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DEAN WITTER
JAPAN FUND
PROSPECTUS--JULY 24, 1996
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DEAN WITTER JAPAN FUND (THE "FUND") IS AN OPEN-END, NON-DIVERSIFIED MANAGEMENT
INVESTMENT COMPANY WHOSE INVESTMENT OBJECTIVE IS TO SEEK LONG-TERM CAPITAL
APPRECIATION. THE FUND SEEKS TO MEET ITS INVESTMENT OBJECTIVE BY INVESTING
PRIMARILY IN SECURITIES OF ISSUERS LOCATED IN JAPAN. (SEE "INVESTMENT OBJECTIVE
AND POLICIES.")
Shares of the Fund are continuously offered at net asset value without the
imposition of a sales charge. However, redemptions and/or repurchases are
subject in most cases to a contingent deferred sales charge, scaled down from 5%
to 1% of the amount redeemed, if made within six years of purchase, which charge
will be paid to the Fund's Distributor, Dean Witter Distributors Inc. (See
"Redemptions and Repurchases--Contingent Deferred Sales Charge.") In addition,
the Fund pays the Distributor a Rule 12b-1 distribution fee pursuant to a Plan
of Distribution at the annual rate of 1.0% of the lesser of the (i) average
daily aggregate net sales or (ii) average daily net assets of the Fund. (See
"Purchase of Fund Shares--Plan of Distribution.")
This Prospectus sets forth concisely the information you should know before
investing in the Fund. It should be read and retained for future reference.
Additional information about the Fund is contained in the Statement of
Additional Information, dated July 24, 1996, which has been filed with the
Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone numbers listed on this page. The
Statement of Additional Information is incorporated herein by reference.
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TABLE OF CONTENTS
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Prospectus Summary................................ 2
Summary of Fund Expenses.......................... 3
Financial Highlights.............................. 4
The Fund and its Management....................... 5
Investment Objective and Policies................. 5
Risk Factors and Special Considerations......... 6
Investment Restrictions........................... 12
Purchase of Fund Shares........................... 13
Shareholder Services.............................. 14
Redemptions and Repurchases....................... 16
Dividends, Distributions and Taxes................ 18
Performance Information........................... 18
Additional Information............................ 19
Report of Independent Accountants................. 20
Financial Statements--May 31, 1996................ 21
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SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
DEAN WITTER
JAPAN FUND
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 392-2550 or
(800) 869-NEWS (toll free)
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
DEAN WITTER DISTRIBUTORS INC., DISTRIBUTOR
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PROSPECTUS SUMMARY
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THE The Fund is organized as a Trust, commonly known as a Massachusetts business trust, and
FUND is an open-end, non-diversified management investment company. The Fund invests
primarily in securities of issuers located in Japan.
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SHARES OFFERED Shares of beneficial interest with $0.01 par value (see page 19).
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MINIMUM Minimum initial investment, $1,000 ($100 if the account is opened through
PURCHASE EasyInvest-SM-); minimum subsequent investment, $100 (see page 13).
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OFFERING At net asset value without sales charge (see page 13). Shares redeemed within six years
PRICE of purchase are subject to a contingent deferred sales charge under most circumstances
(see page 17).
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INVESTMENT The investment objective of the Fund is to seek long-term capital appreciation (see page
OBJECTIVE 5).
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INVESTMENT Dean Witter InterCapital Inc., the Investment Manager of the Fund, and its wholly-owned
MANAGER AND subsidiary, Dean Witter Services Company Inc., serve in various investment management,
SUB-ADVISER advisory, management and administrative capacities to ninety-eight investment companies
and other portfolios with net assets under management of approximately $84.6 billion at
June 30, 1996. Morgan Grenfell Investment Services Ltd. has been retained by the
Investment Manager as Sub-Adviser to provide investment advice and manage the Fund's
portfolio. Morgan Grenfell Investment Services Ltd. currently serves as investment
adviser for primarily U.S. corporate and public employee benefit plans, investment
companies, endowments and foundations with assets of approximately $14.1 billion at June
30, 1996 (see page 5).
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MANAGEMENT The Investment Manager receives a monthly fee at the annual rate of 1.0% of the Fund's
FEE daily net assets, of which the Sub-Adviser receives 40% (see page 5).
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DIVIDENDS AND Dividends from net investment income, if any, are paid at least annually. Capital gains,
DISTRIBUTIONS if any, are distributed at least annually or retained for reinvestment by the Fund.
Dividends and capital gains distributions are automatically reinvested in additional
shares at net asset value (without sales charge), unless the shareholder elects to
receive cash (see page 18).
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DISTRIBUTOR Dean Witter Distributors Inc. (the "Distributor"). The Distributor receives from the
Fund a distribution fee accrued daily and payable monthly at the rate of 1.0% per annum
of the lesser of (i) the Fund's average daily aggregate net sales or (ii) the Fund's
average daily net assets. This fee compensates the Distributor for the services provided
in distributing shares of the Fund and for sales related expenses. The Distributor also
receives the proceeds of any contingent deferred sales charges (see pages 13 and 17).
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REDEMPTION-- Shares are redeemable by the shareholder at net asset value. An account may be
CONTINGENT involuntarily redeemed if the total value of the account is less than $100 or, if the
DEFERRED SALES account was opened through EasyInvest-SM-, if after twelve months the shareholder has
CHARGE invested less than $1,000 in the account. Although no commission or sales load is
imposed upon the purchase of shares, a contingent deferred sales charge (scaled down
from 5% to 1%) is imposed on any redemption of shares if after such redemption the
aggregate current value of an account with the Fund is less than the aggregate amount of
the investor's purchase payments made during the six years preceding the redemption.
However, there is no charge imposed on redemption of shares purchased through
reinvestment of dividends or distributions (see pages 16-18).
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RISKS The net asset value of the Fund's shares will fluctuate with changes in market value of
portfolio securities. The concentration of the Fund's assets in Japanese issuers will
subject the Fund to the risks of adverse social, political or economic events which
occur in or affect Japan. It should be recognized that the foreign securities and
markets in which the Fund invests pose different and greater risks than those
customarily associated with domestic securities and their markets. The Fund may also
invest in options and futures transactions which may be considered speculative in nature
and may involve greater risks than those customarily assumed by other investment
companies which do not invest in such instruments (see pages 6-12). The Fund is a
non-diversified investment company and, as such, is not subject to the diversification
requirements of the Investment Company Act of 1940. As a result, a relatively high
percentage of the Fund's assets may be invested in a limited number of issuers. However,
the Fund intends to qualify as a regulated investment company under the federal income
tax laws and, as such, will be subject to the diversification requirements of the
Internal Revenue Code (see pages 10 and 18).
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THE ABOVE IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION APPEARING
ELSEWHERE IN THIS PROSPECTUS
AND IN THE STATEMENT OF ADDITIONAL INFORMATION.
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SUMMARY OF FUND EXPENSES
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The following table illustrates all expenses and fees that a shareholder of the
Fund will incur. The estimated fees and expenses set forth in the table are for
the fiscal year ending May 31, 1997.
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SHAREHOLDER TRANSACTION EXPENSES
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Maximum Sales Charge Imposed on Purchases............................. None
Maximum Sales Charge Imposed on Reinvested Dividends.................. None
Contingent Deferred Sales Charge
(as a percentage of the lesser of original purchase price or
redemption proceeds)............................................... 5.0%
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A contingent deferred sales charge is imposed at the following declining rates:
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YEAR SINCE PURCHASE PAYMENT MADE PERCENTAGE
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First................................................................. 5.0%
Second................................................................ 4.0%
Third................................................................. 3.0%
Fourth................................................................ 2.0%
Fifth................................................................. 2.0%
Sixth................................................................. 1.0%
Seventh and thereafter................................................ None
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Redemption Fees....................................................... None
Exchange Fee.......................................................... None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees....................................................... 1.0%
12b-1 Fees*........................................................... 1.0%
Other Expenses........................................................ 0.41%
Total Fund Operating Expenses**....................................... 2.41%
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* The 12b-1 fee is accrued daily and payable monthly, at an annual
rate of 1.0% of the lesser of: (a) the average daily aggregate
gross sales of the Fund's shares since the inception of the Fund
(not including reinvestments of dividends or distributions), less
the average daily aggregate net asset value of the Fund's shares
redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or waived, or (b) the Fund's
average daily net assets. A portion of the 12b-1 fee equal to 0.25%
of the Fund's average daily net assets is characterized as a
service fee within the meaning of National Association of
Securities Dealers, Inc. ("NASD") guidelines and is a payment made
to the selling broker for personal service and/or maintenance of
shareholder accounts. The remainder of the 12b-1 fee is an asset
based sales charge, and is a distribution fee paid to the
Distributor to compensate it for the services provided and the
expenses borne by the Distributor and others in the distribution of
the Fund's shares (see "Purchase of Fund Shares").
** "Total Fund Operating Expenses," as shown above, is based upon the
sum of 12b-1 Fees, Management Fees and estimated "Other Expenses"
which may be incurred by the Fund for the fiscal year ending May
31, 1997.
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EXAMPLE 1 YEAR 3 YEARS
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You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period:....................................... $ 74 $ 105
You would pay the following expenses on the same investment,
assuming no redemption:.................................... $ 24 $ 75
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THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF THE FUND MAY BE GREATER OR LESS THAN
THOSE SHOWN.
The purpose of this table is to assist the investor in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"The Fund and its Management," "Plan of Distribution" and "Redemptions and
Repurchases."
Long-term shareholders of the Fund may pay more in sales charges and
distribution fees than the economic equivalent of the maximum front-end sales
charges permitted by the NASD.
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FINANCIAL HIGHLIGHTS
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The following per share data and ratios for a share of beneficial interest
outstanding for the period April 26, 1996 (commencement of operations) through
May 31, 1996 have been audited by Price Waterhouse LLP, independent accountants.
The financial highlights should be read in conjunction with the financial
statements, notes thereto and the unqualified report of the independent
accountants contained in this Prospectus commencing at page 20.
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FOR THE PERIOD
APRIL 26, 1996*
THROUGH
MAY 31, 1996
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PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $10.00
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Net investment loss................................................. --
Net realized and unrealized loss.................................... (0.39)
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Net asset value, end of period...................................... $ 9.61
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TOTAL INVESTMENT RETURN+.............................................. (3.90)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................................ 2.84%(2)
Net investment loss................................................. (0.52)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................. $273,544
Portfolio turnover rate............................................. --%(1)
Average commission rate paid........................................ $ 0.0424
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* COMMENCEMENT OF OPERATIONS.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
4
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THE FUND AND ITS MANAGEMENT
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Dean Witter Japan Fund (the "Fund") is an open-end, non-diversified, management
investment company. The Fund is a trust of the type commonly known as a
"Massachusetts business trust" and was organized under the laws of The
Commonwealth of Massachusetts on January 22, 1996.
Dean Witter InterCapital Inc. ("InterCapital" or the "Investment Manager"),
whose address is Two World Trade Center, New York, New York 10048, is the Fund's
Investment Manager. The Investment Manager, which was incorporated in July,
1992, is a wholly-owned subsidiary of Dean Witter, Discover & Co. ("DWDC"), a
balanced financial services organization providing a broad range of nationally
marketed credit and investment products.
InterCapital and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to ninety-eight investment companies, thirty of which
are listed on the New York Stock Exchange, with combined assets of approximately
$81.8 billion at June 30, 1996. The Investment Manager also manages portfolios
of pension plans, other institutions and individuals which aggregated
approximately $2.8 billion at such date.
The Fund has retained the Investment Manager to provide administrative
services, manage its business affairs and supervise the investment of the Fund's
assets. InterCapital has retained Dean Witter Services Company Inc. to perform
the aforementioned administrative services for the Fund.
