<PAGE>
PROSPECTUS
JANUARY 11, 1995
Dean Witter Premier Income Trust (the "Fund") is an open-end,
diversified management investment company, whose investment objective is to earn
a high level of current income consistent with low volatility of principal. The
Fund seeks to achieve its investment objective by investing primarily in high
quality fixed rate and adjustable rate mortgage-backed securities and other
asset-backed securities which either are issued or guaranteed by the United
States Government, its agencies or instrumentalities, or rated Aaa by Moody's
Investors Service, Inc. or AAA by Standard & Poor's Corporation or, if not
rated, determined to be of comparable quality. See "Investment Objective and
Policies."
Shares of the Fund are offered at net asset value plus a sales
charge of 3.0% of the offering price, scaled down on purchases of $100,000 or
more. In addition, pursuant to a Rule 12b-1 Plan of Distribution under the
Investment Company Act of 1940, the Fund may reimburse the Distributor, in an
amount equal to payments not exceeding the annual rate of 0.20% of the average
daily net assets of the Fund, for specific expenses incurred in promoting the
distribution of the Fund's shares.
This Prospectus sets forth concisely the information you should
know before investing in the Fund. It should be read and retained for future
reference. Additional information about the Fund is contained in the Statement
of Additional Information, dated January 11, 1995, which has been filed with the
Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone numbers listed on this page. The
Statement of Additional Information is incorporated herein by reference.
DEAN WITTER DISTRIBUTORS INC.
DISTRIBUTOR
TABLE OF CONTENTS
Prospectus Summary/2
Summary of Fund Expenses/3
Financial Highlights/4
The Fund and Its Management/5
Investment Objective and Policies/6
Risk Considerations/13
Investment Restrictions/16
Purchase of Fund Shares/17
Shareholder Services/20
Redemptions and Repurchases/22
Dividends, Distributions and Taxes/23
Performance Information/24
Additional Information/25
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
Premier Income 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 open-end,
Fund diversified management investment company investing primarily in high-quality fixed rate and adjustable rate
mortgage-backed securities and in asset-backed securities.
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Shares Offered Shares of beneficial interest with $0.01 par value (see page 24).
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Offering The price of the shares offered by this prospectus varies with the changes in the value of the Fund's
Price investments. The offering price, determined once daily as of 4:00 p.m., New York time, on each day that the New
York Stock Exchange is open, is equal to the net asset value plus a sales charge of 3.0% of the offering price,
scaled down on purchases of $100,000 or over (see page 17).
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Minimum Minimum initial investment, $1,000. Minimum subsequent investment, $100 (see page 17).
Purchase
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Investment The investment objective of the Fund is to earn a high level of current income consistent with low volatility of
Objective principal.
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Investment Manager Dean Witter InterCapital Inc. ("InterCapital"), the Investment Manager of the Fund, and its wholly-owned
and subsidiary, Dean Witter Services Company Inc., serve in various investment management, advisory, management and
Sub-Advisor administrative capacities to ninety investment companies and other portfolios with assets of approximately $67.8
billion at November 30, 1994. BlackRock Financial Management L.P. (the "Sub-Advisor") has been retained by the
Investment Manager to provide investment advice and manage the Fund's portfolio. The Sub-Advisor currently
serves as the investment adviser to fixed income investors in the United States and overseas through funds with
combined net assets in excess of $22 billion (see page 5).
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Management Fee The Investment Manager receives a monthly fee at the annual rate of 0.50% of daily net assets. The Sub-Advisor
receives a monthly fee from the Investment Manager equal to 40% of the Investment Manager's monthly fee (see
page 5).
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Dividends Income dividends are declared daily and paid monthly; capital gains distributions, if any, are paid at least
annually. Income dividends and capital gains distributions are automatically reinvested in additional shares at
net asset value unless the shareholder elects to receive cash.
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Plan of The Fund is authorized to reimburse Dean Witter Distributors Inc. (the "Distributor") for specific expenses
Distribution incurred in promoting the distribution of the Fund's shares pursuant to a Plan of Distribution pursuant to Rule
12b-1 under the Investment Company Act of 1940. Reimbursement may in no event exceed an amount equal to payments
at the annual rate of 0.20 of 1% of average daily net assets of the Fund (see page 18). The Distributor also
receives a sales charge of 3% of the offering price.
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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 portfolio
Considerations securities. Mortgage-backed and asset-backed securities have different characteristics than traditional debt
securities, primarily in that interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time (see page 7). Mortgage-backed and asset-backed securities generally
decrease in value as a result of increases in interest rates and may benefit less than other fixed-income
securities from declining interest rates because of prepayment risks. The types of mortgage-backed securities in
which the Fund may invest include derivative products such as collateralized mortgage obligations and stripped
mortgage-backed securities, which are highly sensitive to changes in prepayment and interest rates and have
special characteristics and risks (see pages 8 and 9). Asset-backed securities involve certain risks not posed
by mortgage-backed securities, resulting mainly from the fact that asset-backed securities do not usually
contain the complete benefit of a security interest in the related collateral (see page 10). In addition, the
Fund may utilize certain investment techniques, including options and futures for hedging purposes, and the use
of leverage, including reverse repurchase agreements and dollar rolls, which entail additional risks (see pages
10-15).
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Reduced Sales Right of Accumulation; Letter of Intent; Automatic Investment of Dividends and Distributions; EasyInvestSM;
Charges and Systematic Withdrawal Plan; Exchange Privilege (see pages 18-21).
Shareholder
Services
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</TABLE>
THE ABOVE IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION APPEARING
ELSEWHERE
IN THIS PROSPECTUS AND 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
year ended October 31, 1994.
The following table illustrates all expenses and fees that a shareholder of
the Fund will incur.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
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Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)................................................ 3.0 %
Maximum Sales Charge Imposed on Reinvested Dividends................................. None
Deferred Sales Charge................................................................ None
Redemption Fees...................................................................... None
Exchange Fee......................................................................... None
ANNUAL FUND EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
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Management Fees...................................................................... 0.50 %
12b-1 Fees*.......................................................................... 0.18 %
Other Expenses....................................................................... 0.90 %
Total Fund Expenses.................................................................. 1.58 %
<FN>
------------
* THE 12B-1 FEE 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............................................................... $ 46 $ 78 $ 113 $ 212
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF THE FUND MAY BE MORE 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" and "Purchase of Fund Shares."
Long-term shareholders of the Fund may pay more in sales charges and
distribution fees than the economic equivalent of the maximum front-end sales
charges permitted by the NASD.
