENTAGE OF THE LESSER OF ORIGINAL PURCHASE PRICE OR
REDEMPTION PROCEEDS) none none none
REDEMPTION FEES none(1) none none
EXCHANGE FEE none none none
- - ----------
(1) Purchases and sales of MIT III are made on the New York Stock Exchange or
otherwise through brokers and dealers and are generally subject to
brokerage commissions which vary. Customarily, such commissions may
depend upon the size of the transaction, the broker selected and other
factors.
4
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
- - ----------------------------------------------------------------------------
PRO FORMA
COMBINED
TAX-EXEMPT TAX-EXEMPT
MIT III (CLASS D) (CLASS D)
--------------- -------------- -----------
MANAGEMENT FEES 0.65%(2) 0.44% 0.44%
DISTRIBUTION AND SERVICE (12B-1) FEES none none none
OTHER EXPENSES 0.34% 0.07% 0.07%
TOTAL ANNUAL FUND OPERATING EXPENSES 0.99% 0.51% 0.51%
- - ----------
(2) The Management Fees shown for MIT III reflect both the advisory and
administration fees paid by MIT III under its Investment Advisory
Agreement with MSDW Advisors and its Administration Agreement with Morgan
Stanley Dean Witter Services Company Inc., respectively. The combined
services provided to MIT III under these two agreements are comparable to
the services provided to Tax-Exempt under its Investment Management
Agreement with MSDW Advisors. For more information, please see "Synopsis
-- Comparison of MIT III and Tax-Exempt -- Investment Management and
Administration."
EXAMPLE
To attempt to show the effect of these expenses on an investment over
time, the hypotheticals shown below have been created. The Example assumes that
an investor invests $10,000 in either MIT III or Class D shares of Tax-Exempt
or the new combined fund (Tax-Exempt), that the investment has a 5% return each
year and that the operating expenses for each fund remain the same (as set
forth in the chart above). Although a shareholder's actual costs may be higher
or lower, the tables below show a shareholder's costs at the end of each period
based on these assumptions.
Expenses Over Time:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
MIT III ............................... $101 $315 $547 $1,213
Tax-Exempt (Class D) .................. $ 52 $164 $285 $ 640
Pro Forma Combined (Class D) .......... $ 52 $164 $285 $ 640
The purpose of the foregoing fee table is to assist the investor or
shareholder in understanding the various costs and expenses that an investor or
shareholder in the fund will bear directly or indirectly. For a more complete
description of these costs and expenses, see "Comparison of MIT III and
Tax-Exempt -- Investment Management and Administration Fees, Other Significant
Fees, and Purchases, Exchanges and Redemptions" below.
TAX CONSEQUENCES OF THE REORGANIZATION
As a condition to the Reorganization, MIT III and Tax-Exempt, will receive
an opinion of Mayer, Brown & Platt to the effect that the Reorganization will
constitute a tax-free reorganization for federal income tax purposes, and that
no gain or loss will be recognized by MIT III or the shareholders of MIT III
for federal income tax purposes as a result of the transactions included in the
Reorganization. For further information about the tax consequences of the
Reorganization, see "The Reorganization -- Tax Aspects of the Reorganization"
below.
5
REASONS FOR THE REORGANIZATION
MIT III is a closed-end fund that has traded on the New York Stock
Exchange ("NYSE") at a discount to net asset value for the past six years. For
more information, see "Additional Matters Regarding MIT III -- History of
Public Trading of MIT III's Shares" below. The Board of MIT III has, in the
past, considered a number of options in attempting to reduce or eliminate the
discount, including share repurchases and the use of tender offers. For a
number of years, the Board has authorized a share repurchase program to
repurchase shares of MIT III in the open-market in order to support the price
of the fund's shares. The Board has concluded that currently, the
Reorganization is an appropriate course for Shareholders of MIT III to realize
the net asset value of their shares as well as other benefits offered by the
Reorganization. For further information on the reasons for the Board's
decision, see "The Reorganization -- The Board's Consideration," set forth
below.
COMPARISON OF MIT III AND TAX-EXEMPT
INVESTMENT OBJECTIVES AND POLICIES. MIT III and Tax-Exempt have similar
investment objectives. As its investment objective, MIT III seeks to provide
current income exempt from federal income tax. Tax-Exempt has an investment
objective of seeking to provide a high level of current income exempt from
federal income tax, consistent with preservation of capital. The respective
investment objectives of MIT III and Tax-Exempt are fundamental and may not be
changed without respective shareholder approval.
Tax-Exempt seeks to achieve its investment objective by investing at least
80% of its total assets in securities that pay interest exempt from federal
income taxes, i.e., municipal obligations. Likewise, MIT III seeks to achieve
its investment objective by investing at least 80% of its net assets in
municipal obligations. Income dividend distributions of Tax-Exempt and MIT III,
to the extent derived from municipal obligations, are normally exempt from
federal income taxes, however, all, or a portion of, MIT III's investments in
municipal obligations may be subject to the alternative minimum tax for certain
investors. Under normal circumstances, Tax-Exempt has a 20% limit on
investments in municipal obligations subject to the alternative minimum tax.
Other than as set forth above, the investment policies of MIT III and
Tax-Exempt are substantially similar; the principal differences between them
are described under "Comparison of Investment Objectives, Policies and
Restrictions" below.
INVESTMENT MANAGEMENT AND ADMINISTRATION FEES. Pursuant to an Investment
Advisory Agreement, MIT III's investment adviser, MSDW Advisors, manages MIT
III's assets, including placing orders for the purchase and sale of portfolio
securities. MSDW Advisors obtains and evaluates such information and advice
relating to the economy, securities markets and securities as it deems
necessary or useful to manage the assets of MIT III in a manner consistent with
its objective and policies. As compensation for advisory services provided to
MIT III, MIT III pays MSDW Advisors an advisory fee, calculated weekly and
payable monthly, by applying the following annual rates to the fund's weekly
net assets: 0.40% to the portion of the fund's weekly net assets not exceeding
$250 million and 0.30% to the portion of the fund's weekly net assets exceeding
$250 million. Pursuant to an Administration Agreement, MIT III has retained
Morgan Stanley Dean Witter Services Company Inc. ("MSDW Services"), a wholly
owned subsidiary of MSDW Advisors, to serve as Administrator for MIT III. Under
that agreement, MSDW Services provides MIT III with certain administrative
and/or bookkeeping services. As compensation for such services, MIT III pays
MSDW Services a fee, calculated weekly and payable monthly, by applying the
following annual rates to the fund's weekly net assets: 0.25% to the portion of
the fund's weekly net assets not exceeding $250 million; 0.20% to the portion
of the fund's weekly net assets exceeding $250 million but not exceeding $500
million; 0.167% to the portion of the fund's weekly net assets exceeding $500
million but not exceeding $750 million; and 0.133% to the portion of
6
the fund's weekly net assets exceeding $750 million. The services provided to
MIT III under both the Investment Advisory Agreement and the Administration
Agreement are comparable to those provided by MSDW Advisors to Tax-Exempt under
its Investment Management Agreement with MSDW Advisors. Pursuant to that
agreement, Tax-Exempt pays MSDW Advisors, monthly compensation calculated daily
by applying the following annual rates to the average daily net assets of the
fund: 0.50% of the portion of the daily net assets not exceeding $500 million;
0.425% of the portion of the daily net assets exceeding $500 million but not
exceeding $750 million; 0.375% of the portion of the daily net assets exceeding
$750 million but not exceeding $1 billion; 0.35% of the portion of the daily
net assets exceeding $1 billion but not exceeding $1.25 billion; and 0.325% of
the portion of the daily net assets exceeding $1.25 billion. Each class of
shares of Tax-Exempt is subject to the same management fee rates.
MIT III is a closed-end investment company and therefore does not have a
distribution plan pursuant to Rule 12b-1 under the 1940 Act ("12b-1 Plan").
Tax-Exempt has adopted a 12b-1 Plan for the distribution of its shares,
however, there are no 12b-1 fees applicable to Tax-Exempt's Class D shares. For
information relating to the 12b-1 fees applicable to Tax-Exempt's Class A, B
and C shares, see the section entitled "Share Class Arrangements" in
Tax-Exempt's Prospectus, attached hereto.
OTHER SIGNIFICANT FEES. Both MIT III and Tax-Exempt pay additional fees in
connection with their operations, including legal, auditing, transfer agent,
trustees fees and custodial fees and, in the case of MIT III, listing fees for
the listing of its shares on the NYSE. See "Synopsis -- Fee Table" above for
the percentage of average net assets represented by such "Other Expenses."
PURCHASES, EXCHANGES AND REDEMPTIONS. Class D shares of Tax-Exempt are
currently offered at net asset value and such shares may be redeemed for cash
without redemption or other charge at the net asset value per share next
determined. Normally, Class D shares of Tax-Exempt are offered only to a
limited group of investors. Subsequent to the Reorganization, all MIT III
shares will be designated Class D shares of Tax-Exempt. However, additional
investments (except for reinvestment of distributions received on shares
acquired as a result of the Reorganization) in Class D shares of Tax-Exempt (or
in Class D shares of any other Morgan Stanley Dean Witter Fund) by Shareholders
holding such shares may only be made if those Shareholders are otherwise
eligible to purchase Class D shares. Class D shares acquired in the
Reorganization may, however, be exchanged for Class D shares of another Morgan
Stanley Dean Witter Fund pursuant to Class D's exchange privileges discussed
below.
Tax-Exempt offers four classes of shares (Class A, Class B, Class C and
Class D) which differ principally in terms of sales charges, distribution and
service fees, and ongoing expenses. For further information relating to each of
the classes of Tax-Exempt's shares, see the section entitled "Share Class
Arrangements" in Tax-Exempt's Prospectus attached hereto.
Class D shares of Tax-Exempt that are held with a broker-dealer that has
entered into a selected dealer agreement with Tax-Exempt's distributor (or
shares held directly with Tax-Exempt's transfer agent) may be exchanged for
Class D shares of any other Morgan Stanley Dean Witter Fund that offers its
shares in more than one class, or any of Morgan Stanley Dean Witter Short-Term
U.S. Treasury Trust, Morgan Stanley Dean Witter North American Government
Income Trust, Morgan Stanley Dean Witter Limited Term Municipal Trust, Morgan
Stanley Dean Witter Short-Term Bond Fund and the five Morgan Stanley Dean
Witter Funds that are money market funds (the foregoing funds are collectively
referred to as the "Exchange Funds"), without the imposition of an exchange
fee.
Tax-Exempt shareholders may redeem their Tax-Exempt shares on any business
day at the net asset value of such shares. Tax-Exempt provides telephone
exchange privileges to its shareholders. For greater details relating to
exchange privileges applicable to Tax-Exempt, see the section entitled "How to
Exchange Shares" in Tax-Exempt's Prospectus.
7
Tax-Exempt may redeem involuntarily, at net asset value, most accounts
valued at less than $100. However, Tax-Exempt offers a reinstatement privilege
whereby a shareholder who has not previously exercised such privilege whose
shares have been redeemed or repurchased may, within thirty-five days after the
date of redemption or repurchase, reinstate any portion or all of the proceeds
thereof in shares of the same class from which such shares were redeemed or
repurchased.
Unlike Tax-Exempt, MIT III is a closed-end investment company and does not
redeem its shares or engage in the continuous offering of new shares in the
same manner as an open-end investment company and does not offer to exchange
its shares for shares of other investment companies. Shares of MIT III are only
purchased and sold on the NYSE.
DIVIDENDS. Tax-Exempt declares income dividends daily and pays dividends
from net investment income monthly; MIT III declares and pays dividends from
net investment income monthly. Tax-Exempt usually distributes net capital
gains, if any, in June and December and MIT III distributes all of its net
realized short-term and long-term capital gains at least once per year. Each,
however, may determine either to distribute or to retain all or part of any net
long-term capital gains in any year for reinvestment. With respect to
Tax-Exempt, dividends and capital gains distributions are automatically
reinvested in additional shares at net asset value unless the shareholder
elects to receive cash. All persons who become registered holders of MIT III
are automatically included in MIT III's automatic dividend reinvestment plan
unless they elect to receive distributions in cash. Under that plan,
Shareholders' dividends are automatically reinvested in shares of MIT III at
the then-current market price of such shares. For more information on MIT III's
dividend reinvestment plan, see Exhibit C to this Proxy Statement and
Prospectus. As discussed above, Tax-Exempt's and MIT III's income dividend
distributions to shareholders are generally exempt from federal income taxes.
PRINCIPAL RISK FACTORS
The share price or net asset value of Tax-Exempt and the market price per
share of MIT III on the NYSE as well as MIT III's net asset value will
fluctuate with changes in the market value of their respective portfolio
securities. The market value of the funds' portfolio securities will increase
or decrease due to a variety of economic, market and political factors,
including changes in prevailing interest rates, which cannot be predicted. The
principal risks of an investment in either Tax-Exempt or MIT III are the risks
associated with their respective fixed-income securities which primarily
consist of municipal obligations. Fixed income securities are subject to two
types of risks: credit risk and interest rate risk.
Credit risk refers to the possibility that the issuer of a security will
be unable or unwilling to make interest payments and/or repay the principal on
its debt. In the case of certain municipal obligations known as revenue bonds,
the credit risk refers to the possibility that the user fees from a project or
specified revenue source are insufficient to meet interest and/or principal
payment obligations or the credit impairment of the user. Interest rate risk
refers to fluctuations in the value of a fixed-income security resulting from
changes in the general level of interest rates. When the general level of
interest rates goes up, the prices of most fixed-income securities go down.
When the general level of interest rates goes down, the prices of most
fixed-income securities go up.
MIT III may invest up to 35% of its assets in municipal obligations rated
below investment grade (i.e., junk bonds), and it may invest without limitation
in municipal obligations rated in the lowest investment grade category.
Tax-Exempt may invest in such lower rated obligations to a significantly
limited extent (e.g., the fund may only invest up to 5% of its assets in junk
bonds). Lower rated obligations are generally subject to increased credit and
interest rate risk and thus have speculative characteristics. As a result,
these securities are generally more volatile and less liquid than higher rated
securities.
8
Both Tax-Exempt and MIT III may invest a portion of their respective
assets in inverse floating rate municipal obligations which are obligations
that are typically created through a division of a fixed rate municipal
obligation into two separate instruments, a short-term obligation and a
long-term obligation. The interest rates on inverse floating rate municipal
obligations generally move in the reverse direction of market interest rates.
The interest rate on the short-term obligation is set at periodic auctions. The
interest rate on the long-term obligation is the rate the issuer would have
paid on the fixed-income obligation: (i) plus the difference between such fixed
rate and the rate on the short-term obligation, if the short-term rate is lower
than the fixed rate; or (ii) minus such difference if the interest rate on the
short-term obligation is higher than the fixed rate. Inverse floating rate
municipal obligations offer the potential for higher income than is available
from fixed rate obligations of comparable maturity and credit rating but they
also carry greater risks. In particular, the prices of inverse floating rate
municipal obligations are more volatile, i.e., they increase and decrease in
response to changes in interest rates to a greater extent than comparable fixed
rate obligations.
Certain of the municipal obligations that Tax-Exempt and MIT III may
invest in will be covered by insurance at the time of issuance or at a later
date. Such insurance covers the remaining term of the security. Insured
municipal obligations would generally be assigned a lower rating if the rating
were based primarily on the credit quality of the issuer without regard to the
insurance feature. If the claims-paying ability of the insurer were downgraded,
the ratings on the municipal obligations it insures may also be downgraded.
Both Tax-Exempt and MIT III may invest in municipal lease obligations
which are obligations issued by state and local agencies or authorities to
finance 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, in part,
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 that 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 these legislative appropriations do not occur,
holders of such municipal lease obligations may experience difficulty
exercising their rights, including disposition of the property.
Both Tax-Exempt and MIT III may also invest in futures obligations which
are considered speculative in nature and involve certain risks.
The foregoing discussion is a summary of the principal risk factors of MIT
III and Tax-Exempt. For a more complete discussion of the risks of Tax-Exempt,
see "Principal Risks" and "Additional Risk Information" in Tax-Exempt's
Prospectus attached hereto and incorporated herein by reference.
THE REORGANIZATION
THE PROPOSAL
The Board of Trustees of MIT III, including the Independent Trustees,
having reviewed the financial position of MIT III, the ability of Shareholders
of MIT III to realize the net asset value of their shares and the prospects for
achieving economies of scale through the Reorganization and having determined
that the Reorganization is in the best interests of MIT III and its
Shareholders and that the interests of MIT III's Shareholders will not be
diluted as a result thereof, recommends approval of the Reorganization by
Shareholders of MIT III.
9
THE BOARD'S CONSIDERATION
At a meeting held on August 24, 2000, the Board, including all of the
Independent Trustees, unanimously approved the Reorganization Agreement and
determined to recommend that MIT III Shareholders approve the Reorganization
Agreement. In reaching this decision, the Board made an extensive inquiry into
a number of factors, particularly the elimination of the current market
discount of MIT III shares, the effect on Shareholders of "open-ending" MIT III
including, for example, the potential impact of redemptions on portfolio
management, and the comparative expense ratios of MIT III and the Class D
shares of Tax-Exempt. The Board also considered other factors, including, but
not limited to: comparable investment objectives, policies, restrictions and
portfolios of MIT III and Tax-Exempt; the terms and conditions of the
Reorganization which would affect the price of shares to be issued in the
Reorganization; the tax-free nature of the Reorganization; and any direct or
indirect costs to be incurred by MIT III and Tax-Exempt in connection with the
Reorganization.
In recommending the Reorganization to Shareholders, the Board of MIT III
considered that the Reorganization would have the following benefits to
Shareholders:
1. MIT III, since January of 1994, has generally traded at a discount to
its net asset value and is, as of the date of this Proxy Statement and
Prospectus, trading at a discount. The Reorganization at net asset value would
benefit the Shareholders of MIT III by immediately eliminating any such
discount. See "Additional Matters Regarding MIT III -- History of Public
Trading of MIT III's Shares" below.
2. Once the Reorganization is consummated, the expenses which would be
borne by Class D shareholders of the "combined fund" are expected to be
significantly lower on a percentage basis than the expenses per share of MIT
III. This is partially attributable to the fact that Tax-Exempt's investment
management fee rate (0.44% of its net assets) was appreciably lower for its
last fiscal year than MIT III's combined advisory/administration fee rate
(0.65%) paid for its last fiscal year. (As noted earlier, MIT III pays separate
advisory and administration fees under two agreements for services comparable
to those provided under Tax-Exempt's single Investment Management Agreement.)
Furthermore, the rate of other expenses paid by Class D of the surviving
Tax-Exempt (0.07% of average daily net assets) for its last fiscal year was
lower than the rate of other expenses paid by MIT III (0.34% of average daily
net assets) for its last fiscal year. In addition, to the extent that the
Reorganization would result in Shareholders becoming shareholders of a combined
larger fund, further economies of scale could be achieved since various fixed
expenses (e.g., auditing and legal) can be spread over a larger number of
shares. The Board noted that the expense ratio for MIT III (0.99% for its
fiscal year ended August 31, 2000) was materially higher than the expense ratio
for Class D shares of Tax-Exempt (0.51% for its fiscal year ended December 31,
1999).
3. Shareholders of MIT III would have a continued participation in a
portfolio of municipal obligations normally exempt from federal income tax.
4. Shareholders would have the ability to exchange their Class D shares of
Tax-Exempt acquired as a result of the Reorganization into Class D shares of
any Morgan Stanley Dean Witter Multi-Class Fund without the imposition of any
sales charge or additional fees. The Board noted, however, that exchange
privileges will not be available to Shareholders who hold Tax-Exempt shares
with broker-dealers that have not entered into a selected dealer agreement with
Tax-Exempt's distributor. MIT III, being a closed-end fund, does not offer any
exchange privileges.
5. The Reorganization is intended to qualify as a tax-free reorganization
for federal income tax purposes, pursuant to which no gain or loss will be
recognized by MIT III or its Shareholders for Federal income tax purposes as a
result of transactions included in the Reorganization.
10
The Board of Trustees of Tax-Exempt, including a majority of the
Independent Trustees of Tax-Exempt, also have determined that the
Reorganization is in the best interests of Tax-Exempt and its shareholders and
that the interests of existing shareholders of Tax-Exempt will not be diluted
as a result thereof. The transaction will enable Tax-Exempt to acquire
investment securities which are consistent with Tax-Exempt's investment
objective, without the costs attendant to the purchase of such securities in
the market. Also, the addition of MIT III's assets to Tax-Exempt's portfolio
may result in a further reduction in Tax-Exempt's investment management fee
resulting from the addition of more assets at a lower breakpoint rate in the
management fee schedule and may result also in the economies of scale described
above. Finally, the Board considered that even if the benefits enumerated above
are not realized, the costs to the Fund are sufficiently minor to warrant
taking the opportunity to realize those benefits.
THE REORGANIZATION AGREEMENT
The terms and conditions under which the Reorganization would be
consummated, as summarized below, are set forth in the Reorganization
Agreement. This summary is qualified in its entirety by reference to the
Reorganization Agreement, a copy of which is attached as Exhibit A to this
Proxy Statement and Prospectus.
The Reorganization Agreement provides that (i) MIT III will transfer all
of its assets, including portfolio securities, cash (other than cash amounts
retained by MIT III as a "Cash Reserve" in the amount sufficient to discharge
its liabilities not discharged prior to the Valuation Date (as defined below)
and for expenses of the dissolution), cash equivalents and receivables to
Tax-Exempt on the Closing Date in exchange for the assumption by Tax-Exempt of
stated liabilities of MIT III, including all expenses, costs, charges and
reserves, as reflected on an unaudited statement of assets and liabilities of
MIT III prepared by the Treasurer of MIT III, as of the Valuation Date (as
defined below) in accordance with generally accepted accounting principles
consistently applied from the prior audited period, and the delivery of the
Tax-Exempt Shares; (ii) such Tax-Exempt Shares would be distributed to
Shareholders on the Closing Date or as soon as practicable thereafter; (iii)
MIT III would be de-registered as an investment company under the 1940 Act;
(iv) MIT III would be dissolved as a Massachusetts business trust; and (v) the
outstanding shares of MIT III would be canceled.
The number of Tax-Exempt Shares to be delivered to MIT III will be
determined by dividing the aggregate net asset value of the shares of MIT III
acquired by Tax-Exempt by the net asset value per share of the Class D shares
of Tax-Exempt; these values will be calculated as of the close of business of
the New York Stock Exchange on the third business day following the receipt of
the requisite approval by Shareholders of the Reorganization Agreement or at
such other time as MIT III and Tax-Exempt may agree (the "Valuation Date"). As
an illustration, assume that on the Valuation Date, the shares of MIT III had
an aggregate net asset value (not including any Cash Reserve of MIT III) of
$100,000. If the net asset value per Class D share of Tax-Exempt were $10 per
share at the close of business on the Valuation Date, the number of Class D
shares of Tax-Exempt to be issued would be 10,000 ($100,000 (divided by)
$10). These 10,000 Class D shares of of Tax-Exempt would be distributed to the
former shareholders of MIT III. This example is given for illustration purposes
only and does not bear any relationship to the dollar amounts or shares
expected to be involved in the Reorganization.
On the Closing Date or as soon as practicable thereafter, MIT III will
distribute pro rata to its Shareholders of record as of the close of business
on the Valuation Date, the Tax-Exempt Shares it receives. Each Shareholder will
receive Class D shares of Tax-Exempt that corresponds to the shares of MIT III
currently held by that Shareholder. Tax-Exempt will cause its transfer agent to
credit and confirm an appropriate number of Tax-Exempt Shares to each
Shareholder. Certificates for Tax-Exempt Shares will be issued only upon
written request of a Shareholder and only for whole shares, with fractional
shares credited to the name of the
11
Shareholder on the books of Tax-Exempt. Shareholders who wish to receive
certificates representing their Tax-Exempt Shares must, after receipt of their
confirmations, make a written request to Tax-Exempt's transfer agent Morgan
Stanley Dean Witter Trust FSB, Harborside Financial Center, Jersey City, New
Jersey 07311. Shareholders of MIT III holding their shares in certificate form
will be asked to surrender such certificates in connection with the
Reorganization. Shareholders who do not surrender their certificates prior to
the Closing Date will still receive their shares of Tax-Exempt; however, such
Shareholders will not be able to redeem, transfer or exchange the Tax-Exempt
Shares received until the old certificates have been surrendered.
The Closing Date will be the next business day following the Valuation
Date. The consummation of the Reorganization is contingent upon the approval of
the Reorganization by the Shareholders and the receipt of the other opinions
and certificates set forth in Sections 6, 7 and 8 of the Reorganization
Agreement and the occurrence of the events described in those Sections, certain
of which may be waived by MIT III or Tax-Exempt. The Reorganization Agreement
may be amended in any mutually agreeable manner. All expenses of this
solicitation, including the cost of preparing and mailing this Proxy Statement
and Prospectus, will be borne, as set forth in this Proxy Statement and
Prospectus under "Expenses of Solicitation," by MIT III, which expenses are
expected to approximate $105,500. MIT III and Tax-Exempt will bear all of their
respective other expenses associated with the Reorganization.
The Reorganization Agreement may be terminated and the Reorganization
abandoned at any time, before or after approval by Shareholders or by mutual
consent of MIT III, and Tax-Exempt. In addition, either party may terminate the
Reorganization Agreement upon the occurrence of a material breach of the
Reorganization Agreement by the other party or if, by May 31, 2001, any
condition set forth in the Reorganization Agreement has not been fulfilled or
waived by the party entitled to its benefits.
Under the Reorganization Agreement, within one year after the Closing
Date, MIT III shall: either pay or make provision for all of its liabilities
and distribute any remaining amount of the Cash Reserve (after paying or making
provision for such liabilities and the estimated cost of making the
distribution) to former Shareholders of MIT III that received Tax-Exempt
Shares. MIT III shall be de-registered as an investment company under the 1940
Act, dissolved under Massachusetts law promptly following the distributions of
shares of Tax-Exempt to Shareholders of record of MIT III.
The effect of the Reorganization is that Shareholders who vote their
shares in favor of the Reorganization Agreement are electing to sell their
shares of MIT III (at net asset value on the Valuation Date calculated after
subtracting any Cash Reserve) and reinvest the proceeds in Tax-Exempt Shares at
net asset value and without recognition of taxable gain or loss for Federal
income tax purposes. See "Tax Aspects of the Reorganization" below. As noted in
"Tax Aspects of the Reorganization" below, if MIT III recognizes net gain from
the sale of securities prior to the Closing Date, such gain, to the extent not
offset by capital loss carryforwards, will be distributed to Shareholders prior
to the Closing Date and will be taxable to Shareholders as capital gain.
Prior to the NYSE's suspension of trading of MIT III's shares, which is
currently expected to occur on the next business day after the Meeting
(assuming Shareholders of MIT III approve the Reorganization Agreement at the
Meeting), Shareholders will continue to be able to sell their shares of MIT III
on the NYSE at the market price of the shares on the NYSE when the sell order
is placed. Following the suspension of trading, Shareholders will no longer be
able to sell their MIT III shares on the NYSE. On or after the Closing Date,
however, Shareholders will be able to redeem their newly-issued shares of
Tax-Exempt.
TAX ASPECTS OF THE REORGANIZATION
At least one but not more than 20 business days prior to the Valuation
Date, MIT III will declare and pay a dividend or dividends which, together with
all previous such dividends, will have the effect of distributing to
12
Shareholders all of MIT III's investment company taxable income for all periods
since the inception of MIT III through and including the Valuation Date
(computed without regard to any dividends paid deduction), and all of MIT III's
net capital gain, if any, realized in such periods (after reduction for any
capital loss carryforward).
The Reorganization is intended to qualify for Federal income tax purposes
as a tax-free reorganization under Section 368(a)(1)(C) of the Internal Revenue
Code of 1986, as amended (the "Code").
As a condition to the Reorganization, MIT III and Tax-Exempt will receive
an opinion of Mayer, Brown & Platt to the effect that, based on certain
assumptions, facts, the terms of the Reorganization Agreement and
representations set forth in the Reorganization Agreement or otherwise provided
by MIT III and Tax-Exempt (including a representation to the effect that
Tax-Exempt has no plan or intention to sell or otherwise dispose of more than
fifty percent of the assets of MIT III acquired in the Reorganization except
for dispositions made in the ordinary course of business):
1. The transfer of MIT III's assets in exchange for the Tax-Exempt Shares
and the assumption by Tax-Exempt of certain stated liabilities of MIT III
followed by the distribution by MIT III of the Tax-Exempt Shares to
Shareholders in exchange for their MIT III shares pursuant to and in accordance
with the terms of the Reorganization Agreement will constitute a
"reorganization" within the meaning of Section 368(a)(1)(C) of the Code, and
MIT III and Tax-Exempt will each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code;
2. No gain or loss will be recognized by Tax-Exempt upon the receipt of
the assets of MIT III solely in exchange for the Tax-Exempt Shares and the
assumption by Tax-Exempt of the stated liabilities of MIT III;
3. No gain or loss will be recognized by MIT III upon the transfer of the
assets of MIT III to Tax-Exempt in exchange for the Tax-Exempt Shares and the
assumption by Tax-Exempt of the stated liabilities or upon the distribution of
Tax-Exempt Shares to Shareholders in exchange for their MIT III shares;
4. No gain or loss will be recognized by Shareholders upon the exchange of
the shares of MIT III for the Tax-Exempt Shares;
5. The aggregate tax basis for the Tax-Exempt Shares received by each of
the Shareholders pursuant to the Reorganization will be the same as the
aggregate tax basis of the shares in MIT III held by each such Shareholder
immediately prior to the Reorganization;
6. The holding period of the Tax-Exempt Shares to be received by each
Shareholder will include the period during which the shares of MIT III
surrendered in exchange therefor were held (provided such shares in MIT III
were held as capital assets on the date of the Reorganization);
7. The tax basis of the assets of MIT III acquired by Tax-Exempt will be
the same as the tax basis of such assets of MIT III immediately prior to the
Reorganization; and
8. The holding period of the assets of MIT III in the hands of Tax-Exempt
will include the period during which those assets were held by MIT III.
The advice of Counsel is not binding on the Internal Revenue Service or
the courts and neither MIT III nor Tax-Exempt has sought or will seek a ruling
with respect to the tax treatment of the Reorganization.
SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE EFFECT, IF
ANY, OF THE PROPOSED TRANSACTION IN LIGHT OF THEIR INDIVIDUAL CIRCUMSTANCES.
BECAUSE THE FOREGOING DISCUSSION ONLY RELATES TO THE FEDERAL INCOME TAX
CONSEQUENCES OF THE PROPOSED TRANSACTION, SHAREHOLDERS SHOULD ALSO CONSULT
THEIR TAX ADVISORS AS TO STATE AND LOCAL TAX CONSEQUENCES, IF ANY, OF THE
PROPOSED TRANSACTION.
13
DESCRIPTION OF SHARES OF TAX-EXEMPT AND MIT III AND THE ORGANIZATION OF THE TWO
FUNDS
Class D shares of Tax-Exempt to be issued pursuant to the Reorganization
Agreement will, when issued, be fully paid and non-assessable by Tax-Exempt and
transferable without restrictions and will have no preemptive rights. As stated
above, Class D shares of Tax-Exempt are not subject to any sales charge on
purchase or redemption or any 12b-1 fee.
Shares of MIT III (the only existing class of which is common) are
entitled to one vote for each share held and to vote for the election of
Trustees and on other matters submitted to meetings of shareholders. Shares of
MIT III have no pre-emptive or conversion rights and the shares, when issued,
are fully paid and non-assessable.
The shareholders of Tax-Exempt are entitled to a full vote for each full
share of beneficial interest held. Tax-Exempt is authorized to issue an
unlimited number of shares of beneficial interest. All shares of beneficial
interest of Tax-Exempt are of $0.01 par value and are equal as to earnings,
assets and voting privileges except that each Class will have exclusive voting
privileges with respect to matters relating to distribution expenses borne
solely by such Class or any other matter in which the interests of one Class
differ from the interests of any other Class. In addition, Class B shareholders
will have the right to vote on any proposed material increase in Class A's
expenses, if such proposal is submitted separately to Class A shareholders.
Also, Class A, Class B and Class C bear expenses related to the distribution of
their respective shares.
Tax-Exempt's Declaration of Trust permits the Trustees to authorize the
creation of additional series of shares (the proceeds of which would be
invested in separate, independently managed portfolios) and additional Classes
of shares within any series. The Trustees have not presently authorized any
such additional series or Classes of shares other than as set forth in
Tax-Exempt's Prospectus.
Tax-Exempt is not required to hold annual meetings of shareholders and in
ordinary circumstances Tax-Exempt 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 Investment Company Act or the Declaration of
Trust. Under certain circumstances, the Trustees may be removed by the actions
of the Trustees. In addition, under certain circumstances, the shareholders may
call a meeting to remove the Trustees and Tax-Exempt is required to provide
assistance in communicating with shareholders about such a meeting. 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. MIT III, whose shares are listed on the NYSE, does hold annual
meetings as required by the rules of the NYSE.
Both Tax-Exempt and MIT III are entities of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of a
business trust may, under certain limited circumstances, be held personally
liable as partners for the obligations of Tax-Exempt or MIT III. However, the
Declaration of Trust of both funds contains an express disclaimer of
shareholder liability for acts or obligations of Tax-Exempt or MIT III,
requires that notice of such Tax-Exempt or MIT III obligations include such
disclaimer, and provides for indemnification out of the Tax-Exempt's or MIT
III's property for any shareholder held personally liable for the obligations
of Tax-Exempt or MIT III. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
Tax-Exempt or MIT III themselves would be unable to meet their obligations.
Given the above limitations on shareholder personal liability, and the nature
of Tax-Exempt's and MIT III's assets and operations, the possibility of
Tax-Exempt or MIT III being unable to meet their obligations is remote and
thus, in the opinion of Massachusetts counsel to Tax-Exempt and MIT III, the
risk to Tax-Exempt and MIT III shareholders of personal liability is remote.
14
MIT III presently has certain anti-takeover provisions in its Declaration
of Trust which could have the effect of limiting the ability of other entities
or persons to acquire control of MIT III, to cause it to engage in certain
transactions or to modify its structure. The Board of Trustees is divided into
three classes, each having a term of three years. Each year the term of one
class expires. This provision could delay for up to two years the replacement
of a majority of the Board of Trustees. In addition, the affirmative vote or
consent of the holders of 80% of the shares of MIT III (a greater vote than
that required by the 1940 Act and greater than the required vote applicable to
business corporations under state law) is required to authorize the conversion
of MIT III from a closed-end to an open-end investment company, or generally to
authorize any of the following transactions:
(i) merger or consolidation of MIT III with or into any other
corporation;
(ii) issuance of any securities of MIT III to any person or entity for
cash;
(iii) sale, lease or exchange of all or any substantial part of the
assets of MIT III, to any entity or person (except assets having an
aggregate fair market value of less than $1,000,000);
(iv) sale, lease or exchange to MIT III, in exchange for securities of
MIT III, of any assets of any entity or person (except assets having
an aggregate fair market value of less than $1,000,000)
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of 5% or more of the outstanding shares of MIT
III. However, such 80% vote or consent will not be required with respect to the
foregoing transactions where the Board of Trustees under certain conditions
approves the transaction (as the Board has done with respect to the
Reorganization), in which case, with respect to (i) and (iii) above, a majority
shareholder vote or consent will be required, and, with respect to (ii) and
(iv) above, no shareholder vote or consent would be required. Furthermore, any
amendment to the provisions in the Declaration of Trust requiring an 80%
shareholder vote or consent for the foregoing transactions similarly requires
an 80% shareholder vote or consent.
CAPITALIZATION TABLE (UNAUDITED)
The following table sets forth the capitalization of Tax-Exempt and MIT
III as of August 31, 2000 and on a pro forma combined basis as if the
Reorganization had occurred on that date.
NET ASSET
SHARES VALUE
NET ASSETS OUTSTANDING PER SHARE
---------- ----------- ---------
MIT III ............................................. $ 55,954,103 5,798,353 $ 9.65
Tax-Exempt
(Class A) .......................................... $ 18,257,997 1,596,984 $ 11.43
(Class B) .......................................... $ 142,841,544 12,442,278 $ 11.48
(Class C) .......................................... $ 11,157,397 973,960 $ 11.46
(Class D) .......................................... $ 856,258,319 74,945,142 $ 11.43
Total Tax-Exempt (Class A-D) ........................ $1,028,515,257 -- --
Combined Fund (pro forma) (Tax-Exempt after the
Reorganization)
(Class A) .......................................... $ 18,257,997 1,596,984 $ 11.43
(Class B) .......................................... $ 142,841,544 12,442,278 $ 11.48
(Class C) .......................................... $ 11,157,397 973,960 $ 11.46
(Class D) .......................................... $ 912,212,422 79,840,514 $ 11.43
Total Combined Fund (pro forma) (Class A-D) ......... $1,084,469,360 -- --
15
APPRAISAL RIGHTS
Shareholders will have no appraisal rights in connection with the
Reorganization.
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES AND POLICIES
MIT III and Tax-Exempt have similar investment objectives. MIT III seeks
to provide current income exempt from federal income tax; Tax-Exempt seeks to
provide a high level of current income exempt from federal income tax
consistent with preservation of capital.
Tax-Exempt invests at least 80% of its total assets in securities that pay
interest exempt from federal income taxes, in accordance with its investment
objectives set forth above. Tax-Exempt invests at least 75% of its net assets
in (i) municipal bonds rated within the three highest grades by either Moody's
Investors Service ("Moody's"), Standard & Poor's Corporation ("S&P") or Fitch
IBCA, Inc. ("Fitch"); (ii) municipal notes rated within the two highest grades
by Moody's, S&P or Fitch, or, if not rated, have outstanding bonds within the
three highest grades by Moody's, S&P or Fitch; and (iii) municipal commercial
paper rated within the highest grade by such rating organizations. Tax-Exempt
may invest up to 25% of its assets in municipal obligations that are rated
below the limits stated above or are not rated by those rating agencies.
However, Tax-Exempt may only invest up to 5% of its assets in municipal
obligations rated below investment grade (Ba or BB or lower by Moody's or S&P),
commonly known as "junk bonds." Unrated securities may be purchased by
Tax-Exempt if such securities are judged by the Investment Manager to be of
comparable quality to the rated securities described above. Other than its
investment objectives, the foregoing investment policies of Tax-Exempt may be
changed without shareholder approval.
MIT III invests at least 80% of its net assets in municipal obligations
and certain municipal obligations in which MIT III may invest without limit may
be subject to the alternative minimum tax. MIT III invests at least 65% of its
total assets in: (a) Municipal Bonds which are rated at the time of purchase
within the four highest grades (Baa or BBB or better) by Moody's or S&P; (b)
Municipal Notes which at the time of purchase are rated in the two highest
grades by Moody's or in the three highest grades by S&P, or, if not rated,
whose issuers have outstanding one or more issues of Municipal Bonds rated
within the four highest grades by Moody's or S&P; and (c) Municipal Commercial
Paper which at the time of purchase is rated within the highest grade by either
Moody's or S&P. MIT III may invest up to 35% of its assets in junk bonds and
unrated obligations. Thus, with respect to this portion of the portfolio, MIT
III may invest in instruments rated as low as C by Moody's or S&P. Securities
rated Ba or BB or lower by Moody's or S&P, respectively, are considered to be
speculative investments and are commonly known as junk bonds. A general
description of Moody's and S&P ratings of Municipal Bonds, Notes and Commercial
Paper is set forth in Tax-Exempt's "Statement of Additional Information."
MIT III may invest any amount of its assets in securities that pay
interest subject to the "alternative minimum tax" ("AMT") with the result that
some taxpayers may have to pay tax on income distributions from MIT III.
Tax-Exempt may only invest up to 20% of its assets in securities subject to the
AMT unless the fund has adopted a temporary defensive posture as set forth
below.
Both MIT III and Tax-Exempt may invest up to 20% of their respective
assets in taxable money market instruments.
Both MIT III and Tax-Exempt may take temporary "defensive" positions that
are inconsistent with each fund's principal investment strategies in attempting
to respond to adverse market conditions and during a
16
temporary defensive period each fund may invest more than 20% of its assets in
investments, the income of which may be subject to federal income taxes. In
addition, during such a defensive posture, Tax-Exempt may also invest any
amount of its assets in tax-exempt securities subject to the AMT.
The foregoing investment objective and policies of MIT III are fundamental
and may not be changed without the approval of MIT III shareholders.
MIT III may invest up to 10% of the value of its total assets, at the time
of purchase, in Municipal Obligations denominated and payable in foreign
currency, in an effort to increase the income of the fund. Such Obligations are
issued by municipalities in the United States when it is believed that
denomination in a foreign currency would be more attractive to potential
purchasers.
Both MIT III and Tax-Exempt may invest up to 10% of their respective
assets in inverse floating rate municipal obligations. The interest rates on
these obligations generally move in the reverse direction of market interest
rates. If market interest rates fall, the interest rates on the obligations
will increase and if market interest rates increase, the interest rates on the
obligations will fall.
Both MIT III and Tax-Exempt may purchase securities on a when-issued or
delayed delivery basis or, in the case of Tax-Exempt, may purchase or sell
securities on a forward commitment basis. When these transactions are
negotiated, the price is fixed at the time of the commitment, but delivery and
payment can take place a month or more after the date of commitment. The
securities so purchased or sold are subject to market fluctuation and no
interest or dividends accrue to the purchaser prior to the settlement date. At
the time the Fund makes the commitment to purchase or sell securities on a
when-issued, delayed delivery or forward commitment basis, it will record the
transaction and thereafter reflect the value, each day, of such security
purchased, or if a sale, the proceeds to be received, in determining its net
asset value. At the time of delivery of the securities, their value may be more
or less than the purchase or sale price. An increase in the percentage of the
funds' assets committed to the purchase of securities on a when-issued, delayed
delivery or forward commitment basis (Tax-Exempt) may increase the volatility
of their respective net asset value.
Both MIT III and Tax-Exempt may purchase variable rate or floating rate
municipal 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 to 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 of purchasing obligations with a demand
feature is that liquidity, and the ability to obtain repayment of the full
principal amount of an obligation prior to maturity, is enhanced.
Both MIT III and Tax-Exempt may enter into repurchase agreements subject
to certain procedures designed to minimize risks associated with such
investments. Repurchase agreements may be viewed as a type of secured lending
and typically involve the acquisition by a 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
serving as collateral at a specified price and at a fixed time in the future,
usually not more than seven days from the date of purchase. The collateral will
be marked-to-market daily to determine that the value of the collateral, as
specified in the agreement, does not decrease below the purchase price plus
accrued interest. If such decrease occurs, additional collateral will be
requested and, when received, added to the account to maintain full
collateralization. The fund will accrue interest from the institution until the
time when the repurchase is to occur. Although this date is deemed by the fund
to be the maturity date of a repurchase agreement, the
17
maturities of securities subject to repurchase agreements are not subject to
any limits. It is the policy of MIT III and Tax-Exempt not to invest in
repurchase agreements that do not mature within seven days, if any such
investments amount to more than 10% of MIT III's total assets or amount to 10%
of Tax-Exempt's net assets together with any other illiquid assets held by
Tax-Exempt.
Both MIT III and Tax-Exempt may lend their portfolio securities to
brokers, dealers and other financial institutions, provided that the loans are
callable at any time by the fund, and are at all times secured by cash or cash
equivalents, which are maintained in a segregated account pursuant to
applicable regulations and that are equal to at least 100% for Tax-Exempt and
102% for MIT III of the market value, determined daily, of the loaned
securities. The advantage of these loans is that the fund continues to receive
the income on the loaned securities while at the same time earning interest on
the cash amounts deposited as collateral, which will be invested in short-term
obligations. Tax-Exempt may not lend more than 25% of the value of its total
assets while MIT III may not lend more than 10% of the value of its total
assets. As with any extensions of credit, there are risks of delay in recovery
and, in some cases, even loss of rights in the collateral should the borrower
of the securities fail financially. However, these loans of portfolio
securities will only be made to firms deemed by either fund's management to be
creditworthy and when the income which can be earned from such loans justifies
the attendant risks. Upon termination of the loan, the borrower is required to
return the securities to the fund. Any gain or loss in the market price during
the loan period would inure to the fund.
Both MIT III and Tax-Exempt may purchase and sell financial futures
contracts and may purchase and write put and call options on such futures
contracts for the purpose of hedging its portfolio securities against changes
in prevailing interest rates. Both funds may invest in municipal bond index
futures. The funds may not purchase and sell futures contracts or purchase
related options thereon if, immediately thereafter, the amount committed to
margin plus the amount paid for premiums for unexpired options on futures
contracts exceeds 5% of the value of each fund's total assets. Both funds may
purchase or sell (write) options on debt securities as a means of achieving
additional return or hedging the value of their respective portfolios. The
funds will only write covered call or put options, or buy call or put options,
which are listed on national securities exchanges. The funds may not write
covered options in an amount exceeding 20% of the value of their respective
total assets. The funds will not purchase options if, as a result, the
aggregate cost of all outstanding options exceeds 10% of the respective fund's
total assets.
Both MIT III and Tax-Exempt may invest in illiquid securities. MIT III may
invest up to 25% of its total assets in private placement obligations
customarily sold to institutional investors for which only a limited market may
exist at the time of purchase. However MIT may only invest up to 10% of its
total assets in restricted securities, that is, securities subject to
contractual restrictions on resale which may have an adverse effect on their
marketability and prompt disposition. Tax-Exempt may only invest in such
securities in an amount up to 10% of its net assets.
Both MIT III and Tax-Exempt may borrow money. MIT III may borrow money
from a bank for temporary or emergency purposes or for the repurchase of its
shares provided that immediately after such borrowing the amount borrowed does
not exceed 331/3% of the value of its total assets (including the amount
borrowed) less its liabilities (not including any borrowings but including the
fair market value at the time of computation of any other senior securities
then outstanding). Tax-Exempt 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).
Tax-Exempt may purchase securities on a when, as and if issued basis under
which the issuance of the security depends upon the occurrence of a subsequent
event, such as approval of a merger, corporate reorganization or debt
restructuring. The commitment for the purchase of any such security will not be
18
recognized in the portfolio of the fund until the Investment Manager determines
that issuance of the security is probable. At that time, the fund will record
the transaction and, in determining its net asset value, will reflect the value
of the security daily. The value of the fund's commitments to purchase the
securities of any one issuer, together with the value of all securities of such
issuer owned by the fund, may not exceed 5% of the value of the fund's total
assets at the time the initial commitment to purchase such securities is made.
An increase in the percentage of the fund's assets committed to the purchase of
securities on a "when, as and if issued" basis may increase the volatility of
its net asset value. The fund may also sell securities on a "when, as and if
issued" basis provided that the issuance of the security will result
automatically from the exchange or conversion of a security owned by the fund
at the time of sale.
Tax-Exempt may invest in zero coupon securities. Zero coupon 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. A
zero coupon security pays no interest to its holder during its life.
The foregoing discussion is a summary of the principal differences and
similarities between the investment policies of the funds. For a more complete
discussion of Tax-Exempt's policies, see "Principal Investment Strategies" and
"Additional Investment Strategy Information" in Tax-Exempt's Prospectus and
"Description of the Fund and Its Investments and Risks" in Tax-Exempt's
Statement of Additional Information.
INVESTMENT RESTRICTIONS
The investment restrictions adopted by MIT III and Tax-Exempt as
fundamental policies are substantially similar. MIT III's investment
restrictions and their similarities or differences with Tax-Exempt's investment
restrictions are summarized below. A full description of Tax-Exempt's
investment restrictions can be found under the caption "Description of the Fund
and Its Investments and Risks -- Fund Policies/Investment Restrictions" in
Tax-Exempt's Statements of Additional Information. A fundamental investment
restriction cannot be changed without the vote of the majority of the
outstanding voting securities of a fund, as defined in the 1940 Act.
MIT III may not:
1. As to 75% of its total assets, invest more than 5% of the value of its
total assets in the securities of any one issuer, except that this limitation
shall not apply to obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities. Tax-Exempt has a similar
restriction but as to 100% of its total assets.
2. Purchase more than 10% of all outstanding taxable debt securities of
any one issuer (other than obligations issued, or guaranteed as to principal
and interest, by the United States Government, its agencies or
instrumentalities). Tax-Exempt has an identical restriction.
3. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry; provided, however, that such limitations shall not
be applicable to Municipal Obligations issued by governments or political
subdivisions of governments, and obligations issued or guaranteed by the United
States Government, its agencies or instrumentalities. In addition, the fund
reserves the right to invest 25% or more of its assets in any of the following
types of Municipal Obligations, provided that the percentage of the Trust's
total assets in private activity bonds in any one category does not exceed 25%
of the fund's total assets: health facility obligations, housing obligations,
single family mortgage revenue bonds, industrial revenue obligations (including
pollution control obligations), electric utility obligations, airport facility
revenue obligations, water and sewer obligations, university and college
revenue obligations, bridge authority and toll road obligations and resource
recovery obligations. Tax-Exempt has a similar restriction.
19
4. Invest more than 5% of the value of its total assets in taxable
securities of issuers having a record, together with predecessors, of less than
three years of continuous operation. This restriction shall not apply to any
obligation of the United States Government, its agencies or instrumentalities.
Tax-Exempt has an identical restriction.
5. Invest in common stock. Tax-Exempt has an identical restriction.
6. Invest in securities of any issuer if, to the knowledge of the fund,
any officer or trustee of the fund or any officer or director of the Investment
Adviser or Dean Witter Reynolds owns more than 1/2 of 1% of the outstanding
securities of such issuer, and such officers, trustees and directors who own
more than 1/2 of 1% own in the aggregate more than 5% of the outstanding
securities of such issuer. Tax-Exempt has a substantially identical
restriction.
7. Purchase or sell real estate or interests therein, although it may
purchase securities secured by real estate or interests therein. Tax-Exempt has
an identical restriction.
8. Purchase or sell commodities except that the fund may purchase or sell
financial futures contracts and related options thereon. Tax-Exempt has a
substantially similar restriction.
9. Purchase oil, gas or other mineral leases, rights or royalty contracts,
or exploration or development programs. Tax-Exempt has a similar restriction.
10. Write, purchase or sell puts, calls, or combinations thereof, except
for options on futures contracts or options on debt securities. Tax-Exempt has
an identical restriction.
11. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets or, by purchase in the open market of securities of closed-end
investment companies where no underwriter's or dealer's commission or profit,
other than customary broker's commissions, is involved and only if immediately
thereafter not more than (i) 5% of the fund's total assets, taken at market
value, would be invested in any one such company and (ii) 10% of the fund's
total assets, taken at market value, would be invested in such securities.
Tax-Exempt has a similar restriction but it does not have an exception for
purchases of closed-end investment companies.
12. Borrow money, except that the fund may borrow from a bank for
temporary or emergency purposes or for repurchase of its shares provided that
immediately after such borrowing the amount borrowed does not exceed 331/3% of
the value of its total assets (including the amount borrowed) less its
liabilities (not including any borrowings but including the fair market value
at the time of computation of any other senior securities which are outstanding
at the time). Tax-Exempt may only borrow for temporary or emergency purposes
and only in amounts not exceeding 5% of the value of its total assets (not
including the amount borrowed).
13. Pledge its assets or assign or otherwise encumber them except to
secure borrowings effected within the limitations set forth in Restriction 12.
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. Tax-Exempt
has an identical restriction.
14. 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. Tax-Exempt has an identical restriction.
15. 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. Tax-Exempt has a substantially similar
restriction.
20
16. Make short sales of securities. Tax-Exempt has an identical
restriction.
17. Purchase securities on margin, except for such short-term loans as are
necessary for the clearance of purchases of portfolio securities. Tax-Exempt
has an identical restriction.
18. 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. Tax-Exempt has an identical restriction.
19. Invest for the purpose of exercising control or management of any
other issuer. Tax-Exempt has an identical restriction.
20. Invest over 10% of its total assets in restricted securites.
Tax-Exempt has no such fundamental investment restriction.
ADDITIONAL MATTERS REGARDING MIT III
This section sets forth additional information about MIT III which is not
contained elsewhere in this Proxy Statement and Prospectus.
