<PAGE>
PROSPECTUS
JANUARY 31, 1996
Dean Witter Convertible Securities Trust (the "Fund") is an
open-end diversified management investment company whose investment objective is
to seek a high level of total return on its assets through a combination of
current income and capital appreciation. It seeks to achieve its investment
objective by investing principally in "convertible securities," that is, bonds,
notes, debentures, preferred stocks and other securities which are convertible
into common stock. INVESTORS SHOULD CAREFULLY CONSIDER THE RELATIVE RISKS OF
INVESTING IN HIGH YIELD SECURITIES, WHICH ARE COMMONLY KNOWN AS JUNK BONDS.
BONDS OF THIS TYPE ARE CONSIDERED TO BE SPECULATIVE WITH REGARD TO THE PAYMENT
OF INTEREST AND RETURN OF PRINCIPAL. INVESTORS SHOULD ALSO BE COGNIZANT OF THE
FACT THAT SUCH SECURITIES ARE NOT GENERALLY MEANT FOR SHORT-TERM INVESTING AND
SHOULD ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND. (see
"Investment Objective and Policies").
Shares of the Fund are continuously offered at net asset value
without the imposition of a sales charge. However, redemptions and/or
repurchases are subject in most cases to a contingent deferred sales charge,
scaled down from 5% to 1% of the amount redeemed, if made within six years of
purchase, which charge will be paid to the Fund's Distributor, Dean Witter
Distributors Inc. (See "Redemptions and Repurchases--Contingent Deferred Sales
Charge.") In addition, the Fund pays the Distributor a Rule 12b-1 distribution
fee pursuant to a Plan of Distribution at the annual rate of 1% of the lesser of
the (i) average daily aggregate net sales or (ii) average daily net assets of
the Fund. (See "Purchase of Fund Shares--Plan of Distribution.")
This Prospectus sets forth concisely the information you should
know before investing in the Fund. It should be read and retained for future
reference. Additional information about the Fund is contained in the Statement
of Additional Information, dated January 31, 1996, which has been filed with the
Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone numbers listed on this page. The
Statement of Additional Information is incorporated herein by reference.
DEAN WITTER DISTRIBUTORS INC.
DISTRIBUTOR
TABLE OF CONTENTS
Prospectus Summary/2
Summary of Fund Expenses/3
Financial Highlights/4
The Fund and its Management/5
Investment Objective and Policies/5
Risk Considerations/6
Investment Restrictions/12
Purchase of Fund Shares/12
Shareholder Services/15
Redemptions and Repurchases/17
Dividends, Distributions and Taxes/19
Performance Information/20
Additional Information/21
Appendix--Ratings of Investments/23
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Dean Witter
Convertible Securities Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
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PROSPECTUS SUMMARY
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<TABLE>
<S> <C>
The The Fund is organized as a Trust, commonly known as a Massachusetts business trust, and is an open-end
Fund diversified management investment company investing principally in corporate securities that can be converted
into common stock.
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Shares Offered Shares of beneficial interest with $0.01 par value (see page 21).
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Offering At net asset value without sales charge (see page 12). Shares redeemed within six years of purchase are subject
Price 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 EasyInvestSM); minimum subsequent
Purchase investment, $100 (see page 12).
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Investment The investment objective of the Fund is to seek a high level of total return on its assets through a combination
Objective of current income and capital appreciation. It seeks to achieve this objective by investing principally in
"convertible securities," that is bonds, notes, debentures, preferred stocks and other securities which are
convertible into common stock.
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Investment Dean Witter InterCapital Inc. ("InterCapital"), the Investment Manager of the Fund and its wholly-owned
Manager subsidiary, Dean Witter Services Company Inc., serve in various investment management, advisory, management and
administrative capacities to ninety-five investment companies and other portfolios with assets of approximately
$79.5 billion at December 31, 1995 (see page 5).
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Management The Investment Manager receives a monthly fee at the annual rate of 0.60 of 1% of the Fund's net assets not
Fee exceeding $750 million, scaled down at various asset levels to 0.425 of 1% of the Fund's daily net assets
exceeding $3 billion, determined as of the close of each business day. (see page 5).
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Dividends and Income dividends paid quarterly; Capital gains, if any, paid at least once per year. Dividends and capital gains
Capital Gains distributions automatically reinvested in additional shares at net asset value (without sales charge), unless
Distributions the shareholder elects to receive cash. (see page 19).
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Distributor Dean Witter Distributors Inc. (the "Distributor"). The Distributor receives from the Fund a distribution fee,
accrued daily and payable monthly, at the rate of 1% per annum of the lesser of (i) the Fund's average daily
aggregate net sales or (ii) the Fund's average daily net assets. This fee compensates the Distributor for the
services provided in distributing shares of the Fund and for sales-related expenses. The Distributor also
receives the proceeds of any contingent deferred sales charges (see page 13).
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Redemption-- Shares are redeemable by the shareholder at net asset value. An account may be involuntarily redeemed if the
Contingent total value of the account is less than $100 or, if the account was opened through EasyInvestSM, if after twelve
Deferred Sales months the shareholder has invested less than $1,000 in the account. Although no commission or sales load is
Charge 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
falls below the aggregate amount of the investor's purchase payments made during the six years preceding the
redemption. However, there is no charge imposed on redemption of shares purchased through reinvestment of
dividends or distributions (see pages 17-19).
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Tax-Sheltered You can take advantage of tax benefits for personal retirement accounts by investing in the Fund through an IRA
Retirement (Individual Retirement Account) or Custodial Account under Section 403(b) (7) of the Internal Revenue Code (see
Plans page 15).
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Risks The net asset value of the Fund's shares will fluctuate with changes in the market value of its portfolio
securities. Emphasis on convertible securities will result in price fluctuations of the Fund's portfolio
securities with varying interest rates and with changes in the prices of the common stocks associated with their
conversion rights. In addition, the investor is directed to the discussions of corporate fixed-income securities
(certain of which may be lower rated securities commonly known as "junk bonds" or securities which are unrated
by recognized rating agencies), when-issued and delayed delivery securities and forward commitments, when, as
and if issued securities, options, futures contracts, foreign securities, repurchase agreements, and options on
futures (see pages 6 through 10).
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</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
<PAGE>
SUMMARY OF FUND EXPENSES
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The following table illustrates all expenses and fees that a shareholder of
the Fund will incur. The expenses and fees set forth in the table are for the
fiscal year ended September 30, 1995.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------
Maximum Sales Charge Imposed on Purchases................... None
Maximum Sales Charge Imposed on Reinvested Dividends........ None
Deferred Sales Charge
(as a percentage of the lesser of original purchase price
or redemption proceeds).................................. 5.0%
A deferred sales charge is imposed at the following
declining rates:
</TABLE>
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT MADE PERCENTAGE
- ------------------------------------------------------------ ----------
<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>
<S> <C>
Redemption Fee.............................................. None
Exchange Fee................................................ None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE
NET ASSETS)
- ------------------------------------------------------------
Management Fee.............................................. 0.60%
12b-1 Fees*................................................. 1.00%
Other Expenses.............................................. 0.36%
Total Fund Operating Expenses............................... 1.96%
<FN>
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* A PORTION OF THE 12B-1 FEE EQUAL TO 0.25% OF THE FUND'S AVERAGE DAILY NET
ASSETS IS CHARACTERIZED AS A SERVICE FEE WITHIN THE MEANING OF NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. ("NASD") GUIDELINES. (SEE "PURCHASE OF
FUND SHARES")
</TABLE>
<TABLE>
<CAPTION>
10
EXAMPLE 1 year 3 years 5 years years
- ---------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
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:............... $ 70 $ 91 $ 126 $ 228
You would pay the following expenses on
the same investment, assuming no
redemption:............................ $ 20 $ 61 $ 106 $ 228
</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 "Redemptions and
Repurchases."
Long-term shareholders of the Fund may pay more in sales charges and
distribution fees than the economic equivalent of the maximum front-end sales
charges permitted by the NASD.
3
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FINANCIAL HIGHLIGHTS
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The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by Price Waterhouse LLP,
independent accountants. The financial highlights should be read in conjunction
with the financial statements, notes thereto, and the unqualified report of
independent accountants which are contained in the Statement of Additional
Information. Further information about the performance of the Fund is contained
in the Fund's Annual Report to Shareholders, which may be obtained without
charge upon request to the Fund.
<TABLE>
<CAPTION>
FOR THE
PERIOD
OCTOBER
31, 1985*
FOR THE YEAR ENDED SEPTEMBER 30 THROUGH
------------------------------------------------------------------------------------------- SEPTEMBER
1995 1994 1993 1992 1991 1990 1989 1988 1987 30, 1986
------- ------- ------- ------- ------- --------- ------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 10.75 $ 10.62 $ 8.92 $ 8.67 $ 7.65 $ 9.68 $ 8.63 $ 12.42 $ 11.22 $10.00
------- ------- ------- ------- ------- --------- ------- --------- ------- ----------
Net investment income... 0.60 0.42 0.37 0.34 0.37 0.46 0.48 0.38 0.48 0.76
Net realized and
unrealized gain
(loss)................. 0.82 0.11 1.67 0.15 1.05 (2.06) 1.20 (2.87) 1.59 1.22**
------- ------- ------- ------- ------- --------- ------- --------- ------- ----------
Total from investment
operations............. 1.42 0.53 2.04 0.49 1.42 (1.60) 1.68 (2.49) 2.07 1.98
------- ------- ------- ------- ------- --------- ------- --------- ------- ----------
Less dividends and
distributions from:
Net investment
income............... (0.50) (0.40) (0.34) (0.24) (0.40) (0.43) (0.63) (0.23) (0.46) (0.76)
Net realized gain..... -- -- -- -- -- -- -- (1.07) (0.41) --
------- ------- ------- ------- ------- --------- ------- --------- ------- ----------
Total dividends and
distributions.......... (0.50) (0.40) (0.34) (0.24) (0.40) (0.43) (0.63) (1.30) (0.87) (0.76)
------- ------- ------- ------- ------- --------- ------- --------- ------- ----------
Net asset value, end of
period................. $ 11.67 $ 10.75 $ 10.62 $ 8.92 $ 8.67 $ 7.65 $ 9.68 $ 8.63 $ 12.42 $11.22
------- ------- ------- ------- ------- --------- ------- --------- ------- ----------
------- ------- ------- ------- ------- --------- ------- --------- ------- ----------
TOTAL INVESTMENT
RETURN+................ 13.68% 5.02% 23.22% 5.69% 18.93% (16.93)% 20.20% (19.79)% 19.21% 19.91%(1)
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.96% 1.93% 1.93% 1.92% 1.92% 1.88% 1.76% 1.79% 1.62% 1.72%(2)
Net investment income... 5.24% 3.68% 3.44% 3.43% 4.34% 4.96% 4.93% 3.87% 3.85% 7.11%(2)
SUPPLEMENTAL DATA:
Net assets, end of
period, in millions.... $185 $190 $208 $218 $297 $413 $822 $1,073 $2,029 $1,488
Portfolio turnover
rate................... 138% 184% 221% 145% 133% 92% 167% 472% 572% 272%(1)
</TABLE>
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* COMMENCEMENT OF OPERATIONS.
** INCLUDES THE EFFECT OF CAPITAL SHARE TRANSACTIONS.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
4
<PAGE>
THE FUND AND ITS MANAGEMENT
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Dean Witter Convertible Securities Trust (the "Fund") is an open-end
diversified management investment company. The Fund is a trust of the type
commonly known as a "Massachusetts business trust" and was organized under the
laws of the Commonwealth of Massachusetts on May 21, 1985.
Dean Witter InterCapital Inc. ("InterCapital" or the "Investment Manager"),
whose address is Two World Trade Center, New York, New York 10048, is the Fund's
Investment Manager. The Investment Manager, which was incorporated in July,
1992, is a wholly-owned subsidiary of Dean Witter, Discover & Co. ("DWDC"), a
balanced financial services organization providing a broad range of nationally
marketed credit and investment products.
InterCapital and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to ninety-five investment companies, thirty of which
are listed on the New York Stock Exchange, with combined total net assets of
approximately $76.9 billion as of December 31, 1995. The Investment Manager also
manages and advises managers of portfolios of pension plans, other institutions
and individuals which aggregated approximately $2.6 billion at such date.
The Fund has retained the Investment Manager to provide administrative
services, manage its business affairs and manage the investment of the Fund's
assets, including the placing of orders for the purchase and sale of portfolio
securities. InterCapital has retained Dean Witter Services Company Inc. to
perform the aforementioned administrative services for the Fund.
The Fund's Trustees review the various services provided by or under the
direction of the Investment Manager to ensure that the Fund's general investment
policies and programs are being properly carried out and that administrative
services are being provided to the Fund in a satisfactory manner.
As full compensation for the services and facilities furnished to the Fund
and for expenses of the Fund assumed by the Investment Manager, the Fund pays
the Investment Manager monthly compensation calculated daily by applying the
following annual rates to the Fund's net assets determined as of the close of
each business day: 0.60% of the portion of the daily net assets not exceeding
$750 million, scaled down at various asset levels to 0.425% of the portion of
the daily net assets exceeding $3 billion. For the fiscal year ended September
30, 1995, the Fund accrued total compensation to the Investment Manager
amounting to 0.60% of the Fund's average daily net assets and the Fund's total
expenses amounted to 1.96% of the Fund's average daily net assets.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The investment objective of the Fund is to seek a high level of total return
on its assets through a combination of current income and capital appreciation.
There is no assurance that this objective will be achieved. It is a fundamental
policy of the Fund and cannot be changed without shareholder approval. The
following policies may be changed by the Trustees of the Fund without
shareholder approval.
(1) The Fund will normally invest at least 65% of its total assets (taken at
current value) in "convertible securities," i.e., securities (bonds, debentures,
corporate notes, preferred stocks and other securities) which are convertible
into common stock. Securities received upon conversion may be retained in the
Fund's portfolio to permit orderly disposition or to establish long-term holding
periods for federal income tax purposes. The Fund is
5
<PAGE>
not required to sell these securities for the purpose of assuring that 65% of
its assets are invested in convertible securities.
(2) The Fund may invest up to 35% of its total assets (taken at current
value and subject to any restrictions appearing elsewhere in this Prospectus) in
any combination and quantity of the following securities: (a) common stock; (b)
nonconvertible preferred stock; (c) nonconvertible corporate debt securities;
(d) options on debt and equity securities; (e) financial futures contracts and
related options thereon; and (f) money market instruments.
(3) Notwithstanding paragraphs (1) and (2) above, when market conditions
dictate a "defensive" investment strategy, the Fund may invest without limit in
money market instruments, including commercial paper, certificates of deposit,
bankers' acceptances and other obligations of domestic banks or domestic
branches of foreign banks, or foreign branches of domestic banks, in each case
having total assets of at least $500 million, and obligations issued or
guaranteed by the United States Government, or foreign governments or their
respective instrumentalities or agencies.
The Fund may invest in fixed-income securities rated Baa or lower by Moody's
Investors Service, Inc. ("Moody's"), or BBB or lower by Standard & Poor's
Corporation ("S&P"). Fixed-income securities rated Baa by Moody's or BBB by S&P
have speculative characteristics greater than those of more highly rated bonds,
while fixed-income securities rated Ba or BB or lower by Moody's and S&P,
respectively, are considered to be speculative investments. Furthermore, the
Fund does not have any minimum quality rating standard for its investments. As
such, the Fund may invest in securities rated as low as Caa, Ca or C by Moody's
or CCC, CC, C or C1 by S&P. Fixed-income securities rated Caa or Ca by Moody's
may already be in default on payment of interest or principal, while bonds rated
C by Moody's, their lowest bond rating, can be regarded as having extremely poor
prospects of ever attaining any real investment standing. Bonds rated C1 by S&P,
their lowest bond rating, are no longer making interest payments.
Non-rated securities are also considered for investment by the Fund when the
Investment Manager 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.
A general description of Moody's and S&P's ratings is set forth in the
Appendix at the end of this Prospectus.
RISK CONSIDERATIONS
CONVERTIBLE SECURITIES. The Fund will seek to meet its investment objective
by investing primarily in convertible securities in accordance with the
above-stated policies. Investments in these securities can provide a high level
of total return by virtue of their affording current income through interest and
dividend payments and because of the opportunity they provide for capital
appreciation by virtue of their convertibility into common stock. The Fund may
invest in investment grade convertible securities which are rated within the
four highest categories by recognized rating agencies; i.e., S & P and Moody's,
as well as in such securities which are lower rated or which are not rated by
such agencies. See the Statement of Additional Information for a discussion of
S&P and Moody's ratings.
Convertible securities rank senior to common stocks in a corporation's
capital structure and, therefore, entail less risk than the corporation's common
stock. The value of a convertible security is a function of its "investment
value" (its value as if it did not have a conversion privilege), and its
"conversion value" (the security's worth if it were to be exchanged for the
underlying security, at market value, pursuant to its conversion privilege).
To the extent that a convertible security's investment value is greater than
its conversion value, its price will be primarily a reflection of such
investment value and its price will be likely to increase when
6
<PAGE>
interest rates fall and decrease when interest rates rise, as with a
fixed-income security (the credit standing of the issuer and other factors may
also have an effect on the convertible security's value). If the conversion
value exceeds the investment value, the price of the convertible security will
rise above its investment value and, in addition, will sell at some premium over
its conversion value. (This premium represents the price investors are willing
to pay for the privilege of purchasing a fixed-income security with a
possibility of capital appreciation due to the conversion privilege.) At such
times the price of the convertible security will tend to fluctuate directly with
the price of the underlying equity security. Convertible securities may be
purchased by the Fund at varying price levels above their investment values
and/or their conversion values in keeping with the Fund's objective.
ZERO COUPON SECURITIES. A portion of the 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.
CORPORATE FIXED-INCOME SECURITIES. In order to generate the current income
needed to achieve its investment objective, the Fund may invest in investment
grade nonconvertible fixed-income securities as well as in such securities which
are in the lower rating categories of S & P and Moody's or which are not rated
by such agencies. Such investments may be deemed speculative in nature.
The ratings of fixed-income securities by Moody's and S & P are a generally
accepted barometer of credit risk. The Investment Manager will primarily rely
upon such ratings in assessing the creditworthiness of the issuers of the
securities it purchases. Nevertheless, the Investment Manager takes into account
in its security selection process the fact that credit ratings evaluate the
safety of a security's continuing payments of principal and interest, rather
than the risk of decline in its market value. Moreover, as credit rating
agencies may fail to make timely changes in their credit ratings to reflect
changing circumstances and events, the Investment Manager will continuously
monitor the issuers of the lower-rated securities held in the Fund's portfolio
to determine whether these issuers have sufficient cash flow and profits to meet
required principal and interest payments.
All fixed-income securities are subject to two types of risks: the credit
risk and the interest rate risk. The credit risk relates to the ability of the
issuer to meet interest or principal payments or both as they come due. The
interest rate risk refers to the fluctuations in 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.
FOREIGN SECURITIES. The Fund may invest in securities of foreign companies.
However, the Fund will not invest more than 10% of the value of its total
7
<PAGE>
assets, at the time of purchase, in foreign securities (other than securities of
Canadian issuers registered under the Securities Exchange Act of 1934 or
American Depository Receipts, on which there is no such limit). Foreign
securities investments may be affected by changes in currency rates or exchange
control regulations, changes in governmental administration or economic or
monetary policy (in the United States and abroad) or changed circumstances in
dealings between nations. Costs will be incurred in connection with conversions
between various currencies held by the Fund. Investments in foreign securities
will also occasion risks relating to political and economic developments abroad,
including the possibility of expropriations or confiscatory taxation,
limitations on the use or transfer of Fund assets and any effects of foreign
social, economic or political instability.
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. While the Fund will
only purchase securities on a when-issued, delayed delivery or forward
commitment basis with the intention of acquiring the securities, the Fund may
sell the securities before the settlement date, if it is deemed advisable. The
securities so purchased or sold are subject to market fluctuation and no
interest accrues to the purchaser during this period.
WHEN, AS AND IF ISSUED SECURITIES. The Fund may purchase securities on a
"when, as and if issued" basis under which the issuance of the security depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization or debt restructuring. If the anticipated event does
not occur and the securities are not issued, the Fund will have lost an
investment opportunity. There is no overall limit on the percentage of the
Fund's assets which may be committed to the purchase of securities on a "when,
as and if issued" basis. An increase in the percentage of the Fund's assets
committed to the purchase of securities on a "when, as and if issued" basis may
increase the volatility of its net asset value.
PRIVATE PLACEMENTS. The Fund may invest up to 5% of its total assets in
securities which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), or which are otherwise not readily marketable. (Securities eligible for
resale pursuant to Rule 144A under the Securities Act, and determined to be
liquid pursuant to the procedures discussed in the following paragraph, are not
subject to the foregoing restriction.) These securities are generally referred
to as private placements or restricted securities. Limitations on the resale of
such securities may have an adverse effect on their marketability, and may
prevent the Fund from disposing of them promptly at reasonable prices. The Fund
may have to bear the expense of registering such securities for resale and the
risk of substantial delays in effecting such registration.
The Securities and Exchange Commission has adopted Rule 144A under the
Securities Act, which permits the Fund to sell restricted securities to
qualified institutional buyers without limitation. The Investment Manager,
pursuant to procedures adopted by the Trustees of the Fund, will make a
determination as to the liquidity of each restricted security purchased by the
Fund. If a restricted security is determined to be "liquid", such security will
not be included within the category "illiquid securities", which under current
policy may not exceed 15% of the Fund's net assets.
INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in real
estate investment trusts, which pool investors' funds for investments primarily
in commercial real estate properties. Investment in real estate investment
trusts may be the most practical available means for the Fund to invest in the
real estate industry (the Fund is prohibited from investing in real estate
directly). As a shareholder in
8
<PAGE>
a real estate investment trust, the Fund would bear its ratable share of the
real estate investment trust's expenses, including its advisory and
administration fees. At the same time the Fund would continue to pay its own
investment management fees and other expenses, as a result of which the Fund and
its shareholders in effect will be absorbing duplicate levels of fees with
respect to investments in real estate investment trusts.
RIGHTS AND WARRANTS. The Fund may acquire rights and/or warrants which are
attached to other securities in its portfolio, or which are issued as a
distribution by the issuer of a security held in its portfolio. Rights and/or
warrants are, in effect, options to purchase equity securities at a specific
price, generally valid for a specific period of time, and have no voting rights,
pay no dividends and have no rights with respect to the corporation issuing
them.
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 government securities or other securities
from a selling financial institution such as a bank, savings and loan
association or broker-dealer. The agreement provides that the Fund will sell
back to the institution, and that the institution will repurchase, the
underlying security at a specified price and at a fixed time in the future,
usually not more than seven days from the date of purchase. While repurchase
agreements involve certain risks not associated with direct investments in debt
securities, including the risks of default or bankruptcy of the selling
financial institution, the Fund follows procedures to minimize such risks. These
procedures include effecting repurchase transactions only with large,
well-capitalized and well-established financial institutions and maintaining
adequate collateralization.
LOWER-RATED SECURITIES. Because of the special nature of the Fund's
investments in lower rated securities (certain lower rated securities in which
the Fund may invest are commonly known as junk bonds), the Investment Manager
must take account of certain special considerations in assessing the risks
associated with such investments. For example, as the lower rated securities
market is relatively new, its growth had paralleled a long economic expansion
and, until recently, it had not faced adverse economic and market conditions.
Therefore, an economic downturn or increase in interest rates is likely to have
a negative effect on this market and on the value of the lower rated securities
held by the Fund, as well as on the ability of the securities' issuers to repay
principal and interest on their borrowings.
The prices of lower rated securities have been found to be less sensitive to
changes in prevailing interest rates than higher rated investments, but are
likely to be more sensitive to adverse economic changes or individual corporate
developments. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress which
would adversely effect their ability to service their principal and interest
payment obligations, to meet their projected business goals or to obtain
additional financing. If the issuer of a fixed-income security owned by the Fund
defaults, the Fund may incur additional expenses to seek recovery. In addition,
periods of economic uncertainty and change can be expected to result in an
increased volatility of market prices of lower rated securities and a
concomitant volatility in the net asset value of a share of the Fund. Moreover,
the market prices of certain of the Fund's portfolio securities which are
structured as zero coupon 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 lower rated securities may be less liquid than the
markets for higher quality securities and, as such, may have an adverse affect
on the market prices of certain securities. The limited liquidity of the market
may also adversely
9
<PAGE>
affect the ability of the Fund's Trustees to arrive at a fair value for certain
lower rated securities at certain times and should make it difficult for the
Fund to sell certain securities. In addition, new laws and proposed new laws may
have an adverse effect upon the value of lower rated securities and a
concomitant negative impact upon the net asset value of a share of the Fund.
During the fiscal year ended September 30, 1995, 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.................. 10.7%
AA/Aa.................... 1.2%
A/A...................... 1.8%
BBB/Baa.................. 11.2%
BB/Ba.................... 12.6%
B/B...................... 35.9%
CCC/Caa.................. 3.5%
CC/Ca.................... 0.0%
C/C...................... 1.3%
Unrated.................. 21.8%
</TABLE>
OPTIONS AND FUTURES TRANSACTIONS. The Fund is permitted to enter into call
and put options on U.S. Treasury notes, bonds and bills and equity securities
which are listed on Exchanges and are written in over-the-counter transactions
("OTC options"). Listed options are issued by the Options Clearing Corporation.
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, in an amount
not exceeding 20% of the value of its total assets, in order to aid it in
achieving its investment objective.
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
in order to close out a covered call position. The Fund may purchase put options
on securities which it holds (or has the right to acquire) 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 ("futures
contracts") that are traded on U.S. commodity exchanges on such underlying
securities as U.S. Treasury bonds, notes, and bills. The Fund may invest in
financial futures contracts only as a hedge against anticipated interest rate
changes.
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.
The Fund may not enter into futures contracts or purchase related options
thereon if, immediately thereafter, the amount committed to initial margin plus
the amount paid for premiums for unexpired options on futures contracts exceeds
5% of the value of the Fund's total assets, after taking into account unrealized
gains and unrealized losses on such contracts it has entered into, provided,
however, that in the case of an option that is in-the-money (the exercise price
of the call (put) option is less (more) than the market price of the underlying
security) at the time of purchase, the in-the-money amount may be excluded in
calculating the 5%. Moreover, the Fund may only buy and write options which are
listed on national securities exchanges and may not purchase options if, as a
result, the aggregate cost of all outstanding options exceeds
10
<PAGE>
10% of the Fund's total assets. In addition, the Fund may not purchase or sell
futures contracts or related options thereon if, immediately thereafter, more
than one-third of its net assets would be hedged.