3
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FINANCIAL HIGHLIGHTS
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The following ratios and per share data for a share of beneficial interest
outstanding throughout each period and the data relating to debt outstanding
have been audited by Price Waterhouse LLP, independent accountants. This data
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
JULY 1,
FOR THE YEAR ENDED 1991*
OCTOBER 31, THROUGH
---------------------------- OCTOBER
1994 1993 1992 31, 1991
--------- ------- ------- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $9.18 $9.69 $9.95 $9.60
--------- ------- ------- --------
Net investment income.................................... 0.54 0.73 0.71 0.26
Net realized and unrealized gain (loss) on investments... (0.41) (0.45) (0.21) 0.37
--------- ------- ------- --------
Total from investment operations......................... 0.13 0.28 0.50 0.63
--------- ------- ------- --------
Less dividends and distributions from:
Net investment income................................ (0.54) (0.61) (0.71) (0.26)
Net realized gain on investments..................... -- (0.18) (0.05) (0.02)
--------- ------- ------- --------
Total dividends and distributions........................ (0.54) (0.79) (0.76) (0.28)
--------- ------- ------- --------
Net asset value, end of period........................... $8.77 $9.18 $9.69 $9.95
--------- ------- ------- --------
--------- ------- ------- --------
TOTAL INVESTMENT RETURN+................................. 1.44% 2.87% 5.18% 6.41%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................. $43,875 $90,260 $154,860 $132,219
Ratios of expenses to average net assets:
Operating expenses..................................... 1.24% 0.95% 0.99% 0.85%(2)
Interest expense....................................... 0.34% 0.65% 0.61% 0.84%(2)
Total expenses....................................... 1.58% 1.60% 1.60% 1.69%(2)(3)
Ratio of net investment income to average net assets..... 5.32% 7.32% 7.05% 7.50%(2)(3)
Portfolio turnover rate.................................. 393% 412% 254% 91%(1)
<FN>
------------------------
* COMMENCEMENT OF OPERATIONS.
+ DOES NOT REFLECT THE DEDUCTION OF SALES LOAD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE ASSUMED BY THE INVESTMENT
MANAGER, THE ABOVE ANNUALIZED EXPENSE RATIO WOULD HAVE BEEN 1.85% ($.065
PER SHARE) AND THE ABOVE ANNUALIZED NET INVESTMENT INCOME RATIO WOULD HAVE
BEEN 7.34% ($.253 PER SHARE).
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
IN THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
AMOUNT OF AVERAGE AMOUNT AVERAGE NUMBER AVERAGE AMOUNT
DEBT OF DEBT OF FUND SHARES OF FUND'S DEBT
OUTSTANDING AT OUTSTANDING DURING OUTSTANDING DURING PER SHARE
YEAR END OF PERIOD THE PERIOD THE PERIOD DURING THE PERIOD
-------------------------------------------- -------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
1994........................................ $ -0- $ 5,928,019 6,842,596 $ 0.87
1993........................................ $ 10,855,000 $ 24,425,664 13,722,283 $ 1.78
1992........................................ $ 8,600,000 $ 20,123,140 14,571,640 $ 1.38
1991........................................ $ 34,909,000 $ 17,673,706 12,163,651 $ 1.45
</TABLE>
4
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THE FUND AND ITS MANAGEMENT
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Dean Witter Premier Income Trust (the "Fund") is an open-end, diversified
management investment company. The Fund is a trust of the type commonly known as
a "Massachusetts business trust" and was organized under the laws of
Massachusetts on March 27, 1991.
Dean Witter InterCapital Inc. ("InterCapital" or the "Investment Manager"),
whose address is Two World Trade Center, New York, New York 10048, is the Fund's
Investment Manager. The Investment Manager, which was incorporated in July,
1992, is a wholly-owned subsidiary of Dean Witter, Discover & Co. ("DWDC"), a
balanced financial services organization providing a broad range of nationally
marketed credit and investment products.
InterCapital and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to ninety 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 and advises 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 supervise the investment of the Fund's
assets. InterCapital has retained Dean Witter Services Company Inc. to perform
the aforementioned administrative services for the Fund.
Under a Sub-Advisory Agreement between BlackRock Financial Management L.P.
(the "Sub-Advisor") and the Investment Manager, the Sub-Advisor provides the
Fund with investment advice and portfolio management relating to the Fund's
investments in portfolio securities, subject to the overall supervision of the
Investment Manager. The Fund's Trustees review the various services provided by
or under the direction of the Investment Manager and the Sub-Advisor to ensure
that the Fund's general investment policies and programs are being properly
carried out and that administrative services are being provided to the Fund in a
satisfactory manner.
The Sub-Advisor, whose address is 345 Park Avenue, New York, New York 10154,
is a Delaware limited partnership organized in April, 1988 by Laurence D. Fink,
Ralph L. Schlosstein and The Blackstone Group (a private investment bank). The
Sub-Advisor's general partners are Messrs. Fink and Schlosstein and Blackstone
Financial Management Inc. (all the stock of which is owned by partners of The
Blackstone Group). The Sub-Advisor serves as investment adviser to fixed-income
investors in the U.S. and overseas with combined net assets in excess of $22
billion as of November 30, 1994.
On June 16, 1994, the partners of the Sub-Adviser entered into a definitive
agreement to sell their partnership interests in the Sub-Adviser to PNC Bank,
N.A. ("PNC"), headquartered in Pittsburgh, Pennsylvania (the "Transaction"). The
Transaction, which was subject to bank regulatory approval, is expected to close
in early 1995 and is subject to various conditions. After the closing of the
Transaction, BlackRock will retain its name and will continue to operate out of
its New York office. All members of the Sub-Adviser's senior management team
have agreed to sign long-term employment contracts and will be responsible for
managing the day-to-day affairs of the Sub-Adviser. Following the closing of the
Transaction, the Sub-Adviser will become a wholly owned corporate subsidiary of
PNC Asset Management Group, Inc., the holding company for PNC's asset management
business.
PNC is a commercial bank offering a wide range of domestic and international
commercial banking, retail banking and trust services to its customers. Its
principal office is located in Pittsburgh, Pennsylvania.
5
<PAGE>
PNC is a wholly-owned indirect subsidiary of PNC Bank Corp. (the "Holding
Company"), a bank holding company organized under the laws of the Commonwealth
of Pennsylvania.
In order to assure continuity of investment advisory services to the Fund by
the Sub-Adviser after the Transaction, the Board met in person on October 20,
1994, for the purpose of considering whether it would be in the best interests
of the Fund and its shareholders for InterCapital to enter into a new
sub-advisory agreement with the Sub-Adviser (the "New Sub-Advisory Agreement")
to take effect upon consummation of the Transaction. At its meeting, the Board,
including each of the Trustees who are not "interested persons" of the Fund, as
that term is defined in the 1940 Act (the "Independent Trustees"), unanimously
approved the New Sub-Advisory Agreement and recommended it for approval by
Shareholders. The New Sub-Advisory Agreement is identical to the current
Sub-Advisory Agreement except for the effective date and the stated expiration
date. The meeting of Shareholders will take place on or about February 17, 1995.
