<PAGE>
Filed Pursuant to Rule 497(e)
Registration File No.: 333-07613
TCW/DW STRATEGIC INCOME TRUST
PROSPECTUS
MARCH 31, 1997
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TCW/DW Strategic Income Trust (the "Fund") is an open-end, diversified
management investment company, whose primary investment objective is a high
level of current income. As a secondary objective, the Fund seeks to maximize
total return. The Fund seeks to achieve its objectives by allocating under
normal market conditions at least 30% of its investments to each of three
distinct types of fixed-income securities (referred to herein as the "Asset
Classes"): investment grade corporate fixed-income securities, mortgage-backed
securities and high-yield ("junk") corporate fixed-income securities,
including U.S. Dollar denominated foreign high yield fixed-income securities.
Under normal market conditions, at least 65% of the Fund's total assets will
be invested in income producing securities. See "Investment Objectives and
Policies."
Shares of the Fund are continuously offered at the net asset value per share
next determined following receipt of an order, without imposition of a sales
charge. However, repurchases and/or redemptions of shares 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 "Repurchases
and Redemptions--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 0.75% of the 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 March 31, 1997, which has been filed with the
Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone numbers listed on this page.
The Statement of Additional Information is incorporated herein by reference.
TABLE OF CONTENTS
Prospectus Summary .................................................... 2
Summary of Fund Expenses .............................................. 3
Financial Highlights .................................................. 4
The Fund and Its Management ........................................... 5
Investment Objectives and Policies .................................... 5
Risk Considerations and Investment Practices ....................... 8
Investment Restrictions ............................................... 13
Purchase of Fund Shares ............................................... 13
Shareholder Services .................................................. 15
Repurchases and Redemptions ........................................... 16
Dividends, Distributions and Taxes .................................... 18
Performance Information ............................................... 18
Additional Information ................................................ 19
Financial Statements (unaudited) February 28, 1997 .................... 20
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.
TCW/DW STRATEGIC INCOME TRUST
Two World Trade Center
New York, New York 10048
(212)392-2550 or
(800)869-NEWS (toll-free)
Dean Witter Distributors Inc.
Distributor
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.
<PAGE>
PROSPECTUS SUMMARY
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<TABLE>
<CAPTION>
<S> <C>
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THE The Fund is organized as a Trust, commonly known as a Massachusetts
FUND business trust, and is an open-end, diversified management investment
company investing primarily in a portfolio consisting of three distinct
types of fixed-income securities: investment grade corporate fixed-income
securities, mortgage-backed securities and high yield ("junk") corporate
fixed-income securities, including U.S. Dollar denominated foreign high
yield fixed-income securities.
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SHARES Shares of beneficial interest with $0.01 par value (see page 19).
OFFERED
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OFFERING At net asset value (see page 13). Shares redeemed within six years of
PRICE purchase are subject to a contingent deferred sales charge
under most circumstances (see page 17).
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MINIMUM Minimum initial investment, $1,000 ($100 if the account is opened through
PURCHASE EasyInvest (Service Mark) ); minimum subsequent investment, $100 (see page
13).
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INVESTMENT The primary investment objective of the Fund is a high level of current
OBJECTIVES income; as a secondary objective, the Fund seeks to maximize total return
(see page 5).
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MANAGER Dean Witter Services Company Inc. (the "Manager"), a wholly-owned
subsidiary of Dean Witter InterCapital Inc. ("InterCapital"), is the Fund's
manager. The Manager also serves as manager to thirteen other investment
companies advised by TCW Funds Management, Inc. (the "TCW/DW Funds"). The
Manager and InterCapital serve in various investment management, advisory,
management and administrative capacities to a total of 102 investment
companies and other portfolios with assets of approximately
$93 billion at February 28, 1997 (see page 5).
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ADVISER TCW Funds Management, Inc. (the "Adviser") is the Fund's investment
adviser. In addition to the Fund, the Adviser serves as investment adviser
to thirteen other TCW/DW Funds. As of February 28, 1997, the Adviser and
its affiliates had over $53 billion under management or committed to
management in various fiduciary or advisory capacities,
primarily to institutional investors (see page 5).
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MANAGEMENT The Manager receives a monthly fee at the annual rate of 0.36% of daily net
AND ADVISORY assets. The Adviser receives a monthly fee at an annual rate of 0.24% of
FEES daily net assets (see page 5).
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DIVIDENDS Dividends are declared and paid monthly. Capital gains distributions, if
any, are paid at least once a year or are retained for reinvestment by the
Fund. Dividends and capital gains distributions are automatically invested
in additional shares at net asset value 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 0.75% per annum of
the Fund's average daily net assets. This fee compensates the
Distributor for 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
CONTINGENT be involuntarily redeemed if the total value of the account is less than
DEFERRED $100 or, if the account was opened through EasyInvest (Service Mark), if
SALES after twelve months the shareholder has invested less than $1,000 in the
CHARGE 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 page 17).
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RISK The value of the Fund's portfolio securities, and therefore the net asset
CONSIDERATIONS value of the Fund's shares, may increase or decrease due to various
factors, principally changes in prevailing interest rates.
Generally, a rise in interest rates will result in a decrease
in net asset value, while a drop in interest rates will
result in an increase in net asset value. In addition, the
Fund's yield also will vary based on the yield of the Fund's
portfolio securities. Mortgage-backed securities have
different characteristics than traditional debt securities
primarily in that interest and principal payments are made
more frequently, usually monthly, and principal may be
prepaid at any time. These differences can result in
significantly greater price and yield volatility than is the
case with respect to traditional debt securities. Certain of
the high yield, high risk fixed-income securities, including
U.S. Dollar denominated foreign securities, in which the Fund
may invest are subject to greater risk of loss of income and
principal than the higher rated lower yielding fixed-income
securities. The foreign securities and markets in which the
Fund may invest pose different and generally greater risks
than those risks customarily associated with domestic
securities and markets including foreign tax rates and
foreign securities exchange controls. The Fund may enter into
repurchase agreements, reverse repurchase agreements and
dollar rolls, may purchase securities on a when-issued and
delayed delivery basis and may utilize certain investment
techniques including options and futures 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. Reverse
repurchase agreements and dollar rolls involve leverage and
are considered borrowings by the Fund. An investment in the
Fund should not be considered a complete investment program
and is not appropriate for all investors. Investors should
carefully consider their ability to assume these risks and
the risks outlined under the heading "Risk Considerations and
Investment Practices," before making an investment in the
Fund (see pages 8-12).
</TABLE>
The above is qualified in its entirety by the detailed information appearing
elsewhere in this Prospectus and in the Statement of Additional Information.
2
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SUMMARY OF FUND EXPENSES
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The following table illustrates all expenses and fees that a shareholder of
the Fund will incur.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
<S> <C>
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%
</TABLE>
A contingent deferred sales charge is imposed at the following declining
rates:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE PAYMENT MADE PERCENTAGE
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<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>
<TABLE>
<CAPTION>
<S> <C>
Redemption Fees .......................................................... None
Exchange Fee ............................................................. None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management and Advisory Fees+ ............................................ 0.00%
12b-1 Fees* .............................................................. 0.75%
Other Expenses+ .......................................................... 0.00%
Total Fund Operating Expenses**+ ......................................... 0.75%
</TABLE>
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* The 12b-1 fee is accrued daily and payable monthly, at an annual rate
of 0.75% of the Fund's average daily net assets. A portion of the 12b-1
fee equal to 0.20% 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 the 12b-1 Fees, Management and Advisory Fees and estimated "Other
Expenses," which may be incurred by the Fund for the fiscal period
ending August 31, 1997.
+ InterCapital had undertaken to assume all operating expenses (except
for any 12b-1 fee, foreign taxes withheld and/or brokerage fees) and
the Manager had agreed to waive the compensation provided for in its
Management Agreement and the Adviser had undertaken to waive the
compensation provided for in its Advisory Agreement, until such time as
the Fund had $50 million of net assets or until six months from the
date of commencement of the Fund's operations, whichever occurred
first. InterCapital has undertaken to continue to assume all operating
expenses (except for any 12b-1 fee, foreign taxes withheld and/or
brokerage fees) and the Manager and the Adviser have undertaken to
continue to waive their respective compensation until October 31, 1997.
Assuming no waiver of management fees, advisory fees and no assumption
of other expenses, it is estimated that, for the fiscal period ending
August 31, 1997, the "Management and Advisory Fees" would be 0.60%,
"Other Expenses" would be 3.60% and "Total Fund Operating Expenses"
would be 4.95%. For the fiscal period November 26, 1996 (commencement
of operations) through February 28, 1997, the Fund's total operating
expenses, consisting only of 12b-1 fees, amounted to 0.75% of the
Fund's daily net assets.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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: ................................ $58 $54
You would pay the following expenses on the same investment, assuming no redemption: ............ $8 $24
</TABLE>
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 "Repurchases and
Redemptions" in this Prospectus.
Long-term shareholders of the Fund may pay more in sales charges including
distribution fees than the economic equivalent of the maximum front-end sales
charges permitted by the NASD.
3
<PAGE>
FINANCIAL HIGHLIGHTS
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The following ratios and per share data for a share of beneficial interest
outstanding throughout the period have been taken from the records of the Fund
without examination by the independent accountants. The financial highlights
should be read in conjunction with the unaudited financial statements and
notes thereto which are contained in this Prospectus commencing on page 20.