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 generally will 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.
While the futures contracts and options transactions to be engaged in by the
Fund for the purpose of hedging the Fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such instruments.
One such risk is that the Investment Manager 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 may arise in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities and indices
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 its Investment Manager with a
view to achieving the Fund's investment objective. In determining which
securities to purchase for the Fund or hold in the Fund's portfolio, the
Investment Manager will rely on information from various sources, including
rating agencies, research, analysis and appraisals of brokers and dealers,
including Dean Witter Reynolds Inc. ("DWR"), a broker-dealer affiliate of
InterCapital, the views of Trustees of the Fund and others regarding economic
developments and interest rate trends, and the Investment Manager's own analysis
of factors it deems relevant. The Fund is managed within InterCapital's Growth
Group, which manages twenty-six funds and fund portfolios with approximately
$8.8 billion in assets at December 31, 1995. Michael G. Knox, Senior Portfolio
Manager of InterCapital, and a member of InterCapital's Growth Group, has been
the primary portfolio manager of the Fund since November, 1994 and has been the
sole portfolio manager of the Fund since December, 1995. Mr. Knox has been
managing portfolios comprised of growth and other securities at InterCapital
since August, 1993; prior thereto he was a portfolio manager and analyst with
Eagle Asset Management, Inc. (February, 1991-August, 1993) and an assistant
portfolio manager and analyst with Heritage Asset Management, Inc. (July,
1988-February, 1991).
Orders for transactions in portfolio securities are placed for the Fund with
a number of brokers and dealers, including DWR. Pursuant to an order of the
Securities and Exchange Commission, the Fund may effect principal transactions
in certain money market instruments with DWR. In addition, the Fund may incur
brokerage commissions on transactions conducted through DWR.
The portfolio trading engaged in by the Fund may result in its portfolio
turnover rate exceeding 100%. The Fund is expected to incur higher than normal
brokerage commission costs due to its portfolio turnover rate. Short-term gains
and losses taxable at ordinary income rates may result from such portfolio
transactions. See "Dividends, Distributions and Taxes" for a full discussion of
the tax implications of the Fund's trading policy. A more extensive
11
<PAGE>
discussion of the Fund's portfolio brokerage policies is set forth in the
Statement of Additional Information.
Except as specifically noted, all investment objectives, policies and
practices discussed above are not fundamental policies of the Fund and, as such,
may be changed without shareholder approval.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The investment restrictions listed below are among the restrictions that
have been adopted by the Fund as fundamental policies. Under the Investment
Company Act of 1940, as amended (the "Act"), a fundamental policy may not be
changed without the vote of a majority of the outstanding voting securities of
the Fund, as defined in the Act.
The Fund may not:
1. Invest more than 5% of the value of its total assets in the securities of
any one issuer (other than obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities).
2. Purchase more than 10% of all outstanding voting securities or any class
of securities of any one issuer. For purposes of compliance with this
restriction, the Fund will not invest in the convertible securities of any one
issuer if, upon conversion of such securities, the Fund would hold more than 10%
of the outstanding voting securities of that issuer.
3. Invest more than 25% of the value of its total assets in securities of
issuers in any one industry. This restriction does not apply to obligations
issued or guaranteed by the United States Government or its agencies or
instrumentalities.
4. Invest more than 5% of the value of its total assets in securities of
issuers having a record, together with predecessors, of less than three years of
continuous operation. This restriction shall not apply to any obligation of the
United States Government, its agencies or instrumentalities.
5. Borrow money, except that the Fund may borrow from a bank for temporary or
emergency purposes in amounts not exceeding 5% (taken at the lower of cost or
current value) of the value of its total assets (not including the amount
borrowed).
6. Invest more than 5% of the value of its total assets in warrants,
including not more than 2% of such assets in warrants not listed on either the
New York or American Stock Exchange. However, the acquisition of warrants
attached to other securities is not subject to this restriction.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of total or net assets will not be considered a
violation of any of the foregoing restrictions.
PURCHASE OF FUND SHARES
- --------------------------------------------------------------------------------
The Fund offers its shares for sale to the public on a continuous basis.
Pursuant to a Distribution Agreement between the Fund and Dean Witter
Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager,
shares of the Fund are distributed by the Distributor and offered by DWR and
other dealers who have entered into selected dealer agreements with the
Distributor ("Selected Broker-Dealers"). The principal executive office of the
Distributor is located at Two World Trade Center, New York, New York 10048.
The minimum initial purchase is $1,000. Subsequent purchases of $100 or more
may be made by sending a check, payable to Dean Witter Convertible Securities
Trust, directly to Dean Witter Trust
12
<PAGE>
Company (the "Transfer Agent") at P.O. Box 1040, Jersey City, NJ 07303 or by
contacting a DWR or other Selected Broker-Dealer account executive. The minimum
initial purchase in the case of investments through EasyInvest, an automatic
purchase plan (see "Shareholder Services"), is $100, provided that the schedule
of automatic investments will result in investments totalling at least $1,000
within the first twelve months. In the case of investments pursuant to
Systematic Payroll Deduction Plans (including Individual Retirement Plans), the
Fund, in its discretion, may accept investments without regard to any minimum
amounts which would otherwise be required if the Fund has reason to believe that
additional investments will increase the investment in all accounts under such
Plans to at least $1,000. Certificates for shares purchased will not be issued
unless a request is made by the shareholder in writing to the Transfer Agent.
The offering price will be the net asset value per share next determined
following receipt of an order (see "Determination of Net Asset Value").
Shares of the Fund are sold through the Distributor on a normal three
business day settlement basis; that is, payment is due on the third business day
(settlement date) after the order is placed with the Distributor. 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 dividends and
capital gains distributions if their order is received by the close of business
on the day prior to the record date for such distributions. While no sales
charge is imposed at the time shares are purchased, a contingent deferred sales
charge may be imposed at the time of redemption (see "Redemptions and
Repurchases"). Sales personnel are compensated for selling shares of the Fund at
the time of their sale by the Distributor and/or Selected Broker-Dealer. In
addition, some sales personnel of the Selected Broker-Dealer will receive
various types of non-cash compensation as special sales incentives, including
trips, educational and/or business seminars and merchandise. The Fund and the
Distributor reserve the right to reject any purchase orders.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Act (the "Plan"), under which the Fund pays the Distributor a fee, which is
accrued daily and payable monthly, at an annual rate of 1% of the lesser of: (a)
the average daily aggregate gross sales of the Fund's shares since the inception
of the Fund (not including reinvestments of dividends or capital gains
distributions), less the average daily aggregate net asset value of the Fund's
shares redeemed since the Fund's inception upon which a contingent deferred
sales charge has been imposed or waived, or (b) the Fund's average daily net
assets. This fee is treated by the Fund as an expense in the year it is accrued.
A portion of the fee payable pursuant to the Plan, equal to 0.25% of the Fund's
average daily net assets, is characterized as a service fee within the meaning
of NASD guidelines. The service fee is a payment made for personal service
and/or maintenance of shareholder accounts.
Amounts paid under the Plan are paid to the Distributor to compensate it for
the services provided and the expenses borne by the Distributor and others in
the distribution of the Fund's shares, including the payment of commissions for
sales of the Fund's shares and incentive compensation to and expenses of DWR
account executives and others who engage in or support distributions 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.
13
<PAGE>
For the fiscal year ended September 30, 1995, the Fund accrued payments
under the Plan amounting to $1,790,824, which amount is equal to 1.0% of the
Fund's average daily net assets for the fiscal year. The payments accrued under
the Plan were calculated pursuant to clause (b) of the compensation formula
under the Plan.
At any given time, the expenses of 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 "Redemptions and Repurchases--Contingent
Deferred Sales Charge"). For example, if $1 million in expenses in distributing
shares of the Fund had been incurred and $750,000 had been received as described
in (i) and (ii) above, the excess expense would amount to $250,000. The
Distributor has advised the Fund that such excess amounts including the carrying
charge described above, totalled $66,744,351 at September 30, 1995, which was
equal to 36% 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, this excess amount does not constitute a liability of the Fund. Although
there is no legal obligation for the Fund to pay expenses incurred in excess of
payments made to the Distributor under the Plan and the proceeds of contingent
deferred sales charges paid by investors upon redemption of shares, if for any
reason the Plan is terminated, the Trustees will consider at that time the
manner in which to treat such expenses. Any cumulative expenses incurred, but
not yet recovered through distribution fees or contingent deferred sales
charges, may or may not be recovered through future distribution fees or
contingent deferred sales charges.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is determined once daily at 4:00
p.m., New York time, on each day that the New York Stock Exchange is open, or,
on days when the New York Stock Exchange closes prior to 4:00 p.m., at such
earlier time, by taking the value of all assets of the Fund, subtracting 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 quoted
by NASDAQ is valued at its latest sale price on that exchange or quotation
service prior to the time assets are valued; if there were no sales that day,
the security is valued at the latest bid price (in cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market pursuant to procedures adopted by the
Trustees), and (2) all other portfolio securities for which over-the-counter
market quotations are readily available are valued at the latest bid price. When
market quotations are not readily available, or when it is determined by the
Investment Manager that sale or bid prices are not reflective of a security's
fair 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 Fund's Trustees.
Short-term debt securities with remaining maturities of sixty days or less
at the time of purchase are valued at amortized cost, unless the Trustees
determine such does not reflect the securities' market value, in which case
these securities will be valued at their fair value as determined by the
Trustees.
Certain of the Fund's portfolio securities may be valued by an outside
pricing service approved by the Fund's Trustees. The pricing service utilizes a
matrix system incorporating security quality, maturity and coupon as the
evaluation model parameters, and/or research evaluations by its staff, including
review of broker-dealer market price quotations in determining what it believes
is the fair valuation of the portfolio securities valued by such pricing
service.
14
<PAGE>
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. All income dividends
and capital gains distributions are automatically paid in full and fractional
shares of the Fund (or, if specified by the shareholder, any other open-end
investment company for which InterCapital serves as investment manager
(collectively, with the Fund, the "Dean Witter Funds")), unless the shareholder
requests that they be paid in cash. Shares so acquired are not subject to the
imposition of a contingent deferred sales charge upon their redemption (see
"Redemptions and Repurchases").
EASYINVEST-SM-. Shareholders may subscribe to EasyInvest, an automatic
purchase plan which provides for any amount from $100 to $5,000 to be
transferred automatically from a checking or savings account, on a semi-monthly,
monthly or quarterly basis, to the Transfer Agent for investment in shares of
the Fund (see "Purchase of Fund Shares" and "Redemptions and Repurchases --
Involuntary Redemption").
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan (the "Withdrawal
Plan") is available for shareholders who own or purchase shares of the Fund
having a minimum value of $10,000 based upon the then current net asset value.
The Withdrawal Plan provides for monthly or quarterly (March, June, September
and December) checks in any dollar amount, not less than $25, or in any whole
percentage of the account balance, on an annualized basis. Any applicable
contingent deferred sales charge will be imposed on shares redeemed under the
Withdrawal Plan (see "Redemptions and Repurchases--Contingent Deferred Sales
Charge"). Therefore, any shareholder participating in the Withdrawal Plan will
have sufficient shares redeemed from his or her account so that the proceeds
(net of any applicable contingent deferred sales charge) to the shareholder will
be the designated monthly or quarterly amount.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about any of the
above services.
INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS RECEIVED IN CASH. Any shareholder
who receives a cash payment representing a dividend or capital gains
distribution may invest such dividend or distribution at the net asset value per
share next determined after receipt by the Transfer Agent, by returning the
check or the proceeds to the Transfer Agent within thirty days after the payment
date. Shares so acquired are not subject to the imposition of a contingent
deferred sales charge upon their redemption (see "Redemptions and Repurchases.")
TAX-SHELTERED RETIREMENT PLANS. Retirement plans are available through the
Distributor for use by corporations, the self-employed, Individual Retirement
Accounts and Custodial Accounts under Section 403(b)(7) of the Internal Revenue
Code. Adoption of such plans should be on advice of legal counsel or tax
adviser.
For further information regarding plan administration, custodial fees and
other details, investors should contact their DWR or other Selected Broker-
Dealer account executive or the Transfer Agent.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders an "Exchange Privilege"
allowing the exchange of shares of the Fund for shares of other Dean Witter
Funds sold with a contingent deferred sales charge ("CDSC funds"), and for
shares of Dean Witter Short-Term U.S. Treasury Trust, Dean Witter Limited Term
Municipal Trust, Dean Witter Short-Term Bond Fund, Dean Witter Balanced Growth
Fund, Dean Witter Balanced Income Fund and Dean Witter Intermediate Term U.S.
Treasury Trust and five Dean Witter Funds which are money market funds (the
foregoing eleven non-CDSC funds are hereinafter referred to as the "Exchange
Funds"). Exchanges may be made after the shares of the Fund acquired by purchase
(not by exchange or dividend reinvest-
15
<PAGE>
ment) have been held for thirty days. There is no waiting period for exchanges
of shares acquired by exchange or dividend reinvestment.
An exchange to another CDSC fund or any Exchange Fund that is not a money
market fund is on the basis of the next calculated net asset value per share of
each fund after the exchange order is received. When exchanging into a money
market fund from the Fund, shares of the Fund are redeemed out of the Fund at
their next calculated net asset value and the proceeds of the redemption are
used to purchase shares of the money market fund at the net asset value
determined the following business day. Subsequent exchanges between any of the
money market funds and any of the CDSC funds can be effected on the same basis.
No contingent deferred sales charge ("CDSC") is imposed at the time of any
exchange, although any applicable CDSC will be imposed upon ultimate redemption.
Shares of the Fund acquired in exchange for shares of another CDSC fund having a
different CDSC schedule than that of this Fund will be subject to the CDSC
schedule of this Fund, even if such shares are subsequently re-exchanged for
shares of the CDSC fund originally purchased. During the period of time the
shareholder remains in the Exchange Fund (calculated from the last day of the
month in which the Exchange Fund shares were acquired), the holding period (for
the purpose of determining the rate of the CDSC) is frozen. If those shares are
subsequently reexchanged for shares of a CDSC fund, the holding period
previously frozen when the first exchange was made resumes on the last day of
the month in which shares of a CDSC fund are reacquired. Thus, the CDSC is based
upon the time (calculated as described above) the shareholder was invested in a
CDSC fund (see "Redemptions and Repurchases--Contingent Deferred Sales
Charge."). However, in the case of shares exchanged into an Exchange Fund on or
after April 23, 1990, upon a redemption of shares which results in a CDSC being
imposed, a credit (not to exceed the amount of the CDSC) will be given in an
amount equal to the Exchange Fund 12b-1 distribution fees incurred on or after
that date which are attributable to those shares. (Exchange Fund 12b-1
distribution fees, if any, are described in the prospectuses for those funds.)
In addition, shares of the Fund may be acquired in exchange for shares of
Dean Witter Funds sold with a front-end sales charge ("front-end sales charge
funds"), but shares of the Fund, however acquired, may not be exchanged for
shares of front-end sales charge funds. Shares of a CDSC fund acquired in
exchange for shares of a front-end sales charge fund (or in exchange for shares
of other Dean Witter Funds for which shares of a front-end sales charge fund
have been exchanged) are not subject to any CDSC upon their redemption.
Purchases and exchanges should be made for investment purposes only. A
pattern of frequent exchanges may be deemed by the Investment Manager to be
abusive and contrary to the best interests of the Fund's other shareholders and,
at the Investment Manager's discretion, may be limited by the Fund's refusal to
accept additional purchases and/ or exchanges from the investor. Although the
Fund does not have any specific definition of what constitutes a pattern of
frequent exchanges, and will consider all relevant factors in determining
whether a particular situation is abusive and contrary to the best interests of
the Fund and its other shareholders, investors should be aware that the Fund and
each of the other Dean Witter Funds may in their discretion limit or otherwise
restrict the number of times this Exchange Privilege may be exercised by any
investor. Any such restriction will be made by the Fund on a prospective basis
only, upon notice to the shareholder not later than ten days following such
shareholder's most recent exchange. Also the Exchange Privilege may be
terminated or revised at any time by the Fund and/or any of such Dean Witter
Funds for which shares of the Fund have been exchanged, upon such notice as may
be required by applicable regulatory agencies. Shareholders maintaining margin
accounts with DWR or another Selected Broker-Dealer are referred to their
account executive regarding restrictions on exchange of shares of the Fund
pledged in the margin account.
16
<PAGE>
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 other Selected Broker-Dealer is the current dealer of record and
its account numbers are part of the account information, shareholders may
initiate an exchange of shares of the Fund for shares of any of the Dean Witter
Funds (for which the Exchange Privilege is available) pursuant to this Exchange
Privilege by contacting their account executive (no Exchange Privilege
Authorization Form is required). Other shareholders (and those shareholders who
are clients of DWR or another Selected Broker-Dealer but who wish to make
exchanges directly by writing or telephoning the Transfer Agent) must complete
and forward to the Transfer Agent an Exchange Privilege Authorization Form,
copies of which may be obtained from the Transfer Agent, to initiate an
exchange. If the Authorization Form is used, exchanges may be made in writing or
by contacting the Transfer Agent at (800) 869-NEWS (toll-free). The Fund will
employ reasonable procedures to confirm that exchange instructions communicated
over the telephone are genuine. Such procedures may include requiring various
forms of personal identification such as name, mailing address, social security
or other tax identification number and DWR or other Selected Broker-Dealer
account number (if any). Telephone instructions may also be recorded. If such
procedures are not employed, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions.
Telephone exchange instructions will be accepted if received by the Transfer
Agent between 9:00 a.m. and 4:00 p.m., New York time, on any day the New York
Stock Exchange is open. Any shareholder wishing to make an exchange who has
previously filed an Exchange Privilege Authorization Form and who is unable to
reach the Fund by telephone should contact his or her DWR or another 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 with the Dean Witter
Funds in the past.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about the
Exchange Privilege.
REDEMPTIONS AND REPURCHASES
- --------------------------------------------------------------------------------
REDEMPTION. Shares of the Fund can be redeemed for cash at any time at the
net asset value per share next determined; however, such redemption proceeds
will be reduced by the amount of any applicable contingent deferred sales
charges (see below). If shares are held in a shareholder's account without a
share certificate, a written request for redemption sent to the Fund's Transfer
Agent at P.O. Box 983, Jersey City, NJ 07303 is required. If certificates are
held by the shareholder(s), the shares may be redeemed by surrendering the
certificate(s) with a written request for redemption, along with any additional
information required by the Transfer Agent.
CONTINGENT DEFERRED SALES CHARGE. Shares of the Fund which are held 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
17
<PAGE>
sales charge" ("CDSC"), which will be a percentage of the dollar amount of
shares redeemed and will be assessed on an amount equal to the lesser of the
current market value or the cost of the shares being redeemed. The size of this
percentage will depend upon how long the shares have been held, as set forth in
the table below:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR SINCE SALES CHARGE
PURCHASE AS A PERCENTAGE OF
PAYMENT MADE AMOUNT REDEEMED
- ---------------------------------------- -----------------------
<S> <C>
First................................... 5.0%
Second.................................. 4.0%
Third................................... 3.0%
Fourth.................................. 2.0%
Fifth................................... 2.0%
Sixth................................... 1.0%
Seventh and thereafter.................. None
</TABLE>
A CDSC will not be imposed on: (i) any amount which represents an increase
in value of shares purchased within the six years preceding the redemption; (ii)
the current net asset value of shares purchased more than six years prior to the
redemption; and (iii) the current net asset value of shares purchased through
reinvestment of dividends or distributions and/or shares acquired in exchange
for shares of Dean Witter Funds sold with a front-end sales charge or of other
Dean Witter Funds acquired in exchange for such shares. Moreover, in determining
whether a CDSC is applicable it will be assumed that amounts described in (i),
(ii) and (iii) above (in that order) are redeemed first. In addition, no CDSC
will be imposed on redemptions of shares which are attributable to reinvestment
of dividends or distributions from, or the proceeds of, certain Unit Investment
Trusts.
In addition, the CDSC, if otherwise applicable, will be waived in the case
of:
(1) redemptions of shares held at the time a shareholder dies or becomes
disabled, only if the shares are: (A) registered either in the name of an
individual shareholder (not a trust), or in the names of such shareholder and
his or her spouse as joint tenants with right of survivorship; or (B) held in a
qualified corporate or self-employed retirement plan, Individual Retirement
Account ("IRA") or Custodial Account under Section 403(b)(7) of the Internal
Revenue Code ("403(b) Custodial Account"), provided in either case that the
redemption is requested within one year of the death or initial determination of
disability;
(2) redemptions in connection with the following retirement plan
distributions: (A) lump-sum or other distributions from a qualified corporate or
self-employed retirement plan following retirement (or, in the case of a "key
employee" of a "top heavy" plan, following attainment of age 59 1/2); (B)
distributions from an IRA or 403(b) Custodial Account following attainment of
age 59 1/2; or (C) a tax-free return of an excess contribution to an IRA; and
(3) all redemptions of shares held for the benefit of a participant in a
corporate or self-employed retirement plan qualified under Section 401(k) of the
Internal Revenue Code which offers investment companies managed by the
Investment Manager or its subsidiary, Dean Witter Services Company Inc., as
self-directed investment alternatives and for which Dean Witter Trust Company,
an affiliate of the Investment Manager, serves as recordkeeper or Trustee
("Eligible 401(k) Plan"), provided that either: (A) the plan continues to be an
Eligible 401(k) Plan after the redemption; or (B) the redemption is in
connection with the complete termination of the plan involving the distribution
of all plan assets to participants.
With reference to (1) above, for the purpose of determining disability, the
Distributor utilizes the definition of disability contained in Section 72(m)(7)
of the Internal Revenue Code, which relates to the inability to engage in
gainful employment. With reference to (2) above, the term "distribution" does
not encompass a direct transfer of IRA, 403(b) Custodial Account or retirement
plan assets to a successor custodian or trustee. All waivers will be granted
only following receipt by the Distributor of confirmation of the shareholder's
entitlement.
REPURCHASE. DWR and other Selected Broker-Dealers are authorized to
repurchase shares represented by a share certificate which is delivered
18
<PAGE>
to any of their offices. Shares held in a shareholder's account without a share
certificate may also be repurchased by DWR and other Selected Broker-Dealers
upon the telephonic or telegraphic request of the shareholder. The repurchase
price is the net asset value next computed (see "Purchase of Fund Shares") after
such repurchase order is received by DWR or other Selected Broker-Dealer,
reduced by any applicable CDSC.
The CDSC, if any, will be the only fee imposed upon repurchase by the Fund,
the Distributor, DWR or other Selected Broker-Dealers. The offer by DWR and
other Selected Broker-Dealers to repurchase shares may be suspended without
notice by them at any time. In that event, shareholders may redeem their shares
through the Fund's Transfer Agent as set forth above under "Redemption."
PAYMENT FOR SHARES REDEEMED OR REPURCHASED. Payment for shares presented
for repurchase or redemption will be made by check within seven days after
receipt by the Transfer Agent of the certificate and/or written request in good
order. Such payment may be postponed or the right of redemption suspended under
unusual circumstances, 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 executives regarding restrictions on
redemption of shares of the Fund pledged in the margin account.
REINSTATEMENT PRIVILEGE. A shareholder who has had his or her shares
redeemed or repurchased and has not previously exercised this reinstatement
privilege may, within thirty days after the date of the redemption or
repurchase, reinstate any portion or all of the proceeds of such redemption or
repurchase in shares of the Fund at the net asset value next determined after a
reinstatement request, together with the proceeds, is received by the Transfer
Agent and receive a pro-rata credit for any CDSC paid in connection with such
redemption or repurchase.
INVOLUNTARY REDEMPTION. The Fund reserves the right, on sixty days' notice,
to redeem, at their net asset value, the shares of any shareholder (other than
shares held in an Individual Retirement Account or Custodial Account under
Section 403(b)(7) of the Internal Revenue Code) whose shares have a value of
less than $100 or such lesser amount as may be fixed by the Fund's Trustees or,
in the case of an account opened through EasyInvest, 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 or more before the redemption is processed. No CDSC will be
imposed on any involuntary redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. The Fund intends to pay quarterly income
dividends and to distribute net short-term and net long-term gains, if any, at
least once per year. The Fund may, however, determine either to distribute or to
retain all or part of any long-term gains in any year for reinvestment.
All dividends and 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--
19
<PAGE>
Automatic Investment of Dividends and Distributions".)
TAXES. Because the Fund intends to distribute substantially all of its net
investment income and net capital gains to shareholders and otherwise remain
qualified as a regulated investment company under Subchapter M of the Internal
Revenue Code, it is not expected that the Fund will be required to pay any
federal income tax on such income and capital gains. 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 they are
derived from net investment income or net short-term capital gains, are taxable
to the shareholder as ordinary dividend income regardless of whether the
shareholder receives such payments in additional shares or in cash.
Gains or losses on the Fund's transactions in listed non-equity options,
futures and options on futures generally are treated as 60% long-term and 40%
short-term. When the Fund engages in options and futures transactions, various
tax regulations applicable to the Fund may have the effect of causing the Fund
to recognize a gain or loss for tax purposes before that gain or loss is
realized, or to defer recognition of a realized loss for tax purposes.
Recognition, for tax purposes, of an unrealized loss may result in a lesser
amount of the Fund's realized gains being available for annual distribution.
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 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.
One of the requirements for the Fund to remain qualified as a regulated
investment company is that less than 30% of the Fund's gross income be derived
from gains from the sale or other disposition of securities held for less than
three months. Accordingly, the Fund may be restricted in the writing of options
on securities held for less than three months, in the writing of options which
expire in less than three months, and in effecting closing transactions with
respect to call or put options which have been written or purchased less than
three months prior to such transactions. The Fund may also be restricted in its
ability to engage in transactions involving futures contracts.
After the end of the calendar year, shareholders will receive 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.
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.
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
20
<PAGE>
and are not intended to indicate future performance. The yield of the Fund is
computed by dividing the Fund's net investment income over a 30-day period by an
average value (using the average number of shares entitled to receive dividends
and the 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 one year, five and ten years, as
well as 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, all expenses incurred by the Fund and all sales charges incurred by
shareholders, for the stated periods. It also assumes reinvestment of all
dividends and distributions paid by the Fund.