As full compensation for the services and facilities furnished to the Fund
and for expenses of the Fund assumed by the Investment Manager, the Fund pays
the Investment Manager monthly compensation calculated daily by applying the
annual rate of 0.50% to the Fund's net assets. As compensation for its services
provided pursuant to the Sub-Advisory Agreement, the Investment Manager pays the
Sub-Advisor monthly compensation equal to 40% of its monthly compensation.
For the fiscal year ended October 31, 1994, the Fund accrued total
compensation to the Investment Manager amounting to 0.50% of the Fund's average
daily net assets (of which 40% was accrued to the Sub-Advisor by the Investment
Manager) and the Fund's total expenses amounted to 1.58% 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 consistent with low volatility of principal. The Fund's investment
objective is a fundamental policy and may not be changed without shareholder
approval. There is no assurance that the objective will be achieved. The
following policies may be changed by the Board of Trustees without shareholder
approval.
The Fund seeks to achieve its investment objective by investing under normal
circumstances at least 65% of its total assets in (i) fixed rate and adjustable
rate mortgage-backed securities ("Mortgage-Backed Securities") and (ii)
securities backed by other assets, such as automobile or credit card receivables
and home equity loans ("Asset-Backed Securities"). The Fund will only purchase
Mortgage-Backed Securities and Asset-Backed Securities which are issued or
guaranteed by the United States Government, its agencies or instrumentalities or
are rated Aaa by Moody's Investors Service, Inc. ("Moody's") or AAA by Standard
& Poor's Corporation ("S&P") or, if not rated, determined to be of comparable
quality by the Investment Manager and the Sub-Advisor. (Currently there are no
Asset-Backed Securities issued or guaranteed by the United States Government,
its agencies or instrumentalities.) The Fund expects that under normal
circumstances the market value dollar weighted average life (or period until the
next reset date) of the Fund's portfolio securities will be no greater than five
years.
The Fund seeks to achieve low volatility by investing in a diversified
portfolio of securities which the Investment Manager and the Sub-Advisor believe
will, in the aggregate, be resistant to significant fluctuations in market
value. The Investment Manager and Sub-Advisor believe that the Fund's policies
of purchasing shorter term Mortgage-Backed and Asset-Backed Securities will
reduce the volatility of the Fund's net asset value over the long
6
<PAGE>
term. Although the values of fixed-income securities generally increase during
periods of declining interest rates and decrease during periods of increasing
interest rates, the extent of these fluctuations has historically generally been
smaller for short term securities than for securities with longer maturities.
Conversely, the yield available on short term securities has also historically
been lower on average than those available from longer term securities.
While the Fund invests primarily in Mortgage-Backed Securities and
Asset-Backed Securities, under ordinary circumstances it may invest up to 35% of
its total assets in (i) U.S. Government securities (securities guaranteed as to
principal and interest by the United States or its agencies or
instrumentalities), (ii) corporate debt securities, including adjustable rate
securities, rated Aaa by Moody's or AAA by S&P or, if unrated, determined to be
of comparable quality by the Fund's Trustees, (iii) with respect to up to 5% of
the Fund's total assets, high quality municipal securities, including zero
coupon securities, with the highest rating by Moody's or S&P, or (iv) money
market instruments. U.S. Government securities in which the Fund may invest
include Treasury bills, notes and bonds, including zero coupon securities. Money
market instruments in which the Fund may invest are securities issued or
guaranteed by the U.S. Government (Treasury bills, notes and bonds, including
zero coupon securities); bank obligations; Eurodollar certificates of deposit;
obligations of savings institutions; fully insured certificates of deposit; and
commercial paper rated within the two highest grades by Moody's or S&P or, if
not rated, issued by a company having an outstanding debt issue rated AAA by S&P
or Aaa by Moody's.
In an effort to increase investment return or to hedge the Fund's portfolio,
the Fund may engage in various investment techniques, including reverse
repurchase agreements, dollar rolls, purchasing and selling call and put
options, entering into interest rate futures contracts and related options,
purchasing securities on a when-issued, delayed delivery or forward commitment
basis and lending portfolio securities (see "Other Investment Policies" below).
There may be periods during which, in the opinion of the Investment Manager
and the Sub-Advisor, market conditions warrant reduction of some or all of the
Fund's securities holdings. During such periods, the Fund may adopt a temporary
"defensive" posture in which greater than 35% of its total assets are invested
in U.S. Government securities, money market instruments or cash.
MORTGAGE-BACKED SECURITIES
Mortgage-Backed Securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
secured by real property. The term Mortgage-Backed Securities as used herein
includes adjustable rate mortgage securities and derivative mortgage products
such as collateralized mortgage obligations, stripped Mortgage-Backed Securities
and other products described below.
There are currently three basic types of Mortgage-Backed Securities: (i)
those issued or guaranteed by the United States Government or one of its
agencies or instrumentalities, such as the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC") (securities issued by GNMA, but
not those issued by FNMA or FHLMC, are backed by the "full faith and credit" of
the United States); (ii) those issued by private issuers that represent an
interest in or are collateralized by Mortgage-Backed Securities issued or
guaranteed by the United States Government or one of its agencies or
instrumentalities; and (iii) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or Mortgage-Backed
Securities without a government guarantee but usually having some form of
private credit enhancement.
The Fund will invest in mortgage pass-through securities representing
participation interests in pools of residential mortgage loans originated by
United States governmental or private lenders and
7
<PAGE>
guaranteed, to the extent provided in such securities, by the United States
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 semiannually) 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 mortgage pass-through securities in which the Fund may invest include
those issued or guaranteed by GNMA, FNMA and FHLMC. GNMA certificates are direct
obligations of the U.S. Government and, as such, are backed by the "full faith
and credit" of the United States. FNMA is a federally chartered, privately owned
corporation and FHLMC is a corporate instrumentality of the United States. FNMA
and FHLMC certificates are not backed by the full faith and credit of the United
States but the issuing agency or instrumentality has the right to borrow, to
meet its obligations, from an existing line of credit with the U.S. Treasury.
The U.S. Treasury has no legal obligation to provide such line of credit and may
choose not to do so. Each of GNMA, FNMA and FHLMC guarantee timely distribution
of interest to certificate holders. GNMA and FNMA also guarantee timely
distribution of scheduled principal payments. FHLMC generally guarantees only
the ultimate collection of principal of the underlying mortgage loans.
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 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. Private mortgage pass-through
securities 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
8
<PAGE>
securities generally are structured with one or more types of credit
enhancement. Types of credit enhancements are described under "Asset-Backed
Securities" below.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES. Collateralized mortgage obligations or "CMOs" 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 United
States government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing. 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 a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche", is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semiannual basis. Certain CMOs may have variable or floating
interest rates and others may be stripped (securities which provide only the
principal or interest feature of the underlying security).