<TABLE>
<CAPTION>
FOR THE PERIOD
NOVEMBER 26, 1996*
THROUGH
FEBRUARY 28, 1997
------------------
(UNAUDITED)
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..... $10.00
------------------
Net investment income..................... 0.16
Net realized and unrealized loss.......... (0.03)
------------------
Total from investment operations.......... 0.13
Less dividends from net investment
income................................... (0.15)
------------------
Net asset value, end of period............ $9.98
==================
TOTAL INVESTMENT RETURN+.................. 1.31%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................. 0.75%(2)(3)
Net investment income..................... 6.38%(2)(3)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .. $8,048
Portfolio turnover rate................... 42%(1)
</TABLE>
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* Commencement of operations.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) If the Fund had borne all of its expenses that were reimbursed or
waived by InterCapital, the Manager and the Investment Adviser, the
annualized expense and net investment income ratios would have been
4.95% and 2.19%, respectively.
4
<PAGE>
THE FUND AND ITS MANAGEMENT
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TCW/DW Strategic Income Trust (the "Fund") is an open-end, diversified
management investment company. The Fund is a trust of the type commonly known
as a "Massachusetts business trust" and was organized under the laws of
Massachusetts on June 27, 1996.
Dean Witter Services Company Inc. (the "Manager"), whose address is Two
World Trade Center, New York, New York 10048, is the Fund's Manager. The
Manager is a wholly-owned subsidiary of Dean Witter InterCapital Inc.
("InterCapital"). InterCapital 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.
The Manager acts as manager to thirteen other TCW/DW Funds. The Manager and
InterCapital serve in various investment management, advisory, management and
administrative capacities to a total of 102 investment companies, thirty of
which are listed on the New York Stock Exchange, with combined assets of
approximately $89.8 billion as of February 28, 1997. InterCapital also manages
and advises portfolios of pension plans, other institutions and individuals
which aggregated approximately $3.2 billion at such date.
The Fund has retained the Manager to manage its business affairs, supervise
its overall day-to-day operations (other than providing investment advice) and
provide all administrative services.
On February 5, 1997, DWDC and Morgan Stanley Group Inc. announced that they
had entered into an Agreement and Plan of Merger, with the combined company to
be named Morgan Stanley, Dean Witter, Discover & Co. The business of Morgan
Stanley Group Inc. and its affiliated companies is providing a wide range of
financial services for sovereign governments, corporations, institutions and
individuals throughout the world. DWDC is the direct parent of InterCapital
and Dean Witter Distributors Inc., the Fund's distributor. It is currently
anticipated that the transaction will close in mid-1997. Thereafter,
InterCapital and Dean Witter Distributors Inc. will be direct subsidiaries of
Morgan Stanley, Dean Witter, Discover & Co.
TCW Funds Management, Inc. (the "Adviser"), whose address is 865 South
Figueroa Street, Suite 1800, Los Angeles, California 90017, is the Fund's
investment adviser. The Adviser was organized in 1987 as a wholly-owned
subsidiary of The TCW Group, Inc. ("TCW"), whose subsidiaries, including Trust
Company of the West and TCW Asset Management Company, provide a variety of
trust, investment management and investment advisory services. Robert A. Day,
who is Chairman of the Board of Directors of TCW, may be deemed to be a
control person of the Adviser by virtue of the aggregate ownership by Mr. Day
and his family of more than 25% of the outstanding voting stock of TCW. The
Adviser serves as investment adviser to thirteen other TCW/DW Funds in
addition to the Fund. As of February 28, 1997, the Adviser and its affiliated
companies had over $50 billion under management or committed to management,
primarily from institutional investors.
The Fund has retained the Adviser to invest the Fund's assets.
The Fund's Trustees review the various services provided by the Manager and
the 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.
As full compensation for the services and facilities furnished to the Fund
and for expenses of the Fund assumed by the Manager, the Fund pays the Manager
monthly compensation calculated daily by applying the annual rate of 0.36% to
the Fund's net assets. As compensation for its investment advisory services,
the Fund pays the Adviser monthly compensation calculated daily by applying an
annual rate of 0.24% to the Fund's net assets.
The Fund's expenses include: the fees of the Manager and the Adviser; the
fee pursuant to the Plan of Distribution (see "Purchase of Fund Shares");
taxes; legal, transfer agent, custodian and auditing fees; federal and state
registration fees; and printing and other expenses relating to the Fund's
operations which are not expressly assumed by the Manager or Adviser under
their respective Agreements with the Fund. InterCapital had undertaken to
assume all expenses (except for the Plan of Distribution fee and brokerage
fees) and the Manager had undertaken to waive the compensation provided for in
its Management Agreement, and the Adviser had undertaken to waive the
compensation provided for in its Advisory Agreement, until such time as the
Fund had $50 million of net assets or until six months from the date of
commencement of operations, whichever occurred first. InterCapital has
undertaken to continue to assume all operating expenses (except for any 12b-1
fee, foreign taxes withheld and/or brokerage fees) and the Manager and the
Adviser have undertaken to continue to waive their respective compensation
until October 31, 1997.
INVESTMENT OBJECTIVES AND POLICIES
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The primary investment objective of the Fund is a high level of current
income. As a secondary objective, the Fund seeks to maximize total return. The
investment objectives are fundamental and may not be changed without
shareholder approval. There is no assurance that the objectives will be
achieved.
5
<PAGE>
The Fund seeks to achieve its investment objectives by allocating under
normal market conditions at least 30% of its investments to each of three
distinct types of fixed-income securities (referred to herein as the "Asset
Classes"): investment-grade corporate fixed-income securities, mortgage-backed
securities and high yield ("junk") corporate fixed-income securities,
including U.S. Dollar denominated foreign high yield fixed-income securities.
Under normal market conditions, at least 65% of the Fund's total assets will
be invested in income producing securities. The Adviser will adjust the Fund's
assets on a quarterly basis to reflect any changes in the relative values of
the Fund's portfolio securities. At times the Fund may have less than 30%
invested in any one Asset Class due to market fluctuations or other changes in
assets. If during a quarter there is a significant market development, or for
other appropriate reasons, the Adviser may adjust the Fund's assets more
frequently than quarterly.
Generally, the Fund seeks to maintain a dollar-weighted average life of 6-9
years within each Asset Class. In addition, within each Asset Class, the Fund
will not invest in any security which, at the time of purchase, has a
remaining stated maturity greater than 15 years. While the dollar-weighted
average life may represent the "expected" average life with respect to an
Asset Class, the 15 year individual security maturity limitation is based upon
mandatory payments (actual stated final maturity, and not the "expected"
maturity). See also the discussion of average life and prepayment and
extension risk with respect to mortgage-backed securities under "Risk
Considerations and Investment Practices--Mortgage-Backed Securities."
The three Asset Classes in which the Fund may invest are as follows:
INVESTMENT GRADE CORPORATE FIXED-INCOME
SECURITIES
The Fund will invest in corporate debt securities and preferred stock with
investment grade ratings, which consist of securities which are rated at the
time of purchase either Baa or better by Moody's or BBB or better by S&P or
which, if unrated, are deemed to be of comparable quality by the Adviser.
Investments in fixed-income securities rated either Baa by Moody's or BBB
by S&P (the lowest credit ratings designated "investment grade") have
speculative characteristics and, therefore, changes in economic conditions or
other circumstances are more likely to weaken their capacity to make principal
and interest payments than would be the case with investments in securities
with higher credit ratings. If an investment grade fixed-income security held
by the Fund meets the minimum rating requirements set forth above and is
subsequently downgraded below such minimum requirement, or otherwise falls
below investment grade, the Fund will sell such securities as soon as is
practicable without undue market or tax consequences to the Fund.
MORTGAGE-BACKED SECURITIES
The Fund may invest in fixed-rate and adjustable rate mortgage-backed
securities which are issued or guaranteed by the United States Government, its
agencies or instrumentalities or by private issuers which are rated either Aaa
by Moody's or AAA by S&P or, if not rated, are determined to be of comparable
quality by the Adviser. See also "Risk Considerations and Investment
Practices--Mortgage-Backed Securities."
There are currently three basic types of mortgage-backed securities: (i)
those issued or guaranteed by the United States Government or one of its
agencies or instrumentalities, such as the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and
the Federal Home Loan Mortgage Corporation ("FHLMC") (securities issued by
GNMA, but not those issued by FNMA or FHLMC, are backed by the "full faith and
credit" of the United States); (ii) those issued by private issuers that
represent an interest in or are collateralized by mortgage-backed securities
issued or guaranteed by the United States Government or one of its agencies or
instrumentalities; and (iii) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or mortgage-backed
securities without a government guarantee but usually having some form of
private credit enhancement. The aforementioned description of mortgage-backed
securities in which the Fund may invest is intended to include collateralized
mortgage obligations ("CMOs"), except as noted below.
The Fund is prohibited from investing in the following types of
mortgage-backed securities: (i) interest-only stripped mortgage-backed
securities; (ii) principal-only stripped mortgage-backed securities; and (iii)
inverse floating rate CMOs.