HISTORY OF PUBLIC TRADING OF MIT III'S SHARES
Shares of MIT III trade on the New York Stock Exchange under the symbol
"TFC". The following table shows the history of public trading of the shares of
beneficial interest of the Fund by quarter for the last two fiscal years. The
table sets forth the per share high market price and the per share low market
price on the NYSE for each completed fiscal quarter and the corresponding net
asset value for that market price as well as the discount (expressed as a
percentage of net asset value) represented by the difference between the market
price and its corresponding net asset value:
MARKET NET ASSET PERCENTAGE MARKET NET ASSET PERCENTAGE
QUARTER ENDED PRICE-HIGH VALUE DISCOUNT PRICE-LOW VALUE DISCOUNT
- - ------------- ---------- ----- -------- --------- ----- --------
August 31, 2000 $9.3750 $ 9.65 2.85% $7.6250 $ 9.33 18.27%
May 31, 2000 $7.8750 $ 9.32 15.50% $7.5625 $ 9.24 18.15%
February 29, 2000 $7.8125 $ 9.14 14.52% $7.4375 $ 9.35 20.45%
November 30, 1999 $7.9375 $ 9.35 15.11% $7.4375 $ 9.28 19.85%
August 31, 1999 $8.4375 $ 9.85 14.34% $7.8125 $ 9.45 17.33%
May 31, 1999 $8.8125 $10.00 11.88% $8.3125 $ 9.84 15.52%
February 28, 1999 $9.0000 $10.05 10.45% $8.7500 $10.01 12.59%
November 30, 1998 $9.3750 $10.12 7.36% $8.6875 $10.27 15.41%
The MIT III shares generally have traded at a discount from net asset
value since January 21, 1994. On , 2000, the shares traded at a market
price of $ with a net asset value of $ .
INVESTMENT ADVISOR
MIT III's investment adviser, MSDW Advisors, maintains its offices at Two
World Trade Center, New York, New York 10048. MSDW Advisors, which was
incorporated in July, 1992 under the name Dean Witter InterCapital Inc.,
changed its name to Morgan Stanley Dean Witter Advisors Inc. on June 22, 1998.
MSDW Advisors together with Morgan Stanley Dean Witter Services Company Inc.,
its wholly-owned subsidiary, had approximately $ billion in assets under
managements as of , 2000. MSDW Advisors is a
21
wholly-owned subsidiary of MSDW, a preeminent global financial services firm
that maintains leading market positions in each of its three primary businesses
- - -- securities, asset management and credit services. MSDW has its offices at
1585 Broadway, New York, New York 10036.
The Principal Executive Officer and Directors of MSDW Advisors are
Mitchell M. Merin, President and Chief Executive Officer, Ronald E. Robison,
Executive Vice President and Chief Administrative Officer and Barry Fink,
Executive Vice President, Secretary and General Counsel. Messrs. Merin, Robison
and Fink also serve as officers of MIT III.
MSDW Advisors and its wholly-owned subsidiary, MSDW Services, serve in
various investment management, advisory, management and administrative
capacities to investment companies and pension plans and other institutional
and individual investors.
There are various lawsuits pending against MSDW involving material amounts
which, in the opinion of its management, will be resolved with no material
effect on the consolidated financial position of the company.
PORTFOLIO MANAGEMENT
Since March 1993, James F. Willison has been the primary portfolio manager
of MIT III and has been the person primarily responsible for the day-to-day
portfolio management of MIT III's portfolio. Mr. Willison has been a portfolio
manager with MIT III's Investment Advisor for over five years.
EXPENSES BORNE BY MIT III
Under the Advisory Agreement, MIT III is obligated to bear all of the
costs and expenses of its operation, except those specifically assumed by the
Investment Advisor, including, without limitation: charges and expenses of any
registrar, custodian or depository appointed by MIT III for the safekeeping of
its cash, portfolio securities or commodities and other property, and any stock
transfer or dividend agent or agents appointed by MIT III; brokers' commissions
chargeable to MIT III in connection with portfolio securities transactions to
which the Trust is a party; all taxes, including securities or commodities
issuance and transfer taxes, and fees payable by the Trust to Federal, state or
other governmental agencies; costs and expenses of engraving or printing of
certificates representing shares of MIT III; all costs and expenses in
connection with registration and maintenance of registration of MIT III and of
its shares with the Securities and Exchange Commission and various states and
other jurisdictions (including filing fees and legal fees and disbursements of
counsel); the costs and expense of preparing, printing, including typesetting,
and distributing prospectuses for such purposes; all expenses of shareholders'
and Trustees' meetings and of preparing, printing and mailing 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 MIT III's
Administrator or Investment Advisor or any of their corporate affiliates; all
expenses incident to the payment of any dividend or distribution program;
charges and expenses of any outside pricing services; charges and expenses of
legal counsel, including counsel to the Independent Trustees of MIT III, and
independent accountants in connection with any matter relating to MIT III (not
including compensation or expenses of attorneys employed by the Administrator
or Investment Advisor); membership dues of industry associations; interest
payable on borrowings; fees and expenses incident to the listing of MIT III's
shares on any stock exchange; postage; insurance premiums on property or
personnel (including officers and Trustees) of MIT III which inure to its
benefit; extraordinary expenses (including, but not limited to legal claims,
liabilities, litigation costs and any indemnification related thereto); and all
other charges and costs of MIT III's operations unless otherwise explicitly
provided in the Advisory Agreement. MIT III is not responsible for expenses
assumed by the Administrator under the Administration Agreement.
22
ADDITIONAL INFORMATION ABOUT MIT III AND TAX-EXEMPT
GENERAL
MIT III was organized as a "Massachusetts business trust" under the laws
of the Commonwealth of Massachusetts on June 26, 1989 and commenced operations
as a closed-end registered investment company on October 5, 1989. For a
discussion of the organization and operation of Tax-Exempt, see "Fund
Management" and "Investment Objective" in Tax-Exempt's Prospectus.
The Board of Trustees of each of MIT III and Tax-Exempt oversees the
management of the Fund but does not itself manage the Fund. The Trustees review
various services provided by or under the direction of the Investment Manager
or Investment Advisor, as the case may be, to ensure that the Fund's general
investment policies and programs are properly carried out. The Trustees also
conduct their review to ensure that administrative services are provided to the
Fund in a satisfactory manner.
Under state law, the duties of the Trustees are generally characterized as
a duty of loyalty and a duty of care. The duty of loyalty requires a Trustee to
exercise his or her powers in the interest of each Fund and not the Trustee's
own interest or the interest of another person or organization. A Trustee
satisfies his or her duty of care by acting in good faith with the care of an
ordinarily prudent person and in a manner the Trustee reasonably believes to be
in the best interest of each Fund and its shareholders.
FINANCIAL INFORMATION
For certain financial information about Tax-Exempt, see "Financial
Highlights" and "Past Performance" in Tax-Exempt's Prospectus, and for certain
financial information about MIT III, see MIT III's Annual Report for its fiscal
year ended August 31, 2000.
MANAGEMENT
For information about the respective Board of Trustees, Investment
Manager, and the Distributor of Tax-Exempt, see "Fund Management" in
Tax-Exempt's Prospectus and "Investment Management and Other Services" in
Tax-Exempt's Statement of Additional Information and, with respect to MIT III,
see "Additional Matters Regarding MIT III" above.
DESCRIPTION OF SECURITIES AND SHAREHOLDER INQUIRIES
For a description of the nature and most significant attributes of shares
of MIT III and Tax-Exempt, and information regarding shareholder inquiries, see
the discussion herein under "The Reorganization -- Description of Shares of
Tax-Exempt and MIT III" and "Available Information" as well as "Capital Stock
and Other Securities" in Tax-Exempt's Statement of Additional Information.
CUSTODIAN AND TRANSFER AGENT AND DIVIDEND PAYING AGENT
Morgan Stanley Dean Witter Trust FSB is the Transfer Agent for each of MIT
III's and Tax-Exempt's shares and the Dividend Disbursing Agent for payment of
dividends and distributions on their respective shares. The principal business
address of the Transfer Agent is Harborside Financial Center, Plaza Two, Jersey
City, NJ 07311. The Bank of New York, 100 Church Street, New York, NY 10007 is
the Custodian of the assets of both MIT III and Tax-Exempt.
DIVIDENDS, DISTRIBUTIONS AND TAXES
MIT III and Tax-Exempt are each qualified as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986 and each
generally distributes sufficient income and gains so that it will not pay
23
corporate income tax on its earnings. Income dividend distributions made by MIT
III or Tax-Exempt are exempt from federal income taxes, to the extent they are
derived from municipal obligations. Income derived from other portfolio
securities may be subject to federal, state and/or local taxes. Additionally,
income derived from some municipal securities are subject to the federal
"alternative minimum tax" and although interest on these securities is
generally exempt from federal income tax, some shareholders who have many
deductions or exemptions nevertheless may have to pay tax on the income.
Capital gain distributions are normally subject to federal income tax when they
are paid. Any short-term capital gain distributions are taxable to shareholders
as ordinary income. Any long-term capital gain distributions are taxable to
shareholders as long-term capital gains, no matter how long a shareholder has
owned shares in MIT III or Tax-Exempt. After the end of each calendar year, MIT
III and Tax-Exempt shareholders are sent a statement showing the taxable
distributions paid to them in the previous year. The statement provides
information on their dividends and capital gains for tax purposes.
For a further discussion of Tax-Exempt's and MIT III's policies with
respect to dividends, distributions and taxes, see "Distributions" and "Tax
Consequences" in Tax-Exempt's Prospectus as well as the discussion herein under
"Synopsis -- Purchases, Exchanges and Redemptions" with respect to both
Tax-Exempt and MIT III.
PURCHASES, REPURCHASES AND REDEMPTIONS
For a discussion of how Tax-Exempt's shares may be purchased, repurchased
and redeemed, see "How to Buy Shares," "How to Exchange Shares" and "How to
Sell Shares" in Tax-Exempt's Prospectus.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
For a discussion of Tax-Exempt's performance, see management's letter to
shareholders in its Annual Report for its fiscal year ended December 31, 1999
and its Semi-Annual Report for the six month period ended June 30, 2000, each
accompanying this Proxy Statement and Prospectus. For a discussion of the
performance of MIT III, see MIT III's Annual Report for its fiscal year ended
August 31, 2000.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of Tax-Exempt, for the year ended December 31,
1999, have been audited by PricewaterhouseCoopers LLP, independent accountants
and the financial statements of MIT III, for the year ended August 31, 2000,
have been audited by Deloitte & Touche LLP, independent accountants, and are
incorporated by reference in the Statement of Additional Information relating
to the Registration Statement on Form N-14 of which this Proxy Statement and
Prospectus forms a part. These financial statements have been incorporated by
reference in reliance upon such reports given upon the authority of
PricewaterhouseCoopers LLP and Deloitte & Touche LLP, respectively, as experts
in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Tax-Exempt will
be passed upon by Mayer, Brown & Platt, New York, New York. Such firm will rely
on Massachusetts counsel as to matters of Massachusetts law.
AVAILABLE INFORMATION
Additional information about MIT III and Tax-Exempt is available, as
applicable, in the following documents which are incorporated herein by
reference: (i) Tax-Exempt's Prospectus dated February 24, 2000, attached to
this Proxy Statement and Prospectus, which Prospectus forms a part of
Post-Effective Amendment
24
No. 23 to Tax-Exempt's Registration Statement on Form N-1A (File Nos. 2-66268;
811-2979); (ii) Tax-Exempt's Annual Report for its fiscal year ended December
31, 1999, and its succeeding Semi-Annual Report for the six months ended June
30, 2000, accompanying this Proxy Statement and Prospectus; and (iii) MIT III's
Annual Report for its fiscal year ended August 31, 2000. The foregoing
documents may be obtained without charge by calling (800) 869-NEWS (toll-free).
MIT III and Tax-Exempt are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended, and in accordance therewith,
file reports and other information with the Commission. Proxy material, reports
and other information about MIT III and Tax-Exempt which are of public record
can be inspected and copied at public reference facilities maintained by the
Commission at Room 1204, Judiciary Plaza, 450 Fifth Street, NW, Washington,
D.C. 20549 and certain of its regional offices, and copies of such materials
can be obtained at prescribed rates from the Public Reference Branch, Office of
Consumer Affairs and Information Services, Securities and Exchange Commission,
Washington, D.C. 20549.
The shares of beneficial interest of MIT III are listed on the NYSE and,
in accordance with the requirements of the NYSE, MIT III files proxy materials,
reports and other information with the NYSE. These materials can be inspected
at the New York Stock Exchange located at 11 Wall Street, New York, NY 10005 or
by telephoning the NYSE at (212) 656-3000.
OTHER BUSINESS
Management of MIT III knows of no business other than the matters
specified above which will be presented at the Meeting. Since matters not known
at the time of the solicitation may come before the Meeting, the proxy as
solicited confers discretionary authority with respect to such matters as
properly come before the Meeting, including any adjournment or adjournments
thereof, and it is the intention of the persons named as attorneys-in-fact in
the proxy to vote this proxy in accordance with their judgment on such matters.
By Order of the Board of Trustees
Barry Fink, Secretary
October , 2000
25
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made as of this
24th day of August, 2000, by and between MORGAN STANLEY DEAN WITTER TAX-EXEMPT
SECURITIES TRUST, a Massachusetts business trust ("Tax-Exempt") and MORGAN
STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III, a Massachusetts business trust
("MIT III").
This Agreement is intended to be and is adopted as a "plan of
reorganization" within the meaning of Treas. Reg. 1.368-2(g), for a
reorganization under Section 368(a)(1) of the Internal Revenue Code of 1986, as
amended (the "Code"). The reorganization ("Reorganization") will consist of the
transfer to Tax-Exempt of substantially all of the assets of MIT III in
exchange for the assumption by Tax-Exempt of all stated liabilities of MIT III
and the issuance by Tax-Exempt of Class D shares of beneficial interest, par
value $0.01 per share (the "Tax-Exempt Shares"), to be distributed, after the
Closing Date hereinafter referred to, to the shareholders of MIT III in
liquidation of MIT III as provided herein, all upon the terms and conditions
hereinafter set forth in this Agreement.
In consideration of the premises and of the covenants and agreements
hereinafter set forth, the parties hereto covenant and agree as follows:
1. THE REORGANIZATION AND LIQUIDATION OF MIT III
1.1 Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, MIT III agrees to
assign, deliver and otherwise transfer the MIT III Assets (as defined in
paragraph 1.2) to Tax-Exempt and Tax-Exempt agrees in exchange therefor to
assume all of MIT III stated liabilities on the Closing Date as set forth in
paragraph 1.3(a) and to deliver to MIT III the number of Tax-Exempt Shares,
including fractional Tax-Exempt Shares, determined in the manner set forth in
paragraph 2.3. Such transactions shall take place at the closing provided for
in paragraph 3.1 ("Closing").
1.2 (a) The "MIT III Assets" shall consist of all property, including
without limitation, all cash (other than the "Cash Reserve" (as defined in
paragraph 1.3(b)), cash equivalents, securities and dividend and interest
receivables owned by MIT III, and any deferred or prepaid expenses shown as an
asset on MIT III's books on the Valuation Date.
(b) On or prior to the Valuation Date, MIT III will provide Tax-Exempt
with a list of all of MIT III assets to be assigned, delivered and otherwise
transferred to Tax-Exempt and of the stated liabilities to be assumed by
Tax-Exempt pursuant to this Agreement. MIT III reserves the right to sell any
of the securities on such list but will not, without the prior approval of
Tax-Exempt, acquire any additional securities other than securities of the type
in which Tax-Exempt is permitted to invest and in amounts agreed to in writing
by Tax-Exempt. Tax-Exempt will, within a reasonable time prior to the Valuation
Date, furnish MIT III with a statement of Tax-Exempt's investment objectives,
policies and restrictions and a list of the securities, if any, on the list
referred to in the first sentence of this paragraph that do not conform to
Tax-Exempt's investment objective, policies and restrictions. In the event that
MIT III holds any investments that Tax-Exempt is not permitted to hold, MIT III
will dispose of such securities on or prior to the Valuation Date. In addition,
if it is determined that the portfolios of MIT III and Tax-Exempt, when
aggregated, would contain investments exceeding certain percentage limitations
imposed upon Tax-Exempt with respect to such investments, MIT III if requested
by Tax-Exempt will, on or prior to the Valuation Date, dispose of and/or
reinvest a sufficient amount of such investments as may be necessary to avoid
violating such limitations as of the Closing Date (as defined in paragraph
3.1).
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1.3 (a) MIT III will endeavor to discharge all of its liabilities and
obligations on or prior to the Valuation Date. Tax-Exempt will assume all
stated liabilities, which includes, without limitation, all expenses, costs,
charges and reserves reflected on an unaudited Statement of Assets and
Liabilities of MIT III prepared by the Treasurer of MIT III, as of the
Valuation Date in accordance with generally accepted accounting principles
consistently applied from the prior audited period.
(b) On the Valuation Date, MIT III may establish a cash reserve, which
shall not exceed 5% of MIT III's net assets as of the close of business on the
Valuation Date ("Cash Reserve") to be retained by MIT III and used for the
payment of its liabilities not discharged prior to the Valuation Date and for
the expenses of dissolution.
1.4 In order for MIT III to comply with Section 852(a)(1) of the Code and
to avoid having any investment company taxable income or net capital gain (as
defined in Sections 852(b)(2) and 1222(11) of the Code, respectively) in the
short taxable year ending with its dissolution, MIT III will on or before the
Valuation Date (a) declare a dividend in an amount large enough so that it will
have declared dividends of all of its investment company taxable income and net
capital gain, if any, for such taxable year (determined without regard to any
deduction for dividends paid) and (b) distribute such dividend.
1.5 On the Closing Date or as soon as practicable thereafter, MIT III will
distribute Tax-Exempt Shares received by MIT III pursuant to paragraph 1.1 pro
rata to its shareholders of record determined as of the close of business on
the Valuation Date ("MIT III Shareholders"). Each MIT III Shareholder will
receive Class D shares of Tax-Exempt. Such distribution will be accomplished by
an instruction, signed by the Secretary of MIT III, to transfer Tax-Exempt
Shares then credited to MIT III's account on the books of Tax-Exempt to open
accounts on the books of Tax-Exempt in the names of the MIT III Shareholders
and representing the respective pro rata number of Tax-Exempt Shares due such
MIT III Shareholders. All issued and outstanding shares of MIT III
simultaneously will be canceled on MIT III's books; however, share certificates
representing interests in MIT III will represent a number of Tax-Exempt Shares
after the Closing Date as determined in accordance with paragraph 2.3.
Tax-Exempt will issue certificates representing Tax-Exempt Shares in connection
with such exchange only upon the written request of a MIT III Shareholder.
1.6 Ownership of Tax-Exempt Shares will be shown on the books of
Tax-Exempt's transfer agent. Tax-Exempt Shares will be issued in the manner
described in Tax-Exempt's current Prospectus and Statement of Additional
Information.
1.7 Any transfer taxes payable upon issuance of Tax-Exempt Shares in a
name other than the registered holder of Tax-Exempt Shares on MIT III's books
as of the close of business on the Valuation Date shall, as a condition of such
issuance and transfer, be paid by the person to whom Tax-Exempt Shares are to
be issued and transferred.
1.8 Any reporting responsibility of MIT III is and shall remain the
responsibility of MIT III up to and including the date on which MIT III is
dissolved pursuant to paragraph 1.9.
1.9 Within one year after the Closing Date, MIT III shall pay or make
provision for the payment of all its liabilities and taxes, and distribute to
the shareholders of MIT III as of the close of business on the Valuation Date
any remaining amount of the Cash Reserve (as reduced by the estimated cost of
distributing it to shareholders). If and to the extent that any trust, escrow
account, or other similar entity continues after the close of such one-year
period in connection either with making provision for payment of liabilities or
taxes or with distributions to shareholders of MIT III, such entity shall
either (i) qualify as a liquidating trust under Section 7701 of the Code (and
applicable Treasury Regulations thereunder) or other entity which does not
constitute a continuation of MIT III for federal income tax purposes, or (ii)
be subject to a waiver under Section
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368(a)(2)(G)(ii) of the complete distribution requirement of Section
368(a)(2)(G)(i) of the Code. MIT III shall be dissolved under Massachusetts
law, promptly following the making of all distributions pursuant to paragraph
1.5 (and, in any event, within one year after the Closing Date).
1.10 Copies of all books and records maintained on behalf of MIT III in
connection with its obligations under the Investment Company Act of 1940, as
amended (the "1940 Act"), the Code, state blue sky laws or otherwise in
connection with this Agreement will promptly after the Closing be delivered to
officers of Tax-Exempt or their designee and Tax-Exempt or its designee shall
comply with applicable record retention requirements to which MIT III is
subject under the 1940 Act.
2. VALUATION
2.1 The value of the MIT III Assets shall be the value of such assets
computed as of 4:00 p.m. on the New York Stock Exchange on the third business
day following the receipt of the requisite approval by shareholders of MIT III
of this Agreement or at such time on such earlier or later date after such
approval as may be mutually agreed upon in writing (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in MIT III's initial registration statement on Form N-2 dated September
27, 1989 which procedures are similar to the valuation procedures in
Tax-Exempt's then current Prospectus and Statement of Additional Information.
2.2 The net asset value of a Tax-Exempt Share shall be the net asset value
per share computed on the Valuation Date, using the valuation procedures set
forth in Tax-Exempt's then current Prospectus and Statement of Additional
Information.
2.3 The number of Tax-Exempt Shares (including fractional shares, if any)
to be issued hereunder shall be determined, with respect to each class, by
dividing the aggregate net asset value of MIT III shares (determined in
accordance with paragraph 2.1) by the net asset value per share of Class D
shares of Tax-Exempt (determined in accordance with paragraph 2.2). For
purposes of this paragraph, the aggregate net asset value of the shares of MIT
III shall not include the amount of the Cash Reserve.
2.4 All computations of value shall be made by Morgan Stanley Dean Witter
Services Company Inc. ("MSDW Services") in accordance with its regular practice
in pricing Tax-Exempt. Tax-Exempt shall cause MSDW Services to deliver a copy
of its valuation report at the Closing.
3. CLOSING AND CLOSING DATE
3.1 The Closing shall take place on the next business day following the
Valuation Date (the "Closing Date"). The Closing shall be held as of 9:00 a.m.
Eastern time on January 29, 2001, or at such other time as the parties may
agree. The Closing shall be held at Two World Trade Center, New York, New York,
at the principal offices of MIT III and Tax-Exempt. All acts taking place at
the Closing shall be deemed to take place simultaneously as of 9:00 a.m.
Eastern time on the Closing Date unless otherwise provided.
3.2 Portfolio securities held by MIT III and represented by a certificate
or other written instrument shall be presented by it or on its behalf to The
Bank of New York (the "Custodian"), as custodian for Tax-Exempt, for
examination no later than five business days preceding the Valuation Date. Such
portfolio securities (together with any cash or other assets) shall be
delivered by MIT III to the Custodian for the account of Tax-Exempt on or
before the Closing Date in conformity with applicable custody provisions under
the 1940 Act and duly endorsed in proper form for transfer in such condition as
to constitute good delivery thereof in accordance with the custom of brokers.
The portfolio securities shall be accompanied by all necessary Federal and
state stock transfer stamps or a check for the appropriate purchase price of
such stamps. Portfolio securities
A-3
and instruments deposited with a securities depository (as defined in Rule
17f-4 under the 1940 Act) shall be delivered on or before the Closing Date by
book-entry in accordance with customary practices of such depository and the
Custodian. The cash delivered shall be in the form of a Federal Funds wire,
payable to the order of "The Bank of New York, Custodian for Morgan Stanley
Dean Witter Tax-Exempt Securities Trust."
3.3 In the event that on the Valuation Date, (a) the New York Stock
Exchange shall be closed to trading or trading thereon shall be restricted or
(b) trading or the reporting of trading on such Exchange or elsewhere shall be
disrupted so that, in the judgment of both Tax-Exempt and MIT III, accurate
appraisal of the value of the net assets of Tax-Exempt or the MIT III Assets is
impracticable, the Valuation Date shall be postponed until the first business
day after the day when trading shall have been fully resumed without
restriction or disruption and reporting shall have been restored.
3.4 If requested, MIT III shall deliver to Tax-Exempt or its designee (a)
at the Closing, a list, certified by its Secretary, of the names, addresses and
taxpayer identification numbers of the MIT III Shareholders and the number and
percentage ownership of outstanding MIT III shares owned by each such MIT III
Shareholder, all as of the Valuation Date, and (b) as soon as practicable after
the Closing, all original documentation (including Internal Revenue Service
forms, certificates, certifications and correspondence) relating to the MIT III
Shareholders' taxpayer identification numbers and their liability for or
exemption from back-up withholding. Tax-Exempt shall issue and deliver to such
Secretary a confirmation evidencing delivery of Tax-Exempt Shares to be
credited on the Closing Date to Massachusetts Series or provide evidence
satisfactory to MIT III that such Tax-Exempt Shares have been credited to MIT
III's account on the books of Tax-Exempt. At the Closing, each party shall
deliver to the other such bills of sale, checks, assignments, share
certificates, if any, receipts or other documents as such other party or its
counsel may reasonably request.
4. COVENANTS OF TAX-EXEMPT AND MIT III
4.1 Except as otherwise expressly provided herein with respect to MIT III,
Tax-Exempt and MIT III each will operate its business in the ordinary course
between the date hereof and the Closing Date, it being understood that such
ordinary course of business will include customary dividends and other
distributions.
4.2 Tax-Exempt will prepare and file with the Securities and Exchange
Commission ("Commission") a registration statement on Form N-14 under the
Securities Act of 1933, as amended ("1933 Act"), relating to Tax-Exempt Shares
("Registration Statement"). MIT III will provide Tax-Exempt with the Proxy
Materials as described in paragraph 4.3 below, for inclusion in the
Registration Statement. MIT III will further provide Tax-Exempt with such other
information and documents relating to MIT III as are reasonably necessary for
the preparation of the Registration Statement.
4.3 MIT III will call a meeting of its shareholders to consider and act
upon this Agreement and to take all other action necessary to obtain approval
of the transactions contemplated herein. MIT III will prepare the notice of
meeting, form of proxy and proxy statement (collectively, "Proxy Materials") to
be used in connection with such meeting; provided that Tax-Exempt will furnish
MIT III with its currently effective prospectus for inclusion in the Proxy
Materials and with such other information relating to Tax-Exempt as is
reasonably necessary for the preparation of the Proxy Materials.
4.4 MIT III will assist Tax-Exempt in obtaining such information as
Tax-Exempt reasonably requests concerning the beneficial ownership of MIT III
shares.
4.5 Subject to the provisions of this Agreement, Tax-Exempt and MIT III
will each take, or cause to be taken, all action, and do or cause to be done,
all things reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement.
A-4
4.6 MIT III shall furnish or cause to be furnished to Tax-Exempt within 30
days after the Closing Date a statement of MIT III's assets and liabilities as
of the Closing Date, which statement shall be certified by MIT III's Treasurer
and shall be in accordance with generally accepted accounting principles
consistently applied. As promptly as practicable, but in any case within 60
days after the Closing Date, MIT III shall furnish Tax-Exempt, in such form as
is reasonably satisfactory to Tax-Exempt, a statement certified by MIT III's
Treasurer of earnings and profits of MIT III for Federal income tax purposes
that will be carried over to Tax-Exempt pursuant to Section 381 of the Code.
4.7 As soon after the Closing Date as is reasonably practicable, MIT III
(a) shall prepare and file all Federal and other tax returns and reports of MIT
III required by law to be filed with respect to all periods ending on or before
the Closing Date but not theretofore filed and (b) shall pay all Federal and
other taxes shown as due thereon and/or all Federal and other taxes that were
unpaid as of the Closing Date, including without limitation, all taxes for
which the provision for payment was made as of the Closing Date (as represented
in paragraph 5.2(k)).
4.8 Tax-Exempt agrees to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act and the 1940 Act and to
make such filings required by the state Blue Sky and securities laws as it may
deem appropriate in order to continue its operations after the Closing Date.
5. REPRESENTATIONS AND WARRANTIES
5.1 Tax-Exempt represents and warrants to MIT III as follows:
(a) Tax-Exempt is a validly existing Massachusetts business trust with
full power to carry on its business as presently conducted;
(b) Tax-Exempt is a duly registered, open-end, management investment
company, and its registration with the Commission as an investment company
under the 1940 Act and the registration of its shares under the 1933 Act
are in full force and effect;
(c) All of the issued and outstanding shares of Tax-Exempt have been
offered and sold in compliance in all material respects with applicable
registration requirements of the 1933 Act and state securities laws. Shares
of Tax-Exempt are registered in all jurisdictions in which they are
required to be registered under state securities laws and other laws, and
said registrations, including any periodic reports or supplemental filings,
are complete and current, all fees required to be paid have been paid, and
Tax-Exempt is not subject to any stop order and is fully qualified to sell
its shares in each state in which its shares have been registered;
(d) The current Prospectus and Statement of Additional Information of
Tax-Exempt conform in all material respects to the applicable requirements
of the 1933 Act and the 1940 Act and the regulations thereunder and do not
include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading;
(e) Tax-Exempt is not in, and the execution, delivery and performance
of this Agreement will not result in a, material violation of any provision
of Tax-Exempt's Declaration of Trust or By-Laws or of any agreement,
indenture, instrument, contract, lease or other undertaking to which
Tax-Exempt is a party or by which it is bound;
(f) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or, to its
knowledge, threatened against Tax-Exempt or any of its properties or assets
which, if adversely determined, would materially and adversely affect its
financial condition or the
A-5
conduct of its business; and Tax-Exempt knows of no facts that might form
the basis for the institution of such proceedings and is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects, or is reasonably
likely to materially and adversely effect, its business or its ability to
consummate the transactions herein contemplated;
(g) The Statement of Assets and Liabilities, Statement of Operations,
Statement of Changes in Net Assets and Financial Highlights for the year
ended December 31, 1999, of Tax-Exempt audited by PricewaterhouseCoopers
LLP (copies of which have been furnished to MIT III), fairly present, in
all material respects, Tax-Exempt's financial condition as of such date in
accordance with generally accepted accounting principles, and its results
of such operations, changes in its net assets and financial highlights for
such period, and as of such date there were no known liabilities of
Tax-Exempt (contingent or otherwise) not disclosed therein that would be
required in accordance with generally accepted accounting principles to be
disclosed therein;
(h) All issued and outstanding Tax-Exempt Shares are, and at the
Closing Date will be, duly and validly issued and outstanding, fully paid
and nonassessable with no personal liability attaching to the ownership
thereof, except as set forth under the caption "Capital Stock and Other
Securities" in Tax-Exempt's current Statement of Additional Information
incorporated by reference in the Statement of Additional Information to the
Registration Statement. Tax-Exempt does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of its shares;
(i) The execution, delivery and performance of this Agreement have been
duly authorized by all necessary action on the part of Tax-Exempt, and this
Agreement constitutes a valid and binding obligation of Tax-Exempt
enforceable in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating
to or affecting creditors rights and to general equity principles. No other
consents, authorizations or approvals are necessary in connection with
Tax-Exempt's performance of this Agreement;
(j) Tax-Exempt Shares to be issued and delivered to MIT III, for the
account of the MIT III Shareholders, pursuant to the terms of this
Agreement will at the Closing Date have been duly authorized and, when so
issued and delivered, will be duly and validly issued Tax-Exempt Shares,
and will be fully paid and non-assessable with no personal liability
attaching to the ownership thereof, except as set forth under the caption
"Capital Stock and Other Securities" in Tax-Exempt's current Statement of
Additional Information incorporated by reference in the Statement of
Additional Information to the Registration Statement;
(k) All material Federal and other tax returns and reports of
Tax-Exempt required by law to be filed on or before the Closing Date have
been filed and are correct, and all Federal and other taxes shown as due or
required to be shown as due on said returns and reports have been paid or
provision has been made for the payment thereof, and to the best of
Tax-Exempt's knowledge, no such return is currently under audit and no
assessment has been asserted with respect to any such return;
(l) For each taxable year since its inception, Tax-Exempt has met the
requirements of Subchapter M of the Code for qualification and treatment as
a "regulated investment company" and neither the execution or delivery of
nor the performance of its obligations under this Agreement will adversely
affect, and no other events are reasonably likely to occur which will
adversely affect the ability of Tax-Exempt to continue to meet the
requirements of Subchapter M of the Code;
(m) Since December 31, 1999 there has been no change by Tax-Exempt in
accounting methods, principles, or practices, including those required by
generally accepted accounting principles;
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(n) The information furnished or to be furnished by Tax-Exempt for use
in registration statements, proxy materials and other documents which may
be necessary in connection with the transactions contemplated hereby shall
be accurate and complete in all material respects and shall comply in all
material respects with Federal securities and other laws and regulations
applicable thereto; and
(o) The Proxy Materials to be included in the Registration Statement
(only insofar as they relate to Tax-Exempt) will, on the effective date of
the Registration Statement and on the Closing Date, not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not materially
misleading.
5.2 MIT III represents and warrants to Tax-Exempt as follows:
(a) MIT III is a series of a validly existing Massachusetts business
trust with full power to carry on its business as presently conducted;
(b) MIT III is a duly registered, closed-end, management investment
company, and its registration with the Commission as an investment company
under the 1940 Act is in full force and effect;
(c) All of the issued and outstanding shares of beneficial interest of
MIT III have been offered and sold in compliance in all material respects
with applicable requirements of the 1933 Act and state securities laws.
Shares of MIT III are registered in all jurisdictions in which they are
required to be registered and said registrations, including any periodic
reports or supplemental filings, are complete and current, all fees
required to be paid have been paid, and MIT III is not subject to any stop
order and is fully qualified to sell its shares in each state in which its
shares have been registered;
(d) The Registration Statement of MIT III on Form N-2 conformed in all
material respects to the applicable requirements of the 1933 Act and the
1940 Act and the regulations thereunder and did not include any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading;
(e) MIT III is not, and the execution, delivery and performance of this
Agreement will not result, in a material violation of any provision of MIT
III's Declaration of Trust or By-Laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which MIT III is a
party or by which it is bound;
(f) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or, to its
knowledge, threatened against MIT III or any of its properties or assets
which, if adversely determined, would materially and adversely affect its
financial condition or the conduct of its business; and MIT III knows of no
facts that might form the basis for the institution of such proceedings and
is not a party to or subject to the provisions of any order, decree or
judgment of any court or governmental body which materially and adversely
affects, or is reasonably likely to materially and adversely effect, its
business or its ability to consummate the transactions herein contemplated;
(g) The Statement of Assets and Liabilities, Statement of Operations,
Statement of Changes in Net Assets and Financial Highlights of MIT III for
the year ended August 31, 2000, audited by Deloitte & Touche LLP (copies of
which have been or will be furnished to Tax-Exempt) fairly present, in all
material respects, MIT III's financial condition as of such date, and its
results of operations, changes in its net assets and financial highlights
for such period in accordance with generally accepted accounting
principles, and as of such date there were no known liabilities of MIT III
(contingent or otherwise) not disclosed therein that would be required in
accordance with generally accepted accounting principles to be disclosed
therein;
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(h) MIT III has no material contracts or other commitments (other than
this Agreement) that will be terminated with liability to it prior to the
Closing Date;
(i) All issued and outstanding shares of MIT III are, and at the
Closing Date will be, duly and validly issued and outstanding, fully paid
and nonassessable with no personal liability attaching to the ownership
thereof, except as set forth under the caption "The Reorganization --
Description of Shares of Tax-Exempt and MIT III and the Organization of the
Two Funds" in this Proxy Statement and Prospectus. MIT III does not have
outstanding any options, warrants or other rights to subscribe for or
purchase any of its shares, nor is there outstanding any security
convertible to any of its shares. All such shares will, at the time of
Closing, be held by the persons and in the amounts set forth in the list of
shareholders submitted to Tax-Exempt pursuant to paragraph 3.4;
(j) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action on
the part of MIT III, and subject to the approval of MIT III's shareholders,
this Agreement constitutes a valid and binding obligation of MIT III,
enforceable in accordance with its terms, subject as to enforcement to
bankruptcy, insolvency, reorganization, moratorium and other laws relating
to or affecting creditors rights and to general equity principles. No other
consents, authorizations or approvals are necessary in connection with MIT
III's performance of this Agreement;
(k) All material Federal and other tax returns and reports of MIT III
required by law to be filed on or before the Closing Date shall have been
filed and are correct and all Federal and other taxes shown as due or
required to be shown as due on said returns and reports have been paid or
provision has been made for the payment thereof, and to the best of MIT
III's knowledge, no such return is currently under audit and no assessment
has been asserted with respect to any such return;
(l) For each taxable year since its inception, MIT III, has met all the
requirements of Subchapter M of the Code for qualification and treatment as
a "regulated investment company" and neither the execution or delivery of
nor the performance of its obligations under this Agreement will adversely
affect, and no other events are reasonably likely to occur which will
adversely affect the ability of MIT III to continue to meet the
requirements of Subchapter M of the Code;
(m) At the Closing Date, MIT III will have good and valid title to the
MIT III Assets, subject to no liens (other than the obligation, if any, to
pay the purchase price of portfolio securities purchased by MIT III which
have not settled prior to the Closing Date), security interests or other
encumbrances, and full right, power and authority to assign, deliver and
otherwise transfer such assets hereunder, and upon delivery and payment for
such assets, Tax-Exempt will acquire good and marketable title thereto,
subject to no restrictions on the full transfer thereof, including any
restrictions as might arise under the 1933 Act;
(n) On the effective date of the Registration Statement, at the time of
the meeting of MIT III's shareholders and on the Closing Date, the Proxy
Materials (exclusive of the currently effective Tax-Exempt Prospectus
contained therein) will (i) comply in all material respects with the
provisions of the 1933 Act, the Securities Exchange Act of 1934, as amended
("1934 Act") and the 1940 Act and the regulations thereunder and (ii) not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading. Any other information furnished by MIT III for use
in the Registration Statement or in any other manner that may be necessary
in connection with the transactions contemplated hereby shall be accurate
and complete and shall comply in all material respects with applicable
Federal securities and other laws and regulations thereunder;
(o) MIT III will, on or prior to the Valuation Date, declare one or
more dividends or other distributions to shareholders that, together with
all previous dividends and other distributions to
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shareholders, shall have the effect of distributing to the shareholders all
of its investment company taxable income and net capital gain, if any,
through the Valuation Date (computed without regard to any deduction for
dividends paid);
(p) MIT III has maintained or has caused to be maintained on its behalf
all books and accounts as required of a registered investment company in
compliance with the requirements of Section 31 of the 1940 Act and the
Rules thereunder; and
(q) MIT III is not acquiring Tax-Exempt Shares to be issued hereunder
for the purpose of making any distribution thereof other than in accordance
with the terms of this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF MIT III
The obligations of MIT III to consummate the transactions provided for
herein shall be subject, at its election, to the performance by Tax-Exempt of
all the obligations to be performed by it hereunder on or before the Closing
Date and, in addition thereto, the following conditions:
6.1 All representations and warranties of Tax-Exempt contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if
made on and as of the Closing Date;
6.2 Tax-Exempt shall have delivered to MIT III, a certificate of its
President and Treasurer, in a form reasonably satisfactory to MIT III and dated
as of the Closing Date, to the effect that the representations and warranties
of Tax-Exempt made in this Agreement are true and correct at and as of the
Closing Date, except as they may be affected by the transactions contemplated
by this Agreement, and as to such other matters as MIT III shall reasonably
request;
6.3 MIT III shall have received a favorable opinion from Mayer, Brown &
Platt, counsel to Tax-Exempt, dated as of the Closing Date, to the effect that:
(a) Tax-Exempt is a validly existing Massachusetts business trust, and
has the power to own all of its properties and assets and to carry on its
business as presently conducted (Massachusetts counsel may be relied upon
in delivering such opinion); (b) Tax-Exempt is a duly registered, open-end,
management investment company, and its registration with the Commission as
an investment company under the 1940 Act is in full force and effect; (c)
this Agreement has been duly authorized, executed and delivered by
Tax-Exempt and, assuming that the Registration Statement complies with the
1933 Act, the 1934 Act and the 1940 Act and regulations thereunder and
assuming due authorization, execution and delivery of this Agreement by MIT
III, is a valid and binding obligation of Tax-Exempt enforceable against
Tax-Exempt in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating
to or affecting creditors rights and to general equity principles; (d)
Tax-Exempt Shares to be issued to MIT III Shareholders as provided by this
Agreement are duly authorized and upon such delivery will be validly
issued, fully paid and non-assessable (except as set forth under the
caption "Capital Stock and Other Securities" in Tax-Exempt's Statement of
Additional Information), and no shareholder of Tax-Exempt has any
preemptive rights to subscription or purchase in respect thereof
(Massachusetts counsel may be relied upon in delivering such opinion); (e)
the execution and delivery of this Agreement did not, and the consummation
of the transactions contemplated hereby will not, violate Tax-Exempt's
Declaration of Trust or By-Laws (Massachusetts counsel may be relied upon
in delivering such opinion); and (f) to the knowledge of such counsel, no
consent, approval, authorization
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or order of any court or governmental authority of the United States or any
state is required for the consummation by Tax-Exempt of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act and the 1940 Act and such as may be required under state
securities laws; and
6.4 As of the Closing Date, there shall have been no material change in
the investment objective, policies and restrictions nor any increase in the
investment management fees from those described in Tax-Exempt's Prospectus
dated February 24, 2000 and Statement of Additional Information dated February
24, 2000.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF TAX-EXEMPT
The obligations of Tax-Exempt to complete the transactions provided for
herein shall be subject, at its election, to the performance by MIT III of all
the obligations to be performed by it hereunder on or before the Closing Date
and, in addition thereto, the following conditions:
7.1 All representations and warranties of MIT III contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if
made on and as of the Closing Date;
7.2 MIT III shall have delivered to Tax-Exempt at the Closing a
certificate of its President and its Treasurer, in form and substance
satisfactory to Tax-Exempt and dated as of the Closing Date, to the effect that
the representations and warranties of MIT III made in this Agreement are true
and correct at and as of the Closing Date, except as they may be affected by
the transactions contemplated by this Agreement, and as to such other matters
as Tax-Exempt shall reasonably request;
7.3 MIT III shall have delivered to Tax-Exempt a statement of the MIT III
Assets and its liabilities, together with a list of MIT III's portfolio
securities and other assets showing the respective adjusted bases and holding
periods thereof for income tax purposes, as of the Closing Date, certified by
the Treasurer of MIT III;
7.4 MIT III shall have delivered to Tax-Exempt within three business days
after the Closing a letter from PricewaterhouseCoopers LLP with respect to
taxable years ended August 31, 1998 and 1999, and a letter from Deloitte &
Touche LLP for taxable year ended August 31, 2000, each dated as of the Closing
Date stating that (a) such respective firm has performed a limited review of
the Federal and state income tax returns of MIT III for each of the respective
taxable years and, based on such limited review, nothing came to their
attention that caused them to believe that such returns did not properly
reflect, in all material respects, the Federal and state income tax liabilities
of MIT III for the periods covered thereby, (b) for the period from August 31,
2000 to and including the Closing Date, Deloitte & Touche LLP has performed a
limited review (based on unaudited financial data) to ascertain the amount of
applicable Federal, state and local taxes and has determined that same either
have been paid or reserves have been established for payment of such taxes,
and, based on such limited review, nothing came to their attention that caused
them to believe that the taxes paid or reserves set aside for payment of such
taxes were not adequate in all material respects for the satisfaction of all
Federal, state and local tax liabilities for the period from August 31, 2000 to
and including the Closing Date and (c) based on such limited reviews, nothing
came to their attention that caused them to believe that MIT III would not
qualify as a regulated investment company for Federal income tax purposes for
any such year or period;
7.5 Tax-Exempt shall have received at the Closing a favorable opinion from
Mayer, Brown & Platt, counsel to MIT III, dated as of the Closing Date to the
effect that:
A-10
(a) MIT III is a validly existing Massachusetts business trust and has
the power to own all of its properties and assets and to carry on its
business as presently conducted (Massachusetts counsel may be relied upon
in delivering such opinion); (b) MIT III is a duly registered, closed-end,
management investment company under the 1940 Act, and its registration with
the Commission as an investment company under the 1940 Act is in full force
and effect; (c) this Agreement has been duly authorized, executed and
delivered by MIT III and, assuming that the Registration Statement complies
with the 1933 Act, the 1934 Act and the 1940 Act and the regulations
thereunder and assuming due authorization, execution and delivery of this
Agreement by Tax-Exempt, is a valid and binding obligation of MIT III,
enforceable against MIT III, in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors rights and to general equity
principles; (d) the execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, violate
MIT III's Declaration of Trust or By-Laws (Massachusetts counsel may be
relied upon in delivering such opinion); and (e) to the knowledge of such
counsel, no consent, approval, authorization or order of any court or
governmental authority of the United States or any state is required for
the consummation by MIT III of the transactions contemplated herein, except
such as have been obtained under the 1933 Act, the 1934 Act and the 1940
Act and such as may be required under state securities laws; and
7.6 On the Closing Date, the MIT III Assets shall include no assets that
Tax-Exempt, by reason of limitations of the fund's Declaration of Trust or
otherwise, may not properly acquire.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF TAX-EXEMPT AND MIT III
The obligations of MIT III and Tax-Exempt hereunder are each subject to
the further conditions that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
MIT III in accordance with the provisions of MIT III's Declaration of Trust,
and certified copies of the resolutions evidencing such approval shall have
been delivered to Tax-Exempt;
8.2 On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with,
this Agreement or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and
permits of Federal, state and local regulatory authorities (including those of
the Commission and of state Blue Sky and securities authorities, including
"no-action" positions of and exemptive orders from such Federal and state
authorities) deemed necessary by Tax-Exempt or MIT III to permit consummation,
in all material respects, of the transactions contemplated herein shall have
been obtained, except where failure to obtain any such consent, order or permit
would not involve risk of a material adverse effect on the assets or properties
of Tax-Exempt or MIT III;
8.4 The Registration Statement shall have become effective under the 1933
Act, no stop orders suspending the effectiveness thereof shall have been issued
and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act;
8.5 MIT III shall have declared and paid a dividend or dividends and/or
other distribution or distributions that, together with all previous such
dividends or distributions, shall have the effect of distributing to the MIT
A-11
III Shareholders all of MIT III's investment company taxable income (computed
without regard to any deduction for dividends paid) and all of its net capital
gain (after reduction for any capital loss carry-forward and computed without
regard to any deduction for dividends paid) for all taxable years ending on or
before the Closing Date; and
8.6 The parties shall have received the opinion of the law firm of Mayer,
Brown & Platt (based on such representations as such law firm shall reasonably
request), addressed to Tax-Exempt and MIT III, which opinion may be relied upon
by the shareholders of MIT III, substantially to the effect that, for Federal
income tax purposes:
(a) The transfer of MIT III's assets in exchange for Tax-Exempt Shares
and the assumption by Tax-Exempt of certain stated liabilities of MIT III
followed by the distribution by MIT III of Tax-Exempt Shares to the MIT III
Shareholders in exchange for their MIT III shares pursuant to and in
accordance with the terms of the Reorganization Agreement will constitute a
"reorganization" within the meaning of Section 368(a)(1)(C) of the Code,
and MIT III and Tax-Exempt will each be a "party to a reorganization"
within the meaning of Section 368(b) of the Code;
(b) No gain or loss will be recognized by Tax-Exempt upon the receipt
of the assets of MIT III solely in exchange for Tax-Exempt Shares and the
assumption by Tax-Exempt of the stated liabilities of MIT III;
(c) No gain or loss will be recognized by MIT III upon the transfer of
the assets of MIT III to Tax-Exempt in exchange for Tax-Exempt Shares and
the assumption by Tax-Exempt of the stated liabilities or upon the
distribution of Tax-Exempt Shares to the MIT III Shareholders in exchange
for their MIT III shares;
(d) No gain or loss will be recognized by the MIT III Shareholders upon
the exchange of the MIT III shares for Tax-Exempt Shares;
(e) The aggregate tax basis for Tax-Exempt Shares received by each MIT
III Shareholder pursuant to the reorganization will be the same as the
aggregate tax basis of the MIT III Shares held by each such MIT III
Shareholder immediately prior to the Reorganization;
(f) The holding period of Tax-Exempt Shares to be received by each MIT
III Shareholder will include the period during which the MIT III Shares
surrendered in exchange therefor were held (provided such MIT III Shares
were held as capital assets on the date of the Reorganization);
(g) The tax basis of the assets of MIT III acquired by Tax-Exempt will
be the same as the tax basis of such assets to MIT III immediately prior to
the Reorganization; and
(h) The holding period of the assets of MIT III in the hands of
Tax-Exempt will include the period during which those assets were held by
MIT III.
Notwithstanding anything herein to the contrary, neither Tax-Exempt nor
MIT III may waive the conditions set forth in this paragraph 8.6.
9. FEES AND EXPENSES
9.1 (a) Tax-Exempt shall bear its expenses incurred in connection with the
entering into, and carrying out of, the provisions of this Agreement, including
legal, accounting, Commission registration fees and Blue Sky expenses. MIT III
shall bear, as set forth in the Proxy Statement and Prospectus contained in the
Registration Statement, its expenses incurred in connection with the entering
into and carrying out of the provisions of this Agreement, including legal and
accounting fees, printing, filing and proxy solicitation expenses incurred in
connection with the consummation of the transactions contemplated herein. MIT
III shall
A-12
bear any other expenses in connection with the provisions of this Agreement
including certain other legal and accounting fees and portfolio transfer taxes
(if any) incurred in connection with the consummation of the transactions
contemplated herein.
(b) In the event the transactions contemplated herein are not consummated
by reason of MIT III being either unwilling or unable to go forward (other than
by reason of the nonfulfillment or failure of any condition to MIT III's
obligations specified in this Agreement), MIT III's only obligation hereunder
shall be to reimburse Tax-Exempt for all reasonable out-of-pocket fees and
expenses incurred by Tax-Exempt in connection with those transactions.
(c) In the event the transactions contemplated herein are not consummated
by reason of Tax-Exempt being either unwilling or unable to go forward (other
than by reason of the nonfulfillment or failure of any condition to
Tax-Exempt's obligations specified in this Agreement), Tax-Exempt's only
obligation hereunder shall be to reimburse MIT III for all reasonable
out-of-pocket fees and expenses incurred by MIT III in connection with those
transactions.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
herein, except that the representations, warranties and covenants of MIT III
hereunder shall not survive the dissolution and complete liquidation of MIT III
in accordance with Section 1.9.
11. TERMINATION
11.1 This Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time prior to the Closing:
(a) by the mutual written consent of MIT III and Tax-Exempt;
(b) by either Tax-Exempt or MIT III by notice to the other, without
liability to the terminating party on account of such termination
(providing the terminating party is not otherwise in material default or
breach of this Agreement) if the Closing shall not have occurred on or
before May 31, 2001; or
(c) by either Tax-Exempt or MIT III in writing without liability to the
terminating party on account of such termination (provided the terminating
party is not otherwise in material default or breach of this Agreement), if
(i) the other party shall fail to perform in any material respect its
agreements contained herein required to be performed on or prior to the
Closing Date, (ii) the other party materially breaches any of its
representations, warranties or covenants contained herein, (iii) the MIT
III shareholders fail to approve this Agreement at any meeting called for
such purpose at which a quorum was present or (iv) any other condition
herein expressed to be precedent to the obligations of the terminating
party has not been met and it reasonably appears that it will not or cannot
be met.
11.2 (a) Termination of this Agreement pursuant to paragraphs 11.1 (a) or
(b) shall terminate all obligations of the parties hereunder and there shall be
no liability for damages on the part of Tax-Exempt or MIT III, or the trustees
or officers of Tax-Exempt or MIT III, to any other party or its trustees or
officers.
(b) Termination of this Agreement pursuant to paragraph 11.1 (c) shall
terminate all obligations of the parties hereunder and there shall be no
liability for damages on the part of Tax-Exempt or MIT III, or the trustees
or officers of Tax-Exempt or MIT III, except that any party in breach of
this Agreement
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shall, upon demand, reimburse the non-breaching party for all reasonable
out-of-pocket fees and expenses incurred in connection with the
transactions contemplated by this Agreement, including legal, accounting
and filing fees.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the parties.
13. MISCELLANEOUS
13.1 The article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
13.5 The obligations and liabilities of Tax-Exempt hereunder are solely
those of Tax-Exempt. It is expressly agreed that no shareholder, nominee,
trustee, officer, agent, or employee of Tax-Exempt shall be personally liable
hereunder. The execution and delivery of this Agreement have been authorized by
the trustees of Tax-Exempt and signed by authorized officers of Tax-Exempt
acting as such, and neither such authorization by such trustees nor such
execution and delivery by such officers shall be deemed to have been made by
any of them individually or to impose any liability on any of them personally.
13.6 The obligations and liabilities of MIT III hereunder are solely those
of MIT III. It is expressly agreed that no shareholder, nominee, trustee,
officer, agent, or employee of MIT III shall be personally liable hereunder.