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of a CMO series in a number of different ways. Generally,
the purpose of the allocation of the cash flow of a CMO to the various classes
is to obtain a more predictable cash flow to the individual tranches than exists
with the underlying collateral of the CMO. As a general rule, the more
predictable the cash flow is on a CMO tranche, the lower the anticipated yield
will be on that tranche at the time of issuance relative to prevailing market
yields on Mortgage-Backed Securities. As part of the process of creating more
predictable cash flows on most of the tranches in a series of CMOs, one or more
tranches generally must be created that absorb most of the volatility in the
cash flows on the underlying mortgage loans. The yields on these tranches, which
may include Stripped Mortgage-Backed Securities as described below, may be
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 tend to be 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
9
<PAGE>
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.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped Mortgage-Backed Securities are
derivative multiclass mortgage securities. Stripped Mortgage-Backed Securities
may be issued by agencies or instrumentalities of the United States government,
or by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing.
Stripped Mortgage-Backed Securities usually are structured with two classes
that receive different proportions of the interest and principal distribution on
a pool of Mortgage Assets. A common type of Stripped Mortgage-Backed Securities
will have one class receiving some of the interest and most of the principal
from the Mortgage Assets, while the other class will receive most of the
interest and the remainder of the principal. In the most extreme case, one class
will receive all of the interest (the interest-only or "IO" class), while the
other class will receive all of the principal (the principal-only or "PO"
class). PO classes generate income through the accretion of the deep discount at
which such securities are purchased, and, while PO classes do not receive
periodic payments of interest, they receive monthly payments associated with
scheduled amortization and principal prepayment from the Mortgage Assets
underlying the PO class. The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying Mortgage Assets, and a rapid rate of principal payments may
have a material adverse effect on the Fund's yield to maturity. If the
underlying Mortgage Assets experience greater than anticipated prepayments of
principal, the Fund may fail to fully recoup its initial investment in these
securities even if the securities are rated Aaa by Moody's or AAA by S&P.
The Fund may purchase Stripped Mortgage-Backed Securities for income, or for
hedging purposes to protect the Fund's portfolio against interest rate
fluctuations. For example, since an IO class will tend to increase in value as
interest rates rise, it may be utilized to hedge against a decrease in value of
other fixed-income securities in a rising interest rate environment. The Fund's
management understands that the staff of the Securities and Exchange Commission
considers privately issued Stripped Mortgage-Backed Securities representing
interest only or principal only components of U.S. Government or other debt
securities to be illiquid securities. The Fund will treat such securities as
illiquid so long as the staff maintains such position. Stripped Mortgage-Backed
Securities issued by the U.S. Government or its agencies, and which are backed
by fixed-rate mortgages, will be treated as liquid provided they are so
determined by, or under procedures approved by, the Board of Trustees. The Fund
may not invest more than 10% of its net assets in illiquid securities.
ASSET-BACKED SECURITIES
The securitization techniques used to develop Mortgage-Backed Securities are
also applied to a broad range of other assets. Through the use of trusts and
special purpose corporations, various types of assets, primarily automobile and
credit card receivables and home equity loans, are being securitized in
pass-through structures similar to the mortgage pass-through structures
described above or in a pay-through structure similar to the CMO structure.
New instruments and variations of existing Mortgage-Backed Securities and
Asset-Backed Securities continue to be developed. The Fund may invest in any
such instruments or variations as may be developed, to the extent consistent
with its investment objective and policies and applicable regulatory
requirements.
10
<PAGE>
TYPES OF CREDIT ENHANCEMENT. Mortgage-Backed Securities and Asset-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.
OTHER INVESTMENT POLICIES
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements, which
may be viewed as a type of secured lending by the Fund, and which typically
involve the acquisition by the Fund of debt securities, from a selling financial
institution such as a bank, savings and loan association or broker-dealer. The
agreement provides that the Fund will sell back to the institution, and that the
institution will repurchase, the underlying security at a specified price and at
a fixed time in the future, usually not more than seven days from the date of
purchase. While repurchase agreements involve certain risks not associated with
direct investments in debt securities, including the risks of default or
bankruptcy of the selling financial institution, the Fund follows procedures
designed to minimize such risks. These procedures include effecting repurchase
transactions only with large, well-capitalized and well-established financial
institutions and maintaining adequate collateralization.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. The Fund may also use
reverse repurchase agreements and dollar rolls as part of its investment
strategy. Reverse repurchase agreements involve sales by the Fund of portfolio
assets concurrently with an agreement by the Fund to repurchase the same assets
at a later date at a fixed price. Generally, the effect of such a transaction is
that the Fund can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are only advantageous if the interest cost to the
Fund of the reverse repurchase transaction is less than the cost of obtaining
the cash otherwise.
The Fund may enter into dollar rolls in which the Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Fund foregoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the lower forward price for the future purchase (often referred
to as the "drop") as well as by the interest earned on the cash proceeds of the
initial sale.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From
time to time, in the ordinary course of business, the Fund may purchase
securities on a when-issued or delayed delivery basis or may purchase or sell
securities on a forward commitment basis. When such transactions are negotiated,
the price is fixed at the time of the commitment, but delivery and payment can
take place a month or more after the date of the commitment. An increase in the
percentage of the Fund's assets committed to the purchase of securities on a
when-issued, delayed delivery or forward
commit-
11
<PAGE>
ment basis may increase the volatility of the Fund's net asset value. The Fund
will establish a segregated account with its custodian bank in which it will
maintain cash, U.S. Government securities or other liquid high grade debt
obligations equal in value to its obligations in respect of when-issued or
delayed delivery securities and forward commitments. The Fund's ability to enter
into such transactions is not otherwise limited, but the Fund expects that under
normal circumstances no more than 15% of the Fund's total assets will be so
invested.
WHEN, AS AND IF ISSUED SECURITIES. The Fund may purchase securities on a
"when, as and if issued" basis under which the issuance of the security depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization, leveraged buy-out or debt restructuring. If the
anticipated event does not occur and the securities are not issued, the Fund
will have lost an investment opportunity. An increase in the percentage of the
Fund's assets committed to the purchase of securities on a "when, as and if
issued" basis may increase the volatility of its net asset value. The Fund may
also sell securities on a "when, as and if issued" basis provided that the
issuance of a security will result automatically from the exchange or conversion
of a security owned by the Fund at the time of sale.
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, U.S. Government
securities or other high grade debt securities, which are maintained in a
segregated account pursuant to applicable regulations and that are at least
equal to the market value, determined daily, of the loaned securities.
PRIVATE PLACEMENTS. The Fund may invest in securities which are subject to
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or which are
otherwise not readily marketable. These securities are generally referred to as
private placements or restricted securities. Limitations on the resale of such
securities may have an adverse effect on their marketability, and may prevent
the Fund from disposing of them promptly at reasonable prices. The Fund may have
to bear the expense of registering such securities for resale and the risk of
substantial delays in effecting such registration.
The Securities and Exchange Commission has adopted Rule 144A under the
Securities Act, which permits the Fund to sell restricted securities to
qualified institutional buyers without limitation. The Investment Manager and
Sub-Adviser pursuant to procedures adopted by the Trustees of the Fund, will
make a determination as to the liquidity of each restricted security purchased
by the Fund. If a restricted security is determined to be "liquid," such
security will not be included within the category "illiquid securities," which
is limited by the Fund's investment restrictions to 10% of the Fund's total
assets.