The mortgage pass-through securities in which the Fund may invest include
those issued or guaranteed by GNMA, FNMA and FHLMC. GNMA certificates are
direct obligations of the U.S. Government and, as such, are backed by the
"full faith and credit" of the United States. FNMA is a federally chartered,
privately owned corporation and FHLMC is a corporate instrumentality of the
United States. FNMA and FHLMC certificates are not backed by the full faith
and credit of the United States but the issuing agency or instrumentality has
the right to borrow, to meet its obligations, from an existing line of credit
with the U.S. Treasury. The U.S. Treasury has no legal obligation to provide
such line of credit and may choose not to do so. Each of GNMA, FNMA and FHLMC
guarantee timely distribution of interest to certificate holders. GNMA and
FNMA also guarantee timely distribution of scheduled principal payments. FHLMC
generally guarantees only the ultimate collection of principal of the
underlying mortgage loans.
<PAGE>
The Fund may also invest in adjustable rate mortgage securities, which are
pass-through mortgage securities collateralized by mortgages with adjustable
rather than fixed rates.
Collateralized Mortgage Obligations and Multiclass Pass-Through
Securities. The Fund may invest in collateralized mortgage obligations or
"CMOs." CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-
6
<PAGE>
through securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC
certificates, but also may be collateralized by whole loans or private
mortgage pass-through securities (such collateral is collectively hereinafter
referred to as "Mortgage Assets"). Multiclass pass-through securities are
equity interests in a trust composed of Mortgage Assets. Payments of principal
of and interest on the Mortgage Assets, and any reinvestment income thereon,
provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the United States Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. An issuer of CMOs may elect to be
treated, for federal income tax purposes, as a Real Estate Mortgage Investment
Conduit (a "REMIC"). An issuer of a CMO which does not elect to be treated as
a REMIC will be taxable as a corporation under rules regarding taxable
mortgage pools.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly or semiannual basis. Certain CMOs may have variable or
floating interest rates and others may be stripped (securities which provide
only the principal or interest feature of the underlying security).
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of a CMO series in a number of different ways. Generally,
the purpose of the allocation of the cash flow of a CMO to the various classes
is to obtain a more predictable cash flow to the individual tranches than
exists with the underlying collateral of the CMO. As a general rule, the more
predictable the cash flow is on a CMO tranche, the lower the anticipated yield
will be on that tranche at the time of issuance relative to prevailing market
yields on mortgage-backed securities. As part of the process of creating more
predictable cash flows on most of the tranches in a series of CMOs, one or
more tranches generally must be created that absorb most of the volatility in
the cash flows on the underlying mortgage loans. As a result of the
uncertainty of the cash flows of these tranches, market prices and yields may
be more volatile than for other CMO tranches. The Fund will not invest in
inverse floating rate CMOs and interest-only and principal-only stripped
mortgage-backed securities.
CMOs that are issued by private sector entities and are backed by assets
lacking a guarantee of an entity having the credit status of a governmental
agency or instrumentality are generally structured with one or more of the
types of credit enhancement described below under "Risk Considerations and
Investment Practices--Mortgage-Backed Securities."
During temporary defensive periods when market conditions warrant reduction
of some or all of the Fund's securities holdings (any reductions will be
conducted pro rata across each Asset Class), the Fund may invest in short-term
U.S. Treasury securities or other money market instruments. Under such
circumstances the money market instruments in which the Fund may invest, in
addition to short-term U.S. Treasury securities (bills, notes, bonds and zero
coupons securities), are United States bank obligations, such as certificates
of deposit; Eurodollar certificates of deposit; obligations of American
savings institutions; and commercial paper of United States issuers 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.
HIGH YIELD ("JUNK") CORPORATE FIXED-INCOME
SECURITIES
The Fund will invest in high yield, high risk fixed-income securities rated
either Ba or B by Moody's or BB or B by S&P or, if not rated, determined by
the Adviser to be of comparable quality. The high yield, high risk
fixed-income securities in this grouping may include both convertible and
nonconvertible debt securities, preferred stock and U.S. Dollar denominated
foreign corporate fixed-income securities. All foreign high yield, high risk
fixed-income securities must be actually rated by either Moody's or S&P and
may not exceed 10% of the Fund's total assets.
Unrated domestic securities will be considered for investment by the Fund
when the Adviser believes that the financial condition of the issuers of such
securities, or the protection afforded by the terms of the securities
themselves, makes them appropriate investments for the Fund. If a high yield
fixed-income security meets the minimum rating requirements set forth above
and is subsequently downgraded below such minimum requirements, the Fund will
sell such securities as soon as is practicable without undue market or tax
consequences to the Fund. A description of corporate bond ratings is contained
in the Appendix.
<PAGE>
The ratings of fixed-income securities by Moody's and S&P are a generally
accepted barometer of credit risk. However, as the creditworthiness of issuers
of lower-rated fixed-income securities is more problematical than that of
issuers of higher-rated fixed-income securities, the achievement of the Fund's
investment objectives will be more dependent upon the Adviser's own credit
analysis than would be the case with a mutual fund investing primarily in
higher quality bonds. The Adviser will utilize a security's credit rating as
simply one indication of an issuer's creditworthiness and will principally
rely upon its own analysis of any security purchasable by the Fund for its
portfolio.
Investment by the Fund in U.S. Dollar denominated fixed-income securities
issued by foreign issuers may involve certain risks not associated with U.S.
issued securities. Those risks include the political or economic instability
of the issuer or of the country of issue, the difficulty of predicting
international trade patterns and the possibility of imposition
7
<PAGE>
of exchange controls. In addition, there may be less publicly available
information about a foreign company than about a domestic company. A more
detailed description of the general risks of foreign issuers is contained in
the Statement of Additional Information.
The Fund will not invest 35% or more of its total assets in high yield/high
risk corporate fixed-income securities. Under normal circumstances, the
investment grade and high yield corporate fixed-income securities in which the
Fund may invest will be allocated among at least four different industries. No
single corporate issuer will represent more than 5% of the Fund's total
assets.
RISK CONSIDERATIONS AND INVESTMENT
PRACTICES
Given the investment risks described below, an investment in shares of the
Fund should not be considered a complete investment program and is not
appropriate for all investors. Investors should carefully consider their
ability to assume these risks before making an investment in the Fund.
The net asset value of the Fund's shares will fluctuate with changes in the
market value of the Fund's portfolio securities. The market value of the
Fund's portfolio securities will increase or decrease due to a variety of
economic, market or political factors which cannot be predicted. The Fund's
yield will also vary based on the yield of the Fund's portfolio securities.
All fixed-income securities are subject to two types of risks: credit risk and
interest rate risk. Credit risk relates to the ability of the issuer to meet
interest or principal payments or both as they come due. Generally, higher
yielding fixed-income securities are subject to credit risk to a greater
extent than lower yielding fixed-income securities. Interest rate risk refers
to the fluctuations in the net asset value of any portfolio of fixed-income
securities resulting from the inverse relationship between price and yield of
fixed-income securities; that is, when the general level of interest rates
rises, the prices of outstanding fixed-income securities decline, and when
interest rates fall, prices rise.
Mortgage-Backed Securities. Mortgage-backed securities have certain
different characteristics than traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans generally may be prepaid at any time. As a result,
if the Fund purchases such a security at a premium, a prepayment rate that is
faster than expected may reduce both the market value and the yield to
maturity, while a prepayment rate that is slower than expected may have the
opposite effect of increasing market value and yield to maturity.
Alternatively, if the Fund purchases these securities at a discount, faster
than expected prepayments will increase, while slower than expected
prepayments may reduce, market value and yield to maturity.
Mortgage-backed securities, like all fixed-income securities, generally
decrease in value as a result of increases in interest rates. In addition,
although generally the value of fixed-income securities increases during
periods of falling interest rates and, as stated above, decreases during
periods of rising interest rates, as a result of prepayments and other
factors, this is not always the case with respect to mortgage-backed
securities.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on
fixed-rate mortgage loans will increase during a period of falling interest
rates and decrease during a period of rising interest rates. Accordingly,
amounts available for reinvestment by the Fund are likely to be greater during
a period of declining interest rates and, as a result, likely to be reinvested
at lower interest rates than during a period of rising interest rates.
Mortgage-backed securities generally decrease in value as a result of
increases in interest rates and may benefit less than other fixed-income
securities from declining interest rates because of the risk of prepayment.
The average life of mortgage-backed securities is determined using
mathematical models that incorporate prepayment assumptions and other factors
that involve estimates of future economic and market conditions. These
estimates may vary from actual future results, particularly during periods of
extreme market volatility. In addition, under certain market conditions, such
as those that developed in 1994, the average weighted life of mortgage-backed
securities may not accurately reflect the price volatility of such securities.
For example, in periods of supply and demand imbalances in the market for such
securities and/or in periods of sharp interest rate movements, the prices of
mortgage derivative securities may fluctuate to a greater extent than would be
expected from interest rate movements alone.
The Fund's investments in mortgage-backed securities also subject the Fund
to extension risk. Extension risk is the possibility that rising interest
rates may cause prepayments to occur at a slower than expected rate. This
particular risk may effectively change a security which was considered short
or intermediate-term at the time of purchase into a long-term security.
Long-term securities generally fluctuate more widely in response to changes in
interest rates than short or intermediate-term securities.
<PAGE>
CMOs issued by private entities are not U.S. Government securities and are
not guaranteed by any government agency, although the Mortgage Assets
underlying a CMO may be subject to a guarantee. Therefore, if the Mortgage
Assets securing the CMO, as well as any third party credit support or
guarantees, are insufficient to make payment, the holder could sustain a loss.
Also, a number of different factors, including the extent of prepayment of
principal of the Mortgage Assets, affect the availability of cash for
principal payments by the CMO issuer on any payment date and, accordingly,
affect the timing of principal payments on each CMO class.
