<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1994
REGISTRATION NOS.: 33-10363
811-4917
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 9 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 /X/
AMENDMENT NO. 10 /X/
------------------
DEAN WITTER FEDERAL SECURITIES TRUST
(A MASSACHUSETTS BUSINESS TRUST)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 392-1600
SHELDON CURTIS, ESQ.
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPY TO:
DAVID M. BUTOWSKY, ESQ.
GORDON ALTMAN BUTOWSKY
WEITZEN SHALOV & WEIN
114 WEST 47TH STREET
NEW YORK, NEW YORK 10036
----------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Post-Effective Amendment becomes effective.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
___ immediately upon filing pursuant to paragraph (b)
_X_ on December 28, 1994 pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)
___ on (date) pursuant to paragraph (a) of rule 485.
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO SECTION (A)(1) OF RULE 24F-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940. PURSUANT TO SECTION (B)(2) OF RULE 24F-2, THE
REGISTRANT FILED A RULE 24F-2 NOTICE FOR ITS FISCAL YEAR ENDED OCTOBER 31, 1994
WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 5, 1994.
AMENDING THE PROSPECTUS AND UPDATING FINANCIAL STATEMENTS
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<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
CROSS-REFERENCE SHEET
FORM N-1A
<TABLE>
<CAPTION>
ITEM CAPTION
- ----------------------------------------------- -----------------------------------------------------------------------
<S> <C>
PART A PROSPECTUS
1. .......................................... Cover Page
2. .......................................... Prospectus Summary
3. .......................................... Financial Highlights; Performance Information
4. .......................................... Investment Objective and Policies; Financial Highlights; The Fund and
Its Management, Cover Page; Investment Restrictions; Prospectus
Summary
5. .......................................... The Fund and Its Management; Back Cover; Investment Objectives and
Policies
6. .......................................... Dividends, Distributions and Taxes; Additional Information
7. .......................................... Purchase of Fund Shares; Shareholder Services; Prospectus Summary
8. .......................................... Redemptions and Repurchases; Shareholder Services
9. .......................................... Additional Information
PART B STATEMENT OF ADDITIONAL INFORMATION
10. .......................................... Cover Page
11. .......................................... Table of Contents
12. .......................................... The Fund and Its Management
13. .......................................... Investment Practices and Policies; Investment Restrictions; Portfolio
Transactions and Brokerage
14. .......................................... The Fund and Its Management; Trustees and Officers
15. .......................................... The Fund and Its Management; Trustees and Officers
16. .......................................... The Fund and Its Management; The Distributor; Shareholder Services;
Custodian and Transfer Agent; Independent Accountants
17. .......................................... Portfolio Transactions and Brokerage
18. .......................................... Description of Shares of the Fund
19. .......................................... The Distributor; Redemptions and Repurchases; Financial Statements;
Shareholder Services
20. .......................................... Dividends, Distributions and Taxes
21. .......................................... The Distributor
22. .......................................... Performance Information
23. .......................................... Experts; Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
PROSPECTUS
DECEMBER 28, 1994
Dean Witter Federal Securities Trust (the "Fund") is an open-end
diversified management investment company whose investment objective is to earn
a high level of current income. The Fund will seek to achieve its investment
objective by investing primarily in debt securities issued by the U.S.
Government, its agencies or instrumentalities, including mortgage-backed
securities, and by writing covered call and put options against such securities.
The Fund may also purchase options on such securities to effect closing
transactions. In addition, to hedge the Fund's portfolio of securities against
changes in prevailing interest rates, the Fund may purchase put options on U.S.
Government securities and engage in transactions involving interest rate futures
contracts and options on such contracts. Shares of the Fund are not issued,
insured or guaranteed, as to value or yield, by the U.S. Government, its
agencies or instrumentalities.
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 0.85% of the lesser
of (i) the average daily aggregate net sales or (ii) the average daily net
assets of the Fund. (See "Purchase of Fund Shares--Plan of Distribution.")
This Prospectus sets forth concisely the information you should
know before investing in the Fund. It should be read and retained for future
reference. Additional information about the Fund is contained in the Statement
of Additional Information, dated December 28, 1994, 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/4
Investment Objective and Policies/5
Risk Considerations/10
Investment Restrictions/14
Purchase of Fund Shares/15
Shareholder Services/17
Redemptions and Repurchases/20
Dividends, Distributions and Taxes/22
Performance Information/23
Additional Information/24
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
Federal Securities Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 526-3143
<PAGE>
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
Fund open-end diversified management investment company which invests principally in U.S. Government
securities.
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Shares Offered Shares of beneficial interest with $.01 par value (see page 23).
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Offering At net asset value without sales charge (see page 15). Shares redeemed within six years of purchase
Price are subject to a contingent deferred sales charge under most circumstances (see page 20).
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Minimum Minimum initial investment, $1,000; minimum subsequent investments, $100 (see page 15).
Purchase
- ----------------------------------------------------------------------------------------------------------------------
Investment The investment objective of the Fund is to earn a high level of current income.
Objective
- ----------------------------------------------------------------------------------------------------------------------
Investment Dean Witter InterCapital Inc. ("InterCapital"), the Investment Manager of the Fund, and its wholly-
Manager owned subsidiary, Dean Witter Services Company, Inc., serve in various investment management,
advisory, management and administrative capacities to ninety investment companies and other
portfolios with assets of approximately $67.8 billion at November 30, 1994 (see pages 4 and 5).
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Management The Investment Manager receives a monthly fee at the annual rate of 0.55% of the Fund's daily net
Fee assets not exceeding $1 billion, scaled down at various asset levels to 0.35% of the Fund's daily
net assets on assets exceeding $12.5 billion (see page 5).
- ----------------------------------------------------------------------------------------------------------------------
Dividends and Dividends from net investment income are declared daily and paid monthly. Capital gains
Distributions distributions are paid at least annually. Dividends and capital gains distributions are
automatically reinvested in additional shares at net asset value unless the shareholder elects to
receive cash (see pages 17 and 21).
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Distributor and Dean Witter Distributors Inc. (the "Distributor"). The Distributor receives from the Fund a
Distribution Fee distribution fee accrued daily and paid monthly at the rate of 0.85% per annum of the lesser of (i)
the Fund's average daily aggregate net sales or (ii) the Fund's average daily net assets. This fee
compensates the Distributor for the services provided in distributing shares of the Fund and for
sales-related expenses. The Distributor also receives the proceeds of any contingent deferred sales
charges (see pages 15 and 28).
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Redemption-- Shares are redeemable by the shareholder at net asset value. An account may be involuntarily
Contingent redeemed if the total value of the account is less than $100. Although no commission or sales load
Deferred Sales is imposed upon the purchase of shares, a contingent deferred sales charge (scaled down from 5% to
Charge 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 20-21).
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Special Risk The net asset value of the Fund's shares will fluctuate with changes in the market value of its
Considerations portfolio securities. The Fund may purchase and write options on debt instruments, in both
exchange-listed and over-the-counter transactions, and engage in transactions involving futures
contracts and options thereon. In addition, the Fund may borrow money and thereby leverage its
securities investments (in an amount up to 25% of the Fund's total assets) and purchase securities
on a when-issued and delayed delivery and firm commitment basis. These investments may involve
special risks (see pages 5-14).
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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 October 31, 1994.
<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%
</TABLE>
A deferred sales charge is imposed at the following declining rates:
<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 Fees....................................................................... None
Exchange Fees......................................................................... None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
- --------------------------------------------------------------------------------------
Management Fees....................................................................... 0.55%
12b-1 Fees*........................................................................... 0.85%
Other Expenses........................................................................ 0.12%
Total Fund Operating Expenses......................................................... 1.52%
<FN>
- ------------
* A PORTION OF THE 12B-1 FEE EQUAL TO 0.20% OF THE FUND'S AVERAGE DAILY NET
ASSETS IS CHARACTERIZED AS A SERVICE FEE WITHIN THE MEANING OF NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. ("NASD") GUIDELINES.
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 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:.............................................................. $ 66 $ 78 $ 103 $ 182
You would pay the following expenses on the same investment, assuming
no redemption:....................................................... $ 16 $ 48 $ 83 $ 182
</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
<PAGE>
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
MARCH 31,
1987*
FOR THE YEAR ENDED OCTOBER 31, THROUGH
--------------------------------------------------------------------- OCTOBER 31,
1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 10.03 $ 9.57 $ 9.46 $ 8.87 $ 9.27 $ 9.13 $ 9.27 $ 10.00
------- ------- ------- ------- ------- ------- ------- -------------
Net investment income.... 0.60 0.65 0.68 0.72 0.72 0.71 0.74 0.43
Net realized and
unrealized gain (loss)
on investments......... (1.28) 0.46 0.11 0.59 (0.40) 0.34 0.08 (0.58)
------- ------- ------- ------- ------- ------- ------- -------------
Total from investment
operations............. (0.68) 1.11 0.79 1.31 0.32 1.05 0.82 (0.15)
------- ------- ------- ------- ------- ------- ------- -------------
Less dividends and
distributions from:
Net investment income.... (0.61) (0.65) (0.68) (0.72) (0.72) (0.71) (0.74) (0.43)
Paid-in-capital.......... -- -- -- -- -- (0.20) (0.22) (0.15)
------- ------- ------- ------- ------- ------- ------- -------------
Total dividends and
distributions.......... (0.61) (0.65) (0.68) (0.72) (0.72) (0.91) (0.96) (0.58)
------- ------- ------- ------- ------- ------- ------- -------------
Net asset value, end of
period................. $ 8.74 $ 10.03 $ 9.57 $ 9.46 $ 8.87 $ 9.27 $ 9.13 $ 9.27
------- ------- ------- ------- ------- ------- ------- -------------
------- ------- ------- ------- ------- ------- ------- -------------
TOTAL INVESTMENT
RETURN+................ (6.92)% 12.03% 8.56% 15.26% 3.64% 12.32% 9.21% (1.47)%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in millions).......... $ 841 $ 1,128 $ 1,171 $ 1,252 $ 1,397 $ 1,824 $ 2,122 $2,067
Ratios to average net
assets:
Expenses............... 1.52% 1.50% 1.48% 1.50% 1.54% 1.47% 1.50% 1.54%(2)
Net investment
income................ 6.56% 6.59% 7.18% 7.79% 7.92% 7.90% 8.04% 7.76%(2)
Portfolio turnover
rate................... 18% 7% 6% 0% 5% 19% 44% 32 %
<FN>
- ------------------------------
* COMMENCEMENT OF OPERATIONS.
+ DOES NOT REFLECT THE DEDUCTION OF SALES LOAD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
Dean Witter Federal Securities Trust (the "Fund") (formerly named Dean
Witter Government Securities Plus) is an open-end diversified management
investment company. The Fund is a trust of the type commonly known as a
"Massachusetts business trust" and was organized under the laws of Massachusetts
on November 20, 1986.
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
organ-
4
<PAGE>
ization 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 investment companies, thirty of which are
listed on the New York Stock Exchange, with combined total assets of
approximately $65.8 billion at November 30, 1994. The Investment Manager also
manages portfolios of pension plans, other institutions and individuals which
aggregated approximately $2.0 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: 0.55% of the portion of the Fund's daily net assets not
exceeding $1 billion, scaled down at various asset levels to 0.35% of the
portion of daily net assets exceeding $12.5 billion. For the fiscal year ended
October 31, 1994, the Fund accrued total compensation to the Investment Manager
amounting to 0.55% of the Fund's average daily net assets and the Fund's total
expenses amounted to 1.52% of the Fund's average daily net assets.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The investment objective of the Fund is to earn a high level of current
income. There can be no assurance that the investment objective will be
achieved. This objective is fundamental and cannot be changed without
shareholder approval. The following policies may be changed by the Board of
Trustees without shareholder approval.
The Fund will seek to achieve its objective primarily by investing at least
65% of its total assets in U.S. Government securities (including such securities
purchased on a when-issued, delayed delivery or firm commitment basis). U.S.
Government securities include:
(1)U.S. Treasury bills (maturities of one year or
less), U.S. Treasury notes (maturities of one to ten years) and U.S. Treasury
bonds (generally maturities of greater than ten years), all of which are direct
obligations of the U.S. Government and, as such, are backed by the "full faith
and credit" of the United States.
(2)Securities issued by agencies and
instrumentalities of the U.S. Government which are backed by the full faith and
credit of the United States. Among the agencies and instrumentalities issuing
such obligations are the Federal Housing Administration, the Government National
Mortgage Association ("GNMA"), the Department of Housing and Urban Development,
the Export-Import Bank, the Farmers Home Administration, the General Services
Administration, the Maritime Administration and the Small Business
Administration. The maturities of such obligations range from three months to
thirty years.
(3)Securities issued by agencies and
instrumentalities which are not backed by the full faith and credit of the
United States, but whose issuing
5
<PAGE>
agency or instrumentality has the right to borrow, to meet its obligations, from
an existing line of credit with the U.S. Treasury. Among the agencies and
instrumentalities issuing such obligations are the Tennessee Valley Authority,
the Federal National Mortgage Association ("FNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC") and the U.S. Postal Service.
(4)Securities issued by agencies and
instrumentalities which are not backed by the full faith and credit of the
United States, but which are backed by the credit of the issuing agency or
instrumentality. Among the agencies and instrumentalities issuing such
obligations are the Federal Farm Credit System and the Federal Home Loan Banks.
The Fund is not limited as to the maturities of the U.S. Government
securities in which it may invest. For a discussion of the risks of investing in
such securities (including such securities purchased on a when-issued, delayed
delivery or firm commitment basis and zero coupon securities), see "Risk
Considerations" below.
MORTGAGE-BACKED SECURITIES. The Fund may invest in fixed-rate and
adjustable rate U.S. mortgage-backed securities ("Mortgage-Backed Securities").
There are currently three basic types of U.S. Mortgage-Backed Securities: (i)
those issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities, such as GNMA, FNMA and FHLMC (securities issued by GNMA, but
not those issued by FNMA or FHLMC, are backed by the "full faith and credit" of
the United States); (ii) those issued by private issuers that represent an
interest in or are collateralized by Mortgage-Backed Securities issued or
guaranteed by the U.S. Government or one of its agencies or instrumentalities;
and (iii) those issued by private issuers that represent an interest in or are
collateralized by whole mortgage loans or Mortgage-Backed Securities without a
government guarantee but usually having some form of private credit enhancement.
The Fund will invest in mortgage pass-through securities representing
participation interests in pools of residential mortgage loans originated by
U.S. governmental or private lenders such as banks, broker-dealers and financing
corporations and guaranteed, to the extent provided in such securities, by the
U.S. Government or one of its agencies or instrumentalities. Such securities,
which are ownership interests in the underlying mortgage loans, differ from
conventional debt securities, which provide for periodic payment of interest in
fixed amounts (usually semi-annually) and principal payments at maturity or on
specified call dates. Mortgage pass-through securities provide for monthly
payments that are a "pass-through" of the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans, net of any fees paid to the guarantor of such securities
and the servicer of the underlying mortgage loans.
The guaranteed mortgage pass-through securities in which the Fund may invest
include those issued or guaranteed by GNMA, FNMA and FHLMC. GNMA certificates
are direct obligations of the U.S. Government and, as such, are backed by the
"full faith and credit" of the United States. FNMA and FHLMC certificates are
not backed by the full faith and credit of the United States but, as noted
above, the issuing agency or instrumentality has the right to borrow, to meet
its obligations, from an existing line of credit with the U.S. Treasury. The
U.S. Treasury has no legal obligation to provide such line of credit and may
choose not to do so.
Certificates for Mortgage-Backed Securities evidence an interest in a
specific pool of mortgages. These certificates are, in most cases, "modified
pass-through" instruments, wherein the issuing agency guarantees the payment of
principal and interest on mortgages underlying the certificates, whether or not
such amounts are collected by the issuer on the underlying mortgages.
ADJUSTABLE RATE MORTGAGE SECURITIES. The Fund may also invest in adjustable
rate mortgage securities ("ARMs"), which are pass-through mortgage securities
collateralized by mortgages with adjustable rather than fixed rates. ARMs
eligible for inclusion in a mortgage pool generally provide for a
6
<PAGE>
fixed initial mortgage interest rate for either the first three, six, twelve or
thirteen scheduled monthly payments. Thereafter, the interest rates are subject
to periodic adjustment based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest
rate may not vary over the lifetime of the security. In addition, certain ARMs
provide for additional limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. Alternatively,
certain ARMs contain limitations on changes in the required monthly payment. In
the event that a monthly payment is not sufficient to pay the interest accruing
on an ARM, any such excess interest is added to the principal balance of the
mortgage loan, which is repaid through future monthly payments. If the monthly
payment for such an instrument exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment required at such
point to amortize the outstanding principal balance over the remaining term of
the loan, the excess is utilized to reduce the then outstanding principal
balance of the ARM.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES. The Fund may invest in private
mortgage pass-through securities, which are structured similarly to the GNMA,
FNMA and FHLMC mortgage pass-through securities and are issued by originators of
and investors in mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. These securities usually are backed by a pool of
conventional fixed rate or adjustable rate mortgage loans. Since private
mortgage pass-through securities typically are not guaranteed by an entity
having the credit status of GNMA, FNMA and FHLMC, such securities generally are
structured with one or more types of credit enhancement.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES. The Fund may invest in collateralized mortgage obligations or
"CMOs," which are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by GNMA, FNMA or
FHLMC certificates, but also may be collateralized by whole loans or private
mortgage pass-through securities (such collateral collectively hereinafter
referred to as "Mortgage Assets"). Multiclass pass-through securities are equity
interests in a trust composed of Mortgage Assets. Payments of principal of and
interest on the Mortgage Assets, and any reinvestment income thereon, provide
the funds to pay debt service on the CMOs or make scheduled distributions on the
multiclass pass-through securities. CMOs may be issued by agencies or
instrumentalities of the U.S. government, or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. The issuer of a series of CMOs may elect to be treated as a Real
Estate Mortgage Investment Conduit ("REMIC"). REMICs include governmental and/or
private entities that issue a fixed pool of mortgages secured by an interest in
real property. REMICs are similar to CMOs in that they issue multiple classes of
securities but, unlike CMOs, which are required to be structured as debt
securities, REMICs may be structured as indirect ownership interests in the
underlying assets of the REMICs themselves. However, there are no effects on the
Fund from investing in CMOs issued by entities that have elected to be treated
as REMICs, and all future references to CMOs shall also be deemed to include
REMICs. In addition, in reliance upon an interpretation by the staff of the
Securities and Exchange Commission, the Fund may invest without limitation in
CMOs and other Mortgage-Backed Securities which are not by definition excluded
from the provisions of the Act, and which have obtained exemptive orders from
such provisions from the Securities and Exchange Commission.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their
7
<PAGE>
stated maturities or final distribution dates. Interest is paid or accrues on
all classes of the CMOs on a monthly, quarterly or semi-annual basis. Certain
CMOs may have variable or floating interest rates and others may be stripped
(securities which provide only the principal or interest feature of the
underlying security).
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of a CMO series in a number of different ways. Generally,
the purpose of the allocation of the cash flow of a CMO to the various classes
is to obtain a more predictable cash flow to the individual tranches than exists
with the underlying collateral of the CMO. As a general rule, the more
predictable the cash flow is on a CMO tranche, the lower the anticipated yield
will be on that tranche at the time of issuance relative to prevailing market
yields on Mortgage-Backed Securities. As part of the process of creating more
predictable cash flows on most of the tranches in a series of CMOs, one or more
tranches generally must be created that absorb most of the volatility in the
cash flows on the underlying mortgage loans. The yields on these tranches are
generally higher than prevailing market yields on Mortgage-Backed Securities
with similar maturities. As a result of the uncertainty of the cash flows of
these tranches, the market prices of and yield on these tranches generally are
more volatile.
The Fund also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
TYPES OF CREDIT ENHANCEMENT. Mortgage-Backed Securities are often backed by
a pool of assets representing the obligations of a number of different parties.
To lessen the effect of failures by obligors on underlying assets to make
payments, those securities may contain elements of credit support, which fall
into two categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from default ensures ultimate payment of the obligations on at least a
portion of the assets in the pool. This protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches. The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquencies or
losses in excess of those anticipated could adversely affect the return on an
investment in a security. The Fund will not pay any fees for credit support,
although the existence of credit support may increase the price of a security.
For a discussion of the risks of investing in Mortgage-Backed Securities,
see "Risk Considerations" below.
To hedge against adverse changes in the prices of securities it anticipates
purchasing for its portfolio, the Fund may also write covered call and put
options against U.S. Government securities and cash held in its portfolio and
purchase options of the same or similar series to effect closing transactions.
In addition, the Fund may hedge portions of its portfolio securities against
potential changes in prevailing interest rates by purchasing put options on U.S.
Government securities and engaging in transactions involving interest rate
futures contracts and options on such contracts. See "Options and Futures
Transactions" below.
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<PAGE>
While the Fund will be investing primarily in U.S. Government securities, it
may invest up to 35% of its total assets in options on U.S. Government
securities; options on futures contracts and futures contracts; repurchase
agreements; reverse repurchase agreements and dollar rolls (see "Risk
Considerations" below); money market instruments, including commercial paper
rated within the two highest grades by Standard & Poor's Corporation ("S&P") or
the highest grade by Moody's Investors Service, Inc. ("Moody's"), or, if not
rated, issued by a company having an outstanding debt issue rated at least AA by
S&P or Aa by Moody's); certificates of deposit; bankers' acceptances and other
obligations of domestic banks or domestic branches of foreign banks, in each
case having total assets of at least $500 million; and obligations of foreign
governments or their respective instrumentalities or agencies. Moreover, and
notwithstanding any of the above, the Fund may invest in such instruments
without limitation, on a temporary basis, when market conditions dictate a
"defensive" investment strategy. The Fund may also lend its portfolio
securities, as discussed under "Risk Considerations" below.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements, which
may be viewed as a type of secured lending by the Fund, and which typically
involve the acquisition by the Fund of debt securities from a selling financial
institution such as a bank, savings and loan association or broker-dealer. The
agreement provides that the Fund will sell back to the institution, and that the
institution will repurchase, the underlying security at a specified price and at
a fixed time in the future, usually not more than seven days from the date of
purchase. For a discussion of the risks of investing in repurchase agreements,
see "Risk Considerations" below.
