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PROSPECTUS
FEBRUARY 1, 1996
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 February 1, 1996, which has been filed with the
Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone numbers listed on this page. The
Statement of Additional Information is incorporated herein by reference.
DEAN WITTER DISTRIBUTORS INC.
DISTRIBUTOR
TABLE OF CONTENTS
Prospectus Summary/2
Summary of Fund Expenses/3
Financial Highlights/4
The Fund and Its Management/5
Investment Objective and Policies/6
Risk Considerations/13
Investment Restrictions/17
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) 869-NEWS (toll-free)
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PROSPECTUS SUMMARY
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<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 25).
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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-five investment companies and other portfolios with assets of approximately
$79.5 billion at December 31, 1995. BlackRock Financial Management, Inc. (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 $34 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 19). 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 7 and 10). 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
11-15).
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Reduced Sales Right of Accumulation; Letter of Intent; Automatic Investment of Dividends and Distributions; EasyInvest-SM-;
Charges and Systematic Withdrawal Plan; Exchange Privilege (see pages 20-22).
Shareholder
Services
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THE ABOVE IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION APPEARING
ELSEWHERE
IN THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION.
2
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SUMMARY OF FUND EXPENSES
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The following table illustrates all expenses and fees that a shareholder of
the Fund will incur. The expenses and fees set forth in the table are for the
year ended October 31, 1995.
The following table illustrates all expenses and fees that a shareholder of
the Fund will incur.
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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 (includes 0.65% of interest expense).................................. 1.54 %
Total Fund Expenses.................................................................. 2.22 %
<FN>
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* 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
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<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............................................................... $ 52 $ 97 $ 145 $ 278
</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,
1991*
FOR THE YEAR ENDED OCTOBER 31 THROUGH
------------------------------------------ OCTOBER
1995 1994 1993 1992 31, 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.......................... $ 8.77 $ 9.18 $ 9.69 $ 9.95 $ 9.60
--------- --------- --------- --------- ---------
Net investment income............ 0.53 0.54 0.73 0.71 0.26
Net realized and unrealized gain
(loss).......................... 0.14 (0.41) (0.45) (0.21) 0.37
--------- --------- --------- --------- ---------
Total from investment
operations...................... 0.67 0.13 0.28 0.50 0.63
--------- --------- --------- --------- ---------
Dividends and distributions from:
Net investment income.......... (0.65) (0.54) (0.61) (0.71) (0.26)
Net realized gain.............. -- -- (0.18) (0.05) (0.02)
--------- --------- --------- --------- ---------
Total dividends and
distributions................... (0.65) (0.54) (0.79) (0.76) (0.28)
--------- --------- --------- --------- ---------
Net asset value, end of period... $ 8.79 $ 8.77 $ 9.18 $ 9.69 $ 9.95
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN+........... 7.97% 1.44% 2.87% 5.18% 6.41%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses:
Operating...................... 1.57% 1.24% 0.95% 0.99% 0.85%(2)
Interest....................... 0.65% 0.34% 0.65% 0.61% 0.84%(2)
Total............................ 2.22% 1.58% 1.60% 1.60% 1.69%(2)(3)
Net investment income............ 5.83% 5.32% 7.32% 7.05% 7.50%(2)(3)
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands....................... $31,259 $43,875 $90,260 $154,860 $132,219
Portfolio turnover rate.......... 366% 393% 412% 254% 91%(1)
</TABLE>
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<FN>
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* 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 OR WAIVED BY THE THE
INVESTMENT MANAGER, THE ABOVE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME
RATIOS WOULD HAVE BEEN 1.85% AND 7.34%, RESPECTIVELY.
</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-five investment companies, thirty of which
are listed on the New York Stock Exchange, with combined total assets of
approximately $76.9 billion at December 31, 1995. The Investment Manager also
manages and advises portfolios of pension plans, other institutions and
individuals which aggregated approximately $2.6 billion at such date.
The Fund has retained the Investment Manager to provide administrative
services, manage its business affairs and 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, Inc.
(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 $34
billion as of December 31, 1995.