To lessen the effect of failure by obligors on the underlying Mortgage
Assets to make payments, privately issued CMOs may contain elements of credit
support. Such
8
<PAGE>
credit support falls into two categories: (i) liquidity protection and (ii)
protection against losses resulting from ultimate default by an obligor on the
underlying Mortgage Assets. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets, to ensure
that the pass-through of payments due on the underlying Mortgage Assets occurs
in a timely fashion. Protection against losses resulting from ultimate default
enhances the likelihood of ultimate payment of the obligations on at least a
portion of the Mortgage Assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. The Fund will not pay
any additional fees for such credit support, although the existence of credit
support may increase the price the Fund pays for a security.
The ratings of mortgage-backed securities for which third-party credit
enhancement provides liquidity protection or protection against losses from
default are generally dependent upon the continued creditworthiness of the
provider of the credit enhancement. The ratings of such securities could be
subject to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency and loss
experience on the underlying Mortgage Assets is better than expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one
or more classes subordinate to other classes as to the payment of principal
thereof and interest thereon, with the result that defaults on the underlying
assets are borne first by the holders of the subordinated class), creation of
"reserve funds" (where cash or investments, sometimes funded from a portion of
the payments on the underlying assets, are held in reserve against future
losses) and "over-collateralization" (where the scheduled payments on, or the
principal amount of, the underlying assets exceed those required to make
payment of the securities and pay any servicing fees). The degree of credit
support provided for each issue is generally based on historical information
with respect to the level of credit risk associated with the underlying
Mortgage Assets. Delinquency or loss in excess of that which is anticipated
could adversely affect the return on an investment in such a security.
High Yield/High Risk Securities. Because of the special nature of the
Fund's investment in high yield securities, commonly known as "junk bonds,"
the Adviser must take account of certain special considerations in assessing
the risks associated with such investments. It should be recognized that an
economic downturn or increase in interest rates is likely to have a negative
effect on the high yield bond market and on the value of the high yield
securities held by the Fund, as well as on the ability of the securities'
issuers to repay principal and interest on their borrowings.
The prices of high yield 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 high yield securities and a
concomitant volatility in the net asset value of a share of the Fund.
Moreover, the market prices of certain of the Fund's portfolio securities
which are structured as zero coupon and payment-in-kind securities are
affected to a greater extent by interest rate changes and thereby tend to be
more volatile than securities which pay interest periodically and in cash (see
"Dividends, Distributions and Taxes" for a discussion of the tax ramifications
of investments in such securities).
The secondary market for high yield securities may be less liquid than the
markets for higher quality securities and, as such, may have an adverse effect
on the market prices of certain securities. The limited liquidity of the
market may also adversely affect the ability of the Fund's Trustees to arrive
at a fair value for certain high yield securities at certain times and could
make it difficult for the Fund to sell certain securities.
During the period ended February 28, 1997, the monthly dollar weighted
average ratings of the debt obligations held by the Fund, expressed as a
percentage of the Fund's total investments, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
RATINGS TOTAL INVESTMENTS
- ----------- ---------------------
<S> <C>
AAA/Aaa..... 31.6%
AA/Aa....... 5.8%
A/A......... 21.0%
BBB/Baa..... 6.9%
BB/Ba....... 8.8%
B/B......... 24.3%
CCC/Caa..... 0%
CC/Ca....... 0%
C/C......... 0%
D........... 0%
Unrated..... 1.6%
</TABLE>
New laws and proposed new laws may have a potentially negative impact on
the market for high yield bonds. For example, present legislation requires
federally-insured savings and loan associations to divest their investments in
high yield bonds. This legislation and other proposed legislation may have an
adverse effect upon the value of high yield securities and a concomitant
negative impact upon the net asset value of a share of the Fund.
Foreign Securities. Investment by the Fund of a portion of the high yield,
high risk Asset Class in foreign securities may 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,
9
<PAGE>
there may be less publicly available information about such companies.
Moreover, foreign companies are generally not subject to uniform accounting,
auditing and financial 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.
Futhermore, 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 in foreign markets than in the U.S. In addition,
differences in clearance and settlement procedures in foreign markets may
occasion delays in settlements of Fund trades effected in such markets.
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. See also "High Yield/ High Risk
Securities" above.
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, the
Fund follows procedures designed to minimize those risks. See the Statement of
Additional Information for a further discussion of such investments.
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. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest
payments on these securities. Generally, the effect of such a transaction is
that the Fund can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are only advantageous if the interest cost to
the Fund of the reverse repurchase transaction is less than the cost of
obtaining the cash otherwise.
The Fund may enter into dollar rolls in which the Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Fund foregoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the lower forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale.
The Fund will establish a segregated account with its custodian bank in
which it will maintain cash, U.S. Government securities or other liquid
portfolio securities equal in value to its obligations in respect of reverse
repurchase agreements and dollar rolls. 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 the 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. Under the requirements of the
Investment Company Act of 1940, as amended (the "Act"), the Fund is required
to maintain an asset coverage (including the proceeds of the borrowings) of at
least 300% of all borrowings. The Fund does not expect to engage in reverse
repurchase agreements and dollar rolls with respect to greater than 25% of the
Fund's total assets.
Restricted Securities. The Fund may invest up to 5% of its net 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.
<PAGE>
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 Adviser, pursuant to
procedures adopted by the Trustees of the Fund, will make a determination as
to the liquidity of each such restricted security purchased by the Fund. If
such Rule 144A 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. However, 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.
10
<PAGE>
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. 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. See the Statement of
Additional Information for a further discussion of such investments.
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. 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. See
the Statement of Additional Information for a further discussion of such
investments.
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.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to brokers, dealers
and other financial institutions, provided that such loans are callable at any
time by the Fund (subject to certain notice provisions described in the
Statement of Additional Information), and are at all times secured by cash or
money market instruments, which are maintained in a segregated account
pursuant to applicable regulations and that are equal to at least the market
value, determined daily, of the loaned securities. As with any extensions of
credit, there are risks of delay in recovery and in some cases even loss of
rights in the collateral should the borrower of the securities fail
financially. However, loans of portfolio securities will only be made to firms
deemed by the Adviser to be creditworthy and when the income which can be
earned from such loans justifies the attendant risks. The Fund will not under
any circumstances lend more than 25% of the value of its total assets.
Common Stocks. The Fund may invest in common stocks in an amount up to 10%
of its total assets in the circumstances described below when consistent with
the Fund's investment objectives. The Fund may acquire common stocks when
attached to or included in a unit with fixed-income securities, or when
acquired upon conversion of fixed-income securities or upon exercise of
warrants attached to fixed-income securities.
For example, the Fund may purchase the common stock of companies involved
in takeovers or recapitalizations where the issuer, or a controlling
stockholder, has offered, or pursuant to a "going private" transaction is
effecting, an exchange of its common stock for newly-issued fixed-income
securities. By purchasing the common stock of the company issuing the
fixed-income securities prior to the consummation of the transaction or
exchange offer, the Fund will be able to obtain the fixed-income securities
directly from the issuer at their face value, eliminating the payment of a
dealer's mark-up otherwise payable when fixed-income securities are acquired
from third parties, thereby increasing the net yield to the shareholders of
the Fund. While the Fund will incur brokerage commissions in connection with
its purchase of common stocks, it is anticipated that the amount of such
commissions will be significantly less than the amount of such mark-up.
<PAGE>
Options and Futures Transactions. The Fund is permitted to enter into call
and put options on its portfolio securities, including U.S. Government
securities and mortgage-backed securities which are listed on several U.S.
securities exchanges and are written in over-the-counter transactions ("OTC
options"). Listed options are issued or guaranteed by the exchange on which
they trade or by a clearing corporation such as the Options Clearing
Corporation ("OCC"). 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, without limit, in order to hedge against the decline in the value
of a security (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 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
only to close out a covered call position or to protect against an increase in
the price of a security it
11
<PAGE>
anticipates purchasing. The Fund may purchase put options on securities which
it holds in its portfolio only to protect itself against a decline in the
value of the security. The Fund may also purchase put options to close out
written put positions. There are no other limits on the Fund's ability to
purchase call and put options.
The Fund may purchase and sell financial futures contracts that are
currently traded, or may in the future be traded, on U.S. commodity exchanges
on such underlying fixed-income securities as U.S. Treasury bonds, notes, and
bills, mortgage-backed securities ("interest rate" futures) and on such
indexes of U.S. or foreign fixed-income securities as may exist or come into
being, such as the Moody's Investment Grade Corporate Bond Index ("index"
futures). The Fund will 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 will purchase or sell index futures contracts for the purpose
of hedging some or all of its portfolio (or anticipated portfolio) securities
against changes in their prices.
The Fund may also 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. The Fund will
purchase and write options on futures contracts for identical purposes to
those set forth above for the purchase of a futures contract and the sale of a
futures contract or to close out a long or short position in futures
contracts.
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 objectives 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 will 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 Fund's 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 and indexes subject to
futures contracts (and thereby the futures contract prices) may correlate
imperfectly with the behavior of the cash prices of the Fund's portfolio
securities. See the Statement of Additional Information for further discussion
of such risks.
PORTFOLIO MANAGEMENT
The Fund's portfolio is actively managed by the Adviser with a view to
achieving the Fund's investment objective. Philip A. Barach, Jeffrey E.