Under a Sub-Advisory Agreement between Morgan Grenfell Investment Services
Limited (the "Sub-Adviser") and the Investment Manager, the Sub-Adviser provides
the Fund with investment advice and portfolio management relating to the Fund's
investments, subject to the overall supervision of the Investment Manager. The
Fund's Trustees review the various services provided by the Investment Manager
and the Sub-Adviser to ensure that the Fund's general investment policies and
programs are being properly carried out and that administrative services are
being provided to the Fund in a satisfactory manner.
The Sub-Adviser, whose address is 20 Finsbury Circus, London, England,
manages, as of June 30, 1996, assets of approximately $14.1 billion for
primarily U.S. corporate and public employee benefit plans, investment
companies, endowments and foundations. The Sub-Adviser is an indirect subsidiary
of Deutsche Bank AG, the largest commercial bank in Germany.
As full compensation for the services and facilities furnished to the Fund
and for expenses of the Fund assumed by the Investment Manager, the Fund pays
the Investment Manager monthly compensation calculated daily by applying the
annual rate of 1.0% to the Fund's net assets. As compensation for its services
provided pursuant to the Sub-Advisory Agreement, the Investment Manager pays the
Sub-Adviser monthly compensation equal to 40% of its monthly compensation.
The Fund's expenses include: the fee of the Investment Manager; the fee
pursuant to the Plan of Distribution (see "Purchase of Fund Shares"); taxes;
certain legal, transfer agent, custodian and auditing fees; and printing and
other expenses relating to the Fund's operations which are not expressly assumed
by the Investment Manager under its Investment Management Agreement with the
Fund.
INVESTMENT OBJECTIVE AND POLICIES
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The investment objective of the Fund is to seek long-term capital appreciation.
The objective is a fundamental policy of the Fund and may not be changed without
shareholder approval. There is no assurance that the objective will be achieved.
The Fund seeks to achieve its investment objective by investing, under
normal circumstances, at least 65% of its total assets in equity securities
issued by issuers located in Japan. Such issuers will include companies (i)
which are organized under the laws of Japan and have a principal office in
Japan; (ii) which derive 50% or more of their total revenues from operating
business(es) in Japan; or (iii) the equity securities of which are traded
principally on a stock exchange in Japan. Equity securities in which the Fund
may invest include common and preferred stocks and rights or warrants to
purchase common stocks.
The Fund may invest up to 25% of its total assets in equity securities of
Japanese companies traded on the Second Sections of the Main Japanese exchanges
and in the over-the-counter market. These would generally be smaller companies
with above-average growth potential. (See "Risk Factors and Special
Considerations.")
As a "single country" mutual fund, the Fund may exhibit certain speculative
characteristics and thus should not constitute a complete investment program.
Investing internationally involves certain risks, such as economic and political
risk, and therefore poses different and greater risks than those customarily
associated with domestic securities and their markets. The concentration of the
Fund's assets in Japanese issuers will subject the Fund to the risks of adverse
social, political or economic events which occur in Japan (see "Risk Factors and
Special Considerations").
The remainder of the Fund's portfolio equalling, at times, up to 35% of the
Fund's total assets, may be invested in fixed-income and convertible securities
of issuers
5
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located in Japan or guaranteed by the Japanese government when it is deemed that
such investments are consistent with the Fund's investment objective. This
remainder may also include equity, government, fixed-income and convertible
securities issued by issuers located in developed economies in Asia, Europe and
North America, including the United States, subject to the Fund's investment
objective. Although the Fund may invest up to 35% of its net assets in
fixed-income and convertible securities which are either not rated or rated
below investment grade, the Fund has no current intention of investing in excess
of 10% of its net assets in unrated or lower rated convertible securities nor in
excess of 5% of its net assets in unrated or lower rated non-convertible debt
securities (see "Lower Rated Convertible and Fixed-Income Securities" below). In
addition, this portion of the Fund's portfolio will consist of various other
financial instruments such as forward foreign exchange contracts, futures
contracts and options.
The Fund may also invest in securities of Japanese and other foreign issuers
in the form of American Depository Receipts (ADRs), European Depository Receipts
(EDRs) or other similar securities convertible into securities of foreign
issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are receipts
typically issued by a United States bank or trust company evidencing ownership
of the underlying securities. EDRs are European receipts evidencing a similar
arrangement. Generally, ADRs, in registered form, are designed for use in the
United States securities markets and EDRs, in bearer form, are designed for use
in European securities markets.
The Sub-Adviser will use a "bottom-up" approach, whereby the identification
of earnings growth and attractively priced stocks drives the Sub-Adviser's
investment process. However, no investments will be made without assessing
future country risk (including politics, monetary policy and currency) that
might adversely affect stock selection. The Sub-Adviser believes that strong
growth will be reflected in superior investment returns. A company's ability to
grow earnings leads to the accumulation of assets, increased dividend payments
and, ultimately, drives share prices higher.
Because market inefficiency can lead to "over" as well as "under" pricing,
the Sub-Adviser believes that an assessment of company growth prospects must be
combined with an understanding of how the stock is priced. A series of multiples
is used for this purpose and evaluated against the stock's history. Stocks that
are trading significantly above their historic norm are disqualified from
inclusion in the portfolio. In addition, the Fund will maintain a disciplined
sell process for liquidating portfolio holdings.
There may be periods during which, in the opinion of the Investment Manager
or Sub-Adviser, market conditions warrant reduction of some or all of the Fund's
securities holdings. During such periods, the Fund may adopt a temporary
"defensive" posture in which greater than 35% and, in some circumstances up to
100%, of its net assets are invested in cash or money market instruments. Money
market instruments in which the Fund may invest are securities issued or
guaranteed by the U.S. Government (Treasury bills, notes and bonds, including
zero coupon securities); bank obligations (such as certificates of deposit and
bankers' acceptances); Yankee instruments; Eurodollar certificates of deposit;
obligations of savings institutions; fully insured certificates of deposit; and
commercial paper rated within the two highest grades by Moody's or S&P or, if
not rated, issued by a company having an outstanding debt issue rated at least
AA by S&P or Aa by Moody's.
To hedge against adverse price movements in the securities held in its
portfolio and the currencies in which they are denominated (as well as in the
securities it might wish to purchase and their denominated currencies) the Fund
may engage in transactions in forward foreign currency contracts, options on
securities and currencies, and futures contracts and options on futures
contracts on securities, currencies and indexes. The Fund may also purchase
options on securities to facilitate its participation in the potential
appreciation of the value of the underlying securities. A discussion of these
transactions follows below under "Risk Factors and Special Considerations" and
is supplemented by further disclosure in the Statement of Additional
Information.
RISK FACTORS AND SPECIAL
CONSIDERATIONS
Investing in Japanese equity securities involves certain risks and special
considerations as follows:
THE JAPANESE SECURITIES MARKETS
(a) The Exchange Market. The Japanese exchange market is a highly
systemized, government regulated market currently consisting of eight stock
exchanges. The three Main Japanese Exchanges (Tokyo, Osaka and Nagoya) are
comprised of First and Second Sections. The First Sections have more stringent
listing standards with respect to a company's number of years in existence,
number of outstanding shares and trading volume and, accordingly, list larger,
more established companies than the Second Sections. The Fund intends to invest
primarily in the securities of companies listed on the First Section of the
Tokyo Stock Exchange ("TSE"). The TSE is the largest exchange and, as of
December 29, 1995, listed 1,253 companies with market capitalization of
approximately U.S.$3.3 trillion and average monthly trading volume of
approximately U.S.$62.4 billion. The Fund may invest up to 25% of its net assets
in securities which are traded on the Second Sections of the Main Japanese
Exchanges (primarily, the TSE) and in the over-the-counter market, described
below. These are generally smaller, less capitalized companies than those traded
on the First Sections. As of December 29, 1995, the Second Section of the TSE
listed approximately 461 companies with market capitalization of approximately
6
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U.S.$147.3 billion and average monthly trading volume of approximately U.S.$3.9
billion. There are also five regional exchanges in which the Fund does not
currently intend to invest.
(b) The OTC Market. The Japanese OTC market is less systemized than the
stock exchanges. Trading of equity securities in the Japanese OTC market is
conducted by securities firms in Japan, primarily through an organization which
acts as a "matching agent" by matching buy and sell orders. As of December 29,
1995, 677 companies with market capitalization of approximately U.S.$142.1
billion and average monthly trading volume of approximately U.S.$4.7 billion
were traded through the Japanese OTC market.
MARKET RISKS. Although the market for Japanese equities traded on the First
Section of the TSE is substantial in terms of trading volume and liquidity, the
TSE has nonetheless exhibited significant market volatility in the past several
years. With respect to the OTC market, trades of certain stocks may not be
effected on days when the matching of buy and sell orders for such stocks does
not occur. The liquidity of the Japanese OTC market, as well as that of the
Second Sections of the exchanges, although increasing in recent years, is
limited by the small number of publicly held shares which trade on a regular
basis. Overall, Japanese securities markets have declined significantly since
1989 which has contributed to a weakness in the Japanese economy and the impact
of a further decline cannot be ascertained. The common stocks of many Japanese
companies continue, as they have historically, to trade at high price-earnings
ratios in comparison with those in the U.S., even after the recent market
decline. Differences in accounting methods make it difficult to compare the
earnings of Japanese companies with those of companies in other countries,
especially the United States.
POLITICAL RISKS. Japan has a parliamentary form of government. Triggered by
successive revelations of political scandals, one-party domination by the
Liberal Democratic Party which was established in 1955, was terminated in
mid-1993. Since then, political instability has resulted from frequent turnover
of coalition governments and prime ministers. What, if any, effect the current
political situation will have on prospective regulatory reforms of the economy
in Japan cannot be predicted. Recent and future developments in Japan and
neighboring Asian countries may lead to changes in policy that might adversely
affect the Fund.
JAPANESE GOVERNMENT REGULATION. A foreign investor may not directly or
indirectly acquire 10% or more of the total outstanding shares of a Japanese
corporation without prior notification to the Ministry of Finance ("MOF") and
any other ministry with proper jurisdiction. Such ministries may make a
recommendation to modify or prohibit the proposed acquisition if they consider
that such acquisition falls under certain limited conditions specified in the
Foreign Exchange Controls. If the foreign investor does not accept the
recommendation, such ministries may issue an order modifying or prohibiting the
acquisition. The Fund will be considered a foreign investor for this purpose.
ECONOMIC FACTORS. The Japanese economy experienced its worst recession since
World War II in the 1990s. While Japan's Economic Planning Agency claims the
recession ended in October 1993, the economy has been largely stagnant since
then. In addition, asset deflation, both financial and in real estate, has
exerted a continuous drag on the economy. The Japanese government has called for
a transformation of the economy away from its high dependency on export-led
growth towards greater stimulation of the domestic economy. The plan calls for
direct government spending on public works and includes measures to support weak
land prices and to revitalize Japan's stagnating financial markets. There is no
assurance that this package, however, will succeed in fueling economic growth.
Strains in the financial system have also been one of the major causes of
Japan's economic weakness. The non-performing loans of financial institutions
have hampered their ability to take on risks, thus obstructing the flow of funds
into capital outlays as well as equities. At the end of 1995, Japan's financial
institutions were estimated by the government to have at least yen 40 trillion
(U.S.$400 billion) in outstanding loans, including uncollectible loans estimated
at yen 10-15 trillion. While the banking system appears to be making some
progress in its attempt to deal with non-performing assets, the overall problems
in the banking system could make economic recovery more difficult to achieve and
may lead to a crisis in the banking system itself.