LEVERAGING. The Fund may borrow money, but only from a bank and in an
amount up to 25% of the Fund's total assets taken at the lower of market value
or cost, not including the amount borrowed. When the Fund borrows it will be
because it seeks additional income by leveraging its investments through
purchasing securities with the borrowed funds. The Fund will be required to
maintain an asset coverage (including the proceeds of borrowings) of at least
300% of such borrowings in accordance with the provisions of the Investment
Company Act of 1940, as amended (the "Act"). The investment policy provides that
the Fund may not purchase or sell a security on margin. For a discussion of the
risks of leveraging, see "Risk Considerations" below.
OPTIONS. The Fund is permitted to enter into call and put options on U.S.
Treasury notes, bonds and bills which are listed on Exchanges and 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.
OTC OPTIONS. 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. The Fund will engage in OTC
option transactions only with member banks of the Federal Reserve System or
primary U.S. Government securities dealers or with affiliates of such banks or
dealers which have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million.
COVERED CALL WRITING. The Fund is permitted to write covered call options
on U.S. Government
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securities only, without limit, in order to aid it in achieving its investment
objective. As a writer of a call option, the Fund has the obligation, upon
notice of exercise of the option, to deliver the security underlying the option
(certain listed call options written by the Fund will be exercisable by the
purchaser only on a specific date). See "Options and Futures
Transactions--Covered Call Writing" in the Statement of Additional Information.
COVERED PUT WRITING. As a writer of covered put options, 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. The
Fund will write put options for two purposes: (1) to receive 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 aggregate value of the obligations underlying
the puts determined as of the date the options are sold will not exceed 50% of
the Fund's net assets. See "Options and Futures Transactions--Covered Put
Writing" in the Statement of Additional Information.
PURCHASING CALL AND PUT OPTIONS. The Fund may invest up to 10% of its total
assets in the purchase of put and call options on U.S. Government securities.
The Fund may purchase call options only in order to close out a covered call
position. The Fund may purchase put options on U.S. Government 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 in a manner similar to call option
closing purchase transactions. There are no other limits on the Fund's ability
to purchase call and put options.
FUTURES CONTRACTS. The Fund may also purchase and sell interest rate
futures contracts ("futures contracts") that are traded on U.S. commodity
exchanges on such underlying securities as U.S. Treasury bonds, notes and bills
and GNMA certificates. As a futures contract purchaser, the Fund incurs an
obligation to take delivery of a specified amount of the obligation underlying
the contract at a specified time in the future for a specified price. As a
seller of a futures contract, the Fund incurs an obligation to deliver the
specified amount of the underlying obligation at a specified time in return for
an agreed upon price. The Fund will purchase or sell futures contracts only for
the purpose of hedging its portfolio (or anticipated portfolio) securities
against changes in prevailing interest rates. 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. See "Options and Futures Transactions--Futures Contracts" and
"Options on Futures Contracts" in the Statement of Additional Information.
For a discussion of the risks of options and futures transactions, see "Risk
Considerations" below and "Options and Futures Transactions" in the Statement of
Additional Information.
RISK CONSIDERATIONS
The net asset value of the Fund's shares will fluctuate with changes in the
market value of its portfolio securities. Neither the value nor the yield of the
U.S. Government securities invested in by the Fund (or the value or yield of the
shares of the Fund) is guaranteed by the U.S. Government. Such values and yield
will fluctuate with changes in prevailing interest rates and other factors.
Generally, as prevailing interest rates rise, the value of the U.S.
Government securities held by the Fund, and, concomitantly, the net asset value
of the Fund's shares, will fall. Such securities with longer maturities
generally tend to produce higher yields and are subject to greater market
fluctuation as a result of changes in interest rates than debt securities with
shorter maturities. As noted above, the Fund is not limited as to the maturities
of the U.S. Government securities in which it may invest.
RISKS OF MORTGAGE-BACKED SECURITIES. Mortgage-Backed Securities have
certain different char-
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acteristics than traditional debt securities. Among the major differences are
that interest and principal payments are made more frequently, usually monthly,
and that principal may be prepaid at any time because the underlying mortgage
loans or other assets generally may be prepaid at any time. As a result, if the
Fund purchases such a security at a premium, a prepayment rate that is faster
than expected may reduce yield to maturity, while a prepayment rate that is
slower than expected may have the opposite effect of increasing yield to
maturity. Alternatively, if the Fund purchases these securities at a discount,
faster than expected prepayments will increase, while slower than expected
prepayments may reduce, yield to maturity.
Mortgage-Backed Securities, like all fixed-income securities, generally
decrease in value as a result of increases in interest rates. In addition,
although generally the value of fixed-income securities increases during periods
of falling interest rates, Mortgage-Backed Securities may benefit less than
other fixed-income securities from declining interest rates because of the risk
of prepayments.
The average life of Mortgage-Backed Securities varies with the maturities of
the underlying mortgage instruments, which may be up to thirty years but which
may include mortgage instruments with maturities of fifteen years, adjustable
rate mortgage instruments, variable rate mortgage instruments, graduated rate
mortgage instruments and/or other types of mortgage instruments. The assumed
average life of mortgages backing the majority of GNMA and FNMA certificates is
twelve years, and of FHLMC certificates is ten years. This average life is
likely to be substantially shorter than the original maturity of the mortgage
pools underlying the certificates, as a pool's duration may be shortened by
unscheduled or early payments of principal on the underlying mortgages. As
prepayment rates vary widely, it is not possible to accurately predict the
average life of a particular pool.
Although the extent of prepayments on a pool of mortgage loans depends on
various factors, including the prevailing level of interest rates, general
economic conditions, the location and age of the mortgage and other social and
demographic conditions, as a general rule prepayments on fixed rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. If the Fund has purchased securities
backed by pools containing mortgages whose yields exceed the prevailing interest
rate, any premium paid for such securities may be lost. As a result, the net
asset value of shares of the Fund and the Fund's ability to achieve its
investment objective may be adversely affected by mortgage prepayments. Amounts
available for reinvestment by the Fund are likely to be greater during a period
of declining interest rates and, as a result, likely to be reinvested at lower
interest rates than during a period of rising interest rates.
There are certain risks associated specifically with CMOs. CMOs issued by
private entities are not U.S. Government securities and are not guaranteed by
any government agency, although the securities underlying a CMO may be subject
to a guarantee. Therefore, if the collateral securing the CMO, as well as any
third party credit support or guarantees, is insufficient to make payment, the
holder could sustain a loss. However, the Fund will invest in CMOs issued by
private entities only if the CMOs are rated Aaa by Moody's or AAA by S&P, or, if
unrated, such CMOs are determined to be of comparable quality to the permitted
rated investments. Also, a number of different factors, including the extent of
prepayment of principal of the Mortgage Assets, affect the availability of cash
for principal payments by the CMO issuer on any payment date and, accordingly,
affect the timing of principal payments on each CMO class.
RISKS OF OPTIONS AND FUTURES TRANSACTIONS. The Fund may close out its
position as writer of an option only if a liquid secondary market exists for
options of that series. There is no assurance that such a market will exist,
particularly in the case of OTC options, as such options will generally only be
closed out by entering into a closing purchase transaction with the purchasing
dealer. Also, Exchanges may limit the amount by which the price of a futures
contract may move on any day. If the
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<PAGE>
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.
The extent to which the Fund may enter into transactions involving options
and futures contracts 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."
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 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 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.
REPURCHASE AGREEMENTS. While repurchase agreements involve certain risks
not associated with direct investments in debt securities, the Fund follows
procedures designed to minimize those 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 Board of
Trustees of the Fund. In addition, the value of the collateral underlying the
repurchase agreement will be at least equal to the repurchase price, including
any accrued interest earned on the repurchase agreement. In the event of a
default or bankruptcy by a selling financial institution, the Fund will seek to
liquidate such collateral. However, the exercising of the Fund's right to
liquidate such collateral could involve certain costs or delays and, to the
extent that proceeds from any sale upon a default of the obligation to
repurchase were less than the repurchase price, the Fund could suffer a loss.
The Fund may not 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.
LEVERAGING. Borrowings for leveraging will be subject to current margin
requirements of the Federal Reserve Board and where necessary the Fund may use
any or all of its securities as collateral for such borrowings. Any investment
gains made with the additional monies in excess of interest paid will cause the
net asset value of the Fund's shares to rise to a greater extent than would
otherwise be the case. Conversely, if the investment performance of the
additional monies fails to cover their cost to the Fund, net asset value will
decrease to a greater extent than would otherwise be the case. This is the
speculative factor involved in leverage. If, due to market fluctuations or other
reasons, the value of the Fund's assets (including the proceeds of borrowings)
becomes at any time less than three times the amount of any outstanding bank
debt, the Fund, within three business days, will reduce its bank debt to the
extent necessary to meet the required 300% asset coverage. In doing this, the
Fund may have to sell a portion of its investments at a time when it may be
disadvantageous to do so.
ZERO COUPON SECURITIES. A portion of the U.S. Government 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
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<PAGE>
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 price fluctuations during periods of changing
prevailing interest rates than are comparable securities which pay interest
currently.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FIRM COMMITMENTS. From time
to time, in the ordinary course of business, the Fund may purchase U.S.
Government securities on a when-issued or delayed delivery basis or may purchase
or sell U.S. Government securities on a firm commitment basis. When such
transactions are negotiated, the price is fixed at the time of the commitment,
but delivery and payment can take place a month or more after the date of the
commitment. There is no overall limit on the percentage of the Fund's assets
which may be committed to the purchase of securities on a when-issued, delayed
delivery or forward commitment basis. An increase in the percentage of the
Fund's assets committed to the purchase of securities on a when-issued, delayed
delivery or forward commitment basis may increase the volatility of the Fund's
net asset value.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. The Fund may also use
reverse repurchase agreements and dollar rolls as part of its investment
strategy. Reverse repurchase agreements involve sales by the Fund of portfolio
assets concurrently with an agreement by the Fund to repurchase the same assets
at a later date at a fixed price. The Fund may enter into dollar rolls in which
the Fund sells securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type and coupon) securities
on a specified future date. Reverse repurchase agreements and dollar rolls
involve the risk that the market value of the securities the Fund is obligated
to repurchase under the agreement may decline below the repurchase price. In the
event the buyer of securities under a reverse repurchase agreement or dollar
roll files for bankruptcy or becomes insolvent, the Fund's use of the proceeds
of the agreement may be restricted pending a determination by the other party,
or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities.
Reverse repurchase agreements and dollar rolls are speculative techniques
involving leverage, and are considered borrowings by the Fund.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to brokers, dealers and
other financial institutions, provided that such loans are callable at any time
by the Fund (subject to certain notice provisions described in the Statement of
Additional Information), and are at all times secured by cash or money market
instruments, which are maintained in a segregated account pursuant to applicable
regulations and that are equal to at least the market value, determined daily,
of the loaned securities. As with any extensions of credit, there are risks of
delay in recovery and in some cases even loss of rights in the collateral should
the borrower of the securities fail financially. However, loans of portfolio
securities will only be made to firms deemed by the Investment Manager to be
creditworthy and when the income which can be earned from such loans justifies
the attendant risks.
For additional risk disclosure, please refer to the discussion of specific
investments under the "Investment Objective and Policies" section of the
Prospectus and the "Investment Practices and Policies" section of the Statement
of Additional Information.
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
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 Taxable Fixed-Income Group,
which
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manages twenty-four funds and fund portfolios, with approximately $13.3 billion
in assets at November 30, 1994. Rajesh K. Gupta, Senior Vice President of
InterCapital and a member of InterCapital's Taxable Fixed-Income Group, has been
the primary portfolio manager of the Fund since its inception and has been
managing portfolios comprised of government securities at InterCapital for over
five years.
Brokerage commissions are not normally charged on the purchase or sale of
U.S. Government obligations, but such transactions may involve costs in the form
of spreads between bid and asked prices. Orders for transactions in other
portfolio securities and commodities 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. It is not anticipated that
the portfolio trading engaged in by the Fund will result in its portfolio
turnover rate exceeding 100%.
Except as specified, the investment policies noted above are not fundamental
policies and 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 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.
3. Invest more than 10% of its total assets in
"illiquid securities" (securities for which market quotations are not readily
available) and repurchase agreements which have a maturity of longer than seven
days. The staff of the Securities and Exchange Commission ("SEC") has taken the
position that purchased OTC options and the assets used as "cover" for written
OTC options are illiquid securities. The Investment Manager disagrees with this
position. Nevertheless, the Fund has agreed to treat OTC options and the
covering assets thereon as illiquid securities for purposes of this investment
restriction.
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. Purchase or sell commodities or
commodities contracts except that the Fund may purchase or write interest rate
futures contracts and related options thereon.
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 or variation margin for futures
are not deemed to be pledges of assets.)
7. Purchase securities on margin (but the
Fund may obtain short-term loans as are necessary for the clearance of
transactions). 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.
8. Borrow money, except from banks for
investment purposes or as a temporary measure for extraordinary or emergency
purposes in an amount up to 25% of the Fund's total assets, within the limits
set forth in the Act or enter into reverse repurchase agreements in an amount
exceeding 10% of the
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<PAGE>
Fund's total assets other than for purposes of meeting redemptions.
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 Federal Securities Trust,
directly to Dean Witter Trust Company (the "Transfer Agent") at P.O. Box 1040,
Jersey City, NJ 07303 or by contacting an account executive of DWR or other
Selected Broker-Dealer. 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 five
business day settlement basis; that is, payment is due on the fifth business day
(settlement date) after the order is placed with the Distributor. Shares of the
Fund purchased through the Distributor are entitled to dividends beginning on
the next business day following settlement date. Since DWR and other Selected
Broker-Dealers forward investors' funds on settlement date, they will benefit
from the temporary use of the funds if payment is made prior thereto. Shares
purchased through the Transfer Agent are entitled to dividends beginning on the
next business day following receipt of an order. As noted above, orders placed
directly with the Transfer Agent must be accompanied by payment. Investors will
be entitled to receive capital gains distributions if their order is received by
the close of business on the day prior to the record date for such
distributions. 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 paid monthly, at an annual rate of 0.85% of the lesser of: (a)
the average daily aggregate gross sales of the Fund's shares since the inception
of the Fund (not including reinvestments of dividends or distributions), less
the average daily aggregate net asset value of the Fund's shares redeemed since
the Fund's inception upon which a contingent deferred sales charge has been
imposed or waived, or (b) the Fund's average daily net assets. This fee is
treated by the Fund as an
15
<PAGE>
expense in the year it is accrued. A portion of the fee payable pursuant to the
Plan, equal to 0.20% of the Fund's average daily net assets, is characterized as
a service fee within the meaning of NASD guidelines.
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 distribution of shares or
who service shareholder accounts, including overhead and telephone expenses;
printing and distribution of prospectuses and reports used in connection with
the offering of the Fund's shares to other than current shareholders; and
preparation, printing and distribution of sales literature and advertising
materials. In addition, the Distributor may utilize fees paid pursuant to the
Plan to compensate DWR and other Selected Broker-Dealers for their opportunity
costs in advancing such amounts, which compensation would be in the form of a
carrying charge on any unreimbursed distribution expenses.
For the fiscal year ended October 31, 1994, the Fund accrued payments under
the Plan amounting to $8,336,418, which amount is equal to 0.85% 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 amount, including the carrying
charge described above, totalled $33,656,192 at October 31, 1994, which was
equal to 3.58% 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 by
taking the value of all assets of the Fund, subtracting all its liabilities,
dividing by the number of shares outstanding and adjusting to the nearest cent.
The net asset value per share will not be determined on Good Friday and on such
other federal and non-federal holidays as are observed by the New York Stock
Exchange.
In the calculation of the Fund's net asset value: (1) all portfolio
securities for which over-the-counter market quotations are readily available
are valued at the latest bid price prior to the time of valuation, and (2) when
market quotations are not readily available, including circumstances under which
it is determined by the Investment Manager that sale or bid prices are not
reflective of a security's market value, portfolio securities are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Fund's Trustees (valuation of securities
for which market quotations are not readily available may also be based upon
current market prices of securities
16
<PAGE>
which are comparable in coupon, rating and maturity or an appropriate matrix
utilizing similar factors).
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' fair value, in which case these
securities will be valued at their fair value as determined by the Trustees. The
value of other assets will be determined in good faith under procedures
established by and under the supervision of the Trustees.
Certain of the Fund's portfolio securities may
be valued by an outside pricing service approved
by the Fund's Trustees. The pricing service 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.
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"). 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) on the monthly payment date, which will be no later
than the last business day of the month for which the dividend or distribution
is payable. Processing of dividend checks begins immediately following the
monthly payment date. Shareholders who have requested to receive dividends in
cash will normally receive their monthly dividend check during the first ten
days of the following month.
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.")
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.
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
17
<PAGE>
the Transfer Agent for further information about any of the above services.
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 account executive or the Fund.
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 and five
Dean Witter Funds which are money market funds (the foregoing eight 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 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 their 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
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
Invest-
18
<PAGE>
ment 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.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain a copy and examine it carefully
before investing. Exchanges are subject to the minimum investment requirement
and any other conditions imposed by each fund. An exchange will be treated for
federal income tax purposes the same as a repurchase or redemption of shares, on
which the shareholder may realize a capital gain or loss. However, the ability
to deduct capital losses on an exchange may be limited in situations where there
is an exchange of shares within ninety days after the shares are purchased. The
Exchange Privilege is only available in states where an exchange may legally be
made.
If DWR or another Selected Broker-Dealer is the current dealer of record and
its account numbers are part of the account information, shareholders may
initiate an exchange of shares of the Fund for shares of any of the 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) 526-3143 (toll free).
The Fund will employ reasonable procedures to confirm that exchange
instructions communicated over the telephone are genuine. Such procedures may
include requiring various forms of personal identification such as name, mailing
address, social security or other tax identification number and DWR or other
Selected Broker-Dealer account number (if any). Telephone instructions may also
be recorded. If such procedures are not employed, the Fund may be liable for any
losses due to unauthorized or fraudulent instructions.
Telephone exchange instructions will be accepted if received by the Transfer
Agent between 9:00 a.m. and 4:00 p.m., New York time, on any day the New York
Stock Exchange is open. Any shareholder wishing to make an exchange who has
previously filed an Exchange Privilege Authorization Form and who is unable to
reach the Fund by telephone should contact his or her DWR or other Selected
Broker-Dealer account executive, if appropriate, or make a written exchange
request. Shareholders are advised that during periods of drastic economic or
market changes, it is possible that the telephone exchange procedures may be
difficult to implement, although this has not been the 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.
19
<PAGE>
REDEMPTIONS AND REPURCHASES
- --------------------------------------------------------------------------------
REDEMPTION. Shares of the Fund can be redeemed for cash at any time at the
net asset value per share next determined; however, such redemption proceeds may
be reduced by the amount of any applicable contingent deferred sales charges
(see below). If shares are held in a shareholder's account without a share
certificate, a written request for redemption 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 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 ON A PERCENTAGE OF
PAYMENT MADE AMOUNT REDEEMED
- ----------------------------------- ------------------------
<S> <C>
First.............................. 5.0%
Second............................. 4.0%
Third.............................. 3.0%
Fourth............................. 2.0%
Fifth.............................. 2.0%
Sixth.............................. 1.0%
Seventh and thereafter............. None
</TABLE>
A CDSC will not be imposed on: (i) any amount which represents an increase
in value of shares purchased within the six years preceding the redemption; (ii)
the current net asset value of shares purchased more than six years prior to the
redemption; and (iii) the current net asset value of shares purchased through
reinvestment of dividends or distributions and/or shares acquired in exchange
for shares of Dean Witter Funds sold with a front-end sales charge or of other
Dean Witter Funds acquired in exchange for such shares. Moreover, in determining
whether a CDSC is applicable it will be assumed that amounts described in (i),
(ii), and (iii) above (in that order) are redeemed first.
In addition, the CDSC, if otherwise applicable, will be waived in the case
of (i) 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 or Custodial Account under Section 403(b)(7) of the Internal Revenue
Code, provided in either case that the redemption is requested within one year
of the death or initial determination of disability, and (ii) 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 Individual
Retirement Account or Custodial Account under Section 403(b) (7) of the Internal
Revenue Code following attainment of age 59 1/2; or (c) a tax-free return of an
excess contribution to an IRA. 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. All waivers will be granted only following receipt by the
Distributor of confirmation of the investor's entitlement.
REPURCHASE. DWR and other Selected Broker-Dealers are authorized to
repurchase shares represented by a share certificate which is delivered
20
<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 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 and 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 executive regarding restrictions on
redemption of shares of the Fund pledged in the margin account.
REINSTATEMENT PRIVILEGE. A shareholder who has had his or her shares
redeemed or repurchased and has not previously exercised this reinstatement
privilege may, within thirty days after the date of the redemption or
repurchase, reinstate any portion or all of the proceeds of such redemption or
repurchase in shares of the Fund at 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 Trustees. However,
before the Fund redeems such shares and sends the proceeds to the shareholder,
it will notify the shareholder that the value of the shares is less than $100
and allow him or her sixty days to make an additional investment in an amount
which will increase the value of his of her account to $100 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 declares dividends from net
investment income on each day the New York Stock Exchange is open for business
to shareholders of record as of the close of business the preceding business
day. Such dividends are paid monthly. The Fund intends to distribute all of the
Fund's net investment income on an annual basis.
The Fund may pay quarterly dividends of realized net short-term capital
gains, if any. Such dividends may include a portion of the premiums
received by the Fund from expired call and put options written by the Fund on
U.S. Government securities, and of the net gains realized on closing purchase
transactions with respect to such options. The Fund may elect to retain a
portion of any net short-term capital gains for reinvestment. Net realized
long-term capital gains, if any, will be distributed at least once per year,
although the Investment Manager reserves the right to retain a portion of such
gains for reinvestment.
21
<PAGE>
As of October 31, 1994, the Fund had a net capital loss carryover of
approximately $85,553,000. To the extent of such carryover, the Fund could
retain gains realized in future years without either the Fund or its
shareholders being required to pay a tax on such gains. However, the Fund may
distribute to shareholders realized gains. Such distributions could,
notwithstanding the loss carryover, be taxable to shareholders to the extent of
the Fund's realized gains. Also, the Fund may at times make payments from
sources other than income or net capital gains. Payments from such sources
would, in effect, represent a return of a portion of each shareholder's
investment. All, or a portion, of such payments would not be taxable to
shareholders.
All dividends and capital gains distributions will be paid in additional
Fund shares (without sales charge) and automatically credited to the
shareholder's account without issuance of a share certificate unless the
shareholder requests in writing that all dividends be paid in cash. (See
"Shareholder Services--Automatic Investment of Dividends and Distributions".)