In addition to the foregoing, the Fund may advertise its total return over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. Such calculations may or may not reflect the
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 indices compiled by independent organizations
(such as mutual fund performance rankings of Lipper Analytical Services, Inc.).
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS. All shares of beneficial interest of the Fund are of $0.01
par value and are equal as to earnings, assets and voting privileges.
The Fund is not required to hold Annual Meetings of Shareholders and, in
ordinary circumstances, the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances the Trustees may be removed by action of the Trustees or by the
Shareholders.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that Fund
obligations include such disclaimer, and provides for indemnification and
reimbursement of expenses out of the Fund's property for any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability and
the nature of the Fund's assets and operations, the possibility of the Fund's
being unable to meet its obligations is remote and, thus, in the opinion of
Massachusetts counsel to the Fund, the risk to Fund shareholders of personal
liability is remote.
CODE OF ETHICS. Directors, officers and employees of InterCapital, Dean
Witter Services Company Inc. and the Distributor are subject to a strict Code of
Ethics adopted by those companies. The Code of Ethics is intended to ensure that
the interests of shareholders and other clients are placed ahead of any personal
interest, that no undue personal benefit is obtained from person's employment
activities and that actual and potential conflicts of interest are avoided. To
achieve these goals and comply with regulatory requirements, the
21
<PAGE>
Code of Ethics requires, among other things, that personal securities
transactions by employees of the companies be subject to an advance clearance
process to monitor that no investment company managed or advised by InterCapital
("Dean Witter Fund") is engaged at the same time in a purchase or sale of the
same security. The Code of Ethics bans the purchase of securities in an initial
public offering, and also prohibits engaging in futures and options transactions
and profiting on short-term trading (that is, a purchase within sixty days of a
sale or a sale within sixty days of a purchase) of a security. In addition,
investment personnel may not purchase or sell a security for their personal
account within thirty days before or after any transaction in any Dean Witter
Fund managed by them. Any violations of the Code of Ethics are subject to
sanctions, including reprimand, demotion or suspension or termination of
employment. The Code of Ethics comports with regulatory requirements and the
recommendations in the recent report by the Investment Company Institute
Advisory Group on Personal Investing.
SHAREHOLDER INQUIRIES. All inquiries regarding the Fund should be directed
to the Fund at the telephone numbers or address set forth on the front cover of
this Prospectus.
22
<PAGE>
APPENDIX
- --------------------------------------------------------------------------------
RATINGS OF INVESTMENTS
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")
BOND RATINGS
<TABLE>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edge." Interest payments
are protected by a large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with
the Aaa group they comprise what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat larger than in
Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations; i.e., they are
neither highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be
considered as well assured. Often the protection of interest and principal payments may be
very moderate, and therefore not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of desirable investments. Assurance
of interest and principal payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may
be present elements of danger with respect to principal or interest.
Ca Bonds which are rated Ca present obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real investment
standing.
</TABLE>
CONDITIONAL RATING: Municipal bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin
23
<PAGE>
when facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its corporate and
municipal bond rating system. The modifier 1 indicates that the security ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and a modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1, Prime-2, Prime-3.
Issuers rated Prime-1 have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 have a strong capacity for
repayment of short-term promissory obligations; and Issuers rated Prime-3 have
an acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S")
BOND RATINGS
A Standard & Poor's bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. The
ratings are based, in varying degrees, on the following considerations: (1)
likelihood of default-capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with any rating
and may, on occasion, rely on unaudited financial information. The ratings may
be changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or for other reasons.
<TABLE>
<S> <C>
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay principal and differs
from the highest-rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened capacity to
pay interest and repay principal for debt in this category than for debt in higher-rated
categories.
Bonds rated AAA, AA, A and BBB are considered investment grade bonds.
</TABLE>
24
<PAGE>
<TABLE>
<S> <C>
BB Debt rated BB has less near-term vulnerability to default than other speculative grade
debt. However, it faces major ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lead to inadequate capacity to meet timely
interest and principal payment.
B Debt rated B has a greater vulnerability to default but presently has the capacity to
meet interest payments and principal repayments. Adverse business, financial or economic
conditions would likely impair capacity or willingness to pay interest and repay
principal.
CCC Debt rated CCC has a current identifiable vulnerability to default, and is dependent upon
favorable business, financial and economic conditions to meet timely payments of interest
and repayments of principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and repay principal.
CC The rating CC is typically applied to debt subordinated to senior debt which is assigned
an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt which is assigned
an actual or implied CCC- debt rating.
CI The rating CI is reserved for income bonds on which no interest is being paid.
NR Indicates that no rating has been requested, that there is insufficient information on
which to base a rating or that Standard & Poor's does not rate a particular type of
obligation as a matter of policy.
Bonds rated BB, B, CCC, CC and C are regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the addition of a
plus or minus sign to show relative standing within the major ratings categories.
In the case of municipal bonds, the foregoing ratings are sometimes followed by a "p"
which indicates that the rating is provisional. A provisional rating assumes the
successful completion of the project being financed by the bonds being rated and
indicates that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no comment on
the likelihood or risk of default upon failure of such completion.
</TABLE>
25
<PAGE>
COMMERCIAL PAPER RATINGS
Standard and Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The commercial paper rating is not a recommendation to purchase or
sell a security. The ratings are based upon current information furnished by the
issuer or obtained by S&P from other sources it considers reliable. The ratings
may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information. Ratings are graded into group categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Ratings are applicable to both taxable and tax-exempt commercial paper. The
categories are as follows:
Issues assigned A ratings are regarded as having the greatest capacity for
timely payment. Issues in this category are further refined with the designation
1, 2 and 3 to indicate the relative degree of safety.
<TABLE>
<S> <C>
A-1 indicates that the degree of safety regarding timely payment is very strong.
A-2 indicates capacity for timely payment on issues with this designation is strong. However,
the relative degree of safety is not as overwhelming as for issues designated "A-1".
A-3 indicates a satisfactory capacity for timely payment. Obligations carrying this
designation are, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
</TABLE>
26
<PAGE>
THE DEAN WITTER FAMILY OF FUNDS
MONEY MARKET FUNDS DEAN WITTER RETIREMENT SERIES
Dean Witter Liquid Asset Fund Inc. Liquid Asset Series
Dean Witter Tax-Free Daily Income Trust U.S. Government Money Market Series
Dean Witter U.S. Government Money U.S. Government Securities Series
Market Trust Intermediate Income Securities Series
Dean Witter New York Municipal Money American Value Series
Market Trust Capital Growth Series
Dean Witter California Tax-Free Daily Dividend Growth Series
Income Trust Strategist Series
Utilities Series
EQUITY FUNDS Value-Added Market Series
Dean Witter American Value Fund Global Equity Series
Dean Witter Natural Resource
Development Securities Inc. ASSET ALLOCATION FUNDS
Dean Witter Dividend Growth Securities Dean Witter Strategist Fund
Inc. Dean Witter Global Asset Allocation
Dean Witter Developing Growth Fund
Securities Trust
Dean Witter World Wide Investment Trust ACTIVE ASSETS ACCOUNT PROGRAM
Dean Witter Value-Added Market Series Active Assets Money Trust
Dean Witter Utilities Fund Active Assets Tax-Free Trust
Dean Witter Capital Growth Securities Active Assets California Tax-Free Trust
Dean Witter European Growth Fund Inc. Active Assets Government Securities
Dean Witter Pacific Growth Fund Inc. Trust
Dean Witter Precious Metals and
Minerals Trust
Dean Witter Health Sciences Trust
Dean Witter Global Dividend Growth
Securities
Dean Witter Global Utilities Fund
Dean Witter International SmallCap Fund
Dean Witter Mid-Cap Growth Fund
Dean Witter Balanced Growth Fund
Dean Witter Capital Appreciation Fund
Dean Witter Information Fund
FIXED-INCOME FUNDS
Dean Witter High Yield Securities Inc.
Dean Witter Tax-Exempt Securities Trust
Dean Witter U.S. Government Securities
Trust
Dean Witter Intermediate Term U.S.
Treasury Trust
Dean Witter Federal Securities Trust
Dean Witter California Tax-Free Income
Fund
Dean Witter Convertible Securities
Trust
Dean Witter New York Tax-Free Income
Fund
Dean Witter World Wide Income Trust
Dean Witter Intermediate Income
Securities
Dean Witter Global Short-Term Income
Fund Inc.
Dean Witter Multi-State Municipal
Series Trust
Dean Witter Premier Income Trust
Dean Witter Short-Term U.S. Treasury
Trust
Dean Witter Diversified Income Trust
Dean Witter Limited Term Municipal
Trust
Dean Witter Short-Term Bond Fund
Dean Witter National Municipal Trust
Dean Witter High Income Securities
Dean Witter Balanced Income Fund
Dean Witter Hawaii Municipal Trust
<PAGE>
Dean Witter DEAN WITTER
Convertible Securities Trust CONVERTIBLE
Two World Trade Center SECURITIES
New York, New York 10048 TRUST
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Paul Kolton
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive
Officer
Sheldon Curtis
Vice President, Secretary and
General Counsel
Michael G. Knox [LOGO]
Vice President
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT
Dean Witter Trust Company
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
PROSPECTUS -- JANUARY 31, 1996
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DEAN WITTER
JANUARY 31, 1996
CONVERTIBLE
SECURITIES TRUST
- --------------------------------------------------------------------------------
Dean Witter Convertible Securities Trust (the "Fund") is an open-end
diversified management investment company whose investment objective is to seek
a high level of total return on its assets through a combination of current
income and capital appreciation. It seeks to achieve its investment objective by
investing principally in "convertible securities," that is, bonds, notes,
debentures, preferred stocks and other securities which are convertible into
common stocks. (See "Investment Practices and Policies".)
A Prospectus for the Fund dated January 31, 1996, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge from the Fund at the address or telephone numbers listed below or
from the Fund's Distributor, Dean Witter Distributors Inc., or from Dean Witter
Reynolds Inc. at any of its branch offices. This Statement of Additional
Information is not a Prospectus. It contains information in addition to and more
detailed than that set forth in the Prospectus. It is intended to provide
additional information regarding the activities and operations of the Fund, and
should be read in conjunction with the Prospectus.
Dean Witter
Convertible Securities Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The Fund and its Management............................................................ 3
Trustees and Officers.................................................................. 6
Investment Practices and Policies...................................................... 12
Investment Restrictions................................................................ 23
Portfolio Transactions and Brokerage................................................... 24
The Distributor........................................................................ 26
Shareholder Services................................................................... 29
Redemptions and Repurchases............................................................ 34
Dividends, Distributions and Taxes..................................................... 36
Performance Information................................................................ 37
Description of Shares of the Fund...................................................... 38
Custodian and Transfer Agent........................................................... 39
Independent Accountants................................................................ 39
Reports to Shareholders................................................................ 39
Legal Counsel.......................................................................... 40
Experts................................................................................ 40
Registration Statement................................................................. 40
Report of Independent Accountants...................................................... 41
Financial Statements -- September 30, 1995............................................. 42
</TABLE>
2
<PAGE>
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
THE FUND
The Fund is a Trust of the type commonly known as a "Massachusetts business
trust" and was organized under the laws of the Commonwealth of Massachusetts on
May 21, 1985.
THE INVESTMENT MANAGER
Dean Witter InterCapital Inc. (the "Investment Manager" or "InterCapital"),
a Delaware corporation, whose address is Two World Trade Center, New York, New
York 10048, is the Fund's Investment Manager. InterCapital is a wholly-owned
subsidiary of Dean Witter, Discover & Co. ("DWDC"), a Delaware corporation. In
an internal reorganization which took place in January, 1993, InterCapital
assumed the investment advisory, administrative and management activities
previously performed by the InterCapital Division of Dean Witter Reynolds Inc.
("DWR"), a broker-dealer affiliate of InterCapital. (As hereinafter used in this
Statement of Additional Information, the terms "InterCapital" and "Investment
Manager" refer to DWR's InterCapital Division prior to the internal
reorganization and to Dean Witter InterCapital Inc. thereafter.) The daily
management of the Fund and research relating to the Fund's portfolio are
conducted by or under the direction of officers of the Fund and of the
Investment Manager, subject to review by the Fund's Board of Trustees. In
addition, Trustees of the Fund provide guidance on economic factors and interest
rate trends. Information as to these Trustees and Officers is contained under
the caption "Trustees and Officers."
InterCapital is also the investment manager or investment adviser of the
following management investment companies: Active Assets Money Trust, Active
Assets Tax-Free Trust, Active Assets California Tax-Free Trust, Active Assets
Government Securities Trust, InterCapital Income Securities Inc., InterCapital
Insured Municipal Bond Trust, InterCapital Insured Municipal Trust, InterCapital
Insured Municipal Income Trust, InterCapital Insured Municipal Securities,
InterCapital California Insured Municipal Income Trust, InterCapital Insured
California Municipal Securities, InterCapital Quality Municipal Investment
Trust, InterCapital Quality Municipal Income Trust, InterCapital Quality
Municipal Securities, InterCapital California Quality Municipal Securities,
InterCapital New York Quality Municipal Securities, High Income Advantage Trust,
High Income Advantage Trust II, High Income Advantage Trust III, Dean Witter
Government Income Trust, Dean Witter High Yield Securities Inc., Dean Witter
Tax-Free Daily Income Trust, Dean Witter Tax-Exempt Securities Trust, Dean
Witter Dividend Growth Securities Inc., Dean Witter Natural Resource Development
Securities Inc., Dean Witter American Value Fund, Dean Witter Developing Growth
Securities Trust, Dean Witter U.S. Government Money Market Trust, Dean Witter
Variable Investment Series, Dean Witter World Wide Investment Trust, Dean Witter
Select Municipal Reinvestment Fund, Dean Witter U.S. Government Securities
Trust, Dean Witter World Wide Income Trust, Dean Witter California Tax-Free
Income Fund, Dean Witter New York Tax-Free Income Fund, Dean Witter Convertible
Securities Trust, Dean Witter Federal Securities Trust, Dean Witter Value-Added
Market Series, Dean Witter Utilities Fund, Dean Witter California Tax-Free Daily
Income Trust, Dean Witter Strategist Fund, Dean Witter Intermediate Income
Securites, Dean Witter Capital Growth Securities, Dean Witter Precious Metals
and Minerals Trust, Dean Witter New York Municipal Money Market Trust, Dean
Witter European Growth Fund Inc., Dean Witter Global Short-Term Income Fund
Inc., Dean Witter Pacific Growth Fund Inc., Dean Witter Multi-State Municipal
Series Trust, Dean Witter Short-Term U.S. Treasury Trust, Dean Witter Premier
Income Trust, Dean Witter Diversified Income Trust, Dean Witter Health Sciences
Trust, Dean Witter Retirement Series, Dean Witter Global Dividend Growth
Securities, Dean Witter Limited Term Municipal Trust, Dean Witter Short-Term
Bond Fund, Dean Witter Global Utilities Fund, Dean Witter High Income
Securities, Dean Witter Information Fund, Dean Witter National Municipal Trust,
Dean Witter International SmallCap Fund, Dean Witter Mid-Cap Growth Fund, Dean
Witter Select Dimensions Investment Series, Dean Witter Balanced Income Fund,
Dean Witter Balanced Growth Fund, Dean Witter Hawaii Municipal Trust, Dean
Witter Capital Appreciation Fund, Dean Witter Intermediate Term U.S. Treasury
Trust, Municipal Income Trust, Municipal Income Trust II, Municipal
3
<PAGE>
Income Trust III, Municipal Income Opportunities Trust, Municipal Income
Opportunities Trust II, Municipal Income Opportunities Trust III, Municipal
Premium Income Trust and Prime Income Trust. The foregoing investment companies,
together with the Fund, are collectively referred to as the Dean Witter Funds.
In addition, Dean Witter Services Company Inc. ("DWSC"), a wholly-owned
subsidiary of InterCapital, serves as manager for the following investment
companies for which TCW Funds Management, Inc. is the investment adviser: TCW/DW
Core Equity Trust, TCW/DW North American Government Income Trust, TCW/DW Latin
American Growth Fund, TCW/DW Income and Growth Fund, TCW/DW Small Cap Growth
Fund, TCW/DW Balanced Fund, TCW/DW Total Return Trust, TCW/DW Mid-Cap Equity
Trust, TCW/DW Emerging Markets Opportunities Trust, TCW/DW Term Trust 2000,
TCW/DW Term Trust 2002 and TCW/DW Term Trust 2003 (the "TCW/DW Funds").
InterCapital also serves as: (i) sub-adviser to Templeton Global Opportunities
Trust, an open-end investment company; (ii) administrator of The BlackRock
Strategic Term Trust Inc., a closed-end investment company; and (iii)
sub-administrator of MassMutual Participation Investors and Templeton Global
Governments Income Trust, closed-end investment companies.
Pursuant to an Investment Management Agreement (the "Agreement") with the
Investment Manager, the Fund has retained the Investment Manager to manage the
investment of the Fund's assets, including the placing of orders for the
purchase and sale of portfolio securities. The Investment Manager obtains and
evaluates such information and advice relating to the economy, securities
markets, and specific securities as it considers necessary or useful to
continuously manage the assets of the Fund in a manner consistent with its
investment objective and policies.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, such office space, facilities,
equipment, clerical help, bookkeeping and certain legal services as the Fund may
reasonably require in the conduct of its business, including the preparation of
prospectuses, statements of additional information, proxy statements and reports
required to be filed with federal and state securities commissions (except
insofar as the participation or assistance of independent accountants and
attorneys is, in the opinion of the Investment Manager, necessary or desirable).
In addition, the Investment Manager pays the salaries of all personnel,
including officers of the Fund, who are employees of the Investment Manager. The
Investment Manager also bears the cost of telephone service, heat, light, power
and other utilities provided to the Fund.
Effective December 31, 1993, pursuant to a Services Agreement between
InterCapital and DWSC, DWSC began to provide the administrative services to the
Fund which were previously performed directly by InterCapital. On April 17,
1995, DWSC was reorganized in the State of Delaware, necessitating the entry
into a new Services Agreement by InterCapital and DWSC on such date. The
foregoing internal reorganizations did not result in any change in the nature or
scope of the administrative services being provided to the Fund or any of the
fees being paid by the Fund for the overall services being performed under the
terms of the existing Agreement.
Expenses not expressly assumed by the Investment Manager under the Agreement
or by the Distributor of the Fund's shares (see "The Distributor") will be paid
by the Fund. The expenses borne by the Fund include, but are not limited to:
expenses of the Plan of Distribution pursuant to Rule 12b-1 (see "The
Distributor"), charges and expenses of any registrar, custodian, stock transfer
and dividend disbursing agent; brokerage commissions; taxes; engraving and
printing of share certificates; registration costs of the Fund and its shares
under federal and state securities laws; the cost and expense of printing,
including typesetting, and distributing Prospectuses and Statements of
Additional Information of the Fund and supplements thereto to the Fund's
shareholders; all expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing of proxy statements and reports to shareholders;
fees and travel expenses of trustees or members of any advisory board or
committee who are not employees of the Investment Manager or any corporate
affiliate of the Investment Manager; all expenses incident to any dividend,
withdrawal or redemption options; charges and expenses of any outside
4
<PAGE>
service used for pricing of the Fund's shares; fees and expenses of legal
counsel, including counsel to the trustees who are not interested persons of the
Fund or of the Investment Manager (not including compensation or expenses of
attorneys who are employees of the Investment Manager) and independent
accountants; membership dues of industry associations; interest on Fund
borrowings; postage; insurance premiums on property or personnel (including
officers and trustees) of the Fund which inure to its benefit; extraordinary
expenses (including, but not limited to, legal claims and liabilities and
litigation costs and any indemnification relating thereto); and all other costs
of the Fund's operation.
As full compensation for the services and facilities furnished to the Fund
and expenses of the Fund assumed by the Investment Manager, the Fund pays the
Investment Manager monthly compensation calculated daily by applying the
following annual rates to the Fund's daily net assets: 0.60% of the portion of
the daily net assets of the Fund not exceeding $750 million and 0.55% of the
portion of the daily net assets exceeding $750 million but not exceeding $1
billion; 0.50% of the portion of the daily net assets of the Fund exceeding $1
billion but not exceeding $1.5 billion; 0.475% of the portion of the Fund's
daily net assets exceeding $1.5 billion but not exceeding $2 billion; 0.45% of
the portion of the Fund's daily net assets exceeding $2 billion but not
exceeding $3 billion; and 0.425% of the portion of the Fund's daily net assets
exceeding $3 billion. Total compensation accrued to the Investment Manager for
the fiscal years ended September 30, 1993, 1994 and 1995 amounted to $1,277,276,
$1,201,442 and $1,074,494, respectively.
Total operating expenses of the Fund are subject to applicable limitations
under rules and regulations of states where the Fund is authorized to sell its
shares. Therefore, operating expenses are effectively subject to the most
restrictive of such limitations as the same may be amended from time to time.
Presently, the most restrictive limitation is as follows. If, in any fiscal
year, the Fund's total operating expenses, exclusive of taxes, interest,
brokerage fees, distribution fees and extraordinary expenses (to the extent
permitted by applicable state securities laws and regulations), exceeds 2 1/2%
of the first $30,000,000 of average daily net assets, 2% of the next $70,000,000
of average daily net assets and 1 1/2% of any excess over $100,000,000, the
Investment Manager will reimburse the Fund for the amount of such excess. Such
amount, if any, will be calculated daily and credited on a monthly basis. The
Fund did not exceed the expense limitation during the fiscal years ended
September 30, 1993, 1994 and 1995.
The Agreement provides that in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations thereunder, the
Investment Manager is not liable to the Fund or any of its investors for any act
or omission by the Investment Manager or for any losses sustained by the Fund or
its investors. The Agreement in no way restricts the Investment Manager from
acting as investment manager or adviser to others.
The Agreement was initially approved by the Board of Trustees on October 30,
1992 and by the shareholders of the Fund at a Special Meeting of Shareholders
held on January 12, 1993. The Agreement is substantially identical to a prior
investment management agreement which was initially approved by the Trustees on
July 19, 1985 and by DWR as the then sole shareholder on August 8, 1985 and by
the Shareholders of the Fund at a Special Meeting of Shareholders on December
29, 1986. The Agreement took effect on June 30, 1993 upon the spin-off by Sears,
Roebuck & Co. of its remaining shares of DWDC. Under its terms, the Agreement
had an initial term ending April 30, 1994 and provides that it will continue in
effect from year to year thereafter, provided continuance of the Agreement is
approved at least annually by the vote of the holders of a majority, as defined
in the Act, of the outstanding shares of the Fund, or by the Trustees of the
Fund; provided that in either event such continuance is approved annually by the
vote of a majority of the Trustees of the Fund who are not parties to the
Agreement or "interested persons" (as defined in the Act) of any such party (the
"Independent Trustees"), which vote must be cast in person at a meeting called
for the purpose of voting on such approval. At their meeting held on April 20,
1995, the Fund's Board of Trustees, including all of the Independent Trustees,
approved continuation of the Agreement until April 30, 1996.
5
<PAGE>
The Agreement may be terminated at any time, without penalty, on thirty
days' notice by the Trustees of the Fund, by the holders of a majority, as
defined in the Investment Company Act of 1940 (the "Act"), of the outstanding
shares of the Fund, or by the Investment Manager. The Agreement will
automatically terminate in the event of its assignment (as defined in the Act).
The Fund has acknowledged that the name "Dean Witter" is a property right of
DWR. The Fund has agreed that DWR or its parent company may use or, at any time,
permit others to use, the name "Dean Witter". The Fund has also agreed that in
the event the Agreement is terminated, or if the affiliation between
InterCapital and its parent company is terminated, the Fund will eliminate the
name "Dean Witter" from its name if DWR or its parent company shall so request.
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The Trustees and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with
InterCapital and with the 79 Dean Witter Funds and the 12 TCW/DW Funds are shown
below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
<S> <C>
Michael Bozic (55) Chairman and Chief Executive Officer of Levitz Furniture
Trustee Corporation (since November 1995); Director or Trustee of
c/o Levitz Furniture Corporation the Dean Witter Funds; formerly President and Chief
6111 Broken Sound Parkway, N.W. Executive Officer of Hills Department Stores (May,
Boca Raton, Florida 1991-July, 1995); formerly Chairman and Chief Executive
Officer (January, 1987-August, 1990) and President and
Chief Operating Officer (August, 1990-February, 1991) of
the Sears Merchandise Group of Sears, Roebuck and Co.;
Director of Eaglemark Financial Services, Inc., the United
Negro College Fund, Weirton Steel Corporation and Domain
Inc. (home decor retailer).
Charles A. Fiumefreddo* (62) Chairman, Chief Executive Officer and Director of
Chairman of the Board, President, Chief InterCapital, Dean Witter Distributors Inc. ("Distribu-
Executive Officer and Trustee tors") and DWSC; Executive Vice President and Director of
Two World Trade Center DWR; Chairman, Director or Trustee, President and Chief
New York, New York Executive Officer of the Dean Witter Funds; Chairman,
Chief Executive Officer and Trustee of the TCW/DW Funds;
Chairman and Director of Dean Witter Trust Company
("DWTC"); Director and/or officer of various DWDC
subsidiaries; formerly Executive Vice President and
Director of DWDC (until February, 1993).
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
<S> <C>
Edwin J. Garn (63) Director or Trustee of the Dean Witter Funds; formerly
Trustee United States Senator (R-Utah) (1974-1992) and Chairman,
c/o Huntsman Chemical Corporation Senate Banking Committee (1980-1986); formerly Mayor of
500 Huntsman Way Salt Lake City, Utah (1971-1974); formerly Astronaut,
Salt Lake City, Utah Space Shuttle Discovery (April 12-19, 1985); Vice
Chairman, Huntsman Chemical Corporation (since January,
1993);
Director of Franklin Quest (time management systems) and
John Alden Financial Corp., Member of the board of various
civic and charitable organizations.
John R. Haire (70) Chairman of the Audit Committee and Chairman of the
Trustee Committee of the Independent Directors or Trustees and
Two World Trade Center Director or Trustee of the Dean Witter Funds; Trustee of
New York, New York the TCW/DW Funds; formerly President, Council for Aid to
Education (1978-October 1989) and Chairman and Chief
Executive Officer of Anchor Corporation, an Investment
Adviser (1964-1978); Director of Washington National
Corporation (insurance).