INTERNATIONAL TRADE. Japan is largely dependent upon foreign economies for raw
materials. International trade is important to Japan's economy, as exports
provide the means to pay for many of the raw materials it must import. Because
of the concentration of Japanese exports in highly visible products such as
automobiles, machine tools and semiconductors, and the large trade surpluses
ensuing therefrom, Japan has entered a difficult phase in its relations with its
trading partners, particularly with respect to the United States, with whom the
trade imbalance is the greatest. It is possible that differences over trade
policy may lead the U.S. to take actions which may have an adverse effect on the
Japanese economy.
CURRENCY FACTORS. Securities in Japan are denominated and quoted in "yen." Yen
are fully convertible and transferable based on floating exchange rates into all
currencies, without administrative or legal restrictions for both non-residents
and residents of Japan. In determining the net asset value of shares of the
Fund, assets or liabilities initially expressed in terms of Japanese yen will be
translated into U.S. dollars at the current selling rate of Japanese yen against
U.S. dollars. As a result, in the absence of a successful currency hedge, the
value of the Fund's assets as measured in U.S. dollars may be affected favorably
or unfavora-
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bly by fluctuations in the value of Japanese yen relative to the U.S. dollar.
NATURAL DISASTERS. In the past, Japan has experienced earthquakes and tidal
waves varying in degrees of severity, and the risks of such phenomena, and
damage resulting therefrom, continue to exist.
GENERAL RISKS OF INVESTING IN JAPANESE AND OTHER FOREIGN SECURITIES. Foreign
securities investments may be affected by changes in currency rates or exchange
control regulations, changes in governmental administration or economic or
monetary policy (in the United States and abroad) or changed circumstances in
dealings between nations. Fluctuations in the relative rates of exchange between
the currencies of different nations will affect the value of the Fund's
investments denominated in foreign currency. Changes in foreign currency
exchange rates relative to the U.S. dollar will affect the U.S. dollar value of
the Fund's assets denominated in that currency and thereby impact upon the
Fund's total return on such assets.
Foreign currency exchange rates are determined by forces of supply and
demand on the foreign exchange markets. These forces are themselves affected by
the international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. Moreover,
foreign currency exchange rates may be affected by the regulatory control of the
exchanges on which the currencies trade. The foreign currency transactions of
the Fund will be conducted on a spot basis or through forward foreign currency
exchange contracts (described below). The Fund will incur certain costs in
connection with these currency transactions.
Investments in foreign securities will also occasion risks relating to
political and economic developments abroad, including the possibility of
expropriations or confiscatory taxation, limitations on the use or transfer of
Fund assets and any effects of foreign social, economic or political
instability. Foreign companies are not subject to the regulatory requirements of
U.S. companies and, as such, there may be less publicly available information
about such companies. Moreover, foreign companies are not subject to uniform
accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies.
Securities of foreign issuers may be less liquid than comparable securities
of U.S. issuers and, as such, their price changes may be more volatile.
Furthermore, foreign exchanges and broker-dealers are generally subject to less
government and exchange scrutiny and regulation than their American
counterparts. Brokerage commissions, dealer concessions and other transaction
costs may be higher on foreign markets than in the U.S. In addition, differences
in clearance and settlement procedures on foreign markets may occasion delays in
settlements of the Fund's trades effected in such markets. As such, the
inability to dispose of portfolio securities due to settlement delays could
result in losses to the Fund due to subsequent declines in value of such
securities and the inability of the Fund to make intended security purchases due
to settlement problems could result in a failure of the Fund to make potentially
advantageous investments.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements, which may
be viewed as a type of secured lending by the Fund, and which 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 at a specified price and at
a fixed time in the future, usually not more than seven days from the date of
purchase. While repurchase agreements involve certain risks not associated with
direct investments in debt securities, including the risks of default or
bankruptcy of the selling financial institution, the Fund follows procedures to
minimize such risks. These procedures include effecting repurchase transactions
only with large, well-capitalized and well-established financial institutions
and maintaining adequate collateralization.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. The Fund may also use reverse
repurchase agreements and dollar rolls as part of its investment strategy.
Reverse repurchase agreements involve sales by the Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. The Fund may enter into dollar rolls in which the
Fund sells securities and simultaneously contracts to repurchase substantially
similar (same type and coupon) securities on a specified future date. Reverse
repurchase agreements and dollar rolls involve the risk that the market value of
the securities the Fund is obligated to repurchase under the agreement may
decline below the repurchase price. In the event the buyer of securities under a
reverse repurchase agreement or dollar roll files for bankruptcy or becomes
insolvent, the Fund's use of proceeds of the agreement may be restricted pending
a determination by the other party, or its trustee or receiver, whether to
enforce the Fund's obligation to repurchase the securities. Reverse repurchase
agreements and dollar rolls are speculative techniques involving leverage, and
are considered borrowings by the Fund.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From time
to time, in the ordinary course of business, 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 such transactions are negotiated, the price is
fixed at the time of the commitment, but delivery and payment can take place a
month or more after the date of the commitment. There is no overall limit on the
percentage of the Fund's assets which may be committed to the purchase of
securities on a
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when-issued, delayed delivery or forward commitment basis. An increase in the
percentage of the Fund's assets committed to the purchase of securities on a
when-issued, delayed delivery or forward commitment basis may increase the
volatility of the Fund's net asset value.
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, leveraged buyout or debt restructuring. If the anticipated event
does not occur and the securities are not issued, the Fund will have lost an
investment opportunity. There is no overall limit on the percentage of the
Fund's assets which may be committed to the purchase of securities on a "when,
as and if issued" basis. 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.
ZERO COUPON SECURITIES. A portion of the fixed-income securities purchased by
the Fund may be zero coupon securities. Such securities are purchased at a
discount from their face amount, giving the purchaser the right to receive their
full value at maturity. The interest earned on such securities is, implicitly,
automatically compounded and paid out at maturity. While such compounding at a
constant rate eliminates the risk of receiving lower yields upon reinvestment of
interest if prevailing interest rates decline, the owner of a zero coupon
security will be unable to participate in higher yields upon reinvestment of
interest received on interest-paying securities if prevailing interest rates
rise.
A zero coupon security pays no interest to its holder during its life.
Therefore, to the extent the Fund invests in zero coupon securities, it will not
receive current cash available for distribution to shareholders. In addition,
zero coupon securities are subject to substantially greater price fluctuations
during periods of changing prevailing interest rates than are comparable
securities which pay interest on a current basis. Current federal tax law
requires that a holder (such as the Fund) of a zero coupon security accrue a
portion of the discount at which the security was purchased as income each year
even though the Fund receives no interest payments in cash on the security
during the year.
PRIVATE PLACEMENTS. The Fund may invest up to 5% of its total assets in
securities which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), or which are otherwise not readily marketable. (Securities eligible for
resale pursuant to Rule 144A under the Securities Act, and determined to be
liquid pursuant to the procedures discussed in the following paragraph, are not
subject to the foregoing restriction.) These securities are generally referred
to as private placements or restricted securities. Limitations on the resale of
such securities may have an adverse effect on their marketability, and may
prevent the Fund from disposing of them promptly at reasonable prices. The Fund
may have to bear the expense of registering such securities for resale and the
risk of substantial delays in effecting such registration.
The Securities and Exchange Commission has adopted Rule 144A under the
Securities Act, which permits the Fund to sell restricted securities to
qualified institutional buyers without limitation. The Investment Manager,
pursuant to procedures adopted by the Trustees of the Fund, will make a
determination as to the liquidity of each restricted security purchased by the
Fund. If a restricted security is determined to be "liquid," such security will
not be included within the category "illiquid securities," which under current
policy may not exceed 15% of the Fund's net assets. Investing in Rule 144A
securities could have the effect of increasing the level of Fund illiquidity to
the extent the Fund, at a particular point in time, may be unable to find
qualified institutional buyers interested in purchasing such securities.
OPTIONS AND FUTURES TRANSACTIONS. The Fund may purchase and sell (write) call
and put options on (i) portfolio securities which are denominated in either U.S.
dollars or foreign currencies; (ii) stock indexes; and (iii) the U.S. dollar and
foreign currencies. Such options are or may in the future be listed on several
U.S. and foreign securities exchanges or may be traded in over-the-counter
transactions ("OTC options"). OTC options are purchased from or sold (written)
to dealers or financial institutions which have entered into direct agreements
with the Fund.
The Fund is permitted to write covered call options on portfolio securities
and the U.S. dollar and foreign currencies, without limit, in order to hedge
against the decline in the value of a security or currency in which such
security is denominated (although such hedge is limited to the value of the
premium received) and to close out long call option positions. The Fund may
write covered put options, under which the Fund incurs an obligation to buy the
security (or currency) underlying the option from the purchaser of the put at
the option's exercise price at any time during the option period, at the
purchaser's election.
The Fund may purchase listed and OTC call and put options in amounts
equalling up to 5% of its total assets. The Fund may purchase call options to
close out a covered call position or to protect against an increase in the price
of a security it anticipates purchasing or, in the case of call options on a
foreign currency, to hedge against an adverse exchange rate change of the
currency in which the security it anticipates purchasing is denominated
vis-a-vis the currency in which the exercise price is denominated. The Fund may
purchase put options on securities which it holds in its portfolio to protect
itself against a decline in the value of the security and to close out written
put positions in a manner similar to call option closing purchase transactions.
There are no limits on the Fund's ability to purchase call and put options other
than compliance with the foregoing policies.
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The Fund may purchase and sell futures contracts that are currently traded,
or may in the future be traded, on U.S. and foreign commodity exchanges on
underlying portfolio securities, on any currency ("currency" futures), on U.S.
and foreign fixed-income securities ("interest rate" futures) and on such
indexes of U.S. or foreign equity or fixed-income securities as may exist or
come into being ("index" futures). The Fund may purchase or sell interest rate
futures contracts for the purpose of hedging some or all of the value of its
portfolio securities (or anticipated portfolio securities) against changes in
prevailing interest rates. The Fund may purchase or sell index futures contracts
for the purpose of hedging some or all of its portfolio securities (or
anticipated portfolio securities) against changes in their prices. The Fund may
purchase or sell currency futures contracts to hedge against an anticipated rise
or decline in the value of the currency in which a portfolio security is
denominated vis-a-vis another currency. As a futures contract purchaser, the
Fund incurs an obligation to take delivery of a specified amount of the
obligation underlying the contract at a specified time in the future for a
specified price. As a seller of a futures contract, the Fund incurs an
obligation to deliver the specified amount of the underlying obligation at a
specified time in return for an agreed upon price.
The Fund also may purchase and write call and put options on futures
contracts which are traded on an exchange and enter into closing transactions
with respect to such options to terminate an existing position.
New futures contracts, options and other financial products and various
combinations thereof continue to be developed. The Fund may invest in any such
futures, options or products as may be developed, to the extent consistent with
its investment objective and applicable regulatory requirements.
RISKS OF OPTIONS AND FUTURES TRANSACTIONS. The Fund may close out its position
as writer of an option, or as a buyer or seller of a futures contract, only if a
liquid secondary market exists for options or futures contracts of that series.
There is no assurance that such a market will exist, particularly in the case of
OTC options, as such options may generally only be closed out by entering into a
closing purchase transaction with the purchasing dealer. Also, exchanges may
limit the amount by which the price of many futures contracts may move on any
day. If the price moves equal the daily limit on successive days, then it may
prove impossible to liquidate a futures position until the daily limit moves
have ceased.
Futures contracts and options transactions may be considered speculative in
nature and may involve greater risks than those customarily assumed by other
investment companies which do not invest in such instruments. One such risk is
that the Investment Manager or Sub-Adviser could be incorrect in its
expectations as to the direction or extent of various interest rate or price
movements or the time span within which the movements take place. For example,
if the Fund sold futures contracts for the sale of securities in anticipation of
an increase in interest rates, and then interest rates went down instead,
causing bond prices to rise, the Fund would lose money on the sale. Another risk
which will arise in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities, currencies
and indexes subject to futures contracts (and thereby the futures contract
prices) may correlate imperfectly with the behavior of the U.S. dollar cash
prices of the Fund's portfolio securities and their denominated currencies. See
the Statement of Additional Information for a further discussion of risks.