TAXES. Because the Fund intends to distribute all of its net investment
income and net short-term capital gains to shareholders and otherwise 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 on such income and capital gains.
Gains or losses on the Fund's transactions in listed options on securities,
futures and options on futures may be 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 net short-term gains being available for quarterly
distribution.
As a regulated investment company, the Fund is subject to the requirement
that less than 30% of its gross income be derived 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.
Shareholders who are required to pay taxes on their income will normally
have to pay federal income taxes, and any applicable state and/or local 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 and net short-term capital gains, are taxable to the
shareholder as ordinary dividend income regardless of whether the shareholder
receives such distributions in additional shares or in cash.
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 corporate dividends received deduction.
After the end of the calendar year, shareholders will be sent full
information on their dividends and capital gains distributions for tax purposes.
To avoid being subject to a 31% federal backup withholding tax on taxable
dividends, distributions and the proceeds of redemptions and repurchases,
shareholders' taxpayer identification numbers must be furnished and certified as
to their accuracy.
The foregoing discussion relates solely to the federal income tax
consequences of an investment in the Fund. Distributions may also be subject to
state and local taxes; therefore, each shareholder is advised to consult his or
her own tax adviser.
22
<PAGE>
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund may quote its "yield" and/or its "total return"
in advertisements and sales literature. Both the yield and the total return of
the Fund are based on historical earnings and are not intended to indicate
future performance. The yield of the Fund is computed by dividing the Fund's net
investment income over a 30-day period by an average value (using the average
number of shares entitled to receive dividends and the 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 periods of one and five 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 indexes compiled by independent organizations
(such as Lipper Analytical Services, Inc. and Salomon Brothers Treasury Index,
Shearson Lehman Government Bond Index, Merrill Lynch Mortgage Master Index and
Donahue's Money Market Index).
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
being unable to meet its obligations is remote and, in the opinion of
Massachusetts counsel to the Fund, the risk to Fund shareholders of personal
liability is remote.
SHAREHOLDER INQUIRES. 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.
23
<PAGE>
Dean Witter Dean Witter
Federal Securities Trust Federal
Two World Trade Center Securities Trust
New York, New York 10048
TRUSTEES
Jack F. Bennett
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
Rajesh K. Gupta
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 -- DECEMBER 28, 1994
<PAGE>
<TABLE>
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION DEAN WITTER
DECEMBER 28, 1994 FEDERAL SECURITIES
TRUST
</TABLE>
- --------------------------------------------------------------------------------
Dean Witter Federal Securities Trust (the "Fund") is an open-end diversified
management investment company whose investment objective is to earn a high level
of current income. The Fund will seek to achieve its investment objective by
investing primarily in debt securities issued by the U.S. Government, its
agencies or instrumentalities and by writing covered call and put options
against such securities. The Fund may also purchase options on such securities
to effect closing transactions. In addition, to hedge the Fund's portfolio of
securities against changes in prevailing interest rates, the Fund may purchase
put options on U.S. Government securities and engage in transactions involving
interest rate futures contracts and options on such contracts. Shares of the
Fund are not issued, insured or guaranteed by the U.S. Government, its agencies
or instrumentalities.
A Prospectus for the Fund dated December 28, 1994, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge from the Fund at its address or telephone number 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 you
additional information regarding the activities and operations of the Fund, and
should be read in conjunction with the Prospectus.
Dean Witter
Federal Securities Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550
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TABLE OF CONTENTS
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<S> <C>
The Fund and its Management............................................................ 3
Trustees and Officers.................................................................. 6
Investment Practices and Policies...................................................... 9
Investment Restrictions................................................................ 21
Portfolio Transactions and Brokerage................................................... 22
The Distributor........................................................................ 23
Shareholder Services................................................................... 26
Redemptions and Repurchases............................................................ 31
Dividends, Distributions and Taxes..................................................... 33
Performance Information................................................................ 35
Description of Shares of the Fund...................................................... 36
Custodian and Transfer Agent........................................................... 37
Independent Accountants................................................................ 37
Reports to Shareholders................................................................ 37
Legal Counsel.......................................................................... 37
Experts................................................................................ 37
Registration Statement................................................................. 38
Report of Independent Accountants...................................................... 39
Financial Statements -- October 31, 1994............................................... 40
Appendix -- Ratings of Corporate Debt Instruments...................................... 48
</TABLE>
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THE FUND AND ITS MANAGEMENT
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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
November 20, 1986. The Fund's name was changed from Dean Witter Government
Securities Plus to Dean Witter Federal Securities Trust by the Trustees of the
Fund on August 17, 1992.
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 Dean Witter InterCapital Inc. thereafter.) The daily
management of the Fund and research relating to the Fund's portfolio is
conducted by or under the direction of officers of the Fund and of the
Investment Manager, subject to 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 investment companies: Dean Witter Liquid Asset Fund Inc., InterCapital
Income Securities Inc., Dean Witter High Yield Securities Inc., Dean Witter
Tax-Free Daily Income Trust, Dean Witter Developing Growth Securities Trust,
Dean Witter Tax-Exempt Securities Trust, Dean Witter Natural Resource
Development Securities, Inc., Dean Witter Dividend Growth Securities Inc., Dean
Witter American Value Fund, 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 California Tax-Free Income Fund, Dean Witter New
York Tax-Free Income Fund, Dean Witter Convertible Securities Trust, Dean Witter
Intermediate Income Securities, Dean Witter Value-Added Market Series, High
Income Advantage Trust, High Income Advantage Trust II, High Income Advantage
Trust III, Dean Witter Government Income Trust, Dean Witter Utilities Fund, Dean
Witter Managed Assets Trust, Dean Witter California Tax-Free Daily Income Trust,
Dean Witter Strategist Fund, Dean Witter World Wide Income Trust, Dean Witter
New York Municipal Money Market Trust, Dean Witter Capital Growth Securities,
Dean Witter European Growth Fund Inc., Dean Witter Precious Metals and Minerals
Trust, Dean Witter Global Short-Term Income Fund Inc., Dean Witter Pacific
Growth Fund Inc., Dean Witter Multi-State Municipal Series Trust, Dean Witter
Premier Income Trust, Dean Witter Short-Term U.S. Treasury Trust, InterCapital
Insured Municipal Bond Trust, InterCapital Insured Municipal Trust, InterCapital
Insured Municipal Income Trust, InterCapital California Insured Municipal Income
Trust, InterCapital Insured Municipal Securities, 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, 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 National Municipal Trust, Dean Witter High Income Securities,
Dean Witter International SmallCap Fund, Dean Witter Mid-Cap Growth Fund, Dean
Witter Select Dimensions Investment Series, Active Assets Money Trust, Active
Assets Tax-Free Trust, Active Assets California Tax-Free Trust, Active Assets
Government Securities Trust, Municipal Income Trust, Municipal Income Trust II,
Municipal Income Trust III, Municipal Income Opportunities Trust, Municipal
Income Opportunities Trust II, Municipal Income Opportunities Trust III, Prime
Income Trust and Municipal Premium Income Trust. The foregoing investment
companies, together with the Fund, are collectively referred to as the Dean
Witter Funds.
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In addition, Dean Witter Services Company Inc. ("DWSC"), a wholly-owned
subsidiary of InterCapital, serves as manager for the following companies for
which TCW Funds Management, Inc. is the 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 North American Intermediate Income Trust, TCW/DW Global
Convertible Trust, TCW/DW Total Return 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.
The Investment Manager also serves as an investment adviser for Dean Witter
World Wide Investment Fund, an investment company organized under the laws of
Luxembourg, shares of which may not be offered in the United States or purchased
by American citizens outside of the United States.
Pursuant to an Investment Management Agreement (the "Agreement") with the
Investment Manager, the Fund has retained the Investment Manager to manage the
investment of the Fund's assets, including the placing of orders for the
purchase and sale of portfolio securities. The Investment Manager obtains and
evaluates such information and advice relating to the economy, securities
markets, and specific securities as it considers necessary or useful to
continuously manage the assets of the Fund in a manner consistent with its
investment objective and policies.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, such office space, facilities,
equipment, clerical help, bookkeeping and legal services as the Fund may
reasonably require in the conduct of its business, including the preparation of
prospectuses, 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. The foregoing
internal reorganization 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, Dean Witter Distributors Inc.
("Distributors" or the "Distributor") (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 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;
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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: 0.55% of the portion of
the daily net assets of the Fund not exceeding $1 billion; 0.525% of the portion
of the Fund's daily net assets exceeding $1 billion but not exceeding $1.5
billion; 0.50% of the portion of the Fund's daily net assets exceeding $1.5
billion but not exceeding $2 billion; 0.475% of the portion of the Fund's daily
net assets exceeding $2 billion but not exceeding $2.5 billion; 0.45% of the
portion of the Fund's daily net assets exceeding $2.5 billion but not exceeding
$5 billion; 0.425% of the portion of the Fund's daily net assets exceeding $5
billion but not exceeding $7.5 billion; 0.40% of the portion of the Fund's daily
net assets exceeding $7.5 billion but not exceeding $10 billion; 0.375% of the
portion of the Fund's daily net assets exceeding $10 billion but not exceeding
$12.5 billion; and 0.35% of the portion of the Fund's daily net assets exceeding
$12.5 billion. Total compensation accrued to the Investment Manager for the
fiscal years ended October 31, 1992, 1993 and 1994 amounted to $6,570,105,
$6,311,824 and $5,387,156, respectively.
Pursuant to the Agreement, 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), exceed
2 1/2% of the first $30,000,000 of average daily net assets, 2% of the next
$70,000,000 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 its fiscal years ended October 31, 1992, 1993 and
1994.
The Agreement provides that in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations thereunder, the
Investment Manager is not liable to the Fund or any of its investors for any act
or omission by the Investment Manager or for any losses sustained by the Fund or
its investors. The Agreement in no way restricts the Investment Manager from
acting as investment manager or adviser to others.
The Agreement was initially approved by the Trustees on October 30, 1992 and
by the shareholders of the Fund at a Special Meeting of Shareholders on January
12, 1993. The Agreement is substantially identical to a prior investment
agreement which was initially approved by the Trustees on December 15, 1986, by
DWR as the then sole shareholder on January 13, 1987 and by the shareholders at
a Meeting of Shareholders on May 31, 1988, as such prior agreement had been
amended by the Independent Trustees at their meeting held on April 28, 1988 to
lower the management fee payable to the Investment Manager to the current fee
payable. The Agreement took effect on June 30, 1993 upon the spin-off by Sears,
Roebuck and Co. of its remaining shares of DWDC. The Agreement may be terminated
at any time, without penalty, on thirty days' notice by the Board of Trustees of
the Fund, by the holders of a majority, as defined in the Investment Company Act
of 1940 (the "Act"), of the outstanding shares of the Fund, or by the Investment
Manager. The Agreement will automatically terminate in the event of its
assignment (as defined in the Act).
Under its terms, the Agreement had an initial term ending April 30, 1994,
and will remain in effect from year to year thereafter, provided continuance of
the Agreement is approved at least annually by the vote of the holders of a
majority (as defined in the Act) of the outstanding shares of the Fund, or by
the 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
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a meeting called for the purpose of voting on such approval. At their meeting
held on April 8, 1994, the Fund's Board of Trustees, including all of the
Independent Trustees, approved continuation of the Agreement until April 30,
1995.
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
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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 Dean WItter Funds and the TCW/DW Funds are shown
below.
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NAME, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
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<S> <C>
Jack F. Bennett Retired; Director or Trustee of the Dean Witter Funds;
Trustee formerly Senior Vice President and Director of Exxon
c/o Gordon Altman Butowsky Weitzen Corporation (1975-January, 1989) and Under Secretary of
Shalov & Wein the U.S. Treasury for Monetary Affairs (1974-1975);
Counsel to the Independent Trustees Director of Philips Electronics N.V., Tandem Computers
114 West 47th Street Inc. and Massachusetts Mutual Insurance Company; director
New York, New York or trustee of various not-for-profit and business
organizations.
Michael Bozic President and Chief Executive Officer of Hills Department
Trustee Stores (since May, 1991); formerly Chairman and Chief
c/o Hills Stores Inc. Executive Officer (January, 1987-August, 1990) and
15 Dan Road President and Chief Operating Officer (August,
Canton, Massachusetts 1990-February, 1991) of the Sears Merchandise Group of
Sears, Roebuck and Co.; Director or Trustee of the Dean
Witter Funds; Director of Harley Davidson Credit Inc., the
United Negro College Fund and Domain Inc. (home decor
retailer).
Charles A. Fiumefreddo* Chairman, Chief Executive Officer and Director of
Chairman of the Board, President, InterCapital, DWSC and Distributors; Executive Vice
Chief Executive Officer and Trustee President and Director of DWR; Chairman, Director or
Two World Trade Center Trustee, President and Chief Executive Officer of the Dean
New York, New York Witter Funds; Chairman, Chief Executive Officer and
Trustee of the TCW/DW Funds; Chairman and Director of Dean
Witter Trust Company ("DWTC"); Director and/or officer of
various DWDC subsidiaries; formerly Executive Vice
President and Director of DWDC (until February, 1993).
Edwin J. Garn 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
2000 Eagle Gate Tower 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); member of the board of various civic and charitable
organizations.
</TABLE>
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<TABLE>
<CAPTION>
NAME, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
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<S> <C>
John R. Haire 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) and Bowne & Co., Inc. (printing).
Dr. Manuel H. Johnson 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, DC 1990); Co-Chairman and a founder of the Group of Seven
Council (G7C), an international economic commission (since
September, 1990); Director or Trustee of the Dean Witter
Funds; Trustee of the TCW/DW Funds; Director of 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 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 Weitzen Independent Trustees and Trustee of the TCW/DW Funds;
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.
Michael E. Nugent 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 (September, 1984-March 1988);
Director of various business organizations.
Philip J. Purcell* 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.
</TABLE>
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<TABLE>
<CAPTION>
NAME, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
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<S> <C>
John L. Schroeder Executive Vice President and Chief Investment Officer of
Trustee the Home Insurance Company (since August, 1991); Director
c/o The Home Insurance Company or Trustee of the Dean Witter Funds; Director of Citizens
59 Maiden Lane Utilities Company; formerly Chairman and Chief Investment
New York, New York Officer of Axe-Houghton Management and the Axe-Houghton
Funds (April, 1983-June, 1991) and President of USF&G
Financial Services, Inc. (June, 1990-June, 1991).
Sheldon Curtis 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.
Rajesh K. Gupta Senior Vice President of InterCapital (since May, 1991);
Vice President Vice President of various Dean Witter Funds; previously
Two World Trade Center Vice President of InterCapital.
New York, New York
Thomas F. Caloia 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>
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*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, Edmund C. Puckhaber, Executive Vice President of InterCapital, and
Kenton J. Hinchliffe, Jonathan R. Page and James F. Willison, Senior Vice
Presidents of InterCapital, are Vice Presidents of the Fund, and Marilyn K.
Cranney and Barry Fink, First Vice Presidents and Assistant General Counsels of
InterCapital and DWSC, and Lawrence S. Lafer, Lou Anne D. McInnis and Ruth
Rossi, Vice Presidents and Assistant General Counsels of InterCapital and DWSC,
are Assistant Secretaries of the Fund.
The Fund pays each Trustee who is not an employee or retired employee of the
Investment Manager or an affiliated company an annual fee of $1,200 plus $50 for
each meeting of the Board of Trustees or any committee of the Board of Trustees
attended by the Trustee in person (the Fund pays the Chairman of the Audit
Committee an annual fee of $1,000 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 a
minimum required period of service would be entitled to retirement payments upon
reaching the eligible retirement age (normally, after attaining age 72) based
upon length of service and computed as a percentage of one-fifth of the total
compensation earned by such Trustee for service to the Fund in the five-year
period prior to the date of the Trustee's retirement.
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For the fiscal year ended October 31, 1994, the Fund accrued a total of $34,020
for Trustees' fees and expenses and benefits under the retirement program. As of
the date of this Statement of Additional Information, the aggregate 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
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As discussed in the Prospectus, certain of the U.S. Government securities
purchased by the Fund are "mortgage-backed securities", which evidence an
interest in a specific pool of mortgages. Such securities are issued by the
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
GNMA CERTIFICATES. GNMA Certificates evidence an interest in a specific
pool of mortgages insured by the Federal Housing Administration ("FHA") or the
Farmers Home Administration or guaranteed by the Veterans Administration ("VA").
Scheduled payments of principal and interest are made to the registered holders
of GNMA Certificates. The GNMA Certificates that the Fund will invest in are of
the modified pass-through type. GNMA guarantees the timely payment of monthly
installments of principal and interest on modified pass-through certificates at
the time such payments are due, whether or not such amounts are collected by the
issuer on the underlying mortgages. The National Housing Act provides that the
full faith and credit of the United States is pledged to the timely payment of
principal and interest by GNMA of amounts due on these GNMA Certificates.
The average life of GNMA Certificates varies with the maturities of the
underlying mortgage instruments, with maximum maturities of 30 years. The
average life is likely to be substantially less than the original maturity of
the mortgage pools underlying the securities as the result of prepayments or
refinancing of such mortgages or foreclosure. Such prepayments are passed
through to the registered holder with the regular monthly payments of principal
and interest, which has the effect of reducing future payments. Due to the GNMA
guarantee, foreclosures impose no risk to principal investments.
The average life of pass-through pools varies with the maturities of the
underlying mortgage instruments. In addition, a pool's term may be shortened by
unscheduled or early payments of principal on the underlying mortgages. The
occurrence of mortgage prepayments is affected by such factors as the level of
interest rates, general economic conditions, the location and age of the
mortgage and other social and demographic conditions. As prepayment rates vary
widely, it is not possible to accurately predict the average life of a
particular pool. However, statistics indicate that the average life of the type
of mortgages backing the majority of GNMA Certificates is approximately 12
years. For this reason, it is standard practice to treat GNMA Certificates as
30-year mortgage-backed securities which prepay fully in the twelfth year. Pools
of mortgages with other maturities or different characteristics will have
varying assumptions for average life. The assumed average life of pools of
mortgages having terms of less than 30 years is less than 12 years, but
typically not less than 5 years.
The coupon rate of interest of GNMA Certificates is lower than the interest
rate paid on the VA-guaranteed or FHA-insured mortgages underlying the
Certificates, but only by the amount of the fees paid to GNMA and the issuer.
Such fees in the aggregate usually amount to approximately .50 of 1%.
Yields on pass-through securities are typically quoted by investment dealers
and vendors based on the maturities of the underlying instruments and the
associated average life assumption. In periods of falling interest rates, the
rate of prepayment tends to increase, thereby shortening the actual average life
of a pool of mortgage-related securities. Conversely, in periods of rising
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. Reinvestment by the Fund of prepayments may occur at
higher or lower interest rates than the original investment. Historically,
actual average life has been consistent with the 12-year assumption referred to
above. The actual yield of each GNMA Certificate is influenced by the prepayment
experience of the mortgage pool underlying the Certificates. Interest on GNMA
Certificates is paid monthly, rather than semiannually, as is the case with
traditional bonds.
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FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation was created in
1970 through enactment of Title III of the Emergency Home Finance Act of 1970.
Its purpose is to promote development of a nationwide secondary market in
conventional residential mortgages.
The FHLMC issues two types of mortgage pass-through securities, mortgages
participation certificates ("PCs") and guaranteed mortgages certificates
("GMCs"). PCs resemble GNMA Certificates in that each PC represents a pro rata
share of all interest and principal payments made and owned on the underlying
pool. The FHMLC guarantees timely monthly payment of interest on PCs and the
full return of principal when due. PCs have an assumed average life similar to
GNMA Certificates.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years.
FNMA SECURITIES. The Federal National Mortgage Association was established
in 1938 to create a secondary market in mortgages insured by the FHA.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of interest
on FNMA Certificates and the full return of principal. FNMA Certificates have an
assumed average life similar to GNMA Certificates.
LEVERAGING. As discussed in the Prospectus, the Fund may borrow money, but
only from a bank and in an amount up to 25% of the value of the Fund's total
assets taken at the lower of market value or cost, not including the amount
borrowed, in an effort to obtain additional income by leveraging its investments
through purchasing securities with the borrowed funds. Such borrowings will be
subject to current margin requirements of the Federal Reserve Board and where
necessary the Fund may use any or all of its securities as collateral for such
borrowings. Any investment gains made with the additional monies in excess of
interest paid will cause the net asset value of the Fund's shares to rise to a
greater extent than would otherwise be the case. Conversely, if the investment
performance of the additional monies fails to cover their cost to the Fund, net
asset value will decrease to a greater extent than would otherwise be the case.
This is the speculative factor involved in leverage.
The Fund will be required to maintain an asset coverage (including the
proceeds of borrowings) of at least 300% of such borrowings in accordance with
the provisions of the Act. If, due to market fluctuations or other reasons, the
value of the Fund's assets (including the proceeds of borrowings) becomes at any
time less than three times the amount of any outstanding bank debt, the Fund,
within three business days, will reduce its bank debt to the extent necessary to
meet the required 300% asset coverage. In restoring the 300% asset coverage, the
Fund may have to sell a portion of its investments at a time when it may be
disadvantageous to do so.
The investment policy provides that the Fund may not purchase or sell a
security on margin. The margin and bank borrowing restrictions will prevent the
ordinary purchase of a security which involves a cash borrowing from a broker of
any part of the purchase price of a security.
The Fund may also borrow from banks as a temporary measure for extraordinary
or emergency purposes, and for these purposes and leveraging combined, in no
event an amount greater than 25% of the value of the Fund's total assets. The
Fund did not borrow any money during its fiscal year ended October 31, 1994.
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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 Fund 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 Board of 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. The Fund has not
to date lent any of its portfolio securities.
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 collateral will be maintained in a segregated account and will be
marked to market daily to determine that the full value of the collateral, as
specified in the agreement, does not decrease. If such decrease occurs,
additional collateral (Government securities) will be added to the account to
maintain full collateralization. In the event the original seller defaults on
its obligations, the Fund will seek to sell the collateral, which action could
involve costs or delays. In such case, the Fund's ability to dispose of the
collateral to recover its investment may be restricted or delayed.