Dr. Manuel H. Johnson (46) Senior Partner, Johnson Smick International, Inc., a
Trustee consulting firm; Koch Professor of International Eco-
c/o Johnson Smick International, Inc. nomics and Director of the Center for Global Market
1133 Connecticut Avenue, N.W. Studies at George Mason University (since September,
Washington, D.C. 1990); Director or Trustee of the Dean Witter Funds;
Trustee of the TCW/DW Funds; Co-Chairman and a founder of
the Group of Seven Council (G7C), an international
economic commission (since September, 1990); Director of
NASDAQ (since June, 1995); Director of Greenwich Capital
Markets Inc. (broker-dealer); formerly Vice Chairman of
the Board of Governors of the Federal Reserve System
(February, 1986-August 1990) and Assistant Secretary of
the U.S. Treasury (1982-1986).
Paul Kolton (72) Director or Trustee of the Dean Witter Funds; Chairman of
Trustee the Audit Committee and Chairman of the Committee of the
c/o Gordon Altman Butowsky Independent Trustees and Trustee of the TCW/DW Funds;
Weitzen Shalov & Wein formerly Chairman of the Financial Accounting Standards
Counsel to the Independent Trustees Advisory Council and Chairman and Chief Executive Officer
114 West 47th Street of the American Stock Exchange; Director of UCC Investors
New York, New York Holding Inc. (Uniroyal Chemical Company, Inc.); director
or trustee of various not-for-profit organizations.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
<S> <C>
Michael E. Nugent (59) General Partner, Triumph Capital, L.P., a private in-
Trustee vestment partnership (since April, 1988); Director or
c/o Triumph Capital, L.P. Trustee of the Dean Witter Funds; Trustee of the TCW/DW
237 Park Avenue Funds; formerly Vice President, Bankers Trust Company and
New York, New York BT Capital Corporation (1984-1988); Director of various
business organizations.
Philip J. Purcell* (52) Chairman of the Board of Directors and Chief Executive
Trustee Officer of DWDC, DWR and Novus Credit Services Inc.;
Two World Trade Center Director of InterCapital, DWSC and Distributors; Director
New York, New York or Trustee of the Dean Witter Funds; Director and/or
officer of various DWDC subsidiaries.
John L. Schroeder (65) Retired; Director or Trustee of the Dean Witter Funds;
Trustee Trustee of the TCW/DW Funds; Director of Citizens
c/o Gordon Altman Butowsky Utilities Company; formerly Executive Vice President and
Weitzen Shalov & Wein Chief Investment Officer of the Home Insurance Company
Counsel to the Independent Trustees (August, 1991- September, 1995); formerly Chairman and
114 West 47th Street Chief Investment Officer of Axe-Houghton Management and
New York, New York the Axe-Houghton Funds (April, 1983-June, 1991) and
President of USF&G Financial Services, Inc. (June,
1990-June, 1991).
Sheldon Curtis (64) Senior Vice President, Secretary and General Counsel of
Vice President, Secretary and General Counsel InterCapital and DWSC; Senior Vice President, Assistant
Two World Trade Center Secretary and Assistant General Counsel of Distributors;
New York, New York Senior Vice President and Secretary of DWTC; Assistant
Secretary of DWR; Vice President, Secretary and General
Counsel of the Dean Witter Funds and the TCW/DW Funds.
Michael G. Knox (29) Senior Portfolio Manager of InterCapital (since August,
Vice President 1993); formerly a portfolio manager and analyst with Eagle
Two World Trade Center Asset Management, Inc. (February, 1991-August, 1993) and
New York, New York assistant portfolio manager and analyst with Heritage
Asset Management, Inc. (July, 1988-February, 1991).
Thomas F. Caloia (49) First Vice President (since May, 1991) and Assistant
Treasurer Treasurer (since January, 1993) of InterCapital; First
Two World Trade Center Vice President and Assistant Treasurer of DWSC; Treasurer
New York, New York of the Dean Witter Funds and the TCW/DW Funds; previously
Vice President of InterCapital.
<FN>']
- ---------
*Denotes Trustees who are "interested persons" of the Fund, as defined in the
Act.
</TABLE>
In addition, Robert M. Scanlan, President and Chief Operating Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWTC and
Director of DWTC, David A. Hughey, Executive Vice President and Chief
Administrative Officer of InterCapital, DWSC, Distributors and DWTC and Director
of DWTC, and Edmund C. Puckhaber, Executive Vice President of InterCapital and
Director of DWTC, Robert S. Giambrone, Senior Vice President of InterCapital,
DWSC, Distributors and DWTC, and Joseph J. McAlinden, Kevin Hurley and Paul D.
Vance and Ira N. Ross, Senior Vice Presidents of
8
<PAGE>
InterCapital, are Vice Presidents of the Fund, and Barry Fink and Marilyn K.
Cranney, First Vice Presidents and Assistant General Counsels of InterCapital
and DWSC, and LouAnne D. McInnis and Ruth Rossi, Vice Presidents and Assistant
General Counsels of InterCapital and DWSC, and Carsten Otto, a Staff Attorney
with InterCapital, are Assistant Secretaries of the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees consists of nine (9) trustees. These same individuals
also serve as directors or trustees for all of the Dean Witter Funds, and are
referred to in this section as Trustees. As of the date of this Statement of
Additional Information, there are a total of 79 Dean Witter Funds, comprised of
119 portfolios. As of December 31, 1995, the Dean Witter Funds had total net
assets of approximately $71.5 billion and more than five million shareholders.
Seven Trustees (77% of the total number) have no affiliation or business
connection with InterCapital or any of its affiliated persons and do not own any
stock or other securities issued by InterCapital's parent company, DWDC. These
are the "disinterested" or "independent" Trustees. The other two Trustees (the
"management Trustees") are affiliated with InterCapital. Five of the seven
independent Trustees are also Independent Trustees of the TCW/DW Funds.
Law and regulation establish both general guidelines and specific duties for
the Independent Trustees. The Dean Witter Funds seek as Independent Trustees
individuals of distinction and experience in business and finance, government
service or academia; these are people whose advice and counsel are in demand by
others and for whom there is often competition. To accept a position on the
Funds' Boards, such individuals may reject other attractive assignments because
the Funds make substantial demands on their time. Indeed, by serving on the
Funds' Boards, certain Trustees who would otherwise be qualified and in demand
to serve on bank boards would be prohibited by law from doing so.
All of the Independent Trustees serve as members of the Audit Committee and
the Committee of the Independent Trustees. Three of them also serve as members
of the Derivatives Committee. During the calendar year ended December 31, 1995,
the three Committees held a combined total of fifteen meetings. The Committees
hold some meetings at InterCapital's offices and some outside InterCapital.
Management Trustees or officers do not attend these meetings unless they are
invited for purposes of furnishing information or making a report.
The Committee of the Independent Trustees is charged with recommending to
the full Board approval of management, advisory and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing Fund performance; checking on the pricing of portfolio securities,
brokerage commissions, transfer agent costs and performance, and trading among
Funds in the same complex; and approving fidelity bond and related insurance
coverage and allocations, as well as other matters that arise from time to time.
The Independent Trustees are required to select and nominate individuals to fill
any Independent Trustee vacancy on the Board of any Fund that has a Rule 12b-1
plan of distribution. Most of the Dean Witter Funds have such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of such services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; reviewing the adequacy of the Fund's system of internal
controls; and preparing and submitting Committee meeting minutes to the full
Board.
Finally, the Board of each Fund has formed a Derivatives Committee to
establish parameters for and oversee the activities of the Fund with respect to
derivative investments, if any, made by the Fund.
9
<PAGE>
DUTIES OF CHAIRMAN OF COMMITTEES
The Chairman of the Committees maintains an office at the Funds'
headquarters in New York. He is responsible for keeping abreast of regulatory
and industry developments and the Funds' operations and management. He screens
and/or prepares written materials and identifies critical issues for the
Independent Trustees to consider, develops agendas for Committee meetings,
determines the type and amount of information that the Committees will need to
form a judgment on various issues, and arranges to have that information
furnished to Committee members. He also arranges for the services of independent
experts and consults with them in advance of meetings to help refine reports and
to focus on critical issues. Members of the Committees believe that the person
who serves as Chairman of all three Committees and guides their efforts is
pivotal to the effective functioning of the Committees.
The Chairman of the Committees also maintains continuous contact with the
Funds' management, with independent counsel to the Independent Trustees and with
the Funds' independent auditors. He arranges for a series of special meetings
involving the annual review of investment advisory, management and other
operating contracts of the Funds and, on behalf of the Committees, conducts
negotiations with the Investment Manager and other service providers. In effect,
the Chairman of the Committees serves as a combination of chief executive and
support staff of the Independent Trustees.
The Chairman of the Committees is not employed by any other organization and
devotes his time primarily to the services he performs as Committee Chairman and
Independent Trustee of the Dean Witter Funds and as an Independent Trustee of
the TCW/DW Funds. The current Committee Chairman has had more than 35 years
experience as a senior executive in the investment company industry.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL DEAN
WITTER FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the Dean Witter Funds avoids the
duplication of effort that would arise from having different groups of
individuals serving as Independent Trustees for each of the Funds or even of
sub-groups of Funds. They believe that having the same individuals serve as
Independent Trustees of all the Funds tends to increase their knowledge and
expertise regarding matters which affect the Fund complex generally and enhances
their ability to negotiate on behalf of each Fund with the Fund's service
providers. This arrangement also precludes the possibility of separate groups of
Independent Trustees arriving at conflicting decisions regarding operations and
management of the Funds and avoids the cost and confusion that would likely
ensue. Finally, having the same Independent Trustees serve on all Fund Boards
enhances the ability of each Fund to obtain, at modest cost to each separate
Fund, the services of Independent Trustees, and a Chairman of their Committees,
of the caliber, experience and business acumen of the individuals who serve as
Independent Trustees of the Dean Witter Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Fund pays each Independent Trustee an annual fee of $1,000 ($1,200 prior
to September 30, 1995) plus a per meeting fee of $50 for meetings of the Board
of Trustees or committees of the Board of Trustees attended by the Trustee (the
Fund pays the Chairman of the Audit Committee an annual fee of $750 ($1,000
prior to January 1, 1995) and pays the Chairman of the Committee of the
Independent Trustees an additional annual fee of $2,400, in each case inclusive
of the Committee meeting fees). The Fund also reimburses such Trustees for
travel and other out-of-pocket expenses incurred by them in connection with
attending such meetings. Trustees and officers of the Fund who are or have been
employed by the Investment Manager or an affiliated company receive no
compensation or expense reimbursement from the Fund.
The Fund has adopted a retirement program under which an Independent Trustee
who retires after serving for at least five years (or such lesser period as may
be determined by the Board) as an Independent Director or Trustee of any Dean
Witter Fund that has adopted the retirement program (each such Fund referred to
as an "Adopting Fund" and each such Trustee referred to as an "Eligible
Trustee") is entitled to retirement payments upon reaching the eligible
retirement age (normally, after attaining age 72). Annual payments are based
upon length of service. Currently, upon retirement, each Eligible Trustee is
entitled to receive from the Fund, commencing as of his or her retirement date
and continuing
10
<PAGE>
for the remainder of his or her life, an annual retirement benefit (the "Regular
Benefit") equal to 28.75% of his or her Eligible Compensation plus 0.4791666% of
such Eligible Compensation for each full month of service as an Independent
Director or Trustee of any Adopting Fund in excess of five years up to a maximum
of 57.50% after ten years of service. The foregoing percentages may be changed
by the Board.(1) "Eligible Compensation" is one-fifth of the total compensation
earned by such Eligible Trustee for service to the Fund in the five year period
prior to the date of the Eligible Trustee's retirement. Benefits under the
retirement program are not secured or funded by the Fund. As of the date of this
Statement of Additional Information, 57 Dean Witter Funds have adopted the
retirement program.
The following table illustrates the compensation paid and the retirement
benefits accrued to the Fund's Independent Trustees by the Fund for the fiscal
year ended September 30, 1995 and the estimated retirement benefits for the
Fund's Independent Trustees as of September 30, 1995.
<TABLE>
<CAPTION>
FUND COMPENSATION ESTIMATED RETIREMENT BENEFITS
------------------------------- -------------------------------------------------------------------
ESTIMATED ESTIMATED
RETIREMENT CREDITED YEARS ESTIMATED ANNUAL
AGGREGATE BENEFITS OF SERVICE AT PERCENTAGE OF ESTIMATED BENEFITS
NAME OF INDEPENDENT COMPENSATION ACCRUED AS RETIREMENT ELIGIBLE ELIGIBLE UPON
TRUSTEE FROM THE FUND FUND EXPENSES (MAXIMUM 10) COMPENSATION COMPENSATION(2) RETIREMENT(3)
- -------------------- -------------- -------------- ---------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic....... $ 1,900 $ 341 10 57.5% $1,950 1$,121
Edwin J. Garn....... 2,000 634 10 57.5% 1,950 1,121
John R. Haire....... 4,350(4) 3,128 10 57.5% 5,162 2,968
Dr. Manuel H.
Johnson............ 2,000 258 10 57.5% 1,950 1,121
Paul Kolton......... 2,000 1,370 10 57.0% 2,445 1,394
Michael E. Nugent... 1,850 453 10 57.5% 1,950 1,121
John L. Schroeder... 1,850 670 8 47.9% 1,950 934
</TABLE>
- ------------
(1)
An Eligible Trustee may elect alternate payments of his or her retirement
benefits based upon the combined life expectancy of such Eligible Trustee and
his or her spouse on the date of such Eligible Trustee's retirement. The
amount estimated to be payable under this method, through the remainder of the
later of the lives of such Eligible Trustee and spouse, will be the actuarial
equivalent of the Regular Benefit. In addition, the Eligible Trustee may elect
that the surviving spouse's periodic payment of benefits will be equal to
either 50% or 100% of the previous periodic amount, an election that,
respectively, increases or decreases the previous periodic amount so that the
resulting payments will be the actuarial equivalent of the Regular Benefit.
(2)
Based on current levels of compensation.
(3)
Based on current levels of compensation. Amount of annual benefits also varies
depending on the Trustee's elections described in Footnote (1) above.
(4)
Of Mr. Haire's compensation from the Fund, $3,400 was paid to him as Chairman
of the Committee of the Independent Trustees ($2,400) and as Chairman of the
Audit Committee ($1,000).
11
<PAGE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1995 for services
to the 79 Dean Witter Funds and, in the case of Messrs. Haire, Johnson, Kolton
and Nugent, the 11 TCW/DW Funds that were in operation at December 31, 1995.
With respect to Messrs. Haire, Johnson, Kolton and Nugent, the TCW/DW Funds are
included solely because of a limited exchange privilege between those Funds and
five Dean Witter Money Market Funds. Mr. Schroeder was elected as a Trustee of
the TCW/DW Funds on April 20, 1995.
CASH COMPENSATION FROM DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
FOR SERVICE AS TOTAL CASH
FOR SERVICE CHAIRMAN OF COMPENSATION
AS DIRECTOR OR COMMITTEES OF FOR SERVICES
TRUSTEE AND FOR SERVICE AS INDEPENDENT TO
COMMITTEE MEMBER TRUSTEE AND DIRECTORS/ 79 DEAN
OF 79 DEAN COMMITTEE MEMBER TRUSTEES AND WITTER
WITTER OF 11 TCW/DW AUDIT FUNDS AND 11
NAME OF INDEPENDENT TRUSTEE FUNDS FUNDS COMMITTEES TCW/DW FUNDS
- --------------------------- ---------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
Michael Bozic.............. $126,050 -- -- $126,050
Edwin J. Garn.............. 136,450 -- -- 136,450
John R. Haire.............. 98,450 $82,038 $217,350(5) 397,838
Dr. Manuel H. Johnson...... 136,450 82,038 -- 218,488
Paul Kolton................ 136,450 54,788 36,900(6) 228,138
Michael E. Nugent.......... 124,200 75,038 -- 199,238
John L. Schroeder.......... 136,450 46,964 -- 183,414
</TABLE>
- ------------
(5)
For the 79 Dean Witter Funds in operation at December 31, 1995.
(6)
For the 11 TCW/DW Funds in operation at December 31, 1995.
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's officers
and Trustees as a group was less than 1 percent of the Fund's shares of
beneficial interest outstanding.
INVESTMENT PRACTICES AND POLICIES
- --------------------------------------------------------------------------------
CONVERTIBLE SECURITIES. A convertible security entitles the holder to
exchange it for a fixed number of shares of common stock or other equity
security, usually of the same company, at fixed prices within a specified period
of time. As such, a convertible security entitles the holder to receive the
fixed income of a bond or the dividend preference of a preferred stock until the
holder elects to exercise the conversion privilege.
A convertible security's position in a company's capital structure depends
upon its particular provisions. In the case of subordinated convertible
debentures, the holders' claims on assets and earnings are subordinated to the
claims of other creditors, and are senior to the claims of preferred and common
shareholders. In the case of convertible preferred stock, the holders' claims on
assets and earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
Every convertible security may be valued, on a theoretical basis, as if it
did not have a conversion privilege. Such theoretical value is determined by the
yield it provides in comparison with the yields of other securities of
comparable character and quality which do not have a conversion privilege. This
theoretical value, which will change with prevailing interest rates, the credit
standing of the issuer and other pertinent factors, is often referred to as the
"investment value," and represents the security's theoretical price support
level.
"Conversion value" is the amount a convertible security would be worth in
market value if it were to be exchanged for the underlying equity security
pursuant to its conversion privilege. Conversion value fluctuates directly with
the price of the underlying equity security, usually common stock. If, because
of low prices for the common stock, the conversion value is substantially below
the investment value, the
12
<PAGE>
price of the convertible security is governed principally by the factors
described in the preceding paragraph. If the conversion value rises near or
above its investment value, the price of the convertible security generally will
rise above its investment value and, in addition, will sell at some premium over
its conversion value. This premium represents the price investors are willing to
pay for the privilege of purchasing a fixed-income security with a possibility
of capital appreciation due to the conversion privilege. If this appreciation
potential is not realized, this premium may not be recovered.
To the degree that the price of a convertible security rises above its
investment value because of a rise in price of the common stock, it is
influenced more by price fluctuations of the common stock and less by its
investment value. The price of a convertible security that is supported
principally by its conversion value will rise along with any increase in the
price of the common stock, and such price generally will decline along with any
decline in the price of the common stock except that the security will receive
additional support as its price approaches investment value. A convertible
security purchased or held at a time when its price is influenced by its
conversion value will produce a lower yield than nonconvertible senior
securities with comparable investment values. Convertible securities may be
purchased by the Fund at varying price levels above their investment values
and/or their conversion values in keeping with the Fund's investment objectives.
CORPORATE FIXED-INCOME SECURITIES. As discussed in the Prospectus, in order
to generate the current income needed to achieve its investment objective, the
Fund may invest in investment grade non-convertible fixed-income securities as
well as in such securities which are in the lower rating categories of
recognized rating agencies (Standard & Poor's Corporation and Moody's Investors
Service, Inc.) or which are not rated by such agencies. The Investment Manager
will perform its own credit analyses in addition to using recognized rating
agencies and other sources. In making such credit analyses, substantial
consideration will be given to a determination of value based upon, among other
things, anticipated cash flows, interest or dividend coverage, asset coverage,
earnings, experience of the issuer, responsiveness to changes in interest rates
and business conditions and liquidation value relative to the market price.
WHEN, AS AND IF ISSUED SECURITIES. As discussed in the Prospectus, 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. The commitment for the purchase of any such security will not be
recognized in the portfolio of the Fund until the Investment Manager determines
that issuance of the security is probable. At such time, the Fund will record
the transaction and, in determining its net asset value, will reflect the value
of the security daily. At such time, the Fund will also establish a segregated
account with its custodian bank in which it will maintain cash or cash
equivalents or other high grade debt portfolio securities equal in value to
recognized commitments for such securities. Once a segregated account has been
established, if the anticipated event does not occur and the securities are not
issued, the Fund will have lost an investment opportunity. The value of the
Fund's commitments to purchase the securities of any one issuer, together with
the value of all securities of such issuer owned by the Fund, may not exceed 5%
of the value of the Fund's total assets at the time the initial commitment to
purchase such securities is made (see "Investment Restrictions"). Subject to the
foregoing restrictions, the Fund may purchase securities on such basis without
limit. An increase in the percentage of the Fund's assets committed to the
purchase of securities on a "when, as and if issued" basis may increase the
volatility of its net asset value. The Investment Manager and the Trustees do
not believe that the net asset value of the Fund will be adversely affected by
its purchase of securities on such basis. The Fund may also sell securities on a
"when, as and if issued" basis provided that the issuance of the security will
result automatically from the exchange or conversion of a security owned by the
Fund at the time of sale.
13
<PAGE>
OPTIONS AND FUTURES TRANSACTIONS
The Fund may write covered call options against securities held in its
portfolio and covered put options on eligible portfolio securities and purchase
options of the same series to effect closing transactions, and may hedge against
potential changes in the market value of investments (or anticipated
investments) and facilitate the reallocation of the Fund's assets into and out
of equities and fixed-income securities by purchasing put and call options on
portfolio (or eligible portfolio) securities and engaging in transactions
involving futures contracts and options on such contracts.
Call and put options on U.S. Treasury notes, bonds and bills and equity
securities are listed on Exchanges (currently the Chicago Board Options
Exchange, American Stock Exchange, New York Stock Exchange, Pacific Stock
Exchange and Philadelphia Stock Exchange) and are written in over-the-counter
transactions ("OTC Options"). Listed options are issued by the Options Clearing
Corporation ("OCC"). Ownership of a listed call option gives the Fund the right
to buy from the OCC the underlying security covered by the option at the stated
exercise price (the price per unit of the underlying security) by filing an
exercise notice prior to the expiration date of the option. The writer (seller)
of the option would then have the obligation to sell to the OCC the underlying
security at that exercise price prior to the expiration date of the option,
regardless of its then current market price. Ownership of a listed put option
would give the Fund the right to sell the underlying security to the OCC at the
stated exercise price. Upon notice of exercise of the put option, the writer of
the put would have the obligation to purchase the underlying security from the
OCC at the exercise price.
OPTIONS ON TREASURY BONDS AND NOTES. Because trading interest in options
written on Treasury bonds and notes tends to center on the most recently
auctioned issues, the exchanges on which such securities trade will not continue
indefinitely to introduce options with new expirations to replace expiring
options on particular issues. Instead, the expirations introduced at the
commencement of options trading on a particular issue will be allowed to run
their course, with the possible addition of a limited number of new expirations
as the original ones expire. Options trading on each issue of bonds or notes
will thus be phased out as new options are listed on more recent issues, and
options representing a full range of expirations will not ordinarily be
available for every issue on which options are traded.
OPTIONS ON TREASURY BILLS. Because a deliverable Treasury bill changes from
week to week, writers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of the
option, the position may be hedged from a risk standpoint by the writing of a
call option. For so long as the call option is outstanding, the Fund will hold
the Treasury bills in a segregated account with its Custodian, so that they will
be treated as being covered.
OTC OPTIONS. Exchange-listed options are issued by the OCC which assures
that all transactions in such options are properly executed. OTC options are
purchased from or sold (written) to dealers or financial institutions which have
entered into direct agreements with the Fund. With OTC options, such variables
as expiration date, exercise price and premium will be agreed upon between the
Fund and the transacting dealer, without the intermediation of a third party
such as the OCC. If the transacting dealer fails to make or take delivery of the
securities underlying an option it has written, in accordance with the terms of
that option, the Fund would lose the premium paid for the option as well as any
anticipated benefit of the transaction. The Fund will engage in OTC option
transactions only with primary U.S. Government securities dealers recognized by
the Federal Reserve Bank of New York.
COVERED CALL WRITING. The Fund is permitted to write covered call options
on portfolio securities, without limit, in order to aid in achieving its
investment objective. Generally, a call option is "covered" if the Fund owns, or
has the right to acquire, without additional cash consideration (or for
additional cash consideration held for the Fund by its Custodian in a segregated
account) the underlying security subject to the option except that in the case
of call options on U.S. Treasury bills, the Fund might own U.S. Treasury bills
of a different series from those underlying the call option, but with a
principal amount and value corresponding to the exercise price and a maturity
date no later than that of the securities
14
<PAGE>
deliverable under the call option. A call option is also covered if the Fund
holds a call on the same security as the underlying security of the written
option, where the exercise price of the call used for coverage is equal to or
less than the exercise price of the call written or greater than the exercise
price of the call written if the mark-to-market difference is maintained by the
Fund in cash, U.S. Government securities or other high grade debt obligations
which the Fund holds in a segregated account maintained with its Custodian.
The Fund will receive from the purchaser, in return for a call it has
written, a "premium"; i.e., the price of the option. Receipt of these premiums
may better enable the Fund to achieve a greater total return than would be
realized from holding the underlying securities alone. Moreover, the premium
received will offset a portion of the potential loss incurred by the Fund if the
securities underlying the option are ultimately sold by the Fund at a loss. The
premium received will fluctuate with varying economic market conditions. If the
market value of the portfolio securities upon which call options have been
written increases, the Fund may receive less total return from the portion of
its portfolio upon which calls have been written than it would have had such
calls not been written.
As regards listed options and certain over-the-counter ("OTC") options,
during the option period, the Fund may be required, at any time, to deliver the
underlying security against payment of the exercise price on any calls it has
written (exercise of certain listed options may be limited to specific
expiration dates). This obligation is terminated upon the expiration of the
option period or at such earlier time when the writer effects a closing purchase
transaction. A closing purchase transaction is accomplished by purchasing an
option of the same series as the option previously written. However, once the
Fund has been assigned an exercise notice, the Fund will be unable to effect a
closing purchase transaction.
Closing purchase transactions are ordinarily effected to realize a profit on
an outstanding call option to prevent an underlying security from being called,
to permit the sale of an underlying security or to enable the Fund to write
another call option on the underlying security with either a different exercise
price or expiration date or both. Also, effecting a closing purchase transaction
will permit the cash or proceeds from the concurrent sale of any securities
subject to the option to be used for other investments by the Fund. The Fund may
realize a net gain or loss from a closing purchase transaction depending upon
whether the amount of the premium received on the call option is more or less
than the cost of effecting the closing purchase transaction. Any loss incurred
in a closing purchase transaction may be wholly or partially offset by
unrealized appreciation in the market value of the underlying security.
Conversely, a gain resulting from a closing purchase transaction could be offset
in whole or in part or exceeded by a decline in the market value of the
underlying security.