NON-DIVERSIFIED STATUS. The Fund is a non-diversified investment company and,
as such, is not subject to the diversification requirements of the Investment
Company Act of 1940, as amended (the "Investment Company Act"). As a
non-diversified investment company, the Fund may invest a greater portion of its
assets in the securities of a single issuer and thus is subject to greater
exposure to risks such as a decline in the credit rating of that issuer.
However, the Fund anticipates that it will qualify as a regulated investment
company under the federal income tax laws and, if so qualified, will be subject
to the applicable diversification requirements of the Internal Revenue Code, as
amended (the "Code"). As a regulated investment company under the Code, the Fund
may not, as of the end of any of its fiscal quarters, have invested more than
25% of its total assets in the securities of any one issuer (including a foreign
government), or as to 50% of its total assets, have invested more than 5% of its
total assets in the securities of a single issuer.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may enter into forward
foreign currency exchange contracts ("forward contracts") in connection with its
foreign securities investments.
A forward contract involves an obligation to purchase or sell a currency at
a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
The Fund may enter into forward contracts as a hedge against fluctuations in
future foreign exchange rates.
The Fund will enter into forward contracts under various circumstances. When
the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may, for example, desire to "lock in" the
price of the security in U.S. dollars or some other foreign currency which the
Fund is temporarily holding in its portfolio. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars or other
currency, of the amount of foreign currency involved in the underlying security
transactions, the Fund will be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar or
other currency
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which is being used for the security purchase (by the Fund or the counterparty)
and the foreign currency in which the security is denominated during the period
between the date on which the security is purchased or sold and the date on
which payment is made or received.
At other times, when, for example, the Fund's Investment Manager or
Sub-Adviser believe that the currency of a particular foreign country may suffer
a substantial decline against the U.S. dollar or some other foreign currency,
the Fund may enter into a forward contract to sell, for a fixed amount of
dollars or other currency, the amount of foreign currency approximating the
value of some or all of the Fund's securities holdings (or securities which the
Fund has purchased for its portfolio) denominated in such foreign currency.
Under identical circumstances, the Fund may enter into a forward contract to
sell, for a fixed amount of U.S. dollars or other currency, an amount of foreign
currency other than the currency in which the securities to be hedged are
denominated approximating the value of some or all of the portfolio securities
to be hedged. This method of hedging, called "cross-hedging," will be selected
by the Investment Manager or Sub-Adviser when it is determined that the foreign
currency in which the portfolio securities are denominated has insufficient
liquidity or is trading at a discount as compared with some other foreign
currency with which it tends to move in tandem.
In addition, when the Fund's Investment Manager or Sub-Adviser anticipate
purchasing securities at some time in the future, and wish to lock in the
current exchange rate of the currency in which those securities are denominated
against the U.S. dollar or some other foreign currency, the Fund may enter into
a forward contract to purchase an amount of currency equal to some or all of the
value of the anticipated purchase, for a fixed amount of U.S. dollars or other
currency. The Fund may, however, close out the forward contract without
purchasing the security which was the subject of the "anticipatory" hedge.
In all of the above circumstances, if the currency in which the Fund's
securities holdings (or anticipated portfolio securities) are denominated rises
in value with respect to the currency which is being purchased (or sold), the
Fund will have realized fewer gains than had the Fund not entered into the
forward contracts. Moreover, the precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible,
since the future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The Fund is
not required to enter into such transactions with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Investment Manager or Sub-Adviser. The Fund generally will not enter into a
forward contract with a term of greater than one year, although it may enter
into forward contracts for periods of up to five years. The Fund may be limited
in its ability to enter into hedging transactions involving forward contracts by
the Internal Revenue Code requirements relating to qualification as a regulated
investment company (see "Dividends, Distributions and Taxes").
RIGHTS AND WARRANTS. The Fund may acquire rights and/or warrants which are
attached to other securities in its portfolio, or which are issued as a
distribution by the issuer of a security held in its portfolio. Rights and/or
warrants are, in effect, options to purchase equity securities at a specific
price, generally valid for a specific period of time, and have no voting rights,
pay no dividends and have no rights with respect to the corporation issuing
them.
LOWER RATED CONVERTIBLE AND FIXED-INCOME SECURITIES. The Fund may acquire,
through purchase or a distribution by the issuer of a security held in its
portfolio, a fixed-income security which is convertible into common stock of the
issuer. Convertible securities rank senior to common stocks in a corporation's
capital structure and, therefore, entail less risk than the corporation's common
stock. The value of a convertible security is a function of its "investment
value" (its value as if it did not have a conversion privilege), and its
"conversion value" (the security's worth if it were to be exchanged for the
underlying security, at market value, pursuant to its conversion privilege).
To the extent that a convertible security's investment value is greater than
its conversion value, its price will be primarily a reflection of such
investment value and its price will be likely to increase when interest rates
fall and decrease when interest rates rise, as with a fixed-income security (the
credit standing of the issuer and other factors may also have an effect on the
convertible security's value). If the conversion value exceeds the investment
value, the price of the convertible security will rise above its investment
value and, in addition, will sell at some premium over its conversion value.
(This premium represents the price investors are willing to pay for the
privilege of purchasing a fixed-income security with a possibility of capital
appreciation due to the conversion privilege.) At such times the price of the
convertible security will tend to fluctuate directly with the price of the
underlying equity security.
A portion of the fixed-income and convertible securities in which the Fund
may invest are not rated; when rated, such ratings will generally be below
investment grade. Securities below investment grade are the equivalent of high
yield, high risk bonds, commonly known as "junk bonds." Investment grade is
generally considered to be debt securities rated BBB or higher by Standard &
Poor's Corporation ("S&P") or Baa or higher by Moody's Investors Service, Inc.
("Moody's"). However, the Fund will not invest in debt securities that are in
default in payment of principal or interest.
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Because of the special nature of the Fund's permitted investments in lower
rated debt securities, the Investment Manager and Sub-Adviser must take account
of certain special considerations in assessing the risks associated with such
investments. The prices of lower rated securities have been found to be less
sensitive to changes in prevailing interest rates than higher rated investments,
but are likely to be more sensitive to adverse economic changes or individual
corporate developments. During an economic downturn or substantial period of
rising interest rates, highly leveraged issuers may experience financial stress
which would adversely affect their ability to service their principal and
interest payment obligations, to meet their projected business goals or to
obtain additional financing. If the issuer of a fixed-income security owned by
the Fund defaults, the Fund may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty and change can be expected to result
in an increased volatility of market prices of lower rated securities and a
corresponding volatility in the net asset value of a share of the Fund.
PORTFOLIO MANAGEMENT
The Fund's portfolio is actively managed by its Investment Manager and the
Sub-Adviser with a view to achieving the Fund's investment objective. In
determining which securities to purchase for the Fund or hold in the Fund's
portfolio, the Investment Manager and the Sub-Adviser will rely on information
from various sources, including research, analysis and appraisals of brokers and
dealers, the views of Trustees of the Fund and others regarding economic
developments and interest rate trends, and the Investment Manager's and
Sub-Adviser's own analysis of factors they deem relevant. The Fund's primary
portfolio manager is William G.M. Thomas, an Investment Director of the Sub-
Adviser. Mr. Thomas has been managing equity portfolios for the Sub-Adviser for
over ten years.
Personnel of the Investment Manager and Sub-Adviser have substantial
experience in the use of the investment techniques described above under the
heading "Options and Futures Transactions," which techniques require skills
different from those needed to select the portfolio securities underlying
various options and futures contracts.
Orders for transactions in portfolio securities and commodities may be
placed for the Fund with a number of brokers and dealers, including DWR and two
affiliated broker-dealers of the Sub-Adviser (Morgan Grenfell Asia and Partners
Securities Pte. Limited and Morgan Grenfell Asia Securities (Hong Kong)
Limited). Pursuant to an order of the Securities and Exchange Commission, the
Fund may effect principal transactions in certain money market instruments with
Dean Witter Reynolds Inc. ("DWR"), a broker-dealer affiliate of the Investment
Manager. In addition, the Fund may incur brokerage commissions on transactions
conducted through DWR and the two above-mentioned affiliated broker-dealers of
the Sub-Adviser.
Although the Fund does not intend to engage in short-term trading, it may
sell portfolio securities without regard to the length of time they have been
held when such sale will, in the opinion of the Investment Manager or Sub-
Adviser, contribute to the Fund's investment objective. It is not anticipated
that the Fund's portfolio turnover rate will exceed 100% in any one year.
The expenses of the Fund relating to its portfolio management are likely to
be greater than those incurred by other investment companies investing primarily
in securities issued by domestic issuers as custodial costs, brokerage
commissions and other transaction charges related to investing in Japan and
other foreign markets are generally higher than in the United States.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The investment restrictions listed below are among the restrictions which have
been adopted by the Fund as fundamental policies. Under the Investment Company
Act, a fundamental policy may not be changed without the vote of a majority of
the outstanding voting securities of the Fund, as defined in the Act. For
purposes of the following limitations: (i) all percentage limitations apply
immediately after a purchase or initial investment, and (ii) 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 may not:
1. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry. This restriction does not apply to obligations
issued or guaranteed by the United States Government, its agencies or
instrumentalities.
2. Invest more than 5% of the value of its total assets in 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 issued or guaranteed by the United States Government, its
agencies or instrumentalities.
In addition, as a non-fundamental policy, the Fund may not, as to 75% of its
total assets, purchase more than 10% of the voting securities of any issuer.
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PURCHASE OF FUND SHARES
- --------------------------------------------------------------------------------
The Fund offers its shares for sale to the public on a continuous basis.
Pursuant to a Distribution Agreement between the Fund and Dean Witter
Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager,
shares of the Fund are distributed by the Distributor and offered by DWR and
other dealers who have entered into selected dealer agreements with the
Distributor ("Selected Broker-Dealers"). The principal executive office of the
Distributor is located at Two World Trade Center, New York, New York 10048.
The minimum initial purchase is $1,000. Minimum subsequent purchases of $100
or more may be made by sending a check, payable to Dean Witter Japan Fund,
directly to Dean Witter Trust Company (the "Transfer Agent") at P.O. Box 1040,
Jersey City, NJ 07303 or by contacting an account executive of DWR or other
Selected Broker-Dealer. The minimum initial purchase in the case of investments
through EasyInvest-SM-, an automatic purchase plan (see "Shareholder Services"),
is $100, provided that the schedule of automatic investments will result in
investments totalling at least $1,000 within the first twelve months. In the
case of investments pursuant to Systematic Payroll Deduction Plans (including
Individual Retirement Plans), the Fund, in its discretion, may accept
investments without regard to any minimum amounts which would otherwise be
required if the Fund has reason to believe that additional investments will
increase the investment in all accounts under such Plans to at least $1,000.
Certificates for shares purchased will not be issued unless a request is made by
the shareholder in writing to the Transfer Agent. The offering price will be the
net asset value per share next determined following receipt of an order (see
"Determination of Net Asset Value").