On June 16, 1994, the partners of the Sub-Advisor entered into a definitive
agreement to sell their partnership interests in the Sub-Advisor to PNC Bank,
N.A. ("PNC"), headquartered in Pittsburgh, Pennsylvania (the "Transaction"). The
Transaction, which was subject to bank regulatory approval, closed on February
28, 1995 and was subject to various conditions, including the following:
BlackRock will retain its name and will continue to operate out of its New York
office. All members of the Sub-Advisor's senior management team agreed to sign
long-term employment contracts and be responsible for managing the day-to-day
affairs of the Sub-Advisor. Following the closing of the Transaction, the
Sub-Advisor became 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-Advisor 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-Advisor (the "current 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 current Sub-Advisory Agreement and recommended it for
approval by Shareholders. The current Sub-Advisory Agreement is identical to the
former Sub-Advisory Agreement except for the effective date and the stated
expiration date. At the meeting of Shareholders which took place on February 17,
1995, the Shareholders voted to approve the current Sub-Advisory Agreement which
became effective on February 28, 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, 1995, 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 2.22% of the Fund's average
daily net assets.
INVESTMENT OBJECTIVE AND POLICIES
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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-
6
<PAGE>
Backed and Asset-Backed Securities will reduce the volatility of the Fund's net
asset value over the long 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
7
<PAGE>
pools of residential mortgage loans originated by United States governmental or
private lenders and 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
8
<PAGE>
loans. Since private mortgage pass-through securities typically are not
guaranteed by an entity having the credit status of GNMA, FNMA and FHLMC, such
securities generally are structured with one or more types of credit
enhancement. 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
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<PAGE>
calculating the stated maturity date or final distribution date of each class,
which, as with other CMO structures, must be retired by its stated maturity date
or final distribution date but may be retired earlier. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds always are parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes.
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
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<PAGE>
investment objective and policies and applicable regulatory requirements.
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
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<PAGE>
when-issued, delayed delivery or forward commitment 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.
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<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
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<PAGE>
certain market conditions, such as those that developed in 1995, 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).
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<PAGE>
ZERO COUPON SECURITIES. A portion of the fixed-income securities purchased
by the Fund may be zero coupon securities. Such securities are purchased at a
discount from their face amount, giving the purchaser the right to receive their
full value at maturity. The interest earned on such securities is, implicitly,
automatically compounded and paid out at maturity. While such compounding at a
constant rate eliminates the risk of receiving lower yields upon reinvestment of
interest if prevailing interest rates decline, the owner of a zero coupon
security will be unable to particpate in higher yields upon reinvestment of
interest received on interest-paying securities if prevailing interest rates
rise.
A zero coupon security pays no interest to its holder during its life.
Therefore, to the extent the Fund invests in zero coupon securities, it will not
receive current cash available for distribution to shareholders. In addition,
zero coupon securities are subject to substantially greater price fluctuations
during periods of changing prevailing interest rates than are comparable
securities which pay interest on a current basis. Current federal tax law
requires that a holder (such as the Fund) of a zero coupon security accrue a
portion of the discount at which the security was purchased as income each year
even though the Fund receives no interest payments in cash on the security
during the year.
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.
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<PAGE>
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 policies, and the nature of the
Mortgage-Backed Securities and Asset-Backed Securities markets, the Fund's
portfolio turnover rate may exceed 200%. 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, Inc. ("BlackRock"). BlackRock manages in excess
of $34 billion of net assets on behalf of individual and institutional
investors, including 21 closed-end funds traded on either the New York or
American Stock Exchanges and several 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 Managing Director 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.
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<PAGE>
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. Nevertheless, 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
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<PAGE>
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. The minimum initial purchase in the case of investments
through EasyInvestSM, an automatic purchase plan (see "Shareholder Services"),
is $100, provided that the schedule of automatic investments will result in
investments totalling at least $1,000 within the first twelve months. In the
case of investments pursuant to systematic payroll deduction plans (including
individual retirement plans), the Fund, in its discretion, may accept
investments without regard to any minimum amounts which would otherwise be
required if the Fund has reason to believe that additional investments will
increase the investment in all accounts under such plans to at least $1,000.