Gundlach, Frederick H. Horton and Melissa V. Weiler, Managing Directors of
the Adviser, and Bonnie N. Baha and Mark D. Senkpiel, Senior Vice Presidents
of the Adviser, are the Fund's primary portfolio managers and have been so
since the Fund's inception. Ms. Baha and Messrs. Barach and Gundlach have
been portfolio managers with affiliates of the Adviser for over five years.
Mr. Senkpiel joined the Adviser as a portfolio manager in 1996. Prior
thereto, he was an Investment Director of Allstate Insurance Company
(1985-1996). Mr. Horton has been a portfolio manager with affiliates of the
Adviser since October, 1993. From June 1991 through September, 1993, he was
Senior Portfolio Manager for Dewey Square Investors. Ms. Weiler has been a
portfolio manager with affiliates of the Adviser since 1995, and prior
thereto was a Vice President and Portfolio Manager of Crescent Capital
Corporation, an investment adviser, with which she had been affiliated since
1992. Prior thereto, she was a Senior Investment Analyst at First Capital
Holdings Corporation.
In determining which securities to purchase for the Fund or hold in the
Fund's portfolio, the Adviser will rely on information from various sources,
including research, analysis and appraisals of brokers and dealers, including
Dean Witter Reynolds Inc. ("DWR"), a broker-dealer affiliate of the Manager,
and others regarding economic developments and interest rate trends, and the
Adviser's own analysis of factors it deems relevant.
<PAGE>
Orders for transactions in portfolio securities and commodities are placed
for the Fund with a number of brokers and dealers, including DWR. In addition,
the Fund may incur brokerage commissions on transactions conducted through
DWR. Under normal circumstances, it is not anticipated that the Fund's
portfolio turnover rate will exceed 150% in any one year. The Fund will incur
expenses commensurate with its portfolio turnover rate, and thus a higher
level (over 100%) of portfolio transactions will increase the Fund's overall
expenses. See "Dividends, Distributions and Taxes" for a discussion of the tax
implications of the Fund's trading policy.
Except as specifically noted, all investment policies and practices
discussed above are not fundamental policies of the Fund and thus may be
changed without shareholder approval.
12
<PAGE>
INVESTMENT RESTRICTIONS
- -----------------------------------------------------------------------------
The investment restrictions listed below are among the restrictions which
have been adopted by the Fund as fundamental policies. Under the Act, a
fundamental policy may not be changed without the vote of a majority of the
outstanding voting securities of the Fund, as defined in the Act. For purposes
of the following 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 more than 5% of the value of its total assets in the securities
of any one issuer (other than obligations issued, or guaranteed by, the
United States Government, its agencies or instrumentalities), except that
the Fund may invest all or substantially all of its assets in another
registered investment company having the same investment objectives and
policies and substantially the same investment restrictions as the Fund (a
"Qualifying Portfolio").
2. Purchase more than 10% of all outstanding voting securities or more
than 10% of any class of securities of any one issuer, except that the
Fund may invest all or substantially all of its assets in a Qualifying
Portfolio. For purposes of this restriction, all outstanding debt
securities of an issuer are considered as one class and all preferred
stocks of an issuer are considered as one class.
3. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry except that the Fund will invest at least 25%
of its total assets in mortgage-backed securities under normal market
conditions. This restriction does not apply to obligations issued or
guaranteed by the United States Government, its agencies or
instrumentalities.
PURCHASE OF FUND SHARES
- -----------------------------------------------------------------------------
The Fund offers its shares 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 Manager, shares of the Fund are
distributed by the Distributor and offered by DWR and other dealers (which may
include TCW Brokerage Services, an affiliate of the Adviser) who have entered
into selected broker-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 and subsequent purchases of $100 or
more may be made by sending a check, payable to TCW/DW Strategic Income Trust,
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 (Service Mark), 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.
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. 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. As noted above, orders placed directly with the Transfer Agent
must be accompanied by payment. Investors will be entitled to receive income
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 dividends and
distributions.
The offering price will be the net asset value per share next determined
following receipt of an order by the Transfer Agent (see "Determination of Net
Asset Value"). 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 "Repurchases and Redemptions"). Sales personnel of a Selected
Broker-Dealer are compensated for selling shares of the Fund at the time of
their sale by the Distributor and/or Selected Broker-Dealer. In addition, some
sales personnel of the Selected Broker-Dealer will receive various types of
non-cash compensation or 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 0.75% of 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
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<PAGE>
pursuant to the Plan, equal to 0.20% of the Fund's average daily net assets,
is characterized as a service fee within the meaning of NASD guidelines. The
service fee is a payment made for personal service and/or the maintenance of
shareholder accounts.
For the fiscal period November 26, 1996 (commencement of operations)
through February 28, 1997, the Fund accrued payments under the Plan amounting
to $13,601, which amount is equal to the annualized rate of 0.75% of the
Fund's average daily net assets for the fiscal period.
Amounts paid under the Plan are paid to the Distributor to compensate it
for the services provided and the expenses borne by the Distributor and others
in the distribution of the Fund's shares, including the payment of commissions
for sales of the Fund's shares and compensation to and expenses of DWR account
executives and others who engage in or support distribution of shares or who
service shareholder accounts, including overhead and telephone expenses;
printing and distribution of prospectuses and reports used in connection with
the offering of the Fund's shares to other than current shareholders; and
preparation, printing and distribution of sales literature and advertising
materials. In addition, the Distributor may utilize fees paid pursuant to the
Plan to compensate DWR and other Selected Broker-Dealers for their opportunity
costs in advancing such amounts, which compensation would be in the form of a
carrying charge on any unreimbursed distribution expenses.
At any given time, the expenses in distributing shares of the Fund may be
in excess of the total of (i) the payments made by the Fund pursuant to the
Plan, and (ii) the proceeds of contingent deferred sales charges paid by
investors upon the redemption of shares (see "Repurchases and
Redemptions--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 the excess
distribution expenses (including the excess carrying charge described above)
totalled $1,001,282 at February 28, 1997, which was equal to 12.44% 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 (or, on days when the New York Stock Exchange closes prior
to 4:00 p.m., at such earlier time), on each day that the New York Stock
Exchange is open by taking the value of all assets of the Fund, subtracting
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 stock exchange or is valued at its latest sale price on that exchange
(if there were no sales that day, the security is valued at the latest bid
price); 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 Adviser 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 Board of Trustees. 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 60 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. Other short-term debt securities will be valued on a mark-to-market
basis until such time as they reach a remaining maturity of 60 days, whereupon
they will be valued at amortized cost using their value on the 61st day unless
the Trustees determine such does not reflect the securities' market value, in
which case these securities will be valued at their fair value as determined
by the Trustees. All other securities and other assets are valued at their
fair value as determined in good faith under procedures established by and
under the supervision of the Trustees.
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
the pricing service believes is the fair valuation of such portfolio
securities.
14
<PAGE>
SHAREHOLDER SERVICES
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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 TCW/DW
Fund), unless the shareholder requests that they be paid in cash. Shares so
acquired are not subject to the imposition of a contingent deferred sales
charge upon their redemption (see "Repurchases and Redemptions").
Investment of Dividends or Distributions Received in Cash. Any shareholder
who receives a cash payment representing a dividend or capital gains
distribution may invest such dividend or distribution at the net asset value
per share next determined after receipt by the Transfer Agent, by returning
the check or the proceeds to the Transfer Agent within 30 days after the
payment date. Shares so acquired are not subject to the imposition of a
contingent deferred sales charge upon their redemption (see "Repurchases and
Redemptions").
EasyInvest (Service Mark) . Shareholders may subscribe to EasyInvest, an
automatic purchase plan which provides for any amount from $100 to $5,000 to
be transferred automatically from a checking or savings account, on a
semi-monthly, monthly or quarterly basis, to the Fund's Transfer Agent for
investment in shares of the Fund. Shares purchased through EasyInvest will be
added to the shareholder's existing account at the net asset value calculated
the same business day the transfer of funds is effected. For further
information or to subscribe to EasyInvest, shareholders should contact their
DWR or other Selected Broker-Dealer account executive or the Transfer Agent.
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 "Repurchases and Redemptions--Contingent Deferred Sales
Charge"). Therefore, any shareholder participating in the Withdrawal Plan will
have sufficient shares redeemed from his or her account so that the proceeds
(net of any applicable contingent deferred sales charge) to the shareholder
will be the designated monthly or quarterly amount.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for information about any of the above
services.
Tax Sheltered Retirement Plans. Retirement plans are available for use by
corporations, the self-employed, Individual Retirement Accounts and Custodial
Accounts under Section 403(b)(7) of the Internal Revenue Code. Adoption of
such plans should be on advice of legal counsel or tax adviser.
For further information regarding plan administration, custodial fees and
other details, investors should contact their account executive or the
Transfer Agent.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders an "Exchange Privilege"
allowing the exchange of shares of the Fund for shares of any other TCW/DW
Fund sold with a contingent deferred sales charge ("CDSC Funds"), for shares
of TCW/DW North American Government Income Trust, TCW/DW Income and Growth
Fund, TCW/DW Balanced Fund and for shares of five money market funds for which
InterCapital serves as investment manager: Dean Witter Liquid Asset Fund Inc.,
Dean Witter U.S. Government Money Market Trust, Dean Witter Tax-Free Daily
Income Trust, Dean Witter California Tax-Free Daily Income Trust and Dean
Witter New York Municipal Money Market Trust (the foregoing eight 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.