Shares of the Fund are sold through the Distributor on a normal three
business day settlement basis; that is, payment is due on the third business day
(settlement date) after the order is placed with the Distributor. Shares of the
Fund purchased through the Distributor are entitled to any dividends declared
beginning on the next business day following settlement date. Since DWR and
other Selected Broker-Dealers forward investors' funds on settlement date, they
will benefit from the temporary use of the funds if payment is made prior
thereto. Shares purchased through the Transfer Agent are entitled to any
dividends declared beginning on the next business day following receipt of an
order. As noted above, orders placed directly with the Transfer Agent must be
accompanied by payment. Investors will be entitled to receive dividends and
capital gains distributions if their order is received by the close of business
on the day prior to the record date for such distributions. While no sales
charge is imposed at the time shares are purchased, a contingent deferred sales
charge may be imposed at the time of redemption (see "Redemptions and
Repurchases"). Sales personnel are compensated for selling shares of the Fund at
the time of their sale by the Distributor and/or the Selected Broker-Dealer. In
addition, some sales personnel of the Selected Broker-Dealer will receive
various types of non-cash compensation as special sales incentives, including
trips, educational and/or business seminars and merchandise. The Fund and the
Distributor reserve the right to reject any purchase orders.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the Act
(the "Plan"), under which the Fund pays the Distributor a fee, which is accrued
daily and payable monthly, at an annual rate of 1.0% of the lesser of: (a) the
average daily aggregate gross sales of the Fund's shares since the inception of
the Fund (not including reinvestments of dividends or capital gains
distributions), less the average daily aggregate net asset value of the Fund's
shares redeemed since the Fund's inception upon which a contingent deferred
sales charge has been imposed or waived; or (b) the Fund's average daily net
assets. This fee is treated by the Fund as an expense in the year it is accrued.
A portion of the fee payable pursuant to the Plan, equal to 0.25% of the Fund's
average daily net assets, is characterized as a service fee within the meaning
of NASD guidelines. The service fee is a payment made for personal service
and/or the maintenance of shareholder accounts.
Amounts paid under the Plan are paid to the Distributor for services
provided and the expenses borne by the Distributor and others in the
distribution of the Fund's shares, including the payment of commissions for
sales of the Fund's shares and incentive compensation to and expenses of DWR's
account executives and others who engage in or support distribution of shares or
who service shareholder accounts, including overhead and telephone expenses;
printing and distribution of prospectuses and reports used in connection with
the offering of the Fund's shares to other than current shareholders; and
preparation, printing and distribution of sales literature and advertising
materials. In addition, the Distributor may utilize fees paid pursuant to the
Plan to compensate DWR and 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.
For the fiscal period ended May 31, 1996, the Fund accrued payments under
the Plan amounting to $249,726, which amount is equal to 1.00% of the Fund's
average daily net assets for the fiscal period. The payments accrued under the
Plan were calculated pursuant to clause (b) of the compensation formula under
the Plan.
At any given time, the expenses in distributing shares of the Fund may be in
excess of the total of (i) the payments made by the Fund pursuant to the Plan,
and (ii) the proceeds of contingent deferred sales charges paid by
inves-
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tors upon the redemption of shares (see "Redemptions and Repurchases--Contingent
Deferred Sales Charge"). For example, if $1 million in expenses in distributing
shares of the Fund had been incurred and $750,000 had been received as described
in (i) and (ii) above, the excess expense would amount to $250,000. The
Distributor has advised the Fund that such excess amount, including the carrying
charge described above, totalled $15,017,815 at May 31, 1996, which was equal to
5.51% of the Fund's net assets on such date.
Because there is no requirement under the Plan that the Distributor be
reimbursed for all distribution expenses or any requirement that the Plan be
continued from year to year, such excess amount, if any, does not constitute a
liability of the Fund. Although there is no legal obligation for the Fund to pay
expenses incurred in excess of payments made to the Distributor under the Plan,
and the proceeds of contingent deferred sales charges paid by investors upon
redemption of shares, if for any reason the Plan is terminated the Trustees will
consider at that time the manner in which to treat such expenses. Any cumulative
expenses incurred, but not yet recovered through distribution fees or contingent
deferred sales charges, may or may not be recovered through future distribution
fees or contingent deferred sales charges.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is determined once daily at 4:00 p.m.,
New York time, on each day that the New York Stock Exchange is open (or, on days
when the New York Stock Exchange closes prior to 4:00 p.m., at such earlier
time) by taking the value of all assets of the Fund, subtracting all its
liabilities, dividing by the number of shares outstanding and adjusting to the
nearest cent. The net asset value per share will not be determined on Good
Friday and on such other federal and non-federal holidays as are observed by the
New York Stock Exchange.
In the calculation of the Fund's net asset value: (1) an equity portfolio
security listed or traded on the New York or American Stock Exchange or other
domestic or foreign stock exchange or quoted by NASDAQ is valued at its latest
sale price on that exchange or quotation service, prior to the time assets are
valued; if there were no sales that day, the security is valued at the latest
bid price (in cases where a security is traded on more than one exchange, the
security is valued on the exchange designated as the primary market pursuant to
procedures adopted by the Trustees); and (2) all other portfolio securities for
which over-the-counter market quotations are readily available are valued at the
latest bid price. When market quotations are not readily available, including
circumstances under which it is determined by the Investment Manager that sale
and bid prices are not reflective of a security's market value, portfolio
securities are valued at their fair value as determined in good faith under
procedures established by and under the general supervision of the Board of
Trustees. For valuation purposes, quotations of foreign portfolio securities,
other assets and liabilities and forward contracts stated in foreign currency
are translated into U.S. dollar equivalents at the prevailing market rates prior
to the close of the New York Stock Exchange. Dividends receivable are accrued as
of the ex-dividend date or as of the time that the relevant ex-dividend date and
amounts become known.
Short-term debt securities with remaining maturities of sixty days or less
at the time of purchase are valued at amortized cost, unless the Trustees
determine such does not reflect the securities' market value, in which case
these securities will be valued at their fair value as determined by the
Trustees.
Certain of the Fund's portfolio securities may be valued by an outside
pricing service approved by the Fund's Trustees. The pricing service may utilize
a matrix system incorporating security quality, maturity and coupon as the
evaluation model parameters, and/or research evaluations by its staff, including
review of broker-dealer market price quotations, in determining what it believes
is the fair valuation of the portfolio securities valued by such pricing
service.
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. All income dividends and
capital gains distributions are automatically paid in full and fractional shares
of the Fund (or, if specified by the shareholder, any other open-end investment
company for which InterCapital serves as investment manager (collectively, with
the Fund, the "Dean Witter Funds")), unless the shareholder requests that they
be paid in cash. Shares as acquired are not subject to the imposition of a
contingent deferred sales charge upon their redemption (see "Redemptions and
Repurchases").
INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS RECEIVED IN CASH. Any shareholder who
receives a cash payment representing a dividend or capital gains distribution
may invest such dividend or distribution at the net asset value per share next
determined after receipt by the Transfer Agent, by returning the check or the
proceeds to the Transfer Agent within thirty days after the payment date. Shares
so acquired are not subject to the imposition of a contingent deferred sales
charge upon their redemption (see "Redemptions and Repurchases").
14
<PAGE>
EASYINVEST-SM-. Shareholders may subscribe to EasyInvest, an automatic purchase
plan which provides for any amount from $100 to $5,000 to be transferred
automatically from a checking or savings account, on a semi-monthly, monthly or
quarterly basis, to the Transfer Agent for investment in shares of the Fund (see
"Purchase of Fund Shares" and "Redemptions and Repurchases--Involuntary
Redemption").
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan (the "Withdrawal
Plan") is available for shareholders who own or purchase shares of the Fund
having a minimum value of $10,000 based upon the then current net asset value.
The Withdrawal Plan provides for monthly or quarterly (March, June, September
and December) checks in any dollar amount, not less than $25, or in any whole
percentage of the account balance, on an annualized basis. Any applicable
contingent deferred sales charge will be imposed on shares redeemed under the
Withdrawal Plan (see "Redemptions and Repurchases--Contingent Deferred Sales
Charge"). Therefore, any shareholder participating in the Withdrawal Plan will
have sufficient shares redeemed from his or her account so that the proceeds
(net of any applicable contingent deferred sales charge) to the shareholder will
be the designated monthly or quarterly amount.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about any of the
above services.
TAX-SHELTERED RETIREMENT PLANS. Retirement plans are available for use by
corporations, the self-employed, Individual Retirement Accounts and Custodial
Accounts under Section 403(b)(7) of the Internal Revenue Code. Adoption of such
plans should be on advice of legal counsel or tax adviser.
For further information regarding plan administration, custodial fees and
other details, investors should contact their DWR or other Selected Dealer
account executive or the Transfer Agent.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders an "Exchange Privilege" allowing
the exchange of shares of the Fund for shares of other Dean Witter Funds sold
with a contingent deferred sales charge ("CDSC funds"), and for shares of Dean
Witter Short-Term U.S. Treasury Trust, Dean Witter Short-Term Bond Fund, Dean
Witter Limited Term Municipal Trust, Dean Witter Balanced Growth Fund, Dean
Witter Balanced Income Fund, Dean Witter Intermediate Term U.S. Treasury Trust
and five Dean Witter Funds which are money market funds (the foregoing eleven
non-CDSC funds are hereinafter collectively referred to as the "Exchange
Funds"). Exchanges may be made after the shares of the Fund acquired by purchase
(not by exchange or dividend reinvestment) have been held for thirty days. There
is no waiting period for exchanges of shares acquired by exchange or dividend
reinvestment.
An exchange to another CDSC fund or to any Exchange Fund that is not a money
market fund is on the basis of the next calculated net asset value per share of
each fund after the exchange order is received. When exchanging into a money
market fund from the Fund, shares of the Fund are redeemed out of the Fund at
their next calculated net asset value and the proceeds of the redemption are
used to purchase shares of the money market fund at the net asset value
determined the following business day. Subsequent exchanges between any of the
money market funds and any of the CDSC funds can be effected on the same basis.
No contingent deferred sales charge ("CDSC") is imposed at the time of any
exchange, although any applicable CDSC will be imposed upon ultimate redemption.
Shares of the Fund acquired in exchange for shares of another CDSC fund having a
different CDSC schedule than that of this Fund will be subject to the CDSC
schedule of this Fund, even if such shares are subsequently re-exchanged for
shares of the CDSC fund originally purchased. During the period of time the
shareholder remains in the Exchange Fund (calculated from the last day of the
month in which the Exchange Fund shares were acquired), the holding period (for
the purpose of determining the rate of the CDSC) is frozen. If those shares are
subsequently reexchanged for shares of a CDSC fund, the holding period
previously frozen when the first exchange was made resumes on the last day of
the month in which shares of a CDSC fund are reacquired. Thus, the CDSC is based
upon the time (calculated as described above) the shareholder was invested in a
CDSC fund (see "Redemptions and Repurchases--Contingent Deferred Sales Charge").
However, in the case of shares exchanged into an Exchange Fund, upon a
redemption of shares which results in a CDSC being imposed, a credit (not to
exceed the amount of the CDSC) will be given in an amount equal to the Exchange
Fund 12b-1 distribution fees incurred on or after that date which are
attributable to those shares. (Exchange Fund 12b-1 distribution fees are
described in the prospectuses for those funds.)
In addition, shares of the Fund may be acquired in exchange for shares of
Dean Witter Funds sold with a front-end sales charge ("front-end sales charge
funds"), but shares of the Fund, however acquired, may not be exchanged for
shares of front-end sales charge funds. Shares of a CDSC fund acquired in
exchange for shares of a front-end sales charge fund (or in exchange for shares
of other Dean Witter Funds for which shares of a front-end sales charge fund
have been exchanged) are not subject to any CDSC upon their redemption.