The execution and delivery of this Agreement have been authorized by the
trustees of MIT III and signed by authorized officers of MIT III acting as
such, and neither such authorization by such trustees nor such execution and
delivery by such officers shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed by a duly authorized officer.
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
By: /s/ CHARLES A. FIUMEFREDDO
---------------------------------------------
Name: Charles A. Fiumefreddo
Title: Chairman
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
By: /s/ BARRY FINK
----------------------------------------------
Name: Barry Fink
Title: Vice President
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EXHIBIT B
PROSPECTUS - FEBRUARY 24, 2000
Morgan Stanley Dean Witter
- - --------------------------------------------------------------------------------
TAX-EXEMPT SECURITIES TRUST
[GRAPHIC OMITTED]
A MUTUAL FUND THAT SEEKS TO PROVIDE A HIGH LEVEL OF CURRENT INCOME EXEMPT FROM
FEDERAL INCOME TAX, CONSISTENT WITH THE PRESERVATION OF CAPITAL
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
CONTENTS
The Fund Investment Objective .......................... 1
Principal Investment Strategies ............... 1
Principal Risks ............................... 2
Past Performance .............................. 4
Fees and Expenses ............................. 6
Additional Investment Strategy Information .... 7
Additional Risk Information ................... 8
Fund Management ............................... 9
Shareholder Information Pricing Fund Shares ........................... 10
How to Buy Shares ............................. 10
How to Exchange Shares ........................ 12
How to Sell Shares ............................ 14
Distributions ................................. 16
Tax Consequences .............................. 16
Share Class Arrangements ...................... 18
Financial Highlights ............................................... 25
Our Family of Funds .................................. Inside Back Cover
This Prospectus contains important information about the Fund.
Please read it carefully and keep it for future reference.
THE FUND
[GRAPHIC OMITTED]
INVESTMENT OBJECTIVE
- - --------------------
Morgan Stanley Dean Witter Tax-Exempt Securities Trust (the "Fund") seeks to
provide a high level of current income exempt from federal income tax,
consistent with the preservation of capital.
[GRAPHIC OMITTED]
PRINCIPAL INVESTMENT STRATEGIES
- - -------------------------------
(sidebar)
INCOME
An investment objective having the goal of selecting securities to pay out
income rather than rise in price.
(end sidebar)
The Fund will normally invest at least 80% of its total assets in securities
that pay interest exempt from federal income taxes. The Fund's "Investment
Manager," Morgan Stanley Dean Witter Advisors Inc., generally invests the Fund's
assets in municipal obligations. Municipal obligations are bonds, notes or
short-term commercial paper issued by state governments, local governments, and
their respective agencies. At least 75% of these municipal obligations will have
the following ratings at the time of purchase:
o municipal bonds -- within the three highest grades by
Moody's Investors Service Inc.
("Moody's"), Standard & Poor's
Corporation ("S&P"), or Fitch IBCA,
Inc. ("Fitch");
o municipal notes -- within the two highest grades or, if
not rated, have outstanding bonds
within the three highest grades by
Moody's, S&P or Fitch; and
o municipal commercial paper -- within the highest grade by
Moody's, S&P or Fitch.
The Fund may invest up to 25% of its assets in municipal obligations that are
rated below the limits stated above or are not rated by those rating agencies.
However, the Fund may only invest up to 5% of its assets in municipal
obligations rated below investment grade or, if unrated, of comparable quality
as determined by the Investment Manager (commonly known as "junk bonds").
The Fund may invest up to 10% of its assets in inverse floating rate municipal
obligations. The interest rates on these obligations generally move in the
reverse direction of market interest rates. If market interest rates fall, the
interest rate on the obligations will increase and if market interest rates
increase, the interest rate on the obligations will fall.
The Fund may invest up to 20% of its assets in taxable money market instruments
or securities that pay interest income subject to the "alternative minimum tax,"
and some
1
taxpayers may have to pay tax on a Fund distribution of this income. The Fund
therefore may not be a suitable investment for these investors. See the "Tax
Consequences" section for more details.
Municipal bonds, notes and commercial paper are commonly classified as either
"general obligation" or "revenue." General obligation bonds, notes, and
commercial paper are secured by the issuer's faith and credit including its
taxing power, for payment of principal and interest. Revenue bonds, notes and
commercial paper, however, are generally payable from a specific source of
income. They are issued to fund a wide variety of public and private projects in
sectors such as transportation, education and industrial development. Included
within the revenue category are participations in lease obligations. The Fund's
municipal obligation investments may include zero coupon securities, which are
purchased at a discount and accrue interest, but make no interest payments until
maturity.
In pursuing the Fund's investment objective, the Investment Manager has
considerable leeway in deciding which investments it buys, holds or sells on a
day-to-day basis -- and which investment strategies it uses. For example, the
Investment Manager in its discretion may determine to use some permitted
investment strategies while not using others.
[GRAPHIC OMITTED]
PRINCIPAL RISKS
- - ---------------
There is no assurance that the Fund will achieve its investment objective. The
Fund's share price and yield will fluctuate with changes in the market value of
the Fund's portfolio securities. When you sell Fund shares, they may be worth
less than what you paid for them and, accordingly, you can lose money investing
in this Fund.
Credit and Interest Rate Risks. Municipal obligations, like other debt
securities, are subject to two types of risks: credit risk and interest rate
risk.
Credit risk refers to the possibility that the issuer of a security will be
unable to make interest payments and/or repay the principal on its debt. In the
case of revenue bonds, notes or commercial paper, for example, the credit risk
is the possibility that the user fees from a project or other specified revenue
sources are insufficient to meet interest and/or principal payment obligations.
The issuers of private activity bonds, used to finance projects in sectors such
as industrial development and pollution control, also may be negatively impacted
by the general credit of the user of the project.
Interest rate risk refers to fluctuations in the value of a fixed-income
security resulting from changes in the general level of interest rates. When the
general level of interest rates goes up, the prices of most fixed-income
securities go down. When the general level of interest rates goes down, the
prices of most fixed-income securities go up. Zero coupon securities are
typically subject to greater price fluctuations than comparable
2
securities that pay current interest. As a general illustration of the
relationship between fixed-income securities and interest rates, the following
table shows how interest rates affect bond prices.
HOW INTEREST RATES AFFECT BOND PRICES
PRICE PER $1,000 OF A MUNICIPAL BOND
IF INTEREST RATES:
INCREASE* DECREASE**
YEARS TO
MATURITY BOND MATURITY COUPON 1% 2% 1% 2%
1 2000 3.95% $990 $981 $1,010 $1,020
5 2004 4.70% $957 $916 $1,045 $1,093
10 2009 5.05% $926 $858 $1,082 $1,171
20 2019 5.80% $892 $799 $1,128 $1,278
30 2029 5.95% $875 $773 $1,155 $1,350
Source: Municipal Market Data (a division of Thomson Financial Municipal Group);
"Aaa" yield curve as of 12/31/99. The table is not representative of price
changes for inverse floating rate municipal obligations which typically respond
to changes in interest rates to a greater extent than comparable obligations. In
addition, the table is an illustration and does not represent expected yields or
share price changes of any Morgan Stanley Dean Witter mutual fund.
* Assumes no effect from market discount calculation.
**Assumes bonds are non-callable.
The Fund is not limited as to the maturities of the municipal obligations in
which it may invest. Thus, a rise in the general level of interest rates may
cause the price of the Fund's portfolio securities to fall substantially.
Inverse Floating Rate Municipal Obligations. The inverse floating rate municipal
obligations in which the Fund may invest are typically created through a
division of a fixed rate municipal obligation into two separate instruments, a
short-term obligation and a long-term obligation. The interest rate on the
short-term obligation is set at periodic auctions. The interest rate on the
long-term obligation is the rate the issuer would have paid on the fixed income
obligation: (i) plus the difference between such fixed rate and the rate on the
short-term obligation, if the short-term rate is lower than the fixed rate; or
(ii) minus such difference if the interest rate on the short-term obligation is
higher than the fixed rate. Inverse floating rate municipal obligations offer
the potential for higher income than is available from fixed rate obligations of
comparable maturity and credit rating. They also carry greater risks. In
particular, the prices of inverse floating rate municipal obligations are more
volatile, i.e., they increase and decrease in response to changes in interest
rates to a greater extent than comparable fixed rate obligations.
3
Other Risks. The performance of the Fund also will depend on whether the
Investment Manager is successful in pursuing the Fund's investment strategy. The
Fund is also subject to other risks from its permissible investments including
the risks associated with its lease obligations investments. For more
information about these risks, see the "Additional Risk Information" section.
Shares of the Fund are not bank deposits and are not guaranteed or insured by
the FDIC or any other government agency.
4
[GRAPHIC OMITTED]
PAST PERFORMANCE
- - ----------------
The bar chart and table below provide some indication of the risks of investing
in the Fund. The Fund's past performance does not indicate how the Fund will
perform in the future.
(sidebar)
ANNUAL TOTAL RETURNS
This chart shows how the performance of the Fund's Class D shares has varied
from year to year over the past 10 calendar years.
(end sidebar)
[GRAPHIC OMITTED]
ANNUAL TOTAL RETURNS--CALENDAR YEARS
YEAR PERCENTAGE
1990 5.86%
1991 12.71%
1992 9.09%
1993 11.23%
1994 -5.55%
1995 17.37%
1996 3.61%
1997 8.73%
1998 6.11%
1999 -2.71%
The bar chart reflects the performance of Class D shares. All shares held prior
to the Fund adopting its Multi-Class Structure on July 28, 1997 were designated
Class D Shares. Prior to that date, shares were subject to a front-end sales
charge, which is not reflected in the bar chart. The performance of the other
Classes will differ because the Classes have different ongoing fees.
(sidebar)
AVERAGE ANNUAL TOTAL RETURNS
This table compares the Fund's average annual returns with those of a broad
measure of market performance over time. The Fund's returns include the maximum
applicable sales charge for each Class and assume you sold your shares at the
end of each period.
(end sidebar)
During the periods shown in the bar chart, the highest return for a calendar
quarter was 6.89% (quarter ended March 31, 1995) and the lowest return for a
calendar quarter was -5.50% (quarter ended March 31, 1994).
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 1999)
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
Class A(1) -6.95% 5.27% 5.73%
Class B(2) -7.86% -- --
Class C(2) -4.29% -- --
Class D(3) -2.71% 6.42% 6.44%
Lehman Brothers Municipal Bond Index(4) -2.06% 6.91% 6.89%
1 Prior to July 28, 1997 the Fund offered only one class of shares. Because
the distribution arrangement for Class A most closely resembled the
distribution arrangement applicable prior to the implementation of multiple
classes (i.e., Class A is sold with a front-end sales charge), historical
performance information has been restated to reflect the actual maximum
sales charge applicable to Class A (i.e., 4.25%) as compared to the 4.00%
sales charge in effect prior to July 28, 1997. In addition, Class A shares
are now subject to an ongoing 12b-1 fee which is reflected in the restated
performance for that class.
2 Classes B and C commenced operations on July 28, 1997.
3 Because all shares of the Fund held prior to July 28, 1997 were designated
Class D shares, the Fund's historical performance has been restated to
reflect the absence of any sales charge.
4 The Lehman Brothers Municipal Bond Index tracks the performance of Municipal
bonds with maturities of 2 years or more and a minimum credit rating of Baa
or BBB, as measured by Moody's Investor Service, Inc. or Standard & Poor's
Corp. The Index does not include any expenses, fees, or changes. The Index
is unmanaged and should not be considered an investment.
5
[GRAPHIC OMITTED]
FEES AND EXPENSES
- - -----------------
The table below briefly describes the fees and expenses that you may pay if you
buy and hold shares of the Fund. The Fund offers four Classes of shares: Classes
A, B, C and D. Each Class has a different combination of fees, expenses and
other features. The Fund does not charge account or exchange fees. See the
"Share Class Arrangements" section for further fee and expense information.
(sidebar)
SHAREHOLDER FEES
These fees are paid directly from your investment.
(end sidebar)
CLASS A CLASS B CLASS C CLASS D
SHAREHOLDER FEES
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 4.25%1 None None None
Maximum deferred sales charge (load) (as a
percentage based on the lesser of the offering
price or net asset value at redemption) None2 5.00%3 1.00%4 None
(sidebar)
ANNUAL FUND OPERATING EXPENSES
These expenses are deducted from the Fund's assets and are based on expenses
paid for the fiscal year ended December 31, 1999.
(end sidebar)
ANNUAL FUND OPERATING EXPENSES
Management fee 0.44% 0.44% 0.44% 0.44%
Distribution and service (12b-1) fees 0.13% 0.60% 0.70% None
Other expenses 0.07% 0.07% 0.07% 0.07%
Total annual Fund operating expenses 0.64% 1.11% 1.21% 0.51%
1 Reduced for purchases of $25,000 and over.
2 Investments that are not subject to any sales charge at the time of purchase
are subject to a contingent deferred sales charge ("CDSC") of 1.00% that
will be imposed if you sell your shares within one year after purchase,
except for certain specific circumstances.
3 The CDSC is scaled down to 1.00% during the sixth year, reaching zero
thereafter. See "Share Class Arrangements" for a complete discussion of
the CDSC.
4 Only applicable if you sell your shares within one year after purchase.
6
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund, your investment has a
5% return each year, and the Fund's operating expenses remain the same. Although
your actual costs may be higher or lower, the tables below show your costs at
the end of each period based on these assumptions depending upon whether or not
you sell (redeem) your shares at the end of each period.
IF YOU SOLD YOUR SHARES: IF YOU HELD YOUR SHARES:
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
CLASS A $488 $621 $767 $1,189 $488 $621 $767 $1,189
CLASS B $613 $653 $812 $1,352 $113 $353 $612 $1,352
CLASS C $223 $384 $665 $1,466 $123 $384 $665 $1,466
CLASS D $52 $164 $285 $640 $52 $164 $285 $640
Long-term shareholders of Class B and Class C may pay more in sales charges,
including distribution fees, than the economic equivalent of the maximum
front-end sales charges permitted by the NASD.
[GRAPHIC OMITTED]
ADDITIONAL INVESTMENT STRATEGY INFORMATION
- - ------------------------------------------
This section provides additional information relating to the Fund's principal
strategies.
Lease Obligations. Included within the revenue bonds category are participations
in lease obligations or installment purchase contracts of municipalities.
Generally, state and local agencies or authorities issue lease obligations to
acquire equipment and facilities for public and private purposes.
Defensive Investing. The Fund may take temporary "defensive" positions in
attempting to respond to adverse market conditions. The Fund may invest any
amount of its assets in taxable securities, or in tax-exempt securities subject
to the federal alternative minimum tax for individual shareholders when the
Investment Manager believes it is advisable to do so. Although taking a
defensive posture is designed to protect the Fund from an anticipated market
downturn, it could have the effect of reducing the Fund's ability to provide
tax-exempt income. When the Fund takes a defensive position, it may not achieve
its investment objective.
The percentage limitations relating to the composition of the Fund's portfolio
apply at the time the Fund acquires an investment and refer to the Fund's net
assets, unless otherwise noted. Subsequent percentage changes that result from
market fluctuations
7
will not require the Fund to sell any portfolio security. The Fund may change
its principal investment strategies without shareholder approval; however, you
would be notified of any changes.
[GRAPHIC OMITTED]
ADDITIONAL RISK INFORMATION
- - ---------------------------
This section provides additional information relating to the principal risks of
investing in the Fund.
Bond Insurance Risk. Many of the municipal obligations the Fund invests in will
be covered by insurance at the time of issuance or at a later date. Such
insurance covers the remaining term of the security. Insured municipal
obligations would generally be assigned a lower rating if the rating were based
primarily on the credit quality of the issuer without regard to the insurance
feature. If the claims-paying ability of the insurer were downgraded, the
ratings on the municipal obligations it insures may also be downgraded.
Lease Obligations. 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, in part, 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 that 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 these legislative actions do not occur, the holders of
the lease obligation may experience difficulty in exercising their rights,
including disposition of the property.
8
[GRAPHIC OMITTED]
FUND MANAGEMENT
- - ----------------
(sidebar)
MORGAN STANLEY DEAN WITTER ADVISORS INC.
The Investment Manager is widely recognized as a leader in the mutual fund
industry and together with Morgan Stanley Dean Witter Services Company Inc.,
its wholly-owned subsidiary, had approximately $145 billion in assets under
management as of January 31, 2000.
(end sidebar)
The Fund has retained the Investment Manager -- Morgan Stanley Dean Witter
Advisors Inc. -- to provide administrative services, manage its business affairs
and invest its assets, including the placing of orders for the purchase and sale
of portfolio securities. The Investment Manager is a wholly-owned subsidiary of
Morgan Stanley Dean Witter & Co., a preeminent global financial services firm
that maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services. Its main business office is
located at Two World Trade Center, New York, NY 10048.
The Fund's portfolio is managed within the Investment Manager's Tax-Exempt
Group. James F. Willison, Senior Vice President and Director of the Tax-Exempt
Fixed-Income Group of the Investment Manager has been a primary portfolio
manager of the Fund since its inception. Joseph R. Arcieri, Senior Vice
President of the Investment Manager, has been a primary portfolio manager of the
Fund since February 1997. Mr. Willison and Mr. Arcieri have been portfolio
managers with the Investment Manager for over five years.
The Fund pays the Investment Manager a monthly management fee as full
compensation for the services and facilities furnished to the Fund, and for Fund
expenses assumed by the Investment Manager. The fee is based on the Fund's
average daily net assets. For the fiscal year ended December 31, 1999, the Fund
accrued total compensation to the Investment Manager amounting to 0.44% of the
Fund's average daily net assets.
9
SHAREHOLDER INFORMATION
[GRAPHIC OMITTED]
PRICING FUND SHARES
- - -------------------
The price of Fund shares (excluding sales charges), called "net asset value," is
based on the value of the Fund's portfolio securities. While the assets of each
Class are invested in a single portfolio of securities, the net asset value of
each Class will differ because the Classes have different ongoing distribution
fees.
The net asset value per share of the Fund is determined once daily at 4:00 p.m.
Eastern time on each day that the New York Stock Exchange is open (or, on days
when the New York Stock Exchange closes prior to 4:00 p.m., at such earlier
time). Shares will not be priced on days that the New York Stock Exchange is
closed.
The Fund's portfolio securities (except for short-term taxable debt securities
and certain other investments) are valued by an outside independent pricing
service. The service uses a computerized grid matrix of tax-exempt securities
and its evaluations in determining what it believes is the fair value of the
portfolio securities. The Fund's Board of Trustees believes that timely and
reliable market quotations are generally not readily available to the Fund to
value tax-exempt securities and the valuations that the pricing service supplies
are more likely to approximate the fair value of the securities.
An exception to the Fund's general pricing policy concerns its short-term debt
securities. Debt securities with remaining maturities of sixty days or less at
the time of purchase are valued at amortized cost. However, if the cost does not
reflect the securities' market value, these securities will be valued at their
fair value.
[GRAPHIC OMITTED]
HOW TO BUY SHARES
- - -----------------
(sidebar)
CONTACTING A FINANCIAL ADVISOR
If you are new to the Morgan Stanley Dean Witter Family of Funds and would like
to contact a Financial Advisor, call (877) 937-MSDW (toll-free) for the
telephone number of the Morgan Stanley Dean Witter office nearest you. You may
also access our office locator on our Internet site at:
www.msdw.com/individual/funds
(end sidebar)
You may open a new account to buy Fund shares or buy additional Fund shares for
an existing account by contacting your Morgan Stanley Dean Witter Financial
Advisor. Your Financial Advisor or other authorized financial representative
will assist you, step-by-step, with the procedures to invest in the Fund. You
may also purchase shares directly by calling the Fund's transfer agent and
requesting an application.
Because every investor has different immediate financial needs and long-term
investment goals, the Fund offers investors four Classes of shares: Classes A,
B, C and D. Class D shares are only offered to a limited group of investors.
Each Class of shares offers a distinct structure of sales charges, distribution
and service fees, and other features that are designed to address a variety of
needs. Your Financial Advisor or other authorized financial representative can
help you decide which Class may be most appropriate for you. When purchasing
Fund shares, you must specify which Class of shares you wish to purchase.
10
When you buy Fund shares, the shares are purchased at the next share price
calculated (less any applicable front-end sales charge for Class A shares) after
we receive your purchase order. Your payment is due on the third business day
after you place your purchase order. We reserve the right to reject any order
for the purchase of Fund shares.
(sidebar)
EASYINVEST(SM)
A purchase plan that allows you to transfer money automatically from your
checking or savings account or from a Money Market Fund on a semi-monthly,
monthly or quarterly basis. Contact your Morgan Stanley Dean Witter Financial
Advisor for further information about this service.
(end sidebar)
MINIMUM INVESTMENT AMOUNTS
MINIMUM INVESTMENT
INVESTMENT OPTIONS INITIAL ADDITIONAL
Regular Accounts $1,000 $100
EasyInvest(SM)
(Automatically from your
checking or savings account
or Money Market Fund) $100* $100*
* Provided your schedule of investments totals $1,000 in twelve months.
There is no minimum investment amount if you purchase Fund shares through: (1)
the Investment Manager's mutual fund asset allocation plan, (2) a program,
approved by the Fund's distributor, in which you pay an asset-based fee for
advisory, administrative and/or brokerage services, or (3) employer-sponsored
employee benefit plan accounts.
Investment Options for Certain Institutional and Other Investors/Class D Shares.
To be eligible to purchase Class D shares, you must qualify under one of the
investor categories specified in the "Share Class Arrangements" section of this
Prospectus.
Subsequent Investments Sent Directly to the Fund. In addition to buying
additional Fund shares for an existing account by contacting your Morgan Stanley
Dean Witter Financial Advisor, you may send a check directly to the Fund. To buy
additional shares in this manner:
o Write a "letter of instruction" to the Fund specifying the name(s) on the
account, the account number, the social security or tax identification number,
the Class of shares you wish to purchase and the investment amount (which
would include any applicable front-end sales charge). The letter must be
signed by the account owner(s).
o Make out a check for the total amount payable to: Morgan Stanley Dean Witter
Tax-Exempt Securities Trust.
o Mail the letter and check to Morgan Stanley Dean Witter Trust FSB at P.O. Box
1040, Jersey City, NJ 07303.
11
[GRAPHIC OMITTED]
HOW TO EXCHANGE SHARES
- - ----------------------
Permissible Fund Exchanges. You may exchange shares of any Class of the Fund for
the same Class of any other continuously offered Multi-Class Fund, or for shares
of a No-Load Fund, a Money Market Fund, North American Government Income Trust
or Short-Term U.S. Treasury Trust, without the imposition of an exchange fee.
See the inside back cover of this prospectus for each Morgan Stanley Dean Witter
Fund's designation as a Multi-Class Fund, No-Load Fund or Money Market Fund. If
a Morgan Stanley Dean Witter Fund is not listed, consult the inside back cover
of that Fund's prospectus for its designation. For purposes of exchanges, shares
of FSC Funds (subject to a front-end sales charge) are treated as Class A shares
of a Multi-Class Fund.
Exchanges may be made after shares of the Fund acquired by purchase have been
held for thirty days. There is no waiting period for exchanges of shares
acquired by exchange or dividend reinvestment. The current prospectus for each
fund describes its investment objective(s), policies and investment minimums,
and should be read before investment. Since exchanges are available only into
continuously offered Morgan Stanley Dean Witter Funds, exchanges are not
available into any new Morgan Stanley Dean Witter Fund during its initial
offering period, or when shares of a particular Morgan Stanley Dean Witter Fund
are not being offered for purchase.
Exchange Procedures. You can process an exchange by contacting your Morgan
Stanley Dean Witter Financial Advisor or other authorized financial
representative. Otherwise, you must forward an exchange privilege authorization
form to the Fund's transfer agent -- Morgan Stanley Dean Witter Trust FSB -- and
then write the transfer agent or call (800) 869-NEWS to place an exchange order.
You can obtain an exchange privilege authorization form by contacting your
Financial Advisor or other authorized financial representative, or by calling
(800) 869-NEWS. If you hold share certificates, no exchanges may be processed
until we have received all applicable share certificates.
An exchange to any Morgan Stanley Dean Witter Fund (except a Money Market Fund)
is made on the basis of the next calculated net asset values of the Funds
involved after the exchange instructions are accepted. When exchanging into a
Money Market Fund, the Fund's shares are sold at their next calculated net asset
value and the Money Market Fund's shares are purchased at their net asset value
on the following business day.
The Fund may terminate or revise the exchange privilege upon required notice.
The check writing privilege is not available for Money Market Fund shares you
acquire in an exchange.
Telephone Exchanges. For your protection when calling Morgan Stanley Dean Witter
Trust FSB, we will employ reasonable procedures to confirm that exchange
instructions communicated over the telephone are genuine. These procedures may
include
12
requiring various forms of personal identification such as name, mailing
address, social security or other tax identification number. Telephone
instructions also may be recorded.
Telephone instructions will be accepted if received by the Fund's transfer agent
between 9:00 a.m. and 4:00 p.m. Eastern time on any day the New York Stock
Exchange is open for business. 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 Fund in the past.
Margin Accounts. If you have pledged your Fund shares in a margin account,
contact your Morgan Stanley Dean Witter Financial Advisor or other authorized
financial representative regarding restrictions on the exchange of such shares.
Tax Considerations of Exchanges. If you exchange shares of the Fund for shares
of another Morgan Stanley Dean Witter Fund there are important tax
considerations. For tax purposes, the exchange out of the Fund is considered a
sale of Fund shares -- and the exchange into the other Fund is considered a
purchase. As a result, you may realize a capital gain or loss.
You should review the "Tax Consequences" section and consult your own tax
professional about the tax consequences of an exchange.
Limitations on Exchanges. Certain patterns of exchanges may result in the Fund
limiting or prohibiting, at its discretion, additional purchases and/or
exchanges. Determinations in this regard may be made based on the frequency or
dollar amount of previous exchanges. The Fund will notify you in advance of
limiting your exchange privileges.
CDSC Calculations on Exchanges. See the "Share Class Arrangements" section of
this Prospectus for a further discussion of how applicable contingent deferred
sales charges (CDSCs) are calculated for shares of one Morgan Stanley Dean
Witter Fund that are exchanged for shares of another.
For further information regarding exchange privileges, you should contact your
Morgan Stanley Dean Witter Financial Advisor or call (800) 869-NEWS.
13
[GRAPHIC OMITTED]
HOW TO SELL SHARES
- - ------------------
You can sell some or all of your Fund shares at any time. If you sell Class A,
Class B or Class C shares, your net sale proceeds are reduced by the amount of
any applicable CDSC. Your shares will be sold at the next price calculated after
we receive your order to sell as described below.
OPTIONS PROCEDURES
Contact Your To sell your shares, simply call your Morgan Stanley
Financial Advisor Dean Witter Financial Advisor or other authorized
financial representative.
[GRAPHIC OMITTED] Payment will be sent to the address to which the account
is registered or deposited in your brokerage account.
By Letter You can also sell your shares by writing a
"letter of instruction" that includes:
o your account number;
o the dollar amount or the number
of shares you wish to sell;
o the Class of shares you wish to sell; and
[GRAPHIC OMITTED] o the signature of each owner as it appears on the
account.
If you are requesting payment to anyone other than the
registered owner(s) or that payment be sent to any
address other than the address of the registered
owner(s) or pre-designated bank account, you will need a
signature guarantee. You can obtain a signature
guarantee from an eligible guarantor acceptable to
Morgan Stanley Dean Witter Trust FSB. (You should
contact Morgan Stanley Dean Witter Trust FSB at (800)
869-NEWS for a determination as to whether a particular
institution is an eligible guarantor.) A notary public
cannot provide a signature guarantee. Additional
documentation may be required for shares held by a
corporation, partnership, trustee or executor.
Mail the letter to Morgan Stanley Dean Witter Trust FSB
at P.O. Box 983, Jersey City, NJ 07303. If you hold
share certificates, you must return the certificates,
along with the letter and any required additional
documentation.
A check will be mailed to the name(s) and address in
which the account is registered, or otherwise according
to your instructions.
Systematic If your investment in all of the Morgan Stanley Dean
Withdrawal Plan Witter Family of Funds has a total Withdrawal Plan
[GRAPHIC OMITTED] market value of at least $10,000, you may elect to
withdraw amounts of $25 or more, or in any whole
percentage of a Fund's balance (provided the amount is
at least $25), on a monthly, quarterly, semi-annual or
annual basis, from any Fund with a balance of at least
$1,000. Each time you add a Fund to the plan, you must
meet the plan requirements.
Amounts withdrawn are subject to any applicable CDSC. A
CDSC may be waived under certain circumstances. See the
Class B waiver categories listed in the "Share Class
Arrangements" section of this Prospectus.
To sign up for the Systematic Withdrawal Plan, contact
your Morgan Stanley Dean Witter Financial Advisor or
call (800) 869-NEWS. You may terminate or suspend your
plan at any time. Please remember that withdrawals from
the plan are sales of shares, not Fund "distributions,"
and ultimately may exhaust your account balance. The
Fund may terminate or revise the plan at any time.
--------------------------------------------------------
14
Payment for Sold Shares. After we receive your complete instructions to sell as
described above, a check will be mailed to you within seven days, although we
will attempt to make payment within one business day. Payment may also be sent
to your brokerage account.
Payment may be postponed or the right to sell your shares suspended, under
unusual circumstances. If you request to sell shares that were recently
purchased by check, your sale will not be effected until it has been verified
that the check has been honored.
Reinstatement Privilege. If you sell Fund shares and have not previously
exercised the reinstatement privilege, you may, within 35 days after the date of
sale, invest any portion of the proceeds in the same Class of Fund shares at
their net asset value and receive a pro rata credit for any CDSC paid in
connection with the sale.
Involuntary Sales. The Fund reserves the right, on sixty days' notice, to sell
the shares of any shareholder (other than shares held in an IRA or 403(b)
Custodial Account) whose shares, due to sales by the shareholder, have a value
below $100, or in the case of an account opened through EasyInvest(SM), if after
12 months the shareholder has invested less than $1,000 in the account.
However, before the Fund sells your shares in this manner, we will notify you
and allow you sixty days to make an additional investment in an amount that will
increase the value of your account to at least the required amount before the
sale is processed. No CDSC will be imposed on any involuntary sale.
Margin Accounts. If you have pledged your Fund shares in a margin account,
contact your Morgan Stanley Dean Witter Financial Advisor or other authorized
financial representative regarding restrictions on the sale of such shares.
15
[GRAPHIC OMITTED]
DISTRIBUTIONS
- - -------------
(sidebar)
TARGETED DIVIDENDS(SM)
You may select to have your Fund distributions automatically invested in other
Classes of Fund shares or Classes of another Morgan Stanley Dean Witter Fund
that you own. Contact your Morgan Stanley Dean Witter Financial Advisor for
further information about this service.
(end sidebar)
The Fund passes substantially all of its earnings from income and capital gains
along to its investors as "distributions." The Fund earns interest from
fixed-income investments. These amounts are passed along to Fund shareholders as
"income dividend distributions." The Fund realizes capital gains whenever it
sells securities for a higher price than it paid for them. These amounts may be
passed along as "capital gain distributions."
The Fund declares income dividends separately for each Class. Distributions paid
on Class A and Class D shares usually will be higher than for Class B and Class
C because distribution fees that Class B and Class C pay are higher. Normally,
income dividends are declared on each day the New York Stock Exchange is open
for business, and are distributed to shareholders monthly. Capital gains, if
any, are usually distributed in June and December. The Fund, however, may retain
and reinvest any long-term capital gains. The Fund may at times make payments
from sources other than income or capital gains that represent a return of a
portion of your investment.
Distributions are reinvested automatically in additional shares of the same
Class and automatically credited to your account, unless you request in writing
that all distributions be paid in cash. If you elect the cash option, processing
of your dividend checks begins immediately following the monthly payment date,
and the Fund will mail a monthly dividend check to you normally during the first
seven days of the following month. No interest will accrue on uncashed checks.
If you wish to change how your distributions are paid, your request should be
received by the Fund's transfer agent, Morgan Stanley Dean Witter Trust FSB, at
least five business days prior to the record date of the distributions.
[GRAPHIC OMITTED]
TAX CONSEQUENCES
- - ----------------
As with any investment, you should consider how your Fund investment will be
taxed. The tax information in this Prospectus is provided as general
information. You should consult your own tax professional about the tax
consequences of an investment in the Fund.
You need to be aware of the possible tax consequences when:
o The Fund makes distributions; and
o You sell Fund shares, including an exchange to another Morgan Stanley Dean
Witter Fund.
16
Taxes on Distributions. Your income dividend distributions are normally exempt
from federal income taxes -- to the extent they are derived from municipal
obligations. Income derived from other portfolio securities may be subject to
federal, state and/or local income taxes.
Income derived from some municipal securities is subject to the federal
"alternative minimum tax." Certain tax-exempt securities whose proceeds are used
to finance private, for-profit organizations are subject to this special tax
system that ensures that individuals pay at least some federal taxes. Although
interest on these securities is generally exempt from federal income tax, some
taxpayers who have many tax deductions or exemptions nevertheless may have to
pay tax on the income.
If you borrow money to purchase shares of the Fund, the interest on the borrowed
money is generally not deductible for personal income tax purposes.
If the Fund makes any capital gain distributions, those distributions will
normally be subject to federal income tax when they are paid, whether you take
them in cash or reinvest them in the Fund shares. Any long-term capital gain
distributions are taxable to you as long-term capital gains, no matter how long
you have owned shares in the Fund.
The Fund may derive gains in part from municipal obligations the Fund purchased
below their principal or face values. All, or a portion, of these gains may be
taxable to you as ordinary income rather than capital gains.
Taxes on Sales. Your sale of Fund shares normally is subject to federal and
state income tax and may result in a taxable gain or loss to you. A sale also
may be subject to local income tax. Your exchange of Fund shares for shares of
another Morgan Stanley Dean Witter Fund is treated for tax purposes like a sale
of your original shares and a purchase of your new shares. Thus, the exchange
may, like a sale, result in a taxable gain or loss to you and will give you a
new tax basis for your new shares.
When you open your Fund account, you should provide your social security or tax
identification number on your investment application. By providing this
information, you will avoid being subject to a federal backup withholding tax of
31% on taxable distributions and redemption proceeds. Any withheld amount would
be sent to the IRS as an advance tax payment.
17
[GRAPHIC OMITTED]
SHARE CLASS ARRANGEMENTS
- - ------------------------
The Fund offers several Classes of shares having different distribution
arrangements designed to provide you with different purchase options according
to your investment needs. Your Morgan Stanley Dean Witter Financial Advisor or
other authorized financial representative can help you decide which Class may be
appropriate for you.
The general public is offered three Classes: Class A shares, Class B shares and
Class C shares, which differ principally in terms of sales charges and ongoing
expenses. A fourth Class, Class D shares, is offered only to a limited category
of investors. Shares that you acquire through reinvested distributions will not
be subject to any front-end sales charge or CDSC -- contingent deferred sales
charge. Sales personnel may receive different compensation for selling each
Class of shares. The sales charges applicable to each Class provide for the
distribution financing of shares of that Class.
The chart below compares the sales charge and maximum annual 12b-1 fee
applicable to each Class:
MAXIMUM
CLASS SALES CHARGE ANNUAL 12B-1 FEE
A Maximum 4.25% initial sales charge reduced for
purchases of $25,000 or more; shares sold
without an initial sales charge are generally
subject to a 1.0% CDSC during the first year 0.25%
B Maximum 5.0% CDSC during the first year
decreasing to 0% after six years 0.60%
C 1.0% CDSC during the first year 0.70%
D None None
CLASS A SHARES Class A shares are sold at net asset value plus an initial sales
charge of up to 4.25%. The initial sales charge is reduced for purchases of
$25,000 or more according to the schedule below. Investments of $1 million or
more are not subject to an initial sales charge, but are generally subject to a
contingent deferred sales charge, or CDSC, of 1.0% on sales made within one year
after the last day of the month of purchase. The CDSC will be assessed in the
same manner and with the same CDSC waivers as with Class B shares. Class A
shares are also subject to a distribution (12b-1) fee of up to 0.25% of the
average daily net assets of the Class.
18
The offering price of Class A shares includes a sales charge (expressed as a
percentage of the offering price) on a single transaction as shown in the
following table:
(sidebar)
FRONT-END SALES CHARGE OR FSC
An initial sales charge you pay when purchasing Class A shares that is based on
a percentage of the offering price. The percentage declines based upon the
dollar value of Class A shares you purchase. We offer three ways to reduce your
Class A sales charges -- the Combined Purchase Privilege, Right of Accumulation
and Letter of Intent.
(end sidebar)
FRONT-END SALES CHARGE
AMOUNT OF PERCENTAGE OF APPROXIMATE PERCENTAGE
SINGLE TRANSACTION PUBLIC OFFERING PRICE OF NET AMOUNT INVESTED
Less than $25,000 4.25% 4.44%
$25,000 but less than $50,000 4.00% 4.17%
$50,000 but less than $100,000 3.50% 3.63%
$100,000 but less than $250,000 2.75% 2.83%
$250,000 but less than $1 million 1.75% 1.78%
$1 million and over 0 0
The reduced sales charge schedule is applicable to purchases of Class A shares
in a single transaction by:
o A single account (including an individual, trust or fiduciary account).
o Family member accounts (limited to husband, wife and children under the age of
21).
o Pension, profit sharing or other employee benefit plans of companies and their
affiliates.
o Tax-exempt organizations.
o Groups organized for a purpose other than to buy mutual fund shares.
Combined Purchase Privilege. You also will have the benefit of reduced sales
charges by combining purchases of Class A shares of the Fund in a single
transaction with purchases of Class A shares of other Multi-Class Funds and
shares of FSC Funds.
Right of Accumulation. You also may benefit from a reduction of sales charges if
the cumulative net asset value of Class A shares of the Fund purchased in a
single transaction, together with shares of other Funds you currently own which
were previously purchased at a price including a front-end sales charge
(including shares acquired through reinvestment of distributions), amounts to
$25,000 or more. Also, if you have a cumulative net asset value of all your
Class A and Class D shares equal to at least $5 million (or $25 million for
certain employee benefit plans), you are eligible to purchase Class D shares of
any Fund subject to the Fund's minimum initial investment requirement.
19
You must notify your Morgan Stanley Dean Witter Financial Advisor or other
authorized financial representative (or Morgan Stanley Dean Witter Trust FSB if
you purchase directly through the Fund), 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 when an order is
placed by mail. The reduced sales charge will not be granted if: (i)
notification is not furnished at the time of the order; or (ii) a review of the
records of Dean Witter Reynolds or other authorized dealer of Fund shares or the
Fund's transfer agent does not confirm your represented holdings.
Letter of Intent. The schedule of reduced sales charges for larger purchases
also will be available to you if you enter into a written "letter of intent." A
letter of intent provides for the purchase of Class A shares of the Fund or
other Multi-Class Funds or shares of FSC Funds within a thirteen-month period.
The initial purchase under a letter of intent must be at least 5% of the stated
investment goal. To determine the applicable sales charge reduction, you may
also include: (1) the cost of shares of other Morgan Stanley Dean Witter Funds
which were previously purchased at a price including a front-end sales charge
during the 90-day period prior to the distributor receiving the letter of
intent, and (2) the cost of shares of other Funds you currently own acquired in
exchange for shares of Funds purchased during that period at a price including a
front-end sales charge. You can obtain a letter of intent by contacting your
Morgan Stanley Dean Witter Financial Advisor or other authorized financial
representative, or by calling (800) 869-NEWS. If you do not achieve the stated
investment goal within the thirteen-month period, you are required to pay the
difference between the sales charges otherwise applicable and sales charges
actually paid, which may be deducted from your investment.
Other Sales Charge Waivers. In addition to investments of $1 million or more,
your purchase of Class A shares is not subject to a front-end sales charge (or a
CDSC upon sale) if your account qualifies under one of the following categories:
o A trust for which Morgan Stanley Dean Witter Trust FSB provides discretionary
trustee services.
o Persons participating in a fee-based investment program (subject to all of its
terms and conditions, including termination fees, mandatory sale or transfer
restrictions on termination) approved by the Fund's distributor pursuant to
which they pay an asset-based fee for investment advisory, administrative and/
or brokerage services.
o A client of a Morgan Stanley Dean Witter Financial Advisor who joined us from
another investment firm within six months prior to the date of purchase of
Fund shares, and you used the proceeds from the sale of shares of a
proprietary mutual fund of that Financial Advisor's previous firm that imposed
either a front-end or deferred sales charge to purchase Class A shares,
provided that: (1) you sold the shares not more than 60 days prior to the
purchase of fund shares, and (2) the sale proceeds were maintained in the
interim in cash or a money market fund.
20
o Current or retired Directors/Trustees of the Morgan Stanley Dean Witter Funds,
such persons' spouses and children under the age of 21, and trust accounts for
which any of such persons is a beneficiary.
o Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries, such persons' spouses and children
under the age of 21, and trust accounts for which any of such persons is a
beneficiary.
CLASS B SHARES Class B shares are offered at net asset value with no initial
sales charge but are subject to a contingent deferred sales charge, or CDSC, as
set forth in the table below. For the purpose of calculating the CDSC, shares
are deemed to have been purchased on the last day of the month during which they
were purchased.
(sidebar)
CONTINGENT DEFERRED SALES CHARGE OR CDSC
A fee you pay when you sell shares of certain Morgan Stanley Dean Witter Funds
purchased without an initial sales charge. This fee declines the longer you hold
your shares as set forth in the table.
(end sidebar)
CDSC AS A PERCENTAGE OF
YEAR SINCE PURCHASE PAYMENT MADE AMOUNT REDEEMED
First 5.0%
Second 4.0%
Third 3.0%
Fourth 2.0%
Fifth 2.0%
Sixth 1.0%
Seventh and thereafter None
Each time you place an order to sell or exchange shares, shares with no CDSC
will be sold or exchanged first, then shares with the lowest CDSC will be sold
or exchanged next. For any shares subject to a CDSC, the CDSC will be assessed
on an amount equal to the lesser of the current market value or the cost of the
shares being sold. A lower CDSC schedule applies in most cases to shares of the
Fund acquired in connection with the reorganization of Dean Witter National
Municipal Trust and the Fund on November 7, 1997.
CDSC Waivers. A CDSC, if otherwise applicable, will be waived in the case of:
o Sales of shares held at the time you die or become disabled (within the
definition in Section 72(m)(7) of the Internal Revenue Code which relates to
the ability to engage in gainful employment), if the shares are:
(i) registered either in your name (not a trust) or in the names of you and
your spouse as joint tenants with right of survivorship; or (ii) held in a
qualified corporate or self-employed retirement plan, IRA or 403(b) Custodial
Account, provided in either case that the sale is requested within one year of
your death or initial determination of disability.
o Sales in connection with the following retirement plan "distributions:" (i)
lump-sum or other distributions from a qualified corporate or self-employed
retirement plan following retirement (or, in the case of a "key employee" of a
"top
21
heavy" plan, following attainment of age 59 1/2); (ii) distributions from an
IRA or 403(b) Custodial Account following attainment of age 59 1/2; or (iii) a
tax-free return of an excess IRA contribution (a "distribution" does not include
a direct transfer of IRA, 403(b) Custodial Account or retirement plan assets to
a successor custodian or trustee).
o Sales of shares in connection with the Systematic Withdrawal Plan of up
to 12% annually of the value of each Fund from which plan sales are
made. The percentage is determined on the date you establish the
Systematic Withdrawal Plan and based on the next calculated share price.
You may have this CDSC waiver applied in amounts up to 1% per month, 3%
per quarter, 6% semi-annually or 12% annually. Shares with no CDSC will
be sold first, followed by those with the lowest CDSC. As such, the
waiver benefit will be reduced by the amount of your shares that are not
subject to a CDSC. If you suspend your participation in the plan, you
may later resume plan payments without requiring a new determination of
the account value for the 12% CDSC waiver.
o Sales of shares if you simultaneously invest the proceeds in the
Investment Manager's mutual fund asset allocation program, pursuant
to which investors pay an asset-based fee. Any shares you acquire
in connection with the Investment Manager's mutual fund asset
allocation program are subject to all of the terms and conditions
of that program, including termination fees, mandatory sale or
transfer restrictions on termination.
All waivers will be granted only following the Fund's distributor receiving
confirmation of your entitlement. If you believe you are eligible for a CDSC
waiver, please contact your Financial Advisor or call (800) 869-NEWS.
Distribution Fee. Class B shares are also subject to an annual 12b-1 fee of
0.60% of the average daily net assets of Class B.
Conversion Feature. After ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund with no initial sales charge. The
ten year period runs from the last day of the month in which the shares were
purchased, or in the case of Class B shares acquired through an exchange, from
the last day of the month in which the original Class B shares were purchased;
the shares will convert to Class A shares based on their relative net asset
values in the month following the ten year period. At the same time, an equal
proportion of Class B shares acquired through automatically reinvested
distributions will convert to Class A shares on the same basis. (Class B shares
held before May 1, 1997, however, will convert to Class A shares in May 2007.)
Currently, the Class B share conversion is not a taxable event; the conversion
feature may be cancelled if it is deemed a taxable event in the future by the
Internal Revenue Service.
22
If you exchange your Class B shares for shares of a Money Market Fund, a No-Load
Fund, North American Government Income Trust or Short-Term U.S. Treasury Trust,
the holding period for conversion is frozen as of the last day of the month of
the exchange and resumes on the last day of the month you exchange back into
Class B shares.
Exchanging Shares Subject to a CDSC. There are special considerations when you
exchange Fund shares that are subject to a CDSC. When determining the length of
time you held the shares and the corresponding CDSC rate, any period (starting
at the end of the month) during which you held shares of a fund that does not
charge a CDSC will not be counted. Thus, in effect the "holding period" for
purposes of calculating the CDSC is frozen upon exchanging into a fund that does
not charge a CDSC.
For example, if you held Class B shares of the Fund for one year, exchanged to
Class B of another Morgan Stanley Dean Witter Multi-Class Fund for another year,
then sold your shares, a CDSC rate of 4% would be imposed on the shares based on
a two year holding period -- one year for each Fund. However, if you had
exchanged the shares of the Fund for a Money Market Fund (which does not charge
a CDSC) instead of the Multi-Class Fund, then sold your shares, a CDSC rate of
5% would be imposed on the shares based on a one year holding period. The one
year in the Money Market Fund would not be counted. Nevertheless, if shares
subject to a CDSC are exchanged for a Fund that does not charge a CDSC, you will
receive a credit when you sell the shares equal to the distribution (12b-1)
fees, if any, you paid on those shares while in that Fund up to the amount of
any applicable CDSC.
In addition, shares that are exchanged into or from a Morgan Stanley Dean Witter
Fund subject to a higher CDSC rate will be subject to the higher rate, even if
the shares are re-exchanged into a Fund with a lower CDSC rate.
CLASS C SHARES Class C shares are sold at net asset value with no initial sales
charge but are subject to a CDSC of 1.0% on sales made within one year after the
last day of the month of purchase. The CDSC will be assessed in the same manner
and with the same CDSC waivers as with Class B shares.
Distribution Fee. Class C shares are subject to an annual distribution (12b-1)
fee of up to 0.70% of the average daily net assets of that Class. The Class C
shares' distribution fee may cause that Class to have higher expenses and pay
lower dividends than Class A or Class D shares. Unlike Class B shares, Class C
shares have no conversion feature and, accordingly, an investor that purchases
Class C shares may be subject to distribution (12b-1) fees applicable to Class C
shares for an indefinite period.
23
CLASS D SHARES Class D shares are offered without any sales charge on purchases
or sales and without any distribution (12b-1) fee. Class D shares are offered
only to investors meeting an initial investment minimum of $5 million and the
following investor categories:
o Investors participating in the Investment Manager's mutual fund asset
allocation program (subject to all of its terms and conditions, including
termination fees, mandatory sale or transfer restrictions on termination)
pursuant to which they pay an asset-based fee.
o Persons participating in a fee-based investment program (subject to all of its
terms and conditions, including termination fees, mandatory sale or transfer
restrictions on termination) approved by the Fund's distributor pursuant to
which they pay an asset-based fee for investment advisory, administrative and/
or brokerage services.
o Certain unit investment trusts sponsored by Dean Witter Reynolds.
o Certain other open-end investment companies whose shares are distributed by
the Fund's distributor.
o Investors who were shareholders of the Dean Witter Retirement Series on
September 11, 1998 for additional purchases for their former Dean Witter
Retirement Series accounts.
Meeting Class D Eligibility Minimums. To meet the $5 million initial investment
to qualify to purchase Class D shares you may combine: (1) purchases in a single
transaction of Class D shares of the Fund and other Morgan Stanley Dean Witter
Multi-Class Funds and/or (2) previous purchases of Class A and Class D shares of
Multi-Class Funds and shares of FSC Funds you currently own, along with shares
of Morgan Stanley Dean Witter Funds you currently own that you acquired in
exchange for those shares.
NO SALES CHARGES FOR REINVESTED CASH DISTRIBUTIONS If you receive a cash payment
representing an income dividend or capital gain and you reinvest that amount in
the applicable Class of shares by returning the check within 30 days of the
payment date, the purchased shares would not be subject to an initial sales
charge or CDSC.
PLAN OF DISTRIBUTION (RULE 12B-1 FEES) The Fund has adopted a Plan of
Distribution in accordance with Rule 12b-1 under the Investment Company Act of
1940 with respect to the distribution of Class A, Class B and Class C shares.
The Plan allows the Fund to pay distribution fees for the sale and distribution
of these shares. It also allows the Fund to pay for services to shareholders of
Class A, Class B and Class C shares. Because these fees are paid out of the
Fund's assets on an ongoing basis, over time these fees will increase the cost
of your investment in these Classes and may cost you more than paying other
types of sales charges.
24
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 fiscal years of the Fund. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate an investor would have earned or lost
on an investment in the Fund (assuming reinvestment of all dividends and
distributions).
This information has been audited by PricewaterhouseCoopers LLP, independent
accountants, whose report, along with the Fund's financial statements, is
included in the annual report, which is available upon request.
FOR THE PERIOD
FOR THE FOR THE JULY 28, 1997*
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
CLASS A
SELECTED PER-SHARE DATA:
Net asset value, beginning of period $12.02 $12.09 $12.00
Income (loss) from investment operations:
Net investment income 0.58 0.59 0.25
Net realized and unrealized gain (loss) (0.91) 0.10 0.14
-------- -------- -----
Total income (loss) from investment operations (0.33) 0.69 0.39
Less dividends and distributions from:
Net investment income (0.58) (0.59) (0.25)
Net realized gain (0.03) (0.17) (0.05)
-------- -------- ------
Total dividends and distributions (0.61) (0.76) (0.30)
Net asset value, end of period $11.08 $12.02 $12.09
TOTAL RETURN+ (2.82)% 5.86% 3.31%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.64%(4)(5) 0.74%(4)(5) 0.76%(2)(3)
Net investment income 4.98%(5) 4.88%(5) 4.96%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $17,198 $15,041 $3,857
Portfolio turnover rate 13% 15% 16%
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.02%.
(4) Does not reflect the effect of expense offset of 0.01%.
(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.
25
FOR THE PERIOD
FOR THE FOR THE JULY 28, 1997*
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
CLASS B
SELECTED PER-SHARE DATA:
Net asset value, beginning of period $12.07 $12.14 $12.00
-------- -------- --------
Income (loss) from investment operations:
Net investment income 0.53 0.55 0.23
Net realized and unrealized gain (loss) (0.91) 0.10 0.19
-------- -------- --------
Total income (loss) from investment operations (0.38) 0.65 0.42
-------- -------- --------
Less dividends and distributions from:
Net investment income (0.53) (0.55) (0.23)
Net realized gain (0.03) (0.17) (0.05)
-------- -------- --------
Total dividends and distributions (0.56) (0.72) (0.28)
-------- -------- --------
Net asset value, end of period $11.13 $12.07 $12.14
TOTAL RETURN+ (3.25)% 5.47% 3.57%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.11%(4)(5) 1.10%(4)(5) 1.14%(2)(3)
Net investment income 4.51%(5) 4.52%(5) 4.87%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $139,786 $132,303 $95,573
Portfolio turnover rate 13% 15% 16%
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.02%.
(4) Does not reflect the effect of expense offset of 0.01%.
(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.