Shareholders utilizing the Fund's Exchange Privilege may subsequently
reexchange such shares back to the Fund. However, no exchange privilege is
available between the Fund and any other fund managed by the Manager or
InterCapital, other than other TCW/DW Funds and the five money market funds
listed above.
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 or any other TCW/DW Fund, shares of the Fund
are redeemed out of the Fund at their next calculated net asset value and the
proceeds of the redemption are used to purchase shares of the money market
fund at their net asset value determined the following day. Subsequent
exchanges between any of the money market funds and any TCW/DW Fund 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. 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 "Repurchases and
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<PAGE>
Redemptions--Contingent Deferred Sales Charge"). However, in the case of
shares of the Fund exchanged into an Exchange Fund, upon a redemption of
shares which results in a CDSC being imposed, a credit (not to exceed the
amount of the CDSC) will be given in an amount equal to the Exchange Fund
12b-1 distribution fees which are attributable to those shares. (Exchange Fund
12b-1 distribution fees are described in the prospectuses for those funds.)
Purchases and exchanges should be made for investment purposes only. A
pattern of frequent exchanges may be deemed by the Manager to be abusive and
contrary to the best interests of the Fund's other shareholders and, at the
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, each of the other TCW/DW Funds and each of the money market funds may in
its discretion limit or otherwise restrict the number of times this Exchange
Privilege may be exercised by any investor. Any such restriction will be made
by the Fund on a prospective basis only, upon notice to the shareholder not
later than ten days following such shareholder's most recent exchange. Also,
the Exchange Privilege may be terminated or revised at any time by the Fund
and/or any of such other TCW/DW Funds or money market 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. 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 money
market funds for which the Exchange Privilege is available pursuant to this
Exchange Privilege by contacting their DWR or other Selected Broker-Dealer
account executive (no Exchange Privilege Authorization Form is required).
Other shareholders (and those shareholders who are clients of DWR or another
Selected Broker-Dealer but who wish to make exchanges directly by writing or
telephoning the Transfer Agent) must complete and forward to the Transfer
Agent an Exchange Privilege Authorization Form, copies of which may be
obtained from the Transfer Agent, to initiate an exchange. If the
Authorization Form is used, exchanges may be made 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 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 will also be recorded. If such
procedures are not employed, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions.
Telephone exchange instructions will be accepted if received by the
Transfer Agent between 9:00 a.m. and 4:00 p.m. New York time, on any day the
New York Stock Exchange is open. Any shareholder wishing to make an exchange
who has previously filed an Exchange Privilege Authorization Form and who is
unable to reach the Fund by telephone should contact his or her DWR or other
Selected Broker-Dealer account executive, if appropriate, or make a written
exchange request. Shareholders are advised that during periods of drastic
economic or market changes, it is possible that the telephone exchange
procedures may be difficult to implement, although this has not been the case
in the past with other funds managed by the Manager.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about the
Exchange Privilege.
REPURCHASES AND REDEMPTIONS
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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 per share 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 (see below).
The CDSC, if any, will be the only fee imposed by the Fund, the
Distributor, DWR or other Selected Broker-Dealer. The offers by DWR and other
Selected Broker-Dealers to repurchase shares may be suspended without notice
by them at any time. In that event, shareholders may redeem their shares
through the Fund's Transfer Agent as set forth below under "Redemption."
Redemption. Shares of the Fund can be redeemed for cash at any time at the
net asset value per share next determined; however, such redemption proceeds
will be reduced by the amount of any applicable contingent deferred
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<PAGE>
sales charge (see below). If shares are held in a shareholder's account
without a share certificate, a written request for redemption to the Fund's
Transfer Agent at P.O. Box 983, Jersey City, NJ 07303 is required. If
certificates are held by the shareholder, the shares may be redeemed by
surrendering the certificates with a written request for redemption along with
any additional documentation required by the Transfer Agent.
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. 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
Manager or its parent, Dean Witter InterCapital Inc., as self-directed
investment alternatives and for which Dean Witter Trust Company or Dean Witter
Trust FSB, each of which is an affiliate of the Manager, serves as Trustee or
the 401(k) Support Services Group of DWR serves as recordkeeper ("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.
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 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
repurchased or redeemed and has not previously exercised this reinstatement
privilege may, within thirty days after the date of the repurchase or
redemption, reinstate any portion or all of the proceeds of such repurchase or
redemption in shares of the Fund at 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
repurchase or redemption.
Involuntary Redemption. The Fund reserves the right, on sixty days'
notice, to redeem, at their net asset value, the shares of any shareholder
(other than shares held in an
17
<PAGE>
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 (Service
Mark), if after twelve months the shareholder has invested less than $1,000 in
the account. However, before the Fund redeems such shares and sends the
proceeds to the shareholder, it will notify the shareholder that the value of
the shares is less than the applicable amount and allow 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 declare and pay monthly
income dividends and to distribute net short-term and net long-term capital
gains, if any, at least once each year. The Fund may, however, determine to
retain all or part of any net 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 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.
With respect to the Fund's investments in zero coupon and payment-in-kind
bonds, the Fund accrues income prior to any actual cash payments by their
issuers. In order to continue to comply with Subchapter M of the Internal
Revenue Code and remain able to forego payment of federal income tax on its
income and capital gains, the Fund must distribute all of its net investment
income, including income accrued from zero coupon and payment-in-kind bonds.
As such, the Fund may be required to dispose of some of its portfolio
securities under disadvantageous circumstances to generate the cash required
for distribution.
Shareholders who are required to pay taxes on their income will normally
have to pay federal income taxes, and any state income taxes, on the dividends
and distributions they receive from the Fund. Such dividends and
distributions, to the extent that they are derived from net investment income
or net short-term capital gains, are taxable to the shareholder as ordinary
income regardless of whether the shareholder receives such payments in
additional shares or in cash. Any dividends declared with a record date in the
last quarter of any calendar year which are paid in the following year prior
to February 1 will be deemed received by the shareholder in the prior calendar
year. Since the Fund's income is expected to be derived primarily from
interest rather than dividends, only a small portion, if any, of such
dividends and distributions is expected to be eligible for the Federal
dividends received deduction available to corporations.
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. Capital gains may be generated
by transactions in options and futures contracts engaged in by the Fund.
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 has made 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.
The Fund may at times make payments from sources other than income or net
capital gains. Payments from such sources will, in effect, represent a return
of a portion of each shareholder's investment. All, or a portion, of such
payments will not be taxable to shareholders.
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.
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 "yield" and/or its "total return"
in advertisements and sales literature. Both the yield and the total return of
the Fund are based on historical earnings and are not intended to indicate
future performance. The yield of the Fund is computed by dividing the Fund's
net investment income over a 30-day
18
<PAGE>
period by an average value (using the average number of shares entitled to
receive dividends and the net asset value per share at the end of the period),
all in accordance with applicable regulatory requirements. Such amount is
compounded for six months and then annualized for a twelve-month period to
derive the Fund's yield.
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 the life of the Fund. Average
annual total return reflects all income earned by the Fund, any appreciation
or depreciation of the Fund's assets and all expenses incurred by the Fund,
for the stated periods. It alsoassumes 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. Such calculations may or may not reflect
the deduction of the contingent deferred sales charge which, if reflected,
would reduce the performance quoted. The Fund may also advertise the growth of
hypothetical investments of $10,000, $50,000 and $100,000 in shares of the
Fund. The Fund from time to time may also advertise its performance relative
to certain performance rankings and indexes compiled by independent
organizations (such as mutual fund performance rankings of Lipper Analytical
Services, Inc.).
ADDITIONAL INFORMATION
- -----------------------------------------------------------------------------
Voting Rights. All shares of beneficial interest of the Fund are of $0.01
par value and are equal as to earnings, assets and voting privileges.
The Fund is not required to hold Annual Meetings of Shareholders and, in
ordinary circumstances, the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances, the Trustees may be removed by action of the Trustees or by the
shareholders.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for 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 limitation on shareholder personal liability, and
the nature of the Fund's assets and operations, the possibility of the Fund
being unable to meet its obligations is remote and thus, in the opinion of
Massachusetts counsel to the Fund, the risk to Fund shareholders of personal
liability is remote.
Code of Ethics. The Adviser is subject to a Code of Ethics with respect to
investment transactions in which the Adviser's officers, directors and certain
other persons have a beneficial interest to avoid any actual or potential
conflict or abuse of their fiduciary position. The Code of Ethics, as it
pertains to the TCW/DW Funds, contains several restrictions and procedures
designed to eliminate conflicts of interest including: (a) pre-clearance of
personal investment transactions to ensure that personal transactions by
employees are not being conducted at the same time as the Adviser's clients;
(b) quarterly reporting of personal securities transactions; (c) a prohibition
against personally acquiring securities in an initial public offering,
entering into uncovered short sales and writing uncovered options; (d) a seven
day "blackout period" prior or subsequent to a TCW/DW Fund transaction during
which portfolio managers are prohibited from making certain transactions in
securities which are being purchased or sold by a TCW/DW Fund; (e) a
prohibition, with respect to certain investment personnel, from profiting in
the purchase and sale, or sale and purchase, of the same (or equivalent)
securities within 60 calendar days; and (f) a prohibition against acquiring
any security which is subject to firm wide or, if applicable, a department
restriction of the Adviser. The Code of Ethics provides that exemptive relief
may be given from certain of its requirements, upon application. The Adviser's
Code of Ethics complies with regulatory requirements and, insofar as it
relates to persons associated with registered investment companies, the 1994
Report of the Advisory Group on Personal Investing of the Investment Company
Institute.