The Fund will accrue interest from the institution until the time when the
repurchase is to occur. Although such date is deemed by the Fund to be the
maturity date of a repurchase agreement, the maturities of securities subject to
repurchase agreements are not subject to any limits. 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. 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
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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 entered into repurchase agreements during the fiscal year ended October
31, 1994 in amounts not exceeding 5% of the Fund's total assets.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. The Fund may also use
reverse repurchase agreements and dollar rolls as part of its investment
strategy. Reverse repurchase agreements involve sales by the Fund of portfolio
assets concurrently with an agreement by the Fund to repurchase the same assets
at a later date at a fixed price. Generally, the effect of such a transaction is
that the Fund can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are only advantageous if the interest cost to the
Fund of the reverse repurchase transaction is less than the cost of obtaining
the cash otherwise. Opportunities to achieve this advantage may not always be
available, and the Fund intends to use the reverse repurchase technique only
when it will be to its advantage to do so.
The Fund may enter into dollar rolls in which the Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Fund foregoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the lower forward price for the future purchase (often referred
to as the "drop") as well as by the interest earned on the cash proceeds of the
initial sale.
The Fund will establish a segregated account with its Custodian in which it
will maintain cash or cash equivalents or other portfolio securities (i.e., U.S.
Government securities) equal in value to its obligations in respect of reverse
repurchase agreements. Reverse repurchase agreements and dollar rolls are
considered borrowings by the Fund and for purposes other than meeting
redemptions may not exceed 10% of the Fund's total assets.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. As
discussed in the Prospectus, from time to time the Fund may purchase securities
on a when-issued or delayed delivery basis or may purchase or sell securities on
a forward commitment basis. When 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 or
dividends accrue to the purchaser prior to the settlement date. At the time the
Fund makes the commitment to purchase or sell securities on a when-issued,
delayed delivery or forward commitment basis, it will record the transaction and
thereafter reflect the value, each day, of such security purchased or, if a
sale, the proceeds to be received, in determining its net asset value. At the
time of delivery of the securities, their value may be more or less than the
purchase or sale price. The Fund will also establish a segregated account with
its custodian bank in which it will continually maintain cash or cash
equivalents or other portfolio (U.S. Government) securities equal in value to
commitments to purchase securities on a when-issued, delayed delivery or forward
commitment basis.
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) by purchasing put and call options on portfolio (or eligible
portfolio) securities and engaging in transactions involving futures contracts
and options on such contracts.
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Call and put options on U.S. Treasury notes, bonds and bills are listed on
Exchanges (currently the Chicago Board Options Exchange and the American 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.
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 member banks of the Federal Reserve System or primary
U.S. Government securities dealers or with affiliates of such banks or dealers
which have capital of at least $50 million or whose obligations are guaranteed
by an entity having capital of at least $50 million.
OPTIONS ON TREASURY BONDS AND NOTES. Because trading interest in options
written on Treasury bonds and notes tends to center mostly 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 it will
be treated as being covered.
OPTIONS ON GNMA CERTIFICATES. Currently, options on GNMA Certificates are
only traded over-the-counter. Since the remaining principal balance of GNMA
Certificates declines each month as a result of mortgage payments, the Fund, as
a writer of a GNMA call holding GNMA Certificates as "cover" to satisfy its
delivery obligation in the event of exercise, may find that the GNMA
Certificates it holds no longer have a sufficient remaining principal balance
for this purpose. Should this occur, the Fund will purchase additional GNMA
Certificates from the same pool (if obtainable) or replacement GNMA Certificates
in the cash market in order to maintain its cover. A GNMA Certificate held by
the Fund to cover an option position in any but the nearest expiration month may
cease to represent cover for the option in the event of a decline in the GNMA
coupon rate at which new pools are originated under the FHA/VA loan ceiling in
effect at any given time, as such decline may increase the prepayments made on
other mortgage pools. If this should occur, the Fund will no longer be covered,
and the Fund will either enter into a closing purchase transaction or replace
such Certificate with a Certificate which represents cover. When the Fund closes
out its position or replaces such Certificate, it may realize an unanticipated
loss and incur transaction costs.
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RISKS OF OPTIONS ON U.S. GOVERNMENT SECURITIES. 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. 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 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 or to purchase
an offsetting OTC option, 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 secured put option writer who is unable to
effect a closing purchase transaction or to purchase an offsetting OTC option
would continue to bear the risk of decline in the market price of the underlying
security until the option expires or is exercised. In addition, a secured put
writer would be unable to utilize the amount held in cash or U.S. Government
securities as security for the put option for other investment purposes until
the exercise or expiration of the option.
As discussed in the Prospectus, the Fund's ability to close out its position
as a writer of an exchange-listed option is dependent upon the existence of a
liquid secondary market on Option Exchanges. 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.
The hours of trading for options on U.S. Government securities 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.
COVERED CALL WRITING. The Fund is permitted to write covered call options
on portfolio securities, without limit. 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 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
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<PAGE>
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 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 and OTC 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 up to eighteen
months 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 and Futures 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, at
all times, 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 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). In the case of listed options, 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.
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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
differences 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 and OTC 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 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 which is sold.
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 or to purchase
an offsetting OTC option, 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 secured put option writer who is unable to
effect a closing purchase transaction or to purchase an offsetting OTC option
would continue to bear the risk of decline in the market price of the underlying
security until the option expires or is exercised. In addition, a secured put
writer would be unable to utilize the amount held in cash or U.S. Government
securities or other high grade debt obligations as security 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, particularly in the case of
OTC options, as such options will generally only be closed out by entering into
a closing purchase transaction with the purchasing dealer. 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).
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<PAGE>
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.
INTEREST RATE FUTURES CONTRACTS. As a purchaser of an interest rate futures
contract ("futures contract"), the Fund incurs an obligation to take delivery of
a specified amount of the obligation underlying the futures contract at a
specified time in the future for a specified price. As a seller of a futures
contract, the Fund incurs an obligation to deliver the specified amount of the
underlying obligation at a specified time in return for an agreed upon price.
The Fund will purchase or sell futures contracts for the purpose of hedging
its portfolio (or anticipated portfolio) securities against changes in
prevailing interest rates. If the Investment Manager anticipates that interest
rates may rise and, concomitantly, the price of U.S. Government securities fall,
the Fund may sell a futures contract. If declining interest rates are
anticipated, the Fund may purchase a futures contract to protect against a
potential increase in the price of U.S. Government securities the Fund intends
to purchase. Subsequently, appropriate U.S. Government securities may be
purchased by the Fund in an orderly fashion; as securities are purchased,
corresponding futures positions would be terminated by offsetting sales of
contracts. In addition, futures contracts will be bought or sold in order to
close out a short or long position in a corresponding futures contract.
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 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
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<PAGE>
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 its Custodian, in a segregated account in the name of the broker
performing the transaction an "initial margin" of cash or U.S. Government
securities 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 marked to market daily and the
Fund may be required to make subsequent deposits into the segregated account,
maintained at its Custodian for that purpose, of cash or U.S. Government
securities, called "variation margin", in the name of the 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), and the writer the obligation, 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 U.S. Government
securities 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 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")
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<PAGE>
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 U.S. Government securities held by the Fund. However, it
is possible that the futures market may advance and the value of securities held
in the Fund's portfolio may decline. If this were to occur, the Fund would lose
money on the futures contracts and also experience a decline in value in its
portfolio securities. However, while this could occur for a very brief period or
to a very small degree, over time the market prices of the securities of a
diversified portfolio will tend to move in the same direction as the prices of
futures contracts.
If the Fund purchases a futures contract to hedge against the increase in
value of U.S. Government securities it intends to buy, and the value of such
securities decreases, then the Fund 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 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 interest rate 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.
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<PAGE>
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 broker
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
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 interest rate 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 relationships between the debt
securities and futures market 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 U.S. Government 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.
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 contracts or underlying U.S. Government 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.
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
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<PAGE>
contribute to its investment objective. As a result, the Fund's portfolio
turnover rate may exceed 100% (although it is not anticipated to do so). 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.
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 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.
4. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
5. 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 reverse repurchase agreement; (b) borrowing money; or (c)
purchasing any securities on a when-issued, delayed delivery or forward
commitment basis.
6. Make loans of money or securities, except: (a) by the purchase of
publicly distributed debt obligations in which the Fund may invest
consistent with its investment objectives and policies; (b) by investment in
repurchase or reverse purchase agreements; or (c) by lending its portfolio
securities.
7. 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.
8. Invest for the purpose of exercising control or management of any
other issuer.
9. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry. This restriction does not apply to obligations
issued or guaranteed by the United States Government or its agencies or
instrumentalities.
10. Make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without payment
of any further consideration, for securities of the same issue as, and equal
in amount to, the securities sold short, and unless not more than 10% of the
Fund's net assets (taken at market value) is held as collateral for such
sales at any one time (it is the present
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<PAGE>
intention of management to make such sales only for the purpose of deferring
realization of gain or loss for Federal income tax purposes; such sales
would not be made of securities subject to outstanding options).
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 the foregoing restrictions.
PORTFOLIO TRANSACTIONS AND BROKERAGE
- --------------------------------------------------------------------------------
Subject to the general supervision of the Trustees of the Fund, the
Investment Manager is responsible for the investment decisions and the placing
of the orders for portfolio transactions for the Fund. The Fund's portfolio
transactions will occur primarily with issuers, underwriters or major dealers in
U.S. Government securities acting as principals. Such transactions are normally
on a net basis and do not involve payment of brokerage commissions. The cost of
securities purchased from an underwriter usually includes a commission paid by
the issuer to the underwriters; transactions with dealers normally reflect the
spread between bid and asked prices. Options and futures transactions will
usually be effected through a broker and a commission will be charged. During
the fiscal years ended October 31, 1992, 1993 and 1994, the Fund paid a total of
$90,817, $82,663 and $104,215, respectively, in brokerage commissions.
The Investment Manager currently serves as investment manager to a number of
clients, including other investment companies, and may in the future act as
investment manager or adviser to others. It is the practice of the Investment
Manager to cause purchase or 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 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. During the
fiscal year ended October 31, 1994, the Fund did not direct the payment of any
brokerage commissions because of research services provided.
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.
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.
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<PAGE>
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 October 31, 1992, 1993 and
1994, the Fund paid a total of $12,961, $8,910 and $10,971, 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 October 31, 1994, the brokerage
commissions paid to DWR represented approximately 10.53% of the total brokerage
commissions paid by the Fund during the year and were paid on account of
transactions having an aggregate dollar value equal to approximately 13.04% of
the aggregate dollar value of all portfolio transactions of the Fund during the
year for which commissions were paid. The percentage of transactions effected by
DWR as broker exceeds the percentage of total brokerage commissions paid to DWR
as a result of a discounted brokerage commission rate received by the Fund from
DWR, as a QUID PRO QUO for clearing all futures transactions through DWR. In
addition, during the fiscal years ended October 31, 1992, 1993 and 1994, the
Fund paid DWR $72,948, $69,450 and $81,776, respectively, for clearing options
and futures transactions.
THE DISTRIBUTOR
- --------------------------------------------------------------------------------
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 (the
"Independent Trustees"), approved, at their meeting held on October 30, 1992,
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. By
its terms, the Distribution Agreement had an initial term ending April 30, 1994,
and will remain in effect from year to year thereafter if approved by the Board.
At their meeting held on April 8, 1994, the Trustees, including all of the
Independent Trustees, approved the continuation of the Distribution Agreement
until April 30, 1995.
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 initial typesetting, printing and distribution of prospectuses and
supplements thereto to 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 judgement or
mistake of law or for any act of omission or for any losses sustained by the
Fund or its shareholders.
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<PAGE>
PLAN OF DISTRIBUTION
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 0.85% 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
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 $1,647,000, $960,000
and $822,000 in contingent deferred sales charges for the fiscal years ended
October 31, 1992, 1993 and 1994, 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 0.20% 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
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.
The Plan was adopted by a majority vote of the Board of Trustees, including
all of the Trustees of the Fund 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"), cast in person at a
meeting called for the purpose of voting on the Plan, on December 15, 1986, by
DWR as the then sole shareholder of the Fund on January 13, 1987 and by the
shareholders holding a majority, as defined in the Act, of the outstanding
voting securities of the Fund at a Special Meeting of Shareholders of the Fund
held on May 31, 1988.
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 their meeting held on April 28, 1993,
the Trustees, including a majority of the Independent 12b-1 Trustees, also
approved certain technical amendments to the Plan in connection with amendments
adopted by the National Association of Securities Dealers, Inc. to its Rules of
Fair Practice.
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 and DWR under the Plan, during the fiscal year ended October 31,
1994, of $8,336,418. This amount is equal to 0.85% of the Fund's average daily
net assets 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
24
<PAGE>
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 4% of the amount sold and an annual
residual commission of up to 0.20 of 1% of the current value (not including
reinvested dividends or distributions) 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
sales compensation, and overhead and other branch office distribution-related
expenses including: (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. 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 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 $8,336,418 accrued under the Plan for the fiscal
year ended October 31, 1994 to the Distributor. The Distributor and DWR estimate
that they have spent, pursuant to the Plan, $166,756,019 on behalf of the Fund
since the inception of the Plan. It is estimated that this amount was spent in
approximately the following ways: (i) 2.19% ($3,652,763) -- advertising and
promotional expenses; (ii) 0.23% ($380,464) printing of prospectuses for
distribution to other than current shareholders; and (iii) 97.58% ($162,722,792)
- -- other expenses, including the gross sales credit and the carrying charge, of
which 16.21% ($26,375,319) represents carrying charges, 33.82% ($55,029,840)
represents commission credits to DWR branch offices for payments of commissions
to account executives and 49.97% ($81,317,633) represents overhead and other
branch office distribution-related expenses.
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 $33,656,192 as of October 31, 1994. 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, 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.
25
<PAGE>
Under its terms, the Plan remained in effect until April 30, 1987, and will
continue from year to year thereafter, provided such continuance is approved
annually by a vote of the Trustees in the manner described above. The most
recent continuance of the Plan for one year, until April 30, 1995, was approved
by the Board of Trustees of the Fund, including a majority of the Independent
12b-1 Trustees, at a Board meeting held on April 8, 1994. Prior to approving the
continuation of the Plan, the Trustees requested and received from the
Distributor and reviewed all the information which they deemed necessary to
arrive at an informed determination. In making their determination to continue
the Plan, the Trustees considered: (1) the Fund's experience under the Plan and
whether such experience indicates that the Plan is operating as anticipated; (2)
the benefits the Fund had obtained, was obtaining and would be likely to obtain
under the Plan; and (3) what services had been provided and were continuing to
be provided under the Plan to the Fund and its shareholders. Based upon their
review, the Trustees of the Fund, including each of the Independent 12b-1
Trustees, determined that continuation of the Plan would be in the best interest
of the Fund and would have a reasonable likelihood of continuing to benefit the
Fund and its shareholders. In the Trustees' quarterly review of the Plan, they
will consider its continued appropriateness and the level of compensation
provided herein.
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) on not more than thirty days' written notice to any
other party to the Plan. The Plan will automatically terminate in the event of
its assignment (as defined in the Act). 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 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. 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 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 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.
As stated in the Prospectus, the Investment Manager will compute the Fund's
net asset value once daily at 4:00 p.m. New York time on each day that the New
York Stock Exchange is open. The New York Stock Exchange currently observes the
following holidays: New Year's Day; Presidents' Day; Good Friday; Memorial Day;
Independence Day; Labor Day; Thanksgiving Day; and Christmas Day.
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
Upon the purchase of shares of the Fund, a Shareholder Investment Account is
opened for the investor on the books of the Fund 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
26
<PAGE>
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 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 monthly
payment date, as stated in the Prospectus. 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 payment date of the
dividend or the record date of the distribution. In the case of recently
purchased shares for which registration instructions have not been received on
the payment or 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 Federal 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 monthly
payment date and will begin to earn dividends, if any, in the selected Dean
Witter Fund the next business day. To participate in the Targeted Dividends
program, shareholders should contact their DWR or other selected broker-dealer
account executive or the Transfer Agent. Shareholders of the Fund must be
shareholders of the Dean Witter Fund targeted to receive investments from
dividends at the time they enter the Targeted Dividends program. Investors
should review the prospectus of the targeted Dean Witter Fund before entering
the program.
EASYINVEST-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. As discussed in
the Prospectus, any shareholder who receives a cash payment representing a
dividend or distribution may invest such dividend or distribution at 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
27
<PAGE>
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 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.
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.
DIRECT INVESTMENTS THROUGH TRANSFER AGENT. As discussed in the Prospectus,
a shareholder may make additional investments in Fund shares at any time through
a Shareholder Investment Account by sending a check in any amount, not less than
$100, 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 investment account.
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 and five Dean Witter Funds which are money market funds (the foregoing
eight 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.
28
<PAGE>
Any new account established through the Exchange Privilege will have the
same registration and cash dividend or dividend reinvestment plan as the present
account, unless the Transfer Agent receives written notification to the
contrary. For telephone exchanges, the exact registration of the existing
account and the account number must be provided.
Any shares held in certificate form cannot be exchanged but must be
forwarded to the Transfer Agent and deposited into the shareholder's account
before being eligible for exchange. (Certificates mailed in for deposit should
not be endorsed.)
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 CDSC 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 that 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
29
<PAGE>
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-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.
The Transfer Agent acts as agent for shareholders of the Fund in effecting
redemptions of Fund shares and in applying the proceeds to the purchase of other
fund shares. In the absence of negligence on its part, neither the Transfer
Agent nor the Fund shall be liable for any redemption of Fund shares caused by
unauthorized telephone or telegraph instructions. Accordingly, in such an event
the investor shall bear the risk of loss. The staff of the Securities and
Exchange Commission is currently considering the propriety of such a policy.
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-broker 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 initial investment
is $10,000 for Dean Witter Short-Term U.S Treasury Trust, although that fund
may, at its discretion, accept initial purchases of 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 for
termination or material revision), provided that six months' prior written
notice of termination will be given to the shareholders who hold shares of an
Exchange Fund pursuant to the Exchange Privilege, and provided further that the
Exchange Privilege may be terminated or materially revised without notice at
times (a) when the New York Stock Exchange is
30
<PAGE>
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 objective, policies
and restrictions.
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. 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.
31
<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 AS A
PURCHASE 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
regulations of the Securities and Exchange Commission shall govern as to whether
the conditions
32
<PAGE>
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 accounts.
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 the amount of such
undistributed gains in determining their taxable income and will be able to
claim their share of the tax paid by the Fund as a credit against their 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 applicable
state and/or local 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 quarter of any calendar year which are paid in the following year
prior to February 1 will be deemed received by the shareholder in the prior
year.
Gains or losses on the sales of securities by the Fund will generally 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.
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.
33
<PAGE>
One of the requirements for the Fund to remain qualified as a regulated
investment company is that less than 30% of its 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.
Under current federal law, the Fund will receive net investment income in
the form of interest by virtue of holding Treasury bills, notes and bonds, and
will recognize income attributable to it from holding zero coupon Treasury
securities. 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
payment in cash on the security during the year. As an investment company, the
Fund must pay out substantially all of its net investment income each year.
Accordingly, the Fund, to the extent it invests in zero coupon Treasury
securities, may be required to pay out as an income distribution each year an
amount which is greater than the total amount of cash receipts of interest the
Fund actually received. Such distributions will be made from the available cash
of the Fund or by liquidation of portfolio securities if necessary. If a
distribution or cash necessitates the liquidation of portfolio securities, the
Investment Manager will select which securities to sell. The Fund may realize a
gain or loss from such sales. In the event the Fund realizes net capital gains
from such transactions, its shareholders may receive a larger capital gain
distribution, if any, than they would in the absence of such transactions.
In computing net investment income, the Fund will not amortize premiums or
accrue discounts on fixed-income securities in the portfolio, except those
original issue discounts for which amortization is required for federal income
tax purposes. Additionally, with respect to market discounts on bonds, a portion
of any capital gain realized upon disposition will be characterized as taxable
ordinary income in accordance with the provisions of the Internal Revenue Code.
Realized gains and losses on security transactions are determined on the
identified cost method.
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.
OPTIONS AND FUTURES. Exchange-traded futures contracts, listed options on
futures contracts and listed options on U.S. Government securities are
classified as "Section 1256" contracts under the Code. The character of gain or
loss resulting from the sale, disposition, closing out, expiration or other
termination of Section 1256 contracts is generally treated as long-term capital
gain or loss to the extent of 60 percent thereof and short-term capital gain or
loss to the extent of 40 percent thereof. Section 1256 contracts are also
required to be marked-to-market at the end of the Fund's fiscal year, for
purpose of Federal income tax calculations. These rules may be different if
these transactions represent straddles for tax purposes.
Over-the-counter options are not classified as Section 1256 contracts and
are not subject to the mark-to-market or 60 percent-40 percent taxation rules.
When call options written, or put options purchased, by the Fund are exercised,
the gain or loss realized on the sales of the underlying securities may be
either short-term or long-term, depending upon the holding period of the
securities. In determining the amount of gain or loss, the sales proceeds are
reduced by the premium paid for over-the-counter puts or increased by the
premium received for over-the-counter calls.
34
<PAGE>
If the Fund holds a U.S. Government security which is offset by a Section
1256 contract, the Fund would be deemed to hold a "mixed straddle" position, as
such is defined in the Code. The Fund may elect to identify its mixed straddle
positions and thereby avoid the application of certain rules which could, in
certain circumstances, cause deferral or disallowance of losses, change
long-term capital gains into short-term gains, or change short-term capital
losses into long-term capital losses.
Whether the portfolio security constituting part of the identified mixed
straddle is deemed to have been held for less than three months for purposes of
determining qualification of the Fund as a regulated investment company will be
determined generally by the actual holding period of the security, without
regard to the recognition of gain or loss upon entering into the mixed straddle.
This recognition of unrealized gain or loss will be taken into account, however,
in determining the amount of income available for the Fund's quarterly
distributions, and can result in an amount which is greater or less than the
Fund's net realized gains being available for distribution. If an amount which
is less than the Fund's net realized gains is available for distribution, the
Fund may elect to distribute more than such available amount, up to the full
amount of such net realized gains. Such a distribution may, in part, constitute
a return of capital to the shareholders.
If the Fund does not elect to identify a mixed straddle, no recognition of
gain or loss on the U.S. Government securities in the Fund's portfolio will
result when the mixed straddle is entered into. However, any losses realized on
the straddle will be governed by a number of tax rules which might, under
certain circumstances, defer or disallow the losses in whole or in part, change
long-term gains into short-term gains, or change short-term losses into
long-term losses. A deferral or disallowance of recognition of a realized loss
may result in an amount being available for the Fund's quarterly distributions
which is greater than the Fund's net realized gains.