26
FOR THE PERIOD
FOR THE FOR THE JULY 28, 1997*
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
CLASS C
SELECTED PER-SHARE DATA:
Net asset value, beginning of period $12.04 $12.11 $12.00
Income (loss) from investment operations:
Net investment income 0.51 0.53 0.23
Net realized and unrealized gain (loss) (0.91) 0.10 0.16
-------- --------- ---------
Total income (loss) from investment
operations (0.40) 0.63 0.39
Less dividends and distributions from:
Net investment income (0.51) (0.53) (0.23)
Net realized gain (0.03) (0.17) (0.05)
-------- --------- ---------
Total dividends and distributions (0.54) (0.70) (0.28)
Net asset value, end of period $11.10 $12.04 $12.11
TOTAL RETURN+ (3.37)% 5.36% 3.28%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.21%(4)(5) 1.20%(4)(5) 1.20%(2)(3)
Net investment income 4.41%(5) 4.34%(5) 4.41%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $10,025 $7,599 $2,953
Portfolio turnover rate 13% 15% 16%
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.02%.
(4) Does not reflect the effect of expense offset of 0.01%.
(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.
27
YEARS ENDED DECEMBER 31 1999
CLASS D
SELECTED PER-SHARE DATA:
Net asset value, beginning of period $12.01
Income (loss) from investment operations:
Net investment income 0.59
Net realized and unrealized gain (loss) (0.91)
------
Total income (loss) from investment operations (0.32)
Less dividends and distributions from:
Net investment income (0.59)
Net realized gain (0.03)
------
Total dividends and distributions (0.62)
Net asset value, end of period $11.07
TOTAL RETURN+ (2.71)%
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.51%(1)(2)
Net investment income 5.11%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $853,216
Portfolio turnover rate 13%
YEARS ENDED DECEMBER 31 1998* 1997* 1996 1995
CLASS D
SELECTED PER-SHARE DATA:
Net asset value, beginning of period $12.08 $11.77 $12.09 $11.01
Income (loss) from investment operations:
Net investment income 0.62 0.63 0.65 0.67
Net realized and unrealized gain (loss) 0.10 0.36 (0.24) 1.19
-------- ---------- ---------- ----------
Total income (loss) from investment operations 0.72 0.99 0.41 1.86
Less dividends and distributions from:
Net investment income (0.62) (0.63) (0.65) (0.67)
Net realized gain (0.17) (0.05) (0.08) (0.11)
----------- ---------- ---------- ----------
Total dividends and distributions (0.79) (0.68) (0.73) (0.78)
Net asset value, end of period $12.01 $12.08 $11.77 $ 12.09
TOTAL RETURN+ 6.11% 8.73% 3.61% 17.37%
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.50%(1)(2) 0.49% 0.48% 0.48%
Net investment income 5.12%(2) 5.34% 5.52% 5.76%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $1,023,246 $1,096,998 $1,190,034 $1,325,308
Portfolio turnover rate 15% 16% 18% 21%
* Prior to July 28, 1997, the Fund issued one class of shares. All shares
of the Fund held prior to that date have been designated Class D shares.
+ Calculated based on the net asset value as of the last business day of
the period.
(1) Does not reflect the effect of expense offset of 0.01%.
(2) Reflects overall Fund ratios for investment income and non-class specific
expenses.
28
MORGAN STANLEY DEAN WITTER
FAMILY OF FUNDS
The Morgan Stanley Dean Witter Family of Funds offers investors a wide range of
investment choices. Come on in and meet the family!
- - --------------------------------------------------------------------------------
GROWTH FUNDS
GROWTH FUNDS
Aggressive Equity Fund
American Opportunities Fund
Capital Growth Securities
Developing Growth Securities
Growth Fund
Market Leader Trust
Mid-Cap Equity Trust
Next Generation Trust
Small Cap Growth Fund
Special Value Fund
21st Century Trend Fund
THEME FUNDS
Financial Services Trust
Health Sciences Trust
Information Fund
Natural Resource Development Securities
GLOBAL/INTERNATIONAL FUNDS
Competitive Edge Fund -- "Best Ideas" Portfolio
European Growth Fund
Fund of Funds -- International Portfolio
International Fund
International SmallCap Fund
Japan Fund
Latin American Growth Fund
Pacific Growth Fund
- - --------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
Balanced Growth Fund
Balanced Income Fund
Convertible Securities Trust
Dividend Growth Securities
Equity Fund
Fund of Funds -- Domestic Portfolio
Income Builder Fund
Mid-Cap Dividend Growth Securities
S&P 500 Index Fund
S&P 500 Select Fund
Strategist Fund
Total Market Index Fund
Total Return Trust
Value Fund
Value-Added Market Series/Equity Portfolio
THEME FUNDS
Real Estate Fund
Utilities Fund
GLOBAL FUNDS
Global Dividend Growth Securities
Global Utilities Fund
- - --------------------------------------------------------------------------------
INCOME FUNDS
GOVERNMENT INCOME FUNDS
Federal Securities Trust
Short-Term U.S. Treasury Trust
U.S. Government Securities Trust
DIVERSIFIED INCOME FUNDS
Diversified Income Trust
CORPORATE INCOME FUNDS
High Yield Securities
Intermediate Income Securities
Short-Term Bond Fund(NL)
GLOBAL INCOME FUNDS
North American Government Income Trust
World Wide Income Trust
TAX-FREE INCOME FUNDS
California Tax-Free Income Fund
Hawaii Municipal Trust(FSC)
Limited Term Municipal Trust(NL)
Multi-State Municipal Series Trust(FSC)
New York Tax-Free Income Fund
Tax-Exempt Securities Trust
- - --------------------------------------------------------------------------------
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
Liquid Asset Fund(MM)
U.S. Government Money Market Trust(MM)
TAX-FREE MONEY MARKET FUNDS
California Tax-Free Daily Income Trust(MM)
New York Municipal Money Market Trust(MM)
Tax-Free Daily Income Trust(MM)
There may be funds created after this Prospectus was published. Please consult
the inside back cover of a new Fund's Prospectus for its designation, e.g.,
Multi-Class Fund or Money Market Fund.
Unless otherwise noted, each listed Morgan Stanley Dean Witter Fund, except for
North American Government Income Trust and Short-Term U.S. Treasury Trust, is a
Multi-Class Fund. A Multi-Class Fund is a mutual fund offering multiple Classes
of shares. The other types of Funds are: NL -- No-Load (Mutual) Fund; MM --
Money Market Fund; FSC -- A mutual fund sold with a front-end sales charge and
a distribution (12b-1) fee.
PROSPECTUS - FEBRUARY 24, 2000
Additional information about the Fund's investments is available in the Fund's
Annual and Semi-Annual Reports to Shareholders. In the Fund's Annual Report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. The
Fund's Statement of Additional Information also provides additional information
about the Fund. The Statement of Additional Information is incorporated herein
by reference (legally is part of this Prospectus). For a free copy of any of
these documents, to request other information about the Fund, or to make
shareholder inquiries, please call:
(800) 869-NEWS
You also may obtain information about the Fund by calling your Morgan Stanley
Dean Witter Financial Advisor or by visiting our Internet site at:
WWW.MSDW.COM/INDIVIDUAL/FUNDS
Information about the Fund (including the Statement of Additional Information)
can be viewed and copied at the Securities and Exchange Commission's Public
Reference Room in Washington, DC. Information about the Reference Room's
operations may be obtained by calling the SEC at (202) 942-8090. Reports and
other information about the Fund are available on the EDGAR Database on the
SEC's Internet site (www.sec.gov), and copies of this information may be
obtained, after paying a duplicating fee, by electronic request at the
following e-mail address: publicinfo@sec.gov, or by writing the Public
Reference Section of the SEC, Washington, DC 20549-0102.
TICKER SYMBOLS:
Class A: TAXAX Class C: TAXCX
Class B: TAXBX Class D: TAXDX
(THE FUND'S INVESTMENT COMPANY ACT FILE NO. IS 811-2979)
Morgan Stanley Dean Witter
TAX-EXEMPT SECURITIES TRUST
[GRAPHIC OMITTED]
A MUTUAL FUND THAT SEEKS TO
PROVIDE A HIGH LEVEL OF CURRENT
INCOME EXEMPT FROM FEDERAL
INCOME TAX, CONSISTENT WITH
THE PRESERVATION OF CAPITAL
EXHIBIT C
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
TERMS & PROVISIONS OF THE
- - --------------------------------------------------------------------------------
Dividend Reinvestment Plan
- - --------------------------------------------------------------------------------
(A) Shareholders of the Trust (except brokers, and nominees of banks and
financial institutions) may participate in the Dividend Reinvestment Plan ("the
Plan") and will be deemed to have appointed Morgan Stanley Dean Witter Trust
FSB, Harborside Financial Center, Plaza Two, Jersey City, New Jersey 07311 (the
"Transfer Agent") as their Transfer Agent to act on their behalf under the
Plan. Under the Plan, dividends and distributions ("distributions") will be
reinvested in additional Shares of the Trust. The Plan will continue in effect
for each shareholder as to all future distributions until terminated.
(B) The payment date for distributions will generally be approximately two
weeks after the record date.
(C) Whenever the Trust declares a dividend or other distribution, it will pay
the amount thereof to the Transfer Agent on behalf of shareholders under the
Plan in cash which the Transfer Agent will forward to the Plan agent to buy
Shares in the open market for the participants' accounts. Market price for the
purpose of the Plan will be the market price of the Shares on a national
securities exchange or, in the event the Shares are not listed on a securities
exchange at the time, market price will be the asked price, or the mean of the
asked prices if more than one is available, of the Shares in the
over-the-counter market.
(D) The cost of full and fractional Shares acquired for each shareholder's
account in connection with a particular distribution shall be determined by the
average cost per share of the Shares acquired by the Transfer Agent in
connection with that distribution. Shareholders will receive a confirmation
showing the average cost of Shares acquired as soon as practicable after the
Transfer Agent has received the Shares purchased by the Plan agent. The
Transfer Agent may mingle the cash in a shareholder's account with similar
funds of other shareholders of the Trust for whom it acts as Transfer Agent
under the Plan.
(E) As used herein, the term "market price" means the closing price of the
Trust's Shares on a national securities exchange plus expected brokerage
commissions.
(F) There is no service charge by the Transfer Agent to shareholders who
participate in the Plan. However, the Trust reserves the right to amend the
Plan in the future to include a
service charge. Each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Plan agent's open market purchases in
connection with the reinvestment of dividends or capital gains distributions.
(G) The Transfer Agent will maintain the shareholder's account, hold the
additional Shares acquired through the Plan in safekeeping and furnish him or
her with written confirmation of all transactions in the account. Upon written
request to the Transfer Agent signed by the shareholder, a certificate for all
full Shares in a shareholder's account will be sent to the shareholder, but the
shareholder will continue to be a participant in the Plan unless he requests
termination.
(H) Shareholders may terminate their participation in the Plan at any time and
elect to receive distributions in cash by notifying the Transfer Agent in
writing. Such notification must be received prior to the record date of any
distribution. There will be no charge or other penalty for such termination.
Upon termination, the Transfer Agent will send the shareholder a share
certificate for the number of full Shares in his or her account and a check for
the market value of any fractional Share unless otherwise instructed by the
shareholder.
(I) Brokers and nominees of banks and financial institutions are advised to
contact the Transfer Agent in the event any beneficial owners of the Shares
held in their names desire to participate in the Plan.
(J) Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan, or
change the Transfer Agent. Any material change in the Plan will be applied to
any distribution paid subsequent to notice thereof sent to participants in the
Plan at least thirty days before the record date for such distribution. The
Transfer Agent is to be liable only for wilful misconduct or negligence in
acting as Transfer Agent under the Plan.
(K) For more information, please contact the Transfer Agent at the address
above.
(L) Capital gains and income are realized on distributions reinvested pursuant
to the Plan even though cash is not received.
C-1
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST Two World Trade Center,
Letter to the Shareholders December 31, 1999 New York, New York 10048
DEAR SHAREHOLDER:
Interest rates rose steadily during 1999, making it the worst year for the
fixed-income markets since 1994. The benchmark 30-year Treasury bond began the
year yielding 5.1 percent amid fears of a global recession. However, the
economic problems in Asia, Europe and Latin America abated as the year
progressed. The U.S. economy, led by consumer demand, experienced robust
growth. As a result, the fixed-income markets anticipated that the Federal
Reserve Board would change monetary policy and remove the liquidity it had
provided during the 1998 international economic crises. Between June and
November, the Fed raised the federal funds rate a total of 75 basis points from
4.75 percent to 5.50 percent. At year-end, the yield on the 30-year Treasury
bond was nearly 6.50 percent. Subsequently, on February 2, 2000, the fed-funds
rate was raised an additional 25 basis points.
MUNICIPAL MARKET CONDITIONS
The long-term insured municipal index yield began 1999 near a record low of
5.05 percent. By the end of December, this index yield had increased almost a
full percentage point, to 5.97 percent. Because bond prices move inversely to
changes in interest rates, higher yields have caused bond prices to decline
significantly. The increase in the index yield during 1999 translated into a 13
percent price decline for a generic insured municipal bond with a 30-year
maturity.
The municipal market index outperformed U.S. Treasury bonds early last year but
later gave ground as interest rates continued to rise. The ratio of the 30-year
municipal yield to the Treasury bond yield is a measure of relative
performance. The yield ratio declined from 99 percent in January to 91 percent
in May 1999 and ended the year at 92 percent. A declining ratio means
municipals have outperformed Treasuries and a rising ratio indicates
underperformance by municipals. Over the past five years, the ratio has ranged
from a high of 99 percent to a low of 82 percent.
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Letter to the Shareholders December 31, 1999, continued
Higher interest rates reduced municipal market underwriting in 1999. New-issue
volume declined 20 percent. Refunding activity, the most
interest-rate-sensitive component of supply, was down more than 50 percent.
30-YEAR BOND YIELDS 1994-1999
AAA AAA
Date Ins Tsy % Relationship Date Ins Tsy % Relationship
12/31/93 5.40% 6.34% 85.17% 12/31/96 5.60 6.63 84.46%
01/31/94 5.40 6.24 86.54% 01/31/97 5.70 6.79 83.95%
02/28/94 5.80 6.66 87.09% 02/28/97 5.65 6.80 83.09%
03/31/94 6.40 7.09 90.27% 03/31/97 5.90 7.10 83.10%
04/29/94 6.35 7.32 86.75% 04/30/97 5.75 6.94 82.85%
05/31/94 6.25 7.43 84.12% 05/30/97 5.65 6.91 81.77%
06/30/94 6.50 7.61 85.41% 06/30/97 5.60 6.78 82.60%
07/29/94 6.25 7.39 84.57% 07/30/97 5.30 6.30 84.13%
08/31/94 6.30 7.45 84.56% 08/31/97 5.50 6.61 83.21%
09/30/94 6.55 7.81 83.87% 09/30/97 5.40 6.40 84.38%
10/31/94 6.75 7.96 84.80% 10/31/97 5.35 6.15 86.99%
11/30/94 7.00 8.00 87.50% 11/30/97 5.30 6.05 87.60%
12/30/94 6.75 7.88 85.66% 12/31/97 5.15 5.92 86.99%
01/31/95 6.40 7.70 83.12% 01/31/98 5.15 5.80 88.79%
02/28/95 6.15 7.44 82.66% 02/28/98 5.20 5.92 87.84%
03/31/95 6.15 7.43 82.77% 03/31/98 5.25 5.93 88.53%
04/28/95 6.20 7.34 84.47% 04/30/98 5.35 5.95 89.92%
05/31/95 5.80 6.66 87.09% 05/29/98 5.20 5.80 89.66%
06/30/95 6.10 6.62 92.15% 06/30/98 5.20 5.65 92.04%
07/31/95 6.10 6.86 88.92% 07/31/98 5.18 5.71 90.72%
08/31/95 6.00 6.66 90.09% 08/31/98 5.03 5.27 95.45%
09/29/95 5.95 6.48 91.82% 09/30/98 4.95 5.00 99.00%
10/31/95 5.75 6.33 90.84% 10/31/98 5.05 5.16 97.87%
11/30/95 5.50 6.14 89.58% 11/30/98 5.00 5.06 98.81%
12/29/95 5.35 5.94 90.07% 12/31/98 5.05 5.10 99.02%
01/31/96 5.40 6.03 89.55% 01/31/99 5.00 5.09 98.23%
02/29/96 5.60 6.46 86.69% 02/28/99 5.10 5.58 91.40%
03/29/96 5.85 6.66 87.84% 03/31/99 5.15 5.63 91.47%
04/30/96 5.95 6.89 86.36% 04/30/99 5.20 5.66 91.87%
05/31/96 6.05 6.99 86.55% 05/31/99 5.30 5.83 90.91%
06/28/96 5.90 6.89 85.63% 06/30/99 5.47 5.96 91.78%
07/31/96 5.85 6.97 83.93% 07/31/99 5.55 6.10 90.98%
08/30/96 5.90 7.11 82.98% 08/31/99 5.75 6.06 94.88%
09/30/96 5.70 6.93 82.25% 09/30/99 5.85 6.05 96.69%
10/31/96 5.65 6.64 85.09% 10/31/99 6.03 6.16 97.89%
11/29/96 5.50 6.35 86.61% 11/30/99 6.00 6.29 95.39%
12/31/99 5.97 6.48 92.13%
PERFORMANCE
The performance of Morgan Stanley Dean Witter Tax-Exempt Securities Trust was
impacted by the higher interest-rate environment. For the 12-month period ended
December 31, 1999, the Fund's Class A and D shares returned -2.82 percent and
- - -2.71 percent, respectively. For the same period, the Fund's Class B and C
shares returned -3.25 percent and -3.37 percent, respectively. (The performance
of the Fund's four share classes varies because of differing expenses. Total
return figures assume the
2
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Letter to the Shareholders December 31, 1999, continued
reinvestment of all distributions and do not reflect the deduction of any
applicable sales charges.) During the same period, the Lehman Brothers
Municipal Bond Index returned -2.06 percent. The accompanying chart compares
the Fund's performance to that of the Lehman index.
PORTFOLIO STRUCTURE
The Fund's net assets of $1.02 billion were diversified among 14 long-term
sectors and 106 credits. As interest rates have increased, the Fund's
short-term investment position, which had ranged from 1 - 3 percent in 1998,
was gradually increased to 7 - 9 percent. Refunded bonds represented 12 percent
of net assets. Refunded issues have been refinanced and are generally defensive
portfolio holdings. At the end of December, the portfolio's average maturity
was 15 years. Average duration, a measure of sensitivity to interest-rate
changes, was a relatively short 7.6 years. The accompanying charts provide
current information on the portfolio's credit quality, sector distribution and
geographic diversification. Optional call provisions by year and their
respective cost (book) yields are also charted.
LOOKING AHEAD
The Federal Reserve Board raised the fed-funds rate twice last summer and once
more in November. These actions confirmed its previously disclosed bias of
becoming less accommodative in the face of continued strong domestic economic
growth. It is anticipated that the central bank may raise short-term interest
rates further in 2000, again influencing long-term rates. However, we believe
municipal bonds continue to offer tax-conscious investors good long-term value
relative to Treasuries. We continue to stress credit quality and a conservative
portfolio management profile.
We appreciate your ongoing support of Morgan Stanley Dean Witter Tax-Exempt
Securities Trust and look forward to continuing to serve your investment needs.
Very truly yours,
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
3
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Letter to the Shareholders December 31, 1999, continued
LARGEST SECTORS AS OF DECEMBER 31, 1999
(% OF NET ASSETS)
TRANSPORTATION 16%
GENERAL OBLIGATION 15%
ELECTRIC 14%
REFUNDED 12%
WATER & SEWER 9%
MORTGAGE 9%
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
CREDIT RATINGS AS OF DECEMBER 31, 1999
(% OF TOTAL LONG-TERM PORTFOLIO)
Aaa or AAA 65%
Aa or AA 19%
A or A 13%
Baa or BBB 2%
NR 1%
100%
AS MEASURED BY MOODY'S INVESTORS SERVICE, INC.
OR STANDARD & POOR'S CORP.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
GEOGRAPHIC SUMMARY OF INVESTMENTS
BASED ON MARKET VALUE AS A PERCENT OF NET ASSETS
DECEMBER 31, 1999
ALABAMA ................ 1.0% LOUISIANA .............. 0.7% OHIO ................... 3.2%
ALASKA ................. 5.2 MARYLAND ............... 1.2 PENNSYLVANIA ........... 2.9
ARIZONA ................ 4.9 MASSACHUSETTS .......... 6.3 PUERTO RICO ............ 1.8
CALIFORNIA ............. 4.9 MICHIGAN ............... 1.7 SOUTH CAROLINA ......... 2.7
COLORADO ............... 1.3 MINNESOTA .............. 1.5 TENNESSEE .............. 2.8
CONNECTICUT ............ 0.3 MISSOURI ............... 2.0 TEXAS .................. 9.6
FLORIDA ................ 4.2 NEBRASKA ............... 0.3 UTAH ................... 4.7
GEORGIA ................ 3.1 NEVADA ................. 1.9 VIRGINIA ............... 4.1
HAWAII ................. 0.7 NEW HAMPSHIRE .......... 0.1 WASHINGTON ............. 3.7
ILLINOIS ............... 1.6 NEW JERSEY ............. 4.0 WISCONSIN .............. 1.3
INDIANA ................ 1.0 NEW MEXICO ............. 0.7 ----
KANSAS ................. 0.2 NEW YORK ............... 6.9 TOTAL .................. 98.7%
KENTUCKY ............... 4.6 NORTH CAROLINA ......... 1.6 ====
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
4
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Letter to the Shareholders December 31, 1999, continued
CALL AND COST (BOOK) YIELD STRUCTURE
DECEMBER 31, 1999
PERCENT CALLABLE*
YEARS
BONDS
CALLABLE
- - ----------
2000 7%
2001 10%
2002 7%
2003 9%
2004 6%
2005 11%
2006 7%
2007 10%
2008 9%
2009 7%
2010+ 17%
WEIGHTED AVERAGE CALL PROTECTION: 6 YEARS
COST (BOOK) YIELD**
2000 8.0%
2001 6.7%
2002 6.6%
2003 7.5%
2004 5.8%
2005 6.7%
2006 5.8%
2007 5.9%
2008 5.3%
2009 5.7%
2010+ 6.1%
WEIGHTED AVERAGE BOOK YIELD: 6.4%
- - ---------------
* % BASED ON LONG-TERM PORTFOLIO.
** COST OR "BOOK" YIELD IS THE ANNUAL INCOME EARNED ON A PORTFOLIO INVESTMENT
BASED ON ITS ORIGINAL PURCHASE PRICE BEFORE FUND OPERATING EXPENSES. FOR
EXAMPLE, THE FUND EARNED A BOOK YIELD OF 6.7% ON 10% OF THE BONDS IN THE
LONG-TERM PORTFOLIO THAT ARE CALLABLE IN 2001.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
5
MORGAN STANLEY DEAN WITTER TAX EXEMPT SECURITIES TRUST
Fund Performance December 31, 1999
GROWTH OF $10,000 - CLASS A AND D SHARES
($ in Thousands)
Date TOTAL CLASS A TOTAL CLASS D LEHMAN LIPPER
---- ------------- ------------- --------- --------
December 31, 1989 $ 9,575 $10,000 $10,000 $10,000
December 31, 1990 $10,110 $10,586 $10,729 $10,600
December 31, 1991 $11,367 $11,931 $12,032 $11,876
December 31, 1992 $12,370 $13,016 $13,093 $12,933
December 31, 1993 $13,725 $14,478 $14,700 $14,541
December 31, 1994 $12,931 $13,674 $13,940 $13,663
December 31, 1995 $15,139 $16,049 $16,374 $16,028
December 31, 1996 $15,646 $16,629 $17,100 $16,601
December 31, 1997 $16,971 $18,081 $18,671 $18,160
December 31, 1998 $17,966 $19,185 $19,881 $19,184
December 31, 1999 $17,460(3) $18,665(3) $19,472 $18,404
---- Fund ---- Lehman(4) ---- Lipper(5)
Past performance is not predictive of future returns. Performance for Class B
and Class C shares will vary from the performance of Class A and Class D shares
shown above due to differences in sales charges and expenses.
Average Annual Total Returns
- - --------------------------------------------------------------------------------
Class A Shares*
- - -------------------------------------------------------------
Period Ended 12/31/99
- - ----------------------
1 year (2.82)%(1) (6.95)%(2)
5 years 6.19 %(1) 5.27 %(2)
10 years 6.19 %(1) 5.73 %(2)
Class B Shares+
- - -------------------------------------------------------------
Period Ended 12/31/99
- - ---------------------
1 year (3.25)%(1) (7.86)%(2)
Since Inception (7/28/97) 2.31 %(1) 1.19 %(2)
Class C Shares++
- - -------------------------------------------------------------
Period Ended 12/31/99
- - ---------------------
1 year (3.37)%(1) (4.29)%(2)
Since Inception (7/28/97) 2.09 %(1) 2.09 %(2)
Class D Shares#
- - -------------------------------------------------------------
Period Ended 12/31/99
- - ---------------------
1 year (2.71)%(1)
5 years 6.42 %(1)
10 years 6.44 %(1)
Prior to July 28, 1997 the Fund offered only one class of shares. Because the
distribution arrangement for Class A most closely resembled the distribution
arrangement applicable prior to the implementation of multiple classes (i.e.,
Class A is sold with a front-end sales charge), historical performance
information has been restated to reflect the actual maximum sales charge
applicable to Class A (i.e., 4.25%) as compared to the 4.00% sales charge in
effect prior to July 28, 1997. In addition, Class A shares are now subject to
an ongoing 12b-1 fee which is reflected in the restated performance for that
class.
Because all shares of the fund held prior to July 28, 1997 were designated
Class D shares, the Fund's historical performance has been restated to reflect
the absence of any sales charge.
- - ---------------
(1) Figure shown assumes reinvestment of all distributions and does not
reflect the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and the deduction
of the maximum applicable sales charge. See the Fund's current prospectus
for complete details on fees and sales charges.
(3) Closing value assuming a complete redemption on December 31, 1999.
(4) The Lehman Brothers Municipal Bond Index tracks the performance of
municipal bonds with maturities of 2 years or more and a minimum credit
rating of Baa or BBB, as measured by Moody's Investors Service, Inc. or
Standard & Poor's Corp. The Index does not include any expenses, fees, or
charges. The Index is unmanaged and should not be considered an
investment.
* The maximum front- end sales charge for Class A is 4.25%.
+ The maximum CDSC for Class B is 5.0%. The CDSC declines to 0% after six
years.
++ The maximum CDSC for Class C shares is 1.0% for shares redeemed within one
year of purchase.
# Class D shares have no sales charge.
6
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Portfolio of Investments December 31, 1999
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- - -----------------------------------------------------------------------------------------------------------------------------------
TAX-EXEMPT MUNICIPAL BONDS (90.1%)
General Obligation (14.5%)
North Slope Borough, Alaska,
$ 5,000 Ser 1992 A Conv (MBIA) ...................................................... 5.90 % 06/30/03 $ 5,181,450
15,000 Ser 1994 B (FSA) ............................................................ 0.00 06/30/05 11,304,150
15,000 Ser 1995 A (MBIA) ........................................................... 0.00 06/30/06 10,676,400
10,000 Ser 1996 B (MBIA) ........................................................... 0.00 06/30/06 7,117,600
10,000 Ser 1996 B (MBIA) ........................................................... 0.00 06/30/07 6,715,500
9,500 Ser 1999 A (MBIA) ........................................................... 0.00 06/30/10 5,314,015
4,000 Connecticut, College Savings 1989 Ser A ...................................... 0.00 07/01/08 2,553,640
Florida Board of Education, Capital Outlay
5,000 Refg Ser 1999 B (MBIA) ...................................................... 4.50 06/01/24 3,927,000
5,000 Ser 1998 A .................................................................. 4.75 06/01/28 4,008,500
20,000 Massachusetts, Refg 1996 Ser A (AMBAC) ....................................... 6.00 11/01/10 21,195,199
4,000 Clark County, Nevada, Transportation Ser 1992 A (AMBAC) ...................... 6.50 06/01/17 4,295,040
New York City, New York,
1,500 1995 Ser D (MBIA) ........................................................... 6.20 02/01/07 1,598,640
1,925 1990 Ser D .................................................................. 6.00 08/01/07 1,927,522
1,545 1990 Ser D .................................................................. 6.00 08/01/08 1,547,024
North Carolina,
10,000 1997 Ser A .................................................................. 5.20 03/01/16 9,400,100
8,000 Public School Building, Ser 1999 ............................................ 4.60 04/01/17 6,782,960
10,000 South-Western City School District, Ohio, Ser 1999 (AMBAC) ................... 4.75 12/01/19 8,354,000
10,000 Pennsylvania, First Ser 1995 (FGIC) .......................................... 5.50 05/01/12 10,032,300
4,000 Shelby County, Tennessee, Refg 1995 Ser A .................................... 5.625 04/01/14 3,997,680
20,000 King County, Washington, Ltd Tax 1995 (MBIA) ................................. 6.00 01/01/23 19,633,400
2,000 Washington, Ser 1994 A ....................................................... 5.80 09/01/08 2,056,160
- - --------- ------------
171,470 147,618,280
- - --------- ------------
Educational Facilities Revenue (3.9%)
10,000 Indiana University, Student Fee Ser K (MBIA) ................................. 5.875 08/01/20 9,749,000
4,000 Maryland State Health & Educational Facilities Authority,
The Johns Hopkins University Refg Ser 1998 .................................. 5.125 07/01/20 3,582,480
7,000 Massachusetts Health & Educational Facilities Authority, Boston University
1991 Ser K & L (MBIA) ....................................................... 6.66 10/01/31 7,261,660
5,000 Missouri Health & Educational Facilities Authority, Washington University
Ser 1998 A .................................................................. 4.75 11/15/37 3,807,050
2,000 New Jersey Economic Development Authority, The Seeing Eye Inc 1991 ........... 7.30 04/01/11 2,046,560
8,000 New Jersey Educational Facilities Authority, Princeton University Ser 1999 A . 4.75 07/01/25 6,576,320
5,000 New York State Dormitory Authority, State University Ser 1989 B .............. 0.00 05/15/02 4,458,600
2,000 Ohio State University, General Receipts, Ser 1999 A .......................... 5.80 12/01/29 1,923,120
- - --------- ------------
43,000 39,404,790
- - --------- ------------
See Notes to Financial Statements
7
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Portfolio of Investments December 31, 1999, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- - -----------------------------------------------------------------------------------------------------------------------------------
Electric Revenue (14.0%)
$ 25,000 Salt River Project Agricultural Improvement & Power District, Arizona,
Refg 1993 Ser C (Secondary MBIA) ............................................. 5.50 % 01/01/10 $ 25,559,500
10,000 Sacramento Municipal Utility District, California, Refg 1994 Ser I (MBIA) ..... 5.75 01/01/15 10,060,400
10,000 Municipal Electric Authority of Georgia, Ser Y (Secondary MBIA) ............... 6.50 01/01/17 10,739,000
5,000 Long Island Power Authority, New York, Ser 1998 A (FSA) ....................... 5.125 12/01/22 4,368,800
Puerto Rico Electric Power Authority,
1,500 Power Ser X .................................................................. 6.00 07/01/15 1,518,030
15,000 Power Ser O .................................................................. 0.00 07/01/17 5,267,700
5,000 Power Ser EE (MBIA) .......................................................... 4.50 07/01/18 4,139,400
15,000 South Carolina Public Service Authority, 1995 Refg Ser A (AMBAC) .............. 6.25 01/01/22 15,028,050
710 Austin, Texas, Combined Utilities Refg Ser 1994 (FGIC) ........................ 6.25 05/15/16 725,301
20,000 Lower Colorado River Authority, Texas, Refg Ser 1999 A ........................ 5.50 05/15/21 18,531,000
San Antonio, Texas, Electric & Gas
13,000 Refg Ser 1994 C .............................................................. 4.70 02/01/06 12,756,900
5,000 Refg Ser 1998 A .............................................................. 4.50 02/01/21 3,928,100
Intermountain Power Agency, Utah,
5,000 Refg Ser 1998 A (MBIA) ....................................................... 5.25 07/01/15 4,687,300
10,000 Refg 1997 Ser B (MBIA) ....................................................... 5.75 07/01/19 9,681,400
15,000 Washington Public Power Supply System, Proj #2 Refg Ser 1994 A
(Secondary MBIA) ............................................................. 6.00 07/01/07 15,794,550
- - ---------- ------------
155,210 142,785,431
- - ---------- ------------
Hospital Revenue (3.8%)
Rochester, Minnesota,
5,000 Mayo Foundation/Medical Center Ser 1992 I .................................... 5.75 11/15/21 4,860,300
3,700 Mayo Foundation/Medical Center Ser 1992 F .................................... 6.25 11/15/21 3,733,596
10,000 Missouri Health & Educational Facilities Authority, Barnes-Jewish Inc/
Christian Health Services Ser 1993 A ......................................... 5.25 05/15/14 9,480,300
1,300 New Hampshire Higher Educational & Health Facilities Authority,
St Joseph Hospital Ser 1994 (Connie Lee) ..................................... 6.35 01/01/07 1,368,406
6,000 New York State Medical Care Facilities Finance Agency, Presbyterian
Hospital - FHA Insured Mtge Ser 1994 A ....................................... 5.25 08/15/14 5,738,220
5,000 North Central Texas Health Facilities Development Corporation, University
Medical Center Inc Ser 1997 (FSA) ............................................ 5.45 04/01/15 4,736,800
10,000 Fredericksburg Industrial Development Authority, Virginia, Medicorp
Health Refg Ser 1996 (AMBAC) ................................................. 5.25 06/15/16 9,153,800
- - ---------- ------------
41,000 39,071,422
- - ---------- ------------
Industrial Development/Pollution Control Revenue (4.1%)
1,500 Hawaii Department of Budget & Finance, Hawaiian Electric Co
Ser 1995 A (AMT) (MBIA) ...................................................... 6.60 01/01/25 1,549,665
10,000 Clark County, Nevada, Nevada Power Co Ser 1992 A (AMT) (FGIC) ................. 6.70 06/01/22 10,233,600
5,000 Washoe County, Nevada, Sierra Pacific Power Co Ser 1987 (AMBAC) ............... 6.30 12/01/14 5,156,900
5,000 Alliance Airport Authority, Texas, AMR Corp Ser 1990 (AMT) .................... 7.50 12/01/29 5,154,600
See Notes to Financial Statements
8
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Portfolio of Investments December 31, 1999, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- - -----------------------------------------------------------------------------------------------------------------------------------
$ 10,000 Dallas-Fort Worth International Airport Facility Improvement Corporation,
Texas, American Airlines Inc Ser 1995 ....................................... 6.00 % 11/01/14 $ 9,477,500
10,000 Weston, Wisconsin, Wisconsin Public Service Co Refg Ser 1993 A ............... 6.90 02/01/13 10,794,900
- - ---------- ------------
41,500 42,367,165
- - ---------- ------------
Mortgage Revenue - Multi-Family (2.3%)
880 Massachusetts Housing Finance Agency, Rental 1994 Ser A (AMT)(AMBAC) ......... 6.65 07/01/19 905,177
5,560 Michigan Housing Development Authority, Rental 1992 Ser A (Bifurcated FSA) ... 6.50 04/01/23 5,796,133
9,000 New Jersey Housing & Mortgage Finance Agency, 1995 Ser A (AMBAC) ............. 6.05 11/01/20 8,894,160
New York City Housing Development Corporation, New York,
4,260 Ruppert Proj - FHA Ins Sec 223F ............................................. 6.50 11/15/18 4,302,400
4,114 Stevenson Commons Proj - FHA Ins Sec 223F ................................... 6.50 05/15/18 4,154,020
- - ---------- ------------
23,814 24,051,890
- - ---------- ------------
Mortgage Revenue - Single Family (6.6%)
7,000 Alaska Housing Finance Corporation, Governmental 1995 Ser A (MBIA) ........... 5.875 12/01/24 6,781,740
2,440 California Housing Finance Agency, Home Cap Apprec 1983 Ser B ................ 0.00 08/01/15 496,686
Colorado Housing & Finance Authority,
2,000 1998 Ser A-2 (AMT) .......................................................... 6.60 05/01/28 2,024,320
2,500 1997 Ser C-2 (AMT) .......................................................... 6.875 11/01/28 2,617,225
12,100 Illinios Housing Development Authority, Residential 1991 Ser C (AMT) ......... 6.875 02/01/18 12,468,929
Missouri Housing Development Commission, Homeownership
3,020 GNMA/FNMA Collateralized 1996 Ser C (AMT) ................................... 7.45 09/01/27 3,210,411
3,910 GNMA/FNMA Collateralized 1997 Ser C-1 ....................................... 6.55 09/01/28 4,049,274
2,800 Nebraska Investment Finance Authority, GNMA-Backed 1990 (AMT) ................ 7.631 09/10/30 2,884,140
3,450 Ohio Housing Finance Agency, GNMA-Backed 1991 Ser A 1 & 2 (AMT) .............. 6.903 03/01/31 3,550,844
10,000 Pennsylvania Housing Finance Agency, Ser 1991-31 C (AMT) ..................... 7.00 10/01/23 10,366,800
Tennessee Housing Development Agency,
3,955 Mortgage Finance 1993 Ser A ................................................. 5.90 07/01/18 3,919,880
1,000 Mortgage Finance 1994 Ser B (AMT) ........................................... 6.55 07/01/19 1,009,990
10,785 Mortgage Finance 1993 Ser A ................................................. 5.95 07/01/28 10,454,440
275 Utah Housing Finance Agency, Fed Ins/Guaranteed Loans 1994 Issue E (AMT) ..... 6.50 07/01/26 277,852
2,800 Wisconsin Housing & Economic Development Authority, Home Ownership
1991 Ser (AMT) .............................................................. 7.097 10/25/22 2,899,568
- - ---------- ------------
68,035 67,012,099
- - ---------- ------------
Public Facilities Revenue (1.1%)
2,000 North City West School Facilities Authority, California, Community Dist #1
Special Tax Ser 1995 B (FSA) ................................................ 6.00 09/01/19 1,997,520
3,500 Denver, Colorado, Excise Tax Ser 1985 A (Secondary FSA) ...................... 5.00 11/01/08 3,468,500
5,000 Ohio Building Authority, 1985 Ser C .......................................... 9.75 10/01/05 6,102,150
--------- ------------
10,500 11,568,170
--------- ------------
See Notes to Financial Statements
9
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Portfolio of Investments December 31, 1999, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- - ---------------------------------------------------------------------------------------------------------------------------------
Recreational Facilities Revenue (0.3%)
Metropolitan Football Stadium District, Colorado,
$ 4,000 Sales Tax Ser 1999 A (MBIA) .............................................. 0.00 % 01/01/10 $ 2,300,240
2,000 Sales Tax Ser 1999 A (MBIA) .............................................. 0.00 01/01/12 1,010,600
- - ---------- --------------
6,000 3,310,840
- - ---------- --------------
Resource Recovery Revenue (1.7%)
7,000 Savannah Resource Recovery Development Authority, Georgia, Savannah
Energy Systems Co Ser 1992 ............................................... 6.30 12/01/06 7,228,970
10,000 Northeast Maryland Waste Disposal Authority, Montgomery County
Ser 1993 A (AMT) ......................................................... 6.30 07/01/16 10,116,400
- - ---------- --------------
17,000 17,345,370
- - ---------- --------------
Transportation Facilities Revenue (16.0%)
5,000 San Francisco Bay Area Rapid Transit District, California, Sales Tax
Ser 1998 (AMBAC) ......................................................... 4.75 07/01/23 4,130,550
13,000 San Joaquin Hills Transportation Corridor Agency, California, Toll Road
Refg Ser 1997 A (MBIA) ................................................... 0.00 01/15/26 2,611,440
5,000 E-470 Public Highway Authority, Colorado, Ser 1997 B (MBIA) ............... 0.00 09/01/16 1,824,850
1,000 Lee County, Florida, Ser 1995 (MBIA) ...................................... 5.75 10/01/22 976,350
Mid-Bay Bridge Authority, Florida,
8,965 Ser 1993 A (AMBAC) ....................................................... 5.85 10/01/13 9,107,095
3,000 Ser 1997 A (AMBAC) ....................................................... 0.00 10/01/21 770,250
10,000 Atlanta, Georgia, Airport Ser 1990 (AMT) .................................. 6.25 01/01/21 9,816,700
5,000 Hawaii, Airports Second Ser 1991 (AMT) .................................... 7.00 07/01/18 5,211,650
4,000 Regional Transportation Authority, Illinois, Refg Ser 1999 (FSA) .......... 5.75 06/01/21 3,875,400
2,000 Kansas, Highway Refg Ser 1998 ............................................. 5.50 09/01/12 2,029,020
Kentucky Turnpike Authority,
9,000 Economic Development Road Refg Ser 1995 (AMBAC) .......................... 6.50 07/01/08 9,847,350
30,000 Resource Recovery Road 1987 Ser A ........................................ 5.00 07/01/08 29,430,599
13,385 Massachusetts Turnpike Authority, Western 1997 Ser A (MBIA) ............... 5.55 01/01/17 13,312,186
7,700 Minneapolis - St Paul Metropolitan Airports Commission, Minnesota,
Ser 1998 A (AMBAC) ....................................................... 5.00 01/01/30 6,421,107
New Jersey Highway Authority,
7,000 Sr Parkway 1999 Ser ...................................................... 5.625 01/01/30 6,608,980
11,000 Sr Parkway Refg 1992 Ser ................................................. 6.25 01/01/14 11,396,220
5,000 New Jersey Transportation Trust Fund Authority, 1999 Ser A ................ 5.75 06/15/16 5,021,000
6,595 Albuquerque, New Mexico, Airport Refg Ser 1997 (AMT) (AMBAC) .............. 6.375 07/01/15 6,801,028
5,000 Ohio Turnpike Commission, Ser 1998 B (FGIC) ............................... 4.50 02/15/24 3,906,550
Pennsylvania Turnpike Commission,
5,000 Ser L of 1991 (MBIA) ..................................................... 6.00 06/01/15 5,093,750
5,000 Ser A 1998 (AMBAC) ....................................................... 4.75 12/01/27 3,987,300
8,000 Puerto Rico Highway & Transportation Authority, Refg Ser X ................ 5.50 07/01/15 7,748,800
10,000 South Carolina Transportation Infrastructure Bank, Ser 1999 A (AMBAC) ..... 5.50 10/01/16 9,669,900
3,000 Virginia Transportation Board, US Route 58 Corridor Ser 1993 B ............ 5.625 05/15/13 3,003,210
- - ---------- --------------
182,645 162,601,285
- - ---------- --------------
See Notes to Financial Statements
10
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Portfolio of Investments December 31, 1999, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- - -----------------------------------------------------------------------------------------------------------------------------------
Water & Sewer Revenue (9.0%)
$ 10,000 Phoenix Civic Improvement Corporation, Arizona, Jr Lien Water Ser 1994 ..... 5.45 % 07/01/19 $ 9,366,200
10,000 California Department of Water Resources, Central Valley Ser L ............. 5.50 12/01/23 9,332,800
10,000 Los Angeles, California, Wastewater Ser 1994-A (MBIA) ...................... 5.875 06/01/24 9,878,100
5,000 Fulton County, Georgia, Water & Sewerage Ser 1998 (FGIC) ................... 4.75 01/01/28 4,000,300
10,000 Louisville & Jefferson County Metropolitan Sewer District, Kentucky,
Ser 1998 A (FGIC) ......................................................... 4.75 05/15/28 7,973,400
9,500 Massachusetts Water Resources Authority, Refg 1992 Ser B ................... 5.50 11/01/15 9,111,640
Detroit, Michigan,
3,320 Sewage Refg Ser 1993 A (FGIC) ............................................. 5.70 07/01/13 3,334,276
10,000 Water Supply 1997 Ser A (MBIA) ............................................ 5.00 07/01/21 8,606,500
10,000 Cleveland, Ohio, Waterworks Impr & Refg 1998 Ser I (FSA) ................... 5.00 01/01/23 8,594,300
5,000 Spartanburg, South Carolina, Jr Lien Water System Ser 1998 (FGIC) .......... 5.25 06/01/28 4,362,750
11,000 Metropolitan Government of Nashville & Davidson County, Tennessee,
Refg Ser 1998 A (FGIC) .................................................... 4.75 01/01/22 9,053,110
10,000 Dallas, Texas, Waterworks & Sewer Refg Ser 1998 (FSA) ...................... 5.00 10/01/29 8,331,300
---------- --------------
103,820 91,944,676
---------- --------------
Other Revenue (0.8%)
5,000 New York Local Government Assistance Corporation, Ser 1993 C ............... 5.50 04/01/17 4,837,350
3,000 Houston, Texas, Sr Lien Hotel Occupancy Tax Refg Ser 1995 (FSA) ............ 5.50 07/01/11 3,000,000
---------- --------------
8,000 7,837,350
---------- --------------
Refunded (12.0%)
10,000 Birmingham Water Works & Sewer Board, Alabama, Ser 1994 .................... 5.50 01/01/04+ 10,417,500
9,000 Los Angeles Convention and Exhibition Center Authority, California,
Ser 1985 COPs ............................................................. 9.00 12/01/05+ 10,978,200
2,500 Mid-Bay Bridge Authority, Florida, Ser 1991 A (ETM) ........................ 6.875 10/01/22 2,777,700
2,500 Massachusetts Health & Educational Facilities Authority,
Malden Hospital - FHA Ins Mtge Ser A (ETM) ................................ 5.00 08/01/16 2,318,800
10,000 Massachusetts Water Resources Authority, 1996 Ser A (FGIC) ................. 5.50 11/01/06+ 10,387,600
14,000 New York State Dormitory Authority, Suffolk County Judicial Ser 1986 (ETM).. 7.375 07/01/16 16,367,400
7,000 San Antonio, Texas, Electric & Gas Refg Ser 1994 C (ETM) ................... 4.70 02/01/06 6,819,120
25,000 Intermountain Power Agency, Utah, Refg 1985 Ser H (GAINS) .................. 0.00 # 07/01/03+ 28,104,000
5,000 Salt Lake City, Utah, IHC Hospital Inc Ser 1983 (ETM) ...................... 5.00 06/01/15 4,691,150
28,000 Fairfax County Industrial Development Authority, Virginia, Fairfax
Hospital/Inova Health Ser 1991 ............................................ 6.801 08/15/01+ 29,404,760
---------- --------------
113,000 122,266,230
---------- --------------
984,994 TOTAL TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $902,914,260) ............. 919,184,998
---------- --------------
See Notes to Financial Statements
11
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Portfolio of Investments December 31, 1999, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- - ------------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (8.6%)
$ 15,000 Maricopa County, Arizona Public Service Co Ser 1994 C (Demand 01/03/00)......... 4.80*% 05/01/29 $ 15,000,000
21,000 Collier County Health Facilities Authority, Florida, Cleveland Clinic Health
Ser 1999 (Demand 01/03/00) .................................................... 4.70* 01/01/33 21,000,000
7,000 Louisiana Public Facilities Authority, Kenner Hotel Ser 1985 (Demand 01/03/00).. 5.00* 12/01/15 7,000,000
20,000 New York State Dormitory Authority, State University Ser 1990 B ................ 7.00 05/15/00+ 20,607,000
24,000 Harris County Health Facilities Development Corporation, Texas,
Methodist Hospital Ser 1994 (Demand 01/03/00) ................................. 4.80* 12/01/25 24,000,000
- - ---------- --------------
87,000 TOTAL SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (Identified Cost $87,607,000) ......................... 87,607,000
- - ---------- --------------
$1,071,994 TOTAL INVESTMENTS (Identified Cost $990,521,260) (a) ......................................... 98.7% 1,006,791,998
==========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES ............................................... 1.3 13,433,289
----- --------------
NET ASSETS ................................................................................... 100.0% $1,020,225,287
===== ==============
- - ---------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
GAINS Growth and Income Security.
+ Prerefunded to call date shown.
# Currently a zero coupon bond; will convert to 10.00% coupon on
July 1, 2000.
* Current coupon of variable rate demand obligation.
(a) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$38,326,839 and the aggregate gross unrealized depreciation is
$22,056,101, resulting in net unrealized appreciation of
$16,270,738.
- - ---------------
AMBAC AMBAC Assurance Corporation.
Connie Lee Connie Lee Insurance Company - A wholly owned subsidiary of AMBAC
Assurance Corporation.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
See Notes to Financial Statements
12
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1999
ASSETS:
Investments in securities, at value
(identified cost $990,521,260) .................................. $1,006,791,998
Cash .............................................................. 1,692,345
Receivable for:
Interest ...................................................... 15,344,365
Shares of beneficial interest sold ............................ 190,362
Investments sold .............................................. 35,000
Prepaid expenses and other assets ................................. 63,621
--------------
TOTAL ASSETS .................................................. 1,024,117,691
--------------
LIABILITIES:
Payable for:
Dividends to shareholders ..................................... 2,408,252
Shares of beneficial interest repurchased ..................... 869,861
Investment management fee ..................................... 393,153
Plan of distribution fee ...................................... 83,114
Accrued expenses .................................................. 138,024
--------------
TOTAL LIABILITIES ............................................. 3,892,404
--------------
NET ASSETS .................................................... $1,020,225,287
==============
COMPOSITION OF NET ASSETS:
Paid-in-capital ................................................... $1,008,602,876
Net unrealized appreciation ....................................... 16,270,738
Accumulated undistributed net investment income ................... 20,278
Accumulated net realized loss ..................................... (4,668,605)
--------------
NET ASSETS .................................................... $1,020,225,287
==============
CLASS A SHARES:
Net Assets ........................................................ $17,198,331
Shares Outstanding (unlimited authorized, $.01 par value) ......... 1,552,372
NET ASSET VALUE PER SHARE ..................................... $11.08
======
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44% of net asset value) ............. $11.57
======
CLASS B SHARES:
Net Assets ........................................................ $139,786,097
Shares Outstanding (unlimited authorized, $.01 par value) ......... 12,564,649
NET ASSET VALUE PER SHARE ..................................... $11.13
======
CLASS C SHARES:
Net Assets ........................................................ $10,024,734
Shares Outstanding (unlimited authorized, $.01 par value) ......... 902,958
NET ASSET VALUE PER SHARE ..................................... $11.10
======
CLASS D SHARES:
Net Assets ........................................................ $853,216,125
Shares Outstanding (unlimited authorized, $.01 par value) ......... 77,068,274
NET ASSET VALUE PER SHARE ..................................... $11.07
======
See Notes to Financial Statements
13
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Financial Statements, continued
STATEMENT OF OPERATIONS
For the year ended December 31, 1999
NET INVESTMENT INCOME:
INTEREST INCOME ................................... $ 62,752,799
-------------
EXPENSES
Investment management fee ......................... 4,908,427
Plan of distribution fee (Class A shares) ......... 23,738
Plan of distribution fee (Class B shares) ......... 855,483
Plan of distribution fee (Class C shares) ......... 67,457
Transfer agent fees and expenses .................. 391,939
Registration fees ................................. 97,797
Shareholder reports and notices ................... 88,271
Professional fees ................................. 84,185
Custodian fees .................................... 45,589
Trustees' fees and expenses ....................... 18,226
Other ............................................. 38,492
-------------
TOTAL EXPENSES ................................. 6,619,604
Less: expense offset .............................. (45,456)
-------------
NET EXPENSES ................................... 6,574,148
-------------
NET INVESTMENT INCOME .......................... 56,178,651
-------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss ................................. (4,668,605)
Net change in unrealized appreciation ............. (82,789,197)
-------------
NET LOSS ....................................... (87,457,802)
-------------
NET DECREASE ...................................... $ (31,279,151)
=============
See Notes to Financial Statements
14
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Financial Statements, continued
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
- - -------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................ $ 56,178,651 $ 59,803,857
Net realized gain (loss) ............................. (4,668,605) 15,111,631
Net change in unrealized appreciation ................ (82,789,197) (5,416,357)
-------------- --------------
NET INCREASE (DECREASE) ........................... (31,279,151) 69,499,131
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A shares .................................... (929,080) (460,545)
Class B shares .................................... (6,430,720) (5,022,084)
Class C shares .................................... (422,770) (218,789)
Class D shares .................................... (48,394,252) (54,102,439)
Net realized gain
Class A shares .................................... (52,982) (187,529)
Class B shares .................................... (400,237) (1,743,115)
Class C shares .................................... (27,144) (93,965)
Class D shares .................................... (2,638,565) (14,360,329)
-------------- --------------
TOTAL DIVIDENDS AND DISTRIBUTIONS ................. (59,295,750) (76,188,795)
-------------- --------------
Net decrease from transactions in shares of beneficial
interest ........................................... (67,388,661) (14,502,186)
-------------- --------------
NET DECREASE ...................................... (157,963,562) (21,191,850)
NET ASSETS:
Beginning of period .................................. 1,178,188,849 1,199,380,699
-------------- --------------
END OF PERIOD
(Including undistributed net investment income of
$20,278 and $18,572, respectively) ................ $1,020,225,287 $1,178,188,849
============== ==============
See Notes to Financial Statements
15
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Notes to Financial Statements December 31, 1999
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Tax-Exempt Securities Trust (the "Fund") is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Fund's investment
objective is to provide a high level of current income which is exempt from
federal income tax, consistent with the preservation of capital. The Fund was
incorporated in Maryland in 1979, commenced operations on March 27, 1980 and
reorganized as a Massachusetts business trust on April 30, 1987. On July 28,
1997, the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year,
six years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS - Portfolio securities are valued for the Fund by
an outside independent pricing service approved by the Trustees. The pricing
service has informed the Fund that in valuing the Fund's portfolio securities,
it uses both a computerized matrix of tax-exempt securities and evaluations by
its staff, in each case based on information concerning market transactions and
quotations from dealers which reflect the bid side of the market each day. The
Fund's portfolio securities are thus valued by reference to a combination of
transactions and quotations for the same or other securities believed to be
comparable in quality, coupon, maturity, type of issue, call provisions,
trading characteristics and other features deemed to be relevant. Short-term
debt securities having a maturity date of more than sixty days at time of
purchase are valued on a mark-to-market basis until sixty days prior to
maturity and thereafter at amortized cost based on their value on the 61st day.