OPTIONS AND FUTURES TRANSACTIONS. 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"). OTC options are
purchased from or sold (written) to dealers or financial institutions which have
entered into direct agreements with the Fund. The Fund may purchase listed and
over-the-counter call and put options on U.S. Government securities and
Mortgage-Backed Securities in amounts equalling up to 5% of its total assets.
The Fund may purchase call and put options on securities which it holds (or has
the right to acquire) in its portfolio only for hedging purposes.
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, Eurodollar
instruments and Mortgage-Backed Securities. 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, and not for
speculative purposes.
12
<PAGE>
The Fund may also purchase 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.
RISK CONSIDERATIONS
The net asset value of the Fund's shares will fluctuate with changes in the
market value of the Fund's portfolio securities. The market value of the Fund's
portfolio securities will increase or decrease due to a variety of economic,
market and political factors which cannot be predicted, in particular movements
in interest rates and, with respect to foreign currencies, currency exchange
rates. A decline in prevailing interest rates generally increases the value of
fixed-income securities, while an increase in rates usually reduces the value of
those securities. (The Fund's yield also will vary based on the yield of the
Fund's portfolio securities.)
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Mortgage-Backed and
Asset-Backed Securities have certain different characteristics than traditional
debt securities. Among the major differences are that interest and principal
payments are made more frequently, usually monthly, and that principal may be
prepaid at any time because the underlying mortgage loans 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 will
reduce yield to maturity, while a prepayment rate that is slower than expected
will 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 will reduce,
yield to maturity. The Fund may invest a portion of its assets in derivative
Mortgage-Backed Securities such as Stripped Mortgage-Backed Securities which are
highly sensitive to changes in prepayment and interest rates. The Investment
Manager and the Sub-Advisor will seek to manage these risks (and potential
benefits) by investing in a variety of such securities and through hedging
techniques.
Mortgage-Backed Securities and Asset-Backed Securities, like all fixed
income securities, generally decrease in value as a result of increases in
interest rates. In addition, although generally the value of fixed-income
securities increases during periods of falling interest rates and, as stated
above, decreases during periods of rising interest rates, as a result of
prepayments and other factors, this is not always the case with respect to
Mortgage-Backed Securities and Asset-Backed Securities.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Fund are likely to be greater during a period
of declining interest rates and, as a result, likely to be reinvested at lower
interest rates than during a period of rising interest rates. Asset-Backed
Securities, although less likely to experience the same prepayment rates as
Mortgage-Backed Securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors, such as changes
in credit use and payment patterns resulting from social, legal and economic
factors, will predominate. Mortgage-Backed Securities and Asset-Backed
Securities generally decrease in value as a result of increases in interest
rates and may benefit less than other fixed income securities from declining
interest rates because of the risk of prepayment.
The Fund may invest in mortgage derivative securities, such as CMOs, the
average life of which is determined using mathematical models that incorporate
prepayment assumptions and other factors that involve estimates of future
economic and market conditions. These estimates may vary from actual future
results, particularly during periods of extreme market volatility. In addition,
under
13
<PAGE>
certain market conditions, such as those that developed in 1994, the average
weighted life of mortgage derivative securities may not accurately reflect the
price volatility of such securities. For example, in periods of supply and
demand imbalances in the market for such securities and/or in periods of sharp
interest rate movements, the prices of mortgage derivative securities may
fluctuate to a greater extent than would be expected from interest rate
movements alone.
The Fund's investments in mortgage derivative securities also subject the
Fund to extension risk. Extension risk is the possibility that rising interest
rates may cause prepayments to occur at a slower than expected rate. This
particular risk may effectively change a security which was considered short or
intermediate-term at the time of purchase into a long-term security. Long-term
securities generally fluctuate more widely in response to changes in interest
rates than short or intermediate-term securities.
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, as stated above, the Fund will invest only
in CMOs which are rated AAA by S&P or Aaa by Moody's or, if unrated, are
determined to be of comparable quality. 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.
Asset-Backed Securities involve certain risks that are not posed by
Mortgage-Backed Securities, resulting mainly from the fact that Asset-Backed
Securities do not usually contain the complete benefit of a security interest in
the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, some of which may reduce the ability to obtain
full payment. In the case of automobile receivables, due to various legal and
economic factors, proceeds from repossessed collateral may not always be
sufficient to support payments on these securities.
STRIPPED MORTGAGE-BACKED SECURITIES. The yield to maturity on an IO class
is extremely sensitive to the rate of principal payments (including prepayments)
on the related underlying Mortgage Assets, and a rapid rate of principal
payments may have a material adverse effect on the Fund's yield to maturity. If
the underlying Mortgage Assets experience greater than anticipated prepayments
of principal, the Fund may fail to fully recoup its initial investment in these
securities even if the securities are rated Aaa by Moody's or AAA by S&P.
The Fund may purchase Stripped Mortgage-Backed Securities for income, or for
hedging purposes to protect the Fund's portfolio against interest rate
fluctuations. For example, since an IO class will tend to increase in value as
interest rates rise, it may be utilized to hedge against a decrease in value of
other fixed-income securities in a rising interest rate environment. The Fund
understands that the staff of the Securities and Exchange Commission considers
privately issued Stripped Mortgage-Backed Securities representing interest only
or principal only components of U.S. Government or other debt securities to be
illiquid securities. The Fund will treat such securities as illiquid so long as
the staff maintains such position. Stripped Mortgage-Backed Securities issued by
the U.S. Government or its agencies, and which are backed by fixed-rate
mortgages, will be treated as liquid provided they are so determined by, or
under procedures approved by, the Board of Trustees. The Fund may not invest
more than 10% of its total assets in illiquid securities (see "Investment
Restrictions" below).
14
<PAGE>
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. The Fund will establish a
segregated account with its custodian bank in which it will maintain cash, U.S.
Government securities or other liquid high grade debt obligations equal in value
to its obligations in respect of reverse repurchase agreements and dollar rolls.
Reverse repurchase agreements and dollar rolls involve the risk that the market
value of the securities the Fund is obligated to repurchase under the agreement
may decline below the repurchase price. In the event the buyer of securities
under a reverse repurchase agreement or dollar roll files for bankruptcy or
becomes insolvent, the Fund's use of the proceeds of the agreement may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls are speculative techniques
involving leverage, and are considered borrowings by the Fund. The Fund does not
expect to engage in reverse repurchase agreements and dollar rolls with respect
to greater than 25% of the Fund's total assets.
OPTIONS AND FUTURES TRANSACTIONS. Exchanges may 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.