Master/Feeder Conversion. The Fund reserves the right to seek to achieve
its investment objective by investing all of its investable assets in a
diversified, open-end management investment company having the same investment
objective and policies and substantially the same investment restrictions as
those applicable to the Fund. Such investment would be made only if the
Trustees of the Fund believe that to do so would be in the best interests of
the Fund and its shareholders.
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>
TCW/DW STRATEGIC INCOME TRUST
PORTFOLIO OF INVESTMENTS February 28, 1997 (unaudited)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE BONDS (59.3%)
Aerospace & Defense (1.3%)
$100 Lockheed Martin Corp. .......................................... 7.25 % 05/15/06 $ 101,334
------------
Automotive (1.2%)
100 General Motors Corp. ........................................... 7.10 03/15/06 100,009
------------
Banks (7.4%)
100 Chase Manhattan Corp. .......................................... 6.50 08/01/05 96,769
50 Chevy Chase Bank F.S.B. ........................................ 9.25 12/01/08 52,125
100 Citicorp ........................................................ 7.125 05/15/06 100,432
100 First Chicago NBD ............................................... 6.125 02/15/06 93,443
50 First Nationwide Escrow - 144A* ................................. 10.625 10/01/03 55,250
100 Nationsbank Corp. .............................................. 7.50 09/15/06 102,606
100 Wells Fargo & Co. .............................................. 6.125 11/01/03 95,561
------------
596,186
------------
Beverages - Soft Drinks (2.0%)
100 Coca-Cola Enterprises, Inc. .................................... 7.875 02/01/22 104,737
50 Delta Beverage Group - 144A* .................................... 9.75 12/15/03 52,500
------------
157,237
------------
Building Materials (1.9%)
100 Atrium Companies, Inc. - 144A* .................................. 10.50 11/15/06 102,375
50 Building Materials Corp. of America - 144A* ..................... 8.625 12/15/06 50,875
------------
153,250
------------
Chemicals (3.9%)
50 Acetex Corp. ................................................... 9.75 10/01/03 50,375
250 Foamex L.P. .................................................... 11.25 10/01/02 265,000
------------
315,375
------------
Commercial Services (0.3%)
20 Jorgensen Earle Co. ............................................ 10.75 03/01/00 20,000
------------
Consumer - Noncyclical (0.7%)
50 International Home Foods, Inc. - 144A* .......................... 10.375 11/01/06 52,000
------------
Containers (1.3%)
100 Plastic Containers, Inc. - 144A* ................................ 10.00 12/15/06 104,000
------------
Distribution (2.0%)
100 Iron Mountain, Inc. ............................................ 10.125 10/01/06 107,625
50 Paging Network .................................................. 10.125 08/01/07 50,062
------------
157,687
------------
Energy (0.6%)
50 Forcenergy, Inc. -144A* ......................................... 8.50 02/15/07 50,000
------------
Entertainment (1.2%)
100 Walt Disney Co. (Series B) ...................................... 6.75 03/30/06 98,544
------------
Entertainment/Gaming (1.8%)
100 Circus Circus Enterprises, Inc. ................................ 6.45 02/01/06 95,134
50 Showboat Inc. .................................................. 9.25 05/01/08 51,375
------------
146,509
------------
Financial (5.0%)
100 Associates Corp. N.A. .......................................... 6.00 06/15/00 98,336
100 Bear Stearns Co., Inc. ......................................... 6.75 05/01/01 99,989
100 Fleet Financial Group, Inc. .................................... 7.125 04/15/06 99,770
100 Ford Motor Credit Corp. ........................................ 8.20 02/15/02 105,894
------------
403,989
------------
Forest Products (1.3%)
100 Specialty Paperboard, Inc. - 144A* .............................. 9.375 10/15/06 101,875
------------
Gas Transmission (1.2%)
100 Enron Corp. .................................................... 7.125 05/15/07 99,605
------------
Hospital Management (1.4%)
100 Dade International, Inc. (Series B) ............................. 11.125 05/01/06 110,000
------------
SEE NOTES TO FINANCIAL STATEMENTS
20
<PAGE>
TCW/DW STRATEGIC INCOME TRUST
PORTFOLIO OF INVESTMENTS February 28, 1997 (unaudited) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------
Industrials (6.2%)
$100 General American Transportation Corp. .......................... 6.75 % 03/01/06 $ 96,240
100 Lilly Eli & Co. ................................................ 8.125 12/01/01 105,601
100 News America Holdings .......................................... 7.375 10/17/08 100,041
100 Praxair Inc. ................................................... 6.75 03/01/03 99,195
100 Tyco International, Ltd. ....................................... 6.375 01/15/04 96,117
------------
497,194
------------
Lodging (1.3%)
100 HMC Acquisition Properties (Series B) ........................... 9.00 12/15/07 103,250
------------
Manufacturing (0.6%)
50 Sweetheart Cup .................................................. 10.50 09/01/03 51,875
------------
Media Group (2.6%)
50 Adams Outdoor Advertising ....................................... 10.75 03/15/06 53,750
100 Jacor Communications Co. ....................................... 9.75 12/15/06 105,500
50 Paxson Communications Corp. .................................... 11.625 10/01/02 53,625
------------
212,875
------------
Metals & Mining (2.6%)
100 AK Steel Corp. - 144A* .......................................... 9.125 12/15/06 103,750
100 WCI Steel, Inc. - 144A* ......................................... 10.00 12/01/04 104,625
------------
208,375
------------
Retail (2.7%)
100 Finlay Fine Jewelry ............................................. 10.625 05/01/03 105,625
100 Guitar Center Management ....................................... 11.00 07/01/06 109,500
------------
215,125
------------
Retail - Department Stores (1.3%)
100 May Department Stores Co. ...................................... 7.45 09/15/11 103,521
------------
Retail - Drug Stores (1.3%)
100 Di Giorgio Corp. ............................................... 12.00 02/15/03 106,750
------------
Retail - Food Chains (2.0%)
50 Grand Union Co. ................................................ 12.00 09/01/04 51,313
100 Smith's Food & Drug Centers, Inc. .............................. 11.25 05/15/07 112,750
------------
164,063
------------
Telephones (2.4%)
100 AT&T Corp. ..................................................... 7.125 01/15/02 101,563
100 GTE South, Inc. ................................................ 6.00 02/15/08 91,663
------------
193,226
------------
Utilities - Electric (1.8%)
50 California Energy ............................................... 10.25 01/15/04 54,750
100 PacifiCorp ..................................................... 6.12 01/15/06 93,636
------------
148,386
------------
TOTAL CORPORATE BONDS (Identified Cost $4,760,171) .................................. 4,772,240
------------
CONVERTIBLE BOND (0.6%)
Entertainment/Gaming
50 California Hotel Finance Corp. (Identified Cost $52,125) ........ 11.00 12/01/02 52,500
------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS (27.7%)
448 Federal Home Loan Mortgage Corp. ............................... 7.00 12/15/03 449,182
446 Federal Home Loan Mortgage Corp. ............................... 6.50 08/01/11 436,334
315 Federal National Mortgage Assoc. ............................... 7.50 09/01/01 320,051
444 Federal National Mortgage Assoc. ............................... 6.50 11/01/11 434,307
446 Federal National Mortgage Assoc. ............................... 7.00 11/01/11 443,947
150 U.S. Treasury Note ............................................. 5.75 08/15/03 144,498
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Identified Cost $2,248,720) ............. 2,228,319
------------
SHORT-TERM INVESTMENTS (9.5%)
U.S. GOVERNMENT AGENCIES (a)(6.2%)
200 Farm Credit System Financial ................................... 5.18 03/03/97 199,943
300 Federal Home Loan Mortgage Corp. ............................... 5.20 03/03/97 299,913
------------
TOTAL U.S. GOVERNMENT AGENCIES (Amortized Cost $499,856) ............................ 499,856
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
21
<PAGE>
TCW/DW STRATEGIC INCOME TRUST
PORTFOLIO OF INVESTMENTS February 28, 1997 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENT (3.3%)
$265 The Bank of New York 5.25% due 03/03/97 (dated 02/28/97; proceeds
$265,198; collateralized by $276,010 U.S. Treasury Note 6.25%
due 02/15/07 valued at $270,463)(Identified Cost $265,159) ....................... $ 265,159
-----------
TOTAL SHORT-TERM INVESTMENTS (Identified Cost $765,015) ........................... 765,015
-----------
TOTAL INVESTMENTS (Identified Cost $7,826,031)(b)........................ 97.1% 7,818,074
OTHER ASSETS IN EXCESS OF LIABILITIES ................................... 2.9 229,885
----- -----------
NET ASSETS .............................................................. 100.0% $8,047,959
====== ===========
</TABLE>
- ------------
* Resale is restricted to qualified institutional investors.
(a) Securities were 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 is
$51,972 and the aggregate gross unrealized depreciation is $59,929,
resulting in net unrealized depreciation of $7,957.