Short-term debt securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS - Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
The Fund amortizes premiums and accretes discounts over the life of the
respective securities. Interest income is accrued daily.
16
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Notes to Financial Statements December 31, 1999, continued
C. MULTIPLE CLASS ALLOCATIONS - Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date
such items are recognized. Distribution fees are charged directly to the
respective class.
D. 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.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - The Fund records dividends and
distributions to its shareholders on the record date. The amount of dividends
and distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and distributions which
exceed net investment income and net realized capital gains for financial
reporting purposes but not for tax purposes are reported as dividends in excess
of net investment income or distributions in excess of net realized capital
gains. To the extent they exceed net investment income and net realized capital
gains for tax purposes, they are reported as distributions of paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with Morgan Stanley Dean Witter
Advisors Inc. (the "Investment Manager"), the Fund pays the Investment Manager
a management fee, accrued daily and payable monthly, by applying the following
annual rates to the Fund's net assets determined as of the close of each
business day: 0.50% to the portion of daily net assets not exceeding $500
million; 0.425% to the portion of daily net assets exceeding $500 million but
not exceeding $750 million; 0.375% to the portion of daily net assets exceeding
$750 million but not exceeding $1 billion; 0.35% to the portion of daily net
assets exceeding $1 billion but not exceeding $1.25 billion; and 0.325% to the
portion of daily net assets exceeding $1.25 billion.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services,
heat, light, power and other utilities provided to the Fund.
17
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Notes to Financial Statements December 31, 1999, continued
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan"), pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A - up
to 0.25% of the average daily net assets of Class A; (ii) Class B - 0.60% of
the average daily net assets of Class B; and (iii) Class C - up to 0.70% of the
average daily net assets of Class C. In the case of Class A shares, amounts
paid under the Plan are paid to the Distributor for services provided. In the
case of Class B and Class C shares, amounts paid under the Plan are paid to the
Distributor for (1) services provided and the expenses borne by it and others
in the distribution of the shares of these Classes, including the payment of
commissions for sales of these Classes and incentive compensation to, and
expenses of, Morgan Stanley Dean Witter Financial Advisors and others who
engage in or support distribution of the shares or who service shareholder
accounts, including overhead and telephone expenses; (2) printing and
distribution of prospectuses and reports used in connection with the offering
of these shares to other than current shareholders; and (3) preparation,
printing and distribution of sales literature and advertising materials. In
addition, the Distributor may utilize fees paid pursuant to the Plan, in the
case of Class B shares, to compensate Dean Witter Reynolds Inc. ("DWR"), an
affiliate of the Investment Manager and Distributor, and other selected
broker-dealers for their opportunity costs in advancing such amounts, which
compensation would be in the form of a carrying charge on any unreimbursed
expenses.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund
pursuant to the Plan and contingent deferred sales charges paid by investors
upon redemption of Class B shares. Although there is no legal obligation for
the Fund to pay expenses incurred in excess of payments made to the Distributor
under the Plan and the proceeds of contingent deferred sales charges paid by
investors upon redemption of shares, if for any reason the Plan is terminated,
the Trustees will consider at that time the manner in which to treat such
expenses. The Distributor has advised the Fund that such excess amounts,
including carrying charges, totaled $4,717,309 at December 31, 1999.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.70% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected
18
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Notes to Financial Statements December 31, 1999, continued
broker-dealer representatives may be reimbursed in the subsequent calendar
year. For the year ended December 31, 1999, the distribution fee was accrued
for Class A shares and Class C shares at the annual rate of 0.13% and 0.70%,
respectively.
The Distributor has informed the Fund that for the year ended December 31,
1999, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $274,899 and $10,671,
respectively and received $107,818 in front-end sales charges from sales of the
Fund's Class A shares. The respective shareholders pay such charges which 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 December 31, 1999
aggregated $137,618,438 and $245,779,835, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager
and Distributor, is the Fund's transfer agent. At December 31, 1999, the Fund
had transfer agent fees and expenses payable of approximately $13,800.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended December 31, 1999
included in Trustees' fees and expenses in the Statement of Operations amounted
to $5,892. At December 31, 1999, the Fund had an accrued pension liability of
$52,664 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. FEDERAL INCOME TAX STATUS
At December 31, 1999, the Fund had a net capital loss carryover of
approximately $4,670,000 which will be available through December 31, 2007 to
offset future capital gains to the extent provided by regulations.
19
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Notes to Financial Statements December 31, 1999, continued
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- ---------------- --------------- ----------------
CLASS A SHARES
Sold ........................................ 1,023,382 $ 11,894,433 1,188,860 $ 14,401,331
Reinvestment of dividends and distributions . 35,276 407,295 23,219 279,925
Redeemed .................................... (757,512) (8,588,318) (279,886) (3,403,298)
--------- -------------- --------- --------------
Net increase - Class A ...................... 301,146 3,713,410 932,193 11,277,958
--------- -------------- --------- --------------
CLASS B SHARES
Sold ........................................ 5,634,037 65,447,290 4,978,407 60,561,390
Reinvestment of dividends and distributions . 304,367 3,532,880 307,110 3,717,941
Redeemed .................................... (4,333,128) (49,694,515) (2,198,759) (26,762,285)
---------- -------------- ---------- --------------
Net increase - Class B ...................... 1,605,276 19,285,655 3,086,758 37,517,046
---------- -------------- ---------- --------------
CLASS C SHARES
Sold ........................................ 843,726 9,755,515 505,118 6,127,960
Reinvestment of dividends and distributions . 26,647 307,538 18,393 222,199
Redeemed .................................... (598,459) (6,828,777) (136,298) (1,653,180)
---------- -------------- ---------- --------------
Net increase - Class C ...................... 271,914 3,234,276 387,213 4,696,979
---------- -------------- ---------- --------------
CLASS D SHARES
Sold ........................................ 1,880,172 21,134,542 264,495 3,195,718
Reinvestment of dividends and distributions . 2,424,240 28,046,032 3,213,005 38,720,154
Redeemed .................................... (12,402,477) (142,802,576) (9,095,698) (109,910,041)
----------- -------------- ---------- --------------
Net decrease - Class D ...................... (8,098,065) (93,622,002) (5,618,198) (67,994,169)
----------- -------------- ---------- --------------
Net decrease in Fund ........................ (5,919,729) $ (67,388,661) (1,212,034) $ (14,502,186)
=========== ============== ========== ==============
7. SUBSEQUENT EVENT
On January 26, 2000, the Board of Trustees of the Fund and of Morgan Stanley
Dean Witter Multi-State Municipal Series Trust - Massachusetts Series
("Massachusetts"), Michigan Series ("Michigan"), Minnesota Series ("Minnesota")
and Ohio Series ("Ohio") each approved four reorganization plans ("the Plans")
whereby Massachusetts, Michigan, Minnesota and Ohio would be merged into the
Fund. The Plans are subject to the consent of Massachusetts', Michigan's,
Minnesota's and Ohio's shareholders. If the Plans are approved (each Plan is
independent of the other and therefore, the effectiveness of each Plan is not
20
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Notes to Financial Statements December 31, 1999, continued
dependent upon the approval of the other Plans), the assets of Massachusetts,
Michigan, Minnesota and Ohio would be combined with the assets of the Fund and
shareholders of Massachusetts, Michigan, Minnesota and Ohio would become Class
D shareholders of the Fund, receiving Class D shares of the Fund equal to the
value of their holdings in Massachusetts, Michigan, Minnesota and Ohio,
respectively.
21
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Financial Highlights
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
- - ---------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $12.02 $12.09 $12.00
------ ------ ------
Income (loss) from investment operations:
Net investment income ................................ 0.58 0.59 0.25
Net realized and unrealized gain (loss) .............. (0.91) 0.10 0.14
------ ------ ------
Total income (loss) from investment operations ......... (0.33) 0.69 0.39
------ ------ ------
Less dividends and distributions from:
Net investment income ................................ (0.58) (0.59) (0.25)
Net realized gain .................................... (0.03) (0.17) (0.05)
------ ------ ------
Total dividends and distributions ...................... (0.61) (0.76) (0.30)
------ ------ ------
Net asset value, end of period ......................... $11.08 $12.02 $12.09
====== ======= ======
TOTAL RETURN+ .......................................... (2.82)% 5.86% 3.31%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 0.64 %(4)(5) 0.74%(4)(5) 0.76%(2)(3)
Net investment income .................................. 4.98 %(5) 4.88%(5) 4.96%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $17,198 $15,041 $3,857
Portfolio turnover rate ................................ 13 % 15% 16%
- - -------------
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.02%.
(4) Does not reflect the effect of expense offset of 0.01%.
(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.
See Notes to Financial Statements
22
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Financial Highlights, continued
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
- - ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $12.07 $12.14 $12.00
------ ------ ------
Income (loss) from investment operations:
Net investment income ................................ 0.53 0.55 0.23
Net realized and unrealized gain (loss) .............. (0.91) 0.10 0.19
------ ------ ------
Total income (loss) from investment operations ......... (0.38) 0.65 0.42
------ ------ ------
Less dividends and distributions from:
Net investment income ................................ (0.53) (0.55) (0.23)
Net realized gain .................................... (0.03) (0.17) (0.05)
------ ------ ------
Total dividends and distributions ...................... (0.56) (0.72) (0.28)
------ ------ ------
Net asset value, end of period ......................... $11.13 $12.07 $12.14
====== ====== ======
TOTAL RETURN+ .......................................... (3.25)% 5.47% 3.57%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.11 %(4)(5) 1.10%(4)(5) 1.14%(2)(3)
Net investment income .................................. 4.51 %(5) 4.52%(5) 4.87%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $139,786 $132,303 $95,573
Portfolio turnover rate ................................ 13 % 15% 16%
- - --------------
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.02%.
(4) Does not reflect the effect of expense offset of 0.01%.
(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.
See Notes to Financial Statements
23
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Financial Highlights, continued
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
- - ----------------------------------------------------------------------------------------------------------------------
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $12.04 $12.11 $12.00
------ ------ ------
Income (loss) from investment operations:
Net investment income ................................. 0.51 0.53 0.23
Net realized and unrealized gain (loss) ............... (0.91) 0.10 0.16
------ ------ ------
Total income (loss) from investment operations ......... (0.40) 0.63 0.39
------ ------ ------
Less dividends and distributions from:
Net investment income ................................. (0.51) (0.53) (0.23)
Net realized gain ..................................... (0.03) (0.17) (0.05)
------ ------ ------
Total dividends and distributions ...................... (0.54) (0.70) (0.28)
------ ------ ------
Net asset value, end of period ......................... $11.10 $12.04 $12.11
====== ====== ======
TOTAL RETURN+ .......................................... (3.37)% 5.36% 3.28%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.21 %(4)(5) 1.20%(4)(5) 1.20%(2)(3)
Net investment income .................................. 4.41 %(5) 4.34%(5) 4.41%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $10,025 $7,599 $2,953
Portfolio turnover rate ................................ 130 % 15% 16%
- - --------------
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.02%.
(4) Does not reflect the effect of expense offset of 0.01%.
(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.
See Notes to Financial Statements
24
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Financial Highlights, continued
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1999 1998 1997* 1996 1995
- - -----------------------------------------------------------------------------------------------------------------------------------
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............. $12.01 $12.08 $11.77 $12.09 $11.01
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income ........................... 0.59 0.62 0.63 0.65 0.67
Net realized and unrealized gain (loss) ......... (0.91) 0.10 0.36 (0.24) 1.19
------ ------ ------ ------ ------
Total income (loss) from investment operations ... (0.32) 0.72 0.99 0.41 1.86
------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income ........................... (0.59) (0.62) (0.63) (0.65) (0.67)
Net realized gain ............................... (0.03) (0.17) (0.05) (0.08) (0.11)
------ ------ ------ ------ ------
Total dividends and distributions ................ (0.62) (0.79) (0.68) (0.73) (0.78)
------ ------ ------ ------ ------
Net asset value, end of period ................... $11.07 $12.01 $12.08 $11.77 $12.09
====== ====== ====== ====== ======
TOTAL RETURN+ .................................... (2.71)% 6.11% 8.73% 3.61% 17.37%
RATIOS TO AVERAGE NET ASSETS:
Expenses ......................................... 0.51 %(1)(2) 0.50%(1)(2) 0.49% 0.48% 0.48%
Net investment income ............................ 5.11 %(2) 5.12%(2) 5.34% 5.52% 5.76%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .......... $853,216 $1,023,246 $1,096,998 $1,190,034 $1,325,308
Portfolio turnover rate .......................... 13 % 15% 16% 18% 21%
- - --------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares
of the Fund held prior to that date have been designated Class D shares.
+ Calculated based on the net asset value as of the last business day of
the period.
(1) Does not reflect the effect of expense offset of 0.01%.
(2) Reflects overall Fund ratios for investment income and non-class specific
expenses.
See Notes to Financial Statements
25
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
Report of Independent Accountants
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES 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 Morgan Stanley Dean Witter
Tax-Exempt Securities Trust (the "Fund") at December 31, 1999, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the periods presented, in conformity with accounting principles generally
accepted in the United States. 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 auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at December 31, 1999 by correspondence with the custodian, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 7, 2000
1999 FEDERAL TAX NOTICE (unaudited)
During the year ended December 31, 1999, the Fund paid the following
per share amounts from tax-exempt income: $0.58 to Class A shareholders,
$0.53 to Class B shareholders, $0.51 to Class C shareholders and $0.59
to Class D shareholders.
For the year ended December 31, 1999, the Fund paid long-term capital
gains of $0.03 per share to Class A, B, C and D shareholders.
26
(This page has been left blank intentionally.)
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn MORGAN STANLEY
Wayne E. Hedien DEAN WITTER
Dr. Manuel H. Johnson TAX-EXEMPT
Michael E. Nugent SECURITIES TRUST
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Mitchell M. Merin
President
Barry Fink
Vice President, Secretary and General Counsel
James F. Willison
Vice President
Joseph R. Arcieri
Vice President
Thomas F. Caloia
Treasurer
[GRAPHIC OMITTED]
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
This report is submitted for the general
information of shareholders of the Fund.
For more detailed information about the
Fund, its officers and trustees, fees,
expenses and other pertinent information,
please see the prospectus of the Fund.
ANNUAL REPORT
This report is not authorized for distribution DECEMBER 31, 1999
to prospective investors in the Fund unless
preceded or accompanied by an effective
prospectus. Read the prospectus carefully before
investing.
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST Two World Trade Center
LETTER TO THE SHAREHOLDERS June 30, 2000 New York, New York 10048
DEAR SHAREHOLDER:
The U.S. economic expansion continued during the six-month period ended June 30,
2000. Real personal consumption accelerated and unemployment reached a 30-year
low. At the same time, a surge in oil prices heightened the risk of inflation.
The Federal Reserve Board responded by further tightening monetary policy. Three
increases in the federal funds rate, totaling 100 basis points, have occurred
since February. The rate now stands at a nine-year high of 6.50 percent.
Strong economic growth and a less accommodative monetary policy caused long-term
interest rates to increase throughout 1999. This January, however, the U.S.
Treasury announced plans to use the federal budget surplus to reduce its debt.
This announcement initially precipitated a 50 to 75 basis point drop in yields
of longer maturity Treasuries. Municipal bond yields also declined but lagged
the trend of Treasury yields. Long-term interest rates rose in April, but began
to decline in May and June as signs of an economic slowdown developed.
MUNICIPAL MARKET CONDITIONS
The long-term insured municipal index began the year at 5.97 percent. This index
reached a high of 6.19 percent in mid January and ended June at 5.84 percent.
Because bond prices move inversely to changes in interest rates, higher yields
caused bond prices to decline significantly last year and improve marginally in
the first six months of this year.
The ratio of municipal yields as a percentage of Treasury yields has
historically been used as a measure of relative value. The increase in the ratio
from 92 percent at the end of 1999 to 99 percent at the end of June may be
attributed to the magnitude of the rally in long-term Treasuries. A rising yield
ratio indicates weaker relative performance by municipals. Over the past five
years, the ratio has ranged between an average annual high of 93 percent and an
average annual low of 85 percent.
During the first six months of this year, new-issue volume was 22 percent lower
than the same period last year. Refunding activity, the most
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
LETTER TO THE SHAREHOLDERS June 30, 2000, continued
interest-rate-sensitive component of supply, dropped more than 70 percent and
represented less than 10 percent of total volume. Approximately 40 percent of
the underwritings were enhanced with bond insurance.
[30-YEAR BOND YIELDS CHART]
30-YEAR BOND YIELDS 1994 - 2000
Insured U.S. Insured Municipal Yields as a
Municipal Yields Treasury Yields Percentage of U.S. Treasury Yields
1994 5.4% 6.34% 85.17%
5.4 6.24 86.54
5.8 6.66 87.09
6.4 7.09 90.27
6.35 7.32 86.75
6.25 7.43 84.12
6.5 7.61 85.41
6.25 7.39 84.57
6.3 7.45 84.56
6.55 7.81 83.87
6.75 7.96 84.8
7 8.00 87.5
6.75 7.88 85.66
1995 6.4 7.70 83.12
6.15 7.44 82.66
6.15 7.43 82.77
6.2 7.34 84.47
5.8 6.66 87.09
6.1 6.62 92.15
6.1 6.86 88.92
6 6.66 90.09
5.95 6.48 91.82
5.75 6.33 90.84
5.5 6.14 89.58
5.35 5.94 90.07
1996 5.4 6.03 89.55
5.6 6.46 86.69
5.85 6.66 87.84
5.95 6.89 86.36
6.05 6.99 86.55
5.9 6.89 85.63
5.85 6.97 83.93
5.9 7.11 82.98
5.7 6.93 82.25
5.65 6.64 85.09
5.5 6.35 86.61
5.6 6.63 84.46
1997 5.7 6.79 83.95
5.65 6.80 83.09
5.9 7.10 83.1
5.75 6.94 82.85
5.65 6.91 81.77
5.6 6.78 82.6
5.3 6.30 84.13
5.5 6.61 83.21
5.4 6.40 84.38
5.35 6.15 86.99
5.3 6.05 87.6
5.15 5.92 86.99
1998 5.15 5.80 88.79
5.2 5.92 87.84
5.25 5.93 88.53
5.35 5.95 89.92
5.2 5.80 89.66
5.2 5.65 92.04
5.18 5.71 90.72
5.03 5.27 95.45
4.95 5.00 99.00
5.05 5.16 97.87
5.00 5.06 98.81
5.05 5.10 99.02
1999 5.00 5.09 98.23
5.10 5.58 91.40
5.15 5.63 91.47
5.20 5.66 91.87
5.30 5.83 90.91
5.47 5.96 91.78
5.55 6.10 90.98
5.75 6.06 94.88
5.85 6.05 96.69
6.03 6.16 97.89
6.00 6.29 95.39
5.97 6.48 92.13
2000 6.18 6.49 95.22
6.04 6.14 98.37
5.82 5.83 99.83
5.91 5.96 99.16
5.91 6.01 98.34
5.84 5.90 98.98
Source: Municipal Market Data - A Division of Thomson Financial Municipal Group
and Bloomberg L.P.
PERFORMANCE
For the six-month period ended June 30, 2000, Morgan Stanley Dean Witter
Tax-Exempt Securities Trust's Class A and D shares returned 4.09 percent and
4.18 percent, respectively. During the same period, the Lehman Brothers
Municipal Bond Index returned 4.48 percent.(1) For the same period, the Fund's
Class B and C shares returned 3.87 percent and 3.82 percent, respectively. The
performance of the Fund's four share classes varies because of differing
expenses. Total return figures assume the reinvestment of all distributions but
do not reflect the deduction of any applicable sales charges.
- - ---------------------
(1)The Lehman Brothers Municipal Bond Index tracks the performance of municipal
bonds with maturities of two years or greater and a minimum credit rating of
Baa or BBB, as rated by Moody's Investors Service, Inc., or Standard & Poor's
Corporation, respectively. The index does not include any expenses, fees or
charges. The index is unmanaged and should not be considered an investment.
2
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
LETTER TO THE SHAREHOLDERS June 30, 2000, continued
PORTFOLIO STRUCTURE
The Fund's net assets of approximately $981 million were diversified among 14
long-term sectors and 103 credits. During the past six months the cash and
short-term investment position ranged between 7 and 9 percent of net assets.
Issues in the refunded bond category comprised 10 percent of net assets.
Refunded bonds have been refinanced and will be redeemed on the dates shown in
the portfolio. At the end of June, the portfolio's average maturity was 15
years. Average duration, a measure of sensitivity to interest-rate changes, was
7 years. The accompanying charts provide current information on the portfolio's
credit quality, maturity distribution and sector concentrations. Optional call
provisions and their respective cost (book) yields are also charted by year.
LOOKING AHEAD
The Federal Reserve Board has expressed concern about consumer wealth and rising
prices. We anticipate that the central bank will continue to focus on inflation
and may increase short-term rates if it feels that the economic momentum is not
slowing sufficiently. We believe municipal bonds continue to offer tax-conscious
investors good long-term value.
As explained in footnote 7 of the Notes to Financial Statements, the Fund
acquired Morgan Stanley Dean Witter Multi-State Municipal Series
Trust -- Massachusetts, Michigan, Minnesota and Ohio Series on July 24, 2000.
We appreciate your ongoing support of Morgan Stanley Dean Witter Tax-Exempt
Securities Trust and look forward to continuing to serve your investment needs.
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO /s/ MITCHELL M. MERIN
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
3
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
LETTER TO THE SHAREHOLDERS June 30, 2000, continued
[LARGEST SECTORS BAR CHART]
LARGEST SECTORS AS OF JUNE 30, 2000
(% OF NET ASSETS)
GENERAL OBLIGATION 16%
TRANSPORTATION 15%
ELECTRIC 13%
MORTGAGE 10%
REFUNDED 10%
WATER & SEWER 10%
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
[CREDIT RATINGS PIE CHART]
CREDIT RATINGS AS OF JUNE 30, 2000
(% OF TOTAL LONG-TERM PORTFOLIO)
Aaa or AAA Aa or AA A or A Baa or BBB NR
---------- -------- ------ ---------- --
63% 25% 9% 2% 1%
AS MEASURED BY MOODY'S INVESTORS SERVICE, INC. OR
STANDARD & POOR'S CORP.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
[DISTRIBUTION BY MATURITY BAR CHART]
DISTRIBUTION BY MATURITY
(% OF NET ASSETS)
UNDER 1 YEAR 8.0%
1-5 YEARS 6.4%
5-10 YEARS 18.5%
10-20 YEARS 35.9%
20-30 YEARS 27.8%
30+ YEARS 2.0%
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
4
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
LETTER TO THE SHAREHOLDERS June 30, 2000, continued
CALL AND COST (BOOK) YIELD STRUCTURE
JUNE 30, 2000
[BAR CHART]
WEIGHTED AVERAGE
CALL PROTECTION: 6 YEARS
YEARS BONDS CALLABLE PERCENT CALLABLE*
- - -------------------- -----------------
2000 2%
2001 12%
2002 7%
2003 9%
2004 5%
2005 11%
2006 7%
2007 10%
2008 10%
2009 6%
2010+ 21%
COST (BOOK) YIELD**
[BAR CHART]
WEIGHTED AVERAGE
BOOK YIELD: 6.2%
COST (BOOK) YIELD**
-------------------
2000 8.2%
2001 6.5%
2002 6.6%
2003 7.5%
2004 5.9%
2005 6.7%
2006 5.8%
2007 5.9%
2008 5.3%
2009 5.6%
2010+ 6.0%
* % BASED ON LONG-TERM PORTFOLIO.
** COST OR "BOOK" YIELD IS THE ANNUAL INCOME EARNED ON A PORTFOLIO INVESTMENT
BASED ON ITS ORIGINAL PURCHASE PRICE BEFORE FUND OPERATING EXPENSES. FOR
EXAMPLE, THE FUND EARNED A BOOK YIELD OF 6.5% ON THE 12% OF THE BONDS IN THE
LONG-TERM PORTFOLIO THAT ARE CALLABLE IN 2001.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
5
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FUND PERFORMANCE June 30, 2000
AVERAGE ANNUAL TOTAL RETURNS
- - --------------------------------------------------------------------------------
CLASS A SHARES*
- - ----------------------------------------------
PERIOD ENDED 6/30/00
- - -------------------------
1 Year 2.39%(1) -1.96%(2)
5 Years 5.22%(1) 4.31%(2)
10 Years 6.42%(1) 5.96%(2)
CLASS B SHARES**
- - ----------------------------------------------
PERIOD ENDED 6/30/00
- - -------------------------
1 Year 1.93%(1) -2.93%(2)
Since Inception (7/28/97) 3.24%(1) 2.33%(2)
CLASS C SHARES+
- - ----------------------------------------------
PERIOD ENDED 6/30/00
- - -------------------------
1 Year 1.82%(1) 0.85%(2)
Since Inception (7/28/97) 3.05%(1) 3.05%(2)
CLASS D SHARES++
- - ----------------------------------------------
PERIOD ENDED 6/30/00
- - -------------------------
1 Year 2.53%(1)
5 Years 5.44%(1)
10 Years 6.67%(1)
Prior to July 28, 1997 the Fund offered only one class of shares. Because the
distribution arrangements for Class A most closely resembled the distribution
arrangement applicable prior to the implementation of multiple classes (i.e.,
Class A is sold with a front-end sales charge), historical performance
information has been restated to reflect the actual maximum sales charge
applicable to Class A (i.e., 4.25%) as compared to the 4.00% sales charge in
effect prior to July 28, 1997. In addition, Class A shares are now subject to an
ongoing 12b-1 fee which is reflected in the restated performance for that class.
Because all shares of the Fund held prior to July 28, 1997 were designated Class
D shares, the Fund's historical performance has been restated to reflect the
absence of any sales charge.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST.
- - ---------------------
(1) Figure shown assumes reinvestment of all distributions and
does not reflect the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and
the deduction of the maximum applicable sales charge. See
the Fund's current prospectus for complete details on fees
and sales charges.
* The maximum front-end sales charge for Class A is 4.25%.
** The maximum contingent deferred sales charge (CDSC) for
Class B is 5.0%. The CDSC declines to 0% after six years.
+ The maximum CDSC for Class C shares is 1% for shares
redeemed within one year of purchase.
++ Class D shares have no sales charge.
6
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS June 30, 2000 (unaudited)
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- - ------------------------------------------------------------------------------------------------------------
TAX-EXEMPT MUNICIPAL BONDS (90.6%)
General Obligation (16.0%)
North Slope Borough, Alaska,
$ 3,000 Ser 1992 A Conv (MBIA)..................................... 5.90% 06/30/03 $ 3,091,200
15,000 Ser 1994 B (FSA)........................................... 0.00 06/30/05 11,587,350
15,000 Ser 1995 A (MBIA).......................................... 0.00 06/30/06 10,972,200
10,000 Ser 1996 B (MBIA).......................................... 0.00 06/30/06 7,314,800
10,000 Ser 1996 B (MBIA).......................................... 0.00 06/30/07 6,919,700
9,500 Ser 1999 A (MBIA).......................................... 0.00 06/30/10 5,521,875
4,000 Connecticut, College Savings 1989 Ser A..................... 0.00 07/01/08 2,640,040
Florida Board of Education,
5,000 Capital Outlay Refg Ser 1999 B (MBIA)...................... 4.50 06/01/24 4,108,600
5,000 Capital Outlay Ser 1998 A.................................. 4.75 06/01/28 4,221,000
Massachusetts,
20,000 Refg 1996 Ser A (AMBAC).................................... 6.00 11/01/10 21,547,199
10,000 2000 Ser B................................................. 6.00 06/01/16 10,432,200
3,000 Clark County, Nevada, Transportation Ser 1992 A (AMBAC)..... 6.50 06/01/17 3,330,990
New York City, New York,
1,500 1995 Ser D (MBIA).......................................... 6.20 02/01/07 1,605,945
1,925 1990 Ser D................................................. 6.00 08/01/07 1,927,118
1,545 1990 Ser D................................................. 6.00 08/01/08 1,546,699
North Carolina,
10,000 1997 Ser A................................................. 5.20 03/01/16 9,728,800
8,000 Public School Building Ser 1999............................ 4.60 04/01/17 7,037,120
10,000 South-Western City School District, Ohio, Ser 1999
(AMBAC).................................................... 4.75 12/01/19 8,722,400
10,000 Pennsylvania, First Ser 1995 (FGIC)......................... 5.50 05/01/12 10,171,000
4,000 Shelby County, Tennessee, Refg 1995 Ser A................... 5.625 04/01/14 4,043,640
18,000 King County, Washington, Ltd Tax 1995 (MBIA)................ 6.00 01/01/23 18,135,000
2,000 Washington, Ser 1994 A...................................... 5.80 09/01/08 2,059,240
- - ---------- -----------
176,470 156,664,116
- - ---------- -----------
Educational Facilities Revenue (4.0%)
10,000 Indiana University, Student Fee Ser K (MBIA)................ 5.875 08/01/20 10,025,200
3,000 Maryland State Health & Educational Facilities Authority,
The Johns Hopkins University Refg Ser 1998................. 5.125 07/01/20 2,813,370
7,000 Massachusetts Health & Educational Facilities Authority,
Boston University 1991 Ser K & L (MBIA).................... 6.66 10/01/31 7,261,590
5,000 Missouri Health & Educational Facilities Authority,
Washington University Ser 1998 A........................... 4.75 11/15/37 4,029,300
2,000 New Jersey Economic Development Authority, The Seeing Eye
Inc 1991................................................... 7.30 04/01/11 2,034,720
8,000 New Jersey Educational Facilities Authority, Princeton
University Ser 1999 A...................................... 4.75 07/01/25 6,907,920
5,000 New York State Dormitory Authority, State University Ser
1989 B..................................................... 0.00 05/15/02 4,561,150
2,000 Ohio State University, General Receipts Ser 1999 A.......... 5.80 12/01/29 1,994,840
- - ---------- -----------
42,000 39,628,090
- - ---------- -----------
SEE NOTES TO FINANCIAL STATEMENTS
7
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS June 30, 2000 (unaudited) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- - ------------------------------------------------------------------------------------------------------------
Electric Revenue (12.9%)
$ 25,000 Salt River Project Agricultural Improvement & Power
District, Arizona, Refg 1993 Ser C (Secondary MBIA)........ 5.50% 01/01/10 $25,898,000
10,000 Sacramento Municipal Utility District, California, Refg 1994
Ser I (MBIA)............................................... 5.75 01/01/15 10,236,300
10,000 Municipal Electric Authority of Georgia, Ser Y (Secondary
MBIA)...................................................... 6.50 01/01/17 11,098,600
Long Island Power Authority, New York,
15,000 Ser 2000 A (FSA)........................................... 0.00 06/01/17 5,776,800
5,000 Ser 1998 A (FSA)........................................... 5.125 12/01/22 4,544,400
Puerto Rico Electric Power Authority,
1,500 Power Ser X................................................ 6.00 07/01/15 1,558,095
15,000 Power Ser O................................................ 0.00 07/01/17 5,636,700
5,000 Power Ser EE (MBIA)........................................ 4.50 07/01/18 4,309,800
15,000 South Carolina Public Service Authority, 1995 Refg Ser A
(AMBAC).................................................... 6.25 01/01/22 15,516,450
710 Austin, Texas, Combined Utilities Refg Ser 1994 (FGIC)...... 6.25 05/15/16 748,113
San Antonio, Texas,
13,000 Electric & Gas Refg Ser 1994 C............................. 4.70 02/01/06 12,873,770
5,000 Electric & Gas Refg Ser 1998 A............................. 4.50 02/01/21 4,156,100
10,000 Intermountain Power Agency, Utah, Refg 1997 Ser B (MBIA).... 5.75 07/01/19 10,000,000
13,500 Washington Public Supply Power System, Proj #2 Refg Ser 1994
A (Secondary MBIA)......................................... 6.00 07/01/07 14,256,810
- - ---------- -----------
143,710 126,609,938
- - ---------- -----------
Hospital Revenue (4.4%)
Rochester, Minnesota,
5,000 Mayo Foundation/Medical Center Ser 1992 I.................. 5.75 11/15/21 4,963,150
6,200 Mayo Foundation/Medical Center Ser 1992 F.................. 6.25 11/15/21 6,298,766
10,000 Missouri Health & Educational Facilities Authority,
Barnes-Jewish Inc/Christian Health Services Ser 1993 A..... 5.25 05/15/14 9,774,100
1,300 New Hampshire Higher Educational & Health Facilities
Authority, St Joseph Hospital Ser 1994 (Connie Lee)........ 6.35 01/01/07 1,375,543
6,000 New York State Medical Care Facilities Finance Agency,
Presbyterian Hospital - FHA Insured Mtge Ser 1994 A........ 5.25 08/15/14 5,795,580
5,000 North Central Texas Health Facilities Development
Corporation, University Medical Center Inc Ser 1997
(FSA)...................................................... 5.45 04/01/15 4,905,250
10,000 Fredericksburg Industrial Development Authority, Virginia,
Medicorp Health Refg Ser 1996 (AMBAC)...................... 5.25 06/15/16 9,492,100
- - ---------- -----------
43,500 42,604,489
- - ---------- -----------
Industrial Development/Pollution Control Revenue (4.4%)
1,500 Hawaii Department of Budget & Finance, Hawaiian Electric Co
Ser 1995 A (AMT) (MBIA).................................... 6.60 01/01/25 1,582,905
10,000 Clark County, Nevada, Nevada Power Co Ser 1992 A (AMT)
(FGIC)..................................................... 6.70 06/01/22 10,466,300
5,000 Washoe County, Nevada, Sierra Pacific Power Co Ser 1987
(AMBAC).................................................... 6.30 12/01/14 5,184,900
5,000 Alliance Airport Authority, Texas, AMR Corp Ser 1990
(AMT)...................................................... 7.50 12/01/29 5,056,550
SEE NOTES TO FINANCIAL STATEMENTS
8
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS June 30, 2000 (unaudited) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- - ------------------------------------------------------------------------------------------------------------
$ 10,000 Dallas-Fort Worth International Airport Facility Improvement
Corporation, Texas, American Airlines Inc Ser 1995......... 6.00% 11/01/14 $ 9,546,100
10,000 Weston, Wisconsin, Wisconsin Public Service Co Refg Ser 1993
A.......................................................... 6.90 02/01/13 10,725,500
- - ---------- -----------
41,500 42,562,255
- - ---------- -----------
Mortgage Revenue - Multi-Family (2.5%)
880 Massachusetts Housing Finance Agency, Rental 1994 Ser A
(AMT) (AMBAC).............................................. 6.65 07/01/19 903,584
5,560 Michigan Housing Development Authority, Rental 1992 Ser A
(Bifurcated FSA)........................................... 6.50 04/01/23 5,733,750
9,000 New Jersey Housing & Mortgage Finance Agency, 1995 Ser A
(AMBAC).................................................... 6.05 11/01/20 9,069,120
New York City Housing Development Corporation, New York,
4,212 Ruppert Proj - FHA Ins Sec 223F............................ 6.50 11/15/18 4,252,818
4,065 Stevenson Commons Proj - FHA Ins Sec 223F.................. 6.50 05/15/18 4,103,625
- - ---------- -----------
23,717 24,062,897
- - ---------- -----------
Mortgage Revenue - Single Family (7.8%)
7,000 Alaska Housing Finance Corporation, Governmental 1995 Ser A
(MBIA)..................................................... 5.875 12/01/24 6,905,850
2,440 California Housing Finance Agency, Home 1983 Ser B.......... 0.00 08/01/15 522,575
Colorado Housing & Finance Authority,
2,000 1998 Ser A-2 (AMT)......................................... 6.60 05/01/28 2,075,040
2,500 1997 Ser C-2 (AMT)......................................... 6.875 11/01/28 2,614,675
11,700 Illinois Housing Development Authority, Residential 1991 Ser
C (AMT).................................................... 6.875 02/01/18 11,998,584
Missouri Housing Development Commission, Homeownership
2,820 GNMA/FNMA Collateralized 1996 Ser C (AMT).................. 7.45 09/01/27 2,995,799
3,910 GNMA/FNMA Collateralized 1997 Ser C-1...................... 6.55 09/01/28 4,097,563
2,000 Loan Program, Ser 2000 B-1 (AMT)........................... 7.45 09/01/31 2,203,680
2,500 Nebraska Investment Finance Authority, GNMA-Backed 1990
(AMT)...................................................... 7.631 09/10/30 2,557,000
5,000 New Hampshire Housing Finance Authority, Mortgage
Acquisition 2000 Ser B (AMT)............................... 6.70 07/01/29 5,233,700
3,350 Ohio Housing Finance Agency, GNMA-Backed 1991 Ser A 1 & 2
(AMT)...................................................... 6.903 03/01/31 3,430,903
4,000 Oregon Housing & Community Service Department, Ser 2000 F
(AMT)...................................................... 6.25 07/01/28 4,034,160
10,000 Pennsylvania Housing Finance Agency, Ser 1991-31 C (AMT).... 7.00 10/01/23 10,320,600
Tennessee Housing Development Agency,
3,955 Mortgage Finance 1993 Ser A................................ 5.90 07/01/18 3,956,345
1,000 Mortgage Finance 1994 Ser B (AMT).......................... 6.55 07/01/19 1,009,360
9,785 Mortgage Finance 1993 Ser A................................ 5.95 07/01/28 9,674,527
240 Utah Housing Finance Agency, Fed Ins/Gtd Loans 1994 Issue E
(AMT)...................................................... 6.50 07/01/26 241,049
2,800 Wisconsin Housing & Economic Development Authority, Home
Ownership 1991 Ser (AMT)................................... 7.097 10/25/22 2,883,356
- - ---------- -----------
77,000 76,754,766
- - ---------- -----------
SEE NOTES TO FINANCIAL STATEMENTS
9
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS June 30, 2000 (unaudited) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- - ------------------------------------------------------------------------------------------------------------
Public Facilities Revenue (0.8%)
$ 2,000 North City West School Facilities Authority, California,
Community Dist #1 Special Tax Ser 1995 B (FSA)............. 6.00% 09/01/19 $ 2,067,580
5,000 Ohio Building Authority, 1985 Ser C......................... 9.75 10/01/05 6,010,800
- - ---------- -----------
7,000 8,078,380
- - ---------- -----------
Recreational Facilities Revenue (1.0%)
3,500 Denver, Colorado, Excise Tax Ser 1985 A (Secondary FSA)..... 5.00 11/01/08 3,499,650
Metropolitan Football Stadium District, Colorado,
4,000 Sales Tax Ser 1999 A (MBIA)................................ 0.00 01/01/10 2,397,440
2,000 Sales Tax Ser 1999 A (MBIA)................................ 0.00 01/01/12 1,059,560
3,000 Houston, Texas, Sr Lien Hotel Occupancy Tax Refg Ser 1995
(FSA)...................................................... 5.50 07/01/11 3,035,100
- - ---------- -----------
12,500 9,991,750
- - ---------- -----------
Resource Recovery Revenue (1.8%)
7,000 Savannah Resource Recovery Development Authority, Georgia,
Savannah Energy Systems Co Ser 1992........................ 6.30 12/01/06 7,189,560
10,000 Northeast Maryland Waste Disposal Authority, Montgomery
County Ser 1993 A (AMT).................................... 6.30 07/01/16 10,175,400
- - ---------- -----------
17,000 17,364,960
- - ---------- -----------
Transportation Facilities Revenue (14.9%)
5,000 San Francisco Bay Area Rapid Transit District, California,
Sales Tax Ser 1998 (AMBAC)................................. 4.75 07/01/23 4,354,950
13,000 San Joaquin Hills Transportation Corridor Agency,
California, Toll Road Refg Ser 1997 A (MBIA)............... 0.00 01/15/26 2,886,260
3,000 Colorado Department of Transportation, Ser 2000 (AMBAC)..... 6.00 06/15/15 3,155,430
5,000 E-470 Public Highway Authority, Colorado, Ser 1997 B
(MBIA)..................................................... 0.00 09/01/16 1,958,900
Mid-Bay Bridge Authority, Florida,
8,965 Ser 1993 A (AMBAC)......................................... 5.85 10/01/13 9,250,087
3,000 Ser 1997 A (AMBAC)......................................... 0.00 10/01/21 826,290
5,000 Atlanta, Georgia, Airport Ser 2000 (FGIC)................... 5.875 01/01/17 5,136,800
5,000 Hawaii, Airports Second Ser 1991 (AMT)...................... 7.00 07/01/18 5,174,850
Kentucky Turnpike Authority,
9,000 Economic Development Road Refg Ser 1995 (AMBAC)............ 6.50 07/01/08 9,887,670
30,000 Resource Recovery Road 1987 Ser A.......................... 5.00 07/01/08 29,688,600
8,700 Massachusetts Turnpike Authority, Western 1997 Ser A
(MBIA)..................................................... 5.55 01/01/17 8,700,000
7,700 Minneapolis - St Paul Metropolitan Airports Commission,
Minnesota, Ser 1998 A (AMBAC).............................. 5.00 01/01/30 6,785,317
New Jersey Highway Authority,
9,560 Sr Parkway Refg 1992 Ser................................... 6.25 01/01/14 9,928,251
7,000 Sr Parkway 1999 Ser........................................ 5.625 01/01/30 6,895,910
6,595 Albuquerque, New Mexico, Airport Refg Ser 1997 (AMT)
(AMBAC).................................................... 6.375 07/01/15 6,962,078
5,000 Ohio Turnpike Commission, Ser 1998 B (FGIC)................. 4.50 02/15/24 4,097,100
SEE NOTES TO FINANCIAL STATEMENTS
10
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS June 30, 2000 (unaudited) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- - ------------------------------------------------------------------------------------------------------------
Pennsylvania Turnpike Commission,
$ 5,000 Ser L of 1991 (MBIA)....................................... 6.00% 06/01/15 $ 5,079,750
5,000 Ser A 1998 (AMBAC)......................................... 4.75 12/01/27 4,214,750
8,000 Puerto Rico Highway & Transportation Authority, Refg Ser
X.......................................................... 5.50 07/01/15 8,122,720
10,000 South Carolina Transportation Infrastructure Bank, Ser 1999
A (AMBAC).................................................. 5.50 10/01/16 9,988,400
3,000 Virginia Transportation Board, US Route 58 Corridor Ser 1993
B.......................................................... 5.625 05/15/13 3,037,350
- - ---------- -----------
162,520 146,131,463
- - ---------- -----------
Water & Sewer Revenue (9.6%)
10,000 Phoenix Civic Improvement Corporation, Arizona, Jr Lien
Water Ser 1994............................................. 5.45 07/01/19 9,768,800
10,000 California Department of Water Resources, Central Valley Ser
L.......................................................... 5.50 12/01/23 9,767,900
10,000 Los Angeles, California, Wastewater Ser 1994-A (MBIA)....... 5.875 06/01/24 10,091,300
5,000 Fulton County, Georgia, Water & Sewerage Ser 1998 (FGIC).... 4.75 01/01/28 4,234,300
2,700 Kansas Development Finance Authority, Public Water Supply
Ser 2000-2 (AMBAC)......................................... 5.75 04/01/17 2,741,526
10,000 Louisville & Jefferson County Metropolitan Sewer District,
Kentucky, Ser 1998 A (FGIC)................................ 4.75 05/15/28 8,434,400
5,000 Massachusetts Water Resources Authority, Refg 1992 Ser B.... 5.50 11/01/15 4,984,200
Detroit, Michigan,
3,320 Sewage Refg Ser 1993 A (FGIC).............................. 5.70 07/01/13 3,372,157
10,000 Water Supply 1997 Ser A (MBIA)............................. 5.00 07/01/21 9,013,300
10,000 Cleveland, Ohio, Waterworks Impr & Refg 1998 Ser I (FSA).... 5.00 01/01/23 8,955,500
5,000 Spartanburg, South Carolina, Jr Lien Water Ser 1998
(FGIC)..................................................... 5.25 06/01/28 4,601,650
11,000 Metropolitan Government of Nashville & Davidson County,
Tennessee,
Refg Ser 1998 A (FGIC)..................................... 4.75 01/01/22 9,470,010
10,000 Dallas, Texas, Waterworks & Sewer Refg Ser 1998 (FSA)....... 5.00 10/01/29 8,764,600
- - ---------- -----------
102,020 94,199,643
- - ---------- -----------
Other Revenue (0.5%)
5,000 New York Local Government Assistance Corporation, Ser 1993 C. 5.50 04/01/17 5,015,850
- - ---------- -----------
Refunded (10.0%)
9,000 Los Angeles Convention & Exhibition Center Authority,
California, Ser 1985 COPs.................................. 9.00 12/01/05+ 10,981,260
2,500 Mid-Bay Bridge Authority, Florida, Ser 1991 A (ETM)......... 6.875 10/01/22 2,858,225
2,500 Massachusetts Health & Educational Facilities Authority,
Malden Hospital - FHA Ins Mtge Ser A (ETM)................. 5.00 08/01/16 2,393,275
10,000 Massachusetts Water Resources Authority, 1996 Ser A
(FGIC)..................................................... 5.50 11/01/06+ 10,429,600
13,750 New York State Dormitory Authority, Suffolk County Judicial
Ser 1986 (ETM)............................................. 7.375 07/01/16 15,984,100
7,000 San Antonio, Texas, Electric & Gas Refg Ser 1994 C (ETM).... 4.70 02/01/06 6,858,390
25,000 Intermountain Power Agency, Utah, Refg 1985 Ser H (GAINS)... 0.00# 07/01/03+ 28,767,500
5,000 Salt Lake City, Utah, IHC Hospital Inc Ser 1983 (ETM)....... 5.00 06/01/15 4,805,600
SEE NOTES TO FINANCIAL STATEMENTS
11
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS June 30, 2000 (unaudited) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- - ------------------------------------------------------------------------------------------------------------
$ 14,000 Fairfax County Industrial Development Authority, Virginia,
Fairfax Hospital/Inova Health Ser 1991..................... 8.927%++ 08/29/01+ $15,190,000
- - ---------- -----------
88,750 98,267,950
- - ---------- -----------
942,687 TOTAL TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $860,412,943)................. 887,936,547
- - ---------- -----------
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (8.0%)
12,500 Maricopa County, Arizona Public Service Co Ser 1994 C
(Demand 07/03/00).......................................... 4.50* 05/01/29 12,500,000
18,500 Collier County Health Facilities Authority, Florida,
Cleveland Clinic Health Ser 1999 (Demand 07/03/00)......... 4.50* 01/01/33 18,500,000
10,000 Atlanta, Georgia, Airport Ser 1990 (AMT).................... 6.25 01/01/01+ 10,289,700
17,000 Philadelphia Hospital & Higher Education Facilities
Authority, Children's Hospital of Philadelphia Ser 1992
(Demand 07/03/00).......................................... 4.50* 03/01/27 17,000,000
20,500 Harris County Health Facilities Development Corporation,
Texas, Methodist Hospital Ser 1994 (Demand 07/03/00)....... 4.55* 12/01/25 20,500,000
- - ---------- -----------
78,500 TOTAL SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS
- - ---------- (Identified Cost $77,317,702)...................................... 78,789,700
-----------
$1,021,187 TOTAL INVESTMENTS (Identified Cost $937,730,645) (a)................ 98.6% 966,726,247
==========
OTHER ASSETS IN EXCESS OF LIABILITIES .................................
1.4 13,795,816
----- -----------
NET ASSETS........................................................... 100.0% $980,522,063
===== ===========
- - ---------------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
GAINS Growth and Income Security.
+ Prerefunded to call date shown.
++ Current coupon rate for residual interest bond. This rate
resets periodically as the auction rate on the related
short-term securities fluctuates.
# Currently a zero coupon bond; will convert to 10.00% coupon
on July 1, 2000.
* Current coupon of variable rate demand obligation.
(a) The aggregate cost for federal income tax purposes
approximates identified cost. The aggregate gross unrealized
appreciation is $40,729,455 and the aggregate gross
unrealized depreciation is $11,733,853, resulting in net
unrealized appreciation of $28,995,602.
Bond Insurance:
- - ---------------
AMBAC AMBAC Assurance Corporation.
Connie Lee Connie Lee Insurance Company.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
SEE NOTES TO FINANCIAL STATEMENTS
12
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS June 30, 2000 (unaudited) continued
Geographic Summary of Investments
Based on Market Value as a Percent of Net Assets
Alaska...................... 5.3%
Arizona..................... 4.9
California.................. 5.2
Colorado.................... 1.7
Connecticut................. 0.3
Florida..................... 2.2
Georgia..................... 3.9
Hawaii...................... 0.7
Illinois.................... 1.2
Indiana..................... 1.0
Kansas...................... 0.3
Kentucky.................... 4.9
Maryland.................... 1.3
Massachusetts............... 6.8
Michigan.................... 1.8
Minnesota................... 1.8
Missouri.................... 2.4
Nebraska.................... 0.3
Nevada...................... 1.9
New Hampshire............... 0.7
New Jersey.................. 3.5
New Mexico.................. 0.7
New York.................... 5.6
North Carolina.............. 1.7
Ohio........................ 5.3
Oregon...................... 0.4
Pennsylvania................ 4.8
Puerto Rico................. 2.0
South Carolina.............. 3.1
Tennessee................... 2.9
Texas....................... 7.8
Utah........................ 4.5
Virginia.................... 2.8
Washington.................. 3.5
Wisconsin................... 1.4
----
Total....................... 98.6%
====
- - ---------------------
Portfolio structure is subject to change.