After the end of the calendar 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 any portion treated as a non-taxable
return of capital. Any such return of capital will reduce the shareholders' tax
basis in their shares. 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
October 31, 1994, the Fund's yield, calculated pursuant to the formula described
above, was 7.07%.
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
35
<PAGE>
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 returns of the Fund for the fiscal year ended
October 31, 1994, for the five years ended October 31, 1994 and for the period
from March 31, 1987 (commencement of operations) through October 31, 1994 were
- -11.28%, 5.92% and 6.69%, 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 returns of the Fund for the fiscal year ended October
31, 1994, for the five years ended October 31, 1994 and for the period from
March 31, 1987 through October 31, 1994 were -6.92%, 6.22% and 6.69%,
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 returns for the fiscal year ended October 31,
1994, for the five years ended October 31, 1994 and for the period from March
31, 1987 through October 31, 1994 were -6.92%, 35.23% and 63.45%, 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 effect of any applicable CDSC) and multiplying by $10,000, $50,000
or $100,000, as the case may be. Investments of $10,000, $50,000 and $100,000 in
the Fund at inception would have grown to $16,345, $81,725 and $163,450,
respectively, at October 31, 1994.
The Fund may advertise, from time to time, its performance relative to
certain performance rankings and indexes compiled by independent organizations.
DESCRIPTION OF SHARES OF THE FUND
- --------------------------------------------------------------------------------
The shareholders of the Fund are entitled to a full vote for each full share
held. All of the Trustees, except for Messrs. Bozic, Purcell and Schroeder, 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 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.
36
<PAGE>
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his/her or
its own bad faith, willful misfeasance, gross negligence, or reckless disregard
of his duties. It also provides that all third persons shall look solely to the
Fund property for satisfaction of claims arising in connection with the affairs
of the Fund. With the exceptions stated, 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 Fund shall be of unlimited duration subject to the provisions in
the Declaration of Trust concerning termination by action of the shareholders or
the Trustees.
CUSTODIAN AND TRANSFER AGENT
- --------------------------------------------------------------------------------
The Bank of New York, 90 Washington Street, New York, New York 10286 is the
Custodian of the Fund's assets. 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 of Dean Witter Distributors Inc., the Fund's
Distributor. As Transfer Agent and Dividend Disbursing Agent, Dean Witter Trust
Company's responsibilities include maintaining shareholder accounts; disbursing
cash dividends and reinvesting dividends; processing account registration
changes; handling purchase and redemption transactions; mailing prospectuses and
reports; mailing and tabulating proxies; processing share certificate
transactions; and maintaining shareholder records and lists. For these services
Dean Witter Trust Company receives a per shareholder account fee from the Fund.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
Price Waterhouse LLP serves as the independent accountants of the Fund. The
independent accountants are responsible for auditing the annual financial
statements of the Fund.
REPORTS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports showing
the Fund's portfolio and other information. An annual report, containing
financial statements audited by independent accountants, will be sent to
shareholders each year.
The Fund's fiscal year ends on October 31. 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 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.
37
<PAGE>
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.
38
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of Dean Witter Federal 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 Federal Securities
Trust (the "Fund") at October 31, 1994, 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 seven years in
the period then ended and for the period March 31, 1987 (commencement of
operations) through October 31, 1987, 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 October 31, 1994 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
New York, New York
December 12, 1994
39
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATES VALUE
- ----------- ---------- ------------------- ---------------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (70.1%)
U.S. TREASURY BONDS (65.4%)
$ 20,000 .......................................................... 9.875% 11/15/15 $ 23,553,125
22,000 .......................................................... 10.375 11/15/12 26,039,063
225,600 .......................................................... 12.00+ 8/15/13 298,602,750
30,000 .......................................................... 12.50 8/15/14 41,325,000
15,000 .......................................................... 13.25 5/15/14 21,581,250
95,000 .......................................................... 14.00 11/15/11 138,685,156
---------------
549,786,344
---------------
U.S. TREASURY NOTES (4.4%)
15,000 .......................................................... 4.75 2/15/97 14,313,281
25,000 .......................................................... 5.00 1/31/99 22,847,656
---------------
37,160,937
---------------
U.S. TREASURY BILL (A) (0.3%)
3,000 .......................................................... 4.51 11/10/94 2,996,617
---------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(IDENTIFIED COST $603,999,821)........................................................... 589,943,898
---------------
U.S. GOVERNMENT AGENCIES (26.4%)
FEDERAL NATIONAL MORTGAGE ASSOC. (3.8%)
PRINCIPAL STRIPS (3.8%)
(Identified Cost $34,964,351)
38,323 .......................................................... 0.00 12/20/01- 3/ 9/02 31,559,177
---------------
MORTGAGE PASS-THROUGH SECURITIES (22.6%)
FEDERAL HOME LOAN MORTGAGE CORP. (7.8%)
38,183 .......................................................... 9.50 10/ 1/10- 2/ 1/20 39,483,460
19,851 .......................................................... 10.00 9/ 1/15-10/ 1/19 20,905,603
4,767 .......................................................... 10.50 1/ 1/16-10/ 1/18 5,078,000
---------------
65,467,063
---------------
FEDERAL NATIONAL MORTGAGE ASSOC. (3.0%)
19,551 .......................................................... 6.50 10/ 1/23-12/ 1/23 17,248,082
3,981 .......................................................... 8.50 1/ 1/22- 3/ 1/22 3,947,892
3,576 .......................................................... 9.50 9/ 1/16- 5/ 1/20 3,730,391
255 .......................................................... 9.75 3/ 1/16- 2/ 1/18 268,534
---------------
25,194,899
---------------
GOVERNMENT NATIONAL MORTGAGE ASSOC. (11.8%)
39,117 .......................................................... 7.00 1/15/23- 5/15/24 35,058,800
39,628 .......................................................... 7.50 6/15/17- 1/15/23 36,791,708
25,107 .......................................................... 8.50 10/15/19-10/15/24 24,793,503
2,120 .......................................................... 10.00 5/15/16-11/15/20 2,270,822
479 .......................................................... 11.00 9/15/18 528,428
---------------
99,443,261
---------------
TOTAL MORTGAGE PASS-THROUGH SECURITIES
(IDENTIFIED COST $196,490,673)........................................................... 190,105,223
---------------
TOTAL U.S. GOVERNMENT AGENCIES
(IDENTIFIED COST $231,455,024)........................................................... 221,664,400
---------------
SHORT-TERM INVESTMENTS (0.8%)
U.S. GOVERNMENT AGENCY (A) (0.8%)
(Amortized Cost $6,400,000)
$ 6,400 Federal National Mortgage Assoc........................... 4.75% 11/01/94 $ 6,400,000
---------------
</TABLE>
40
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATES VALUE
- ----------- ---------- ------------------- ---------------
<C> <S> <C> <C> <C>
REPURCHASE AGREEMENT (0.0%)
219 The Bank of New York 4.8125% due 11/01/94 (dated 10/31/94;
proceeds $219,253; collateralized by $5,031 U.S.
Treasury Bond 10.375% due 11/15/12 valued at $6,183 and
by $211,989 U.S. Treasury Note 7.50% due 2/28/96 valued
at $217,425) (Identified Cost $219,224)................. 219,224
---------------
TOTAL SHORT-TERM INVESTMENTS (IDENTIFIED COST $6,619,224).................................. 6,619,224
---------------
TOTAL INVESTMENTS (IDENTIFIED COST $842,074,069) (B)....................................... $ 818,227,522
---------------
---------------
<CAPTION>
EXPIRATION
NUMBER OF MONTH/STRIKE
CONTRACTS PRICE
- ----------- ----------
<C> <S> <C> <C> <C>
WRITTEN OPTIONS OUTSTANDING (0.00%)*
CALL OPTIONS ON TREASURY BOND FUTURES (0.00%)
100 (Premiums Received $27,508)................................................ Dec/100 $ 28,125 *
---------------
---------------
<CAPTION>
DELIVERY
YEAR/MONTH
------------
<C> <S> <C> <C> <C>
FINANCIAL FUTURES (C) (0.00%)*
SHORT POSITION
930 U.S. TREASURY BONDS........................................................ 1994/Dec $ 34,805
---------------
---------------
TOTAL INVESTMENTS (IDENTIFIED COST $842,074,069) (B)....................... 97.3% 818,227,522
TOTAL WRITTEN OPTIONS OUTSTANDING.......................................... 0.0 (28,125)
TOTAL VARIATION MARGIN ON FINANCIAL FUTURES................................ 0.0 (34,805)
OTHER ASSETS IN EXCESS OF LIABILITIES...................................... 2.7 22,562,042
---------- -------------
NET ASSETS................................................................. 100.0% $$840,726,634
---------- -------------
---------- -------------
<FN>
- ----------------
* NON-INCOME PRODUCING SECURITY.
** THE MARKET VALUE OF U.S. TREASURY SECURITIES PLEDGED TO COVER WRITTEN
OPTIONS OF FUTURES CONTRACTS IS $19,853,906.
+ SOME OR ALL OF THESE SECURITIES ARE HELD IN CONNECTION WITH OPEN
OPTIONS WRITTEN. SEE PORTFOLIO OF WRITTEN OPTIONS.
(A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE RATE SHOWN REFLECTS A
BOND EQUIVALENT INTEREST RATE.
(B) THE AGGREGATE COST OF INVESTMENTS FOR FEDERAL INCOME TAX PURPOSES IS
$845,186,413; THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $1,102,952
AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $28,061,843,
RESULTING IN NET UNREALIZED DEPRECIATION OF $26,958,891.
(C) VALUE REPRESENTS VARIATION MARGIN ON OPEN FUTURES CONTRACTS AT OCTOBER
31, 1994. THE MARKET VALUE OF THE FUTURES CONTRACTS IS $91,459,688 AND
THE UNREALIZED APPRECIATION OF THESE CONTRACTS IS $2,370,502.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
41
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $842,074,069) (Note
1)...................................... $ 818,227,522
Receivable for:
Interest................................ 17,889,743
Investments sold........................ 7,028,193
Principal paydowns...................... 858,723
Shares of beneficial interest sold...... 289,653
Written options......................... 27,508
Prepaid expenses and other assets......... 41,576
-------------
TOTAL ASSETS...................... 844,362,918
-------------
LIABILITIES:
Written call options outstanding, at value
(premiums received $27,508) (Note 1).... 28,125
Payable for:
Shares of beneficial interest
repurchased........................... 1,672,118
Dividends to shareholders............... 640,234
Plan of distribution fee (Note 3)....... 617,579
Investment management fee (Note 2)...... 399,610
Variation margin (Note 4)............... 34,805
Accrued expenses and other payables (Note
4)...................................... 243,813
-------------
TOTAL LIABILITIES................. 3,636,284
-------------
NET ASSETS:
Paid-in-capital........................... 953,567,493
Net unrealized depreciation............... (21,476,662)
Accumulated net realized loss............. (90,846,763)
Distributions in excess of net investment
income.................................. (517,434)
-------------
NET ASSETS........................ $ 840,726,634
-------------
-------------
NET ASSET VALUE PER SHARE, 96,211,039
shares outstanding (unlimited shares
authorized of $.01 par value)...........
$8.74
-------------
-------------
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME:
INTEREST INCOME........................ $ 79,276,458
--------------
EXPENSES
Plan of distribution fee (Note 3).... 8,336,418
Investment management fee (Note 2)... 5,387,156
Transfer agent fees and expenses..... 850,891
Shareholder reports and notices...... 97,592
Professional fees.................... 76,854
Custodian fees....................... 73,020
Registration fees.................... 70,662
Trustees' fees and expenses (Note
4)................................. 34,020
Other................................ 16,235
--------------
TOTAL EXPENSES................... 14,942,848
--------------
NET INVESTMENT INCOME.......... 64,333,610
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (Note 1):
Net realized gain (loss) on:
Investments........................ (6,827,188)
Futures contracts.................. 16,874,475
Options written.................... 2,085,784
Net change in unrealized appreciation
on investments..................... (149,350,543)
--------------
NET LOSS ON INVESTMENTS.......... (137,217,472)
--------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS.... $ (72,883,862)
--------------
--------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
OCTOBER 31, 1994 OCTOBER 31, 1993
------------------ ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income................................................. $ 64,333,610 $ 76,148,935
Net realized gain (loss) on investments............................... 12,133,071 (29,752,910)
Net change in unrealized appreciation on investments.................. (149,350,543) 84,572,343
------------------ ------------------
Net increase (decrease) in net assets resulting from operations... (72,883,862) 130,968,368
------------------ ------------------
Dividends to shareholders from net investment income.................... (64,700,229) (75,986,599)
------------------ ------------------
Net decrease from transactions in shares of beneficial interest (Note
5)..................................................................... (150,082,996) (97,826,746)
------------------ ------------------
Total decrease.................................................... (287,667,087) (42,844,977)
NET ASSETS:
Beginning of period..................................................... 1,128,393,721 1,171,238,698
------------------ ------------------
END OF PERIOD (including distributions in excess of net investment
income of $517,434 and $150,815, respectively)......................... $ 840,726,634 $ 1,128,393,721
------------------ ------------------
------------------ ------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
42
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND ACCOUNTING POLICIES--Dean Witter Federal 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
commenced operations on March 31, 1987.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS--(1) all 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; (2) listed
options 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 price; (3) futures contracts are valued at the latest sale price as of
the close of the commodities exchange on which they trade unless the
Trustees determine that such price does not reflect their market value, in
which case they will be valued at fair value as determined by the Trustees;
(4) when market quotations are not readily available, portfolio securities
are valued at their fair value as determined in good faith under procedures
established by and under the general supervision of the Trustees (valuation
of debt securities for which market quotations are not readily available may
be based upon current market prices of securities which are comparable in
coupon, rating and maturity or an appropriate matrix utilizing similar
factors); (5) short-term debt securities having a maturity date of more than
sixty days 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-time securities having a maturity date of sixty days or less at
the time of purchase are valued at amortized cost; and (6) the value of
other assets will be at their fair value as determined in good faith under
procedures established by and under the general supervision of the Trustees.
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 on the identified cost
method. Discounts on securities purchased are accreted over the life of the
respective securities. The Fund does not amortize premiums on securities
purchased. Interest income is accrued daily.
C. OPTIONS AND FUTURES--(1) Written options on debt obligations: When the
Fund writes a call or put option, an amount equal to the premium received is
included in the Fund's Statement of Assets and Liabilities. The amount of
the liability is subsequently marked-to-market to reflect the current market
value. If a written option either expires or the Fund enters into a closing
purchase transaction, the Fund realizes a gain or loss without regard to any
unrealized gain or loss on the underlying security and the liability related
to such option is extinguished. If a written call option is exercised, the
Fund realizes a gain or loss from the sale of the underlying security and
the proceeds from such sale are increased by the premium originally
received. If a written put option is exercised, the amount of the premium
originally received reduces the cost of the security which the Fund
purchases upon exercise of the option; (2) Purchased options on debt
obligations: When the Fund purchases a call or put option, the premium paid
is recorded as an investment and is subsequently marked-to-market to reflect
the current market value. If a purchased option expires, the Fund will
realize a loss to the extent of the premium paid. If the Fund enters into a
closing sale transaction, a gain or loss is realized for the difference
between the proceeds from the sale and the cost of the option. If a put
option is exercised, the cost of the security sold upon exercise will be
increased by the premium originally paid. If a call option is exercised, the
cost of the security purchased upon exercise will be increased by the
premium originally paid; (3) Option on futures contracts: The Fund is
required to deposit U.S. Government securities as "initial margin" and
"variation margin" with respect to written call and put options on futures
contracts. If a written option expires, the Fund realizes a gain. If a
written call or put option is exercised, the premium received will decrease
or increase the unrealized
43
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
loss or gain on the futures contract. If the Fund enters into a closing
purchase transaction, the Fund realizes a gain or loss without regard to any
unrealized gain or loss on the underlying futures contract and the liability
related to such option is extinguished; (4) Futures contracts: A futures
contract is an agreement between two parties to buy and sell financial
instruments at a set price on a future date. Upon entering into such a
contract, the Fund is required to pledge to the broker cash or U.S.
Government securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Fund agrees
to receive from or pay to the broker an amount of cash equal to the daily
fluctuation in the value of the contract. Such receipts or payments known as
"variation margin" are recorded by the Fund as unrealized gains or losses.
Upon closing of the contract, the Fund realizes a gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed.
D. FEDERAL INCOME TAX STATUS--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS--The Fund records dividends
and distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized
capital gains are determined in accordance with federal income tax
regulations, which may differ from generally accepted accounting principles.
The "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 at the close of each business day: 0.55% to the portion of daily net
assets not exceeding $1 billion; 0.525% to the portion of daily net assets
exceeding $1 billion but not exceeding $1.5 billion; 0.50% to the portion of
daily net assets exceeding $1.5 billion but not exceeding $2 billion; 0.475% to
the portion of daily net assets exceeding $2 billion but not exceeding $2.5
billion; 0.45% to the portion of daily net assets exceeding $2.5 billion but not
exceeding $5 billion; 0.425% to the portion of daily net assets exceeding $5
billion but not exceeding $7.5 billion; 0.40% to the portion of daily net assets
exceeding $7.5 billion but not exceeding $10 billion; 0.375% to the portion of
daily net assets exceeding $10 billion but not exceeding $12.5 billion; and
0.35% to the portion of daily net assets exceeding $12.5 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
44
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
"Plan") pursuant to Rule 12b-1 under the Act, pursuant to which the Fund pays
the Distributor compensation accrued daily and payable monthly at an annual rate
of 0.85% of the lesser of: (a) the average daily aggregate gross sales of the
Fund's shares since the Fund's inception (not including reinvestment of dividend
or capital gain distributions), less the average daily aggregate net asset value
of the Fund's shares redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the Fund's average daily net assets. Amounts paid under the Plan
are paid to the Distributor to compensate it for the services provided and the
expenses borne by it and others in the distribution of the Fund's shares,
including the payment of commissions for sales of the Fund's shares and
incentive compensation to and expenses of the account executives of Dean Witter
Reynolds Inc., an affiliate of the Investment Manager and Distributor, and other
employees or selected broker-dealers who engage in or support distribution of
the Fund's shares or who service shareholder accounts, including overhead and
telephone expenses, printing and distribution of prospectuses and reports used
in connection with the offering of the Fund's shares to other than current
shareholders and preparation, printing and distribution of sales literature and
advertising materials. In addition, the Distributor may be compensated under the
Plan for its opportunity costs in advancing such amounts which compensation
would be in the form of a carrying charge on any unreimbursed expenses incurred
by the Distributor.
Provided that the Plan continues in effect, any cumulative expenses incurred
by the Distributor, 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 October 31,
1994, it received approximately $822,000 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--Purchases and
proceeds from sales/ prepayments of portfolio securities, excluding short-term
investments, for the year ended October 31, 1994 were $170,305,413 and
$303,592,962, respectively.
Transactions in written options for the year ended October 31, 1994 were as
follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUMS
----------- --------------
<S> <C> <C>
Option contracts written, outstanding at beginning of year............................. 200 $ 83,137
Options written........................................................................ 12,600 5,651,060
Options closed......................................................................... (11,852) (5,463,040)
Options exercised...................................................................... (409) (107,798)
Options expired........................................................................ (439) (135,851)
----------- --------------
Option contracts written, outstanding at end of year................................... 100 $ 27,508
----------- --------------
----------- --------------
</TABLE>
For the year ended October 31, 1994, the Fund incurred $10,971 and $81,776
in brokerage commissions for transactions executed and for clearing options and
futures transactions, respectively, with Dean Witter Reynolds Inc., on behalf of
the Fund.
Dean Witter Trust Company, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At October 31, 1994, the Fund had
transfer agent fees and expenses payable of approximately $82,000.
At October 31, 1994, the Fund had payables for variation margin on futures
contracts from Dean Witter Reynolds Inc. in the amount of $34,805.
45
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
On April 1, 1991, the Fund established an unfunded noncontributory defined
benefit pension plan covering all independent Trustees of the Fund who will have
served as an independent Trustee for at least five years at the time of
retirement. Benefits under this plan are based on years of service and
compensation during the last five years of service. Aggregate pension costs for
the year ended October 31, 1994, included in Trustees' fees and expenses in the
Statement of Operations, amounted to $34,020. At October 31, 1994, the Fund had
an accrued pension liability of $47,866 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
OCTOBER 31, 1994 OCTOBER 31, 1993
-------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Sold........................................ 10,119,372 $ 93,966,925 11,777,136 $ 116,032,284
Reinvestment of dividends................... 3,923,981 36,393,372 4,374,510 43,009,775
-------------- ---------------- -------------- ----------------
14,043,353 130,360,297 16,151,646 159,042,059
Repurchases................................. (30,316,610) (281,320,721) (26,099,762) (256,868,805)
Reclassification due to permanent book/tax
difference................................. -- 877,428 -- --
-------------- ---------------- -------------- ----------------
Net decrease................................ (16,273,257) $ (150,082,996) (9,948,116) $ (97,826,746)
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
</TABLE>
6. FEDERAL INCOME TAX STATUS--At October 31, 1994, the Fund had approximate net
capital loss carryovers which may be used to offset future capital gains to the
extent provided by regulations which are available through October 31 in the
following years:
<TABLE>
<CAPTION>
1996 1997 1998 2000 2002 TOTAL
- -------------- -------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 28,036,000 $ 15,672,000 $ 6,866,000 $ 3,854,000 $ 31,125,000 $ 85,553,000
- -------------- -------------- ------------- ------------- -------------- --------------
- -------------- -------------- ------------- ------------- -------------- --------------
</TABLE>
At October 31, 1994, the Fund was required for Federal income tax purposes
to defer approximately $2,182,000 of realized losses on certain closed options
and futures contracts.
As of October 31, 1994, the Fund had temporary book/tax differences
primarily attributable to capital loss deferrals on wash sales and straddles and
permanent book/tax differences primarily attributable to dividend
redesignations. To reflect cumulative reclassifications arising from permanent
book/tax differences as of October 31, 1993, paid-in-capital was credited
$877,428, accumulated net realized loss on investments was charged $359,996 and
distributions in excess of net investment income was charged $517,432.
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK--As of October 31, 1994,
the Fund had outstanding written options on interest rate futures and interest
rate futures contracts to hedge positions or anticipated positions in U.S.