If a call option expires unexercised, the Fund realizes a gain in the amount
of the premium on the option less the commission paid. Such a gain, however, may
be offset by depreciation in the market value of the underlying security during
the option period. If a call option is exercised, the Fund realizes a gain or
loss from the sale of the underlying security equal to the difference between
the purchase price of the underlying security and the proceeds of the sale of
the security plus the premium received on the option less the commission paid.
Options written by a Fund normally have expiration dates of from up to nine
months (equity securities) to eighteen months (fixed-income securities) from the
date written. The exercise price of a call option may be below, equal to or
above the current market value of the underlying security at the time the option
is written. See "Risks of Options Transactions," below.
COVERED PUT WRITING. As a writer of a covered put option, 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 (certain listed put options written by the Fund will be
exercisable by the purchaser only on a specific date). A put is "covered" if the
Fund maintains, in a segregated account maintained on its behalf at the Fund's
Custodian, cash, U.S. Government securities or other high grade debt obligations
in an amount equal to at least the exercise price of the option, at all times
during the option period. Similarly, a written put position could be covered by
the Fund by its purchase of a put option on the same security as the underlying
security of the written option, where the
15
<PAGE>
exercise price of the purchased option is equal to or more than the exercise
price of the put written or less than the exercise price of the put written if
the mark-to-market difference is maintained by the Fund in cash, U.S. Government
securities or other high grade debt obligations which the Fund holds in a
segregated account maintained at its Custodian. In writing puts, the Fund
assumes the risk of loss should the market value of the underlying security
decline below the exercise price of the option (any loss being decreased by the
receipt of the premium on the option written). During the option period, the
Fund may be required, at any time, to make payment of the exercise price against
delivery of the underlying security. The operation of and limitations on covered
put options in other respects are substantially identical to those of call
options.
The Fund will write put options for two purposes: (1) to receive the income
derived from the premiums paid by purchasers; and (2) when the Investment
Manager wishes to purchase the security underlying the option at a price lower
than its current market price, in which case it will write the covered put at an
exercise price reflecting the lower purchase price sought. The potential gain on
a covered put option is limited to the premium received on the option (less the
commissions paid on the transaction) while the potential loss equals the
difference between the exercise price of the option and the current market price
of the underlying securities when the put is exercised, offset by the premium
received (less the commissions paid on the transaction).
PURCHASING CALL AND PUT OPTIONS. The Fund may purchase listed call and put
options in amounts equalling up to 10% of its total assets. The Fund may
purchase call options only in order to close out a covered call position (see
"Covered Call Writing" above). The call purchased is likely to be on the same
securities and have the same terms as the written option. The option would
generally be acquired from the dealer or financial institution which purchased
the call written by the Fund.
The Fund may purchase put options on securities which it holds (or has the
right to acquire) in its portfolio only to protect itself against a decline in
the value of the security. If the value of the underlying security were to fall
below the exercise price of the put purchased in an amount greater than the
premium paid for the option, the Fund would incur no additional loss. The Fund
may also purchase put options to close out written put positions in a manner
similar to call options closing purchase transactions. In addition, the Fund may
sell a put option which it has previously purchased prior to the sale of the
securities underlying such option. Such a sale would result in a net gain or
loss depending on whether the amount received on the sale is more or less than
the premium and other transaction costs paid on the put option when it was
purchased. Any such gain or loss could be offset in whole or in part by a change
in the market value of the underlying security. If a put option purchased by the
Fund expired without being sold or exercised, the premium would be lost.
RISKS OF OPTIONS TRANSACTIONS. During the option period, the covered call
writer has, in return for the premium on the option, given up the opportunity
for capital appreciation above the exercise price should the market price of the
underlying security increase, but has retained the risk of loss should the price
of the underlying security decline. The secured put writer also retains the risk
of loss should the market value of the underlying security decline below the
exercise price of the option less the premium received on the sale of the
option. In both cases, the writer has no control over the time when it may be
required to fulfill its obligation as a writer of the option. Once an option
writer has received an exercise notice, it cannot effect a closing purchase
transaction in order to terminate its obligation under the option and must
deliver or receive the underlying securities at the exercise price.
Prior to exercise or expiration, an option position can only be terminated
by entering into a closing purchase or sale transaction. If a covered call
option writer is unable to effect a closing purchase transaction it cannot sell
the underlying security until the option expires or the option is exercised.
Accordingly, a covered call option writer may not be able to sell an underlying
security at a time when it might otherwise be advantageous to do so. A covered
put option writer who is unable to effect a closing purchase transaction would
continue to bear the risk of decline in the market price of the underlying
16
<PAGE>
security until the option expires or is exercised. In addition, a covered put
writer would be unable to utilize the amount held in cash or U.S. Government or
other high grade short-term debt obligations as cover for the put option for
other investment purposes until the exercise or expiration of the option.
The Fund's ability to close out its position as a writer of an option is
dependent upon the existence of a liquid secondary market on option exchanges.
There is no assurance that such a market will exist. However, the Fund may be
able to purchase an offsetting option which does not close out its position as a
writer but constitutes an asset of equal value to the obligation under the
option written. If the Fund is not able to either enter into a closing purchase
transaction or purchase an offsetting position, it will be required to maintain
the securities subject to the call, or the collateral underlying the put, even
though it might not be advantageous to do so, until a closing transaction can be
entered into (or the option is exercised or expires). In addition, in the event
of the bankruptcy of a broker through which the Fund engages in transactions in
options, the Fund could experience delays and/or losses in liquidating open
positions purchased or sold through the broker and/or incur a loss of all or
part of its margin deposits with the broker.
Among the possible reasons for the absence of a liquid secondary market on
an Exchange are: (i) insufficient trading interest in certain options; (ii)
restrictions on transactions imposed by an Exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (iv) interruption of the normal
operations on an Exchange; (v) inadequacy of the facilities of an Exchange or
the Options Clearing Corporation ("OCC") to handle current trading volume; or
(vi) a decision by one or more Exchanges to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that Exchange (or in that class or series of options) would cease to
exist, although outstanding options on that Exchange that had been issued by the
OCC as a result of trades on that Exchange would generally continue to be
exercisable in accordance with their terms.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in options, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by the Fund,
the Fund could experience a loss of all or part of the value of the option.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the Investment Manager.
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different Exchanges or are held or written on
one or more accounts or through one or more brokers). An Exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. These position limits may restrict the
number of listed options which the Fund may write.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
FUTURES CONTRACTS. The Fund may purchase and sell futures contracts that
are traded on U.S. commodity exchanges on such underlying securities as U.S.
Treasury bonds, notes and bills. As a futures contract purchaser, the Fund
incurs an obligation to take delivery of a specified amount of the obligation
underlying the contract at a specified time in the future for a specified price.
As a seller of a futures contract, the Fund incurs an obligation to deliver the
specified amount of the underlying obligation at a specified time in return for
an agreed upon price.
Although most futures contracts call for actual delivery or acceptance of
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. A futures
17
<PAGE>
contract sale is closed out by effecting a futures contract purchase for the
same aggregate amount of the specific type of security and the same delivery
date. If the sale price exceeds the offsetting purchase price, the seller would
be paid the difference and would realize a gain. If the offsetting purchase
price exceeds the sale price, the seller would pay the difference and would
realize a loss. Similarly, a futures contract purchase is closed out by
effecting a futures contract sale for the same aggregate amount of the specific
type of security and the same delivery date. If the offsetting sale price
exceeds the purchase price, the purchaser would realize a gain, whereas if the
purchase price exceeds the offsetting sale price, the purchaser would realize a
loss. There is no assurance that the Fund will be able to enter into a closing
transaction.
When the Fund enters into a futures contract, it is initially required to
deposit with the Fund's Custodian, in a segregated account in the name of the
broker performing the transaction, an "initial margin" of cash or U.S.
Government securities or other high grade short-term obligations equal to
approximately 2% of the contract amount. Initial margin requirements are
established by the Exchanges on which futures contracts trade and may, from time
to time, change. In addition, brokers may establish margin deposit requirements
in excess of those required by the Exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a brokers' client but is, rather, a good faith deposit on the futures
contract which will be returned to the Fund upon the proper termination of the
futures contract. The margin deposits made are mark-to-market daily and the Fund
may be required to make subsequent deposits of cash or U.S. Government
securities called "variation margin", with the Fund's futures contract clearing
broker, which are reflective of price fluctuations in the futures contract.
Currently, interest rate futures contracts can be purchased on debt securities
such as U.S. Treasury Bills and Bonds, U.S. Treasury Notes with maturities
between 6 1/2 and 10 years, GNMA Certificates and Bank Certificates of Deposit.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write call and put
options on futures contracts which are traded on an Exchange and enter into
closing transactions with respect to such options to terminate an existing
position. An option on a futures contract gives the purchaser the right (in
return for the premium paid), to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the term of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option is accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contract at the time of exercise
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract.
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
(purchase of a call option or sale of a put option) and the sale of a futures
contract (purchase of a put option or sale of a call option), or to close out a
long or short position in futures contracts. If, for example, the Investment
Manager wished to protect against an increase in interest rates and the
resulting negative impact on the value of a portion of its fixed-income
portfolio, it might write a call option on an interest rate futures contract,
the underlying security of which correlates with the portion of the portfolio
the Investment Manager seeks to hedge. Any premiums received in the writing of
options on futures contracts may, of course, augment the total return of the
Fund and thereby provide a further hedge against losses resulting from price
declines in portions of the Fund's portfolio.
The writer of an option on a futures contract is required to deposit initial
and variation margin pursuant to requirements similar to those applicable to
futures contracts. Premiums received from the writing of an option on a futures
contract are included in initial margin deposits.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Fund may not
enter into futures contracts or purchase related options thereon if, immediately
thereafter, the amount committed to margin plus the amount paid for premiums for
unexpired options on futures contracts exceeds 5% of the
18
<PAGE>
value of the Fund's total assets, after taking into account unrealized gains and
unrealized losses on such contracts it has entered into, provided, however, that
in the case of an option that is in-the-money (the exercise price of the call
(put) option is less (more) than the market price of the underlying security) at
the time of purchase, the in-the-money amount may be excluded in calculating the
5%. However, there is no overall limitation on the percentage of the Fund's
assets which may be subject to a hedge position. In addition, in accordance with
the regulations of the Commodity Futures Trading Commission ("CFTC") under which
the Fund is exempted from registration as a commodity pool operator, the Fund
may only enter into futures contracts and options on futures contracts
transactions for purposes of hedging a part or all of its portfolio. If the CFTC
changes its regulations so that the Fund would be permitted to write options on
futures contracts for purposes other than hedging the Fund's investments without
CFTC registration, the Fund may engage in such transactions for those purposes.
Except as described above, there are no other limitations on the use of futures
and options thereon by the Fund.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. As stated
in the Prospectus, the Fund may sell a futures contract to protect against the
decline in the value of securities held by the Fund. However, it is possible
that the futures market may advance and the value of securities held in the
portfolio of the Fund may decline. If this occurred, the Fund would lose money
on the futures contract and also experience a decline in value of its portfolio
securities. However, while this could occur for a very brief period or to a very
small degree, over time the value of a diversified portfolio will tend to move
in the same direction as the futures contracts.
If the Fund purchases a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the Investment Manager may determine not to invest in the
securities as planned and will realize a loss on the futures contract that is
not offset by a reduction in the price of the securities.
In order to assure that the Fund is entering into transactions in futures
contracts for hedging purposes as such is defined by the Commodities Futures
Trading Commission either: 1) a substantial majority (i.e., approximately 75%)
of all anticipatory hedge transactions (transactions in which the Fund does not
own at the time of the transaction, but expects to acquire, the securities
underlying the relevant futures contract) involving the purchase of futures
contracts will be completed by the purchase of securities which are the subject
of the hedge or 2) the underlying value of all long positions in futures
contracts will not exceed the total value of: a) all short-term debt obligations
held by the Fund; b) cash held by the Fund; c) cash proceeds due to the Fund on
investments within thirty days; d) the margin deposited on the contracts; and e)
any unrealized appreciation in the value of the contracts.
If the Fund maintains a short position in a futures contract or has sold a
call option on a futures contract, it will cover this position by holding, in a
segregated account maintained at its Custodian, cash, U.S. Government securities
or other high grade debt obligations equal in value (when added to any initial
or variation margin on deposit) to the market value of the securities underlying
the futures contract or the exercise price of the option. Such a position may
also be covered by owning the securities underlying the futures contract, or by
holding a call option permitting the Fund to purchase the same contract at a
price no higher than the price at which the short position was established.
In addition, if the Fund holds a long position in a futures contract or has
sold a put option on a futures contract, it will hold cash, U.S. Government
securities or other high grade debt obligations equal to the purchase price of
the contract or the exercise price of the put option (less the amount of initial
or variation margin on deposit) in a segregated account maintained for the Fund
by its Custodian. Alternatively, the Fund could cover its long position by
purchasing a put option on the same futures contract with an exercise price as
high or higher than the price of the contract held by the Fund.
Exchanges limit the amount by which the price of a futures contract 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. In the event of adverse price movements, the Fund would continue to
be required to make daily cash payments of variation margin on open futures
positions. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to
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meet daily variation margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to take or make
delivery of the instruments underlying futures contracts it holds at a time when
it is disadvantageous to do so. The inability to close out options and futures
positions could also have an adverse impact on the Fund's ability to effectively
hedge its portfolio. In addition, in the event of the bankruptcy of a broker
through which the Fund engages in transactions in futures or options thereon,
the Fund could experience delays and/or losses in liquidating open positions
purchased or sold through the broker and/or incur a loss of all or part of its
margin deposits with the broker.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
Similarly, in the event of the bankruptcy of the writer of an OTC option
purchased by the Fund, the Fund could experience a loss of all or part of the
value of the option. Transactions are entered into by the Fund only with brokers
or financial institutions deemed creditworthy by the Investment Manager.
While the futures contracts and options transactions to be engaged in by the
Fund for the purpose of hedging the Fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such instruments.
One such risk which may 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. Another such risk is that prices of futures
contracts may not move in tandem with the changes in prevailing interest rates
against which the Fund seeks a hedge. A correlation may also be distorted by the
fact that the futures market is dominated by short-term traders seeking to
profit from the difference between a contract or security price objective and
their cost of borrowed funds. Such distortions are generally minor and would
diminish as the contract approached maturity.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Fund and the movements in the prices of the
securities which are the subject of the hedge. If participants in the futures
market elect to close out their contracts through offsetting transactions rather
than meet margin deposit requirements, distortions in the normal relationship
between the debt securities and futures markets could result. Price distortions
could also result if investors in futures contracts opt to make or take delivery
of underlying securities rather than engage in closing transactions due to the
resultant reduction in the liquidity of the futures market. In addition, due to
the fact that, from the point of view of speculators, the deposit requirements
in the futures markets are less onerous than margin requirements in the cash
market, increased participation by speculators in the futures market could cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and because of the imperfect correlation between movements in the
prices of securities and movements in the prices of futures contracts, a correct
forecast of interest rate trends by the Investment Manager may still not result
in a successful hedging transaction.
There is no assurance that a liquid secondary market will exist for futures
contracts and related options in which the Fund may invest. In the event a
liquid market does not exist, it may not be possible to close out a futures
position, and in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin. In addition,
limitations imposed by an exchange or board of trade on which futures contracts
are traded may compel or prevent the Fund from closing out a contract which may
result in reduced gain or increased loss to the Fund. The absence of a liquid
market in futures contracts might cause the Fund to make or take delivery of the
underlying securities at a time when it may be disadvantageous to do so.
The extent to which the Fund may enter into transactions involving futures
contracts and options thereon may be limited by the Internal Revenue Code's
requirements for qualification as a regulated investment company and the Fund's
intention to qualify as such (see "Dividends, Distributions and Taxes" in the
Prospectus).
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<PAGE>
Compared to the purchase or sale of futures contracts, the purchase of call
or put options on futures contracts involves less potential risk to the Fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a futures contract would result in a loss to the Fund
notwithstanding that the purchase or sale of a futures contract would not result
in a loss, as in the instance where there is no movement in the prices of the
futures contract or underlying securities.
The Investment Manager has substantial experience in the use of the
investment techniques described above under the heading "Options and Futures
Transactions," which techniques require skills different from those needed to
select the portfolio securities underlying various options and futures
contracts.
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 notice
provisions described below), and are at all times secured by cash or cash
equivalents, which are maintained in a segregated account pursuant to applicable
regulations and that are equal to at least the market value, determined daily,
of the loaned securities. The advantage of such loans is that the Fund continues
to receive the income on the loaned securities while at the same time earning
interest on the cash amounts deposited as collateral, which will be invested in
short-term obligations. The Fund will not lend its portfolio securities if such
loans are not permitted by the laws or regulations of any state in which its
shares are qualified for sale and will not lend more than 25% of the value of
its total assets.
A loan may be terminated by the borrower on one business day's notice, or by
the Fund on two business days' notice. If the borrower fails to deliver the
loaned securities within two days after receipt of notice, the Trust could use
the collateral to replace the securities while holding the borrower liable for
any excess of replacement cost over collateral. As with any extensions of
credit, there are risks of delay in recovery and in some cases even loss of
rights in the collateral should the borrower of the securities fail financially.
However, these loans of portfolio securities will only be made to firms deemed
by the Fund's management to be creditworthy and when the income which can be
earned from such loans justifies the attendant risks. Upon termination of the
loan, the borrower is required to return the securities to the Fund. Any gain or
loss in the market price during the loan period would inure to the Fund. The
creditworthiness of firms to which the Fund lends its portfolio securities will
be monitored on an ongoing basis by the Investment Manager pursuant to
procedures adopted and reviewed, on an ongoing basis, by the Trustees of the
Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of such rights
if the matters involved would have a material effect on the Fund's investment in
such loaned securities. The Fund will pay reasonable finder's, administrative
and custodial fees in connection with a loan of its securities. However, the
Fund did not lend any of its portfolio securities during the fiscal year ended
September 30, 1995 and it has no intention of doing so in the foreseeable
future.
REPURCHASE AGREEMENTS
When cash may be available for only a few days, it may be invested by the
Fund in repurchase agreements until such time as it may otherwise be invested or
used for payments of obligations of the Fund. These agreements, which may be
viewed as a type of secured lending by the Fund, typically involve the
acquisition by the Fund of debt securities from a selling financial institution
such as a bank, savings and loan association or broker-dealer. The agreement
provides that the Fund will sell back to the institution, and that the
institution will repurchase, the underlying security ("collateral"), which is
held by the Fund's Custodian, at a specified price and at a fixed time in the
future, usually not more than seven days from the date of purchase. The Fund
will receive interest from the institution until the time when the repurchase is
to occur. Although such date is deemed by the Fund to be the maturity date of a
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repurchase agreement, the maturities of securities subject to repurchase
agreements are not subject to any limits and may exceed one year. While
repurchase agreements involve certain risks not associated with direct
investments in debt securities, the Fund follows procedures designed to minimize
such risks. These procedures include effecting repurchase transactions only with
large, well-capitalized and well-established financial institutions, whose
financial condition will be continually monitored by the Investment Manager
subject to procedures established by the Trustees. In addition, the value of the
collateral underlying the repurchase agreement will always be at least equal to
the repurchase price, including any accrued interest earned on the repurchase
agreement. In the event of a default or bankruptcy by a selling financial
institution, the Fund will seek to liquidate such collateral. However, the
exercising of the Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price, the
Fund could suffer a loss. It is the current policy of the Fund not to invest in
repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by the Fund, amounts to
more than 10% of its total assets. The Fund's investments in repurchase
agreements may at times be substantial when, in the view of the Investment
Manager, liquidity or other considerations warrant. The Fund did not enter into
any repurchase agreements during the fiscal year ended September 30, 1995, in an
amount greater than 5% of its net assets.
ZERO COUPON SECURITIES
A portion of the securities purchased by the Fund may be "zero coupon"
Treasury securities. These are U.S. Treasury bills, notes and bonds which have
been stripped of their unmatured interest coupons and receipts or which are
certificates representing interests in such stripped debt obligations and
coupons. "Zero coupon" securities are purchased at a discount from their face
amount, giving the purchaser the right to receive their full value at maturity.
A zero coupon security pays no interest to its holder during its life. Its value
to an investor consists of the difference between its face value at the time of
maturity and the price for which it was acquired, which is generally an amount
significantly less than its face value (sometimes referred to as a "deep
discount" price).
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 if
prevailing interest rates rise. For this reason, zero coupon securities are
subject to substantially greater market price fluctuations during periods of
changing prevailing interest rates than are comparable debt securities which
make current distributions of interest. 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.
Currently the only U.S. Treasury security issued without coupons is the
Treasury bill. However, in the last few years a number of banks and brokerage
firms have separated ("stripped") the principal portions from the coupon
portions of the U.S. Treasury bonds and notes and sold them separately in the
form of receipts of certificates representing undivided interests in these
instruments (which instruments are generally held by a bank in a custodial or
trust account).
WARRANTS
The Fund may invest up to 5% of its net assets in warrants, but not more
than 2% of such assets in warrants not listed on either the New York or American
Stock Exchange. However, the acquisition of warrants attached to other
securities is not subject to this limitation. For the fiscal year ended
September 30, 1995, the Fund's investments in warrants did not exceed 5% of its
net assets.
FOREIGN SECURITIES
The Fund may invest in securities of foreign companies. However, the Fund
will not invest more than 10% of the value of its total assets, at the time of
purchase, in foreign securities (other than securities of Canadian issuers
registered under the Securities Exchange Act of 1934 or American Depository
Receipts, on which there is no such limit). Investments in certain Canadian
issuers may be speculative due
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<PAGE>
to certain political risks and may be subject to substantial price fluctuations.
Foreign securities investments may be affected by changes in currency rates or
exchange control regulations, changes in governmental administration or economic
or monetary policy (in the United States and abroad) or changed circumstances in
dealings between nations. Costs may be incurred in connection with conversions
between various currencies held by the Fund.
The Fund may invest in securities of foreign companies. Dividends paid by
foreign issuers may be subject to withholding and other foreign taxes which may
decrease the net return on such investments as compared to dividends paid to the
Fund by domestic corporations. It should be noted that there may be less
publicly available information about foreign issuers than about domestic
issuers, and foreign issuers are not subject to uniform accounting, auditing and
financial reporting standards and requirements comparable to those of domestic
issuers. Securities of some foreign issuers are less liquid and more volatile
than securities of comparable domestic issuers and foreign brokerage commissions
are generally higher than in the United States. Foreign securities markets may
also be less liquid, more volatile and less subject to government supervision
than those in the United States. The Fund may be affected either unfavorably or
favorably by fluctuations in the relative rates of exchange as between the
currencies of different nations and exchange control regulations. Investments in
foreign countries could be affected by other factors not present in the United
States, including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations. Securities purchased on
foreign exchanges will be held in custody by a foreign branch of a domestic
bank. During the fiscal year ended September 30, 1995, the Fund did not purchase
any foreign securities in an amount greater than 5% of its net assets.
PORTFOLIO TURNOVER
The Fund may sell portfolio securities without regard to the length of time
they have been held whenever such sale will, in the Investment Manager's
opinion, strengthen the Fund's position and contribute to its investment
objective. As a result, the Fund's portfolio turnover rate may exceed 100%. A
100% turnover rate would occur, for example, if 100% of the securities held in
the Fund's portfolio (excluding all securities whose maturities at acquisition
were one year or less) were sold and replaced within one year. During the fiscal
year ended September 30, 1995, the Fund's portfolio turnover rate was 138%.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
In addition to the investment restrictions enumerated in the Prospectus, the
investment restrictions listed below have been adopted by the Fund as
fundamental policies, except as otherwise indicated. 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. Such a
majority is defined as the lesser of (a) 67% or more of the shares present at a
meeting of shareholders, if the holders of 50% of the outstanding shares of the
Fund are present or represented by proxy or (b) more than 50% of the outstanding
shares of the Fund.
The Fund may not:
1. Invest in securities of any issuer if, to the knowledge of the Fund,
any officer, or trustee/ director of the Fund or of the Investment Manager
owns more than 1/2 of 1% of the outstanding securities of such issuer, and
such officers and trustees/directors who own more than 1/2 of 1% own in the
aggregate more than 5% of the outstanding securities of such issuer.
2. Purchase or sell real estate or interests therein, although the Fund
may purchase securities of issuers which engage in real estate operations
and securities secured by real estate or interests therein.
3. Purchase or sell commodities except that the Fund may purchase
financial futures contracts and related options thereon.
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<PAGE>
4. Purchase oil, gas or other mineral leases, rights or royalty
contracts, or exploration or development programs, except that the Fund may
invest in the securities of companies which operate, invest in, or sponsor
such programs.
5. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
6. Pledge its assets or assign or otherwise encumber them except to
secure permitted borrowings. (For the purpose of this restriction,
collateral arrangements with respect to the writing of options and
collateral arrangements with respect to initial and variation margin for
futures are not deemed to be pledges of assets and such arrangements are not
deemed to be the issuance of a senior security as set forth in restriction
(7).)
7. Issue senior securities as defined in the Act except insofar as the
Fund may be deemed to have issued a senior security by reason of: (a)
entering into any repurchase agreement; (b) borrowing money in accordance
with restrictions described above and in the Prospectus; (c) purchasing any
securities on a when-issued or delayed delivery basis; or (d) lending
portfolio securities.
8. Make loans of money or securities, except: (a) by the purchase of
debt obligations in which the Fund may invest consistent with its investment
objectives and policies; (b) by investment in repurchase agreements; or (c)
by lending its portfolio securities.
9. Make short sales of securities or maintain a short position, unless
at all times when a short position is open it either owns an equal amount of
such securities or owns securities which, without payment of any further
consideration, are convertible into or exchangeable for securities of the
same issue as, and equal in amount to, the securities sold short.
10. Purchase securities on margin, except for such short-term loans as
are necessary for the clearance of portfolio securities. The deposit or
payment by the Fund of initial or variation margin in connection with
futures contracts or related options thereon is not considered the purchase
of a security on margin.
11. Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security.
12. Invest for the purpose of exercising control or management of any
other issuer.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of total or net assets will not be considered a
violation of any of the foregoing restrictions.
PORTFOLIO TRANSACTIONS AND BROKERAGE
- --------------------------------------------------------------------------------
The Investment Manager is responsible for decisions to buy and sell
securities and futures contracts for the Fund, the selection of brokers and
dealers to effect the transactions and the negotiation of brokerage commissions,
if any. Purchases and sales of securities on a stock exchange are effected
through brokers who charge a commission for their services. In the
over-the-counter market, securities are generally traded on a "net" basis with
dealers acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a profit to the dealer.