Participation in the options or futures markets involves investment risks
and transaction costs to which the Fund would not be subject absent the use of
these strategies. If the Investment Manager's or Sub-Advisors' prediction of
movements in the direction of the securities, currency or interest rate markets
are inaccurate, the adverse consequences to the Fund (e.g., a reduction in the
Fund's net asset value or a reduction in the amount of income available for
distribution) may leave the Fund in a worse position than if such strategies
were not used. Risks inherent in the use of options, futures contracts
and options on futures contracts include (a) dependence on the Investment
Manager's or Sub-Advisors' ability to predict correctly movements in the
direction of interest rates, as well as securities and/or currency markets; (b)
imperfect correlation between the price of options and futures contracts and
options thereon and movements in the prices of the securities or currencies
being hedged; (c) the fact that skills needed to use these strategies are
different from those needed to select portfolio securities; (d) the possible
absence of a liquid secondary market for any particular instrument at any time;
and (e) the possible need to defer closing out certain hedged positions to avoid
adverse tax consequences.
Another such risk is that the price of the futures contract may not move in
tandem with the change in prevailing interest rates against which the Fund seeks
a hedge. A correlation may be distorted by the fact that the futures market is
dominated by short-term traders seeking to profit from the difference between a
contract or security price objective and their cost of borrowed funds. Such
distortions are generally minor and would diminish as the contract approached
maturity. See the Statement of Additional Information for further discussion of
such risks.
New futures contracts, options and other financial products and various
combinations thereof continue to be developed. The Fund may invest in any such
futures, options or products as may be developed, to the extent consistent with
its investment objective and applicable regulatory requirements.
For additional risk disclosure, please refer to the "Investment Objective
and Policies" and "Portfolio Characteristics" sections of the Prospectus and to
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 and the
Sub-Advisor with a view to achieving the Fund's investment objective. As a
result of the Fund's investment objective and
15
<PAGE>
policies, and the nature of the Mortgage-Backed Securities and Asset-Backed
Securities markets, the Fund's portfolio turnover rate may exceed 200%, but is
not expected to exceed 300%. Short-term gains and losses may result from such
portfolio transactions. See "Dividends, Distributions and Taxes" for a
discussion of the tax implications of the Fund's trading policy.
In determining which securities to purchase for the Fund or hold in the
Fund's portfolio, the Investment Manager and the Sub-Advisor 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 and Sub-Advisor's own analysis of factors they deem
relevant. The Fund is part of the Dean Witter family of mutual funds and is
managed by its Investment Manager, InterCapital, and by its Sub-Advisor,
BlackRock Financial Management ("BlackRock"). BlackRock manages in excess of $22
billion of net assets on behalf of individual and institutional investors,
including 21 closed-end funds and 3 open-end funds. Along with BlackRock's
portfolio management team, Scott Amero has been the Fund's primary portfolio
manager since its inception. Mr. Amero is a Partner of BlackRock and a member of
its Investment Strategy Committee, and is a specialist in the mortgage and short
duration sectors. His areas of expertise include asset-backed securities,
adjustable rate mortgage securities and other short duration mortgage products.
Prior to joining BlackRock in 1990, Mr. Amero was a Vice President in Fixed
Income Research at The First Boston Corporation, where he became the firm's
primary strategist for short duration securities.
Brokerage commissions are not normally charged on the purchase or sale of
Mortgage-Backed Securities or U.S. Government securities, but such transactions
generally involve costs in the form of spreads between bid and asked prices.
Orders for transactions in portfolio securities are placed for the Fund with a
number of brokers and dealers, which may include 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.
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. With respect to 75% of its total assets, 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 of any one issuer.
3. Invest 25% or more of the value of its total
assets in securities of issuers in any one industry, except that the Fund will
invest at least 25% of its assets in Mortgage-Backed and Asset-Backed Securities
under normal market conditions. This restriction does not apply to obligations
issued or guaranteed by the United States Government or its agencies or
instrumentalities.
4. Invest more than 10% of its total assets in
"illiquid securities" and repurchase agreements which have a maturity of longer
than seven days. The staff of the Securities and Exchange Commission has taken
the position that OTC options are illiquid securities. The Investment Manager
and Sub-Advisor disagree with this position.
Neverthe-
16
<PAGE>
less, the Fund has agreed to treat OTC options as illiquid securities for
purposes of this investment restriction so long as the staff maintains such
position.
5. 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 Mortgage-Backed Securities or Asset-Backed Securities or to any obligation of
the United States Government, its agencies or instrumentalities.
6. Purchase or sell commodities or
commodities contracts except that the Fund may purchase and sell interest rate
futures contracts and related options thereon.
7. 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 initial or variation margin
for futures are not deemed to be pledges of assets.)
8. 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.
9. Borrow money in excess of 33 1/3% of the
Fund's total assets (including the proceeds of the borrowings).
If a percentage restriction is adhered to at the time of investment (except
in the case of Restriction 9), 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.
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager, pursuant to a
Distribution Agreement between the Fund and 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 Premier Income Trust,
directly to Dean Witter Trust Company (the "Transfer Agent") at P.O. Box 1040,
Jersey City, NJ 07303 or by contacting an account executive of DWR or other
Selected Broker-Dealer. 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" below),
plus a sales charge (expressed as a percentage of the offering price) on a
single transaction as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE
----------------------------------------
PERCENTAGE APPROXIMATE
AMOUNT OF OF PUBLIC PERCENTAGE OF
SINGLE TRANSACTION OFFERING PRICE AMOUNT INVESTED
---------------------- ----------------- ---------------------
<S> <C> <C>
Less than $100,000.... 3.00% 3.09%
$100,000 but less than
$250,000............. 2.50 2.56
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
SALES CHARGE
----------------------------------------
PERCENTAGE APPROXIMATE
AMOUNT OF OF PUBLIC PERCENTAGE OF
SINGLE TRANSACTION OFFERING PRICE AMOUNT INVESTED
---------------------- ----------------- ---------------------
<S> <C> <C>
$250,000 but less than
$500,000............. 2.00 2.04
$500,000 but less than
$1,000,000........... 1.25 1.27
$1,000,000 and over... -0- -0-
</TABLE>
The above schedule of sales charges is applicable to purchases in a single
transaction by, among others: (a) an individual; (b) an individual, his or her
spouse and their children under the age of 21 purchasing shares for his or her
own accounts; (c) a trustee or other fiduciary purchasing shares for a single
trust estate or a single fiduciary account; (d) a pension, profit-sharing or
other employee benefit plan qualified or non-qualified under Section 401 of the
Internal Revenue Code; (e) tax-exempt organizations enumerated in Section
501(c)(3) or (13) of the Internal Revenue Code; (f) employee benefit plans
qualified under Section 401 of the Internal Revenue Code of a single employer or
of employers who are "affiliated persons" of each other within the meaning of
Section 2(a)(3)(c) of the Act and for investments in Individual Retirement
Accounts of employees of a single employer through Systematic Payroll Deduction
Plans, or (g) any other organized group of persons, whether incorporated or not,
provided the organization has been in existence for at least six months and has
some purpose other than the purchase of redeemable securities of a registered
investment company at a discount.