Government securities, or in the case of written options, to close out long or
short positions in futures contracts. Written options and futures contracts
involve elements of market risk in excess of the amounts reflected in the
Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable
change in the price of interest rate futures contracts, an unfavorable change in
interest rates and the absence of a liquid secondary market. As of October 31,
1994, written options had a value of $28,125 and the variation margin on futures
contracts was $34,805.
46
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE
PERIOD
MARCH 31,
1987*
FOR THE YEAR ENDED OCTOBER 31, THROUGH
--------------------------------------------------------------------- OCTOBER 31,
1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 10.03 $ 9.57 $ 9.46 $ 8.87 $ 9.27 $ 9.13 $ 9.27 $ 10.00
------- ------- ------- ------- ------- ------- ------- -------------
Net investment income.... 0.60 0.65 0.68 0.72 0.72 0.71 0.74 0.43
Net realized and
unrealized gain (loss)
on investments......... (1.28) 0.46 0.11 0.59 (0.40) 0.34 0.08 (0.58)
------- ------- ------- ------- ------- ------- ------- -------------
Total from investment
operations............. (0.68) 1.11 0.79 1.31 0.32 1.05 0.82 (0.15)
------- ------- ------- ------- ------- ------- ------- -------------
Less dividends and
distributions from:
Net investment income.... (0.61) (0.65) (0.68) (0.72) (0.72) (0.71) (0.74) (0.43)
Paid-in-capital.......... -- -- -- -- -- (0.20) (0.22) (0.15)
------- ------- ------- ------- ------- ------- ------- -------------
Total dividends and
distributions.......... (0.61) (0.65) (0.68) (0.72) (0.72) (0.91) (0.96) (0.58)
------- ------- ------- ------- ------- ------- ------- -------------
Net asset value, end of
period................. $ 8.74 $ 10.03 $ 9.57 $ 9.46 $ 8.87 $ 9.27 $ 9.13 $ 9.27
------- ------- ------- ------- ------- ------- ------- -------------
------- ------- ------- ------- ------- ------- ------- -------------
TOTAL INVESTMENT
RETURN+................ (6.92)% 12.03% 8.56% 15.26% 3.64% 12.32% 9.21% (1.47)%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in millions).......... $ 841 $ 1,128 $ 1,171 $ 1,252 $ 1,397 $ 1,824 $ 2,122 $2,067
Ratios to average net
assets:
Expenses............... 1.52% 1.50% 1.48% 1.50% 1.54% 1.47% 1.50% 1.54%(2)
Net investment
income................ 6.56% 6.59% 7.18% 7.79% 7.92% 7.90% 8.04% 7.76%(2)
Portfolio turnover
rate................... 18% 7% 6% 0% 5% 19% 44% 32 %(1)
<FN>
- ------------------------------
* COMMENCEMENT OF OPERATIONS.
+ DOES NOT REFLECT THE DEDUCTION OF SALES LOAD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
47
<PAGE>
APPENDIX
- --------------------------------------------------------------------------------
RATINGS OF CORPORATE DEBT INSTRUMENTS
BONDS
The four highest ratings of Moody's Investors Service, Inc. ("Moody's") for
corporate bonds are Aaa, Aa, A and Baa, all of which are considered investment
grade. Bonds rated Aaa are judged to be of the "best quality". The rating of Aa
is assigned to bonds which are of "high quality by all standards", but as to
which margins of protection or other elements make long-term risks appear
somewhat larger than Aaa rated bonds. The Aaa and Aa rated bonds comprise what
are generally known as "high grade bonds". Bonds which are rated A by Moody's
possess many favorable investment attributes and are considered "upper medium
grade obligations". Bonds rated Baa are considered "medium grade" obligations.
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. Moody's applies numerical
modifiers, 1, 2, and 3, in each rating classification for Aa and below. The
modifier 1 indicates that the security ranks in the higher end of its category;
the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of its category. The foregoing ratings are
sometimes presented in parentheses preceded with a "con" indicating that the
bonds are rated conditionally. Bonds, the security for which 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 when facilities are completed, or (c)
payments to which some other limiting condition attaches. Such parenthetical
rating denotes the probable credit stature upon completion of construction or
elimination of the basis of the condition.
The four highest ratings of Standard & Poor's Corporation ("Standard &
Poor's") for bonds are AAA, AA, A and BBB, all of which are considered
investment grade. Bonds rated AAA bear the highest rating assigned by Standard &
Poor's to a debt obligation, and the rating indicates an extremely strong
capacity to pay interest and repay principal. Bonds rated AA also qualify as
high-quality debt obligations. Capacity to pay interest and repay principal is
very strong, and in the majority of instances they differ from AAA issues only
in small degree. Bonds rated A have 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. The BBB rating, which is the
lowest "investment grade" security rating by Standard & Poor's, indicates an
adequate capacity to repay principal and pay interest. Whereas they normally
exhibit adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay principal
and interest for bonds in this category than for bonds in the A category. The
ratings of AA and below may be modified by the addition of a plus or minus sign
to show relative standing within the major rating categories. 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.
COMMERCIAL PAPER
Moody's Commercial Paper ratings are opinions of the ability of issuers 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, Highest Quality; Prime-2, Higher Quality; and Prime-3,
High Quality.
Standard & 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
48
<PAGE>
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 four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. Issues assigned A ratings are
regarded as having the greatest capacity for timely payment. Issues in this
category are further refined with the designations 1, 2, and 3 to indicate the
relative degree of safety. The "A-1+" and "A-1" designations indicate that the
degree of safety regarding timely payment is very strong.
49
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
PART C OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) FINANCIAL STATEMENTS
(1) Financial statements and schedules, included
in Prospectus (Part A): Page in
Prospectus
----------
Financial highlights for the period March 31, 1987
through October 31, 1987, and for the years ended
October 31, 1988, 1989, 1990, 1991, 1992, 1993
and 1994 ........................................... 4
(2) Financial statements included in the Statement of
Additional Information (Part B): Page in
SAI
---
Portfolio of Investments at October 31, 1994........ 40
Statement of assets and liabilities at
October 31, 1994.................................... 42
Statement of operations for the year ended
October 31, 1994.................................... 42
Statement of changes in net assets for the
years ended October 31, 1993 and 1994............... 42
Notes to Financial Statements....................... 43
Financial highlights for the period March 31, 1987
through October 31, 1987, and for the years ended
October 31, 1988, 1989, 1990, 1991, 1992, 1993
and 1994 ........................................... 47
(3) Financial statements included in Part C:
None
(b) EXHIBITS:
9. - Form of Services Agreement between Dean Witter
InterCapital Inc. and Dean Witter Services Company
Inc.
11. - Consent of Independent Accountants
<PAGE>
16. - Schedules for Computation of Performance
Quotations
27. - Financial Data Schedule
Other - Power of Attorney
________________________________
All other exhibits previously filed and incorporated
by reference.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None
Item 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
(1) (2)
Number of Record Holders
Title of Class at November 30, 1994
-------------- --------------------------
<S> <C>
Shares of Beneficial Interest 55,506
</TABLE>
Item 27. INDEMNIFICATION
Pursuant to Section 5.3 of the Registrant's Declaration of
Trust and under Section 4.8 of the Registrant's By-Laws, the indemnification of
the Registrant's trustees, officers, employees and agents is permitted if it is
determined that they acted under the belief that their actions were in or not
opposed to the best interest of the Registrant, and, with respect to any
criminal proceeding, they had reasonable cause to believe their conduct was not
unlawful. In addition, indemnification is permitted only if it is determined
that the actions in question did not render them liable by reason of willful
misfeasance, bad faith or gross negligence in the performance of their duties or
by reason of reckless disregard of their obligations and duties to the
Registrant. Trustees, officers, employees and agents will be indemnified for
the expense of litigation if it is determined that they are entitled to
indemnification against any liability established in such litigation. The
Registrant may also advance money for these expenses provided that they give
their undertakings to repay the Registrant unless their conduct is later
determined to permit indemnification.
Pursuant to Section 5.2 of the Registrant's Declaration of Trust and
paragraph 8 of the Registrant's Investment Management Agreement,
neither the Investment Manager nor any trustee, officer, employee or agent of
the Registrant shall be liable for any action or failure to act, except in the
case of bad faith, willful misfeasance, gross negligence or reckless disregard
of duties to the Registrant.
2
<PAGE>
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer, or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
trustee, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act, and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes that it will apply the
indemnification provision of its by-laws in a manner consistent with Release
11330 of the Securities and Exchange Commission under the Investment Company Act
of 1940, so long as the interpretation of Sections 17(h) and 17(i) of such Act
remains in effect.
Registrant, in conjunction with the Investment Manager, Registrant's
Trustees, and other registered investment management companies managed by the
Investment Manager, maintains insurance on behalf of any person who is or was a
Trustee, officer, employee, or agent of Registrant, or who is or was serving at
the request of Registrant as a trustee, director, officer, employee or agent of
another trust or corporation, against any liability asserted against him and
incurred by him or arising out of his position. However, in no event will
Registrant maintain insurance to indemnify any such person for any act for which
Registrant itself is not permitted to indemnify him.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
See "The Fund and Its Management" in the Prospectus regarding the
business of the investment adviser. The following information is given
regarding officers of Dean Witter InterCapital Inc. InterCapital is a wholly-
owned subsidiary of Dean Witter, Discover & Co. The principal address of the
Dean Witter Funds is Two World Trade Center, New York, New York 10048.
The term "Dean Witter Funds" used below refers to the following registered
investment companies:
CLOSED-END INVESTMENT COMPANIES
(1) InterCapital Income Securities Inc.
(2) High Income Advantage Trust
(3) High Income Advantage Trust II
3
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(4) High Income Advantage Trust III
(5) Municipal Income Trust
(6) Municipal Income Trust II
(7) Municipal Income Trust III
(8) Dean Witter Government Income Trust
(9) Municipal Premium Income Trust
(10) Municipal Income Opportunities Trust
(11) Municipal Income Opportunities Trust II
(12) Municipal Income Opportunities Trust III
(13) Prime Income Trust
(14) InterCapital Insured Municipal Bond Trust
(15) InterCapital Quality Municipal Income Trust
(16) InterCapital Quality Municipal Investment Trust
(17) InterCapital Insured Municipal Income Trust
(18) InterCapital California Insured Municipal Income Trust
(19) InterCapital Insured Municipal Trust
(20) InterCapital Quality Municipal Securities
(21) InterCapital New York Quality Municipal Securities
(22) InterCapital California Quality Municipal Securities
(23) InterCapital Insured California Municipal Securities
(24) InterCapital Insured Municipal Securities
OPEN-END INVESTMENT COMPANIES:
(1) Dean Witter Short-Term Bond Fund
(2) Dean Witter Tax-Exempt Securities Trust
(3) Dean Witter Tax-Free Daily Income Trust
(4) Dean Witter Dividend Growth Securities Inc.
(5) Dean Witter Convertible Securities Trust
(6) Dean Witter Liquid Asset Fund Inc.
(7) Dean Witter Developing Growth Securities Trust
(8) Dean Witter Retirement Series
(9) Dean Witter Federal Securities Trust
(10) Dean Witter World Wide Investment Trust
(11) Dean Witter U.S. Government Securities Trust
(12) Dean Witter Select Municipal Reinvestment Fund
(13) Dean Witter High Yield Securities Inc.
(14) Dean Witter Intermediate Income Securities
(15) Dean Witter New York Tax-Free Income Fund
(16) Dean Witter California Tax-Free Income Fund
(17) Dean Witter Health Sciences Trust
(18) Dean Witter California Tax-Free Daily Income Trust
(19) Dean Witter Managed Assets Trust
(20) Dean Witter American Value Fund
(21) Dean Witter Strategist Fund
(22) Dean Witter Utilities Fund
(23) Dean Witter World Wide Income Trust
(24) Dean Witter New York Municipal Money Market Trust
(25) Dean Witter Capital Growth Securities
(26) Dean Witter Precious Metals and Minerals Trust
(27) Dean Witter European Growth Fund Inc.
(28) Dean Witter Global Short-Term Income Fund Inc.
(29) Dean Witter Pacific Growth Fund Inc.
4
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(30) Dean Witter Multi-State Municipal Series Trust
(31) Dean Witter Premier Income Trust
(32) Dean Witter Short-Term U.S. Treasury Trust
(33) Dean Witter Diversified Income Trust
(34) Dean Witter U.S. Government Money Market Trust
(35) Dean Witter Global Dividend Growth Securities
(36) Active Assets California Tax-Free Trust
(37) Dean Witter Natural Resource Development Securities Inc.
(38) Active Assets Government Securities Trust
(39) Active Assets Money Trust
(40) Active Assets Tax-Free Trust
(41) Dean Witter Limited Term Municipal Trust
(42) Dean Witter Variable Investment Series
(43) Dean Witter Value-Added Market Series
(44) Dean Witter Global Utilities Fund
(45) Dean Witter High Income Securities
(46) Dean Witter National Municipal Trust
(47) Dean Witter International SmallCap Fund
(48) Dean Witter Mid-Cap Growth Fund
(49) Dean Witter Select Dimensions Investment Series
The term "TCW/DW Funds" refers to the following registered investment companies:
OPEN-END INVESTMENT COMPANIES
(1) TCW/DW Core Equity Trust
(2) TCW/DW North American Government Income Trust
(3) TCW/DW Latin American Growth Fund
(4) TCW/DW Income and Growth Fund
(5) TCW/DW Small Cap Growth Fund
(6) TCW/DW Balanced Fund
(7) TCW/DW North American Intermediate Income Trust
(8) TCW/DW Global Convertible Trust
(9) TCW/DW Total Return Trust
CLOSED-END INVESTMENT COMPANIES
(1) TCW/DW Term Trust 2000
(2) TCW/DW Term Trust 2002
(3) TCW/DW Term Trust 2003
(4) TCW/DW Emerging Markets Opportunities Trust
5
<PAGE>
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
INTERCAPITAL INC. AND NATURE OF CONNECTION
- ----------------- ------------------------------------------------
Charles A. Fiumefreddo Executive Vice President and Director of Dean
Chairman, Chief Witter Reynolds Inc. ("DWR"); Chairman, Chief
Executive Officer and Executive Officer and Director of Dean Witter
Director Distributors Inc. ("Distributors") and Dean
Witter Services Company Inc. ("DWSC"); Chairman
and Director of Dean Witter Trust Company
("DWTC"); Chairman, Director or Trustee, President
and Chief Executive Officer of the Dean Witter
Funds and Chairman, Chief Executive Officer and
Trustee of the TCW/DW Funds; Formerly Executive
Vice President and Director of Dean Witter,
Discover & Co. ("DWDC"); Director and/or officer
of various DWDC subsidiaries.
Philip J. Purcell Chairman, Chief Executive Officer and Director of
Director of DWDC and DWR; Director of DWSC and
Distributors; Director or Trustee of the Dean
Witter Funds; Director and/or officer of various
DWDC subsidiaries.
Richard M. DeMartini Executive Vice President of DWDC; President and
Director Chief Operating Officer of Dean Witter Capital;
Director of DWR, DWSC, Distributors and DWTC;
Trustee of the TCW/DW Funds.
James F. Higgins Executive Vice President of DWDC; President and
Director Chief Operating Officer of Dean Witter Financial;
Director of DWR, DWSC, Distributors and DWTC.
Thomas C. Schneider Executive Vice President and Chief Financial
Executive Vice Officer of DWDC, DWR, DWSC and Distributors;
President, Chief Director of DWR, DWSC and Distributors.
Financial Officer and
Director
Christine A. Edwards Executive Vice President, Secretary and General
Director Counsel of DWDC and DWR; Executive Vice President,
Secretary and Chief Legal Officer of Distributors;
Director of DWR, DWSC and Distributors.
Robert M. Scanlan President and Chief Operating Officer of DWSC,
President and Chief Executive Vice President of Distributors;
Operating Officer Executive Vice President and Director of DWTC;
Vice President of the Dean Witter Funds and the
TCW/DW Funds.
David A. Hughey Executive Vice President and Chief Administrative
Executive Vice Officer of DWSC, Distributors and DWTC; Director
President and Chief of DWTC; Vice President of the Dean Witter Funds
Administrative Officer and the TCW/DW Funds.
6
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NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
INTERCAPITAL INC. AND NATURE OF CONNECTION
- ----------------- ------------------------------------------------
Edmund C. Puckhaber Director of DWTC; Vice President of the Dean
Executive Vice Witter Funds.
President
John Van Heuvelen President, Chief Operating Officer and Director
Executive Vice of DWTC.
President
Sheldon Curtis Assistant Secretary of DWR; Senior Vice President,
Senior Vice President, Secretary and General Counsel of DWSC; Senior Vice
General Counsel and President, Assistant General Counsel and Assistant
Secretary Secretary of Distributors; Senior Vice President
and Secretary of DWTC; Vice President, Secretary
and General Counsel of the Dean Witter Funds and
the TCW/DW Funds.
Peter M. Avelar
Senior Vice President Vice President of various Dean Witter Funds.
Mark Bavoso
Senior Vice President Vice President of various Dean Witter Funds.
Thomas H. Connelly
Senior Vice President Vice President of various Dean Witter Funds.
Edward Gaylor
Senior Vice President Vice President of various Dean Witter Funds.
Rajesh K. Gupta
Senior Vice President Vice President of various Dean Witter Funds.
Kenton J. Hinchcliffe
Senior Vice President Vice President of various Dean Witter Funds.
John B. Kemp, III Director of the Provident Savings Bank, Jersey
Senior Vice President City, New Jersey.
Anita Kolleeny
Senior Vice President Vice President of various Dean Witter Funds.
Jonathan R. Page
Senior Vice President Vice President of various Dean Witter Funds.
Ira Ross
Senior Vice President Vice President of various Dean Witter Funds.
Rochelle G. Siegel
Senior Vice President Vice President of various Dean Witter Funds.
Paul D. Vance
Senior Vice President Vice President of various Dean Witter Funds.
7
<PAGE>
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
INTERCAPITAL INC. AND NATURE OF CONNECTION
- ----------------- ------------------------------------------------
Elizabeth A. Vetell
Senior Vice President
James F. Willison
Senior Vice President Vice President of various Dean Witter Funds.
Ronald J. Worobel
Senior Vice President Vice President of various Dean Witter Funds.
Thomas F. Caloia First Vice President and Assistant Treasurer of
First Vice President DWSC, Assistant Treasurer of Distributors;
and Assistant Treasurer of the Dean Witter Funds and the TCW/DW
Treasurer Funds.
Marilyn K. Cranney Assistant Secretary of DWR; First Vice President
First Vice President and Assistant Secretary of DWSC; Assistant
and Assistant Secretary Secretary of the Dean Witter Funds and the TCW/DW
Funds.
Barry Fink First Vice President and Assistant Secretary of
First Vice President DWSC; Assistant Secretary of the Dean Witter
and Assistant Secretary Funds and the TCW/DW Funds.
Michael Interrante First Vice President and Controller of DWSC;
First Vice President Assistant Treasurer of Distributors;First Vice
and Controller President and Treasurer of DWTC.
Robert Zimmerman
First Vice President
Joan Allman
Vice President
Joseph Arcieri
Vice President Vice President of various Dean Witter Funds.
Stephen Brophy
Vice President
Terence P. Brennan, II
Vice President
Douglas Brown
Vice President
Thomas Chronert
Vice President
Rosalie Clough
Vice President
8
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NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
INTERCAPITAL INC. AND NATURE OF CONNECTION
- ----------------- ------------------------------------------------
Patricia A. Cuddy
Vice President Vice President of various Dean Witter Funds.
B. Catherine Connelly
Vice President
Salvatore DeSteno
Vice President Vice President of DWSC.
Frank J. DeVito
Vice President Vice President of DWSC.
Dwight Doolan
Vice President
Bruce Dunn
Vice President
Jeffrey D. Geffen
Vice President
Deborah Genovese
Vice President
Peter W. Gurman
Vice President
Russell Harper
Vice President
John Hechtlinger
Vice President
David Hoffman
Vice President
David Johnson
Vice President
Christopher Jones
Vice President
Stanley Kapica
Vice President
Konrad J. Krill
Vice President Vice President of various Dean Witter Funds.
Paul LaCosta
Vice President Vice President of various Dean Witter Funds.
9
<PAGE>
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
INTERCAPITAL INC. AND NATURE OF CONNECTION
- ----------------- ------------------------------------------------
Lawrence S. Lafer Vice President and Assistant Secretary of DWSC;
Vice President and Assistant Secretary of the Dean Witter Funds and
Assistant Secretary the TCW/DW Funds.
Thomas Lawlor
Vice President
Lou Anne D. McInnis Vice President and Assistant Secretary of DWSC;
Vice President and Assistant Secretary of the Dean Witter Funds and
Assistant Secretary the TCW/DW Funds.
Sharon K. Milligan
Vice President
James Mulcahy
Vice President
James Nash
Vice President
Richard Norris
Vice President
Hugh Rose
Vice President
Ruth Rossi Vice President and Assistant Secretary of DWSC;
Vice President and Assistant Secretary of the Dean Witter Funds and
Assistant Secretary the TCW/DW Funds.
Carl F. Sadler
Vice President
Rafael Scolari
Vice President Vice President of Prime Income Trust
Diane Lisa Sobin
Vice President Vice President of various Dean Witter Funds.
Kathleen Stromberg
Vice President Vice President of various Dean Witter Funds.
Vinh Q. Tran
Vice President Vice President of various Dean Witter Funds.
Alice Weiss
Vice President Vice President of various Dean Witter Funds.
10
<PAGE>
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
INTERCAPITAL INC. AND NATURE OF CONNECTION
- ----------------- ------------------------------------------------
Jayne M. Wolff
Vice President Vice President of various Dean Witter Funds.
Marianne Zalys
Vice President
Item 29. PRINCIPAL UNDERWRITERS
(a) Dean Witter Distributors Inc. ("Distributors"), a Delaware
corporation, is the principal underwriter of the Registrant.
Distributors is also the principal underwriter of the following
investment companies:
(1) Dean Witter Liquid Asset Fund Inc.
(2) Dean Witter Tax-Free Daily Income Trust
(3) Dean Witter California Tax-Free Daily Income Trust
(4) Dean Witter Retirement Series
(5) Dean Witter Dividend Growth Securities Inc.
(6) Dean Witter Natural Resource Development Securities Inc.
(7) Dean Witter World Wide Investment Trust
(8) Dean Witter Capital Growth Securities
(9) Dean Witter Convertible Securities Trust
(10) Active Assets Tax-Free Trust
(11) Active Assets Money Trust
(12) Active Assets California Tax-Free Trust
(13) Active Assets Government Securities Trust
(14) Dean Witter Short-Term Bond Fund
(15) Dean Witter Mid-Cap Growth Fund
(16) Dean Witter U.S. Government Securities Trust
(17) Dean Witter High Yield Securities Inc.