Option and futures transactions will usually be effected through a broker and a
commission will be charged.
The Fund also expects that securities will be purchased at times in
underwritten offerings where the price includes a fixed amount of compensation,
generally referred to as the underwriter's concession or discount. On occasion,
the Fund may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid.
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<PAGE>
The Investment Manager currently serves as investment manager to a number of
clients, including other investment companies, and may in the future act as
investment manager or adviser to others. It is the practice of the Investment
Manager to cause purchase and sale transactions to be allocated among the Fund
and others whose assets it manages in such manner as it deems equitable. In
making such allocations among the Fund and other client accounts, the main
factors considered are the respective investment objectives, the relative size
of portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held and the
opinions of the persons responsible for managing the portfolios of the Fund and
other client accounts.
The aggregate amount of brokerage commissions paid by the Fund during the
fiscal years ended September 30, 1993, 1994 and 1995 was $331,205, $401,973 and
$233,311, respectively.
The policy of the Fund regarding purchases and sales of securities and
futures contracts for its portfolio is that primary consideration will be given
to obtaining the most favorable prices and efficient execution of transactions.
In seeking to implement the Fund's policies, the Investment Manager effects
transactions with those brokers and dealers who the Investment Manager believes
provide the most favorable prices and are capable of providing efficient
executions. If the Investment Manager believes such price and execution are
obtainable from more than one broker or dealer, it may give consideration to
placing portfolio transactions with those brokers and dealers who also furnish
research and other services to the Fund or the Investment Manager. Such services
may include, but are not limited to, any one or more of the following:
information as to the availability of securities for purchase or sale;
statistical or factual information or opinions pertaining to investment; wire
services; and appraisals or evaluations of portfolio securities.
The information and services received by the Investment Manager from brokers
and dealers may be of benefit to the Investment Manager in the management of
accounts of some of its other clients and may not in all cases benefit the Fund
directly. While the receipt of such information and services is useful in
varying degrees and would generally reduce the amount of research or services
otherwise performed by the Investment Manager and thereby reduce its expenses,
it is of indeterminable value and the management fee paid to the Investment
Manager is not reduced by any amount that may be attributable to the value of
such services. During the fiscal year ended September 30, 1995, the Fund
directed payment of $194,863 in brokerage commissions in connection with
transactions in the aggregate amount of $74,017,020 to brokers because of
research services provided.
Pursuant to an order of the Securities and Exchange Commission, the Fund may
effect principal transactions in certain money market instruments with DWR. The
Fund will limit its transactions with DWR to U.S. Government and Government
Agency Securities, Bank Money Instruments (I.E., Certificates of Deposit and
Bankers' Acceptances) and Commercial Paper. Such transactions will be effected
with DWR only when the price available from DWR is better than that available
from other dealers.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may be
effected through DWR. In order for DWR to effect portfolio transactions for the
Fund, the commissions, fees or other remuneration received by DWR must be
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers in connection with comparable transactions involving similar
securities being purchased or sold on an exchange during a comparable period of
time. This standard would allow DWR to receive no more than the remuneration
which would be expected to be received by an unaffiliated broker in a
commensurate arm's-length transaction. Furthermore, the Trustees of the Fund,
including a majority of the Trustees who are not "interested" Trustees, have
adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to DWR are consistent with the
foregoing standard. During the fiscal years ended September 30, 1993, 1994 and
1995, the Fund paid a total of $20,207, $31,360 and $27,100, respectively, in
brokerage commissions to DWR. The Fund does not reduce the management fee it
pays to the Investment Manager by any amount of the brokerage commissions it may
pay to DWR. During the fiscal year ended September 30, 1995, the brokerage
commissions paid to DWR represented approximately 11.62% of the total brokerage
commissions paid
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<PAGE>
by the Fund during the year and were paid on account of transactions having an
aggregate dollar value equal to approximately 11.02% of the aggregate dollar
value of all portfolio transactions of the Fund during the year for which
commissions were paid.
THE DISTRIBUTOR
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As discussed in the Prospectus, shares of the Fund are distributed by Dean
Witter Distributors Inc. (the "Distributor"). The Distributor has entered into a
selected dealer agreement with DWR, which through its own sales organization,
sells shares of the Fund. In addition, the Distributor may enter into selected
dealer agreements with other selected broker-dealers. The Distributor, a
Delaware corporation, is a wholly-owned subsidiary of DWDC. The Trustees of the
Fund, including a majority of the Trustees who are not and were not, at the time
they voted, 'interested persons' of the Fund (as defined in the Act) at their
meeting held on October 30, 1992, approved the current Distribution Agreement
appointing the Distributor as exclusive Distributor of the Fund's shares and
providing for the Distributor to bear distribution expenses not borne by The
Fund. The current Distribution Agreement is substantively identical to the
Fund's previous distribution agreements. The Distribution Agreement took effect
on June 30, 1993 upon the spin-off by Sears, Roebuck and Co. of its remaining
shares of DWDC. By its terms, the Distribution Agreement had an initial term
ending April 30, 1994, and provides that it will remain in effect from year to
year thereafter if approved by the Board. At their meeting held on April 20,
1995, the Trustees, including all of the Independent Trustees, approved the
continuation of the Agreement until April 30, 1996.
The Distributor bears all expenses it may incur in providing services under
the Distribution Agreement. Such expenses include the payment of commissions for
sales of the Fund's shares and incentive compensation to account executives. The
Distributor also pays certain expenses in connection with the distribution of
the Fund's shares, including the costs of preparing, printing and distributing
advertising or promotional materials, and the costs of printing and distributing
prospectuses and supplements thereto to prospective shareholders. The Fund bears
the costs of registering the Fund and its shares under federal and state
securities laws. The Fund and the Distributor have agreed to indemnify each
other against certain liabilities, including liabilities under the Securities
Act of 1933, as amended. Under the Distribution Agreement, the Distributor uses
its best efforts in rendering services to the Fund, but in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations, the Distributor is not liable to the Fund or any of its
shareholders for any error of judgment or mistake of law or for any act of
omission or for any losses sustained by the Fund or its shareholders.
PLAN OF DISTRIBUTION
To compensate the Distributor for the services provided and the expenses
borne by the Distributor or any selected dealer under the Distribution
Agreement, the Fund has adopted a Plan of Distribution pursuant to Rule 12b-1
under the Act (the "Plan") pursuant to which the Fund pays the Distributor
compensation accrued daily and payable monthly at the annual rate of 1.0% of the
lesser of: (a) the average daily aggregate gross sales of the Fund's shares
since the inception of the Fund (not including reinvestment of dividends or
capital gains distributions), less the average daily aggregate net asset value
of the Fund's shares redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or waived, or (b) the Fund's average
daily net assets. The Distributor also receives the proceeds of contingent
deferred sales charges imposed on certain redemptions of shares, which are
separate and apart from payments made pursuant to the Plan. (see "Redemptions
and Repurchases -- Contingent Deferred Sales Charge" in the Prospectus). The
Distributor has informed the Fund that it and/or DWR received approximately
$76,000, $38,000 and $76,212 in contingent deferred sales charges for the fiscal
years ended September 30, 1993, 1994 and 1995, respectively, none of which was
retained by the Distributor.
The Distributor has informed the Fund that a portion of the fees payable by
the Fund each year pursuant to the Plan equal to 0.25% of the Fund's average
daily net assets is characterized as a "service fee" under the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. (of which the
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<PAGE>
Distributor is a member). Such portion of the fee is a payment made for personal
service and/or the maintenance of shareholder accounts. The remaining portion of
the Plan fees payable by the Fund is characterized as an "asset-based sales
charge" as such is defined by the aforementioned Rules of Fair Practice.
Under its terms, the Plan had an initial term ending December 31, 1985, and
provides that it will remain in effect from year to year thereafter, provided
such continuance is approved annually by a vote of the Trustees, including a
majority of the Trustees who are not "interested persons" of the Fund (as
defined in the Act) and who have no direct or indirect financial interest in the
operation of the Plan (the "Independent 12b-1 Trustees"). The Plan was submitted
to and approved by the shareholders at the Annual Meeting of Shareholders on
December 29, 1986. Continuation of the Plan was most recently approved by the
Trustees, including a majority of the Independent 12b-1 Trustees, on April 20,
1995 at a meeting called for the purpose of voting on such Plan. At that meeting
the Trustees and the Independent 12b-1 Trustees, after evaluating all the
information they deemed necessary to make an informed determination of whether
the Plan should be continued, approved the continuation of the Plan until April
30, 1996. The determination was based upon the conclusion of the Trustees that
the Plan provides an effective means of stimulating sales of shares of the Fund
and of reducing or avoiding net redemptions and the potentially adverse effects
that may occur therefrom.
At their meeting held on October 30, 1992, the Trustees of the Fund,
including all of the Independent 12b-1 Trustees, approved certain amendments to
the Plan which took effect in January, 1993 and were designed to reflect the
fact that upon the reorganization described above the share distribution
activities theretofore performed for the Fund by DWR were assumed by the
Distributor and DWR's sales activities are now being performed pursuant to the
terms of a selected dealer agreement between the Distributor and DWR. The
amendments provide that payments under the Plan will be made to the Distributor
rather than to DWR as before the amendment, and that the Distributor in turn is
authorized to make payments to DWR, its affiliates or other selected
broker-dealers (or direct that the Fund pay such entities directly). The
Distributor is also authorized to retain part of such fee as compensation for
its own distribution-related expenses. At a meeting held on April 28, 1993, the
Trustees, including a majority of the Independent 12b-1 Trustees, approved
certain technical amendments to the Plan in connection with recent amendments
adopted by the National Association of Securities Dealers, Inc. to its Rules of
Fair Practice. At a special meeting held on December 19, 1995, a majority of the
shareholders of the Fund, approved an amendment to the Plan to permit payments
to be made under the Plan with respect to certain distribution expenses incurred
in connection with the distribution of shares, including personal services to
shareholders with respect to holding of such shares, of an investment company
whose assets are acquired by the Fund in a tax-free reorganization. The
shareholders approved the Amendment in connection with the Acquisition of the
assets of TCW/DW Convertible Trust.
Under the Plan and as required by Rule 12b-1, the Trustees receive and
review promptly after the end of each calendar quarter a written report provided
by the Distributor of the amounts expended under the Plan and the purpose for
which such expenditures were made. The Fund accrued amounts payable to the
Distributor, under the Plan, during the fiscal year ended September 30, 1995, of
$1,790,824. This amount is equal to payments required to be paid monthly by the
Fund which were computed at the annual rate of 1.0% of the average daily net
assets of the Fund for the fiscal year and was calculated pursuant to clause (b)
of the compensation formula under the Plan. This amount is treated by the Fund
as an expense in the year it is accrued.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method, shares of the Fund are
sold without a sales load being deducted at the time of purchase, so that the
full amount of an investor's purchase payment will be invested in shares without
any deduction for sales charges. Shares of the Fund may be subject to a
contingent deferred sales charge, payable to the Distributor, if redeemed during
the six years after their purchase. DWR compensates its account executives by
paying them, from its own funds, commissions for the sale of the Fund's shares,
currently a gross sales credit of up to 5% of the amount sold and an annual
residual commission of up to 0.25 of 1% of the current value (not including
reinvested dividends or distributions)
27
<PAGE>
of the amount sold. The gross sales credit is a charge which reflects
commissions paid by DWR to its account executives and DWR's Fund associated
distribution-related expenses, including overhead and sales compensation. The
distribution fee that the Distributor receives from the Fund under the Plan, in
effect, offsets distribution expenses incurred under the Plan on behalf of the
Fund and DWR's opportunity costs, such as the gross sales credit and an assumed
interest charge thereon ("carrying charge"). In the Distributor's reporting of
the distribution expenses to the Fund, such assumed interest (computed at the
"broker's call rate") has been calculated on the gross sales credit as it is
reduced by amounts received by the Distributor under the Plan and any contingent
deferred sales charge received by the Distributor upon redemption of shares of
the Fund. No other interest charge is included as a distribution expense in the
Distributor's calculation of its distribution costs for this purpose. The
broker's call rate is the interest rate charged to securities brokers on loans
secured by exchange-listed securities.
The Fund paid 100% of the $1,790,824 accrued under the Plan for the fiscal
year ended September 30, 1995 to the Distributor. The Distributor and DWR
estimate that they have spent, pursuant to the Plan, $157,293,526 on behalf of
the Fund since the inception of the Fund. It is estimated that this amount was
spent in approximately the following ways: (i) 1.37% ($2,150,921) -- advertising
and promotional expenses; (ii) 0.33% ($520,019) printing of prospectuses for
distribution to other than current shareholders; and (iii) 98.30% ($154,622,580)
- -- other expenses, including the gross sales credit and the carrying charge, of
which 24.74% ($28,257,277) represents carrying charges, 31.21% ($48,256,691)
represents commission credits to DWR branch offices for payments of commissions
to account executives and 44.05% ($68,108,612) represents overhead and other
branch office distribution-related expenses. The term "overhead and other branch
office distribution-related expenses" represents (a) the expenses of operating
DWR's branch offices in connection with the sale of Fund shares, including lease
costs, the salaries and employee benefits of operations and sales support
personnel, utility costs, communications costs and the costs of stationery and
supplies, (b) the costs of client sales seminars, (c) travel expenses of mutual
fund sales coordinators to promote the sale of Fund shares and (d) other
expenses relating to branch promotion of Fund sales.
At any given time, the expenses of distributing shares of the Fund may be
more or less than the total of (i) the payments made by the Fund pursuant to the
Plan and (ii) the proceeds of contingent deferred sales charges paid by
investors upon redemption of shares. The Distributor has advised the Fund that
the excess expenses, including the carrying charge designed to approximate the
opportunity costs incurred by DWR which arise from it having advanced monies
without having received the amount of any sales charges imposed at the time of
sale of the Fund's shares, totalled $66,747,020 as of September 30, 1995.
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, this excess amount does not constitute a liability
of the Fund. Although there is no legal obligation for the Fund to pay expenses
incurred in excess of payments made to the Distributor under the Plan and the
proceeds of contingent deferred sales charges paid by investors upon redemption
of shares, if for any reason the Plan is terminated, the 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.
No interested person of the Fund nor any Trustee of the Fund who is not an
interested person of the Fund, as defined in the Act, has any direct financial
interest in the operation of the Plan except to the extent that the Distributor,
InterCapital, DWSC and DWR or certain of their employees may be deemed to have
such an interest as a result of benefits derived from the successful operation
of the Plan or as a result of receiving a portion of the amounts expended
thereunder by the Fund.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of the
Fund, and all material amendments to the Plan must also be approved by the
Trustees in the manner described above. The Plan may be terminated at any time,
without payment of any penalty, by vote of a majority of the Independent 12b-1
Trustees or by a vote of a majority of the outstanding voting securities of the
Fund (as defined in the Act)
28
<PAGE>
on not more than thirty days' written notice to any other party to the Plan. So
long as the Plan is in effect, the election and nomination of Independent 12b-1
Trustees shall be committed to the discretion of the Independent 12b-1 Trustees.
DETERMINATION OF NET ASSET VALUE
As stated in the Prospectus, short-term securities with remaining maturities
of sixty days or less at the time of purchase are valued at amortized cost,
unless the 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 sixty
days, whereupon they will be valued at amortized cost using their value on the
61st day unless the Trustees determine such does not reflect the securities'
market value, in which case these securities will be valued at their fair value
as determined by the Trustees. Listed options on debt securities are valued at
the latest sale price on the exchange on which they are listed unless no sales
of such options have taken place that day, in which case they will be valued at
the mean between their latest bid and asked prices. Unlisted options on debt
securities and all options on equity securities are valued at the mean between
their latest bid and asked prices. Futures are valued at the latest sale price
on the commodities exchange on which they trade unless the Trustees determine
such price does not reflect their market value, in which case they 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.
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 and on each other day in which there is a sufficient degree of trading
in the Fund's investments to affect the net asset value, except that the net
asset value may not be computed on a day on which no orders to purchase, or
tenders to sell or redeem, Fund shares have been received, by taking the value
of all assets of the Fund, subtracting its liabilities, dividing by the number
of shares outstanding and adjusting to the nearest cent. The New York Stock
Exchange currently observes the following holidays: New Year's Day; President's
Day; Good Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day;
and Christmas Day.
SHAREHOLDER SERVICES
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Upon the purchase of shares of the Fund, a Shareholder Investment Account is
opened for the investor on the books of the Fund and maintained by the Fund's
Transfer Agent, Dean Witter Trust Company (the "Transfer Agent"). This is an
open account in which shares owned by the investor are credited by the Transfer
Agent in lieu of issuance of a share certificate. If a share certificate is
desired, it must be requested in writing for each transaction. Certificates are
issued only for full shares and may be redeposited in the account at any time.
There is no charge to the investor for issuance of a certificate. Whenever a
shareholder instituted transaction takes place in the Shareholder Investment
Account, the shareholder will be mailed a confirmation of the transaction from
the Fund or from DWR or other selected broker-dealer.
AUTOMATIC INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. As stated in the
Prospectus, all income dividends and capital gains distributions are
automatically paid in full and fractional shares of the Fund, unless the
shareholder requests that they be paid in cash. Each purchase of shares of the
Fund is made upon the condition that the Transfer Agent is thereby automatically
appointed as agent of the investor to receive all dividends and capital gains
distributions on shares owned by the investor. Such dividends and distributions
will be paid, at the net asset value per share, in shares of the Fund (or in
cash if the shareholder so requests) as of the close of business on the record
date. At any time an investor may request the Transfer Agent, in writing, to
have subsequent dividends and/or capital gains distributions paid to him or her
in cash rather than shares. To assure sufficient time to process the change,
such request should be received by the Transfer Agent at least five business
days prior to the record date of
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<PAGE>
the dividend or distribution. In the case of recently purchased shares for which
registration instructions have not been received on the record date, cash
payments will be made to DWR or other selected broker-dealer, and will be
forwarded to the shareholder, upon the receipt of proper instructions.
TARGETED DIVIDENDS.-SM- In states where it is legally permissible,
shareholders may also have all income dividends and capital gains distributions
automatically invested in shares of an open-end Dean Witter Fund other than Dean
Witter Convertible Securities Trust. Such investment will be made as described
above for automatic investment in shares of the Fund, at the net asset value per
share of the selected Dean Witter Fund as of the close of business on the
payment date of the dividend or distribution and will begin to earn dividends,
if any, in the selected Dean Witter Fund the next business day. To participate
in the Targeted Dividends program, shareholders should contact their DWR or
other selected broker-dealer account executive or the Transfer Agent.
Shareholders of the Fund must be shareholders of the Dean Witter Fund targeted
to receive investments from dividends at the time they enter the Targeted
Dividends program. Investors should review the prospectus of the targeted Dean
Witter Fund before entering the program.
EASYINVEST.-SM- Shareholders may subscribe to EasyInvest, an automatic
purchase plan which provides for any amount from $100 to $5,000 to be
transferred automatically from a checking or savings account, on a semi-monthly,
monthly or quarterly basis, to the Transfer Agent for investment in shares of
the Fund. Shares purchased through EasyInvest will be added to the shareholder's
existing account at the net asset value calculated the same business day the
transfer of funds is effected. For further information or to subscribe to
EasyInvest, shareholders should contact their DWR or other selected
broker-dealer account executive or the Transfer Agent.
INVESTMENT OF DIVIDENDS OR DISTRIBUTIONS RECEIVED IN CASH. Any shareholder
who receives a cash payment representing a dividend or distribution may invest
such dividend or distribution at the net asset value, without the imposition of
a contingent deferred sales charge upon redemption, by returning the check or
the proceeds to the Transfer Agent within thirty days after the payment date. If
the shareholder returns the proceeds of a dividend or distribution, such funds
must be accompanied by a signed statement indicating that the proceeds
constitute a dividend or distribution to be invested. Such investment will be
made at the net asset value per share next determined after receipt of the
proceeds by the Transfer Agent.
SYSTEMATIC WITHDRAWAL PLAN. As discussed in the Prospectus, a systematic
withdrawal plan (the "Withdrawal Plan") is available for shareholders who own or
purchase shares of the Fund having a minimum value of $10,000 based upon the
then current net asset value. The Withdrawal Plan provides for monthly or
quarterly (March, June, September and December) checks in any dollar amount, not
less than $25, or in any whole percentage of the account balance, on an
annualized basis. Any applicable contingent deferred sales charge will be
imposed on shares redeemed under the Withdrawal Plan (see "Redemptions and
Repurchases--Contingent Deferred Sales Charge"). Therefore, any shareholder
participating in the Withdrawal Plan will have sufficient shares redeemed from
his or her account so that the proceeds (net of any applicable contingent
deferred sales charge) to the shareholder will be the designated monthly or
quarterly amount.
The Transfer Agent acts as agent for the shareholder in tendering to the
Fund for redemption sufficient full and fractional shares to provide the amount
of the periodic withdrawal payment designated in the application. The shares
will be redeemed at their net asset value determined, at the shareholder's
option, on the tenth or twenty-fifth day (or next following business day) of the
relevant month or quarter and normally a check for the proceeds will be mailed
by the Transfer Agent, or amounts credited to a shareholder's DWR or other
selected broker-dealer brokerage account, within five business days after the
date of redemption. The Withdrawal Plan may be terminated at any time by the
Fund.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted.
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<PAGE>
Each withdrawal constitutes a redemption of shares and any gain or loss
realized must be recognized for federal income tax purposes. Although the
shareholder may make additional investments of $2,500 or more under the
Withdrawal Plan, withdrawals made concurrently with purchases of additional
shares may be inadvisable because of the contingent deferred sales charge
applicable to the redemption of shares purchased during the preceding six years
(see "Redemption and Repurchases -- Contingent Deferred Sales Charge").
Any shareholder who wishes to have payments under the Withdrawal Plan made
to a third party or sent to an address other than the one listed on the account
must send complete written instructions to the Transfer Agent to enroll in the
Withdrawal Plan. The shareholder's signature on such instructions must be
guaranteed by an eligible guarantor acceptable to the Transfer Agent
(shareholders should contact the Transfer Agent for a determination as to
whether a particular institution is such an eligible guarantor). A shareholder
may, at any time, change the amount and interval of withdrawal payments through
his or her account executive or by written notification to the Transfer Agent.
In addition, the party and/or the address to which checks are mailed may be
changed by written notification to the Transfer Agent, with signature guarantees
required in the manner described above. The shareholder may also terminate the
Withdrawal Plan at any time by written notice to the Transfer Agent. In the
event of such termination, the account will be continued as a regular
shareholder investment account. The shareholder may also redeem all or part of
the shares held in the Withdrawal Plan account (see "Redemptions and
Repurchases" in the Prospectus) at any time. Shareholders wishing to enroll in
the Withdrawal Plan should contact their account executive or the Transfer
Agent.
DIRECT INVESTMENTS THROUGH TRANSFER AGENT. As discussed in the Prospectus,
a shareholder may make additional investments in Fund shares at any time by
sending a check in any amount, not less than $100, payable to Dean Witter
Convertible Securities Trust, directly to the Fund's Transfer Agent. Such
amounts will be applied to the purchase of Fund shares at the net asset value
per share next determined after receipt of the check or purchase payment by the
Transfer Agent. The shares so purchased will be credited to the investor's
account.
TAX-SHELTERED RETIREMENT PLANS. Retirement plans are available for use by
corporations, the self-employed, Individual Retirement Accounts and Custodial
Accounts under Section 403(b)(7) of the Internal Revenue Code. Adoption of such
plans should be on advice of legal counsel or tax adviser.
For further information regarding plan administration, custodial fees and
other details, investors should contact their DWR or other selected
broker-dealer account executive or the Transfer Agent.
EXCHANGE PRIVILEGE
As discussed in the Prospectus, the Fund makes available to its shareholders
an Exchange Privilege whereby shareholders of the Fund may exchange their shares
for shares of other Dean Witter Funds sold with a contingent deferred sales
charge ("CDSC funds"), and for shares of Dean Witter Short-Term U.S. Treasury
Trust, Dean Witter Limited Term Municipal Trust, Dean Witter Short-Term Bond
Fund, Dean Witter Balanced Growth Fund, Dean Witter Balanced Income Fund, Dean
Witter Intermediate Term U.S. Treasury Trust and five Dean Witter Funds which
are money market funds (the foregoing eleven non-CDSC funds are hereinafter
referred to as the "Exchange Funds"). Exchanges may be made after the shares of
the Fund acquired by purchase (not by exchange or dividend reinvestment) have
been held for thirty days. There is no waiting period for exchanges of shares
acquired by exchange or dividend reinvestment. An exchange will be treated for
federal income tax purposes the same as a repurchase or redemption of shares, on
which the shareholder may realize a capital gain or loss.
Any new account established through the Exchange Privilege will have the
same registration and cash dividend or dividend reinvestment plan as the present
account, unless the Transfer Agent receives written notification to the
contrary. For telephone exchanges, the exact registration of the existing
account and the account number must be provided.
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<PAGE>
Any shares held in certificate form cannot be exchanged but must be
forwarded to the Transfer Agent and deposited into the shareholder's account
before being eligible for exchange. (Certificates mailed in for deposit should
not be endorsed.)
As described below, and in the Prospectus under the captions "Exchange
Privilege" and "Contingent Deferred Sales Charge", a contingent deferred sales
charge ("CDSC") may be imposed upon a redemption, depending on a number of
factors, including the number of years from the time of purchase until the time
of redemption or exchange ("holding period"). When shares of the Fund or any
other CDSC fund are exchanged for shares of an Exchange Fund, the exchange is
executed at no charge to the shareholder, without the imposition of the CDSC at
the time of the exchange. During the period of time the shareholder remains in
the Exchange Fund (calculated from the last day of the month in which the
Exchange Fund shares were acquired), the holding period or "year since purchase
payment made" is frozen. When shares are redeemed out of the Exchange Fund, they
will be subject to a CDSC which would be based upon the period of time the
shareholder held shares in a CDSC fund. However, in the case of shares exchanged
into an Exchange Fund on or after April 23, 1990, upon a redemption of shares
which results in a CDSC being imposed, a credit (not to exceed the amount of the
CDSC) will be given in an amount equal to the Exchange Fund 12b-1 distribution
fees incurred on or after that date which are attributable to those shares.