SEE NOTES TO FINANCIAL STATEMENTS
22
<PAGE>
TCW/DW STRATEGIC INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1997 (unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $7,826,031) ................ $7,818,074
Receivable for:
Investments sold ........................... 199,899
Interest ................................... 126,160
Shares of beneficial interest sold ........ 16,273
Deferred organizational expenses ............. 153,837
Receivable from affiliate .................... 26,167
------------
TOTAL ASSETS................................ 8,340,410
------------
LIABILITIES:
Payable for:
Investments purchased ...................... 106,247
Plan of distribution fee ................... 4,461
Dividends to shareholders .................. 1,729
Accrued expenses and other payables ......... 26,177
Organizational expenses ...................... 153,837
------------
TOTAL LIABILITIES .......................... 292,451
------------
NET ASSETS:
Paid-in-capital .............................. 8,060,835
Net unrealized depreciation .................. (7,957)
Undistributed net investment income ......... 5,725
Net realized loss............................. (10,644)
------------
NET ASSETS.................................. $8,047,959
============
NET ASSET VALUE PER SHARE,
806,707 shares outstanding (unlimited shares
authorized of $.01 par value) ............... $ 9.98
============
</TABLE>
STATEMENT OF OPERATIONS
For the period November 26, 1996* through February 28, 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME................... $129,345
----------
EXPENSES
Organizational expenses........... 26,163
Professional fees................. 15,746
Plan of distribution fee.......... 13,601
Trustees' fees and expenses ..... 10,001
Management fee.................... 6,528
Shareholder reports and notices .. 5,144
Investment advisory fee........... 4,352
Custodian fees.................... 3,326
Registration fees................. 2,408
Transfer agent fees and expenses . 1,204
Other............................. 1,218
----------
TOTAL EXPENSES.................. 89,691
LESS: AMOUNTS
WAIVED/REIMBURSED............... (76,090)
----------
NET EXPENSES.................... 13,601
----------
NET INVESTMENT INCOME........... 115,744
----------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss................. (10,644)
Net unrealized depreciation ...... (7,957)
----------
NET LOSS ....................... (18,601)
----------
NET INCREASE ..................... $ 97,143
==========
</TABLE>
- ------------
* Commencement of operations.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
NOVEMBER 26, 1996*
THROUGH
FEBRUARY 28, 1997
- --------------------------------------------------------------- ------------------
<S> <C>
(unaudited)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income .......................................... $ 115,744
Net realized loss............................................... (10,644)
Net unrealized depreciation..................................... (7,957)
------------
NET INCREASE.................................................. 97,143
Dividends from net investment income............................ (110,019)
Net increase from transactions in shares of beneficial interest 7,960,835
NET INCREASE.................................................. 7,947,959
NET ASSETS:
Beginning of period............................................. 100,000
------------
END OF PERIOD
(Including undistributed net investment income of $5,725) .... $8,047,959
============
</TABLE>
- ------------
* Commencement of operations.
SEE NOTES TO FINANCIAL STATEMENTS
23
<PAGE>
TCW/DW STRATEGIC INCOME TRUST
NOTES TO FINANCIAL STATEMENTS February 28, 1997 (unaudited)
1. ORGANIZATIONAL AND ACCOUNTING POLICIES
TCW/DW Strategic Income Trust (the "Fund") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as an open-end, diversified
management investment company. The Fund's primary investment objective is to
generate a high level of current income. The Fund seeks to achieve its
objective by allocating its investments among three distinct types of fixed
income securities; investment-grade corporate, mortgage-backed and high yield
corporate securities. The Fund was organized as a Massachusetts business trust
on June 27, 1996 and had no other 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. ("InterCapital"), an
affiliate of Dean Witter Services Company Inc. (the "Manager"), to effect the
Fund's initial capitalization. The Fund commenced operations on November 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
pursuant to procedures adopted 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 TCW Funds Management, Inc. (the "Adviser")
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 (valuation of debt securities for which market quotations are not
readily available may be based upon current market prices of securities which
are comparable in coupon, rating and maturity or an appropriate matrix
utilizing similar factors); (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; (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.
Discounts are accreted over the life of the respective securities. Dividend
income and other distributions are recorded on the ex-dividend date.
Interest income is accrued daily.
24
<PAGE>
TCW/DW STRATEGIC INCOME TRUST
NOTES TO FINANCIAL STATEMENTS February 28, 1997 (unaudited) continued
C. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
D. 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.
E. ORGANIZATIONAL EXPENSES -- InterCapital paid the organizational expenses of
the Fund in the amount of approximately $180,000 and will be reimbursed for
the full amount thereof exclusive of any amounts assumed. 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. In the
event that at any time during the five year period beginning with the date of
the commencement of operations the initial shares acquired by the Manager
prior to such date are redeemed by any holder thereof, the redemption proceeds
payable in respect of such shares will be reduced by the pro rata share (based
on the proportionate share of the initial shares redeemed to the total number
of original shares outstanding at the time of redemption) of the then
unamortized deferred organizational expenses as of the date of such
redemption. In the event that the Fund liquidates before the deferred
organizational expenses are fully amortized, the Manager shall bear such
unamortized deferred organizational expenses.
2. MANAGEMENT AGREEMENT
Pursuant to a Management Agreement, the Fund pays the Manager a management
fee, accrued daily and payable monthly, by applying the annual rate of 0.36%
to the net assets of the Fund determined as of the close of each business day.
Under the terms of the Management Agreement, the 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 Manager. The Manager also bears the cost of telephone
services, heat, light, power and other utilities provided to the Fund.
InterCapital had undertaken to assume all operating expenses (except for any
12b-1 fee, foreign taxes withheld and/or brokerage fees) and the Manager had
agreed to waive the compensation provided for in its Management Agreement and
the Adviser had agreed to waive the compensation provided for in its Invesment
Advisory Agreement until the Fund had $50 million of net assets or May 26,
1997, whichever occurred first. InterCapital has undertaken to continue to
assume these expenses and the Manager and the Adviser have agreed to continue
to waive their respective compensation until October 31, 1997.
25
<PAGE>
TCW/DW STRATEGIC INCOME TRUST
NOTES TO FINANCIAL STATEMENTS February 28, 1997 (unaudited) continued
3. INVESTMENT ADVISORY AGREEMENT -- Pursuant to an Investment Advisory
Agreement, the Fund pays the Adviser an advisory fee, accrued daily and
payable monthly, by applying the annual rate of 0.24% as of the close of each
business day.
Under the terms of the Investment Advisory Agreement, the Fund has retained
the Adviser to invest the Fund's assets, including placing orders for the
purchase and sale of portfolio securities. The Adviser obtains and evaluates
such information and advice relating to the economy, securities markets, and
specific securities as it considers necessary or useful to continuously manage
the assets of the Fund in a manner consistent with its investment objective.
In addition, the Adviser pays the salaries of all personnel, including
officers of the Fund, who are employees of the Adviser.
4. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the 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 0.75% of 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
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 cost 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, may be recovered through future distribution fees from
the Fund and contingent deferred sales charges from the Fund's shareholders.
Although there is no legal obligation for the Fund to pay expenses incurred in
excess of payments made to the Distributor under the Plan and the proceeds of
contingent deferred sales charges paid by investors upon redemption of shares,
if for any reason the Plan is terminated, the Trustees will consider at that
time the manner in which to treat such expenses. The Distributor has advised
the Fund that such excess amounts, including carrying charges, totaled
$1,001,282 at February 28, 1997.
The Distributor has informed the Fund that for the period ended February 28,
1997, it received approximately $3,200 in contingent deferred sales charges
from certain redemptions of the Fund's shares.
5. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities,
excluding short-term investments, for the period ended February 28, 1997
aggregated $9,593,399 and $2,518,990 respectively.
Included in the aforementioned are purchases and sales of U.S. Government
securities of $4,247,723 and $1,983,850, respectively.
26
<PAGE>
TCW/DW STRATEGIC INCOME TRUST
NOTES TO FINANCIAL STATEMENTS February 28, 1997 (unaudited) continued
Dean Witter Trust Company, an affiliate of the Manager and Distributor, is the
Fund's transfer agent. For the period ended February 28, 1997, the Fund had
transfer agent fees and expenses payable of approximately $400.
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
NOVEMBER 26, 1996*
THROUGH FEBRUARY 28,
1997
------------------------
SHARES AMOUNT
---------- ------------
<S> <C> <C>
Sold ...................... 809,942 $8,093,090
Reinvestment of dividends.. 5,642 56,169
---------- ------------
815,584 8,149,259
Repurchased ............... (18,877) (188,424)
---------- ------------
Net increase............... 796,707 $7,960,835
========== ============
</TABLE>
- ------------
* Commencement of operations.
7. FINANCIAL HIGHLIGHTS
See the "Financial Highlights" table on page 4 of this Prospectus.
27
<PAGE>
TCW/DW STRATEGIC INCOME TRUST
Two World Trade Center
New York, New York 10048
TRUSTEES
John C. Argue
Richard M. DeMartini
Charles A. Fiumefreddo
John R. Haire
Dr. Manuel H. Johnson
Thomas E. Larkin, Jr.
Michael E. Nugent
John L. Schroeder
Marc I. Stern
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Thomas E. Larkin, Jr.
President
Barry Fink
Vice President, Secretary and
General Counsel
Bonnie N. Baha
Vice President
Philip A. Barach
Vice President
Jeffrey E. Gundlach
Vice President
Frederick H. Horton
Vice President
Mark D. Senkpiel
Vice President
Melissa V. Weiler
Vice President
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Dean Witter Trust Company
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
MANAGER
Dean Witter Services Company Inc.
ADVISER
TCW Funds Management, Inc.