(18) Dean Witter New York Tax-Free Income Fund
(19) Dean Witter Tax-Exempt Securities Trust
(20) Dean Witter California Tax-Free Income Fund
(21) Dean Witter Managed Assets Trust
(22) Dean Witter Limited Term Municipal Trust
(23) Dean Witter World Wide Income Trust
(24) Dean Witter Utilities Fund
(25) Dean Witter Strategist Fund
(26) Dean Witter New York Municipal Money Market Trust
(27) Dean Witter Intermediate Income Securities
(28) Prime Income Trust
(29) Dean Witter European Growth Fund Inc.
(30) Dean Witter Developing Growth Securities Trust
(31) Dean Witter Precious Metals and Minerals Trust
(32) Dean Witter Pacific Growth Fund Inc.
(33) Dean Witter Multi-State Municipal Series Trust
(34) Dean Witter Premier Income Trust
(35) Dean Witter Short-Term U.S. Treasury Trust
(36) Dean Witter Diversified Income Trust
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(37) Dean Witter Health Sciences Trust
(38) Dean Witter Global Dividend Growth Securities
(39) Dean Witter American Value Fund
(40) Dean Witter U.S. Government Money Market Trust
(41) Dean Witter Global Short-Term Income Fund Inc.
(42) Dean Witter Variable Investment Series
(43) Dean Witter Value-Added Market Series
(44) Dean Witter Global Utilities Fund
(45) Dean Witter High Income Securities
(46) Dean Witter National Municipal Trust
(47) Dean Witter International SmallCap Fund
(1) TCW/DW Core Equity Trust
(2) TCW/DW North American Government Income Trust
(3) TCW/DW Latin American Growth Fund
(4) TCW/DW Income and Growth Fund
(5) TCW/DW Small Cap Growth Fund
(6) TCW/DW Balanced Fund
(7) TCW/DW North American Intermediate Income Trust
(8) TCW/DW Global Convertible Trust
(9) TCW/DW Total Return Trust
(b) The following information is given regarding directors and officers of
Distributors not listed in Item 28 above. The principal address of
Distributors is Two World Trade Center, New York, New York 10048.
None of the following persons has any position or office with the
Registrant.
Positions and
Office with
Name Distributors
---- -------------
Fredrick K. Kubler Senior Vice President, Assistant
Secretary and Chief Compliance
Officer.
Michael T. Gregg Vice President and Assistant
Secretary.
Item 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder are
maintained by the Investment Manager at its offices, except records relating to
holders of shares issued by the Registrant, which are maintained by the
Registrant's Transfer Agent, at its place of business as shown in the
prospectus.
Item 31. MANAGEMENT SERVICES
Registrant is not a party to any such management-related service
contract.
12
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Item 32. UNDERTAKINGS
Registrant hereby undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
13
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-
Effective Amendment to the Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York and State of
New York on the 22nd day of December, 1994.
DEAN WITTER FEDERAL SECURITIES TRUST
By /s/ Sheldon Curtis
--------------------------------------
Sheldon Curtis
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 9 has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
(1) Principal Executive Officer President, Chief
Executive Officer,
Trustee and Chairman
By /s/ Charles A. Fiumefreddo 12/22/94
----------------------------
Charles A. Fiumefreddo
(2) Principal Financial Officer Treasurer and Principal
Accounting Officer
By /s/ Thomas F. Caloia 12/22/94
--------------------------
Thomas F. Caloia
(3) Majority of the Trustees
Charles A. Fiumefreddo (Chairman)
Philip J. Purcell
By /s/ Sheldon Curtis 12/22/94
--------------------------
Sheldon Curtis
Attorney-in-Fact
Jack F. Bennett Manuel H. Johnson
Michael Bozic Paul Kolton
Edwin J. Garn Michael E. Nugent
John R. Haire John L. Schroeder
By /s/ David M. Butowsky 12/22/94
---------------------------
David M. Butowsky
Attorney-in-Fact
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
9. -- Form of Services Agreement between Dean Witter
InterCapital Inc. and Dean Witter Services Company
Inc.
11. -- Consent of Independent Accountants
16. -- Schedules for Computation of Performance Quotations
27. -- Financial Data Schedule
Other -- Power of Attorney
<PAGE>
SERVICES AGREEMENT
AGREEMENT made as of the 31st day of December, 1993 by and between Dean
Witter InterCapital Inc., a Delaware corporation (herein referred to as
"InterCapital"), and Dean Witter Services Company Inc., a New Jersey corporation
(herein referred to as "DWS").
WHEREAS, InterCapital has entered into separate agreements (each such
agreement being herein referred to as an "Investment Management Agreement") with
certain investment companies as set forth on Schedule A (each such investment
company being herein referred to as a "Fund" and, collectively, as the "Funds")
pursuant to which InterCapital is to perform, or supervise the performance of,
among other services, administrative services for the Funds (and, in the case of
Funds with multiple portfolios, the Series or Portfolios of the Funds (such
Series and Portfolio being herein individually referred to as "a Series" and,
collectively, as "the Series"));
WHEREAS, InterCapital desires to retain DWS to perform the administrative
services as described below; and
WHEREAS, DWS desires to be retained by InterCapital to perform such
administrative services:
Now, therefore, in consideration of the mutual covenants and agreements of
the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. DWS agrees to provide administrative services to each Fund as
hereinafter set forth. Without limiting the generality of the foregoing, DWS
shall (i) administer the Fund's business affairs and supervise the overall
day-to-day operations of the Fund (other than rendering investment advice); (ii)
provide the Fund with full administrative services, including the maintenance of
certain books and records, such as journals, ledger accounts and other records
required under the Investment Company Act of 1940, as amended (the"Act"), the
notification to the Fund and InterCapital of available funds for investment, the
reconciliation of account information and balances among the Fund's custodian,
transfer agent and dividend disbursing agent and InterCapital, and the
calculation of the net asset value of the Fund's shares; (iii) provide the Fund
with the services of persons competent to perform such supervisory,
administrative and clerical functions as are necessary to provide effective
operation of the Fund; (iv) oversee the performance of administrative and
professional services rendered to the Fund by others, including its custodian,
transfer agent and dividend disbursing agent, as well as accounting, auditing
and other services; (v) provide the Fund with adequate general office space and
facilities; (vi) assist in the preparation and the printing of the periodic
updating of the Fund's registration statement and prospectus (and, in the case
of an open-end Fund, the statement of additional information), tax returns,
proxy statements, and reports to its shareholders and the Securities and
Exchange Commission; and (vii) monitor the compliance of the Fund's investment
policies and restrictions.
In the event that InterCapital enters into an Investment Management
Agreement with another investment company, and wishes to retain DWS to perform
administrative services hereunder, it shall notify DWS in writing. If DWS is
willing to render such services, it shall notify InterCapital in writing,
whereupon such other Fund shall become a Fund as defined herein.
2. DWS shall, at its own expense, maintain such staff and employ or retain
such personnel and consult with such other persons as it shall from time to time
determine to be necessary or useful to the performance of its obligations under
this Agreement. Without limiting the generality of the foregoing, the staff and
personnel of DWS shall be deemed to include officers of DWS and persons employed
or otherwise retained by DWS (including officers and employees of InterCapital,
with the consent of InterCapital) to furnish services, statistical and other
factual data, information with respect to technical and scientific developments,
and such other information, advice and assistance as DWS may desire. DWS shall
maintain each Fund's records and books of account (other than those maintained
by the Fund's transfer agent, registrar, custodian and other agencies). All such
books and records so maintained shall be the property of the Fund and, upon
request therefor, DWS shall surrender to InterCapital or to the Fund such of the
books and records so requested.
3. InterCapital will, from time to time, furnish or otherwise make
available to DWS such financial reports, proxy statements and other information
relating to the business and affairs of the Fund as DWS may
1
<PAGE>
reasonably require in order to discharge its duties and obligations to the Fund
under this Agreement or to comply with any applicable law and regulation or
request of the Board of Directors/Trustees of the Fund.
4. For the services to be rendered, the facilities furnished, and the
expenses assumed by DWS, InterCapital shall pay to DWS monthly compensation
calculated daily (in the case of an open-end Fund) or weekly (in the case of
a closed-end Fund) by applying the annual rate or rates set forth on Schedule B
to the net assets of each Fund. Except as hereinafter set forth, (i) in the
case of an open-end Fund, compensation under this Agreement shall be calculated
by applying 1/365th of the annual rate or rates to the Fund's or the Series'
daily net assets determined as of the close of business on that day or the last
previous business day and (ii) in the case of a closed-end Fund, compensation
under this Agreement shall be calculated by applying the annual rate or rates
to the Fund's average weekly net assets determined as of the close of the last
business day of each week. If this Agreement becomes effective subsequent to
the first day of a month or shall terminate before the last day of a month,
compensation for that part of the month this Agreement is in effect shall be
prorated in a manner consistent with the calculation of the fees as set forth
on Schedule B. Subject to the provisions of paragraph 5 hereof, payment of DWS'
compensation for the preceding month shall be made as promptly as possible
after completion of the computations contemplated by paragraph 5 hereof.
5. In the event the operating expenses of any open-end Fund and/or any
Series thereof, or of InterCapital Income Securities Inc., including amounts
payable to InterCapital pursuant to the Investment Management Agreement, for any
fiscal year ending on a date on which this Agreement is in effect, exceed the
expense limitations applicable to the Fund and/or any Series thereof imposed by
state securities laws or regulations thereunder, as such limitations may be
raised or lowered from time to time, or, in the case of InterCapital Income
Securities Inc. or Dean Witter Variable Investment Series or any Series thereof,
the expense limitation specified in the Fund's Investment Management Agreement,
the fee payable hereunder shall be reduced on a pro rata basis in the same
proportion as the fee payable by the Fund under the Investment Management
Agreement is reduced.
6. DWS shall bear the cost of rendering the administrative services to be
performed by it under this Agreement, and shall, at its own expense, pay the
compensation of the officers and employees, if any, of the Fund employed by DWS,
and such clerical help and bookkeeping services as DWS shall reasonably require
in performing its duties hereunder.
7. DWS will use its best efforts in the performance of administrative
activitives on behalf of each Fund, but in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations hereunder,
DWS shall not be liable to the Fund or any of its investors for any error of
judgment or mistake of law or for any act or omission by DWS or for any losses
sustained by the Fund or its investors. It is understood that, subject to the
terms and conditions of the Investment Management Agreement between each Fund
and InterCapital, InterCapital shall retain ultimate responsibility for all
services to be performed hereunder by DWS. DWS shall indemnify InterCapital and
hold it harmless from any liability that InterCapital may incur arising out of
any act or failure to act by DWS in carrying out its responsibilities hereunder.
8. It is understood that any of the shareholders, Directors/Trustees,
officers and employees of the Fund may be a shareholder, director, officer or
employee of, or be otherwise interested in, DWS, and in any person controlling,
controlled by or under common control with DWS, and that DWS and any person
controlling, controlled by or under common control with DWS may have an interest
in the Fund. It is also understood that DWS and any affiliated persons thereof
or any persons controlling, controlled by or under common control with DWS have
and may have advisory, management, administration service or other contracts
with other organizations and persons, and may have other interests and
businesses, and further may purchase, sell or trade any securities or
commodities for their own accounts or for the account of others for whom they
may be acting.
9. This Agreement shall continue until April 30, 1994, and thereafter shall
continue automatically for successive periods of one year unless terminated by
either party by written notice delivered to the other party within 30 days of
the expiration of the then-existing period. Notwithstanding the foregoing, this
Agreement may be terminated at any time, by either party on 30 days' written
notice delivered to the other party. In the
2
<PAGE>
event that the Investment Management Agreement between any Fund and InterCapital
is terminated, this Agreement will automatically terminate with respect to such
Fund.
10. This Agreement may be amended or modified by the parties in any manner
by mutual written agreement executed by each of the parties hereto.
11. This Agreement shall be construed and interpreted in accordance with
the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written in New York, New York.
DEAN WITTER INTERCAPITAL INC.
By: /s/
-----------------------------
Attest:
/s/
- --------------------------
DEAN WITTER SERVICES COMPANY INC.
By: /s/
-----------------------------
Attest:
/s/
- --------------------------
3
<PAGE>
SCHEDULE A
DEAN WITTER FUNDS
AT DECEMBER 31, 1993
OPEN-END FUNDS
1. Active Assets California Tax-Free Trust
2. Active Assets Government Securities Trust
3. Active Assets Money Trust
4. Active Assets Tax-Free Trust
5. Dean Witter American Value Fund
6. Dean Witter California Tax-Free Daily Income Trust
7. Dean Witter California Tax-Free Income Fund
8. Dean Witter Capital Growth Securities
9. Dean Witter Convertible Securities Trust
10. Dean Witter Developing Growth Securities Trust
11. Dean Witter Diversified Income Trust
12. Dean Witter Dividend Growth Securities Inc.
13. Dean Witter Equity Income Trust
14. Dean Witter European Growth Fund Inc.
15. Dean Witter Federal Securities Trust
16. Dean Witter Global Dividend Growth Securities
17. Dean Witter Global Short-Term Income Fund Inc.
18. Dean Witter Health Sciences Trust
19. Dean Witter High Yield Securities Inc.
20. Dean Witter Intermediate Income Securities
21. Dean Witter Limited Term Municipal Trust
22. Dean Witter Liquid Asset Fund Inc.
23. Dean Witter Managed Assets Trust
24. Dean Witter Multi-State Municipal Series Trust
25. Dean Witter Natural Resource Development Securities Inc.
26. Dean Witter New York Municipal Money Market Trust
27. Dean Witter New York Tax-Free Income Fund
28. Dean Witter Pacific Growth Fund Inc.
29. Dean Witter Precious Metals and Minerals Trust
30. Dean Witter Premier Income Trust
31. Dean Witter Retirement Series
32. Dean Witter Select Municipal Reinvestment Fund
33. Dean Witter Short-Term U.S. Treasury Trust
34. Dean Witter Strategist Fund
35. Dean Witter Tax-Exempt Securities Trust
36. Dean Witter Tax-Free Daily Income Trust
37. Dean Witter U.S. Government Money Market Trust
38. Dean Witter U.S. Government Securities Trust
39. Dean Witter Utilities Fund
40. Dean Witter Value-Added Market Series
41. Dean Witter Variable Investment Series
42. Dean Witter World Wide Income Trust
43. Dean Witter World Wide Investment Trust
CLOSED-END FUNDS
44. High Income Advantage Trust
45. High Income Advantage Trust II
46. High Income Advantage Trust III
47. InterCapital Income Securities Inc.
48. Dean Witter Government Income Trust
49. InterCapital Insured Municipal Bond Trust
50. InterCapital Insured Municipal Trust
51. InterCapital Insured Municipal Income Trust
52. InterCapital California Insured Municipal Income Trust
53. InterCapital Quality Municipal Investment Trust
54. InterCapital Quality Municipal Income Trust
55. InterCapital Quality Municipal Securities
56. InterCapital California Quality Municipal Securities
57. InterCapital New York Quality Municipal Securities
4
<PAGE>
DEAN WITTER SERVICES COMPANY
SCHEDULE OF ADMINISTRATIVE FEES - JANUARY 1, 1994
Monthly compensation calculated daily by applying the following annual
rates to a fund's net assets:
Dean Witter Federal 0.055% of the portion of the daily net assets
Securities Trust not exceeding $1 billion; 0.0525% of the portion
of the daily net assets exceeding $1 billion but
not exceeding $1.5 billion; 0.050% of the
portion of the daily net assets exceeding $1.5
billion but not exceeding $2 billion; 0.0475% of
the portion of the daily net assets exceeding $2
billion but not exceeding $2.5 billion; 0.045%
of the portion of the daily net assets exceeding
$2.5 billion but not exceeding $5 billion;
0.0425% of the portion of the daily net assets
exceeding $5 billion but not exceeding $7.5
billion; 0.040% of the portion of the daily net
assets exceeding $7.5 billion but not exceeding
$10 billion; 0.0375% of the portion of the daily
net assets exceeding $10 billion but not
exceeding $12.5 billion; and 0.035% of the
portion of the daily net assets exceeding $12.5
billion.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 9 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
December 12, 1994, relating to the financial statements and financial highlights
of Dean Witter Federal Securities Trust, which appears in such Statement of
Additional Information, and to the incorporation by reference of our report into
the Prospectus which constitutes part of this Registration Statement. We also
consent to the references to us under the headings "Financial Highlights" in the
Prospectus and "Independent Accountants" and "Experts" in the Statement of
Additional Information.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
December 20, 1994
<PAGE>
DEAN WITTER FEDERAL SECURITIES TRUST
SCHEDULE OF COMPUTATION OF YIELD QUOTATION
10/31/94
6
YIELD = 2 { [ ((a-b) /cd) +1] -1}
WHERE: a = Dividends and interest earned during the period
b = Expenses accrued for the period
c = The average daily number of shares outstanding
during the period that were entitled to receive
dividends
d = The maximum offering price per share on the last
day of the period
6
YIELD = 2 { [ ((5,983,049.09 - 1,043,902.95) /97,314,097.662 X 8.74) +1] -1}
= 7.07%
<PAGE>
FINAL DATE: 31-Oct-94
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS
FEDERAL SECURITIES TRUST
(A) AVERAGE ANNUAL TOTAL RETURNS (I.E. STANDARDIZED COMPUTATIONS)
_ _
| ______________________ |
FORMULA: | | |
| /\ n | ERV |
T = | \ | ------------------- | - 1
| \ | P |
| \| |
|_ _|
T = AVERAGE ANNUAL TOTAL RETURN
n = NUMBER OF YEARS
ERV = ENDING REDEEMABLE VALUE
P = INITIAL INVESTMENT
<TABLE>
<CAPTION>
(A)
$1,000 ERV AS OF NUMBER OF AVERAGE ANNUAL
INVESTED - P 31-Oct-94 YEARS - n TOTAL RETURN - T
- ------------- ----------- ----------- ----------------------
<S> <C> <C> <C>
31-Oct-93 $887.20 1 -11.28%
31-Oct-89 $1,333.50 5.00 5.92%
31-Mar-87 $1,634.50 7.59 6.69%
</TABLE>
(B) AVERAGE ANNUAL TOTAL RETURNS WITHOUT DEDUCTION FOR APPLICABLE
SALES CHARGE (NON STANDARD COMPUTATIONS)
(C) TOTAL RETURN WITHOUT DEDUCTION FOR APPLICABLE SALES CHARGE
(NON STANDARD COMPUTATIONS)
_ _
| ______________________ |
FORMULA: | | |
| /\ n | EV |
t = | \ | ------------------- | - 1
| \ | P |
| \| |
|_ _|
EV
TR = --------------- - 1
P
t = AVERAGE ANNUAL TOTAL RETURN
(NO DEDUCTION FOR APPLICABLE SALES CHARGE)
n = NUMBER OF YEARS
EV = ENDING VALUE (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
P = INITIAL INVESTMENT
TR = TOTAL RETURN (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
<TABLE>
<CAPTION>
(C) (B)
$1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL
INVESTED - P 31-Oct-94 RETURN - TR YEARS - n TOTAL RETURN - t
- ------------- ----------- ----------- ----------------- ------- ------------------------
<S> <C> <C> <C> <C>
31-Oct-93 $930.80 -6.92% 1.00 -6.92%
31-Oct-89 $1,352.30 35.23% 5.00 6.22%
31-Mar-87 $1,634.50 63.45% 7.59 6.69%
</TABLE>
(D) GROWTH OF $10,000
(E) GROWTH OF $50,000
(F) GROWTH OF $100,000
FORMULA: G= (TR+1)*P
G= GROWTH OF INITIAL INVESTMENT
P= INITIAL INVESTMENT
TR= TOTAL RETURN SINCE INCEPTION
<TABLE>
<CAPTION>
TOTAL (D) GROWTH OF (E) GROWTH OF (F) GROWTH OF
INVESTED - P RETURN - TR $10,000 INVESTMENT -G $50,000 INVESTMENT - G $100,000 INVESTMENT - G
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
31-Mar-87 63.45 $16,345 $81,725 $163,450
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1994
<PERIOD-END> OCT-31-1994
<INVESTMENTS-AT-COST> 842,074,069
<INVESTMENTS-AT-VALUE> 818,227,522
<RECEIVABLES> 26,093,820
<ASSETS-OTHER> 41,576
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 844,362,918
<PAYABLE-FOR-SECURITIES> 28,125
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,608,159
<TOTAL-LIABILITIES> 3,636,284
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 953,567,493
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (517,434)
<ACCUMULATED-NET-GAINS> (90,846,763)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (21,476,662)
<NET-ASSETS> 840,726,634
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 79,276,458
<OTHER-INCOME> 0
<EXPENSES-NET> 14,942,848
<NET-INVESTMENT-INCOME> 64,333,610
<REALIZED-GAINS-CURRENT> (12,133,071)
<APPREC-INCREASE-CURRENT> (149,350,543)
<NET-CHANGE-FROM-OPS> (72,883,862)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (64,700,229)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,119,372
<NUMBER-OF-SHARES-REDEEMED> (30,316,610)
<SHARES-REINVESTED> 3,923,981
<NET-CHANGE-IN-ASSETS> (150,082,996)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,387,156
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 14,942,848
<AVERAGE-NET-ASSETS> 980,755,124
<PER-SHARE-NAV-BEGIN> 10.03
<PER-SHARE-NII> .60
<PER-SHARE-GAIN-APPREC> (1.28)
<PER-SHARE-DIVIDEND> (.61)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.74
<EXPENSE-RATIO> 1.52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of JACK F. BENNETT, EDWIN J.