Shareholders acquiring shares of an Exchange Fund pursuant to this exchange
privilege may exchange those shares back into a CDSC fund from the Exchange
Fund, with no charge being imposed on such exchange. The holding period
previously frozen when shares were first exchanged for shares of the Exchange
Fund resumes on the last day of the month in which shares of a CDSC fund are
reacquired. A CDSC is imposed only upon an ultimate redemption, based upon the
time (calculated as described above) the shareholder was invested in a CDSC
fund.
In addition, shares of the Fund may be acquired in exchange for shares of
Dean Witter Funds sold with a front-end sales charge ("front-end sales charge
funds") but shares of the Fund, however acquired, may not be exchanged for
shares of front-end sales charge funds. Shares of a CDSC fund acquired in
exchange for shares of a front-end sales charge fund (or in exchange for shares
of other Dean Witter Funds for which shares of a front-end sales charge fund
have been exchanged) are not subject to any CDSC upon their redemption.
When shares initially purchased in a CDSC fund are exchanged for shares of
another CDSC fund, or for shares of an Exchange Fund, the date of purchase of
the shares of the fund exchanged into, for purposes of the CDSC upon redemption,
will be the last day of the month in which the shares being exchanged were
originally purchased. In allocating the purchase payments between funds for
purposes of the CDSC the amount which represents the current net asset value of
shares at the time of the exchange which were (i) purchased more than three or
six years (depending on the CDSC schedule applicable to the shares) prior to the
exchange, (ii) originally acquired through reinvestment of dividends or
distributions and (iii) acquired in exchange for shares of front-end sales
charge funds, or for shares of other Dean Witter Funds for which shares of
front-end sales charge funds have been exchanged (all such shares called "Free
Shares"), will be exchanged first. Shares of Dean Witter American Value Fund
acquired prior to April 30, 1984, shares of Dean Witter Dividend Growth
Securities Inc. and Dean Witter Natural Resource Development Securities Inc.
acquired prior to July 2, 1984, and shares of Dean Witter Strategist Fund
acquired prior to November 8, 1989, are also considered Free Shares and will be
the first Free Shares to be exchanged. After an exchange, all dividends earned
on shares in an Exchange Fund will be considered Free Shares. If the exchanged
amount exceeds the value of such Free Shares, an exchange is made, on a
block-by-block basis, of non-Free Shares held for the longest period of time
(except that if shares held for identical periods of time but subject to
different CDSC schedules are held in the same Exchange Privilege account, the
shares of that block which are subject to a lower CDSC rate will be exchanged
prior to the shares of that block that are subject to a higher CDSC rate).
Shares equal to any appreciation in the value of non-Free Shares exchanged will
be treated as Free Shares, and the amount of the purchase payments for the
non-Free Shares of the fund exchanged into will be equal to the lesser of (a)
the purchase payments for, or (b) the current net asset value of, the exchanged
non-Free Shares. If an exchange between funds would result in exchange of only
part of a particular block of non-
32
<PAGE>
Free Shares, then shares equal to any appreciation in the value of the block (up
to the amount of the exchange) will be treated as Free Shares and exchanged
first, and the purchase payment for that block will be allocated on a pro rata
basis between the non-Free Shares of that block to be retained and the non-Free
Shares to be exchanged. The prorated amount of such purchase payment
attributable to the retained non-Free Shares will remain as the purchase payment
for such shares, and the amount of purchase payment for the exchanged non-Free
Shares will be equal to the lesser of (a) the prorated amount of the purchase
payment for, or (b) the current net asset value of, those exchanged non-Free
Shares. Based upon the procedures described in the Prospectus under the caption
"Contingent Deferred Sales Charge", any applicable CDSC will be imposed upon the
ultimate redemption of shares of any fund, regardless of the number of exchanges
since those shares were originally purchased.
With respect to the redemption or repurchase of shares of the Fund, the
application of proceeds to the purchase of new shares in the Fund or any other
of the funds and the general administration of the Exchange Privilege, the
Transfer Agent acts as agent for the Distributor and for the shareholder's
selected broker-dealer, if any, in the performance of such functions. The
Transfer Agent shall be liable for its own negligence and not for the default or
negligence of its correspondents or for losses in transit. The Fund shall not be
liable for any default or negligence of the Transfer Agent, the Distributor or
any selected broker-dealer.
The Distributor and any selected broker-dealer have authorized and appointed
the Transfer Agent to act as their agent in connection with the application of
proceeds of any redemption of Fund shares to the purchase of shares of any other
fund and the general administration of the Exchange Privilege. No commission or
discounts will be paid to the Distributor or any selected broker-dealer for any
transactions pursuant to this Exchange Privilege.
Exchanges are subject to the minimum investment requirement and any other
conditions imposed by each fund. (The minimum initial investment is $5,000 for
Dean Witter Liquid Asset Fund Inc., Dean Witter Tax-Free Daily Income Trust,
Dean Witter California Tax-Free Daily Income Trust and Dean Witter New York
Municipal Money Market Trust, although those funds may, at their discretion,
accept initial investments of as low as $1,000. The minimum investment for Dean
Witter Short-Term U.S. Treasury Trust is $10,000, although that fund, in its
discretion, may accept initial purchases as low as $5,000. The minimum initial
investment for all other Dean Witter Funds for which the Exchange Privilege is
available is $1,000.) Upon exchange into an Exchange Fund, the shares of that
fund will be held in a special Exchange Privilege Account separately from
accounts of those shareholders who have acquired their shares directly from that
fund. As a result, certain services normally available to shareholders of those
funds, including the check writing feature, will not be available for funds held
in that account.
The Fund and each of the other Dean Witter Funds may limit the number of
times this Exchange Privilege may be exercised by any investor within a
specified period of time. Also, the Exchange Privilege may be terminated or
revised at any time by the Fund and/or any of the Dean Witter Funds for which
shares of the Fund have been exchanged, upon such notice as may be required by
applicable regulatory agencies (presently sixty days prior written notice for
termination or material revision), provided that six months prior written notice
of termination will be given to the shareholders who hold shares of Exchange
Funds pursuant to this Exchange Privilege and provided further that the Exchange
Privilege may be terminated or materially revised without notice at times (a)
when the New York Stock Exchange is closed for other than customary weekends and
holidays, (b) when trading on that Exchange is restricted, (c) when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, (d) during any other period
when the Securities and Exchange Commission by order so permits (provided that
applicable rules and regulations of the Securities and Exchange Commission shall
govern as to whether the conditions prescribed in (b) or (c) exist) or (e) if
the Fund would be unable to invest amounts effectively in accordance with its
investment objectives, policies and restrictions.
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. An exchange will be treated
33
<PAGE>
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.
For further information regarding the Exchange Privilege, shareholders
should contact their DWR or other selected broker-dealer account executive or
the Transfer Agent.
REDEMPTIONS AND REPURCHASES
- --------------------------------------------------------------------------------
REDEMPTION. As stated in the Prospectus, shares of the Fund can be redeemed
for cash at any time at the net asset value per share next determined; however,
such redemption proceeds may be reduced by the amount of any applicable
contingent deferred sales charges (see below). If shares are held in a
shareholder's account without a share certificate, a written request for
redemption to the Fund's Transfer Agent at P.O. Box 983, Jersey City, NJ 07303
is required. If certificates are held by the shareholder, the shares may be
redeemed by surrendering the certificates with a written request for redemption.
The share certificate, or an accompanying stock power, and the request for
redemption, must be signed by the shareholder or shareholders exactly as the
shares are registered. Each request for redemption, whether or not accompanied
by a share certificate, must be sent to the Fund's Transfer Agent, which will
redeem the shares at their net asset value next computed (see "Purchase of Fund
Shares" in the Prospectus) after it receives the request, and certificate, if
any, in good order. Any redemption request received after such computation will
be redeemed at the next determined net asset value. The term "good order" means
that the share certificate, if any, and request for redemption are properly
signed, accompanied by any documentation required by the Transfer Agent, and
bear signature guarantees when required by the Fund or the Transfer Agent. If
redemption is requested by a corporation, partnership, trust or fiduciary, the
Transfer Agent may require that written evidence of authority acceptable to the
Transfer Agent be submitted before such request is accepted.
Whether certificates are held by the shareholder or shares are held in a
shareholder's account, if the proceeds are to be paid to any person other than
the record owner, or if the proceeds are to be paid to a corporation (other than
the Distributor or a selected broker-dealer for the account of the shareholder),
partnership, trust or fiduciary, or sent to the shareholder at an address other
than the registered address, signatures must be guaranteed by an eligible
guarantor acceptable to the Transfer Agent (shareholders should contact the
Transfer Agent for a determination as to whether a particular institution is
such an eligible guarantor). A stock power may be obtained from any dealer or
commercial bank. The Fund may change the signature guarantee requirements from
time to time upon notice to shareholders, which may be by means of a new
prospectus.
CONTINGENT DEFERRED SALES CHARGE. As stated in the Prospectus, a contingent
deferred sales charge ("CDSC") will be imposed on any redemption by an investor
if after such redemption the current value of the investor's shares of the Fund
is less than the dollar amount of all payments by the shareholder for the
purchase of Fund shares during the preceding six years. However, no CDSC will be
imposed to the extent that the net asset value of the shares redeemed does not
exceed: (a) the current net asset value of shares purchased more than six years
prior to the redemption, plus (b) the current net asset value of shares
purchased through reinvestment of dividends or distributions of the Fund or
another Dean Witter Fund (see "Shareholder Services -- Targeted Dividends"),
plus (c) the current net asset value of shares acquired in exchange for (i)
shares of Dean Witter front-end sales charge funds, or (ii) shares of other Dean
Witter Funds for which shares of front-end sales charge funds have been
exchanged (see "Shareholder Services -- Exchange Privilege"), plus (d) increases
in the net asset value of the investor's shares above the total amount of
payments for the purchase of Fund shares made during the preceding six years.
The CDSC will be paid to the Distributor. In addition, no CDSC will be imposed
on redemptions of shares which are attributable to reinvestment of dividends or
distributions from, or the proceeds of, certain Unit Investment Trusts.
34
<PAGE>
In determining the applicability of the CDSC to each redemption, the amount
which represents an increase in the net asset value of the investor's shares
above the amount of the total payments for the purchase of shares within the
last six years will be redeemed first. In the event the redemption amount
exceeds such increase in value, the next portion of the amount redeemed will be
the amount which represents the net asset value of the investor's shares
purchased more than six years prior to the redemption and/or shares purchased
through reinvestment of dividends or distributions and/or shares acquired in
exchange for shares of Dean Witter front-end sales charge funds, or for shares
of other Dean Witter funds for which shares of front-end sales charge funds have
been exchanged. A portion of the amount redeemed which exceeds an amount which
represents both such increase in value and the value of shares purchased more
than six years prior to the redemption and/or shares purchased through
reinvestment of dividends or distributions and/or shares acquired in the
above-described exchanges will be subject to a CDSC.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Fund shares until the time of
redemption of such shares. For purposes of determining the number of years from
the time of any payment for the purchase of shares, all payments made during a
month will be aggregated and deemed to have been made on the last day of the
month. The following table sets forth the rates of the CDSC:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR SINCE SALES CHARGE
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>
In determining the rate of the CDSC it will be assumed that a redemption is
made of shares held by the investor for the longest period of time within the
applicable six-year period. This will result in any such CDSC being imposed at
the lowest possible rate. Accordingly, shareholders may redeem, without
incurring any CDSC, amounts equal to any net increase in the value of their
shares above the amount of their purchase payments made within the past six
years and amounts equal to the current value of shares purchased more than six
years prior to the redemption and shares purchased through reinvestment of
dividends or distributions or acquired in exchange for shares of Dean Witter
front-end sales charge funds, or for shares of other Dean Witter Funds for which
shares of front-end sales charge funds have been exchanged. The CDSC will be
imposed, in accordance with the table shown above, on any redemptions within six
years of purchase which are in excess of these amounts and which redemptions are
not (a) requested within one year of death or initial determination of
disability of a shareholder, or (b) made pursuant to certain taxable
distributions from retirement plans or retirement accounts, as described in the
Prospectus.
PAYMENT FOR SHARES REDEEMED OR REPURCHASED. As discussed in the Prospectus,
payment for shares presented for repurchase or redemption will be made by check
within seven days after receipt by the Transfer Agent of the certificate and/or
written request in good order. The term good order means that the share
certificate, if any, and request for redemption are properly signed, accompanied
by any documentation required by the Transfer Agent, and bear signature
guarantees when required by the Fund or the Transfer Agent. Such payment may be
postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on that Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the Securities
and Exchange Commission by order so permits; provided that applicable rules and
35
<PAGE>
regulations of the Securities and Exchange Commission shall govern as to whether
the conditions prescribed in (b) or (c) exist. If the shares to be redeemed have
recently been purchased by check (including a certified or bank cashier's
check), payment of redemption proceeds may be delayed for the minimum time
needed to verify that the check used for investment has been honored (not more
than fifteen days from the time of investment of the check by the Transfer
Agent). Shareholders maintaining margin accounts with DWR or another selected
broker-dealer are referred to their account executive regarding restrictions on
redemption of shares of the Fund pledged in the margin account.
TRANSFERS OF SHARES. In the event a shareholder requests a transfer of
shares to a new registration, such shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the contingent deferred sales charge or free of such charge
(and with regard to the length of time shares subject to the charge have been
held), any transfer involving less than all of the shares in an account will be
made on a pro-rata basis (that is, by transferring shares in the same proportion
that the transferred shares bear to the total shares in the account immediately
prior to the transfer). The transferred shares will continue to be subject to
any applicable contingent deferred sales charge as if they had not been so
transferred.
REINSTATEMENT PRIVILEGE. As discussed in the Prospectus, a shareholder who
has had his or her shares redeemed or repurchased and has not previously
exercised this reinstatement privilege may within thirty days after the date of
redemption or repurchase reinstate any portion or all of the proceeds of such
redemption or repurchase in shares of the Fund at the net asset value next
determined after the reinstatement request, together with such proceeds, is
received by the Transfer Agent.
Exercise of the reinstatement privilege will not affect the federal income
tax treatment of any gain or loss realized upon redemption or repurchase, except
that if the redemption or repurchase resulted in a loss and reinstatement is
made in shares of the Fund, some or all of the loss, depending on the amount
reinstated, will not be allowed as a deduction for federal income tax purposes
but will be applied to adjust the cost basis of the shares acquired upon
reinstatement.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
As discussed in the Prospectus, the Fund will determine either to distribute
or to retain all or part of any net long-term capital gains in any year for
reinvestment. If any such gains are retained, the Fund will pay federal income
tax thereon, and will notify shareholders that following an election by the
Fund, the shareholders will be required to include such undistributed gains in
determining their taxable income and may claim their share of the tax paid by
the Fund as a credit against their individual federal income tax.
Because the Fund intends to distribute all of its net investment income and
capital gains to shareholders and otherwise continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code, it is not
expected that the Fund will be required to pay any federal income tax.
Shareholders 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 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 in the last calendar
quarter of any year to shareholder of record for that period which are paid in
the following calendar year prior to February 1 will be deemed received by the
shareholder in the prior calendar year.
Gains or losses on the sales of securities by the Fund will be long-term
capital gains or losses if the securities have been held by the Fund for more
than twelve months. Gains or losses on the sale of securities held for twelve
months or less will be short-term capital gains or losses.
36
<PAGE>
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.
The Fund has qualified and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986 (the
"Code"). If so qualified, the Fund will not be subject to federal income tax on
its net investment income and net short-term capital gains, if any, realized
during any fiscal year in which it distributes such income and capital gains to
its shareholders.
Any dividend or capital gains distribution received by a shareholder from
any investment company will have the effect of reducing the net asset value of
the shareholder's stock in that company by the exact amount of the dividend or
capital gains distribution. Furthermore, capital gains distributions and
dividends are subject to federal income taxes. If the net asset value of the
shares should be reduced below a shareholder's cost as a result of the payment
of dividends or the distribution of realized long-term capital gains, such
payment or distribution would be in part a return of the shareholder's
investment to the extent of such reduction below the shareholder's cost, but
nonetheless would be fully taxable at either ordinary or capital gain rates.
Therefore, an investor should consider the tax implications of purchasing Fund
shares immediately prior to a dividend or distribution record date.
Dividend payments will be eligible for the federal dividends received
deduction available to the Fund's corporate shareholders only to the extent the
aggregate dividends received by the Fund would be eligible for the deduction if
the Fund were the shareholder claiming the dividends received deduction. The
amount of dividends paid by the Fund which may qualify for the dividends
received deduction is limited to the aggregate amount of qualifying dividends
which the Fund derives from its portfolio investments which the Fund has held to
a minimum period, usually 46 days. Any distributions made by the Fund will not
be eligible for the dividends received deduction with respect to shares which
are held by the shareholder for 45 days or less. Any long-term capital gain
distributions will also not be eligible for the dividends received deduction.
The ability to take the dividends received deduction will also be limited in the
case of a Fund shareholder which incurs or continues indebtedness which is
directly attributable to its investment in the Fund.
After the end of the year, shareholders will be sent full information on
their dividends and capital gains distributions for tax purposes, including
information as to the portion taxable as ordinary income, the portion taxable as
long-term capital gains and the portion eligible for the dividends received
deduction. 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 are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, state or local taxes.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
As discussed in the Prospectus, from time to time the Fund may quote its
"yield" and/or its "total return" in advertisements and sales literature. Yield
is calculated for any 30-day period as follows: the amount of interest and/or
dividend income for each security in the Fund's portfolio is determined in
accordance with regulatory requirements; the total for the entIre portfolio
constitutes the Fund's gross income for the period. Expenses accrued during the
period are subtracted to arrive at "net investment income". The resulting amount
is divided by the product of the net asset value per share on the last day of
the period multiplied by the average number of Fund shares outstanding during
the period that were entitled to dividends. This amount is added to 1 and raised
to the sixth power. 1 is then subtracted from the result and the difference is
multiplied by 2 to arrive at the annualized yield. For the 30-day period ended
September 30, 1995, the Fund's yield, calculated pursuant to the formula
described above, was 5.7%.
37
<PAGE>
The Fund's "average annual total return" represents an annualization of the
Fund's total return over a particular period and is computed by finding the
annual percentage rate which will result in the ending redeemable value of a
hypothetical $1,000 investment made at the beginning of a one, five or ten year
period, or for the period from the date of commencement of the Fund's
operations, if shorter than any of the foregoing. The ending redeemable value is
reduced by any contingent deferred sales charge at the end of the one, five or
ten year or other period. For the purpose of this calculation, it is assumed
that all dividends and distributions are reinvested. The formula for computing
the average annual total return involves a percentage obtained by dividing the
ending redeemable value by the amount of the initial investment, taking a root
of the quotient (where the root is equivalent to the number of years in the
period) and subtracting 1 from the result. The average annual total return of
the Fund for the fiscal year ended September 30, 1995, for the five years ended
September 30, 1995 and for the period from October 31, 1985 (commencement of
operations) through September 30, 1995 was 8.68%, 12.83% and 7.86%,
respectively.
In addition to the foregoing, the Fund may advertise its total return over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. Such calculations may or may not reflect the
deduction of the contingent deferred sales charge which, if reflected, would
reduce the performance quoted. For example, the average annual total return of
the Fund may be calculated in the manner described above, but without deduction
for any applicable contingent deferred sales charge. Based on this calculation,
the average annual total return of the Fund for the fiscal year ended September
30, 1995, for the five years ended September 30, 1995 and for the period from
October 31, 1985 through September 30, 1995 was 13.68%, 13.08% and 7.86%,
respectively.
In addition, the Fund may compute its aggregate total return for specified
periods by determining the aggregate percentage rate which will result in the
ending value of a hypothetical $1,000 investment made at the beginning of the
period. For the purpose of this calculation, it is assumed that all dividends
and distributions are reinvested. The formula for computing aggregate total
return involves a percentage obtained by dividing the ending value (without the
reduction for any contingent deferred sales charge) by the initial $1,000
investment and subtracting 1 from the result. Based on the foregoing
calculation, the Fund's total return for the fiscal year ended September 30,
1995, for the five years ended September 30, 1995 and for the period from
October 31, 1985 through September 30, 1995 was 13.68%, 84.90% and 111.68%,
respectively.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in shares of the Fund by adding 1 to the Fund's
aggregate total return to date (expressed as a decimal and without taking into
account the extent of any applicable contingent deferred sales charge) and
multiplying by $10,000, $50,000 or $100,000, as the case may be. Investments of
$10,000, $50,000 or $100,000 in the Fund at inception would have grown to
$21,168, $105,840 and $211,680, respectively, at September 30, 1995.
The Fund may advertise, from time to time, its performance relative to
certain performance rankings and indices compiled by independent organizations.
DESCRIPTION OF SHARES OF THE FUND
- --------------------------------------------------------------------------------
As discussed in the Prospectus, the shareholders of the Fund are entitled to
a full vote for each full share held. The Trustees have been elected by the
shareholders of the Fund, most recently at a Special Meeting of Shareholders
held on January 12, 1993. Messrs. Bozic, Purcell and Schroeder were elected by
the other Trustees of the Fund on April 8, 1994. The Trustees themselves have
the power to alter the number and the terms of office of the Trustees, and they
may at any time lengthen or shorten their own terms or make their terms of
unlimited duration and appoint their own successors, provided that always at
least a majority of the Trustees has been elected by the shareholders of the
Fund. Under certain circumstances, the Trustees may be removed by action of the
Trustees. The shareholders also have the right, under certain circumstances, to
remove the Trustees. The voting rights of shareholders are not
38
<PAGE>
cumulative, so that holders of more than 50 percent of the shares voting can, if
they choose, elect all Trustees being selected, while the holders of the
remaining shares would be unable to elect any Trustees.
The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios) and additional classes of shares
within any series (which would be used to distinguish among the rights of
different categories of shareholders, as might be required by future regulations
or other unforeseen circumstances). However, the Trustees have not authorized
any such additional series or classes of shares.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may a rise from his/her
or its own bad faith, willful misfeasance, gross negligence, or reckless
disregard of his duties. It also provides that all third persons shall look
solely to the Fund property for satisfaction of claims arising in connection
with the affairs of the Fund. With the exceptions stated, the Declaration of
Trust provides that a Trustee, officer, employee or agent is entitled to be
indemnified against all liability in connection with the affairs of the Fund.
The Fund is authorized to issue an unlimited number of shares of beneficial
interest. The Trust shall be of unlimited duration, subject to the provisions in
the Declaration of Trust concerning termination by action of the shareholders or
the Trustees.
CUSTODIAN AND TRANSFER AGENT
- --------------------------------------------------------------------------------
The Bank of New York, 90 Washington Street, New York, New York 10286 is the
Custodian of the Fund's assets. Any of the Fund's cash balances with the
Custodian in excess of $100,000 are unprotected by federal deposit insurance.
Such balances may, at times, be substantial.
Dean Witter Trust Company, Harborside Financial Center, Plaza Two, Jersey
City, New Jersey 07311 is the Transfer Agent of the Fund's shares and Dividend
Disbursing Agent for payment of dividends and distributions on Fund shares and
Agent for shareholders under various investment plans described herein. Dean
Witter Trust Company is an affiliate of Dean Witter InterCapital Inc., the
Fund's Investment Manager and Dean Witter Distributors Inc., the Fund's
Distributor. As Transfer Agent and Dividend Disbursing Agent, Dean Witter Trust
Company's responsibilities include maintaining shareholder accounts; including
providing subaccounting and recordkeeping services for certain retirement
accounts; disbursing cash dividends and reinvesting dividends; processing
account registration changes; handling purchase and redemption transactions;
mailing prospectuses and reports; mailing and tabulating proxies; processing
share certificate transactions; and maintaining shareholder records and lists.
For these services Dean Witter Trust Company receives a per shareholder account
fee from the Fund.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
Price Waterhouse LLP serves as the independent accountants of the Fund. The
independent accountants are responsible for auditing the annual financial
statements of the Fund.
REPORTS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports showing
the Fund's portfolio and other information. An annual report, containing
financial statements audited by independent accountants, will be sent to
shareholders each year.
39
<PAGE>
The Fund's fiscal year ends on September 30. The financial statements of the
Fund must be audited at least once a year by independent accountants whose
selection is made annually by the Fund's Trustees.
LEGAL COUNSEL
- --------------------------------------------------------------------------------
Sheldon Curtis, Esq., who is an officer and the General Counsel of the
Investment Manager, is an officer and the General Counsel of the Fund.
EXPERTS
- --------------------------------------------------------------------------------
The annual financial statements of the Fund included in this Statement of
Additional Information and incorporated by reference in the Prospectus have been
so included and incorporated in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
40
<PAGE>
DEAN WITTER CONVERTIBLE SECURITIES TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER CONVERTIBLE SECURITIES TRUST
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dean Witter Convertible Securities
Trust, (the "Fund") at September 30, 1995, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the nine years in the
period then ended and for the period October 31, 1985 (commencement of
operations) through September 30, 1986, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities owned at September 30, 1995, by correspondence with
the custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
OCTOBER 18, 1995
- --------------------------------------------------------------------------------
1995 FEDERAL TAX NOTICE (UNAUDITED)
During the fiscal year ended September 30, 1995, 15.39% of the
income dividends qualified for dividends received deduction
available to corporations.