13
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2000 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $937,730,645)............................. $966,726,247
Cash........................................................ 365,660
Receivable for:
Interest................................................ 14,280,414
Investments sold........................................ 305,497
Shares of beneficial interest sold...................... 284,992
Prepaid expenses and other assets........................... 68,023
------------
TOTAL ASSETS............................................ 982,030,833
------------
LIABILITIES:
Payable for:
Shares of beneficial interest repurchased............... 682,781
Investment management fee............................... 361,902
Dividends to shareholders............................... 283,336
Plan of distribution fee................................ 77,157
Accrued expenses............................................ 103,594
------------
TOTAL LIABILITIES....................................... 1,508,770
------------
NET ASSETS.............................................. $980,522,063
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $954,985,240
Net unrealized appreciation................................. 28,995,602
Accumulated undistributed net investment income............. 20,278
Accumulated net realized loss............................... (3,479,057)
------------
NET ASSETS.............................................. $980,522,063
============
CLASS A SHARES:
Net Assets.................................................. $18,105,378
Shares Outstanding (unlimited authorized, $.01 par value)... 1,610,844
NET ASSET VALUE PER SHARE............................... $11.24
============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44% of net asset value)........ $11.74
============
CLASS B SHARES:
Net Assets.................................................. $138,624,776
Shares Outstanding (unlimited authorized, $.01 par value)... 12,283,479
NET ASSET VALUE PER SHARE............................... $11.29
============
CLASS C SHARES:
Net Assets.................................................. $9,606,889
Shares Outstanding (unlimited authorized, $.01 par value)... 853,009
NET ASSET VALUE PER SHARE............................... $11.26
============
CLASS D SHARES:
Net Assets.................................................. $814,185,020
Shares Outstanding (unlimited authorized, $.01 par value)... 72,495,571
NET ASSET VALUE PER SHARE............................... $11.23
============
SEE NOTES TO FINANCIAL STATEMENTS
14
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the six months ended June 30, 2000 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $29,292,803
-----------
EXPENSES
Investment management fee................................... 2,221,234
Plan of distribution fee (Class A shares)................... 14,965
Plan of distribution fee (Class B shares)................... 410,915
Plan of distribution fee (Class C shares)................... 33,740
Transfer agent fees and expenses............................ 160,898
Shareholder reports and notices............................. 47,785
Registration fees........................................... 37,489
Professional fees........................................... 33,081
Custodian fees.............................................. 20,335
Trustees' fees and expenses................................. 9,018
Other....................................................... 16,976
-----------
TOTAL EXPENSES.......................................... 3,006,436
Less: expense offset........................................ (20,303)
-----------
NET EXPENSES............................................ 2,986,133
-----------
NET INVESTMENT INCOME................................... 26,306,670
-----------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain........................................... 1,189,548
Net change in unrealized appreciation....................... 12,724,864
-----------
NET GAIN................................................ 13,914,412
-----------
NET INCREASE................................................ $40,221,082
===========
SEE NOTES TO FINANCIAL STATEMENTS
15
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 2000 DECEMBER 31, 1999
- - ---------------------------------------------------------------------------------------
(unaudited)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income.............................. $ 26,306,670 $ 56,178,651
Net realized gain (loss)........................... 1,189,548 (4,668,605)
Net change in unrealized appreciation.............. 12,724,864 (82,789,197)
-------------- --------------
NET INCREASE (DECREASE)........................ 40,221,082 (31,279,151)
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A shares................................. (451,266) (929,080)
Class B shares................................. (3,303,490) (6,430,720)
Class C shares................................. (227,757) (422,770)
Class D shares................................. (22,324,157) (48,394,252)
Net realized gain
Class A shares................................. -- (52,982)
Class B shares................................. -- (400,237)
Class C shares................................. -- (27,144)
Class D shares................................. -- (2,638,565)
-------------- --------------
TOTAL DIVIDENDS AND DISTRIBUTIONS.............. (26,306,670) (59,295,750)
-------------- --------------
Net decrease from transactions in shares of
beneficial interest............................... (53,617,636) (67,388,661)
-------------- --------------
NET DECREASE................................... (39,703,224) (157,963,562)
NET ASSETS:
Beginning of period................................ 1,020,225,287 1,178,188,849
-------------- --------------
END OF PERIOD
(Including undistributed net investment income
of $20,278 and $20,278, respectively).......... $ 980,522,063 $1,020,225,287
============== ==============
SEE NOTES TO FINANCIAL STATEMENTS
16
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS June 30, 2000 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Tax-Exempt Securities Trust (the "Fund") is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Fund's investment
objective is to provide a high level of current income which is exempt from
federal income tax, consistent with the preservation of capital. The Fund was
incorporated in Maryland in 1979, commenced operations on March 27, 1980 and
reorganized as a Massachusetts business trust on April 30, 1987. On July 28,
1997, the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- Portfolio securities are valued for the Fund by
an outside independent pricing service approved by the Trustees. The pricing
service has informed the Fund that in valuing the Fund's portfolio securities,
it uses both a computerized matrix of tax-exempt securities and evaluations by
its staff, in each case based on information concerning market transactions and
quotations from dealers which reflect the bid side of the market each day. The
Fund's portfolio securities are thus valued by reference to a combination of
transactions and quotations for the same or other securities believed to be
comparable in quality, coupon, maturity, type of issue, call provisions, trading
characteristics and other features deemed to be relevant. Short-term debt
securities having a maturity date of more than sixty days at time of purchase
are valued on a mark-to-market basis until sixty days prior to maturity and
thereafter at amortized cost based on their value on the 61st day. Short-term
debt securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.
17
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS June 30, 2000 (unaudited) continued
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
The Fund amortizes premiums and accretes discounts over the life of the
respective securities. Interest income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. 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.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the record date. The amount of dividends
and distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and distributions which
exceed net investment income and net realized capital gains for financial
reporting purposes but not for tax purposes are reported as dividends in excess
of net investment income or distributions in excess of net realized capital
gains. To the extent they exceed net investment income and net realized capital
gains for tax purposes, they are reported as distributions of paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with Morgan Stanley Dean Witter
Advisors Inc. (the "Investment Manager"), the Fund pays the Investment Manager a
management fee, accrued daily and payable monthly, by applying the following
annual rates to the Fund's net assets determined as of the close of each
business day: 0.50% to the portion of daily net assets not exceeding $500
million; 0.425% to the portion of daily net assets exceeding $500 million but
not exceeding $750 million; 0.375% to the portion of daily net assets exceeding
$750 million but not exceeding $1 billion; 0.35% to the
18
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS June 30, 2000 (unaudited) continued
portion of daily net assets exceeding $1 billion but not exceeding $1.25
billion; and 0.325% to the portion of daily net assets exceeding $1.25 billion.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan"), pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A -- up
to 0.25% of the average daily net assets of Class A; (ii) Class B -- 0.60% of
the average daily net assets of Class B; and (iii) Class C -- up to 0.70% of the
average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled $5,318,401
at June 30, 2000.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.70% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the six months ended June 30, 2000, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.17% and
0.70%, respectively.
The Distributor has informed the Fund that for the six months ended June 30,
2000, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $159,315 and $959, respectively
and received $42,011 in front-end sales charges from sales of the Fund's Class A
shares. The respective shareholders pay such charges which are not an expense of
the Fund.
19
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS June 30, 2000 (unaudited) continued
4. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 2000 DECEMBER 31, 1999
--------------------------- ----------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ------------ -------------
CLASS A SHARES
Sold..................................................... 2,046,856 $ 22,764,791 1,023,382 $ 11,894,433
Reinvestment of dividends and distributions.............. 17,126 190,365 35,276 407,295
Redeemed................................................. (2,005,510) (22,300,508) (757,512) (8,588,318)
----------- ------------- ------------ -------------
Net increase - Class A................................... 58,472 654,648 301,146 3,713,410
----------- ------------- ------------ -------------
CLASS B SHARES
Sold..................................................... 4,238,409 47,228,433 5,634,037 65,447,290
Reinvestment of dividends and distributions.............. 142,132 1,586,291 304,367 3,532,880
Redeemed................................................. (4,661,711) (51,930,451) (4,333,128) (49,694,515)
----------- ------------- ------------ -------------
Net increase (decrease) - Class B........................ (281,170) (3,115,727) 1,605,276 19,285,655
----------- ------------- ------------ -------------
CLASS C SHARES
Sold..................................................... 54,325 604,568 843,726 9,755,515
Reinvestment of dividends and distributions.............. 14,498 161,488 26,647 307,538
Redeemed................................................. (118,772) (1,321,670) (598,459) (6,828,777)
----------- ------------- ------------ -------------
Net increase (decrease) - Class C........................ (49,949) (555,614) 271,914 3,234,276
----------- ------------- ------------ -------------
CLASS D SHARES
Sold..................................................... 314,419 3,498,195 1,880,172 21,134,542
Reinvestment of dividends and distributions.............. 1,066,894 11,851,294 2,424,240 28,046,032
Redeemed................................................. (5,954,016) (65,950,432) (12,402,477) (142,802,576)
----------- ------------- ------------ -------------
Net decrease - Class D................................... (4,572,703) (50,600,943) (8,098,065) (93,622,002)
----------- ------------- ------------ -------------
Net decrease in Fund..................................... (4,845,350) $ (53,617,636) (5,919,729) $ (67,388,661)
=========== ============= ============ =============
5. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended June 30, 2000 aggregated
$54,115,718 and $98,721,121, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At June 30, 2000, the Fund had
transfer agent fees and expenses payable of approximately $2,500.
20
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS June 30, 2000 (unaudited) continued
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the six months ended June 30, 2000
included in Trustees' fees and expenses in the Statement of Operations amounted
to $2,972. At June 30, 2000, the Fund had an accrued pension liability of
$51,912 which is included in accrued expenses in the Statement of Assets and
Liabilities.
6. FEDERAL INCOME TAX STATUS
At December 31, 1999, the Fund had a net capital loss carryover of approximately
$4,670,000 which will be available through December 31, 2007 to offset future
capital gains to the extent provided by regulations.
7. SUBSEQUENT EVENT -- MERGERS
On July 24, 2000, the Fund acquired all the net assets of Morgan Stanley Dean
Witter Multi-State Municipal Series Trust -- Massachusetts Series
("Massachusetts Series"), Michigan Series ("Michigan Series"), Minnesota Series
("Minnesota Series") and Ohio Series ("Ohio Series") based on the respective
valuations as of the close of business on July 21, 2000, pursuant to four
reorganization plans approved by the shareholders of Massachusetts Series,
Michigan Series, Minnesota Series and the Ohio Series on June 22, 2000. The
acquisition was accomplished by a tax-free exchange of 792,540 Class D shares of
the Fund at a net asset value of $11.31 per share for 852,866 shares of
Massachusetts Series; 1,059,251 Class D of the Fund at a net asset value of
$11.31 per share for 1,182,639 shares of Michigan Series; 453,481 Class D of the
Fund at a net asset value of $11.31 per share for 513,915 shares of Minnesota
Series; and 1,079,835 Class D of the Fund at a net asset value of $11.31 per
share for 1,175,451 shares of the Ohio Series. The net assets of the Fund and
Massachusetts Series, Michigan Series, Minnesota Series and the Ohio Series
immediately before the acquisition were $982,320,805, $8,984,072, $11,975,503,
$5,126,864 and $12,211,414, respectively, including unrealized appreciation of
$282,180, $102,725, $26,335, $39,899 for Massachusetts Series, Michigan Series,
Minnesota Series and the Ohio Series, respectively. Immediately after the
acquisition, the combined net assets of the Fund amounted to $1,020,618,658.
21
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
FOR THE PERIOD
FOR THE SIX FOR THE YEAR FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED ENDED THROUGH
JUNE 30, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
- - -------------------------------------------------------------------------------------------------------------------------------
(unaudited)
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period................ $11.08 $12.02 $12.09 $12.00
------ ------ ------ ------
Income (loss) from investment operations:
Net investment income.............................. 0.29 0.58 0.59 0.25
Net realized and unrealized gain (loss)............ 0.16 (0.91) 0.10 0.14
------ ------ ------ ------
Total income (loss) from investment operations...... 0.45 (0.33) 0.69 0.39
------ ------ ------ ------
Less dividends and distributions from:
Net investment income.............................. (0.29) (0.58) (0.59) (0.25)
Net realized gain.................................. -- (0.03) (0.17) (0.05)
------ ------ ------ ------
Total dividends and distributions................... (0.29) (0.61) (0.76) (0.30)
------ ------ ------ ------
Net asset value, end of period...................... $11.24 $11.08 $12.02 $12.09
====== ====== ====== ======
TOTAL RETURN+....................................... 4.09%(1) (2.82)% 5.86% 3.31%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ 0.69%(2)(5) 0.64 %(4)(5) 0.74%(4)(5) 0.76%(2)(3)
Net investment income............................... 5.25%(2)(5) 4.98 %(5) 4.88%(5) 4.96%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............. $18,105 $17,198 $15,041 $3,857
Portfolio turnover rate............................. 6%(1) 13 % 15% 16%
- - ---------------------
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.02%.
(4) Does not reflect the effect of expense offset of 0.01%.
(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
22
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL HIGHLIGHTS, continued
FOR THE PERIOD
FOR THE SIX FOR THE YEAR FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED ENDED THROUGH
JUNE 30, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
- - -------------------------------------------------------------------------------------------------------------------------------
(unaudited)
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period................ $11.13 $12.07 $12.14 $12.00
------ ------ ------ -------
Income (loss) from investment operations:
Net investment income.............................. 0.27 0.53 0.55 0.23
Net realized and unrealized gain (loss)............ 0.16 (0.91) 0.10 0.19
------ ------ ------ -------
Total income (loss) from investment operations...... 0.43 (0.38) 0.65 0.42
------ ------ ------ -------
Less dividends and distributions from:
Net investment income.............................. (0.27) (0.53) (0.55) (0.23)
Net realized gain.................................. -- (0.03) (0.17) (0.05)
------ ------ ------ -------
Total dividends and distributions................... (0.27) (0.56) (0.72) (0.28)
------ ------ ------ -------
Net asset value, end of period...................... $11.29 $11.13 $12.07 $12.14
====== ====== ====== =======
TOTAL RETURN+....................................... 3.87%(1) (3.25)% 5.47% 3.57%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ 1.12%(2)(4)(5) 1.11 %(4)(5) 1.10%(4)(5) 1.14%(2)(3)
Net investment income............................... 4.82%(2)(5) 4.51 %(5) 4.52%(5) 4.87%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............. $138,625 $139,786 $132,303 $95,573
Portfolio turnover rate............................. 6%(1) 13 % 15% 16%
- - ---------------------
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.02%.
(4) Does not reflect the effect of expense offset of 0.01%.
(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
23
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL HIGHLIGHTS, continued
FOR THE PERIOD
FOR THE SIX FOR THE YEAR FOR THE YEAR JULY 28, 1997*
MONTHS ENDED ENDED ENDED THROUGH
JUNE 30, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
- - ------------------------------------------------------------------------------------------------------------------------
(unaudited)
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period......... $11.10 $12.04 $12.11 $12.00
------ ------ ------ ------
Income (loss) from investment operations:
Net investment income....................... 0.26 0.51 0.53 0.23
Net realized and unrealized gain (loss)..... 0.16 (0.91) 0.10 0.16
------ ------ ------ ------
Total income (loss) from investment
operations.................................. 0.42 (0.40) 0.63 0.39
------ ------ ------ ------
Less dividends and distributions from:
Net investment income....................... (0.26) (0.51) (0.53) (0.23)
Net realized gain........................... -- (0.03) (0.17) (0.05)
------ ------ ------ ------
Total dividends and distributions............ (0.26) (0.54) (0.70) (0.28)
------ ------ ------ ------
Net asset value, end of period............... $11.26 $11.10 $12.04 $12.11
====== ====== ====== ======
TOTAL RETURN+................................ 3.82%(1) (3.37)% 5.36% 3.28%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses..................................... 1.22%(2)(5) 1.21 %(4)(5) 1.20%(4)(5) 1.20%(2)(3)
Net investment income........................ 4.72%(2)(5) 4.41 %(5) 4.34%(5) 4.41%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands...... $9,607 $10,025 $7,599 $2,953
Portfolio turnover rate...................... 6%(1) 13 % 15% 16%
- - ---------------------
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.02%.
(4) Does not reflect the effect of expense offset of 0.01%.
(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
24
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
FINANCIAL HIGHLIGHTS, continued
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED ----------------------------------------------------------------------
JUNE 30, 2000 1999 1998 1997* 1996 1995
- - ----------------------------------------------------------------------------------------------------------------------------------
(unaudited)
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of
period.............................. $11.07 $12.01 $12.08 $11.77 $12.09 $11.01
------ ------ ------ ------ ------ ------
Income (loss) from investment
operations:
Net investment income............... 0.30 0.59 0.62 0.63 0.65 0.67
Net realized and unrealized gain
(loss)............................ 0.16 (0.91) 0.10 0.36 (0.24) 1.19
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations.......................... 0.46 (0.32) 0.72 0.99 0.41 1.86
------ ------ ------ ------ ------ ------
Less dividends and distributions
from:
Net investment income............... (0.30) (0.59) (0.62) (0.63) (0.65) (0.67)
Net realized gain................... -- (0.03) (0.17) (0.05) (0.08) (0.11)
------ ------ ------ ------ ------ ------
Total dividends and distributions.... (0.30) (0.62) (0.79) (0.68) (0.73) (0.78)
------ ------ ------ ------ ------ ------
Net asset value, end of period....... $11.23 $11.07 $12.01 $12.08 $11.77 $12.09
====== ====== ====== ====== ====== ======
TOTAL RETURN+........................ 4.18%(1) (2.71)% 6.11% 8.73% 3.61% 17.37%
RATIOS TO AVERAGE NET ASSETS:
Expenses............................. 0.52%(2)(4) 0.51%(3)(4) 0.50%(3)(4) 0.49% 0.48% 0.48%
Net investment income................ 5.42%(2)(4) 5.11%(4) 5.12%(4) 5.34% 5.52% 5.76%
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands........................... $814,185 $853,216 $1,023,246 $1,096,998 $1,190,034 $1,325,308
Portfolio turnover rate.............. 6%(1) 13% 15% 16% 18% 21%
- - ---------------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date have been designated Class D shares.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.01%.
(4) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
25
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
CHANGE IN INDEPENDENT ACCOUNTANTS
On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.
The reports of PricewaterhouseCoopers LLP on the financial statements of the
Fund for the past two fiscal years contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle.
In connection with its audits for the two most recent fiscal years and through
July 1, 2000, there have been no disagreements with PricewaterhouseCoopers LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make
reference thereto in their report on the financial statements for such years.
The Fund, with the approval of its Board of Trustees and its Audit Committee,
engaged Deloitte & Touche LLP as its new independent accountants as of July 1,
2000.
26
(This Page Intentionally Left Blank)
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Mitchell M. Merin
President
Barry Fink
Vice President, Secretary and General Counsel
James F. Willison
Vice President
Joseph R. Arcieri
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center -- Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
The financial statements included herein have been taken from the records of the
Fund without examination by the independent accountants and accordingly they
do not express an opinion thereon.
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and trustees,
fees, expenses and other pertinent information, please see the prospectus of
the Fund.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective prospectus. Read the
prospectus carefully before investing.
Morgan Stanley Dean Witter Distributors Inc., member NASD.
MORGAN STANLEY
DEAN WITTER
TAX-EXEMPT
SECURITIES TRUST
SEMIANNUAL REPORT
JUNE 30, 2000
ANNUAL REPORT OF
MUNICIPAL INCOME TRUST III,
DATED AUGUST 31, 2000
TO BE FILED BY AMENDMENT
MORGAN STANLEY DEAN WITTER
TAX-EXEMPT SECURITIES TRUST
PART B
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relates to the shares of Morgan
Stanley Dean Witter Tax-Exempt Securities Trust ("Tax-Exempt") to be issued
pursuant to an Agreement and Plan of Reorganization, dated August 24, 2000,
between Tax-Exempt and Morgan Stanley Dean Witter Municipal Income Trust III
("MIT III") in connection with the acquisition by Tax-Exempt of substantially
all of the assets, subject to stated liabilities, of MIT III. This Statement of
Additional Information does not constitute a prospectus. This Statement of
Additional Information does not include all information that a shareholder
should consider before voting on the proposals contained in the Proxy Statement
and Prospectus, and, therefore, should be read in conjunction with the related
Proxy Statement and Prospectus, dated October , 2000. A copy of the Proxy
Statement and Prospectus may be obtained without charge by mailing a written
request to Tax-Exempt at Two World Trade Center, New York, New York 10048 or by
calling (800) 869-NEWS (TOLL FREE). Please retain this document for future
reference.
The date of this Statement of Additional Information is October , 2000.
B-1
TABLE OF CONTENTS
PAGE
----
INTRODUCTION ..................................... B-3
ADDITIONAL INFORMATION ABOUT TAX-EXEMPT .......... B-3
FINANCIAL STATEMENTS ............................. B-4
B-2
INTRODUCTION
This Statement of Additional Information is intended to supplement the
information provided in the Proxy Statement and Prospectus dated October ,
2000 (the "Proxy Statement and Prospectus"). The Proxy Statement and Prospectus
has been sent to MIT III shareholders in connection with the solicitation of
proxies by the Board of Trustees of MIT III to be voted at the Special Meeting
of shareholders of MIT III to be held on January 23, 2001. This Statement of
Additional Information incorporates by reference the Statement of Additional
Information of Tax-Exempt dated February 24, 2000.
ADDITIONAL INFORMATION ABOUT TAX-EXEMPT
INVESTMENT OBJECTIVES AND POLICIES
For additional information about Tax-Exempt's investment objectives and
policies, see "Description of the Fund and Its Investments and Risks" in
Tax-Exempt's Statement of Additional Information.
MANAGEMENT
For additional information about the Board of Trustees, officers and
management personnel of Tax-Exempt, see "Management of the Fund" and
"Investment Management and Other Services" in Tax-Exempt's Statement of
Additional Information.
INVESTMENT ADVISORY AND OTHER SERVICES
For additional information about Tax-Exempt's investment manager, see
"Investment Management and Other Services" in Tax-Exempt's Statement of
Additional Information. For additional information about Tax-Exempt's
independent auditors, see "Investment Management and Other Services" in
Tax-Exempt's Statement of Additional Information. For additional information
about other services provided to Tax-Exempt, see "Investment Management and
Other Services" in Tax-Exempt's Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE
For additional information about brokerage allocation practices, see
"Brokerage Allocation and Other Practices" in Tax-Exempt's Statement of
Additional Information.
DESCRIPTION OF FUND SHARES
For additional information about the voting rights and other
characteristics of the shares of Tax-Exempt, see "Capital Stock and Other
Securities" in Tax-Exempt's Statement of Additional Information.
PURCHASE, REDEMPTION AND PRICING OF SHARES
For additional information about the purchase and redemption of
Tax-Exempt's shares and the determination of net asset value, see "Purchase,
Redemption and Pricing of Shares" in Tax-Exempt's Statement of Additional
Information.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
For additional information about Tax-Exempt's policies regarding dividends
and distributions and tax matters affecting Tax-Exempt and its shareholders,
see "Taxation of the Fund and Shareholders" in Tax-Exempt's Statement of
Additional Information.
DISTRIBUTION OF SHARES
For additional information about Tax-Exempt's distributor and the
distribution agreement between Tax-Exempt and its distributor, see "Investment
Management and Other Services" and "Underwriters" in Tax-Exempt's Statement of
Additional Information.
B-3
PERFORMANCE DATA
For additional information about Tax-Exempt's performance, see
"Calculation of Performance Data" in Tax-Exempt's Statement of Additional
Information.
FINANCIAL STATEMENTS
Tax-Exempt's most recent audited financial statements are set forth in
Tax-Exempt's Annual Report for the fiscal year ended December 31, 1999.
Tax-Exempt's updated, unaudited financial statements are set forth in its
Semi-Annual Report for the six month period ended June 30, 2000. A copy of the
Annual Report and the Semi-Annual Report of Tax-Exempt accompanies, and is
incorporated by reference in, the Proxy Statement and Prospectus. MIT III's most
recent audited financial statements are set forth in MIT III's Annual Report for
the fiscal year ended August 31, 2000, which are incorporated by reference in
the Proxy Statement and Prospectus.
B-4
STATEMENT OF ADDITIONAL INFORMATION
Morgan Stanley Dean Witter
Tax-Exempt Securities Trust
February 24, 2000
- - --------------------------------------------------------------------------------
This Statement of Additional Information is not a Prospectus. The
Prospectus (dated February 24, 2000) for the Morgan Stanley Dean Witter
Tax-Exempt Securities Trust may be obtained without charge from the Fund at its
address or telephone number listed below or from Dean Witter Reynolds at any of
its branch offices.
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Two World Trade Center
New York, New York 10048
(800) 869-NEWS
TABLE OF CONTENTS
- - --------------------------------------------------------------------------------
I. Fund History ................................................... 4
II. Description of the Fund and Its Investments and Risks .......... 4
A. Classification ............................................ 4
B. Investment Strategies and Risks ........................... 4
C. Fund Policies/Investment Restrictions ..................... 9
III. Management of the Fund ......................................... 11
A. Board of Trustees ......................................... 11
B. Management Information .................................... 11
C. Compensation .............................................. 15
IV. Control Persons and Principal Holders of Securities ............ 17
V. Investment Management and Other Services ....................... 17
A. Investment Manager ........................................ 17
B. Principal Underwriter ..................................... 18
C. Services Provided by the Investment Manager ............... 18
D. Dealer Reallowances ....................................... 19
E. Rule 12b-1 Plan ........................................... 19
F. Other Service Providers ................................... 23
VI. Brokerage Allocation and Other Practices ....................... 24
A. Brokerage Transactions .................................... 24
B. Commissions ............................................... 24
C. Brokerage Selection ....................................... 25
D. Directed Brokerage ........................................ 25
E. Regular Broker-Dealers .................................... 25
VII. Capital Stock and Other Securities ............................. 26
VIII. Purchase, Redemption and Pricing of Shares ..................... 26
A. Purchase/Redemption of Shares ............................. 26
B. Offering Price ............................................ 27
IX. Taxation of the Fund and Shareholders .......................... 28
X. Underwriters ................................................... 30
XI. Calculation of Performance Data ................................ 30
XII. Financial Statements ........................................... 33
XIII. Appendix ....................................................... 54
2
GLOSSARY OF SELECTED DEFINED TERMS
The terms defined in this glossary are frequently used in this Statement
of Additional Information (other terms used occasionally are defined in the
text of the document).
"Custodian" - The Bank of New York is the Custodian of the Fund's assets.
"Dean Witter Reynolds" - Dean Witter Reynolds Inc., a wholly-owned
broker-dealer subsidiary of MSDW.
"Distributor" - Morgan Stanley Dean Witter Distributors Inc., a
wholly-owned broker-dealer subsidiary of MSDW.
"Financial Advisors" - Morgan Stanley Dean Witter authorized financial
services representatives.
"Fund" - Morgan Stanley Dean Witter Tax-Exempt Securities Trust, a
registered open-end investment company.
"Investment Manager" - Morgan Stanley Dean Witter Advisors Inc., a
wholly-owned investment advisor subsidiary of MSDW.
"Independent Trustees" - Trustees who are not "interested persons" (as
defined by the Investment Company Act) of the Fund.
"Morgan Stanley & Co." - Morgan Stanley & Co. Incorporated, a wholly-owned
broker-dealer subsidiary of MSDW.
"Morgan Stanley Dean Witter Funds" - Registered investment companies (i)
for which the Investment Manager serves as the investment advisor and (ii) that
hold themselves out to investors as related companies for investment and
investor services.
"MSDW" - Morgan Stanley Dean Witter & Co., a preeminent global financial
services firm.
"MSDW Services Company" - Morgan Stanley Dean Witter Services Company Inc.,
a wholly-owned fund services subsidiary of the Investment Manager.
"Transfer Agent" - Morgan Stanley Dean Witter Trust FSB, a wholly-owned
transfer agent subsidiary of MSDW.
"Trustees" - The Board of Trustees of the Fund.
3
I. FUND HISTORY
- - --------------------------------------------------------------------------------
The Fund was incorporated in the State of Maryland on December 31, 1979
under the name InterCapital Tax-Exempt Securities Inc. On March 17, 1983, the
Fund's shareholders approved a change in the Fund's name, effective March 21,
1983, to Dean Witter Tax-Exempt Securities Inc. On April 30, 1987, the Fund
reorganized as a Massachusetts business trust, with the name Dean Witter
Tax-Exempt Securities Trust. Effective June 22, 1998, the Fund's name was
changed to Morgan Stanley Dean Witter Tax-Exempt Securities Trust.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
- - --------------------------------------------------------------------------------
A. CLASSIFICATION
The Fund is an open-end, diversified management investment company whose
investment objective is to provide a high level of current income exempt from
federal income tax, consistent with the preservation of capital.
B. INVESTMENT STRATEGIES AND RISKS
The following discussion of the Fund's investment strategies and risks
should be read with the sections of the Fund's Prospectus titled "Principal
Investment Strategies," "Principal Risks," "Additional Investment Strategy
Information," and "Additional Risk Information."
TAXABLE SECURITIES. The Fund may invest up to 20% of its total assets, or
more than 20% of its total assets when assuming a temporary defensive position,
in taxable money market instruments or in tax-exempt securities subject to the
federal alternative minimum tax for individual shareholders. 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 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.
The types of taxable money market instruments in which the Fund may invest
are limited to the following short-term fixed-income securities (maturing in
one year or less from the time of purchase): (i) obligations of the United
States Government, its agencies, instrumentalities or authorities; (ii)
commercial paper rated P-1 by Moody's Investors Services, Inc. ("Moody's") or
A-1 by Standard & Poor's Corporation ("S&P"); (iii) certificates of deposit of
domestic banks with assets of $1 billion or more; and (iv) repurchase
agreements with respect to portfolio securities.
VARIABLE RATE AND FLOATING RATE OBLIGATIONS. The Fund may invest in
Municipal Bonds and Municipal Notes ("Municipal Obligations") of the type
called variable rate. 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 issue 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 an obligation prior to
maturity, is enhanced.
FUTURES CONTRACTS AND OPTIONS ON FUTURES. 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.
4
Although the terms of futures contracts specify actual delivery or receipt
of securities, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the securities.
Closing out of a futures contract is usually effected by entering into an
offsetting transaction. An offsetting transaction for a futures contract sale
is effected by the Fund entering into a futures contract purchase for the same
aggregate amount of the specific type of financial instrument at the same
delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is immediately paid the difference and thus realizes a gain.
If the offsetting purchase price exceeds the sale price, the Fund pays the
difference and realizes 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 as 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 change is reflected in the net asset value of the particular Fund
holding the options.
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 61/2
and 10 years, Certificates of the Government National Mortgage Association,
Bank Certificates of Deposit and on a municipal bond index. 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 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 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 the 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.
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 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. There
is no limit, however, on the percentage of the Fund's assets that may be
committed to hedging transactions.
5
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.
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 the total assets of the Fund. A call option is
"covered" if the Fund owns the underlying security subject to the option or has
an absolute and immediate right to acquire that security without additional
cash consideration (or for additional consideration (in cash, Treasury bills or
other liquid portfolio securities) held in a segregated account on the Fund's
books) 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 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 on the Fund's books. 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 on the Fund's books, or holds a put
on the same security 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 fund as the option
previously purchased. There can be no assurance that either a closing purchase
or sale transaction on behalf of the Fund can be effected when the Fund so
desires.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Since call option prices generally reflect increases in
the price of the underlying security, any loss resulting from the purchase of a
call option may also be wholly or partially offset by unrealized appreciation
of the underlying security. If a put option written by the Fund is exercised,
the Fund may incur a loss equal to
6
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 commission upon the exercise of call options and upon
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.
If the Fund maintains a short position in a futures contract or has sold a
call option in a futures contract, it will cover this position by holding, in a
segregated account maintained on the books of the Fund, cash, U.S. government
securities or other liquid portfolio securities equal in value (when added to
any initial or variation margin on deposit) to the market value of the
securities underlying the futures contract or the exercise price of the option.
Such a position may also be covered by owning the securities underlying the
futures contract (in the case of a stock index futures contract a portfolio of
securities substantially replicating the relevant index), or by holding a call
option permitting the Fund to purchase the same contract at a price no higher
than the price at which the short position was established.
In addition, if the Fund holds a long position in a futures contract or
has sold a put option on a futures contract, it will hold cash, U.S. government
securities or other liquid portfolio securities equal to the purchase price of
the contract or the exercise price of the put option (less the amount of
initial or variation margin on deposit) in a segregated account maintained on
the books of the Fund. Alternatively, the Fund could cover its long position by
purchasing a put option on the same futures contract with an exercise price as
high or higher than the price of the contract held by the Fund.
REPURCHASE AGREEMENTS. The Fund may invest in 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 serving as collateral at a specified price
and at a fixed time in the future, usually not more than seven days from the
date of purchase. The collateral will be marked-to-market daily to determine
that the value of the collateral, as specified in the agreement, does not
decrease below the purchase price plus accrued interest. If such decrease
occurs, additional collateral will be requested and, when received, added to
the account to maintain full collateralization. The Fund will accrue interest
from the institution until the time when the repurchase is to occur. Although
this 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.
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 subject to procedures established by the Trustees. In addition, as
described above, the value of the collateral underlying the repurchase
agreement will 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 form any sale upon a default of the obligation to repurchase were less
than the repurchase price, the
7
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 10% of its net assets.
LENDING PORTFOLIO SECURITIES. The Fund may lend its portfolio securities
to brokers, dealers and other financial institutions, provided that the loans
are callable at any time by the Fund, and are at all times secured by cash or
cash equivalents, which are maintained in a segregated account pursuant to
applicable regulations and that are equal to at least 100% of the market value,
determined daily, of the loaned securities. The advantage of these loans is
that the Fund continues to receive the income on the loaned securities while at
the same time earning interest on the cash amounts deposited as collateral,
which will be invested in short-term obligations. The Fund will not lend more
than 25% of the value of its total assets.
As with any extensions of credit, there are risks of delay in recovery
and, in some cases, even loss of rights in the collateral should the borrower
of the securities fail financially. However, these loans of portfolio
securities will only be made to firms deemed by the Fund's management to be
creditworthy and when the income which can be earned from such loans justifies
the attendant risks. Upon termination of the loan, the borrower is required to
return the securities to the Fund. Any gain or loss in the market price during
the loan period would inure to the Fund.
When voting or consent rights which accompany loaned securities pass to
the borrower, the Fund will follow the policy of calling the loaned securities,
to be delivered within one day after notice, to permit the exercise of the
rights if the matters involved would have a material effect on the Fund's
investment in the loaned securities. The Fund will pay reasonable finder's,
administrative and custodial fees in connection with a loan of its securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From
time to time the Fund may purchase securities on a when-issued or delayed
delivery basis or may purchase or sell securities on a forward commitment
basis. When these transactions are negotiated, the price is fixed at the time
of the commitment, but delivery and payment can take place a month or more
after the date of commitment. While the Fund will only purchase securities on a
when-issued, delayed delivery or forward commitment basis with the intention of
acquiring the securities, the Fund may sell the securities before the
settlement date, if it is deemed advisable. The securities so purchased or sold
are subject to market fluctuation and no interest or dividends accrue to the
purchaser prior to the settlement date.
At the time the Fund makes the commitment to purchase or sell securities
on a when-issued, delayed delivery or forward commitment basis, it will record
the transaction and thereafter reflect the value, each day, of such security
purchased, or if a sale, the proceeds to be received, in determining its net
asset value. At the time of delivery of the securities, their value may be more
or less than the purchase or sale price. 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 its net
asset value. The Fund will also establish a segregated account on the Fund's
books in which it will continually maintain cash or cash equivalents or other
liquid portfolio securities equal in value to commitments to purchase
securities on a when-issued, delayed delivery or forward commitment basis.
WHEN, AS AND IF ISSUED SECURITIES. The Fund may purchase securities on a
"when, as and if issued" basis under which the issuance of the security depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization or debt restructuring. The commitment for the purchase
of any such security will not be recognized in the portfolio of the Fund until
the Investment Manager determines that issuance of the security is probable. At
that time, the Fund will record the transaction and, in determining its net
asset value, will reflect the value of the security daily. At that time, the
Fund will also establish a segregated account on the Fund's books in which it
will maintain cash or cash equivalents or other liquid portfolio securities
equal in value to recognized commitments for such securities.
The value of the Fund's commitments to purchase the securities of any one
issuer, together with the value of all securities of such issuer owned by the
Fund, may not exceed 5% of the value of the Fund's
8
total assets at the time the initial commitment to purchase such securities is
made. An increase in the percentage of the Fund's assets committed to the
purchase of securities on a "when, as and if issued" basis may increase the
volatility of its net asset value. The Fund may also sell securities on a
"when, as and if issued" basis provided that the issuance of the security will
result automatically from the exchange or conversion of a security owned by the
Fund at the time of sale.
YEAR 2000. The investment management services provided to the Fund by the
Investment Manager and the services provided to shareholders by the Distributor
and the Transfer Agent depend on the smooth functioning of their computer
systems. Many computer software systems in use today were designed in such a
way that they may not be able to recognize the year 2000, but revert to 1900 or
some other date, due to the manner in which dates were encoded and calculated.
That failure could have a negative impact on the handling of securities trades,
pricing and account services.
Improperly functioning trading systems may result in settlement problems
and liquidity issues. Governmental data processing errors could result in
overall economic uncertainties. Operations ran smoothly from the last week in
December through the first few weeks of January, but the year 2000 issue may
yet have an adverse impact on financial market participants and other entities,
including the issuers whose securities are contained in the Fund's portfolio.
C. FUND POLICIES/INVESTMENT RESTRICTIONS
The investment objective, policies and restrictions listed below have been
adopted by the Fund as fundamental policies. Under the Investment Company Act
of 1940 (the "Investment Company Act"), a fundamental policy may not be changed
without the vote of a majority of the outstanding voting securities of the
Fund. The Investment Company Act defines a majority as the lesser of (a) 67% or
more of the shares present at a meeting of shareholders, if the holders of 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.
In addition, for purposes of the following restrictions: (a) an "issuer"
of a security is the entity whose assets and revenues are committed to the
payment of interest and principal on that particular security, provided that
the guarantee of a security will be considered a separate security and provided
further that a guarantee of a security shall not be deemed a security issued by
the guarantor if the value of all securities guaranteed by the guarantor and
owned by the Fund does not exceed 10% of the value of the total assets of the
Fund; (b) a "taxable security" is any security the interest on which is subject
to federal income tax; and (c) all percentage limitations apply immediately
after a purchase or initial investment, and any subsequent change in any
applicable percentage resulting from market fluctuations or other changes in
total or net assets does not require elimination of any security from the
portfolio.
The Fund will:
1. Seek to provide a high level of current income exempt from federal
income tax, consistent with the preservation of capital.
The Fund may not:
1. Invest more than 5% of the value of its total assets in the securities
of any one issuer (other than obligations issued or guaranteed by the
United States Government, its agencies or instrumentalities).
2. Purchase more than 10% of all outstanding taxable debt securities of
any one issuer (other than obligations issued, or guaranteed as to
principal and interest by, the United States Government, its agencies or
instrumentalities).
3. Invest more than 25% of the value of its total assets in taxable
securities of issuers in any one industry (industrial development and
pollution control bonds are grouped into industries based upon the
business in which the issuers of such obligations are engaged). This
restriction does not apply to obligations issued or guaranteed by the
United States Government, its agencies or instrumentalities or to cash
equivalents.
9
4. Invest more than 5% of the value of its total assets in taxable
securities of issuers having a record, together with predecessors, of
less than three years of continuous operation. This restriction shall not
apply to any obligations of the United States Government, its agencies or
instrumentalities.
5. Invest in common stock.
6. Write, purchase or sell puts, calls, or combinations thereof, except
for options on futures contracts or options on debt securities.
7. Invest in securities of any issuer, if, to the knowledge of the Fund,
any officer or trustee of the Fund or of the Investment Manager owns more
than 1/2 of 1% of the outstanding securities of the issuer, and the
officers and trustees who own more than 1/2 of 1% own in the aggregate
more than 5% of the outstanding securities of the issuer.
8. Purchase or sell real estate or interests therein, although it may
purchase securities secured by real estate or interests therein.
9. Purchase or sell commodities except that the Fund may purchase
financial futures contracts and related options.
10. 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).
11. Pledge its assets or assign or otherwise encumber them except to secure
permitted borrowing. 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.
12. Issue senior securities as defined in the Investment Company 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; or (e)
lending portfolio securities.
13. Make loans of money or securities, except: (a) by the purchase of debt
obligations and (b) by investment in repurchase agreements.
14. Make short sales of securities.
15. Purchase securities on margin, except for such short-term loans as are
necessary for the clearance of purchases of portfolio securities.
16. Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act in disposing of a
portfolio security.
17. Invest for the purpose of exercising control or management of any
other issuer.
18. Purchase oil, gas or other mineral leases, rights or royalty contracts,
or exploration or development programs.
19. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objective by investing all or substantially all
of its assets in another investment company having substantially the same
investment objective and policies as the Fund.
10
III. MANAGEMENT OF THE FUND
- - --------------------------------------------------------------------------------
A. BOARD OF TRUSTEES
The Board of Trustees of the Fund oversees the management of the Fund but
does not itself manage the Fund. The Trustees review various services provided
by or under the direction of the Investment Manager to ensure that the Fund's
general investment policies and programs are properly carried out. The Trustees
also conduct their review to ensure that administrative services are provided
to the Fund in a satisfactory manner.
Under state law, the duties of the Trustees are generally characterized as
a duty of loyalty and a duty of care. The duty of loyalty requires a Trustee to
exercise his or her powers in the interest of the Fund and not the Trustee's
own interest or the interest of another person or organization. A Trustee
satisfies his or her duty of care by acting in good faith with the care of an
ordinarily prudent person and in a manner the Trustee reasonably believes to be
in the best interest of the Fund and its shareholders.
B. MANAGEMENT INFORMATION
TRUSTEES AND OFFICERS. The Board of the Fund consists of eight (8)
Trustees. These same individuals also serve as directors or trustees for all of
the Morgan Stanley Dean Witter Funds. Six Trustees (75% of the total number)
have no affiliation or business connection with the Investment Manager or any
of its affiliated persons and do not own any stock or other securities issued
by the Investment Manager's parent company, MSDW. These are the
"non-interested" or "independent" Trustees. The other two Trustees (the
"management Trustees") are affiliated with the Investment Manager.
The Trustees and executive officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with the
Investment Manager, and with the Morgan Stanley Dean Witter Funds (there were
93 such Funds as of the calendar year ended December 31, 1999), are shown
below.
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- - ------------------------------------------- ----------------------------------------------------
Michael Bozic (59) ........................ Vice Chairman of Kmart Corporation (since
Trustee December 1998); Director or Trustee of the Morgan
c/o Kmart Corporation Stanley Dean Witter Funds; formerly Chairman
3100 West Big Beaver Road and Chief Executive Officer of Levitz Furniture
Troy, Michigan Corporation (November 1995-November 1998) and
President and Chief Executive Officer of Hills
Department Stores (May 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 Weirton Steel Corporation.
Charles A. Fiumefreddo* (66) .............. Chairman, Director or Trustee, and Chief Executive
Chairman of the Board, Officer of the Morgan Stanley Dean Witter Funds;
Chief Executive Officer and Trustee formerly Chairman, Chief Executive Officer and
Two World Trade Center Director of the Investment Manager, the Distributor
New York, New York and MSDW Services Company; Executive Vice
President and Director of Dean Witter Reynolds;
Chairman and Director of the Transfer Agent;
formerly Director and/or officer of various MSDW
subsidiaries (until June 1998).
11
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- - ------------------------------------------- ----------------------------------------------------
Edwin J. Garn (67) ........................ Director or Trustee of the Morgan Stanley Dean
Trustee Witter Funds; formerly United States Senator (R-
c/o Huntsman Corporation Utah)(1974-1992) and Chairman, Senate Banking
500 Huntsman Way Committee (1980-1986); formerly Mayor of Salt
Salt Lake City, Utah Lake City, Utah (1971-1974); formerly Astronaut,
Space Shuttle Discovery (April 12-19, 1985); Vice
Chairman, Huntsman Corporation (chemical
company); Director of Franklin Covey (time
management systems), BMW Bank of North
America, Inc. (industrial loan corporation), United
Space Alliance (joint venture between Lockheed
Martin and the Boeing Company) and Nuskin Asia
Pacific (multilevel marketing); member of the board
of various civic and charitable organizations.
Wayne E. Hedien (66) ...................... Retired; Director or Trustee of the Morgan Stanley
Trustee Dean Witter Funds; Director of The PMI Group,
c/o Mayer, Brown & Platt Inc. (private mortgage insurance); Trustee and
Counsel to the Independent Trustees Vice Chairman of The Field Museum of Natural
1675 Broadway History; formerly associated with the Allstate
New York, New York Companies (1966-1994), most recently as
Chairman of The Allstate Corporation (March 1993-
December 1994) and Chairman and Chief
Executive Officer of its wholly-owned subsidiary,
Allstate Insurance Company (July 1989-December
1994); director of various other business and
charitable organizations.
Dr. Manuel H. Johnson (51) ................ Senior Partner, Johnson Smick International, Inc.,
Trustee a consulting firm; Co-Chairman and a founder of
c/o Johnson Smick International, Inc. the Group of Seven Council (G7C), an international
1133 Connecticut Avenue, N.W. economic commission; Chairman of the Audit
Washington, D.C. Committee and Director or Trustee of the Morgan
Stanley Dean Witter Funds; Director of Greenwich
Capital Markets, Inc. (broker-dealer) and NVR, Inc.
(home construction); Chairman and Trustee of the
Financial Accounting Foundation (oversight
organization of the Financial Accounting Standards
Board); formerly Vice Chairman of the Board of
Governors of the Federal Reserve System (1986-
1990) and Assistant Secretary of the U.S. Treasury.
Michael E. Nugent (63) .................... General Partner, Triumph Capital, L.P., a private
Trustee investment partnership; Chairman of the Insurance
c/o Triumph Capital, L.P. Committee and Director or Trustee of the Morgan
237 Park Avenue Stanley Dean Witter Funds; formerly Vice
New York, New York President, Bankers Trust Company and BT Capital
Corporation (1984-1988); director of various
business organizations.
Philip J. Purcell* (56) ................... Chairman of the Board of Directors and Chief
Trustee Executive Officer of MSDW, Dean Witter Reynolds
1585 Broadway and Novus Credit Services Inc.; Director of the
New York, New York Distributor; Director or Trustee of the Morgan
Stanley Dean Witter Funds; Director of American
Airlines, Inc. and its parent company, AMR
Corporation; Director and/or officer of various
MSDW subsidiaries.
12
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- - ------------------------------------------- ----------------------------------------------------
John L. Schroeder (69) .................... Retired; Chairman of the Derivatives Committee
Trustee and Director or Trustee of the Morgan Stanley
c/o Mayer, Brown & Platt Dean Witter Funds; Director of Citizens Utilities
Counsel to the Independent Trustees Company (telecommunications, gas, electric and
1675 Broadway water utilities company); formerly Executive Vice
New York, New York President and Chief Investment Officer of the
Home Insurance Company (August 1991-
September 1995).
Mitchell M. Merin (46) .................... President and Chief Operating Officer of Asset
President Management of MSDW (since December 1998);
Two World Trade Center President and Director (since April 1997) and Chief
New York, New York Executive Officer (since June 1998) of the
Investment Manager and MSDW Services
Company; Chairman, Chief Executive Officer and
Director of the Distributor (since June 1998);
Chairman and Chief Executive Officer (since
June 1998) and Director (since January 1998) of
the Transfer Agent; Director of various MSDW
subsidiaries; President of the Morgan Stanley Dean
Witter Funds (since May 1999); Trustee of various
Van Kampen investment companies (since
December 1999); previously Chief Strategic Officer
of the Investment Manager and MSDW Services
Company and Executive Vice President of the
Distributor (April 1997-June 1998), Vice President
of the Morgan Stanley Dean Witter Funds
(May 1997-April 1999), and Executive Vice
President of Dean Witter, Discover & Co.
Barry Fink (45) ........................... Executive Vice President (since December 1999)
Vice President, and Secretary and General Counsel (since
Secretary and General Counsel February 1997) and Director (since July 1998) of
Two World Trade Center the Investment Manager and MSDW Services
New York, New York Company; Executive Vice President (since
December 1999) and Assistant Secretary and
Assistant General Counsel (since February 1997)
of the Distributor; Assistant Secretary of Dean
Witter Reynolds (since August 1996); Vice
President, Secretary and General Counsel of the
Morgan Stanley Dean Witter Funds (since February
1997); previously Senior Vice President (March
1997-December 1999), First Vice President (June
1993-February 1997), Vice President and Assistant
Secretary and Assistant General Counsel of the
Investment Manager and MSDW Services
Company, Senior Vice President of the Distributor
(March 1997-December 1999) and Assistant
Secretary of the Morgan Stanley Dean Witter
Funds.
James F. Willison (56) .................... Senior Vice President and Director of the Tax-
Vice President Exempt Fixed-Income Group of the Investment
Two World Trade Center Manager; Vice President of various Morgan Stanley
New York, New York Dean Witter Funds.
13
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- - ------------------------------------------- ----------------------------------------------------
Joseph R. Arcieri (51) .................... Senior Vice President of the Investment Manager
Vice President (since December 1999); formerly Vice President of
Two World Trade Center the Investment Manager; Vice President of various
New York, New York Morgan Stanley Dean Witter Funds.
Thomas F. Caloia (53) ..................... First Vice President and Assistant Treasurer of the
Treasurer Investment Manager, the Distributor and MSDW
Two World Trade Center Services Company; Treasurer of the Morgan
New York, New York Stanley Dean Witter Funds.
- - ----------
* Denotes Trustees who are "interested persons" of the Fund as defined by the
Investment Company Act.
In addition, Ronald E. Robison, Executive Vice President, Chief
Administrative Officer and Director of the Investment Manager and MSDW Services
Company, Robert S. Giambrone, Senior Vice President of the Investment Manager,
MSDW Services Company, the Distributor and the Transfer Agent and Director of
the Transfer Agent, Joseph J. McAlinden, Executive Vice President and Chief
Investment Officer of the Investment Manager and Director of the Transfer
Agent, Peter M. Avelar, Senior Vice President of the Investment Manager and
Director of the High Yield Group of the Investment Manager, Jonathan R. Page,
Senior Vice President of the Investment Manager and Director of the Money
Market Group of the Investment Manager, Katherine H. Stromberg, Senior Vice
President of the Investment Manager, and Gerard J. Lian, Vice President of the
Investment Manager, are Vice Presidents of the Fund.
In addition, Marilyn K. Cranney, Todd Lebo, Lou Anne D. McInnis, Carsten
Otto and Ruth Rossi, First Vice Presidents and Assistant General Counsels of
the Investment Manager and MSDW Services Company, and Natasha Kassian,
Assistant Vice President and Assistant General Counsel of the Investment
Manager and MSDW Services Company, are Assistant Secretaries of the Fund.
INDEPENDENT DIRECTORS/TRUSTEES AND THE COMMITTEES. Law and regulation
establish both general guidelines and specific duties for the independent
directors/trustees. The Morgan Stanley Dean Witter Funds seek as independent
directors/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. All of the independent directors/trustees serve as members of the Audit
Committee. In addition, three of the directors/trustees, including two
independent directors/trustees, serve as members of the Derivatives Committee
and the Insurance Committee.
The independent directors/trustees are 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 directors/trustees are required to select and nominate individuals
to fill any independent director/trustee vacancy on the board of any Fund that
has a Rule 12b-1 plan of distribution. Most of the Morgan Stanley Dean Witter
Funds have a Rule 12b-1 plan.
The Audit Committee is charged with recommending to the full board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of the 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.
14
The board of each Fund has a Derivatives Committee to approve parameters
for and monitor the activities of the Fund with respect to derivative
investments, if any, made by the Fund.
Finally, the board of each Fund has formed an Insurance Committee to
review and monitor the insurance coverage maintained by the Fund.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT DIRECTORS/TRUSTEES
FOR ALL MORGAN STANLEY DEAN WITTER FUNDS. The independent directors/trustees
and the Funds' management believe that having the same independent
directors/trustees for each of the Morgan Stanley Dean Witter Funds avoids the
duplication of effort that would arise from having different groups of
individuals serving as independent directors/trustees for each of the Funds or
even of sub-groups of Funds. They believe that having the same individuals
serve as independent directors/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 directors/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
directors/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
directors/trustees, of the caliber, experience and business acumen of the
individuals who serve as independent directors/trustees of the Morgan Stanley
Dean Witter Funds.
TRUSTEE AND OFFICER INDEMNIFICATION. The Fund's Declaration of Trust
provides that no Trustee, officer, employee or agent of the Fund is liable to
the Fund or to a shareholder, nor is any Trustee, officer, employee or agent
liable to any third persons in connection with the affairs of the Fund, except
as such liability may arise from his/her or its own bad faith, willful
misfeasance, gross negligence or reckless disregard of his/her or its duties.
It also provides that all third persons shall look solely to the Fund property
for satisfaction of claims arising in connection with the affairs of the Fund.
With the exceptions stated, 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.
C. COMPENSATION
The Fund pays each Independent Trustee an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Trustees, the Independent
Trustees or Committees of the Board of Trustees attended by the Trustee (the
Fund pays the Chairman of the Audit Committee an additional annual fee of $750
and the Chairmen of the Derivatives and Insurance Committees additional annual
fees of $500). If a Board meeting and a meeting of the Independent Trustees or
a Committee meeting, or a meeting of the Independent Trustees and/or more than
one Committee meeting, take place on a single day, the Trustees are paid a
single meeting fee by the Fund. The Fund also reimburses such Trustees for
travel and other out-of-pocket expenses incurred by them in connection with
attending such meetings. Trustees and officers of the Fund who are or have been
employed by the Investment Manager or an affiliated company receive no
compensation or expense reimbursement from the Fund for their services as
Trustee.
The following table illustrates the compensation that the Fund paid to its
Independent Trustees for the fiscal year ended December 31, 1999.
FUND COMPENSATION
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- - --------------------------- -------------
Michael Bozic ................................. $1,550
Edwin J. Garn ................................. 1,600
Wayne E. Hedien ............................... 1,600
Dr. Manuel H. Johnson ......................... 2,100
Michael E. Nugent ............................. 1,933
John L. Schroeder ............................. 1,933
15
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1999 for services
to the 93 Morgan Stanley Dean Witter Funds that were in operation at December
31, 1999.