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 any dividends declared
beginning on the next business day following settlement date. Since DWR and
other Selected Broker-Dealers forward investors' funds on settlement date, they
will benefit from the temporary use of the funds if payment is made prior
thereto. Shares purchased through the Transfer Agent are entitled to any
dividends declared beginning on the next business day following receipt of an
order. As noted above, orders placed directly with the Transfer Agent must be
accompanied by payment. Investors will be entitled to receive capital gains
distributions if their order is received by the close of business on the day
prior to the record date for such distributions. 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/or the Distributor reserve the right to reject any
purchase order.
REDUCED SALES CHARGE
RIGHT OF ACCUMULATION. Investors may benefit from a reduction of the sales
charges in accordance with the above schedule if the cumulative net asset value
of shares of the Fund purchased in a single transaction, together with shares
previously purchased which are held at the time of such transaction, amounts to
$100,000 or more.
The Distributor must be notified by the shareholder at the time a purchase
order is placed that the purchase qualifies for the reduced charge under the
Right of Accumulation. Similar notification must be made in writing by the
shareholder when such an order is placed by mail. The reduced sales charge will
not be granted if: (a) such notification is not furnished at the time of the
order; or (b) a review of the records of the Distributor or the Transfer Agent
fails to confirm the investor's represented holdings.
LETTER OF INTENT. The foregoing schedule of reduced sales charges will also
be available to investors who enter into a written Letter of Intent providing
for the purchase, within a thirteen-month period, of shares of the Fund from the
Distributor. The cost of shares of the Fund which were previously purchased at a
price including a front-end sales charge during the 90-day period prior to the
date of receipt by the Distributor of the Letter of
18
<PAGE>
Intent, which are still owned by the shareholder, may also be included in
determining the applicable reduction.
For further information concerning purchases of the Fund's shares, contact
the Distributor or consult the Statement of Additional Information.
PLAN OF DISTRIBUTION
The Fund has entered into a Plan of Distribution pursuant to Rule 12b-1
under the Act, whereby the expenses of certain activities and services by the
Distributor and others in the distribution of the Fund's shares, including the
payment of commissions for sales of the Fund's shares and incentive compensation
to and expenses of DWR's account executives and others who engage in or support
distribution of shares or who service shareholder accounts, including overhead
and telephone expenses; printing and distribution of prospectuses and reports
used in connection with the offering of the Fund's shares to other than current
shareholders; and preparation, printing and distribution of sales literature and
advertising materials. Reimbursements for these expenses will be made in monthly
payments by the Fund to the Distributor, which will in no event exceed an amount
equal to a payment at the annual rate of 0.20 of 1% of the average daily net
assets of the Fund. Expenses incurred by the Distributor pursuant to the Plan in
any fiscal year will not be reimbursed by the Fund through payments accrued in
any subsequent fiscal year. No interest or other financial charges will be
incurred on any distribution expense incurred by the Distributor under the Plan
or on any unreimbursed expenses due to the Distributor pursuant to the Plan. 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.
The Fund accrued $112,520 to the Distributor, pursuant to the Plan of
Distribution, for the year ended October 31, 1994. This is an accrual at the
annual rate of 0.18% of the Fund's average daily net assets.
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) an equity portfolio
security listed or traded on the New York or American Stock Exchange is valued
at its last sale price on that exchange prior to the time when assets are
valued; if there were no sales that day, the security is valued at the closing
bid price, and (2) 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. When market quotations are not readily available, including
circumstances under which it is determined by the Investment Manager and/or the
Sub-Advisor 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
which are comparable in coupon, rating and maturity or an appropriate matrix
utilizing similar factors).
Certain of the Fund's portfolio securities for which reliable market
quotations are generally not readily available are valued by an outside pricing
service approved by the Fund's Trustees. The pricing service utilizes a
computerized grid matrix and/ or research and evaluations by its staff in
determining what it believes is the fair value of the portfolio securities
valued by such pricing service.
Short-term debt securities with remaining maturities of sixty days or less
at the time of
pur-
19
<PAGE>
chase 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 Trust
ees.
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. 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
in shares of the Fund (or in cash if the shareholder so requests) at the net
asset value per share (without sales charge) 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 checks during the
first ten days of the following month.
EASYINVESTSM. 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 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 offering price. The plan provides for monthly or quarterly
(March, June, September, December) checks in any dollar amount, not less than
$25 or in any whole percentage of the account balances, on an annualized basis.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about any of the
above services.
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 front-end (at time of purchase) sales charge
("FESC funds"), for shares of 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-FESC and 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. However, shares of CDSC funds, including shares acquired in
exchange for shares of FESC funds, may not be exchanged for shares of FESC
funds. Thus, shareholders who exchange their Fund shares for shares of CDSC
funds may subsequently exchange those shares for shares of other CDSC funds or
Exchange Funds but may not reacquire FESC fund shares by exchange.
An exchange to another FESC fund, to a CDSC fund or to an 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
20
<PAGE>
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
Exchange Funds, FESC funds and CDSC funds can be effected on the same basis
(except that CDSC fund shares may not be exchanged for shares of FESC funds).
Shares of a CDSC fund acquired in exchange for shares of an FESC fund (or in
exchange for shares of other Dean Witter Funds for which shares of an FESC fund
have been exchanged) are not subject to any contingent deferred sales charge
upon their redemption.
Purchases and exchanges should be made for investment purposes only. A
pattern of frequent exchanges may be deemed by the Investment Manager to be
abusive and contrary to the best interests of the Fund's other shareholders and,
at the Investment Manager's discretion, may be limited by the Fund's refusal to
accept additional purchases and/ or exchanges from the investor. Although the
Fund does not have any specific definition of what constitutes a pattern of
frequent exchanges, and will consider all relevant factors in determining
whether a particular situation is abusive and contrary to the best interests of
the Fund and its other shareholders, investors should be aware that the Fund and
each of the other Dean Witter Funds may in their discretion limit or otherwise
restrict the number of times this Exchange Privilege may be exercised by any
investor. Any such restriction will be made by the Fund on a prospective basis
only, upon notice to the shareholder not later than ten days following such
shareholder's most recent exchange. Also, the Exchange Privilege may be
terminated or revised at any time by the Fund and/or any of such Dean Witter
Funds for which shares of the Fund may be 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 their 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
proce-
21
<PAGE>
dures 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.
For additional information about the Exchange Privilege, shareholders should
contact their DWR or other Selected Broker-Dealer account executive or the
Transfer Agent.
REDEMPTIONS AND REPURCHASES
--------------------------------------------------------------------------------
REDEMPTION. Shares of the Fund can be redeemed for cash at any time at
their current net asset value per share (without any redemption or other
charge). If shares are held in a shareholder's account without a share
certificate, a written request for redemption sent to the Fund's Transfer Agent
at P.O. Box 983, Jersey City, NJ 07303 is required. If certificates are held by
the shareholder(s), the shares may be redeemed by surrendering the
certificate(s) with a written request for redemption, along with any additional
information required by the Transfer Agent.