41
<PAGE>
DEAN WITTER CONVERTIBLE SECURITIES TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (60.6%)
CONVERTIBLE BONDS (59.6%)
AIRLINES (2.1%)
$ 2,999 Continental Airlines - 144A**............... 6.00+ % 02/01/02 $ 2,849,036
1,000 Reno Air Inc. - 144A**...................... 9.00 09/30/02 1,000,000
---------------
3,849,036
---------------
AUTO PARTS (1.6%)
2,900 Arvin Industries, Inc....................... 7.50 09/30/14 2,907,250
---------------
BANKS - INTERNATIONAL (1.7%)
3,000 MBL International Finance (Bermuda) (WI).... 3.00 11/30/02 3,135,000
---------------
BROADCASTING (3.1%)
7,000 Rogers Communications, Inc.................. 2.00 11/26/05 3,517,500
2,000 Scandinavian Broadcasting (Luxembourg)...... 7.25 08/01/05 2,245,000
---------------
5,762,500
---------------
CHEMICALS (1.7%)
7,500 RPM, Inc.................................... 0.00 09/30/12 3,131,250
---------------
CONGLOMERATES (0.8%)
1,500 Alfa S.A. de C.V. (Mexico) - 144A**......... 8.00 09/15/00 1,500,000
---------------
DRUGS (0.5%)
1,000 McKesson Corp............................... 4.50 03/01/04 904,000
---------------
ELECTRICAL & ELECTRONICS (0.4%)
850 Recognition Equipment Inc................... 7.25 04/15/11 765,000
---------------
ELECTRICAL EQUIPMENT (1.1%)
2,000 Magnetek, Inc............................... 8.00 09/15/01 1,975,000
---------------
ENTERTAINMENT (0.9%)
2,050 Savoy Pictures Entertainment, Inc........... 7.00 07/01/03 1,588,750
---------------
ENTERTAINMENT/GAMING (3.7%)
2,500 Argosy Gaming Co............................ 12.00 06/01/01 2,531,250
1,900 United Gaming, Inc.......................... 7.50 09/15/03 1,179,254
5,200 United Gaming, Inc. - 144A**................ 7.50 09/15/03 3,227,432
---------------
6,937,936
---------------
ENVIRONMENTAL CONTROL (1.5%)
2,000 Air & Water Technologies Corp............... 8.00 05/15/15 1,675,000
1,000 United States Filter Corp. - 144A**......... 6.00 09/15/05 1,065,000
---------------
2,740,000
---------------
FINANCIAL (1.2%)
2,100 American Travellers Corp.................... 6.50 10/01/05 2,193,219
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
42
<PAGE>
DEAN WITTER CONVERTIBLE SECURITIES TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1995, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FINANCIAL SERVICES (3.8%)
$ 2,000 AT&T Latin American Equity - 144A**......... 0.00 % 03/30/99 $ 1,690,000
12,500 Fidelity National Financial, Inc............ 0.00 02/15/09 5,281,250
---------------
6,971,250
---------------
HEALTHCARE (4.6%)
4,335 Careline, Inc. - 144A**..................... 8.00 05/01/01 4,519,237
2,900 Grancare, Inc............................... 6.50 01/15/03 2,675,250
850 Pharmaceutical Marketing Services, Inc...... 6.25 02/01/03 671,500
850 Pharmaceutical Marketing Services, Inc. -
144A**...................................... 6.25 02/01/03 689,596
---------------
8,555,583
---------------
HOME BUILDING (2.1%)
1,300 Toll Corp................................... 4.75 01/15/04 1,315,015
3,015 U.S. Home Corp.............................. 4.875 11/01/05 2,612,498
---------------
3,927,513
---------------
INDUSTRIALS (0.6%)
900 Raymond Corp................................ 6.50 12/15/03 1,116,000
---------------
INSURANCE (0.8%)
1,500 Horace Mann Educators Corp.................. 6.50 12/01/99 1,541,250
---------------
METALS (0.5%)
1,250 Crown Resources Corp........................ 5.75 08/27/01 925,000
---------------
OIL & GAS (2.7%)
1,000 Cross Timbers Oil Co........................ 5.25 11/01/03 850,000
11,000 Valhi Inc................................... 0.00 10/20/07 4,070,000
---------------
4,920,000
---------------
PHARMACEUTICALS (0.7%)
1,500 Sandoz Capital BVI, Ltd. (Switzerland) -
144A** (WI)................................. 2.00 10/06/02 1,264,687
---------------
PUBLISHING (4.2%)
10,000 Hollinger, Inc.............................. 0.00 10/05/13 3,062,500
4,500 Time Warner, Inc............................ 0.00 12/17/12 1,528,560
3,092 Time Warner, Inc............................ 8.75 01/10/15 3,246,128
---------------
7,837,188
---------------
REAL ESTATE INVESTMENT TRUST (4.2%)
2,850 Alexander Haagen Properties, Inc. (Series
A).......................................... 7.50 01/15/01 2,372,625
3,750 Camden Property Trust....................... 7.33 04/01/01 3,675,000
1,500 Capstone Capital Corp....................... 10.50 04/01/02 1,725,825
---------------
7,773,450
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
43
<PAGE>
DEAN WITTER CONVERTIBLE SECURITIES TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1995, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
RESTAURANTS (4.4%)
$ 14,000 Boston Chicken Inc.......................... 0.00 % 06/01/15 $ 3,395,000
4,000 Shoney's Inc................................ 0.00 04/11/04 1,710,000
3,375 TPI Enterprises, Inc........................ 8.25 07/15/02 3,105,000
---------------
8,210,000
---------------
RETAIL (5.9%)
1,500 Baby Superstore............................. 4.875 10/01/00 1,530,937
1,500 Eagle Hardware & Garden Inc................. 6.25 03/15/01 1,166,250
1,250 Federated Department Stores, Inc............ 9.72 02/15/04 1,259,375
7,000 Rite Aid Corp............................... 0.00 07/24/06 3,498,880
2,000 Sports & Recreation Inc..................... 4.25 11/01/00 1,505,000
2,000 Tops Appliance City Inc..................... 6.50 11/30/03 900,000
1,150 Waban, Inc.................................. 6.50 07/01/02 1,138,500
---------------
10,998,942
---------------
STEEL (0.7%)
1,275 Nippon Denro Ltd. (India) - 144A**.......... 3.00 04/01/01 809,625
500 Sahaviriya Steel (Thailand) - 144A**........ 3.50 07/26/05 458,750
---------------
1,268,375
---------------
TELECOMMUNICATIONS (1.8%)
2,500 Audiovox Corp............................... 6.25 03/15/01 1,587,500
5,000 U.S. Cellular Corp.......................... 0.00 06/15/15 1,793,750
---------------
3,381,250
---------------
TEXTILES (1.9%)
3,250 Interface, Inc.............................. 8.00 09/15/13 3,539,089
---------------
TRANSPORTATION - INTERNATIONAL (0.4%)
1,651 Consorcio G Grupo S.A. de C.V. (Mexico)..... 8.00 08/08/04 718,185
---------------
TOTAL CONVERTIBLE BONDS
(IDENTIFIED COST $112,562,947)....................................... 110,336,703
---------------
NON-CONVERTIBLE BOND (1.0%)
RESTAURANTS
2,500 Flagstar Corp. (Identified Cost
$2,450,000)................................. 11.375 09/15/03 1,925,000
---------------
TOTAL CORPORATE BONDS
(IDENTIFIED COST $115,012,947)....................................... 112,261,703
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
44
<PAGE>
DEAN WITTER CONVERTIBLE SECURITIES TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1995, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------------------------------
<C> <S> <C>
CONVERTIBLE PREFERRED STOCKS (16.8%)
AUTO PARTS (0.9%)
111,100 MascoTech, Inc. $1.20................................................... $ 1,472,075
---------------
BIOTECHNOLOGY (0.5%)
63,500 Gensia, Inc. $3.75 - 144A**............................................. 920,750
---------------
CHEMICALS (0.8%)
10,000 Atlantic Richfield Co. $2.228........................................... 255,000
20,000 Occidental Petroleum Corp. $3.875 - 144A**.............................. 1,132,500
---------------
1,387,500
---------------
CONGLOMERATES (0.8%)
100,000 Westinghouse Electric Corp. (Series C) $1.30 - 144A**................... 1,512,500
---------------
ENTERTAINMENT (1.1%)
62,600 AMC Entertainment, Inc. $1.75........................................... 2,065,800
---------------
ENTERTAINMENT/GAMING (1.1%)
175,000 Bally Entertainment Corp. $0.89......................................... 1,968,750
---------------
FINANCIAL (2.3%)
45,000 Penncorp Financial Group $3.375......................................... 2,722,500
50,000 Time Warner Financing $1.24............................................. 1,625,000
---------------
4,347,500
---------------
FOODS (0.8%)
30,000 Chiquita Brands International, Inc. (Series A) $2.875................... 1,545,000
---------------
HOME BUILDING (1.7%)
120,000 Beazer Homes (Series A) $2.00........................................... 3,210,000
---------------
METALS (0.2%)
16,600 Freeport-McMoran Copper & Gold, Inc. $1.25.............................. 427,450
---------------
OIL & GAS (2.5%)
75,000 Kelley Oil & Gas Corp. $2.625........................................... 1,331,250
65,000 Valero Energy Corp. $3.125.............................................. 3,339,375
---------------
4,670,625
---------------
PAPER PRODUCTS (0.6%)
25,000 International Paper Capital Trust $2.625 - 144A**....................... 1,185,950
---------------
REAL ESTATE (1.1%)
50,000 Catellus Development Corp (Series B) $3.625 - 144A**.................... 2,028,150
---------------
STEEL (1.2%)
25,000 WHX Corp. (Series A) $3.25.............................................. 1,146,875
25,000 WHX Corp. (Series B) $3.75.............................................. 1,087,500
---------------
2,234,375
---------------
TELECOMMUNICATIONS (0.7%)
35,000 Sprint Corporation $2.63................................................ 1,246,875
---------------
WASTE MANAGEMENT (0.5%)
45,000 International Technology Corp. $1.75.................................... 922,500
---------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(IDENTIFIED COST $29,240,124)........................................... 31,145,800
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
45
<PAGE>
DEAN WITTER CONVERTIBLE SECURITIES TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1995, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (9.9%)
AUTO PARTS (0.3%)
49,900 MascoTech, Inc.......................................................... $ 561,375
---------------
ENTERTAINMENT/GAMING (0.4%)
57,938 International Game Technology........................................... 774,921
---------------
ENVIRONMENTAL CONTROL (0.6%)
122,000 OHM Corp.*.............................................................. 1,098,000
---------------
HEALTHCARE (0.3%)
50,000 Regency Health Services, Inc.*.......................................... 518,750
---------------
HOTELS/MOTELS (0.5%)
85,000 Equity Inns, Inc........................................................ 977,500
---------------
MANUFACTURING (1.1%)
201,000 Foamex International Inc.*.............................................. 2,085,375
---------------
REAL ESTATE INVESTMENT TRUST (3.9%)
95,155 Alexander Haagen Properties, Inc........................................ 1,106,177
58,100 Avalon Properties, Inc.................................................. 1,183,787
12,000 Camden Property Trust................................................... 265,500
105,000 Irvine Apartment Communities, Inc....................................... 1,850,625
50,000 Patriot American Hospitality............................................ 1,281,250
35,000 Reckson Associates Realty Corp.......................................... 927,500
25,000 Urban Shopping Centers, Inc............................................. 550,000
---------------
7,164,839
---------------
RESTAURANTS (1.1%)
105,000 Brinker International, Inc.*............................................ 1,561,875
75,000 Flagstar Companies, Inc.*............................................... 393,750
---------------
1,955,625
---------------
RETAIL (1.5%)
35,000 Michaels Stores, Inc.*.................................................. 568,750
58,700 TJX Companies, Inc...................................................... 697,062
20,000 Toys 'R' Us, Inc.*...................................................... 540,000
54,500 Waban, Inc.*............................................................ 1,028,688
---------------
2,834,500
---------------
TRANSPORTATION (0.2%)
40,000 Team Rental Group, Inc.*................................................ 390,000
---------------
TOTAL COMMON STOCKS
(IDENTIFIED COST $21,087,206)........................................... 18,360,885
---------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
WARRANTS (0.0%)
TELECOMMUNICATIONS
45,000 Audiovox Corp. - 144A** (Identified Cost $0)*............ 03/15/01 67,500
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
46
<PAGE>
DEAN WITTER CONVERTIBLE SECURITIES TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1995, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ------------------------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS (16.9%)
U.S. GOVERNMENT AGENCIES (a) (16.8%)
$ 4,000 Federal Home Loan Banks
5.57% due 10/18/95...................................................... $ 3,989,479
19,100 Federal Home Loan Mortgage Corp.
5.65 to 6.30% due 10/02/95 to 10/06/95***............................... 19,090,770
8,000 Federal National Mortgage Association
5.60 to 5.63% due 10/10/95 to 10/12/95.................................. 7,987,525
---------------
TOTAL U.S. GOVERNMENT AGENCIES
(AMORTIZED COST $31,067,774)............................................ 31,067,774
---------------
REPURCHASE AGREEMENT (0.1%)
217 The Bank of New York
5.375% due 10/02/95 (dated 09/29/95; proceeds $217,096; collateralized
by $228,527 U.S. Treasury Note 7.25% due 05/15/04 valued at $249,505)
(Identified Cost $216,999).............................................. 216,999
---------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST $31,284,773)........................................... 31,284,773
---------------
TOTAL INVESTMENTS
(IDENTIFIED COST $196,625,050) (B)........... 104.2% 193,120,661
LIABILITIES IN EXCESS OF OTHER ASSETS........ (4.2) (7,722,296)
----- ------------
NET ASSETS................................... 100.0% $185,398,365
----- ------------
----- ------------
<FN>
- ---------------------
WI Securities purchased on a when issued basis.
* Non-income producing security.
** Resale is restricted to qualified institutional investors.
*** Some or all of these securities are segregated in connection with
when-issue securities.
+ Payment-in-kind security.
(a) Securities were purchased on a discount basis. The interest rates shown
have been adjusted to reflect a money market equivalent yield.
(b) The aggregate cost for federal income tax purposes is $197,493,421; the
aggregate gross unrealized appreciation is $7,999,341 and the aggregate
gross unrealized depreciation is $12,372,101, resulting in net unrealized
depreciation of $4,372,760.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
47
<PAGE>
DEAN WITTER CONVERTIBLE SECURITIES TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
<TABLE>
<S> <C>
ASSETS:
</TABLE>
<TABLE>
<S> <C>
Investments in securities, at value
(identified cost $196,625,050)............................ $ 193,120,661
Receivable for:
Investments sold........................................ 2,065,625
Interest................................................ 1,313,598
Dividends............................................... 209,320
Shares of beneficial interest sold...................... 121,345
Prepaid expenses and other assets........................... 16,089
-------------
TOTAL ASSETS........................................... 196,846,638
-------------
LIABILITIES:
Payable for:
Investments purchased................................... 10,876,125
Plan of distribution fee................................ 151,433
Dividends to shareholders............................... 98,221
Investment management fee............................... 90,860
Shares of beneficial interest repurchased............... 88,279
Accrued expenses and other payables......................... 143,355
-------------
TOTAL LIABILITIES...................................... 11,448,273
-------------
NET ASSETS:
Paid-in-capital............................................. 552,749,655
Net unrealized depreciation................................. (3,504,389)
Accumulated undistributed net investment income............. 5,408,228
Accumulated net realized loss............................... (369,255,129)
-------------
NET ASSETS............................................. $ 185,398,365
-------------
-------------
NET ASSET VALUE PER SHARE,
15,885,991 SHARES OUTSTANDING (UNLIMITED SHARES AUTHORIZED
OF
$.01 PAR VALUE)...........................................
$11.67
-------------
-------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
48
<PAGE>
DEAN WITTER CONVERTIBLE SECURITIES TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INCOME
Interest.................................................... $10,345,101
Dividends (net of $2,372 foreign withholding tax)........... 2,538,044
-----------
TOTAL INCOME........................................... 12,883,145
-----------
EXPENSES
Plan of distribution fee.................................... 1,790,824
Investment management fee................................... 1,074,494
Transfer agent fees and expenses............................ 368,931
Registration fees........................................... 73,370
Shareholder reports and notices............................. 62,399
Professional fees........................................... 59,863
Custodian fees.............................................. 34,737
Trustees' fees and expenses................................. 25,679
Other....................................................... 12,513
-----------
TOTAL EXPENSES......................................... 3,502,810
-----------
NET INVESTMENT INCOME.................................. 9,380,335
-----------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain........................................... 10,976,243
Net change in unrealized depreciation....................... 2,262,729
-----------
NET GAIN............................................... 13,238,972
-----------
NET INCREASE................................................ $22,619,307
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
49
<PAGE>
DEAN WITTER CONVERTIBLE SECURITIES TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income....................................... $ 9,380,335 $ 7,373,073
Net realized gain........................................... 10,976,243 24,216,296
Net change in unrealized appreciation/depreciation.......... 2,262,729 (21,824,460)
------------------ ------------------
NET INCREASE........................................... 22,619,307 9,764,909
------------------ ------------------
Dividends to shareholders from net investment income........ (8,166,179) (7,325,103)
Net decrease from transactions in shares of beneficial
interest.................................................. (19,449,807) (19,938,327)
------------------ ------------------
TOTAL DECREASE.......................................... (4,996,679) (17,498,521)
NET ASSETS:
Beginning of period......................................... 190,395,044 207,893,565
------------------ ------------------
END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF
$5,408,228 AND $3,360,672, RESPECTIVELY)................ $185,398,365 $190,395,044
------------------ ------------------
------------------ ------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
50
<PAGE>
DEAN WITTER CONVERTIBLE SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1995
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter Convertible Securities Trust (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund was organized as a
Massachusetts business trust on May 21, 1985 and commenced operations on October
31, 1985.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York or American 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 a security
is traded on more than one exchange, the security is valued on the exchange
designated as the primary market by the Trustees); (2) all other portfolio
securities for which over-the-counter market quotations are readily available
are valued at the latest available bid price prior to the time of valuation; (3)
when market quotations are not readily available, including circumstances under
which it is determined by the Investment Manager that sale and bid prices are
not reflective of a security's market value, portfolio securities are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Trustees; (4) certain of the Fund's
portfolio securities may be valued by an outside pricing service approved by the
Trustees. The pricing service utilizes 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 portfolio securities valued by such pricing service; and (5) short-term
debt securities having a maturity date of more than sixty days at time of
purchase are valued on a mark-to-market basis until sixty days prior to maturity
and thereafter at amortized cost based on their value on the 61st day.
Short-term debt securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts on securities purchased are accreted over the life of the respective
securities. Dividend income is recorded on the ex-dividend date. Interest income
is accrued daily.
C. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
51
<PAGE>
DEAN WITTER CONVERTIBLE SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1995, CONTINUED
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the record date. The amount of dividends
and distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and distributions which
exceed net investment income and net realized capital gains for financial
reporting purposes but not for tax purposes are reported as dividends in excess
of net investment income or distributions in excess of net realized capital
gains. To the extent they exceed net investment income and net realized capital
gains for tax purposes, they are reported as distributions of paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with Dean Witter InterCapital
Inc. (the "Investment Manager"), the Fund pays its Investment Manager a
management fee, accrued daily and payable monthly, by applying the following
annual rates to the Fund's net assets determined as of the close of each
business day: 0.60% to the portion of average daily net assets not exceeding
$750 million; 0.55% to the portion of average daily net assets exceeding $750
million but not exceeding $1 billion; 0.50% to the portion of average daily net
assets exceeding $1 billion but not exceeding $1.5 billion; 0.475% to the
portion of average daily net assets exceeding $1.5 billion but not exceeding $2
billion; 0.45% to the portion of average daily net assets exceeding $2 billion
but not exceeding $3 billion; and 0.425% to the portion of average daily net
assets exceeding $3 billion.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Fund has adopted a
Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act pursuant
to which the Fund pays the Distributor compensation, accrued daily and payable
monthly, at an annual rate of 1.0% of the lesser of: (a) the average daily
aggregate
52
<PAGE>
DEAN WITTER CONVERTIBLE SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1995, CONTINUED
gross sales of the Fund's shares since the Fund's inception (not including
reinvestment of dividend or capital gain distributions) less the average daily
aggregate net asset value of the Fund's shares redeemed since the Fund's
inception upon which a contingent deferred sales charge has been imposed or upon
which such charge has been waived; or (b) the Fund's average daily net assets.
Amounts paid under the Plan are paid to the Distributor to compensate it for the
services provided and the expenses borne by it and others in the distribution of
the Fund's shares, including the payment of commissions for sales of the Fund's
shares and incentive compensation to, and expenses of, the account executives of
Dean Witter Reynolds Inc. ("DWR"), an affiliate of the Investment Manager and
Distributor, and other employees or selected dealers who engage in or support
distribution of the Fund's shares or who service shareholder accounts, including
overhead and telephone expenses, printing and distribution of prospectuses and
reports used in connection with the offering of the Fund's shares to other than
current shareholders and preparation, printing and distribution of sales
literature and advertising materials. In addition, the Distributor may be
compensated under the Plan for its opportunity costs in advancing such amounts,
which compensation would be in the form of a carrying charge on any unreimbursed
expenses incurred by the Distributor.
Provided that the Plan continues in effect, any cumulative expenses incurred but
not yet recovered, may be recovered through future distribution fees from the
Fund and contingent deferred sales charges from the Fund's shareholders.
The Distributor has informed the Fund that for the year ended September 30,
1995, it received approximately $76,000 in contingent deferred sales charges
from certain redemptions of the Fund's shares. The Fund's shareholders pay such
charges which are not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended September 30, 1995 aggregated
$217,276,501 and $245,971,391, respectively. For the same period, the Fund
incurred brokerage commissions of $27,100 with DWR for portfolio transactions
executed on behalf of the Fund.
Dean Witter Trust Company, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At September 30, 1995, the Fund had
transfer agent fees and expenses payable of approximately $36,000.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during
53
<PAGE>
DEAN WITTER CONVERTIBLE SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1995, CONTINUED
the last five years of service. Aggregate pension costs for the year ended
September 30, 1995 included in Trustees' fees and expenses in the Statement of
Operations amounted to $7,987. At September 30, 1995, the Fund had an accrued
pension liability of $52,482 which is included in accrued expenses in the
Statement of Assets and Liabilities.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Sold............................................................. 2,692,941 $ 29,337,865 2,423,832 $ 26,535,360
Reinvestment of dividends........................................ 648,602 6,920,932 578,431 6,216,691
----------- -------------- ----------- ------------
3,341,543 36,258,797 3,002,263 32,752,051
Repurchased...................................................... (5,171,631) (55,708,604) (4,869,009) (52,690,378)
----------- -------------- ----------- ------------
Net decrease..................................................... (1,830,088) $ (19,449,807) (1,866,746) $(19,938,327)
----------- -------------- ----------- ------------
----------- -------------- ----------- ------------
</TABLE>
6. FEDERAL INCOME TAX STATUS
During the year ended September 30, 1995, the Fund utilized approximately
$10,073,000 of its net capital loss carryover. At September 30, 1995, the Fund
had a net capital loss carryover of approximately $368,387,000 to offset future
capital gains to the extent provided by regulations available through September
30 of the following years:
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS
- ------------------------------------------------------------------------------
1996 1997 1998 1999 2000 Total
- --------- ------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$ 5,107 $ 218,065 $ 36,349 $ 46,135 $ 62,731 $ 368,387
</TABLE>
As of September 30, 1995, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and permanent book/tax
differences primarily attributable to corporate reorganizations. To reflect
reclassifications arising from permanent book/tax differences for the year ended
September 30, 1995, accumulated net realized loss was charged and accumulated
undistributed net investment income was credited $833,400.
7. AGREEMENT AND PLAN OF REORGANIZATION
On August 24, 1995, the Board of Trustees of TCW/DW Global Convertible Trust
("Global Convertible"), an open-end, non-diversified management investment
company, unanimously adopted an Agreement and Plan of Reorganization, whereby
shareholders of Global Convertible would become shareholders of the Fund
receiving shares of the Fund equal to the value of their holdings in Global
Convertible (the "Reorganization"). The Fund's investment objective and policies
will not be changed as a result of the Reorganization. The Reorganization is
contingent upon the approval of Global Convertible Shareholders as of record
date October 20, 1995.
54
<PAGE>
DEAN WITTER CONVERTIBLE SECURITIES TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30
-------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of
period.......... $ 10.75 $ 10.62 $ 8.92 $ 8.67 $ 7.65 $ 9.68 $ 8.63
------ ------ ------ ----- ----- ----- -----
Net investment
income.......... 0.60 0.42 0.37 0.34 0.37 0.46 0.48
Net realized and
unrealized gain
(loss).......... 0.82 0.11 1.67 0.15 1.05 (2.06) 1.20
------ ------ ------ ----- ----- ----- -----
Total from
investment
operations...... 1.42 0.53 2.04 0.49 1.42 (1.60) 1.68
------ ------ ------ ----- ----- ----- -----
Less dividends
and
distributions
from:
Net investment
income........ (0.50) (0.40) (0.34) (0.24) (0.40) (0.43) (0.63)
Net realized
gain.......... -- -- -- -- -- -- --
------ ------ ------ ----- ----- ----- -----
Total dividends
and
distributions... (0.50) (0.40) (0.34) (0.24) (0.40) (0.43) (0.63)
------ ------ ------ ----- ----- ----- -----
Net asset value,
end of period... $ 11.67 $ 10.75 $ 10.62 $ 8.92 $ 8.67 $ 7.65 $ 9.68
------ ------ ------ ----- ----- ----- -----
------ ------ ------ ----- ----- ----- -----
TOTAL INVESTMENT
RETURN+.......... 13.68% 5.02% 23.22% 5.69% 18.93% (16.93)% 20.20%
RATIOS TO AVERAGE
NET ASSETS:
Expenses......... 1.96% 1.93% 1.93% 1.92% 1.92% 1.88% 1.76%
Net investment
income.......... 5.24% 3.68% 3.44% 3.43% 4.34% 4.96% 4.93%
SUPPLEMENTAL DATA:
Net assets, end
of period, in
millions........ $185 $190 $208 $218 $297 $413 $822
Portfolio
turnover rate... 138% 184% 221% 145% 133% 92% 167%
<CAPTION>
FOR THE PERIOD
THROUGH
1988 1987 SEPTEMBER 30, 1986
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATI
Net asset value,
beginning of
period.......... $ 12.42 $ 11.22 $ 10.00
------ ------ ------
Net investment
income.......... 0.38 0.48 0.76
Net realized and
unrealized gain
(loss).......... (2.87) 1.59 1.22**
------ ------ ------
Total from
investment
operations...... (2.49) 2.07 1.98
------ ------ ------
Less dividends
and
distributions
from:
Net investment
income........ (0.23) (0.46) (0.76)
Net realized
gain.......... (1.07) (0.41) --
------ ------ ------
Total dividends
and
distributions... (1.30) (0.87) (0.76)
------ ------ ------
Net asset value,
end of period... $ 8.63 $ 12.42 $ 11.22
------ ------ ------
------ ------ ------
TOTAL INVESTMENT
RETURN+.......... (19.79)% 19.21% 19.91 %(1)
RATIOS TO AVERAGE
NET ASSETS:
Expenses......... 1.79% 1.62% 1.72 %(2)
Net investment
income.......... 3.87% 3.85% 7.11 %(2)
SUPPLEMENTAL DATA
Net assets, end
of period, in
millions........ $1,073 $2,029 $1,488
Portfolio
turnover rate... 472% 572% 272 %(1)
<FN>
- ---------------------
* Commencement of operations.
** Includes the effect of capital share transactions.
+ Does not reflect the deduction of sales charge.
(1) Not annualized.
(2) Annualized.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
55