CASH COMPENSATION FROM MORGAN STANLEY DEAN WITTER FUNDS
TOTAL CASH
COMPENSATION
FOR SERVICES TO
93 MORGAN
NAME OF STANLEY DEAN
INDEPENDENT TRUSTEE WITTER FUNDS
- - ------------------------------- ----------------
Michael Bozic ................................. $134,600
Edwin J. Garn ................................. 138,700
Wayne E. Hedien ............................... 138,700
Dr. Manuel H. Johnson ......................... 208,638
Michael E. Nugent ............................. 193,324
John L. Schroeder ............................. 193,324
As of the date of this Statement of Additional Information, 55 of the
Morgan Stanley Dean Witter Funds, including the Fund, have adopted a retirement
program under which an independent director/ 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/trustee of any Morgan Stanley Dean Witter
Fund that has adopted the retirement program (each such Fund referred to as an
"Adopting Fund" and each such director/ trustee referred to as an "Eligible
Director/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 Director/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 30.22% of his or her Eligible Compensation
plus 0.5036667% of such Eligible Compensation for each full month of service as
an independent director/trustee of any Adopting Fund in excess of five years up
to a maximum of 60.44% after ten years of service. The foregoing percentages
may be changed by the board.(1) "Eligible Compensation" is one-fifth of the
total compensation earned by such Eligible Director/Trustee for service to the
Adopting Fund in the five year period prior to the date of the Eligible
Director/Trustee's retirement. Benefits under the retirement program are
accrued as expenses on the books of the Adopting Funds. Such benefits are not
secured or funded by the Adopting Funds.
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the Fund for the fiscal year ended December 31,
1999 and by the 55 Morgan Stanley Dean Witter Funds (including the Fund) for
the year ended December 31, 1999, and the estimated retirement benefits for the
Independent Trustees, to commence upon their retirement, from the Fund as of
December 31, 1999 and from the 55 Morgan Stanley Dean Witter Funds as of
December 31, 1999.
- - ----------
(1) An Eligible Director/Trustee may elect alternative payments of his or her
retirement benefits based upon the combined life expectancy of the
Eligible Director/Trustee and his or her spouse on the date of such
Eligible Director/Trustee's retirement. In addition, the Eligible
Director/Trustee may elect that the surviving spouse's periodic payment
of benefits will be equal to a lower percentage of the periodic amount
when both spouses were alive. The amount estimated to be payable under
this method, through the remainder of the later of the lives of the
Eligible Director/Trustee and spouse, will be the actuarial equivalent of
the Regular Benefit.
16
RETIREMENT BENEFITS FROM THE FUND AND ALL MORGAN STANLEY DEAN WITTER FUNDS
FOR ALL ADOPTING FUNDS
------------------------------
ESTIMATED ANNUAL
RETIREMENT BENEFITS BENEFITS
ESTIMATED ACCRUED AS EXPENSES UPON RETIREMENT(2)
CREDITED YEARS ESTIMATED ------------------- --------------------
OF SERVICE AT PERCENTAGE BY ALL FROM ALL
NAME OF RETIREMENT OF ELIGIBLE BY THE ADOPTING FROM THE ADOPTING
INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS
- - -------------------------- ---------------- ------------- -------- ---------- ---------- ---------
Michael Bozic ............ 10 60.44% $378 $20,933 $ 907 $50,588
Edwin J. Garn ............ 10 60.44 557 31,737 909 50,675
Wayne E. Hedien .......... 9 51.37 711 39,566 771 43,000
Dr. Manuel H. Johnson..... 10 60.44 229 13,129 1,360 75,520
Michael E. Nugent ........ 10 60.44 395 23,175 1,209 67,209
John L. Schroeder ........ 8 50.37 768 41,558 955 52,994
- - ----------
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1) on
page 16.
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
- - --------------------------------------------------------------------------------
The following owned 5% or more of the outstanding Class A shares of the
Fund as of January 28, 2000: Morgan Stanley Dean Witter Trust FSB Trustee FBO
Richard K. Allen and Dorothy B. Allen Revocable Trust Husband and Wife Share,
P.O. Box 503, Jersey City, NJ 07311 - 5.603%; Howard C. Kauffmann & Suzanne M.
Kauffmann JTTEN, 2724 Peachtree Road NW, Atlanta, GA 30305-2978 - 5.335%;
Sylvia Corcoran and Edward V. Corcoran JTTEN, 5355 Nautilus Drive, Cape Coral,
FL 33904-5973 - 5.114%; Robert T. Smylie, 2512 Metropolitan Drive, Trevose, PA
19053-6738 - 5.095%; Sharon R. Frank, 338 Waycliffe North, Wayzata, MN
55391-1390 - 5.065%; Theodore S. Oparowski, Jr. and Elizabeth A. McCrave JTTEN,
c/o Mike Tinkler, 33 Beverly Ave., Lansdowne, PA 19050-2705 - 5.035%. The
following owned 5% or more of the outstanding shares of Class C on January 28,
2000: Danilo F. Piccinini & Lola Piccinini JTTEN, P.O. Box 5307, Incline Vlg.,
NV 89450-5307 - 5.881%.
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% of the Fund's shares of
beneficial interest outstanding.
V. INVESTMENT MANAGEMENT AND OTHER SERVICES
- - --------------------------------------------------------------------------------
A. INVESTMENT MANAGER
The Investment Manager to the Fund is Morgan Stanley Dean Witter Advisors
Inc., a Delaware corporation, whose address is Two World Trade Center, New
York, NY 10048. The Investment Manager is a wholly-owned subsidiary of MSDW, a
Delaware corporation. MSDW is a preeminent global financial services firm that
maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services.
Pursuant to an Investment Management Agreement (the "Management
Agreement") with the Investment Manager, the Fund has retained the Investment
Manager to provide administrative services and manage the investment of the
Fund's assets, including the placing of orders for the purchase and sale of
portfolio securities. The Fund pays the Investment Manager monthly compensation
calculated daily by applying the following annual rates to the net assets of
the Fund determined as of the close of each business day: 0.50% of the portion
of the daily net assets not exceeding $500 million; 0.425% of the portion of
the daily net assets exceeding $500 million but not exceeding $750 million;
0.375% of the portion of the daily net assets exceeding $750 million but not
exceeding $1 billion; 0.35% of the portion of the daily net assets exceeding $1
billion but not exceeding $1.25 billion; and 0.325% of the portion of the daily
net assets exceeding $1.25 billion. The management fee is allocated among the
Classes pro rata based on the net assets of the Fund attributable to each
Class. For the fiscal years ended December 31, 1997, 1998 and 1999, the
Investment Manager accrued total compensation under the Management Agreement in
the amounts of $5,004,702, $5,139,570 and $4,908,427, respectively.
17
The Investment Manager has retained its wholly-owned subsidiary, MSDW
Services Company, to perform administrative services for the Fund.
B. PRINCIPAL UNDERWRITER
The Fund's principal underwriter is the Distributor (which has the same
address as the Investment Manager). In this capacity, the Fund's shares are
distributed by the Distributor. The Distributor has entered into a selected
dealer agreement with Dean Witter Reynolds, which through its own sales
organization sells shares of the Fund. In addition, the Distributor may enter
into similar agreements with other selected broker-dealers. The Distributor, a
Delaware corporation, is a wholly-owned subsidiary of MSDW.
The Distributor bears all expenses it may incur in providing services
under the Distribution Agreement. These expenses include the payment of
commissions for sales of the Fund's shares and incentive compensation to
Financial Advisors, the cost of educational and/or business-related trips, and
educational and/or promotional and business-related expenses. The Distributor
also pays certain expenses in connection with the distribution of the Fund's
shares, including the costs of preparing, printing and distributing advertising
or promotional materials, and the costs of printing and distributing
prospectuses and supplements thereto used in connection with the offering and
sale of the Fund's shares. The Fund bears the costs of initial typesetting,
printing and distribution of prospectuses and supplements thereto to
shareholders. The Fund also bears the costs of registering the Fund and its
shares under federal and state securities laws and pays filing fees in
accordance with state securities laws.
The Fund and the Distributor have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act. 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.
C. SERVICES PROVIDED BY THE INVESTMENT MANAGER
The Investment Manager manages 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 the information and
advice relating to the economy, securities markets, and specific securities as
it considers necessary or useful to continuously manage the assets of the Fund
in a manner consistent with its investment objective.
Under the terms of the Management 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, the office space,
facilities, equipment, clerical help, bookkeeping and certain legal services as
the Fund may reasonably require in the conduct of its business, including the
preparation of prospectuses, proxy statements and reports required to be filed
with federal and state securities commissions (except insofar as the
participation or assistance of independent accountants and attorneys is, in the
opinion of the Investment Manager, necessary or desirable). In addition, the
Investment Manager pays the salaries of all personnel, including officers of
the Fund, who are employees of the Investment Manager. The Investment Manager
also bears the cost of telephone service, heat, light, power and other
utilities provided to the Fund.
Expenses not expressly assumed by the Investment Manager under the
Management Agreement or by the Distributor, will be paid by the Fund. These
expenses will be allocated among the four Classes of shares pro rata based on
the net assets of the Fund attributable to each Class, except as described
below. Such expenses include, but are not limited to: expenses of the Plan of
Distribution pursuant to Rule 12b-1; 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
18
typesetting, and distributing prospectuses of the Fund and supplements thereto
to the Fund's shareholders; all expenses of shareholders' and Trustees'
meetings and of preparing, printing and mailing of proxy statements and reports
to shareholders; fees and travel expenses of Trustees or members of any
advisory board or committee who are not employees of the Investment Manager or
any corporate affiliate of the Investment Manager; all expenses incident to any
dividend, withdrawal or redemption options; charges and expenses of any outside
service used for pricing of the Fund's shares; fees and expenses of legal
counsel, including counsel to the Trustees who are not interested persons of
the Fund or of the Investment Manager (not including compensation or expenses
of attorneys who are employees of the Investment Manager); fees and expenses of
the Fund's independent accountants; membership dues of industry associations;
interest on Fund borrowings; postage; insurance premiums on property or
personnel (including officers and Trustees) of the Fund which inure to its
benefit; extraordinary expenses (including, but not limited to, legal claims
and liabilities and litigation costs and any indemnification relating thereto);
and all other costs of the Fund's operation. The 12b-1 fees relating to a
particular Class will be allocated directly to that Class. In addition, other
expenses associated with a particular Class (except advisory or custodial fees)
may be allocated directly to that Class, provided that such expenses are
reasonably identified as specifically attributable to that Class and the direct
allocation to that Class is approved by the Trustees.
The Management 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 Management Agreement will remain in effect from year to year, provided
continuance of the Management Agreement is approved at least annually by the
vote of the holders of a majority, as defined in the Investment Company Act, of
the outstanding shares of the Fund, or by the Trustees; provided that in either
event such continuance is approved annually by the vote of a majority of the
Trustees, including a majority of the Independent Trustees.
D. DEALER REALLOWANCES
Upon notice to selected broker-dealers, the Distributor may reallow up to
the full applicable front-end sales charge during periods specified in such
notice. During periods when 90% or more of the sales charge is reallowed, such
selected broker-dealers may be deemed to be underwriters as that term is
defined in the Securities Act.
E. RULE 12B-1 PLAN
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under
the Investment Company Act (the "Plan") pursuant to which each Class, other
than Class D, pays the Distributor compensation accrued daily and payable
monthly at the following annual rates: 0.25%, 0.60% and 0.70% of the average
daily net assets of Class A, Class B and Class C, respectively.
19
The Distributor also receives the proceeds of front-end sales charges
("FSCs") and of contingent deferred sales charges ("CDSCs") imposed on certain
redemptions of shares, which are separate and apart from payments made pursuant
to the Plan. The Distributor has informed the Fund that it and/or Dean Witter
Reynolds received the proceeds of CDSCs and FSCs, for the last three fiscal
years ended December 31, in approximate amounts as provided in the table below
(the Distributor did not retain any of these amounts).
1999 1998 1997
------------------- ------------------- -------------------
Class A .......... FSCs:(1) $107,818 FSCs:(1) $168,708 FSCs:(1) $ 69,207
CDSCs: $ 0 CDSCs: $ 0 CDSCs: $ 0
Class B .......... CDSCs: $274,899 CDSCs: $119,895 CDSCs: $ 10,314
Class C .......... CDSCs: $ 10,671 CDSCs: $ 6,087 CDSCs: $ 530
Class D .......... FSCs: $ 0 FSCs: $ 0 FSCs: $448,316(2)
- - ----------
(1) FSCs apply to Class A only.
(2) Prior to July 27, 1998 the Fund charged an FSC. On July 28, 1997 existing
shares of the Fund were designated Class D shares, which have no FSC.
The Distributor has informed the Fund that the entire fee payable by Class
A and a portion of the fees payable by each of Class B and Class C each year
pursuant to the Plan equal to 0.15% of the average daily net assets of Class B
and 0.25% of the average daily net assets of Class C are currently each
characterized as a "service fee" under the Rules of the National Association of
Securities Dealers, Inc. (of which the Distributor is a member). The "service
fee" is a payment made for personal service and/or the maintenance of
shareholder accounts. The remaining portion of the Plan fees payable by a
Class, if any, is characterized as an "asset-based sales charge" as such is
defined by the Rules of the Association.
Under the Plan and as required by Rule 12b-1, the Trustees receive and
review promptly after the end of each calendar quarter a written report
provided by the Distributor of the amounts expended under the Plan and the
purpose for which such expenditures were made. Class B shares of the Fund
accrued amounts payable to the Distributor under the Plan, during the fiscal
year ended December 31, 1999, of $855,483. This amount is equal to 0.60% of the
average daily net assets of Class B for the fiscal year. For the fiscal year
ended December 31, 1999, Class A and Class C shares of the Fund accrued
payments under the Plan amounting to $23,738 and $67,457, respectively, which
amounts are equal to 0.13% and 0.70% of the average daily net assets of Class A
and Class C, respectively, for the fiscal year.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method the Fund offers four
Classes, each with a different distribution arrangement.
With respect to Class A shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from proceeds of the FSC, commissions for
the sale of Class A shares, currently a gross sales credit of up to 4.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.15% of the current value
of the respective accounts for which they are the Financial Advisors or dealers
of record in all cases. On orders of $1 million or more (for which no sales
charge was paid), the Investment Manager compensates Financial Advisors by
paying them, from its own funds, a gross sales credit of 1.0% of the amount
sold.
With respect to Class B shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class B shares, currently a gross sales credit of up to 4.0% of the amount
sold and an annual residual commission, currently a residual of up to 0.15% of
the current value (not including reinvested dividends or distributions) of the
amount sold in all cases.
With respect to Class C shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class C shares, currently a gross sales credit of up to 1.0% of the amount
sold and an annual residual commission, currently up to 0.70% of the current
value of the respective accounts for which they are the Financial Advisors of
record.
20
With respect to Class D shares other than shares held by participants in
the Investment Manager's mutual fund asset allocation program, the Investment
Manager compensates Dean Witter Reynolds's Financial Advisors by paying them,
from its own funds, commissions for the sale of Class D shares, currently a
gross sales credit of up to 1.0% of the amount sold. There is a chargeback of
100% of the amount paid if the Class D shares are redeemed in the first year
and a chargeback of 50% of the amount paid if the Class D shares are redeemed
in the second year after purchase. The Investment Manager also compensates Dean
Witter Reynolds's Financial Advisors by paying them, from its own funds, an
annual residual commission, currently up to 0.10% of the current value of the
respective accounts for which they are the Financial Advisors of record (not
including accounts of participants in the Investment Manager's mutual fund
asset allocation program).
The gross sales credit is a charge which reflects commissions paid by Dean
Witter Reynolds to its Financial Advisors and Dean Witter Reynolds's
Fund-associated distribution-related expenses, including sales compensation,
and overhead and other branch office distribution-related expenses including
(a) the expenses of operating Dean Witter Reynolds's branch offices in
connection with the sale of Fund shares, including lease costs, the salaries
and employee benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies, (b) the costs of
client sales seminars, (c) travel expenses of mutual fund sales coordinators to
promote the sale of Fund shares and (d) other expenses relating to branch
promotion of Fund sales.
The Investment Manager pays a retention fee to Financial Advisors at an
annual rate of 0.05% of the value of shares of the Fund sold after January 1,
2000 and held for at least one year. Shares purchased through the reinvestment
of dividends will be eligible for a retention fee, provided that such dividends
were earned on shares otherwise eligible for a retention fee payment. Shares
owned in variable annuities, closed-end fund shares and shares held in 401(k)
plans where the Transfer Agent or Dean Witter Reynolds' Retirement Plan
Services is either recordkeeper or trustee are not eligible for a retention
fee.
For the first year only, the retention fee is paid on any shares of the
Fund sold after January 1, 2000 and held by shareholders on December 31, 2000.
The retention fees are paid by the Investment Manager from its own assets,
which may include profits from investment management fees payable under the
Management Agreement, as well as from borrowed funds.
The distribution fee that the Distributor receives from the Fund under the
Plan, in effect, offsets distribution expenses incurred under the Plan on
behalf of the Fund and, in the case of Class B shares, opportunity costs, such
as the gross sales credit and an assumed interest charge thereon ("carrying
charge"). These expenses may include the cost of Fund-related educational
and/or business-related trips or payment of Fund-related educational and/or
promotional expenses of Financial Advisors. In the Distributor's reporting of
the distribution expenses to the Fund, in the case of Class B shares, such
assumed interest (computed at the "broker's call rate") has been calculated on
the gross credit as it is reduced by amounts received by the Distributor under
the Plan and any contingent deferred sales charges received by the Distributor
upon redemption of shares of the Fund. No other interest charge is included as
a distribution expense in the Distributor's calculation of its distribution
costs for this purpose. The broker's call rate is the interest rate charged to
securities brokers on loans secured by exchange-listed securities.
The Fund is authorized to reimburse expenses incurred or to be incurred in
promoting the distribution of the Fund's Class A and Class C shares and in
servicing shareholder accounts. Reimbursement will be made through payments at
the end of each month. The amount of each monthly payment may in no event
exceed an amount equal to a payment at the annual rate of 0.25%, in the case of
Class A, and 0.70%, in the case of Class C, of the average net assets of the
respective Class during the month. No interest or other financing charges, if
any, incurred on any distribution expenses on behalf of Class A and Class C
will be reimbursable under the Plan. With respect to Class A, in the case of
all expenses other than expenses representing the service fee, and, with
respect to Class C, in the case of all expenses other than expenses
representing a gross sales credit or a residual to Financial Advisors
21
and other authorized financial representatives, such amounts shall be
determined at the beginning of each calendar quarter by the Trustees,
including, a majority of the Independent Trustees. Expenses representing the
service fee (for Class A) or a gross sales credit or a residual to Financial
Advisors and other authorized financial representatives (for Class C) may be
reimbursed without prior determination. In the event that the Distributor
proposes that monies shall be reimbursed for other than such expenses, then in
making quarterly determinations of the amounts that may be reimbursed by the
Fund, the Distributor will provide and the Trustees will review a quarterly
budget of projected distribution expenses to be incurred on behalf of the Fund,
together with a report explaining the purposes and anticipated benefits of
incurring such expenses. The Trustees will determine which particular expenses,
and the portions thereof, that may be borne by the Fund, and in making such a
determination shall consider the scope of the Distributor's commitment to
promoting the distribution of the Fund's Class A and Class C shares.
Each Class paid 100% of the amounts accrued under the Plan with respect to
that Class for the fiscal year ended December 31, 1999 to the Distributor. The
Distributor and Dean Witter Reynolds estimate that they have spent, pursuant to
the Plan, $6,742,375 on behalf of Class B since the inception of the Plan. It
is estimated that this amount was spent in approximately the following ways:
(i) 14.64% ($987,346)-advertising and promotional expenses; (ii) 0.84%
($56,477)-printing of prospectuses for distribution to other than current
shareholders; and (iii) 84.52% ($5,698,552)-other expenses, including the gross
sales credit and the carrying charge, of which 1.47% ($83,916) represents
carrying charges, 22.95% ($1,307,909) represents commission credits to Dean
Witter Reynolds branch offices and other selected broker-dealers for payments
of commissions to Financial Advisors and other authorized financial
representatives, and 32.49% ($1,851,291) represents overhead and other branch
office distribution-related expenses. The amounts accrued by Class A and a
portion of the amounts accrued by Class C under the Plan during the fiscal year
ended December 31, 1999 were service fees. The remainder of the amounts accrued
by Class C were for expenses which relate to compensation of sales personnel
and associated overhead expenses.
In the case of Class B shares, at any given time, the expenses of
distributing shares of the Fund may be more or less than the total of (i) the
payments made by the Fund pursuant to the Plan; and (ii) the proceeds of CDSCs
paid by investors upon redemption of shares. For example, if $1 million in
expenses in distributing Class B shares of the Fund had been incurred and
$750,000 had been received as described in (i) and (ii) above, the excess
expense would amount to $250,000. The Distributor has advised the Fund that in
the case of Class B shares the excess distribution expenses, including the
carrying charge designed to approximate the opportunity costs incurred by Dean
Witter Reynolds which arise from it having advanced monies without having
received the amount of any sales charges imposed at the time of sale of the
Fund's Class B shares, totaled $4,717,309 as of December 31, 1999 (the end of
the Fund's fiscal year), which was equal to 3.37% of the net assets of Class B
on such date. Of this amount, $2,455,436 represents excess distribution
expenses of Dean Witter National Municipal Trust the net assets of which were
combined with those of the Fund on November 7, 1997 pursuant to an Agreement
and Plan of Reorganization. Because there is no requirement under the Plan that
the Distributor be reimbursed for all distribution expenses with respect to
Class B shares or any requirement that the Plan be continued from year to year,
this excess amount does not constitute a liability of the Fund. Although there
is no legal obligation for the Fund to pay expenses incurred in excess of
payments made to the Distributor under the Plan and the proceeds of CDSCs paid
by investors upon redemption of shares, if for any reason the Plan is
terminated, the Trustees will consider at that time the manner in which to
treat such expenses. Any cumulative expenses incurred, but not yet recovered
through distribution fees or CDSCs, may or may not be recovered through future
distribution fees or CDSCs.
In the case of Class A and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.70% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales commission credited to Morgan Stanley Dean Witter Financial
Advisors and other authorized financial representatives at the time of sale may
be reimbursed in the subsequent calendar year. The Distributor has advised the
Fund that there were no such expenses that may be
22
reimbursed in the subsequent year in the case of Class A or Class C on December
31, 1999 (end of the calendar year). No interest or other financing charges
will be incurred on any Class A or Class C distribution expenses incurred by
the Distributor under the Plan or on any unreimbursed expenses due to the
Distributor pursuant to the Plan.
No interested person of the Fund nor any Independent Trustee has any
direct financial interest in the operation of the Plan except to the extent
that the Distributor, the Investment Manager, Dean Witter Reynolds, MSDW
Services Company or certain of their employees may be deemed to have such an
interest as a result of benefits derived from the successful operation of the
Plan or as a result of receiving a portion of the amounts expended thereunder
by the Fund.
On an annual basis, the Trustees, including a majority of the Independent
Trustees, consider whether the Plan should be continued. Prior to approving the
last continuation of the Plan, the Trustees requested and received from the
Distributor and reviewed all the information which they deemed necessary to
arrive at an informed determination. In making their determination to continue
the Plan, the Trustees considered: (1) the Fund's experience under the Plan and
whether such experience indicates that the Plan is operating as anticipated;
(2) the benefits the Fund had obtained, was obtaining and would be likely to
obtain under the Plan, including that: (a) the Plan is essential in order to
give Fund investors a choice of alternatives for payment of distribution and
service charges and to enable the Fund to continue to grow and avoid a pattern
of net redemptions which, in turn, are essential for effective investment
management; and (b) without the compensation to individual brokers and the
reimbursement of distribution and account maintenance expenses of Dean Witter
Reynolds's branch offices made possible by the 12b-1 fees, Dean Witter Reynolds
could not establish and maintain an effective system for distribution,
servicing of Fund shareholders and maintenance of shareholder accounts; and (3)
what services had been provided and were continuing to be provided under the
Plan to the Fund and its shareholders. Based upon their review, the Trustees,
including each of the Independent Trustees, determined that continuation of the
Plan would be in the best interest of the Fund and would have a reasonable
likelihood of continuing to benefit the Fund and its shareholders. In the
Trustees' quarterly review of the Plan, they will consider its continued
appropriateness and the level of compensation provided therein.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of the
affected Class or Classes of the Fund, and all material amendments to the Plan
must also be approved by the Trustees in the manner described above. The Plan
may be terminated at any time, without payment of any penalty, by vote of a
majority of the Independent Trustees or by a vote of a majority of the
outstanding voting securities of the Fund (as defined in the Investment Company
Act) on not more than thirty days' written notice to any other party to the
Plan. So long as the Plan is in effect, the election and nomination of
Independent Trustees shall be committed to the discretion of the Independent
Trustees.
F. OTHER SERVICE PROVIDERS
(1) TRANSFER AGENT/DIVIDEND-PAYING AGENT
Morgan Stanley Dean Witter Trust FSB is the Transfer Agent for the Fund's
shares and the Dividend Disbursing Agent for payment of dividends and
distributions on Fund shares and Agent for shareholders under various
investment plans. The principal business address of the Transfer Agent is
Harborside Financial Center, Plaza Two, Jersey City, NJ 07311.
(2) CUSTODIAN AND INDEPENDENT ACCOUNTANTS
The Bank of New York, 100 Church Street, New York, NY 10007 is the
Custodian of the Fund's assets. Any of the Fund's cash balances with the
Custodian in excess of $100,000 are unprotected by federal deposit insurance.
These balances may, at times, be substantial.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, NY
10036, serves as the independent accountants of the Fund. The independent
accountants are responsible for auditing the annual financial statements of the
Fund.
23
(3) AFFILIATED PERSONS
The Transfer Agent is an affiliate of the Investment Manager, and of the
Distributor. As Transfer Agent and Dividend Disbursing Agent, the Transfer
Agent'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, the Transfer Agent receives a per shareholder account fee from the
Fund and is reimbursed for its out-of-pocket expenses in connection with such
services.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
- - --------------------------------------------------------------------------------
A. BROKERAGE TRANSACTIONS
Subject to the general supervision of the Board of Trustees, the
Investment Manager is responsible for decisions to buy and sell securities for
the Fund, the selection of brokers and dealers to effect the transactions, and
the negotiation of brokerage commissions, if any. Purchases and sales of
securities on a stock exchange are effected through brokers who charge a
commission for their services. The Fund expects that the primary market for the
securities in which it intends to invest will generally be the over-the-counter
market. In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a profit
to the dealer. The Fund 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. Options and
futures transactions will usually be effected through a broker and a commission
will be charged. On occasion, the Fund may also purchase certain money market
instruments directly from an issuer, in which case no commissions or discounts
are paid.
For the fiscal years ended December 31, 1997, 1998 and 1999, the Fund paid
no brokerage commissions.
B. COMMISSIONS
Pursuant to an order of the SEC, the Fund may effect principal
transactions in certain money market instruments with Dean Witter Reynolds. The
Fund will limit its transactions with Dean Witter Reynolds to U.S. Government
and government agency securities, bank money instruments (i.e., certificates of
deposit and bankers' acceptances) and commercial paper. The transactions will
be effected with Dean Witter Reynolds only when the price available from Dean
Witter Reynolds is better than that available from other dealers.
During the fiscal years ended December 31, 1997, 1998 and 1999, the Fund
did not effect any principal transactions with Dean Witter Reynolds.
Brokerage transactions in securities listed on exchanges or admitted to
unlisted trading privileges may be effected through Dean Witter Reynolds,
Morgan Stanley & Co. and other affiliated brokers and dealers. In order for an
affiliated broker or dealer to effect any portfolio transactions on an exchange
for the Fund, the commissions, fees or other remuneration received by the
affiliated broker or dealer must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection
with comparable transactions involving similar securities being purchased or
sold on an exchange during a comparable period of time. This standard would
allow the affiliated broker or dealer to receive no more than the remuneration
which would be expected to be received by an unaffiliated broker in a
commensurate arm's-length transaction. Furthermore, the Trustees, including the
Independent Trustees, have adopted procedures which are reasonably designed to
provide that any commissions, fees or other remuneration paid to an affiliated
broker or dealer are consistent with the foregoing
24
standard. The Fund does not reduce the management fee it pays to the Investment
Manager by any amount of the brokerage commissions it may pay to an affiliated
broker or dealer.
During the fiscal years ended December 31, 1997, 1998 and 1999, the Fund
did not effect any securities transactions through any affiliated brokers or
dealers.
C. BROKERAGE SELECTION
The policy of the Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions 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 possible 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. These
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 are capable of providing
efficient executions. If the Investment Manager believes the prices and
executions are obtainable from more than one broker or dealer, it may give
consideration to placing portfolio transactions with those brokers and dealers
who also furnish research and other services to the Fund or the Investment
Manager. The 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.
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 advisor to others. It is the practice of the Investment
Manager to cause purchase and sale transactions to be allocated among the Fund
and others whose assets it manages in such manner as it deems equitable. In
making such allocations among the Fund and other client accounts, various
factors may be considered, including the respective investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held and the opinions of the persons responsible for managing the
portfolios of the Fund and other client accounts. In the case of certain
initial and secondary public offerings, the Investment Manager utilizes a pro
rata allocation process based on the size of the Morgan Stanley Dean Witter
Funds involved and the number of shares available from the public offering.
D. DIRECTED BROKERAGE
During the fiscal year ended December 31, 1999, the Fund did not pay any
brokerage commissions to brokers because of research services provided.
E. REGULAR BROKER-DEALERS
During the fiscal year ended December 31, 1999, the Fund did not purchase
securities issued by brokers or dealers that were among the ten brokers or the
ten dealers that executed transactions for or with the Fund in the largest
dollar amounts during the year. As of December 31, 1999, the Fund did not own
any securities issued by any of such issuers.
25
VII. CAPITAL STOCK AND OTHER SECURITIES
- - --------------------------------------------------------------------------------
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. All shares of beneficial interest of
the Fund are of $0.01 par value and are equal as to earnings, assets and voting
privileges except that each Class will have exclusive voting privileges with
respect to matters relating to distribution expenses borne solely by such Class
or any other matter in which the interests of one Class differ from the
interests of any other Class. In addition, Class B shareholders will have the
right to vote on any proposed material increase in Class A's expenses, if such
proposal is submitted separately to Class A shareholders. Also, Class A, Class
B and Class C bear expenses related to the distribution of their respective
shares.
The Fund's Declaration of Trust permits the Trustees to authorize the
creation of additional series of shares (the proceeds of which would be
invested in separate, independently managed portfolios) and additional Classes
of shares within any series. The Trustees have not presently authorized any
such additional series or Classes of shares other than as set forth in the
Prospectus.
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 Investment Company Act or the Declaration of
Trust. Under certain circumstances, the Trustees may be removed by the actions
of the Trustees. In addition, under certain circumstances, the shareholders may
call a meeting to remove the Trustees and the Fund is required to provide
assistance in communicating with shareholders about such a meeting. 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.
Under Massachusetts law, shareholders of a business trust may, under
certain limited 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 notice of such Fund obligations include such disclaimer, and
provides for indemnification out of the Fund's property for any shareholder
held personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability, and
the nature of the Fund's assets and operations, the possibility of the Fund
being unable to meet its obligations is remote and thus, in the opinion of
Massachusetts counsel to the Fund, the risk to Fund shareholders of personal
liability is remote.
All of the Trustees have been elected by the shareholders of the Fund,
most recently at a Special Meeting of Shareholders held on May 21, 1997. 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.
VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
- - --------------------------------------------------------------------------------
A. PURCHASE/REDEMPTION OF SHARES
Information concerning how Fund shares are offered to the public (and how
they are redeemed and exchanged) is provided in the Fund's Prospectus.
In the case of Class B shares of the Fund issued in exchange for shares of
Dean Witter National Municipal Trust ("National Municipal") in connection with
the reorganization of National Municipal with the Fund on November 7, 1997
pursuant to an Agreement and Plan of Reorganization (the "Reorganization"),
that were subject to the lower CDSC schedule of National Municipal (as
described below), will continue to be subject to that lower CDSC schedule
unless (i) such shares are subsequently exchanged
26
for shares of a fund with a higher CDSC schedule or (ii) having been exchanged
for shares of Morgan Stanley Dean Witter North American Government Income
Trust, Morgan Stanley Dean Witter Global Short-Term Income Fund Inc. or Morgan
Stanley Dean Witter Short-Term U.S. Treasury Trust, Morgan Stanley Dean Witter
Limited Term Municipal Trust, Morgan Stanley Dean Witter Short-Term Bond Fund,
and the five Morgan Stanley Dean Witter funds which are money market funds (the
"Exchange Funds") are re-exchanged back into the Fund. Under such
circumstances, the CDSC schedule applicable to shares of the fund with the
higher CDSC schedule acquired in the exchange will apply to redemptions of such
fund's shares or, in the case of shares of any of the Exchange Funds acquired
in an exchange and then subsequently re-exchanged back into the Fund, the CDSC
schedule set forth in the above table will apply to redemptions of any of such
shares. The CDSC schedule applicable to National Municipal was as follows:
Shares held for three years or more after purchase (calculated as described in
the paragraph above) are not subject to any CDSC upon redemption. However,
shares redeemed earlier than three years after purchase may be subject to a
CDSC (calculated as described in the paragraph above), the percentage of which
depends on how long the shares have been held, as set forth in the following
table:
Year Since CDSC as a Percentage
Purchase Payment Made of Amount Redeemed
- - ------------------------------- ---------------------
First ........................................ 3.0%
Second ....................................... 2.0%
Third ........................................ 1.0%
Fourth and thereafter ........................ None
Transfer Agent as Agent. With respect to the redemption or repurchase of
Fund shares, the application of proceeds to the purchase of new shares in the
Fund or any other Morgan Stanley Dean Witter Funds and the general
administration of the exchange privilege, the Transfer Agent acts as agent for
the Distributor and for the shareholder's authorized 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 authorized broker-dealer.
The Distributor and any authorized broker-dealer have 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 Morgan Stanley Dean Witter Fund and the general administration of the
exchange privilege. No commission or discounts will be paid to the Distributor
or any authorized broker-dealer for any transaction pursuant to the exchange
privilege.
Transfers of Shares. In the event a shareholder requests a transfer of
Fund shares to a new registration, the shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the CDSC or free of such charge (and with regard to the
length of time shares subject to the charge have been held), any transfer
involving less than all of the shares in an account will be made on a pro rata
basis (that is, by transferring shares in the same proportion that the
transferred shares bear to the total shares in the account immediately prior to
the transfer). The transferred shares will continue to be subject to any
applicable CDSC as if they had not been so transferred.
B. Offering Price
The Fund's Class B, Class C and Class D shares are offered at net asset
value per share and the Class A shares are offered at net asset value per share
plus any applicable FSC which is distributed
27
among the Fund's Distributor, Dean Witter Reynolds and other authorized dealers
as described in Section "V. Investment Management and Other Services - E. Rule
12b-1 Plan."
The price of Fund shares, called "net asset value," is based on the value
of the Fund's portfolio securities. Net asset value per share of each Class is
calculated by dividing the value of the portion of the Fund's securities and
other assets attributable to that Class, less the liabilities attributable to
that Class, by the number of shares of that Class outstanding. The assets of
each Class of shares are invested in a single portfolio. The net asset value of
each Class, however, will differ because the Classes have different ongoing
fees.
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 Trustees. The pricing service has informed the Fund that in
valuing the portfolio securities for the Fund 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 portfolio securities for
the Fund 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 Trustees believe
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 Trustees the use of other pricing services or discontinuance
of the use of any pricing service in whole or part. The Trustees may determine
to approve such recommendation or take other provisions for pricing of the
portfolio securities for the Fund.
Short-term taxable debt securities with remaining maturities of 60 days or
less at time of purchase are valued at amortized cost, unless the Trustees
determine such does not reflect the securities' market value, in which case
these securities will be valued at their fair value as determined by the
Trustees. Other taxable short-term debt securities with maturities of more than
60 days will be valued on a market 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 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 Trustees determine
that such price does not reflect their market value, in which case they will be
valued at their fair value as determined in good faith under procedures
established by and under the supervision of the 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 Trustees.
IX. TAXATION OF THE FUND AND SHAREHOLDERS
- - --------------------------------------------------------------------------------
The Fund generally will make three basic types of distributions: tax
exempt dividends, ordinary dividends and long-term capital gain distributions.
These types of distributions are reported differently on a shareholder's income
tax return and they are also subject to different rates of tax. The tax
treatment of the investment activities of the Fund will affect the amount and
timing and character of the distributions made by the Fund. Shareholders are
urged to consult their own tax professionals regarding specific questions as to
federal, state or local taxes.
INVESTMENT COMPANY TAXATION. The Fund intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986. As such, the Fund will not be subject to federal income tax on its net
investment income and capital gains, if any, to the extent that it distributes
such income and capital gains to its shareholders.
28
The Fund generally intends to distribute sufficient income and gains so
that the Fund will not pay corporate income tax on its earnings. The Fund also
generally intends to distribute to its shareholders in each calendar year a
sufficient amount of ordinary income and capital gains to avoid the imposition
of a 4% excise tax. However, the Fund may instead determine to retain all or
part of any ordinary income or capital gains in any year for reinvestment. In
such event, the Fund will pay federal income tax (and possibly excise tax) on
such retained gains.
Gains or losses on sales of securities by the Fund will be long-term
capital gains or losses if the securities have a tax holding period of more
than one year. Gains or losses on the sale of securities with a tax holding
period of one year or less will be short-term gains or losses.
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.
All or a portion of any gain from tax-exempt obligations purchased at a
market discount may be treated as ordinary income rather than capital gain.
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.
TAXATION OF DIVIDENDS AND DISTRIBUTIONS. The Fund intends to qualify to
pay "exempt-interest dividends" to its shareholders by maintaining, as of the
close of each quarter end 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.
The Fund intends to invest a portion of its assets in certain "private
activity bonds". As a result, a portion of the exempt-interest dividends paid
by the Fund will be an item of tax preference to shareholders subject to the
alternative minimum tax. Certain corporations which are subject to the
alternative minimum tax may also have to include 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.
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 income of the Fund 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.
Shareholders are generally taxed on any ordinary dividend or capital gain
distributions from the Fund in the year they are actually distributed. However,
if any such dividends or distributions are declared in October, November or
December and paid in January then such amounts will be treated for tax purposes
as received by the shareholders on December 31, to shareholders of record of
such month.
Shareholders who are not citizens or residents of the United States and
certain foreign entities may be subject to withholding of United States tax on
distributions made by the Fund of any taxable interest income and short term
capital gains.
After the end of each calendar year, shareholders will be sent full
information on their dividends and capital gain distributions for tax purposes,
including the portion taxable as ordinary income, the portion taxable as
long-term capital gains and the percentage of any distributions which
constitute an item of tax preference for purposes of the alternative minimum
tax.
29
PURCHASES AND REDEMPTIONS AND EXCHANGES OF FUND SHARES. Any dividend or
capital gains distribution received by a shareholder from the Fund will have
the effect of reducing the net asset value of the shareholder's stock in the
Fund by the exact amount of the dividend or capital gains distribution.
Furthermore, capital gains distributions and some portion of the dividends may
be subject to federal income taxes. If a shareholder of the Fund receives
exempt-interest dividends with respect to any share and if such share is held
by the shareholder for six months or less, then any loss on the sale or
exchange of such share may, to the extent of such exempt-interest dividends, be
disallowed. If the net asset value of the shares should be reduced below a
shareholder's cost as a result of the payment of dividends or the distribution
of realized long-term capital gains, such payment or distribution would be in
part a return of the shareholder's investment but nonetheless would be taxable
to the shareholder. Therefore, an investor should consider the tax implications
of purchasing shares of the Fund immediately prior to a distribution record
date.
In general, a sale of shares results in capital gain or loss, and for
individual shareholders, is taxable at a federal rate dependent upon the length
of time the shares were held. A redemption of a shareholder's shares is
normally treated as a sale for tax purposes. Shares of the Fund held for a
period of one year or less will, for tax purposes, generally result in
short-term gains or losses and those held for more than one year generally
result in long-term gain or loss. Under current law, the maximum tax rate on
long-term capital gains realized by individual shareholders is 20%. Any loss
realized by shareholders upon a sale or redemption of shares within six months
of the date of their purchase will be treated as a long-term capital loss to
the extent of any distributions of net long-term capital gains with respect to
such shares during the six-month period.
Gain or loss on the sale or redemption of shares in the Fund is measured
by the difference between the amount received and the tax basis of the shares.
Shareholders should keep records of investments made (including shares acquired
through reinvestment of dividends and distributions) so they can compute the
tax basis of their shares. Under certain circumstances a shareholder may
compute and use an average cost basis in determining the gain or loss on the
sale or redemption of shares.
Exchanges of shares in the Fund for shares of other Morgan Stanley Dean
Witter Funds, are also subject to similar tax treatment. Such an exchange is
treated for tax purposes as a sale of the original shares in the Fund, followed
by the purchase of shares in the Fund.
If a shareholder realizes a loss on the redemption or exchange of a shares
in the Fund and reinvests in shares of the Fund within 30 days before or after
the redemption or exchange, the transactions may be subject to the "wash sale"
rules, resulting in a postponement of the recognition of such loss for tax
purposes.
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 Treasury Regulation
Section 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.
X. UNDERWRITERS
- - --------------------------------------------------------------------------------
The Fund's shares are offered to the public on a continuous basis. The
Distributor, as the principal underwriter of the shares, has certain
obligations under the Distribution Agreement concerning the distribution of the
shares. These obligations and the compensation the Distributor receives are
described above in the sections titled "Principal Underwriter" and "Rule 12b-1
Plans."
XI. CALCULATION OF PERFORMANCE DATA
- - --------------------------------------------------------------------------------
From time to time the Fund may quote its "yield" and/or its "total return"
in advertisements and sales literature. These figures are computed separately
for Class A, Class B, Class C and Class D shares.
Prior to July 28, 1997, the Fund offered only one Class of shares subject
to a maximum sales charge of 4.0% and no 12b-1 fee. Because the distribution
arrangement for Class A most closely resembles the
30
distribution arrangement applicable prior to the implementation of multiple
classes (i.e. Class A is sold with a front-end sales charge), historical
performance information has been restated to reflect (i) the actual maximum
sales charges applicable to Class A (i.e., 4.25%) and (ii) the ongoing 12b-1
fee applicable to Class A Shares. Furthermore, because all shares of the Fund
held prior to July 28, 1997 have been designated Class D shares, the Fund's
historical performance has also been restated to reflect the absence of any
sales charge in the case of Class D shares. Following the restated performance
information for Class A and Class D is the actual performance of the Fund based
on its original, single class sales charge structure as of its last fiscal
year. Also set forth below is the actual performance of Class B and Class C as
of their last fiscal year.
Yield is calculated for any 30-day period as follows: the amount of
interest income for each security in the Fund's portfolio is determined in
accordance with regulatory requirements; the total for the entire portfolio
constitutes the Fund's gross income for the period. Expenses accrued during the
period are subtracted to arrive at "net investment income" of each Class. The
resulting amount is divided by the product of the maximum offering price per
share on the last day of the period, multiplied by the average number of shares
of the applicable Class outstanding during the period that were entitled to
dividends. This amount is added to 1 and raised to the sixth power. 1 is then
subtracted from the result and the difference is multiplied by 2 to arrive at
the annualized yield. For the 30-day period ended December 31, 1999, the yield,
calculated pursuant to the formula described above, was approximately 4.66%,
4.51%, 4.42% and 5.12% for Class A, Class B, Class C and Class D, respectively.
The Fund may also quote a "tax-equivalent yield" for each Class 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 yield for Class A, Class B, Class C and Class D shares, based
upon a Federal personal income tax bracket of 39.60% (the highest current
individual marginal tax rate), for the 30-day period ended December 31, 1999
were 7.72%, 7.47%, 7.32% and 8.48% respectively, based upon the yield quoted
above.
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 operations, if
shorter than any of the foregoing. The ending redeemable value is reduced by
any contingent deferred sales charge ("CDSC") at the end of the one, five, ten
year or other period. For the purpose of this calculation, it is assumed that
all dividends and distributions are reinvested. The formula for computing the
average annual total return involves a percentage obtained by dividing the
ending redeemable value by the amount of the initial investment (which in the
case of Class A shares is reduced by the Class A initial sales charge), taking
a root of the quotient (where the root is equivalent to the number of years in
the period) and subtracting 1 from the result. The average annual total returns
of the Class A and Class D shares of the Fund for the year ended December 31,
1999 were -6.95% and -2.71%, respectively; the restated average annual total
returns for the five years ended December 31, 1999 were 5.27% and 6.42%,
respectively; and the restated average annual total returns for the ten years
ended December, 1999 were 5.73% and 6.44%, respectively. The average annual
total returns of Class B for the fiscal year ended December 31, 1999 and for
the period July 28, 1997 (inception of the Class) through December 31, 1999
were -7.86% and 1.19%, respectively. The average annual total returns of Class
C for the fiscal year ended December 31, 1999 and for the period July 28, 1997
(inception of the Class) through December 31, 1999 were -4.29% and 2.09%,
respectively.
In addition, the Fund may advertise its total return for each Class over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. These calculations may or may not reflect the
imposition of the maximum front-end sales charge for Class A or the deduction
of the CDSC for each of Class B and Class C which, if reflected, would reduce
the performance quoted. For example, the average annual total return of the
Fund may be calculated in the manner described above, but without deduction for
any applicable sales charge. Based on the foregoing calculation, the Fund's
average annual total return for Class A shares for the year ended December 31,
1999 was -2.82% and the restated average annual total return for the five years
ended December 31, 1999 was 6.19% and the
31
restated average annual total return for the ten years ended December 31, 1999
was 6.19%. Because the Class D shares are not subject to any sales charge, the
Fund would only advertise average annual returns as calculated in the previous
paragraph. The average annual total returns of Class B for the fiscal year
ended December 31, 1999 and for the period July 28, 1997 through December 31,
1999 were -3.25% and 2.31%, respectively. The average annual total returns of
Class C for the fiscal year ended December 31, 1999 and for the period July 28,
1997 through December 31, 1999 were -3.37% and 2.09%, respectively.
In addition, the Fund may compute its aggregate total return for each
Class for specified periods by determining the aggregate percentage rate which
will result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is assumed
that all dividends and distributions are reinvested. The formula for computing
aggregate total return involves a percentage obtained by dividing the ending
value (without reduction for any sales charge) by the initial $1,000 investment
and subtracting 1 from the result. Based on the foregoing calculation, the
Fund's total returns for Class A and Class D shares for the year ended December
31, 1999 were -2.82% and -2.71%, respectively, the restated total returns for
the five years ended December 31, 1999 were 35.03% and 36.51%, and the restated
total returns for the ten years ended December 31, 1999 were 82.35% and 86.65%.
Based on the foregoing calculation, the Fund's total returns for Class B and
Class C shares for the year ended December 31, 1999 were -3.25% and -3.37%,
respectively, the total returns for the period July 28, 1997 through December
31, 1999 were 5.70% and 5.15%, respectively.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in each Class of shares of the Fund by adding 1
to the Fund's aggregate total return to date (expressed as a decimal and
without taking into account the effect of any applicable CDSC) and multiplying
by $9,575, $48,250 and $97,250 in the case of Class A (investments of $10,000,
$50,000 and $100,000 adjusted for the initial sales charge) or by $10,000,
$50,000 and $100,000 in the case of each of Class B, Class C and Class D, as
the case may be. Investments of $10,000, $50,000 and $100,000 in each Class at
inception of the Class would have grown to the following amounts at December
31, 1999:
INVESTMENT AT INCEPTION OF:
-------------------------------------
INCEPTION
CLASS DATE: $10,000 $50,000 $100,000
- - ----------------- ----------------- --------- ----------- -----------
Class A ......... 03/27/80(1) $48,187 $242,823 $489,420
Class B ......... 07/28/97 10,570 52,850 105,700
Class C ......... 07/28/97 10,515 52,575 105,150
Class D ......... 03/27/80 52,775 263,875 527,750
- - ----------
(1) For purposes of restating the performance of Class A, the inception date
set forth in the above table is the inception date of the Fund. However,
Class A did not actually commence operation until July 28, 1997.
All shares of the Fund held prior to July 28, 1997 were designated Class D
shares and accordingly, the actual performance numbers set forth below
represent the actual performance of the continuing Class D. The actual average
annual total returns of the Fund, calculated with the deduction of maximum
applicable sales charge described above, for the five years ended December 31,
1999 and for the ten years ended December 31, 1999 were 5.56% and 6.01%,
respectively. The actual average annual total returns of the Fund calculated
without the deduction for any applicable sales charge for the five years ended
December 31, 1999 and for the ten years ended December 31, 1999, were 6.42% and
6.44%, respectively. The Fund's actual aggregate total return, without the
deduction for any application sales charge for the five years ended December
31, 1999 was 36.51% and the actual total return for the ten years ended
December 31, 1999 was 86.65%. Investments of $10,000, $50,000 and $100,000,
adjusted for the sales charges in effect at such time (4.0%, 3.25% or 2.75%,
respectively), in the Fund at inception would have grown to $50,664, $255,299
and $513,237, respectively, at December 31, 1999.
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by recognized organizations.
32
XII. FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
EXPERTS. The financial statements of the Fund for the fiscal year ended
December 31, 1999 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 PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
* * * * *
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 SEC. The complete Registration Statement may be obtained from
the SEC.