15
<PAGE>
Purchases and exchanges should be made for investment purposes only. A
pattern of frequent exchanges may be deemed by the Investment Manager to be
abusive and contrary to the best interests of the Fund's other shareholders and,
at the Investment Manager's discretion, may be limited by the Fund's refusal to
accept additional purchases and/or exchanges from the investor. Although the
Fund does not have any specific definition of what constitutes a pattern of
frequent exchanges, and will consider all relevant factors in determining
whether a particular situation is abusive and contrary to the best interests of
the Fund and its other shareholders, investors should be aware that the Fund and
each of the other Dean Witter Funds may in their discretion limit or otherwise
restrict the number of times this Exchange Privilege may be exercised by any
investor. Any such restriction will be made by the Fund on a prospective basis
only, upon notice of the shareholder not later than ten days following such
shareholder's most recent exchange. Also, the Exchange Privilege may be
terminated or revised at any time by the Fund and/or any of such Dean Witter
Funds for which shares of the Fund have been exchanged, upon such notice as may
be required by applicable regulatory agencies. Shareholders maintaining margin
accounts with DWR or another Selected Broker-Dealer are referred to their
account executive regarding restrictions on exchange of shares of the Fund
pledged in the margin account.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain a copy and examine it carefully
before investing. Exchanges are subject to the minimum investment requirement
and any other conditions imposed by each fund. In the case of any shareholder
holding a share certificate or certificates, no exchanges may be made until all
applicable share certificates have been received by the Transfer Agent and
deposited in the Shareholder's account. An exchange will be treated for federal
income tax purposes the same as a repurchase or redemption of shares, on which
the shareholder may realize a capital gain or loss. However, the ability to
deduct capital losses on an exchange may be limited in situations where there is
an exchange of shares within ninety days after the shares are purchased. The
Exchange Privilege is only available in states where an exchange may legally be
made.
If DWR or another Selected Broker-Dealer is the current dealer of record and
its account numbers are part of the account information, shareholders may
initiate an exchange of shares of the Fund for shares of any of the Dean Witter
Funds (for which the Exchange Privilege is available) pursuant to this Exchange
Privilege by contacting their account executive (no Exchange Privilege
Authorization Form is required). Other shareholders (and those shareholders who
are clients of DWR or another Selected Broker-Dealer but who wish to make
exchanges directly by writing or telephoning the Transfer Agent) must complete
and forward to the Transfer Agent an Exchange Privilege Authorization Form,
copies of which may be obtained from the Transfer Agent, to initiate an
exchange. If the Authorization Form is used, exchanges may be made in writing or
by contacting the Transfer Agent at (800) 869-NEWS (toll-free).
The Fund will employ reasonable procedures to confirm that exchange
instructions communicated over the telephone are genuine. Such procedures may
include requiring various forms of personal identification such as name, mailing
address, social security or other tax identification number and DWR or other
Selected Broker-Dealer account number (if any). Telephone instructions may also
be recorded. If such procedures are not employed, the Fund may be liable for any
losses due to unauthorized or fraudulent instructions.
Telephone exchange instructions will be accepted if received by the Transfer
Agent between 9:00 a.m. and 4:00 p.m., New York time, on any day the New York
Stock Exchange is open. Any shareholder wishing to make an exchange who has
previously filed an Exchange Privilege Authorization Form and who is unable to
reach the Fund by telephone should contact his or her DWR or other Selected
Broker-Dealer account executive, if appropriate, or make a written exchange
request. Shareholders are advised that during periods of drastic economic or
market changes, it is possible that the telephone exchange procedures may be
difficult to implement, although this has not been the experience with the Dean
Witter Funds in the past.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about the
Exchange Privilege.
REDEMPTIONS AND REPURCHASES
- --------------------------------------------------------------------------------
REDEMPTION. Shares of the Fund can be redeemed for cash at any time at the net
asset value per share next determined; however, such redemption proceeds may be
reduced by the amount of any applicable contingent deferred sales charges (see
below). If shares are held in a shareholder's account without a share
certificate, a written request for redemption sent to the Fund's Transfer Agent
at P.O. Box 983, Jersey City, NJ 07303 is required. If certificates are held by
the shareholder(s), the shares may be redeemed by surrendering the certificates
with a written request for redemption, along with any additional information
required by the Transfer Agent.
16
<PAGE>
CONTINGENT DEFERRED SALES CHARGE. Shares of the Fund which are held for six
years or more after purchase (calculated from the last day of the month in which
the shares were purchased) will not be subject to any charge upon redemption.
Shares redeemed sooner than six years after purchase may, however, be subject to
a charge upon redemption. This charge is called a "contingent deferred sales
charge" ("CDSC"), which will be a percentage of the dollar amount of shares
redeemed and will be assessed on an amount equal to the lesser of the current
market value or the cost of the shares being redeemed. The size of this
percentage will depend upon how long the shares have been held, as set forth in
the table below:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR SINCE SALES CHARGE
PURCHASE AS A PERCENTAGE OF
PAYMENT MADE AMOUNT REDEEMED
- ----------------------------------------- -----------------------
<S> <C>
First.................................... 5.0%
Second................................... 4.0%
Third.................................... 3.0%
Fourth................................... 2.0%
Fifth.................................... 2.0%
Sixth.................................... 1.0%
Seventh and thereafter................... None
</TABLE>
A CDSC will not be imposed on: (i) any amount which represents an increase
in value of shares purchased within the six years preceding the redemption; (ii)
the current net asset value of shares purchased more than six years prior to the
redemption; and (iii) the current net asset value of shares purchased through
reinvestment of dividends or distributions and/or shares acquired in exchange
for shares of Dean Witter Funds sold with a front-end sales charge or of other
Dean Witter Funds acquired in exchange for such shares. Moreover, in determining
whether a CDSC is applicable it will be assumed that amounts described in (i),
(ii) and (iii) above (in that order) are redeemed first.
In addition, the CDSC, if otherwise applicable, will be waived in the case
of:
(1) redemptions of shares held at the time a shareholder dies or becomes
disabled, only if the shares are: (A) registered either in the name of an
individual shareholder (not a trust), or in the names of such shareholder and
his or her spouse as joint tenants with right of survivorship; or (B) held in a
qualified corporate or self-employed retirement plan, Individual Retirement
Account ("IRA") or Custodial Account under Section 403(b)(7) of the Internal
Revenue Code ("403(b) Custodial Account"), provided in either case that the
redemption is requested within one year of the death or initial determination of
disability;
(2) redemptions in connection with the following retirement plan
distributions: (A) lump-sum or other distributions from a qualified corporate or
self-employed retirement plan following retirement (or, in the case of a "key
employee" of a "top heavy" plan, following attainment of age 59 1/2); (B)
distributions from an IRA or 403(b) Custodial Account following attainment of
age 59 1/2; or (C) a tax-free return of an excess contribution to an IRA; and
(3) all redemptions of shares held for the benefit of a participant in a
corporate or self-employed retirement plan qualified under Section 401(k) of the
Internal Revenue Code which offers investment companies managed by the
Investment Manager or its subsidiary, Dean Witter Services Company Inc., as
self-directed investment alternatives and for which Dean Witter Trust Company,
an affiliate of the Investment Manager, serves as recordkeeper or Trustee
("Eligible 401(k) Plan"), provided that either: (A) the plan continues to be an
Eligible 401(k) Plan after the redemption; or (B) the redemption is in
connection with the complete termination of the plan involving the distribution
of all plan assets to participants.
With reference to (1) above, for the purpose of determining disability, the
Distributor utilizes the definition of disability contained in Section 72(m)(7)
of the Internal Revenue Code, which relates to the inability to engage in
gainful employment. With reference to (2) above, the term "distribution" does
not encompass a direct transfer of IRA, 403(b) Custodial Account or retirement
plan assets to a successor custodian or trustee. All waivers will be granted
only following receipt by the Distributor of confirmation of the shareholder's
entitlement.
REPURCHASE. DWR and other Selected Broker-Dealers are authorized to repurchase
shares represented by a share certificate which is delivered to any of their
offices. Shares held in a shareholder's account without a share certificate may
also be repurchased by DWR and other Selected Broker-Dealers upon the telephonic
or telegraphic request of the shareholder. The repurchase price is the net asset
value next computed (see "Purchase of Fund Shares") after such repurchase order
is received by DWR or other Selected Broker-Dealer, reduced by any applicable
CDSC.
The CDSC, if any, will be the only fee imposed by either the Fund, the
Distributor or DWR or other Selected Broker-Dealer. The offer by DWR and other
Selected Broker-Dealers to repurchase shares may be suspended without notice by
the Distributor at any time. In that event, shareholders may redeem their shares
through the Fund's Transfer Agent as set forth above under "Redemption."
PAYMENT FOR SHARES REDEEMED OR REPURCHASED. Payment for shares presented for
repurchase or redemption will be made by check within seven days after receipt
by the Transfer Agent of the certificate and/or written request in good order.
Such payment may be postponed or the right of redemption suspended under unusual
circumstances; e.g., when normal trading is not taking place on the New York
Stock Exchange. If the shares to be redeemed have recently been purchased by
check, payment of the redemption proceeds may be delayed for the minimum time
needed to verify that the check used for investment has been honored (not more
than fifteen days from the time of receipt of the check by the Transfer Agent).
Shareholders
17
<PAGE>
maintaining margin accounts with DWR or another Selected Broker-Dealer are
referred to their account executive regarding restrictions on redemption of
shares of the Fund pledged in the margin account.
REINSTATEMENT PRIVILEGE. A shareholder who has had his or her shares redeemed
or repurchased and has not previously exercised this reinstatement privilege
may, within thirty days after the date of the redemption or repurchase,
reinstate any portion or all of the proceeds of such redemption or repurchase in
shares of the Fund at their net asset value next determined after a
reinstatement request, together with the proceeds, is received by the Transfer
Agent and receive a pro-rata credit for any CDSC paid in connection with such
redemption or repurchase.
INVOLUNTARY REDEMPTION. The Fund reserves the right to redeem, on sixty days'
notice and at net asset value, the shares of any shareholder (other than shares
held in an Individual Retirement Account or Custodial Account under Section
403(b)(7) of the Internal Revenue Code) whose shares due to redemptions by the
shareholder have a value of less than $100 or such lesser amount as may be fixed
by the Trustees or, in the case of an account opened through EasyInvest-SM-, if
after twelve months the shareholder has invested less than $1,000 in the
account. However, before the Fund redeems such shares and sends the proceeds to
the shareholder, it will notify the shareholder that the value of the shares is
less than the applicable amount and allow him or her sixty days to make an
additional investment in an amount which will increase the value of his or her
account to at least the applicable amount before the redemption is processed. No
CDSC will be imposed on any involuntary redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. The Fund intends to pay dividends and to
distribute substantially all of its net investment income and distribute capital
gains, if any, once each year. The Fund may, however, determine either to
distribute or to retain all or part of any long-term capital gains in any year
for reinvestment.
All dividends and any capital gains distributions will be paid in additional
Fund shares and automatically credited to the shareholder's account without
issuance of a share certificate unless the shareholder requests in writing that
all dividends and/or distributions be paid in cash (see "Shareholder
Services--Automatic Investment of Dividends and Distributions").
TAXES. Because the Fund intends to distribute all of its net investment income
and net short-term capital gains to shareholders and otherwise qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code, it
is not expected that the Fund will be required to pay any Federal income tax on
any such income and capital gains. Shareholders will normally have to pay
Federal income taxes, and any state and local income taxes, on the dividends and
distributions they receive from the Fund.
Distributions of net investment income and net short-term capital gains are
taxable to the shareholder as ordinary dividend income regardless of whether the
shareholder receives such distributions in additional shares or in cash. Some
part of such dividends and distributions may be eligible for the Federal
dividends received deduction available to the Fund's corporate shareholders.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder has
held the Fund's shares and regardless of whether the distribution is received in
additional shares or in cash. Capital gains distributions are not eligible for
the dividends received deduction.
After the end of the calendar year, shareholders will be sent full
information on their dividends and capital gains distributions for tax purposes.
To avoid being subject to a 31% Federal backup withholding tax on taxable
dividends, capital gains distributions and the proceeds of redemptions and
repurchases, shareholders' taxpayer identification numbers must be furnished and
certified as to their accuracy.