REPURCHASE. DWR and other Selected Broker-Dealers are authorized to
repurchase shares represented by a share certificate which is delivered to any
of their offices. Shares held in a shareholder's account without a share
certificate may 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 determined (see "Purchase of Fund Share -- Determination of Net Asset
Value") after such repurchase order is received. Repurchase orders received by
DWR and other Selected Broker-Dealers prior to 4:00 p.m., New York time, on any
business day will be priced at the net asset value per share that is based on
that day's close. Repurchase orders received after 4:00 p.m., New York time,
will be priced on the basis of the next business day's close. Selected
Broker-Dealers may charge for their services in connection with the repurchase,
but the Fund, DWR and the Distributor do not charge a fee. Payment for shares
repurchased may be made by the Fund to DWR and other Selected Broker-Dealers for
the account of the shareholder. The offer by DWR and other Selected
Broker-Dealers to repurchase shares from dealers or shareholders may be
suspended 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 at
times 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.
22
<PAGE>
REINSTATEMENT PRIVILEGE. A shareholder who has had his or her shares
redeemed or repurchased and has not previously exercised this reinstatement
privilege may, within 30 days after the date of the redemption or repurchase,
reinstate any portion or all of the proceeds of such redemption or repurchase in
shares of the Fund at their net asset value (without a sales charge) next
determined after a reinstatement request, together with the proceeds, is
received by the Transfer Agent.
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 as a result of redemptions or repurchases, or such lesser amount
as may be fixed by the Board of 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 the shareholder sixty
days to make an additional investment in an amount which will increase the value
of the account to $100 or more before the redemption is processed.
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.
Net realized short-term and 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 long-term gains for reinvestment.
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 remain
qualified as a regulated investment company under Subchapter M of the Internal
Revenue Code, it is not expected that the Fund will be required to pay any
federal income tax on such income and capital gains.
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 gain or loss and
40% short-term gain or loss. 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
distribution.
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. Any dividends
declared in the last quarter of any calendar year which are paid in the
23
<PAGE>
following year prior to February 1 will be deemed received by the shareholder in
the prior year.
After the end of the calendar year, shareholders will be sent full
information on their dividends and any capital gains distributions for tax
purposes, including information as to the portion taxable as ordinary income,
the portion taxable as 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, distributions and the proceeds of
redemptions and repurchases, shareholders' taxpayer identification numbers must
be furnished and certified as to their accuracy.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder has
held the Fund's shares and regardless of whether the distribution is received in
additional shares or in cash. Capital gains distributions are not eligible for
the corporate dividends received deduction.
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 advisor. Shareholders will be notified annually by the Fund as to
the Federal tax status of dividends and distributions paid or retained by the
Fund.
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 maximum offering price
per share at the end of the period), all in accordance with applicable
regulatory requirements. Such amount is compounded for six months and then
annualized for a twelve-month period to derive the Fund's yield.
The "average annual total return" of the Fund refers to a figure reflecting
the average annualized percentage increase (or decrease) in the value of an
initial investment in the Fund of $1,000 over one year, 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 period. 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 front-end 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 by adding 1
to the Fund's aggregate total return to date and multiplying by $9,700, $48,500
and $97,500 ($10,000, $50,000 and $100,000 adjusted for 3%, 3% and 2.5% sales
charges, respectively. 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.).
24
<PAGE>
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
VOTING RIGHTS. All shares of beneficial interest of the Fund are of $0.01
par value and are equal as to earnings, assets and voting privileges.
The Fund is not required to hold Annual Meetings of Shareholders, and in
ordinary circumstances the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances, the Trustees may be removed by action of the Trustees or by the
Shareholders.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for obligations of the
Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund and requires that
notice of such disclaimer be given in each instrument entered into or executed
by the Fund, 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 INQUIRIES. All inquiries regarding the Fund should be directed
to the Fund at the telephone numbers or address set forth on the front cover of
this Prospectus.
25
<PAGE>
THE DEAN WITTER FAMILY OF FUNDS
MONEY MARKET FUNDS DEAN WITTER RETIREMENT SERIES
Dean Witter Liquid Asset Fund Inc. Liquid Asset Series
Dean Witter U.S. Government Money U.S. Government Money Market Series
Market Trust U.S. Government Securities Series
Dean Witter Tax-Free Daily Income Trust Intermediate Income Securities Series
Dean Witter California Tax-Free Daily American Value Series
Income Trust Capital Growth Series
Dean Witter New York Municipal Money Dividend Growth Series
Market Trust Strategist Series
EQUITY FUNDS Utilities Series
Dean Witter American Value Fund Value-Added Market Series
Dean Witter Natural Resource Global Equity Series
Development Securities Inc. ASSET ALLOCATION FUNDS
Dean Witter Dividend Growth Securities Dean Witter Managed Assets Trust
Inc. Dean Witter Strategist Fund
Dean Witter Developing Growth ACTIVE ASSETS ACCOUNT PROGRAM
Securities Trust Active Assets Money Trust
Dean Witter World Wide Investment Trust Active Assets Tax-Free Trust
Dean Witter Value-Added Market Series Active Assets California Tax-Free Trust
Dean Witter Utilities Fund Active Assets Government Securities
Dean Witter Capital Growth Securities Trust
Dean Witter European Growth Fund Inc.
Dean Witter Precious Metals and
Minerals Trust
Dean Witter Pacific Growth Fund Inc.
Dean Witter Health Services Trust
Dean Witter Global Dividend Growth
Securities
Dean Witter Global Utilities Fund
Dean Witter International SmallCap Fund
Dean Witter Mid-Cap Growth Fund
FIXED-INCOME FUNDS
Dean Witter High Yield Securities Inc.
Dean Witter Tax-Exempt Securities Trust
Dean Witter U.S. Government Securities
Trust
Dean Witter California Tax-Free Income
Fund
Dean Witter New York Tax-Free Income
Fund
Dean Witter Convertible Securities
Trust
Dean Witter Federal Securities Trust
Dean Witter World Wide Income Trust
Dean Witter Intermediate Income
Securities
Dean Witter Global Short-Term Income
Fund Inc.
Dean Witter Multi-State Municipal
Series Trust
Dean Witter Premier Income Trust
Dean Witter Short-Term U.S. Treasury
Trust
Dean Witter Diversified Income Trust
Dean Witter Limited Term Municipal
Trust
Dean Witter Short-Term Bond Fund
Dean Witter National Municipal Trust
Dean Witter High Income Securities
<PAGE>
Dean Witter
Premier Income Trust
Dean Witter
Two World Trade Center
New York, New York 10048
TRUSTEES Premier Income
Jack F. Bennett Trust
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
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.
SUB-ADVISOR
BlackRock Financial Management L.P.
PROSPECTUS -- JANUARY 11, 1995