33
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PORTFOLIO OF INVESTMENTS December 31, 1999
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- - ------------- -------- ---------- ---------------
TAX-EXEMPT MUNICIPAL BONDS (90.1%)
General Obligation (14.5%)
North Slope Borough, Alaska,
$ 5,000 Ser 1992 A Conv (MBIA) ...................................................... 5.90% 06/30/03 $ 5,181,450
15,000 Ser 1994 B (FSA) ............................................................ 0.00 06/30/05 11,304,150
15,000 Ser 1995 A (MBIA) ........................................................... 0.00 06/30/06 10,676,400
10,000 Ser 1996 B (MBIA) ........................................................... 0.00 06/30/06 7,117,600
10,000 Ser 1996 B (MBIA) ........................................................... 0.00 06/30/07 6,715,500
9,500 Ser 1999 A (MBIA) ........................................................... 0.00 06/30/10 5,314,015
4,000 Connecticut, College Savings 1989 Ser A ...................................... 0.00 07/01/08 2,553,640
Florida Board of Education, Capital Outlay
5,000 Refg Ser 1999 B (MBIA) ...................................................... 4.50 06/01/24 3,927,000
5,000 Ser 1998 A .................................................................. 4.75 06/01/28 4,008,500
20,000 Massachusetts, Refg 1996 Ser A (AMBAC) ....................................... 6.00 11/01/10 21,195,199
4,000 Clark County, Nevada, Transportation Ser 1992 A (AMBAC) ...................... 6.50 06/01/17 4,295,040
New York City, New York,
1,500 1995 Ser D (MBIA) ........................................................... 6.20 02/01/07 1,598,640
1,925 1990 Ser D .................................................................. 6.00 08/01/07 1,927,522
1,545 1990 Ser D .................................................................. 6.00 08/01/08 1,547,024
North Carolina,
10,000 1997 Ser A .................................................................. 5.20 03/01/16 9,400,100
8,000 Public School Building, Ser 1999 ............................................ 4.60 04/01/17 6,782,960
10,000 South-Western City School District, Ohio, Ser 1999 (AMBAC) ................... 4.75 12/01/19 8,354,000
10,000 Pennsylvania, First Ser 1995 (FGIC) .......................................... 5.50 05/01/12 10,032,300
4,000 Shelby County, Tennessee, Refg 1995 Ser A .................................... 5.625 04/01/14 3,997,680
20,000 King County, Washington, Ltd Tax 1995 (MBIA) ................................. 6.00 01/01/23 19,633,400
2,000 Washington, Ser 1994 A ....................................................... 5.80 09/01/08 2,056,160
---------- --------------
171,470 147,618,280
---------- --------------
Educational Facilities Revenue (3.9%)
10,000 Indiana University, Student Fee Ser K (MBIA) ................................. 5.875 08/01/20 9,749,000
4,000 Maryland State Health & Educational Facilities Authority,
The Johns Hopkins University Refg Ser 1998 ................................... 5.125 07/01/20 3,582,480
7,000 Massachusetts Health & Educational Facilities Authority, Boston University
1991 Ser K & L (MBIA) ........................................................ 6.66 10/01/31 7,261,660
5,000 Missouri Health & Educational Facilities Authority, Washington University
Ser 1998 A ................................................................... 4.75 11/15/37 3,807,050
2,000 New Jersey Economic Development Authority, The Seeing Eye Inc 1991 ........... 7.30 04/01/11 2,046,560
8,000 New Jersey Educational Facilities Authority, Princeton University
Ser 1999 A ................................................................... 4.75 07/01/25 6,576,320
5,000 New York State Dormitory Authority, State University Ser 1989 B .............. 0.00 05/15/02 4,458,600
2,000 Ohio State University, General Receipts, Ser 1999 A .......................... 5.80 12/01/29 1,923,120
---------- --------------
43,000 39,404,790
---------- --------------
See Notes to Financial Statements
34
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Portfolio of Investments December 31, 1999, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- - ------------- -------- ---------- ---------------
Electric Revenue (14.0%)
$ 25,000 Salt River Project Agricultural Improvement & Power District, Arizona,
Refg 1993 Ser C (Secondary MBIA) .......................................... 5.50% 01/01/10 $ 25,559,500
10,000 Sacramento Municipal Utility District, California, Refg 1994 Ser I (MBIA) .. 5.75 01/01/15 10,060,400
10,000 Municipal Electric Authority of Georgia, Ser Y (Secondary MBIA) ............ 6.50 01/01/17 10,739,000
5,000 Long Island Power Authority, New York, Ser 1998 A (FSA) .................... 5.125 12/01/22 4,368,800
Puerto Rico Electric Power Authority,
1,500 Power Ser X ............................................................... 6.00 07/01/15 1,518,030
15,000 Power Ser O ............................................................... 0.00 07/01/17 5,267,700
5,000 Power Ser EE (MBIA) ....................................................... 4.50 07/01/18 4,139,400
15,000 South Carolina Public Service Authority, 1995 Refg Ser A (AMBAC) ........... 6.25 01/01/22 15,028,050
710 Austin, Texas, Combined Utilities Refg Ser 1994 (FGIC) ..................... 6.25 05/15/16 725,301
20,000 Lower Colorado River Authority, Texas, Refg Ser 1999 A ..................... 5.50 05/15/21 18,531,000
San Antonio, Texas, Electric & Gas
13,000 Refg Ser 1994 C ........................................................... 4.70 02/01/06 12,756,900
5,000 Refg Ser 1998 A ........................................................... 4.50 02/01/21 3,928,100
Intermountain Power Agency, Utah,
5,000 Refg Ser 1998 A (MBIA) .................................................... 5.25 07/01/15 4,687,300
10,000 Refg 1997 Ser B (MBIA) .................................................... 5.75 07/01/19 9,681,400
15,000 Washington Public Power Supply System, Proj #2 Refg Ser 1994 A
----------
(Secondary MBIA) .......................................................... 6.00 07/01/07 15,794,550
155,210 --------------
---------- 142,785,431
Hospital Revenue (3.8%) --------------
Rochester, Minnesota,
5,000 Mayo Foundation/Medical Center Ser 1992 I ................................. 5.75 11/15/21 4,860,300
3,700 Mayo Foundation/Medical Center Ser 1992 F ................................. 6.25 11/15/21 3,733,596
10,000 Missouri Health & Educational Facilities Authority, Barnes-Jewish Inc/
Christian Health Services Ser 1993 A ...................................... 5.25 05/15/14 9,480,300
1,300 New Hampshire Higher Educational & Health Facilities Authority,
St Joseph Hospital Ser 1994 (Connie Lee) .................................. 6.35 01/01/07 1,368,406
6,000 New York State Medical Care Facilities Finance Agency, Presbyterian
Hospital - FHA Insured Mtge Ser 1994 A .................................... 5.25 08/15/14 5,738,220
5,000 North Central Texas Health Facilities Development Corporation, University
Medical Center Inc Ser 1997 (FSA) ......................................... 5.45 04/01/15 4,736,800
10,000 Fredericksburg Industrial Development Authority, Virginia, Medicorp
----------
Health Refg Ser 1996 (AMBAC) .............................................. 5.25 06/15/16 9,153,800
41,000 --------------
---------- 39,071,422
Industrial Development/Pollution Control Revenue (4.1%) --------------
1,500 Hawaii Department of Budget & Finance, Hawaiian Electric Co
Ser 1995 A (AMT) (MBIA) ................................................... 6.60 01/01/25 1,549,665
10,000 Clark County, Nevada, Nevada Power Co Ser 1992 A (AMT) (FGIC) .............. 6.70 06/01/22 10,233,600
5,000 Washoe County, Nevada, Sierra Pacific Power Co Ser 1987 (AMBAC) ............ 6.30 12/01/14 5,156,900
5,000 Alliance Airport Authority, Texas, AMR Corp Ser 1990 (AMT) ................. 7.50 12/01/29 5,154,600
See Notes to Financial Statements
35
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Portfolio of Investments December 31, 1999, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- - ------------- -------- ---------- ---------------
$ 10,000 Dallas-Fort Worth International Airport Facility Improvement Corporation,
Texas, American Airlines Inc Ser 1995 ....................................... 6.00% 11/01/14 $ 9,477,500
10,000 Weston, Wisconsin, Wisconsin Public Service Co Refg Ser 1993 A ............... 6.90 02/01/13 10,794,900
---------- --------------
41,500 42,367,165
---------- --------------
Mortgage Revenue - Multi-Family (2.3%)
880 Massachusetts Housing Finance Agency, Rental 1994 Ser A (AMT)
(AMBAC) ..................................................................... 6.65 07/01/19 905,177
5,560 Michigan Housing Development Authority, Rental 1992 Ser A
(Bifurcated FSA) ............................................................ 6.50 04/01/23 5,796,133
9,000 New Jersey Housing & Mortgage Finance Agency, 1995 Ser A (AMBAC) ............. 6.05 11/01/20 8,894,160
New York City Housing Development Corporation, New York,
4,260 Ruppert Proj - FHA Ins Sec 223F ............................................. 6.50 11/15/18 4,302,400
4,114 Stevenson Commons Proj - FHA Ins Sec 223F ................................... 6.50 05/15/18 4,154,020
---------- --------------
23,814 24,051,890
---------- --------------
Mortgage Revenue - Single Family (6.6%)
7,000 Alaska Housing Finance Corporation, Governmental 1995 Ser A (MBIA) ........... 5.875 12/01/24 6,781,740
2,440 California Housing Finance Agency, Home Cap Apprec 1983 Ser B ................ 0.00 08/01/15 496,686
Colorado Housing & Finance Authority,
2,000 1998 Ser A-2 (AMT) .......................................................... 6.60 05/01/28 2,024,320
2,500 1997 Ser C-2 (AMT) .......................................................... 6.875 11/01/28 2,617,225
12,100 Illinios Housing Development Authority, Residential 1991 Ser C (AMT) ......... 6.875 02/01/18 12,468,929
Missouri Housing Development Commission, Homeownership
3,020 GNMA/FNMA Collateralized 1996 Ser C (AMT) ................................... 7.45 09/01/27 3,210,411
3,910 GNMA/FNMA Collateralized 1997 Ser C-1 ....................................... 6.55 09/01/28 4,049,274
2,800 Nebraska Investment Finance Authority, GNMA-Backed 1990 (AMT) ................ 7.631 09/10/30 2,884,140
3,450 Ohio Housing Finance Agency, GNMA-Backed 1991 Ser A 1 & 2 (AMT) .............. 6.903 03/01/31 3,550,844
10,000 Pennsylvania Housing Finance Agency, Ser 1991-31 C (AMT) ..................... 7.00 10/01/23 10,366,800
Tennessee Housing Development Agency,
3,955 Mortgage Finance 1993 Ser A ................................................. 5.90 07/01/18 3,919,880
1,000 Mortgage Finance 1994 Ser B (AMT) ........................................... 6.55 07/01/19 1,009,990
10,785 Mortgage Finance 1993 Ser A ................................................. 5.95 07/01/28 10,454,440
275 Utah Housing Finance Agency, Fed Ins/Guaranteed Loans 1994 Issue E
(AMT) ....................................................................... 6.50 07/01/26 277,852
2,800 Wisconsin Housing & Economic Development Authority, Home Ownership
----------
1991 Ser (AMT) .............................................................. 7.097 10/25/22 2,899,568
68,035 --------------
---------- 67,012,099
Public Facilities Revenue (1.1%) --------------
2,000 North City West School Facilities Authority, California, Community Dist #1
Special Tax Ser 1995 B (FSA) ................................................ 6.00 09/01/19 1,997,520
3,500 Denver, Colorado, Excise Tax Ser 1985 A (Secondary FSA) ...................... 5.00 11/01/08 3,468,500
5,000 Ohio Building Authority, 1985 Ser C .......................................... 9.75 10/01/05 6,102,150
---------- --------------
10,500 11,568,170
---------- --------------
See Notes to Financial Statements
36
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Portfolio of Investments December 31, 1999, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- - ------------- -------- ---------- -----------------
Recreational Facilities Revenue (0.3%)
Metropolitan Football Stadium District, Colorado,
$ 4,000 Sales Tax Ser 1999 A (MBIA) ........................................... 0.00% 01/01/10 $ 2,300,240
2,000 Sales Tax Ser 1999 A (MBIA) ........................................... 0.00 01/01/12 1,010,600
---------- --------------
6,000 3,310,840
---------- --------------
Resource Recovery Revenue (1.7%)
7,000 Savannah Resource Recovery Development Authority, Georgia, Savannah
Energy Systems Co Ser 1992 ............................................. 6.30 12/01/06 7,228,970
10,000 Northeast Maryland Waste Disposal Authority, Montgomery County
----------
Ser 1993 A (AMT) ....................................................... 6.30 07/01/16 10,116,400
--------------
17,000 17,345,370
---------- --------------
Transportation Facilities Revenue (16.0%)
5,000 San Francisco Bay Area Rapid Transit District, California, Sales Tax
Ser 1998 (AMBAC) ....................................................... 4.75 07/01/23 4,130,550
13,000 San Joaquin Hills Transportation Corridor Agency, California, Toll Road
Refg Ser 1997 A (MBIA) ................................................. 0.00 01/15/26 2,611,440
5,000 E-470 Public Highway Authority, Colorado, Ser 1997 B (MBIA) ............ 0.00 09/01/16 1,824,850
1,000 Lee County, Florida, Ser 1995 (MBIA) ................................... 5.75 10/01/22 976,350
Mid-Bay Bridge Authority, Florida,
8,965 Ser 1993 A (AMBAC) ..................................................... 5.85 10/01/13 9,107,095
3,000 Ser 1997 A (AMBAC) ..................................................... 0.00 10/01/21 770,250
10,000 Atlanta, Georgia, Airport Ser 1990 (AMT) ............................... 6.25 01/01/21 9,816,700
5,000 Hawaii, Airports Second Ser 1991 (AMT) ................................. 7.00 07/01/18 5,211,650
4,000 Regional Transportation Authority, Illinois, Refg Ser 1999 (FSA) ....... 5.75 06/01/21 3,875,400
2,000 Kansas, Highway Refg Ser 1998 .......................................... 5.50 09/01/12 2,029,020
Kentucky Turnpike Authority,
9,000 Economic Development Road Refg Ser 1995 (AMBAC) ....................... 6.50 07/01/08 9,847,350
30,000 Resource Recovery Road 1987 Ser A ..................................... 5.00 07/01/08 29,430,599
13,385 Massachusetts Turnpike Authority, Western 1997 Ser A (MBIA) ............ 5.55 01/01/17 13,312,186
7,700 Minneapolis - St Paul Metropolitan Airports Commission, Minnesota,
Ser 1998 A (AMBAC) ..................................................... 5.00 01/01/30 6,421,107
New Jersey Highway Authority,
7,000 Sr Parkway 1999 Ser ................................................... 5.625 01/01/30 6,608,980
11,000 Sr Parkway Refg 1992 Ser .............................................. 6.25 01/01/14 11,396,220
5,000 New Jersey Transportation Trust Fund Authority, 1999 Ser A ............. 5.75 06/15/16 5,021,000
6,595 Albuquerque, New Mexico, Airport Refg Ser 1997 (AMT) (AMBAC) ........... 6.375 07/01/15 6,801,028
5,000 Ohio Turnpike Commission, Ser 1998 B (FGIC) ............................ 4.50 02/15/24 3,906,550
Pennsylvania Turnpike Commission,
5,000 Ser L of 1991 (MBIA) .................................................. 6.00 06/01/15 5,093,750
5,000 Ser A 1998 (AMBAC) .................................................... 4.75 12/01/27 3,987,300
8,000 Puerto Rico Highway & Transportation Authority, Refg Ser X ............. 5.50 07/01/15 7,748,800
10,000 South Carolina Transportation Infrastructure Bank, Ser 1999 A (AMBAC) .. 5.50 10/01/16 9,669,900
3,000 Virginia Transportation Board, US Route 58 Corridor Ser 1993 B ......... 5.625 05/15/13 3,003,210
---------- --------------
182,645 162,601,285
---------- --------------
See Notes to Financial Statements
37
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Portfolio of Investments December 31, 1999, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- - ------------- -------- ------------- ---------------
Water & Sewer Revenue (9.0%)
$ 10,000 Phoenix Civic Improvement Corporation, Arizona, Jr Lien Water Ser 1994 ..... 5.45% 07/01/19 $ 9,366,200
10,000 California Department of Water Resources, Central Valley Ser L ............. 5.50 12/01/23 9,332,800
10,000 Los Angeles, California, Wastewater Ser 1994-A (MBIA) ...................... 5.875 06/01/24 9,878,100
5,000 Fulton County, Georgia, Water & Sewerage Ser 1998 (FGIC) ................... 4.75 01/01/28 4,000,300
10,000 Louisville & Jefferson County Metropolitan Sewer District, Kentucky,
Ser 1998 A (FGIC) ........................................................ 4.75 05/15/28 7,973,400
9,500 Massachusetts Water Resources Authority, Refg 1992 Ser B ................... 5.50 11/01/15 9,111,640
Detroit, Michigan,
3,320 Sewage Refg Ser 1993 A (FGIC) ............................................ 5.70 07/01/13 3,334,276
10,000 Water Supply 1997 Ser A (MBIA) ........................................... 5.00 07/01/21 8,606,500
10,000 Cleveland, Ohio, Waterworks Impr & Refg 1998 Ser I (FSA) ................... 5.00 01/01/23 8,594,300
5,000 Spartanburg, South Carolina, Jr Lien Water System Ser 1998 (FGIC) .......... 5.25 06/01/28 4,362,750
11,000 Metropolitan Government of Nashville & Davidson County, Tennessee,
Refg Ser 1998 A (FGIC) ................................................... 4.75 01/01/22 9,053,110
10,000 Dallas, Texas, Waterworks & Sewer Refg Ser 1998 (FSA) ...................... 5.00 10/01/29 8,331,300
---------- --------------
103,820 91,944,676
---------- --------------
Other Revenue (0.8%)
5,000 New York Local Government Assistance Corporation, Ser 1993 C ............... 5.50 04/01/17 4,837,350
3,000 Houston, Texas, Sr Lien Hotel Occupancy Tax Refg Ser 1995 (FSA) ............ 5.50 07/01/11 3,000,000
---------- --------------
8,000 7,837,350
---------- --------------
Refunded (12.0%)
10,000 Birmingham Water Works & Sewer Board, Alabama, Ser 1994 .................... 5.50 01/01/04\+ 10,417,500
9,000 Los Angeles Convention and Exhibition Center Authority, California,
Ser 1985 COPs ............................................................ 9.00 12/01/05\+ 10,978,200
2,500 Mid-Bay Bridge Authority, Florida, Ser 1991 A (ETM) ........................ 6.875 10/01/22 2,777,700
2,500 Massachusetts Health & Educational Facilities Authority,
Malden Hospital - FHA Ins Mtge Ser A (ETM) ............................... 5.00 08/01/16 2,318,800
10,000 Massachusetts Water Resources Authority, 1996 Ser A (FGIC) ................. 5.50 11/01/06\+ 10,387,600
14,000 New York State Dormitory Authority, Suffolk County Judicial Ser 1986
(ETM) .................................................................... 7.375 07/01/16 16,367,400
7,000 San Antonio, Texas, Electric & Gas Refg Ser 1994 C (ETM) ................... 4.70 02/01/06 6,819,120
25,000 Intermountain Power Agency, Utah, Refg 1985 Ser H (GAINS) .................. 0.00# 07/01/03\+ 28,104,000
5,000 Salt Lake City, Utah, IHC Hospital Inc Ser 1983 (ETM) ...................... 5.00 06/01/15 4,691,150
28,000 Fairfax County Industrial Development Authority, Virginia, Fairfax
----------
Hospital/Inova Health Ser 1991 ........................................... 6.801 08/15/01\+ 29,404,760
113,000 --------------
---------- 122,266,230
984,994 --------------
----------
TOTAL TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $902,914,260) ............ 919,184,998
--------------
See Notes to Financial Statements
38
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Portfolio of Investments December 31, 1999, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- - ------------- -------- --------------- ---------------
$ 15,000 Maricopa County, Arizona Public Service Co Ser 1994 C (Demand 01/03/00).. 4.80*% 05/01/29 $ 15,000,000
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (8.6%)
21,000 Collier County Health Facilities Authority, Florida, Cleveland Clinic Heal 4.70* 01/01/33 21,000,000
Ser 1999 (Demand 01/03/00) ...............................................
7,000 Louisiana Public Facilities Authority, Kenner Hotel Ser 1985 5.00* 12/01/15 7,000,000
(Demand 01/03/00) ........................................................ 7.00 05/15/00+ 20,607,000
20,000 New York State Dormitory Authority, State University Ser 1990 B ..........
24,000 Harris County Health Facilities Development Corporation, Texas,
Methodist Hospital Ser 1994 (Demand 01/03/00) ............................ 4.80* 12/01/25 24,000,000
---------- --------------
87,000 TOTAL SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (Identified Cost
$87,607,000) ............................................................. 87,607,000
---------- --------------
$1,071,994 TOTAL INVESTMENTS (Identified Cost $990,521,260) (a) ..................... 98.7% 1,006,791,998
==========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES ........................... 1.3 13,433,289
--------------
NET ASSETS ............................................................... 100.0% $1,020,225,287
==============
- - --------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
GAINS Growth and Income Security.
+ Prerefunded to call date shown.
# Currently a zero coupon bond; will convert to 10.00% coupon on
July 1, 2000.
* Current coupon of variable rate demand obligation.
(a) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$38,326,839 and the aggregate gross unrealized depreciation is
$22,056,101, resulting in net unrealized appreciation of
$16,270,738.
Bond Insurance:
- - --------------
AMBAC AMBAC Assurance Corporation.
Connie Lee Connie Lee Insurance Company - A wholly owned subsidiary of AMBAC
Assurance Corporation.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
See Notes to Financial Statements
39
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1999
ASSETS:
Investments in securities, at value
(identified cost $990,521,260) .................................. $1,006,791,998
Cash .............................................................. 1,692,345
Receivable for:
Interest ....................................................... 15,344,365
Shares of beneficial interest sold ............................. 190,362
Investments sold ............................................... 35,000
Prepaid expenses and other assets ................................. 63,621
--------------
TOTAL ASSETS ................................................... 1,024,117,691
--------------
LIABILITIES:
Payable for:
Dividends to shareholders ...................................... 2,408,252
Shares of beneficial interest repurchased ...................... 869,861
Investment management fee ...................................... 393,153
Plan of distribution fee ....................................... 83,114
Accrued expenses .................................................. 138,024
--------------
TOTAL LIABILITIES .............................................. 3,892,404
--------------
NET ASSETS ..................................................... $1,020,225,287
==============
COMPOSITION OF NET ASSETS:
Paid-in-capital ................................................... $1,008,602,876
Net unrealized appreciation ....................................... 16,270,738
Accumulated undistributed net investment income ................... 20,278
Accumulated net realized loss ..................................... (4,668,605)
--------------
NET ASSETS ..................................................... $1,020,225,287
==============
CLASS A SHARES:
Net Assets ........................................................ $ 17,198,331
Shares Outstanding (unlimited authorized, $.01 par value) ......... 1,552,372
NET ASSET VALUE PER SHARE ...................................... $ 11.08
==============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44% of net asset value) .............. $ 11.57
==============
CLASS B SHARES:
Net Assets ........................................................ $ 139,786,097
Shares Outstanding (unlimited authorized, $.01 par value) ......... 12,564,649
NET ASSET VALUE PER SHARE ...................................... $ 11.13
==============
CLASS C SHARES:
Net Assets ........................................................ $ 10,024,734
Shares Outstanding (unlimited authorized, $.01 par value) ......... 902,958
NET ASSET VALUE PER SHARE ...................................... $ 11.10
==============
CLASS D SHARES:
Net Assets ........................................................ $ 853,216,125
Shares Outstanding (unlimited authorized, $.01 par value) ......... 77,068,274
NET ASSET VALUE PER SHARE ...................................... $ 11.07
==============
See Notes to Financial Statements
40
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Financial Statements, continued
STATEMENT OF OPERATIONS
For the year ended December 31, 1999
NET INVESTMENT INCOME:
INTEREST INCOME ................................... $ 62,752,799
-------------
EXPENSES
Investment management fee ......................... 4,908,427
Plan of distribution fee (Class A shares) ......... 23,738
Plan of distribution fee (Class B shares) ......... 855,483
Plan of distribution fee (Class C shares) ......... 67,457
Transfer agent fees and expenses .................. 391,939
Registration fees ................................. 97,797
Shareholder reports and notices ................... 88,271
Professional fees ................................. 84,185
Custodian fees .................................... 45,589
Trustees' fees and expenses ....................... 18,226
Other ............................................. 38,492
-------------
TOTAL EXPENSES ................................. 6,619,604
Less: expense offset .............................. (45,456)
-------------
NET EXPENSES ................................... 6,574,148
-------------
NET INVESTMENT INCOME .......................... 56,178,651
-------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss ................................. (4,668,605)
Net change in unrealized appreciation ............. (82,789,197)
-------------
NET LOSS ....................................... (87,457,802)
-------------
NET DECREASE ...................................... $ (31,279,151)
=============
See Notes to Financial Statements
41
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Financial Statements, continued
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------- ------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................ $ 56,178,651 $ 59,803,857
Net realized gain (loss) ............................. (4,668,605) 15,111,631
Net change in unrealized appreciation ................ (82,789,197) (5,416,357)
-------------- --------------
NET INCREASE (DECREASE) ........................... (31,279,151) 69,499,131
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A shares .................................... (929,080) (460,545)
Class B shares .................................... (6,430,720) (5,022,084)
Class C shares .................................... (422,770) (218,789)
Class D shares .................................... (48,394,252) (54,102,439)
Net realized gain
Class A shares .................................... (52,982) (187,529)
Class B shares .................................... (400,237) (1,743,115)
Class C shares .................................... (27,144) (93,965)
Class D shares .................................... (2,638,565) (14,360,329)
-------------- --------------
TOTAL DIVIDENDS AND DISTRIBUTIONS ................. (59,295,750) (76,188,795)
-------------- --------------
Net decrease from transactions in shares of beneficial
interest ........................................... (67,388,661) (14,502,186)
-------------- --------------
NET DECREASE ...................................... (157,963,562) (21,191,850)
NET ASSETS:
Beginning of period .................................. 1,178,188,849 1,199,380,699
-------------- --------------
END OF PERIOD
(Including undistributed net investment income of
$20,278 and $18,572, respectively) ................ $1,020,225,287 $1,178,188,849
============== ==============
See Notes to Financial Statements
42
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Notes to Financial Statements December 31, 1999
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Tax-Exempt Securities Trust (the "Fund") is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Fund's investment
objective is to provide a high level of current income which is exempt from
federal income tax, consistent with the preservation of capital. The Fund was
incorporated in Maryland in 1979, commenced operations on March 27, 1980 and
reorganized as a Massachusetts business trust on April 30, 1987. On July 28,
1997, the Fund converted to a multiple class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year,
six years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS - Portfolio securities are valued for the Fund by
an outside independent pricing service approved by the Trustees. The pricing
service has informed the Fund that in valuing the Fund's portfolio securities,
it uses both a computerized matrix of tax-exempt securities and evaluations by
its staff, in each case based on information concerning market transactions and
quotations from dealers which reflect the bid side of the market each day. The
Fund's portfolio securities are thus valued by reference to a combination of
transactions and quotations for the same or other securities believed to be
comparable in quality, coupon, maturity, type of issue, call provisions,
trading characteristics and other features deemed to be relevant. Short-term
debt securities having a maturity date of more than sixty days at time of
purchase are valued on a mark-to-market basis until sixty days prior to
maturity and thereafter at amortized cost based on their value on the 61st day.
Short-term debt securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS - Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
The Fund amortizes premiums and accretes discounts over the life of the
respective securities. Interest income is accrued daily.
43
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Notes to Financial Statements December 31, 1999, continued
C. MULTIPLE CLASS ALLOCATIONS - Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date
such items are recognized. Distribution fees are charged directly to the
respective class.
D. 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.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - The Fund records dividends and
distributions to its shareholders on the record date. The amount of dividends
and distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and distributions which
exceed net investment income and net realized capital gains for financial
reporting purposes but not for tax purposes are reported as dividends in excess
of net investment income or distributions in excess of net realized capital
gains. To the extent they exceed net investment income and net realized capital
gains for tax purposes, they are reported as distributions of paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with Morgan Stanley Dean Witter
Advisors Inc. (the "Investment Manager"), the Fund pays the Investment Manager
a management fee, accrued daily and payable monthly, by applying the following
annual rates to the Fund's net assets determined as of the close of each
business day: 0.50% to the portion of daily net assets not exceeding $500
million; 0.425% to the portion of daily net assets exceeding $500 million but
not exceeding $750 million; 0.375% to the portion of daily net assets exceeding
$750 million but not exceeding $1 billion; 0.35% to the portion of daily net
assets exceeding $1 billion but not exceeding $1.25 billion; and 0.325% to the
portion of daily net assets exceeding $1.25 billion.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services,
heat, light, power and other utilities provided to the Fund.
44
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Notes to Financial Statements December 31, 1999, continued
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan"), pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A - up
to 0.25% of the average daily net assets of Class A; (ii) Class B - 0.60% of
the average daily net assets of Class B; and (iii) Class C - up to 0.70% of the
average daily net assets of Class C. In the case of Class A shares, amounts
paid under the Plan are paid to the Distributor for services provided. In the
case of Class B and Class C shares, amounts paid under the Plan are paid to the
Distributor for (1) services provided and the expenses borne by it and others
in the distribution of the shares of these Classes, including the payment of
commissions for sales of these Classes and incentive compensation to, and
expenses of, Morgan Stanley Dean Witter Financial Advisors and others who
engage in or support distribution of the shares or who service shareholder
accounts, including overhead and telephone expenses; (2) printing and
distribution of prospectuses and reports used in connection with the offering
of these shares to other than current shareholders; and (3) preparation,
printing and distribution of sales literature and advertising materials. In
addition, the Distributor may utilize fees paid pursuant to the Plan, in the
case of Class B shares, to compensate Dean Witter Reynolds Inc. ("DWR"), an
affiliate of the Investment Manager and Distributor, and other selected
broker-dealers for their opportunity costs in advancing such amounts, which
compensation would be in the form of a carrying charge on any unreimbursed
expenses.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund
pursuant to the Plan and contingent deferred sales charges paid by investors
upon redemption of Class B shares. Although there is no legal obligation for
the Fund to pay expenses incurred in excess of payments made to the Distributor
under the Plan and the proceeds of contingent deferred sales charges paid by
investors upon redemption of shares, if for any reason the Plan is terminated,
the Trustees will consider at that time the manner in which to treat such
expenses. The Distributor has advised the Fund that such excess amounts,
including carrying charges, totaled $4,717,309 at December 31, 1999.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.70% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected
45
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Notes to Financial Statements December 31, 1999, continued
broker-dealer representatives may be reimbursed in the subsequent calendar
year. For the year ended December 31, 1999, the distribution fee was accrued
for Class A shares and Class C shares at the annual rate of 0.13% and 0.70%,
respectively.
The Distributor has informed the Fund that for the year ended December 31,
1999, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $274,899 and $10,671,
respectively and received $107,818 in front-end sales charges from sales of the
Fund's Class A shares. The respective shareholders pay such charges which 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 December 31, 1999
aggregated $137,618,438 and $245,779,835, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager
and Distributor, is the Fund's transfer agent. At December 31, 1999, the Fund
had transfer agent fees and expenses payable of approximately $13,800.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended December 31, 1999
included in Trustees' fees and expenses in the Statement of Operations amounted
to $5,892. At December 31, 1999, the Fund had an accrued pension liability of
$52,664 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. FEDERAL INCOME TAX STATUS
At December 31, 1999, the Fund had a net capital loss carryover of
approximately $4,670,000 which will be available through December 31, 2007 to
offset future capital gains to the extent provided by regulations.
46
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Notes to Financial Statements December 31, 1999, continued
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- ---------------- --------------- ----------------
CLASS A SHARES
Sold ........................................ 1,023,382 $ 11,894,433 1,188,860 $ 14,401,331
Reinvestment of dividends and distributions . 35,276 407,295 23,219 279,925
Redeemed .................................... (757,512) (8,588,318) (279,886) (3,403,298)
--------- -------------- --------- --------------
Net increase - Class A ...................... 301,146 3,713,410 932,193 11,277,958
--------- -------------- --------- --------------
CLASS B SHARES
Sold ........................................ 5,634,037 65,447,290 4,978,407 60,561,390
Reinvestment of dividends and distributions . 304,367 3,532,880 307,110 3,717,941
Redeemed .................................... (4,333,128) (49,694,515) (2,198,759) (26,762,285)
---------- -------------- ---------- --------------
Net increase - Class B ...................... 1,605,276 19,285,655 3,086,758 37,517,046
---------- -------------- ---------- --------------
CLASS C SHARES
Sold ........................................ 843,726 9,755,515 505,118 6,127,960
Reinvestment of dividends and distributions . 26,647 307,538 18,393 222,199
Redeemed .................................... (598,459) (6,828,777) (136,298) (1,653,180)
---------- -------------- ---------- --------------
Net increase - Class C ...................... 271,914 3,234,276 387,213 4,696,979
---------- -------------- ---------- --------------
CLASS D SHARES
Sold ........................................ 1,880,172 21,134,542 264,495 3,195,718
Reinvestment of dividends and distributions . 2,424,240 28,046,032 3,213,005 38,720,154
Redeemed .................................... (12,402,477) (142,802,576) (9,095,698) (109,910,041)
----------- -------------- ---------- --------------
Net decrease - Class D ...................... (8,098,065) (93,622,002) (5,618,198) (67,994,169)
----------- -------------- ---------- --------------
Net decrease in Fund ........................ (5,919,729) $ (67,388,661) (1,212,034) $ (14,502,186)
=========== ============== ========= ==============
7. SUBSEQUENT EVENT
On January 26, 2000, the Board of Trustees of the Fund and of Morgan Stanley
Dean Witter Multi-State Municipal Series Trust - Massachusetts Series
("Massachusetts"), Michigan Series ("Michigan"), Minnesota Series ("Minnesota")
and Ohio Series ("Ohio") each approved four reorganization plans ("the Plans")
whereby Massachusetts, Michigan, Minnesota and Ohio would be merged into the
Fund. The Plans are subject to the consent of Massachusetts', Michigan's,
Minnesota's and Ohio's shareholders. If the Plans are approved (each Plan is
independent of the other and therefore, the effectiveness of each Plan is not
47
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Notes to Financial Statements December 31, 1999, continued
dependent upon the approval of the other Plans), the assets of Massachusetts,
Michigan, Minnesota and Ohio would be combined with the assets of the Fund and
shareholders of Massachusetts, Michigan, Minnesota and Ohio would become Class
D shareholders of the Fund, receiving Class D shares of the Fund equal to the
value of their holdings in Massachusetts, Michigan, Minnesota and Ohio,
respectively.
48
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Financial Highlights
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- ------------------------- ----------------------
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $ 12.02 $ 12.09 $ 12.00
-------- ---------- ----------
Income (loss) from investment operations:
Net investment income ................................. 0.58 0.59 0.25
Net realized and unrealized gain (loss) ............... ( 0.91) 0.10 0.14
-------- ---------- ----------
Total income (loss) from investment operations ......... ( 0.33) 0.69 0.39
-------- ---------- ----------
Less dividends and distributions from:
Net investment income ................................. ( 0.58) ( 0.59) ( 0.25)
Net realized gain ..................................... ( 0.03) ( 0.17) ( 0.05)
-------- ----------- ----------
Total dividends and distributions ...................... ( 0.61) ( 0.76) ( 0.30)
-------- ----------- ----------
Net asset value, end of period ......................... $ 11.08 $ 12.02 $ 12.09
======== =========== ==========
TOTAL RETURN\^ ......................................... ( 2.82)% 5.86% 3.31%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 0.64 %(4)(5) 0.74%(4)(5) 0.76%(2)(3)
Net investment income .................................. 4.98 %(5) 4.88%(5) 4.96%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $17,198 15,041 $ 3,857
Portfolio turnover rate ................................ 13 % 15% 16%
- - -------------
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.02%.
(4) Does not reflect the effect of expense offset of 0.01%.
(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.
See Notes to Financial Statements
49
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Financial Highlights, continued
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- ---------------------- ----------------------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $ 12.07 $ 12.14 $ 12.00
---------- ------------ ----------
Income (loss) from investment operations:
Net investment income ................................. 0.53 0.55 0.23
Net realized and unrealized gain (loss) ............... ( 0.91) 0.10 0.19
---------- ------------ ----------
Total income (loss) from investment operations ......... ( 0.38) 0.65 0.42
---------- ------------ ----------
Less dividends and distributions from:
Net investment income ................................. ( 0.53) ( 0.55) ( 0.23)
Net realized gain ..................................... ( 0.03) ( 0.17) ( 0.05)
---------- ------------ ----------
Total dividends and distributions ...................... ( 0.56) ( 0.72) ( 0.28)
---------- ------------ ----------
Net asset value, end of period ......................... $ 11.13 $ 12.07 $ 12.14
========== ============ ==========
TOTAL RETURN\^ ......................................... ( 3.25)% 5.47% 3.57%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.11 %(4)(5) 1.10%(4)(5) 1.14%(2)(3)
Net investment income .................................. 4.51 %(5) 4.52%(5) 4.87%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $139,786 $132,303 $ 95,573
Portfolio turnover rate ................................ 13 % 15% 16%
- - -------------
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.02%.
(4) Does not reflect the effect of expense offset of 0.01%.
(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.
See Notes to Financial Statements
50
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Financial Highlights, continued
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- ---------------------- ----------------------
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $ 12.04 $ 12.11 $ 12.00
-------- ---------- ----------
Income (loss) from investment operations:
Net investment income ................................. 0.51 0.53 0.23
Net realized and unrealized gain (loss) ............... ( 0.91) 0.10 0.16
-------- ---------- ----------
Total income (loss) from investment operations ......... ( 0.40) 0.63 0.39
-------- ---------- ----------
Less dividends and distributions from:
Net investment income ................................. ( 0.51) ( 0.53) ( 0.23)
Net realized gain ..................................... ( 0.03) ( 0.17) ( 0.05)
-------- ---------- ----------
Total dividends and distributions ...................... ( 0.54) ( 0.70) ( 0.28)
-------- ---------- ----------
Net asset value, end of period ......................... $ 11.10 $ 12.04 $ 12.11
======== ========== ==========
TOTAL RETURN\^ ......................................... ( 3.37)% 5.36% 3.28%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.21 %(4)(5) 1.20%(4)(5) 1.20%(2)(3)
Net investment income .................................. 4.41 %(5) 4.34%(5) 4.41%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $10,025 $ 7,599 $ 2,953
Portfolio turnover rate ................................ 13 % 15% 16%
- - -------------
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.02%.
(4) Does not reflect the effect of expense offset of 0.01%.
(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.
See Notes to Financial Statements
51
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Financial Highlights, continued
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998
----------------- ----------------------
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............... $ 12.01 $ 12.08
---------- -------------
Income (loss) from investment operations:
Net investment income ............................. 0.59 0.62
Net realized and unrealized gain (loss) ........... ( 0.91) 0.10
---------- -------------
Total income (loss) from investment operations ..... ( 0.32) 0.72
---------- -------------
Less dividends and distributions from:
Net investment income ............................. ( 0.59) ( 0.62)
Net realized gain ................................. ( 0.03) ( 0.17)
---------- -------------
Total dividends and distributions .................. ( 0.62) ( 0.79)
---------- -------------
Net asset value, end of period ..................... $ 11.07 $ 12.01
========== =============
TOTAL RETURN+ ..................................... ( 2.71)% 6.11 %
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................... 0.51 %(1)(2) 0.50 %(1)(2)
Net investment income .............................. 5.11 %(2) 5.12 %(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ............ $853,216 $1,023,246
Portfolio turnover rate ............................ 13 % 15 %
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997* 1996 1995
------------------ ------------------ ------------------
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............... $ 11.77 $ 12.09 $ 11.01
------------- ------------- -------------
Income (loss) from investment operations:
Net investment income ............................. 0.63 0.65 0.67
Net realized and unrealized gain (loss) ........... 0.36 ( 0.24) 1.19
------------- -------------- -------------
Total income (loss) from investment operations ..... 0.99 0.41 1.86
------------- -------------- -------------
Less dividends and distributions from:
Net investment income ............................. ( 0.63) ( 0.65) ( 0.67)
Net realized gain ................................. ( 0.05) ( 0.08) ( 0.11)
-------------- -------------- --------------
Total dividends and distributions .................. ( 0.68) ( 0.73) ( 0.78)
-------------- -------------- --------------
Net asset value, end of period ..................... $ 12.08 $ 11.77 $ 12.09
============== ============== ==============
TOTAL RETURN+ ..................................... 8.73% 3.61% 17.37%
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................... 0.49% 0.48% 0.48%
Net investment income .............................. 5.34% 5.52% 5.76%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ............ $1,096,998 $1,190,034 $1,325,308
Portfolio turnover rate ............................ 16% 18% 21%
- - -------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares
of the Fund held prior to that date have been designated Class D shares.
+ Calculated based on the net asset value as of the last business day of
the period.
(1) Does not reflect the effect of expense offset of 0.01%.
(2) Reflects overall Fund ratios for investment income and non-class specific
expenses.
See Notes to Financial Statements
52
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES 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 Morgan Stanley Dean Witter
Tax-Exempt Securities Trust (the "Fund") at December 31, 1999, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the periods presented, in conformity with accounting principles generally
accepted in the United States. 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 auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at December 31, 1999 by correspondence with the custodian, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 7, 2000
1999 FEDERAL TAX NOTICE (unaudited)
During the year ended December 31, 1999, the Fund paid the following per
share amounts from tax-exempt income: $0.58 to Class A shareholders,
$0.53 to Class B shareholders, $0.51 to Class C shareholders and $0.59 to
Class D shareholders.
For the year ended December 31, 1999, the Fund paid long-term capital
gains of $0.03 per share to Class A, B, C and D shareholders.
53
XIII. APPENDIX
RATINGS OF INVESTMENTS
- - --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")
MUNICIPAL BOND RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree
of investment risk and are generally referred to as "gilt edge." Interest payments are protected
by a large or by an exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are most unlikely
to impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa
group they comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be considered
as upper medium grade obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations; i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be
considered as well assured. Often the protection of interest and principal payments may be very
moderate, and therefore not well safeguarded during both good and bad times in the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of 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.
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.
54
Rating Refinements: Moody's may apply numerical modifiers, 1, 2, and 3 in
each generic rating classification from Aa through B in its municipal bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and a modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
MUNICIPAL NOTE RATINGS
Moody's ratings for state and municipal note and other short-term loans
are designated Moody's Investment Grade (MIG). MIG 1 denotes best quality and
means there is present strong protection for 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.
55
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.
56
The foregoing ratings are sometimes followed by a "p" which indicates that the
rating is provisional. A provisional rating assumes the successful completion of
the project being financed by the bonds being rated and indicates that payment
of debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood or risk of default upon failure of such completion.
MUNICIPAL NOTE RATINGS
Commencing on July 27, 1984, Standard & Poor's instituted a new rating
category with respect to certain municipal note issues with a maturity of less
than three years. The new note ratings denote the following:
SP-1 denotes a very strong or strong capacity to pay principal and
interest. Issues determined to possess overwhelming safety characteristics
are given a plus (+) designation (SP-1+).
SP-2 denotes a satisfactory capacity to pay principal and interest.
SP-3 denotes a speculative capacity to pay principal and interest.
COMMERCIAL PAPER RATINGS
Standard and Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. The commercial paper rating is not a recommendation to purchase
or sell a security. The ratings are based upon current information furnished by
the issuer or obtained by 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.
FITCH IBCA, INC. ("FITCH")
MUNICIPAL BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided
by insurance policies or financial guarantees unless otherwise indicated.
Bonds carrying the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
57
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit quality. The obligor
has an exceptionally strong ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit quality. The obligor's
ability to pay interest and repay principal is very strong, although not quite as strong
as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of high credit quality. The obligor's
ability to pay interest and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than bonds
with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit quality. The
obligor's ability to pay interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances, however, are more
likely to have adverse impact on these bonds, and therefore impair timely payment.
The likelihood that the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
Plus (+) or Plus and minus signs are used with a rating symbol to indicate the relative position of
Minus (-) a credit within the rating category. Plus and minus signs, however, are not used in the
"AAA" category.
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of a project or the
occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of information available from the
issuer to be inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is called or refinanced and, at
Fitch's discretion, when an issuer fails to furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an occurrence that is likely to
result in a rating change and the likely direction of such change. These are designated
as "Positive," indicating a potential upgrade, "Negative," for potential downgrade, or
"Evolving," where ratings may be raised or lowered. FitchAlert is relatively short-term,
and should be resolved within 12 months.
Ratings Outlook An outlook is used to describe the most likely direction of any rating change over the
intermediate term. It is described as "Positive" or "Negative." The absence of a
designation indicates a stable outlook.
Speculative Grade Bond Ratings: Fitch speculative grade bond ratings
provide a guide to investors in determining the credit risk associated with a
particular security. The ratings ("BB" to "C") represent Fitch's assessment of
the likelihood of timely payment of principal and interest in accordance with
the terms of obligation for bond issues not in default. For defaulted bonds,
the rating ("DDD" to "D") is an assessment of the ultimate recovery value
through reorganization or liquidation.
58
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay interest and repay
principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the obligor in
satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are currently
meeting debt service requirements, the probability of continued timely payment of
principal and interest reflects the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may lead to
default. The ability to meet obligations requires an advantageous business and
economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or principal seems
probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD Bonds are in default on interest and/or principal payments. Such bonds are extremely
DD and D speculative and should be valued on the basis of their ultimate recovery value in
liquidation or reorganization of the obligor. "DDD" represents the highest potential for
recovery on these bonds, and "D" represents the lowest potential for recovery
Plus (+) or Plus and minus signs are used with a rating symbol to indicate the relative position
Minus (-) of a credit within the rating category. Plus and minus signs, however, are not used in
the "DDD," "DD," or "D" categories.
SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as
having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely
payment only slightly less in degree than issues rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory degree of
assurance for timely payment, but the margin of safety is not as great as for issues
assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics suggesting that
the degree of assurance for timely payment is adequate; however, near-term adverse
changes could cause these securities to be rated below investment grade.
59
F-S Weak Credit Quality. Issues assigned this rating have characteristics suggesting a
minimal degree of assurance for timely payment and are vulnerable to near-term
adverse changes in financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent payment default.
LOC The symbol "LOC" indicates that the rating is based on a letter of credit issued by a
commercial bank.
60
MORGAN STANLEY DEAN WITTER TAX-EXEMPT SECURITIES TRUST
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
The response to this item is incorporated herein by reference to Exhibits
1 and 2 under Item 16 below and by reference to Item 27 of, Post-Effective
Amendment No. 23 to Registrant's Registration Statement on Form N-1A, dated
February 24, 2000, which was filed electronically pursuant to Regulation S-T on
February 23, 2000 ("Post-Effective Amendment No. 23") as an amendment to
Registrant's Registration Statement on Form N-1A (File Nos. 811-2979 and
2-66268) (the "Registration Statement").
ITEM 16. EXHIBITS
(1) Declaration of Trust dated April 6, 1987 ("Declaration") (incorporated
herein by reference to Exhibit 1 of Registrant's Post-Effective Amendment
No. 18 filed on February 22, 1996 ("Post-Effective Amendment No. 18"));
Amendment to Declaration Establishing and Designating Additional Classes
of Stock (incorporated herein by reference to Exhibit 1 to Post-Effective
Amendment No. 20 filed on July 3, 1997 ("Post Effective Amendment No.
20"))
(2) Amended and Restated By-Laws of Registrant dated as of May 1, 1999
(incorporated herein by reference to Exhibit 2 to the Registrant's
Post-Effective Amendment No. 23)
(3) Not Applicable
(4) Copy of Agreement and Plan of Reorganization (filed herewith as Exhibit A
to the Proxy Statement and Prospectus)
(5) Not Applicable
(6) Investment Management Agreement (incorporated herein by reference to
Exhibit 5 to Post-Effective Amendment No. 22 filed on February 26, 1999
("Post Effective Amendment No. 22"))
(7) (a) Distribution Agreement between Registrant and Morgan Stanley Dean
Witter Distributors Inc. (incorporated herein by reference to Exhibit
5(a) to Post-Effective Amendment No. 22)
(b) Multiple Class Distribution Agreement between Registrant and Morgan
Stanley Dean Witter Distributors, Inc. (incorporated herein by
reference to Exhibit 6(b) of Post-Effective Amendment No. 20.
(c) Form of Selected Dealer Agreement (incorporated herein by reference to
Exhibit 5(b) to Registrant's Post-Effective Amendment No. 22)
(8) Retirement Plan of Non-Interested Trustees or Directors (incorporated
herein by reference to Exhibit 6 to Post-Effective Amendment No. 23)
(9) (a) Custody Agreement dated September 20, 1991 (incorporated herein by
reference to Exhibit 8 to Post-Effective Amendment No. 18)
(b) Amended and Restated Transfer Agency and Services Agreement between
Registrant and Morgan Stanley Dean Witter Trust FSB (incorporated
herein by reference to Exhibit 8(a) of Post-Effective Amendment No. 22)
C-1
(10) (a) Amended and Restated Plan of Distribution pursuant to Rule 12b-1,
dated July 28, 1997 (incorporated herein by reference to Exhibit 15 to
Post-Effective Amendment No. 20)
(b) Morgan Stanley Dean Witter Funds Multiple Class Plan pursuant to Rule
18f-3 (incorporated herein by reference to Exhibit 15 to Post-Effective
Amendment No. 22)
(11) (a) Opinion and consent of Mayer, Brown & Platt
(b) Opinion and consent of Nutter, McClennen & Fish LLP.
(12) Opinion and consent of Mayer, Brown & Platt regarding tax matters
(13) Form of Services Agreement between Morgan Stanley Dean Witter Advisors
Inc. and Morgan Stanley Dean Witter Services Company Inc. (incorporated
herein by reference to Exhibit 8(b) to Post-Effective Amendment No. 22)
(14) (a) Consent of Independent Accountants -- To be filed by Amendment
(b) Consent of PricewaterhouseCoopers LLP
(15) Not Applicable
(16) Powers of Attorney
(17) (a) Registrant's Rule 24f-2 Notice pursuant to Rule 24f-2 under the
Investment Company Act of 1940, for its fiscal year ended December 31,
1999 (incorporated herein by reference to Form 24f-2 filed with the
Securities and Exchange Commission on February 3, 2000)
(b) Form of Proxy
(c) Voting Information Card
ITEM 17. UNDERTAKINGS
1. The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of the prospectus which is a part
of this registration statement on Form N-14 by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c) of the Securities
Act of 1933, the reoffering prospectus will contain the information called for
by the applicable registration form for reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
items of the applicable form.
2. The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to this
registration statement on Form N-14 and will not be used until the amendment is
effective, and that, in determining any liability under the Securities Act of
1933, each post-effective amendment shall be deemed to be a new registration
statement for the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide offering of
them.
C-2
SIGNATURES
As required by the Securities Act of 1933, this registration statement has
been signed on behalf of the registrant, in the City of New York and State of
New York, on the 13th day of September, 2000.
MORGAN STANLEY DEAN WITTER TAX-EXEMPT
SECURITIES TRUST
By: /s/ Barry Fink
......................................
Barry Fink
Vice President and Secretary
As required by the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
--------- ----- ----
1. Principal Executive Officer
/s/ Charles A. Fiumefreddo Chief Executive Officer,
........................... Trustee and Chairman September 13, 2000
2. Principal Financial Officer
/s/ Thomas F. Caloia Treasurer and Principal
........................... Accounting Officer September 13, 2000
3. Majority of Trustees
/s/ Michael Bozic Trustee September 13, 2000
...........................
/s/ Edwin J. Garn Trustee September 13, 2000
...........................
/s/ Wayne E. Hedien Trustee September 13, 2000
...........................
/s/ James F. Higgins Trustee September 13, 2000
...........................
/s/ Manuel H. Johnson Trustee September 13, 2000
...........................
/s/ Michael E. Nugent Trustee September 13, 2000
...........................
/s/ John L. Schroeder Trustee September 13, 2000
...........................
/s/ Philip J. Purcell Trustee September 13, 2000
...........................
C-3
EXHIBIT INDEX
(1) Declaration of Trust dated April 6, 1987 ("Declaration") (incorporated
herein by reference to Exhibit 1 of Registrant's Post-Effective Amendment
No. 18 filed on February 22, 1996 ("Post-Effective Amendment No. 18"));
Amendment to Declaration Establishing and Designating Additional Classes
of Stock (incorporated herein by reference to Exhibit 1 to Post-Effective
Amendment No. 20 filed on July 3, 1997 ("Post Effective Amendment No.
20"))
(2) Amended and Restated By-Laws of Registrant dated as of May 1, 1999
(incorporated herein by reference to Exhibit 2 to the Registrant's
Post-Effective Amendment No. 23)
(3) Not Applicable
(4) Copy of Agreement and Plan of Reorganization (filed herewith as Exhibit A
to the Proxy Statement and Prospectus)
(5) Not Applicable
(6) Investment Management Agreement (incorporated herein by reference to
Exhibit 5 to Post-Effective Amendment No. 22 filed on February 26, 1999
("Post Effective Amendment No. 22"))
(7) (a) Distribution Agreement between Registrant and Morgan Stanley Dean
Witter Distributors Inc. (incorporated herein by reference to Exhibit
5(a) to Post-Effective Amendment No. 22)
(b) Multiple Class Distribution Agreement between Registrant and Morgan
Stanley Dean Witter Distributors, Inc. (incorporated herein by
reference to Exhibit 6(b) of Post-Effective Amendment No. 20.
(c) Form of Selected Dealer Agreement (incorporated herein by reference to
Exhibit 5(b) to Registrant's Post-Effective Amendment No. 22)
(8) Retirement Plan of Non-Interested Trustees or Directors (incorporated
herein by reference to Exhibit 6 to Post-Effective Amendment No. 23)
(9) (a) Custody Agreement dated September 20, 1991 (incorporated herein by
reference to Exhibit 8 to Post-Effective Amendment No. 18)
(b) Amended and Restated Transfer Agency and Services Agreement between
Registrant and Morgan Stanley Dean Witter Trust FSB (incorporated
herein by reference to Exhibit 8(a) of Post-Effective Amendment No.
22)
(10) (a) Amended and Restated Plan of Distribution pursuant to Rule 12b-1,
dated July 28, 1997 (incorporated herein by reference to Exhibit 15 to
Post-Effective Amendment No. 20)
(b) Morgan Stanley Dean Witter Funds Multiple Class Plan pursuant to Rule
18f-3 (incorporated herein by reference to Exhibit 15 to
Post-Effective Amendment No. 22)
(11) (a) Opinion and consent of Mayer, Brown & Platt
(b) Opinion and consent of Nutter, McClennen & Fish LLP.
(12) Opinion and consent of Mayer, Brown & Platt regarding tax matters
(13) Form of Services Agreement between Morgan Stanley Dean Witter Advisors
Inc. and Morgan Stanley Dean Witter Services Company Inc. (incorporated
herein by reference to Exhibit 8(b) to Post-Effective Amendment No. 22)
(14) (a) Consent of Independent Accountants -- To be filed by Amendment
(b) Consent of PricewaterhouseCoopers LLP
(15) Not Applicable
(16) Powers of Attorney
(17) (a) Registrant's Rule 24f-2 Notice pursuant to Rule 24f-2 under the
Investment Company Act of 1940, for its fiscal year ended December 31,
1999 (incorporated herein by reference to Form 24f-2 filed with the
Securities and Exchange Commission on February 3, 2000)
(b) Form of Proxy
(c) Voting Information Card