Dividends, interest and gains received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. If it qualifies for
and makes the appropriate election with the Internal Revenue Service, the Fund
will report annually to its shareholders the amount per share of such taxes to
enable shareholders to claim United States foreign tax credits or deductions
with respect to such taxes. In the absence of such an election, the Fund would
deduct foreign tax in computing the amount of its distributable income.
Shareholders should consult their tax advisers as to the applicability of
the foregoing to their current situation.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund may quote its "total return" in advertisements and
sales literature. The total return of the Fund is based on historical earnings
and is not intended to indicate future performance.
18
<PAGE>
The "average annual total return" of the Fund refers to a figure reflecting
the average annualized percentage increase (or decrease) in the value of an
initial investment in the Fund of $1,000 over periods of one, five and ten years
or over the life of the Fund if less than any of the foregoing. Average annual
total return reflects all income earned by the Fund, any appreciation or
depreciation of the Fund's assets, all expenses incurred by the Fund and all
sales charges incurred by share-holders, for the stated periods. It also assumes
reinvestment of all dividends and distributions paid by the Fund.
In addition to the foregoing, the Fund may advertise its total return over
different periods of time by means of aggregate, average, and year-by-year or
other types of total return figures. The Fund may also advertise the growth of
hypothetical investments of $10,000, $50,000 and $100,000 in shares of the Fund.
Such calculations may or may not reflect the deduction of the contingent
deferred sales charge which, if reflected, would reduce the performance quoted.
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent organizations,
such as mutual fund performance rankings of Lipper Analytical Services, Inc.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS. All shares of beneficial interest of the Fund are of $0.01 par
value and are equal as to earnings, assets and voting privileges. There are no
conversion, pre-emptive or other subscription rights. In the event of a
liquidation, each share of beneficial interest of the Fund is entitled to its
portion of all the Fund's assets after all debts and expenses have been paid.
The shares do not have cumulative voting rights.
The Fund is not required to hold Annual Meetings of Shareholders and, in
ordinary circumstances, the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances the Trustees may be removed by action of the Trustees or by the
shareholders.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for obligations of the
Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that Fund
obligations include such disclaimer, and provides for indemnification and
reimbursement of expenses out of the Fund's property for any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability, and
the nature of the Fund's assets and operations, in the opinion of Massachusetts
counsel to the Fund, the risk to shareholders of personal liability is remote.
CODE OF ETHICS. Directors, officers and employees of the Investment Manager,
Dean Witter Services Company Inc. and the Distributor are subject to a strict
Code of Ethics adopted by those companies. The Code of Ethics is intended to
ensure that the interests of shareholders and other clients are placed ahead of
any personal interest, that no undue personal benefit is obtained from a
person's employment activities and that actual and potential conflicts of
interest are avoided. To achieve these goals and comply with regulatory
requirements, the Code of Ethics requires, among other things, that personal
securities transactions by employees of the companies be subject to an advance
clearance process to monitor that no Dean Witter Fund is engaged at the same
time in a purchase or sale of the same security. The Code of Ethics bans the
purchase of securities in an initial public offering, and also prohibits
engaging in futures and options transactions and profiting on short-term trading
(that is, a purchase within sixty days of a sale or a sale within sixty days of
a purchase) of a security. In addition, investment personnel may not purchase or
sell a security for their personal account within thirty days before or after
any transaction in any Dean Witter Fund managed by them. Any violations of the
Code of Ethics are subject to sanctions, including reprimand, demotion or
suspension or termination of employment. The Code of Ethics comports with
regulatory requirements and the recommendations in the 1994 report by the
Investment Company Institute Advisory Group on Personal Investing.
The Fund's Sub-Adviser also has a Code of Ethics which complies with
regulatory requirements and, insofar as it relates to persons associated with
the Fund, the 1994 report by the Investment Company Institute Advisory Group on
Personal Investing.
SHAREHOLDER INQUIRIES. All inquiries regarding the Fund should be directed to
the Fund at the telephone numbers or address set forth on the front cover of
this Prospectus.
19
<PAGE>
DEAN WITTER JAPAN FUND
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER JAPAN FUND
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights (appearing on page 4 of this
Prospectus) present fairly, in all material respects, the financial position of
Dean Witter Japan Fund (the "Fund") at May 31, 1996, and the results of its
operations, the changes in its net assets and the financial highlights for the
period April 26, 1996 (commencement of operations) through May 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at May 31, 1996 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provides
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
JULY 10, 1996
20
<PAGE>
DEAN WITTER JAPAN FUND
PORTFOLIO OF INVESTMENTS MAY 31, 1996
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (91.1%)
AUTO PARTS - ORIGINAL EQUIPMENT (2.4%)
297,000 Bridgestone Corp................... $ 5,164,262
166,000 NOK................................ 1,328,061
---------------
6,492,323
---------------
AUTOMOBILES (4.0%)
245,000 Mitsubishi Motors Corp............. 2,055,263
250,000 Nissan Motor Co. Ltd............... 2,055,586
530,000 Suzuki Motor Co. Ltd............... 6,715,686
---------------
10,826,535
---------------
BANKING (12.0%)
431,000 Asahi Bank, Ltd.................... 5,182,205
463,000 Bank of Tokyo - Mitsubishi Ltd..... 10,962,634
155,000 Mitsubishi Trust & Banking......... 2,580,466
265,000 Sanwa Bank, Ltd.................... 5,098,039
325,000 Sumitomo Bank...................... 6,402,608
185,000 Sumitomo Trust & Banking........... 2,566,593
---------------
32,792,545
---------------
BUILDING & CONSTRUCTION (0.9%)
158,000 National House Industrial.......... 2,469,663
---------------
BUSINESS & PUBLIC SERVICES (1.6%)
31,800 Asatsu Inc......................... 1,302,941
49,000 Secom Co........................... 3,172,401
---------------
4,475,342
---------------
CHEMICALS (4.0%)
717,000 Asahi Chemical Industry Co. Ltd.... 5,199,112
286,000 Shin-Etsu Chemical Co.............. 5,713,652
---------------
10,912,764
---------------
ELECTRICAL EQUIPMENT (11.3%)
169,000 Alpine Electronics Inc............. 3,126,156
368,000 Canon, Inc......................... 7,215,686
598,000 Hitachi, Ltd....................... 5,530,892
471,000 Matsushita Electric Industrial Co.,
Ltd................................ 8,102,664
153,000 Matsushita Electric Works.......... 1,627,358
85,600 Sony Corp.......................... 5,439,068
---------------
31,041,824
---------------
ELECTRONICS (10.0%)
447,000 Furukawa Electric Co............... 2,629,412
10,300 Keyence Corp....................... 1,352,756
25,000 Kyocera Corp....................... 1,711,062
43,700 Mabuchi Motor Co................... 2,708,010
95,000 Murata Manufacturing Co., Ltd...... 3,479,467
362,000 NGK Insulators..................... 4,017,758
223,000 Omron Corp......................... 4,516,926
86,000 Rohm Co., Ltd...................... 5,376,989
117,000 Sumitomo Electric Industries....... 1,590,733
---------------
27,383,113
---------------
ENGINEERING & CONSTRUCTION (2.9%)
367,000 Kajima Corp........................ 3,835,646
196,000 Kandenko Co., Ltd.................. 2,465,409
100,000 Kinden Corp........................ 1,581,576
---------------
7,882,631
---------------
<CAPTION>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------
<C> <S> <C>
FINANCIAL SERVICES (5.5%)
27,000 Japan Associated Finance........... $ 3,121,532
300,000 New Japan Securities (ADR)......... 1,895,117
364,000 Nomura Securities Co. Ltd.......... 6,867,925
63,000 Promise Co., Ltd................... 3,175,638
---------------
15,060,212
---------------
INSURANCE (2.8%)
428,000 Sumitomo Marine & Fire............. 3,871,476
294,000 Tokio Marine & Fire Insurance
Co................................. 3,806,881
---------------
7,678,357
---------------
INTERNATIONAL TRADE (2.9%)
581,000 Mitsubishi Corp.................... 7,953,015
---------------
MACHINERY (7.2%)
193,000 Asahi Diamond Industries Co.
Ltd................................ 2,481,225
59,000 Fuji Machine Manufacturing Co...... 1,571,587
1,038,000 Kawasaki Heavy Industries.......... 5,424,251
599,000 Mitsubishi Heavy Industries,
Ltd................................ 5,146,791
669,000 NSK Ltd............................ 5,061,432
---------------
19,685,286
---------------
MEDICAL PRODUCTS & SUPPLIES (0.6%)
171,000 Olympus Optical Co. Ltd............ 1,755,549
---------------
METALS (1.6%)
730,000 Mitsubishi Materials Corp.......... 4,253,607
---------------
PHARMACEUTICALS (2.1%)
200,000 Banyu Pharmaceutical Co. Ltd....... 2,571,217
137,000 Sankyo Co. Ltd..................... 3,243,803
---------------
5,815,020
---------------
REAL ESTATE (2.4%)
196,000 Mitsubishi Estate Co. Ltd.......... 2,737,329
308,000 Mitsui Fudosan Co.................. 3,902,701
---------------
6,640,030
---------------
RECREATION (1.0%)
25,000 H.I.S. Company Ltd................. 1,405,845
25,900 Sony Music Entertainment Inc....... 1,305,540
---------------
2,711,385
---------------
RETAIL (2.4%)
27,600 FamilyMart......................... 1,261,043
46,000 Ito-Yokado Co. Ltd................. 2,608,028
153,000 Tokyo Style........................ 2,702,830
---------------
6,571,901
---------------
RETAIL - DEPARTMENT STORES (0.4%)
89,000 Isetan............................. 1,210,044
---------------
RETAIL - FOOD CHAINS (0.5%)
34,000 York-Benimaru...................... 1,386,792
---------------
RETAIL - SPECIALTY (0.5%)
91,000 Best Denki Co. Ltd................. 1,245,653
---------------
STEEL & IRON (3.4%)
856,000 Kobe Steel Ltd..................... 2,359,304
1,701,000 NKK Corp........................... 4,971,476
171,000 Yamato Kogyo Co., Ltd.............. 1,866,260
---------------
9,197,040
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
21
<PAGE>
DEAN WITTER JAPAN FUND
PORTFOLIO OF INVESTMENTS MAY 31, 1996, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------
<C> <S> <C>
TELECOMMUNICATIONS (2.4%)
742 DDI Corp........................... $ 6,423,529
---------------
TEXTILES (0.9%)
495,000 Teijin Ltd......................... 2,559,240
---------------
TRANSPORTATION (4.2%)
158,000 Mitsubishi Warehouse & Transport... 2,761,931
747,000 Nippon Yusen Kabushiki Kaish....... 4,380,300
669,000 Tobu Railway Co. Ltd............... 4,337,486
---------------
11,479,717
---------------
UTILITIES - GAS (1.2%)
838,000 Osaka Gas Co....................... 3,263,023
---------------
TOTAL COMMON STOCKS
(IDENTIFIED COST $258,536,983)..... 249,166,140
---------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- -----------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (a) (8.7%)
U.S. GOVERNMENT AGENCY
$ 23,800 Federal Home Loan Mortgage Corp.
5.30% due 06/03/96 (Amortized Cost
$23,792,992)....................... 23,792,992
---------------
TOTAL INVESTMENTS
(IDENTIFIED COST $282,329,975) (B)..... 99.8% 272,959,132
CASH AND OTHER ASSETS IN EXCESS OF
LIABILITIES............................ 0.2 585,116
----- ------------
NET ASSETS............................. 100.0% $273,544,248
----- ------------
----- ------------
<FN>
- ---------------------
ADR American Depository Receipt.
(a) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation was $1,494,512 and the
aggregate gross unrealized depreciation was $10,865,355, resulting in net
unrealized depreciation of $9,370,843.