GARN, JOHN R. HAIRE, JOHN E. JEUCK, MANUEL H. JOHNSON, PAUL KOLTON and MICHAEL
E. NUGENT, whose signatures appear below, constitutes and appoints David M.
Butowsky, Ronald Feiman and Stuart Strauss, or any of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution among himself and
each of the persons appointed herein, for him and in his name, place and stead,
in any and all capacities, to sign any amendments to any registration statement
of ANY OF THE DEAN WITTER FUNDS SET FORTH ON SCHEDULE A ATTACHED HERETO, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
Dated: May 10, 1994
/S/Jack F. Bennett /S/Manuel H. Johnson
- -------------------- ----------------------
Jack F. Bennett Manuel H. Johnson
/S/Edwin J. Garn /S/Paul Kolton
- -------------------- -----------------------
Edwin J. Garn Paul Kolton
/S/John R. Haire /S/Michael E. Nugent
- -------------------- ------------------------
John R. Haire Michael E. Nugent
/S/John E. Jeuck
- --------------------
John E. Jeuck
<PAGE>
DEAN WITTER FUNDS
MONEY MARKET
1. Dean Witter Liquid Asset Fund Inc.
2. Active Assets Money Trust
3. Active Assets Tax-Free Trust
4. Active Assets California Tax-Free Trust
5. Active Assets Government Securities Trust
6. Dean Witter Tax-Free Daily Income Trust
7. Dean Witter U.S. Government Money Market Trust
8. Dean Witter California Tax-Free Daily Income Trust
9. Dean Witter New York Municipal Money Market Trust
EQUITY FUNDS
10. Dean Witter American Value Fund
11. Dean Witter Dividend Growth Securities Inc.
12. Dean Witter Capital Growth Securities
13. Dean Witter Natural Resource Development Securities Inc.
14. Dean Witter Precious Metals & Minerals Trust
15. Dean Witter Developing Growth Securities Trust
16. Dean Witter World Wide Investment Trust
17. Dean Witter Value-Added Market Series
18. Dean Witter European Growth Fund Inc.
19. Dean Witter Pacific Growth Fund Inc.
20. Dean Witter Equity Income Trust
21. Dean Witter Utilities Fund
22. Dean Witter Health Sciences Trust
23. Dean Witter Global Dividend Growth Securities
ASSET ALLOCATION FUNDS
24. Dean Witter Managed Assets Trust
25. Dean Witter Strategist Fund
FIXED-INCOME FUNDS
26. Dean Witter High Yield Securities Inc.
27. Dean Witter Convertible Securities Trust
28. Dean Witter Intermediate Income Securities
29. Dean Witter World Wide Income Trust
30. Dean Witter Global Short-Term Income Fund Inc.
31. Dean Witter Diversified Income Trust
32. Dean Witter Premier Income Trust
33. Dean Witter U.S. Government Securities Trust
34. Dean Witter Federal Securities Trust
<PAGE>
35. Dean Witter Short-Term U.S. Treasury Trust
36. Dean Witter Tax-Exempt Securities Trust
37. Dean Witter California Tax-Free Income Fund
38. Dean Witter New York Tax-Free Income Fund
39. Dean Witter Multi-State Municipal Series Trust
Arizona Series
California Series
Florida Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
Ohio Series
Pennsylvania Series
40. Dean Witter Select Municipal Reinvestment Fund
41. Dean Witter Limited Term Municipal Trust
SPECIAL PURPOSE FUNDS
42. Dean Witter Variable Investment Series
Money Market Portfolio
Quality Income Plus Portfolio
High Yield Portfolio
Utilities Portfolio
Dividend Growth Portfolio
Capital Growth Portfolio
European Growth Portfolio
Equity Portfolio
Managed Assets Portfolio
43. Dean Witter Retirement Series
Liquid Asset Series
U.S. Government Money Market Series
U.S. Government Securities Series
Intermediate Income Securities Series
American Value Series
Capital Growth Series
Dividend Growth Series
Strategist Series
Utilities Series
Value-Added Market Series
Global Equity Series
<PAGE>
CLOSED-END FUNDS
44. High Income Advantage Trust
45. High Income Advantage Trust II
46. High Income Advantage Trust III
47. InterCapital Income Securities Inc.
48. Dean Witter Government Income Trust
49. InterCapital Insured Municipal Bond Trust
50. InterCapital Insured Municipal Trust
51. InterCapital Quality Municipal Investment Trust
52. InterCapital Quality Municipal Income Trust
53. Municipal Income Trust
54. Municipal Income Trust II
55. Municipal Income Trust III
56. Municipal Income Opportunities Trust
57. Municipal Income Opportunities Trust II
58. Municipal Income Opportunities Trust III
59. Municipal Premium Income Trust
60. Prime Income Trust
61. InterCapital Insured Municipal Income Trust
62. InterCapital California Insured Municipal Income Trust
63. InterCapital Quality Municipal Securities
64. InterCapital California Quality Municipal Securities
65. InterCapital New York Quality Municipal Securities
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that MICHAEL BOZIC, whose signature appears
below, constitutes and appoints David M. Butowsky, Ronald Feiman and Stuart
Strauss, or any of them, his true and lawful attorneys-in-fact and agents, with
full power of substitution among himself and each of the persons appointed
herein, for him and in his name, place and stead, in any and all capacities, to
sign any amendments to any registration statement of ANY OF THE DEAN WITTER
FUNDS SET FORTH ON SCHEDULE A ATTACHED HERETO, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
Dated: April 15, 1994
/S/ Michael Bozic
- ------------------
Michael Bozic
<PAGE>
DEAN WITTER FUNDS
MONEY MARKET
1. Dean Witter Liquid Asset Fund Inc.
2. Active Assets Money Trust
3. Active Assets Tax-Free Trust
4. Active Assets California Tax-Free Trust
5. Active Assets Government Securities Trust
6. Dean Witter Tax-Free Daily Income Trust
7. Dean Witter U.S. Government Money Market Trust
8. Dean Witter California Tax-Free Daily Income Trust
9. Dean Witter New York Municipal Money Market Trust
EQUITY FUNDS
10. Dean Witter American Value Fund
11. Dean Witter Dividend Growth Securities Inc.
12. Dean Witter Capital Growth Securities
13. Dean Witter Natural Resource Development Securities Inc.
14. Dean Witter Precious Metals & Minerals Trust
15. Dean Witter Developing Growth Securities Trust
16. Dean Witter World Wide Investment Trust
17. Dean Witter Value-Added Market Series
18. Dean Witter European Growth Fund Inc.
19. Dean Witter Pacific Growth Fund Inc.
20. Dean Witter Equity Income Trust
21. Dean Witter Utilities Fund
22. Dean Witter Health Sciences Trust
23. Dean Witter Global Dividend Growth Securities
24. Dean Witter Global Utilities Fund
ASSET ALLOCATION FUNDS
25. Dean Witter Managed Assets Trust
26. Dean Witter Strategist Fund
FIXED-INCOME FUNDS
27. Dean Witter High Yield Securities Inc.
28. Dean Witter Convertible Securities Trust
29. Dean Witter Intermediate Income Securities
30. Dean Witter World Wide Income Trust
31. Dean Witter Global Short-Term Income Fund Inc.
32. Dean Witter Diversified Income Trust
33. Dean Witter Premier Income Trust
34. Dean Witter U.S. Government Securities Trust
35. Dean Witter Federal Securities Trust
<PAGE>
36. Dean Witter Short-Term U.S. Treasury Trust
37. Dean Witter Tax-Exempt Securities Trust
38. Dean Witter California Tax-Free Income Fund
39. Dean Witter New York Tax-Free Income Fund
40. Dean Witter Multi-State Municipal Series Trust
Arizona Series
California Series
Florida Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
Ohio Series
Pennsylvania Series
41. Dean Witter Select Municipal Reinvestment Fund
42. Dean Witter Limited Term Municipal Trust
43. Dean Witter Short-Term Bond Fund
SPECIAL PURPOSE FUNDS
44. Dean Witter Variable Investment Series
Money Market Portfolio
Quality Income Plus Portfolio
High Yield Portfolio
Utilities Portfolio
Dividend Growth Portfolio
Capital Growth Portfolio
European Growth Portfolio
Equity Portfolio
Managed Assets Portfolio
45. Dean Witter Retirement Series
Liquid Asset Series
U.S. Government Money Market Series
U.S. Government Securities Series
Intermediate Income Securities Series
American Value Series
Capital Growth Series
Dividend Growth Series
Strategist Series
Utilities Series
Value-Added Market Series
Global Equity Series
<PAGE>
CLOSED-END FUNDS
46. High Income Advantage Trust
47. High Income Advantage Trust II
48. High Income Advantage Trust III
49. InterCapital Income Securities Inc.
50. Dean Witter Government Income Trust
51. InterCapital Insured Municipal Bond Trust
52. InterCapital Insured Municipal Trust
53. InterCapital Quality Municipal Investment Trust
54. InterCapital Quality Municipal Income Trust
55. Municipal Income Trust
56. Municipal Income Trust II
57. Municipal Income Trust III
58. Municipal Income Opportunities Trust
59. Municipal Income Opportunities Trust II
60. Municipal Income Opportunities Trust III
61. Municipal Premium Income Trust
62. Prime Income Trust
63. InterCapital Insured Municipal Income Trust
64. InterCapital California Insured Municipal Income Trust
65. InterCapital Quality Municipal Securities
66. InterCapital California Quality Municipal Securities
67. InterCapital New York Quality Municipal Securities
68. InterCapital California Insured Municipal Securities
69. InterCapital Insured Municipal Securities
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of CHARLES A. FIUMEFREDDO and
EDWARD R. TELLING, whose signatures appear below, constitutes and appoints
Sheldon Curtis, Marilyn K. Cranney and Barry Fink, or any of them, his true and
lawful attorneys-in-fact and agent, with full power of substitution among
himself and each of the persons appointed herein, for him and in his name, place
and stead, in any and all capacities, to sign any amendments to any registration
statement of ANY OF THE DEAN WITTER FUNDS SET FORTH ON SCHEDULE A ATTACHED
HERETO, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
Dated: May 10, 1994
/S/Charles A. Fiumefreddo /S/Edward R. Telling
- --------------------------- --------------------
Charles A. Fiumefreddo Edward R. Telling
<PAGE>
DEAN WITTER FUNDS
MONEY MARKET
1. Dean Witter Liquid Asset Fund Inc.
2. Active Assets Money Trust
3. Active Assets Tax-Free Trust
4. Active Assets California Tax-Free Trust
5. Active Assets Government Securities Trust
6. Dean Witter Tax-Free Daily Income Trust
7. Dean Witter U.S. Government Money Market Trust
8. Dean Witter California Tax-Free Daily Income Trust
9. Dean Witter New York Municipal Money Market Trust
EQUITY FUNDS
10. Dean Witter American Value Fund
11. Dean Witter Dividend Growth Securities Inc.
12. Dean Witter Capital Growth Securities
13. Dean Witter Natural Resource Development Securities Inc.
14. Dean Witter Precious Metals & Minerals Trust
15. Dean Witter Developing Growth Securities Trust
16. Dean Witter World Wide Investment Trust
17. Dean Witter Value-Added Market Series
18. Dean Witter European Growth Fund Inc.
19. Dean Witter Pacific Growth Fund Inc.
20. Dean Witter Equity Income Trust
21. Dean Witter Utilities Fund
22. Dean Witter Health Sciences Trust
23. Dean Witter Global Dividend Growth Securities
ASSET ALLOCATION FUNDS
24. Dean Witter Managed Assets Trust
25. Dean Witter Strategist Fund
FIXED-INCOME FUNDS
26. Dean Witter High Yield Securities Inc.
27. Dean Witter Convertible Securities Trust
28. Dean Witter Intermediate Income Securities
29. Dean Witter World Wide Income Trust
30. Dean Witter Global Short-Term Income Fund Inc.
31. Dean Witter Diversified Income Trust
32. Dean Witter Premier Income Trust
33. Dean Witter U.S. Government Securities Trust
34. Dean Witter Federal Securities Trust
<PAGE>
35. Dean Witter Short-Term U.S. Treasury Trust
36. Dean Witter Tax-Exempt Securities Trust
37. Dean Witter California Tax-Free Income Fund
38. Dean Witter New York Tax-Free Income Fund
39. Dean Witter Multi-State Municipal Series Trust
Arizona Series
California Series
Florida Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
Ohio Series
Pennsylvania Series
40. Dean Witter Select Municipal Reinvestment Fund
41. Dean Witter Limited Term Municipal Trust
SPECIAL PURPOSE FUNDS
42. Dean Witter Variable Investment Series
Money Market Portfolio
Quality Income Plus Portfolio
High Yield Portfolio
Utilities Portfolio
Dividend Growth Portfolio
Capital Growth Portfolio
European Growth Portfolio
Equity Portfolio
Managed Assets Portfolio
43. Dean Witter Retirement Series
Liquid Asset Series
U.S. Government Money Market Series
U.S. Government Securities Series
Intermediate Income Securities Series
American Value Series
Capital Growth Series
Dividend Growth Series
Strategist Series
Utilities Series
Value-Added Market Series
Global Equity Series
<PAGE>
CLOSED-END FUNDS
44. High Income Advantage Trust
45. High Income Advantage Trust II
46. High Income Advantage Trust III
47. InterCapital Income Securities Inc.
48. Dean Witter Government Income Trust
49. InterCapital Insured Municipal Bond Trust
50. InterCapital Insured Municipal Trust
51. InterCapital Quality Municipal Investment Trust
52. InterCapital Quality Municipal Income Trust
53. Municipal Income Trust
54. Municipal Income Trust II
55. Municipal Income Trust III
56. Municipal Income Opportunities Trust
57. Municipal Income Opportunities Trust II
58. Municipal Income Opportunities Trust III
59. Municipal Premium Income Trust
60. Prime Income Trust
61. InterCapital Insured Municipal Income Trust
62. InterCapital California Insured Municipal Income Trust
63. InterCapital Quality Municipal Securities
64. InterCapital California Quality Municipal Securities
65. InterCapital New York Quality Municipal Securities
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that PHILIP J. PURCELL, whose signature
appears below, constitutes and appoints Sheldon Curtis, Marilyn K. Cranney and
Barry Fink, or any of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution among himself and each of the persons appointed
herein, for him and in his name, place and stead, in any and all capacities, to
sign any amendments to any registration statement of ANY OF THE DEAN WITTER
FUNDS SET FORTH ON SCHEDULE A ATTACHED HERETO, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
Dated: April 8, 1994
/S/ Philip J. Purcell
- -----------------------
Philip J. Purcell
<PAGE>
DEAN WITTER FUNDS
MONEY MARKET
1. Dean Witter Liquid Asset Fund Inc.
2. Active Assets Money Trust
3. Active Assets Tax-Free Trust
4. Active Assets California Tax-Free Trust
5. Active Assets Government Securities Trust
6. Dean Witter Tax-Free Daily Income Trust
7. Dean Witter U.S. Government Money Market Trust
8. Dean Witter California Tax-Free Daily Income Trust
9. Dean Witter New York Municipal Money Market Trust
EQUITY FUNDS
10. Dean Witter American Value Fund
11. Dean Witter Dividend Growth Securities Inc.
12. Dean Witter Capital Growth Securities
13. Dean Witter Natural Resource Development Securities Inc.
14. Dean Witter Precious Metals & Minerals Trust
15. Dean Witter Developing Growth Securities Trust
16. Dean Witter World Wide Investment Trust
17. Dean Witter Value-Added Market Series
18. Dean Witter European Growth Fund Inc.
19. Dean Witter Pacific Growth Fund Inc.
20. Dean Witter Equity Income Trust
21. Dean Witter Utilities Fund
22. Dean Witter Health Sciences Trust
23. Dean Witter Global Dividend Growth Securities
24. Dean Witter Global Utilities Fund
ASSET ALLOCATION FUNDS
25. Dean Witter Managed Assets Trust
26. Dean Witter Strategist Fund
FIXED-INCOME FUNDS
27. Dean Witter High Yield Securities Inc.
28. Dean Witter Convertible Securities Trust
29. Dean Witter Intermediate Income Securities
30. Dean Witter World Wide Income Trust
31. Dean Witter Global Short-Term Income Fund Inc.
32. Dean Witter Diversified Income Trust
33. Dean Witter Premier Income Trust
34. Dean Witter U.S. Government Securities Trust
35. Dean Witter Federal Securities Trust
<PAGE>
36. Dean Witter Short-Term U.S. Treasury Trust
37. Dean Witter Tax-Exempt Securities Trust
38. Dean Witter California Tax-Free Income Fund
39. Dean Witter New York Tax-Free Income Fund
40. Dean Witter Multi-State Municipal Series Trust
Arizona Series
California Series
Florida Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
Ohio Series
Pennsylvania Series
41. Dean Witter Select Municipal Reinvestment Fund
42. Dean Witter Limited Term Municipal Trust
43. Dean Witter Short-Term Bond Fund
SPECIAL PURPOSE FUNDS
44. Dean Witter Variable Investment Series
Money Market Portfolio
Quality Income Plus Portfolio
High Yield Portfolio
Utilities Portfolio
Dividend Growth Portfolio
Capital Growth Portfolio
European Growth Portfolio
Equity Portfolio
Managed Assets Portfolio
45. Dean Witter Retirement Series
Liquid Asset Series
U.S. Government Money Market Series
U.S. Government Securities Series
Intermediate Income Securities Series
American Value Series
Capital Growth Series
Dividend Growth Series
Strategist Series
Utilities Series
Value-Added Market Series
Global Equity Series
<PAGE>
CLOSED-END FUNDS
46. High Income Advantage Trust
47. High Income Advantage Trust II
48. High Income Advantage Trust III
49. InterCapital Income Securities Inc.
50. Dean Witter Government Income Trust
51. InterCapital Insured Municipal Bond Trust
52. InterCapital Insured Municipal Trust
53. InterCapital Quality Municipal Investment Trust
54. InterCapital Quality Municipal Income Trust
55. Municipal Income Trust
56. Municipal Income Trust II
57. Municipal Income Trust III
58. Municipal Income Opportunities Trust
59. Municipal Income Opportunities Trust II
60. Municipal Income Opportunities Trust III
61. Municipal Premium Income Trust
62. Prime Income Trust
63. InterCapital Insured Municipal Income Trust
64. InterCapital California Insured Municipal Income Trust
65. InterCapital Quality Municipal Securities
66. InterCapital California Quality Municipal Securities
67. InterCapital New York Quality Municipal Securities
68. InterCapital California Insured Municipal Securities
69. InterCapital Insured Municipal Securities
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that JOHN L. SCHROEDER, whose signature
appears below, constitutes and appoints David M. Butowsky, Ronald Feiman and
Stuart Strauss, or any of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution among himself and each of the persons
appointed herein, for him and in his name, place and stead, in any and all
capacities, to sign any amendments to any registration statement of ANY OF THE
DEAN WITTER FUNDS SET FORTH ON SCHEDULE A ATTACHED HERETO, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
Dated: April 13, 1994
/S/ John L. Schroeder
- ----------------------
John L. Schroeder
<PAGE>
DEAN WITTER FUNDS
MONEY MARKET
1. Dean Witter Liquid Asset Fund Inc.
2. Active Assets Money Trust
3. Active Assets Tax-Free Trust
4. Active Assets California Tax-Free Trust
5. Active Assets Government Securities Trust
6. Dean Witter Tax-Free Daily Income Trust
7. Dean Witter U.S. Government Money Market Trust
8. Dean Witter California Tax-Free Daily Income Trust
9. Dean Witter New York Municipal Money Market Trust
EQUITY FUNDS
10. Dean Witter American Value Fund
11. Dean Witter Dividend Growth Securities Inc.
12. Dean Witter Capital Growth Securities
13. Dean Witter Natural Resource Development Securities Inc.
14. Dean Witter Precious Metals & Minerals Trust
15. Dean Witter Developing Growth Securities Trust
16. Dean Witter World Wide Investment Trust
17. Dean Witter Value-Added Market Series
18. Dean Witter European Growth Fund Inc.
19. Dean Witter Pacific Growth Fund Inc.
20. Dean Witter Equity Income Trust
21. Dean Witter Utilities Fund
22. Dean Witter Health Sciences Trust
23. Dean Witter Global Dividend Growth Securities
24. Dean Witter Global Utilities Fund
ASSET ALLOCATION FUNDS
25. Dean Witter Managed Assets Trust
26. Dean Witter Strategist Fund
FIXED-INCOME FUNDS
27. Dean Witter High Yield Securities Inc.
28. Dean Witter Convertible Securities Trust
29. Dean Witter Intermediate Income Securities
30. Dean Witter World Wide Income Trust
31. Dean Witter Global Short-Term Income Fund Inc.
32. Dean Witter Diversified Income Trust
33. Dean Witter Premier Income Trust
34. Dean Witter U.S. Government Securities Trust
35. Dean Witter Federal Securities Trust
<PAGE>
36. Dean Witter Short-Term U.S. Treasury Trust
37. Dean Witter Tax-Exempt Securities Trust
38. Dean Witter California Tax-Free Income Fund
39. Dean Witter New York Tax-Free Income Fund
40. Dean Witter Multi-State Municipal Series Trust
Arizona Series
California Series
Florida Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
Ohio Series
Pennsylvania Series
41. Dean Witter Select Municipal Reinvestment Fund
42. Dean Witter Limited Term Municipal Trust
43. Dean Witter Short-Term Bond Fund
SPECIAL PURPOSE FUNDS
44. Dean Witter Variable Investment Series
Money Market Portfolio
Quality Income Plus Portfolio
High Yield Portfolio
Utilities Portfolio
Dividend Growth Portfolio
Capital Growth Portfolio
European Growth Portfolio
Equity Portfolio
Managed Assets Portfolio
45. Dean Witter Retirement Series
Liquid Asset Series
U.S. Government Money Market Series
U.S. Government Securities Series
Intermediate Income Securities Series
American Value Series
Capital Growth Series
Dividend Growth Series
Strategist Series
Utilities Series
Value-Added Market Series
Global Equity Series
<PAGE>
CLOSED-END FUNDS
46. High Income Advantage Trust
47. High Income Advantage Trust II
48. High Income Advantage Trust III
49. InterCapital Income Securities Inc.
50. Dean Witter Government Income Trust
51. InterCapital Insured Municipal Bond Trust
52. InterCapital Insured Municipal Trust
53. InterCapital Quality Municipal Investment Trust
54. InterCapital Quality Municipal Income Trust
55. Municipal Income Trust
56. Municipal Income Trust II
57. Municipal Income Trust III
58. Municipal Income Opportunities Trust
59. Municipal Income Opportunities Trust II
60. Municipal Income Opportunities Trust III
61. Municipal Premium Income Trust
62. Prime Income Trust
63. InterCapital Insured Municipal Income Trust
64. InterCapital California Insured Municipal Income Trust
65. InterCapital Quality Municipal Securities
66. InterCapital California Quality Municipal Securities
67. InterCapital New York Quality Municipal Securities
68. InterCapital California Insured Municipal Securities
69. InterCapital Insured Municipal Securities