</TABLE>
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT MAY 31, 1996:
<TABLE>
<CAPTION>
CONTRACTS TO IN DELIVERY UNREALIZED
DELIVER EXCHANGE FOR DATE APPRECIATION
- -------------------------------------------------------
<S> <C> <C> <C>
$5,288,414 Y 575,432,356 06/03/96 $ 33,750
$ 693,818 Y 75,112,730 06/04/96 898
-------
Total unrealized
appreciation...................... $ 34,648
-------
-------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
22
<PAGE>
DEAN WITTER JAPAN FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $282,329,975)............................ $272,959,132
Cash........................................................ 10,983
Unrealized appreciation on open forward foreign currency
contracts................................................. 34,648
Receivable for:
Shares of beneficial interest sold...................... 1,993,311
Dividends............................................... 7,518
Deferred organizational expenses............................ 203,422
------------
TOTAL ASSETS........................................... 275,209,014
------------
LIABILITIES:
Payable for:
Investments purchased................................... 683,629
Plan of distribution fee................................ 221,890
Investment management fee............................... 221,890
Shares of beneficial interest repurchased............... 127,142
Organizational expenses..................................... 207,375
Accrued expenses and other payables......................... 202,840
------------
TOTAL LIABILITIES...................................... 1,664,766
------------
NET ASSETS:
Paid-in-capital............................................. 283,665,100
Net unrealized depreciation................................. (9,315,376)
Net realized loss........................................... (805,476)
------------
NET ASSETS............................................. $273,544,248
------------
------------
NET ASSET VALUE PER SHARE,
28,455,288 SHARES OUTSTANDING (UNLIMITED SHARES AUTHORIZED
OF $.01 PAR VALUE)........................................
$9.61
------------
------------
</TABLE>
STATEMENT OF OPERATIONS
FOR THE PERIOD APRIL 26, 1996* THROUGH MAY 31, 1996
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INCOME
Interest.................................................... $ 573,809
Dividends (net of $1,329 foreign withholding tax)........... 7,533
------------
TOTAL INCOME........................................... 581,342
------------
EXPENSES
Plan of distribution fee.................................... 249,726
Investment management fee................................... 249,726
Registration fees........................................... 97,626
Transfer agent fees and expenses............................ 52,767
Professional fees........................................... 28,734
Custodian fees.............................................. 17,753
Shareholder reports and notices............................. 8,650
Organizational expenses..................................... 4,089
Trustees' fees and expenses................................. 1,500
Other....................................................... 491
------------
TOTAL EXPENSES......................................... 711,062
------------
NET INVESTMENT LOSS.................................... (129,720)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss on foreign exchange transactions.......... (805,476)
------------
Net unrealized appreciation/depreciation on:
Investments............................................. (9,370,843)
Translation of forward foreign currency contracts, other
assets and liabilities denominated in foreign
currencies............................................ 55,467
------------
TOTAL DEPRECIATION..................................... (9,315,376)
------------
NET DECREASE................................................ $(10,250,572)
------------
------------
<FN>
- ---------------------
* Commencement of operations.
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE
PERIOD
APRIL 26,
1996*
THROUGH
MAY 31, 1996
- --------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss......................................... $ (129,720)
Net realized loss........................................... (805,476)
Net unrealized depreciation................................. (9,315,376)
------------
NET DECREASE........................................... (10,250,572)
Net increase from transactions in shares of beneficial
interest.................................................. 283,694,820
------------
TOTAL INCREASE......................................... 273,444,248
NET ASSETS:
Beginning of period......................................... 100,000
------------
END OF PERIOD.......................................... $273,544,248
------------
------------
<FN>
- ---------------------
* Commencement of operations.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
23
<PAGE>
DEAN WITTER JAPAN FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1996
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter Japan Fund (the "Fund") is registered under the Investment Company
Act of 1940, as amended (the "Act"), as a non-diversified, open-end management
investment company. The Fund's investment objective is to seek long-term capital
appreciation. The Fund seeks to meet its investment objective by investing
primarily in securities of issuers located in Japan. The Fund was organized as a
Massachusetts business trust on January 22, 1996 and had no operations other
than those relating to organizational matters and the issuance of 10,000 shares
of beneficial interest for $100,000 to Dean Witter InterCapital Inc. (the
"Investment Manager") to effect the Fund's initial capitalization. The Fund
commenced operations on April 26, 1996.
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 -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price (in
cases where securities are traded on more than one exchange; the securities are
valued on the exchange designated as the primary market by the Trustees); (2)
all other portfolio securities for which over-the-counter market quotations are
readily available are valued at the latest available bid price prior to the time
of valuation; (3) when market quotations are not readily available, including
circumstances under which it is determined by the Investment Manager that sale
or bid prices are not reflective of a security's market value, portfolio
securities are valued at their fair value as determined in good faith under
procedures established by and under the general supervision of the Trustees; (4)
certain portfolio securities may be valued by an outside pricing service
approved by the Trustees. The pricing service may utilize a matrix system
incorporating security quality, maturity and coupon as the evaluation model
parameters, and/or research and evaluations by its staff, including review of
broker-dealer market price quotations, if available, in determining what it
believes is the fair valuation of the securities valued by such pricing service;
and (5) 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.
Dividend income and other distributions are recorded on the ex-dividend date
except for certain dividends on foreign securities which are recorded as soon as
the Fund is informed after the ex-dividend date. Discounts are accreted over the
life of the respective securities. Interest income is accrued daily.
C. FOREIGN CURRENCY TRANSLATION -- The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, other assets and liabilities and forward contracts are
translated at the exchange rates prevailing at the end of the period; and (2)
purchases, sales, income and expenses are translated at the exchange rates
prevailing on the
24
<PAGE>
DEAN WITTER JAPAN FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1996, CONTINUED
respective dates of such transactions. The resultant exchange gains and losses
are included in the Statement of Operations as realized and unrealized gain/loss
on foreign exchange transactions. Pursuant to U.S. Federal income tax
regulations, certain foreign exchange gains/losses included in realized and
unrealized gain/loss are included in or are a reduction of ordinary income for
federal income tax purposes. The Fund does not isolate that portion of the
results of operations arising as a result of changes in the foreign exchange
rates from the changes in the market prices of the securities.
D. FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may enter into forward foreign
currency contracts which are valued daily at the appropriate exchange rates. The
resultant unrealized exchange gains and losses are included in the Statement of
Operations as unrealized foreign currency gain or loss and in the Statement of
Assets and Liabilities as part of the related foreign currency denominated asset
or liability. The Fund records realized gains or losses on delivery of the
currency or at the time the forward contract is extinguished (compensated) by
entering into a closing transaction prior to delivery.
E. 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 income to its shareholders.
Accordingly, no federal income tax provision is required.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the ex-dividend 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.
G. ORGANIZATIONAL EXPENSES -- The Investment Manager paid the organizational
expenses of the Fund in the amount of approximately $207,000 and will be
reimbursed for the full amount thereof. Such expenses have been deferred and are
being amortized on the straight-line method over a period not to exceed five
years from the commencement of operations.
2. INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, calculated daily and payable monthly, by applying the
annual rate of 1.0% to the net assets of the Fund determined as of the close of
each business day.
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
25
<PAGE>
DEAN WITTER JAPAN FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1996, CONTINUED
Investment Manager also bears the cost of telephone services, heat, light, power
and other utilities provided to the Fund.
Under a Sub-Advisory Agreement between Morgan Grenfell Investment Services Ltd.
("Morgan Grenfell" or the "Sub-Adviser") and the Investment Manager, the
Sub-Adviser provides the Fund with investment advice and portfolio management
relating to the Fund's investments in securities, subject to the overall
supervision of the Investment Manager. As compensation for the services provided
pursuant to the Sub-Advisory Agreement, the Investment Manager pays the
Sub-Adviser monthly compensation equal to 40% of its monthly compensation.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by 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 pursuant
to which the Fund pays the Distributor compensation, accrued daily and payable
monthly, at an annual rate of 1.0% of the lesser of: (a) the average daily
aggregate gross sales of the Fund's shares since the Fund's inception (not
including reinvestment of dividend or capital gain distributions) less the
average daily aggregate net asset value of the Fund's shares redeemed since the
Fund's inception upon which a contingent deferred sales charge has been imposed
or upon which such charge has been waived; or (b) the Fund's average daily net
assets. Amounts paid under the Plan are paid to the Distributor to compensate it
for the services provided and the expenses borne by it and others in the
distribution of the Fund's shares, including the payment of commissions for
sales of the Fund's shares and incentive compensation to, and expenses of, the
account executives of Dean Witter Reynolds Inc. ("DWR"), an affiliate of the
Investment Manager and Distributor, and other employees or selected
broker-dealers who engage in or support distribution of the Fund's shares or who
service shareholder accounts, including overhead and telephone expenses,
printing and distribution of prospectuses and reports used in connection with
the offering of the Fund's shares to other than current shareholders and
preparation, printing and distribution of sales literature and advertising
materials. In addition, the Distributor may be compensated under the Plan for
its opportunity costs in advancing such amounts which compensation would be in
the form of a carrying charge on any unreimbursed expenses incurred by the
Distributor.
Provided that the Plan continues in effect, any cumulative expenses incurred but
not yet recovered by the Distributor, may be recovered through future
distribution fees from the Fund and contingent deferred sales charges from the
Fund's shareholders.
The Distributor has informed the Fund that for the period ended May 31, 1996, it
received approximately $8,000 in contingent deferred sales charges from
redemptions of the Fund's shares.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases of portfolio securities, excluding short-term investments,
for the period ended May 31, 1996 aggregated $258,536,983.
Dean Witter Trust Company, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At May 31, 1996, the Fund had
transfer agent fees and expenses payable of approximately $53,000.
26
<PAGE>
DEAN WITTER JAPAN FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1996, CONTINUED
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 26, 1996*
THROUGH MAY 31, 1996
----------------------------
SHARES AMOUNT
----------- --------------
<S> <C> <C>
Sold............................................................. 28,633,915 $ 285,529,384
Repurchased...................................................... (188,627) (1,834,564)
----------- --------------
Net increase..................................................... 28,445,288 $ 283,694,820
----------- --------------
----------- --------------
<FN>
- ---------------------
* Commencement of operations.
</TABLE>
6. FEDERAL INCOME TAX STATUS
Foreign currency losses incurred after October 31 ("post-October losses") within
the taxable year are deemed to arise on the first business day of the Fund's
next taxable year. The Fund incurred and will elect to defer net foreign
currency losses of approximately $771,000 during fiscal 1996. As of May 31,
1996, the Fund had temporary book/tax differences primarily attributable to
post-October losses and permanent book/tax differences primarily attributable to
a net operating loss. To reflect reclassifications arising from permanent
book/tax differences for the period ended May 31, 1996, paid-in-capital was
charged and net investment loss was credited $129,720.
7. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward foreign currency contracts ("forward contracts")
to facilitate settlement of foreign currency denominated portfolio transactions
or to manage foreign currency exposure associated with foreign currency
denominated securities.
At May 31, 1996, there were outstanding forward contracts used to facilitate
settlement of foreign currency denominated portfolio transactions.
Forward contracts involve elements of market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the foreign exchange rates underlying the forward
contracts. Risks may also arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
8. SELECTED PER SHARE DATA AND RATIOS
See the "Financial Highlights" table on page 4 of this Prospectus.
27
<PAGE>
DEAN WITTER
JAPAN FUND
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 392-2550
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive
Officer
Sheldon Curtis
Vice President, Secretary and
General Counsel
Thomas F. Caloia
Treasurer
CUSTODIAN
The Chase Manhattan Bank N.A.
One Chase Plaza
New York, NY 10005
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Dean Witter Trust Company
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
SUB-ADVISER
Morgan Grenfell Investment Services
Limited