Certificates for shares purchased will not be issued unless a request is made by
the shareholder in writing to the Transfer Agent. The offering price will be the
net asset value per share next determined following receipt of an order (see
"Determination of Net Asset Value" 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
$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 three
business day settlement basis; that is, payment is due on the third business day
(settlement date) after the order is placed with the Distributor. Shares of the
Fund purchased through the Distributor are entitled to any dividends declared
beginning on the next business day following settlement date. Since DWR and
other Selected Broker-Dealers forward investors' funds on settlement date, they
will benefit from the temporary use of the funds if payment is made prior
thereto. Shares purchased through the Transfer Agent are entitled to any
dividends declared beginning on the next business day following receipt of an
order. As noted above, orders placed directly with the Transfer Agent must be
accompanied by payment. Investors will be entitled to receive 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
18
<PAGE>
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 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 $64,994 to the Distributor, pursuant to the Plan of
Distribution, for the year ended October 31, 1995. 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 (or, on
days when the New York Stock Exchange closes prior to 4:00 p.m. at such earlier
19
<PAGE>
time), by taking the value of all assets of the Fund, subtracting all its
liabilities, dividing by the number of shares outstanding and adjusting to the
nearest cent. The net asset value per share will not be determined on Good
Friday and on such other federal and non-federal holidays as are observed by the
New York Stock Exchange.
In the calculation of the Fund's net asset value: (1) an equity portfolio
security listed or traded on the New York or American Stock Exchange or quoted
by NASDAQ is valued at its last sale price on that exchange or quotation service
prior to the time assets are valued; if there were no sales that day, the
security is valued at the latest bid price, (in cases where a security is traded
on more than one exchange, the security is valued on the exchange designated as
the primary market pursuant to procedures adopted by the Trustees), and (2) all
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 purchase are valued at amortized cost, unless the Trustees
determine such does not reflect the securities' market value, in which case
these securities will be valued at their fair value as determined by the
Trustees.
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.
EASYINVEST. Shareholders may subscribe to EasyInvest, an automatic purchase
plan which provides for any amount from $100 to $5,000 to be transferred
automatically from a checking or savings account, on a semi-monthly, monthly or
quarterly basis, to the Transfer Agent for investment in shares of the Fund (see
"Purchase of Fund Shares" and "Redemptions and Repurchases -- Involuntary
Redemption").
20
<PAGE>
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, Dean Witter Balanced Growth Fund, Dean Witter Balanced Income Fund
and Dean Witter Intermediate Term U.S. Treasury Trust and five Dean Witter Funds
which are money market funds (the foregoing eleven non-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 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
21
<PAGE>
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) 869-NEWS (toll-free). The Fund will
employ reasonable procedures to confirm that exchange instructions communicated
over the telephone are genuine. Such procedures may include requiring various
forms of personal identification such as name, mailing address, social security
or other tax identification number and DWR or other Selected Broker-Dealer
account number (if any). Telephone instructions may also be recorded. If such
procedures are not employed, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions.
Telephone exchange instructions will be accepted if received by the Transfer
Agent between 9:00 a.m. and 4:00 p.m. New York time, on any day the New York
Stock Exchange is open. Any shareholder wishing to make an exchange who has
previously filed an Exchange Privilege Authorization Form and who is unable to
reach the Fund by telephone should contact his or her DWR or other Selected
Broker-Dealer account executive, if appropriate, or make a written exchange
request. Shareholders are advised that during periods of drastic economic or
market changes, it is possible that the telephone exchange procedures may be
difficult to implement, although this has not been the 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
22
<PAGE>
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 under
unusual circumstances, e.g., 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 pro-
ceeds may be delayed for the minimum time needed to verify that the check used
for investment has been honored (not more than fifteen days from the time of
receipt of the check by the Transfer Agent). Shareholders maintaining margin
accounts with DWR or another Selected Broker-Dealer are referred to their
account executive regarding restrictions on redemption of shares of the Fund
pledged in the margin account.
REINSTATEMENT PRIVILEGE. A shareholder who has had his or her shares
redeemed or repurchased and has not previously exercised this reinstatement
privilege may, within 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 or, in the case of an account opened
through EasyInvestSM, if after twelve months the shareholder has invested less
than $1,000 in the account. However, before the Fund redeems such shares and
sends the proceeds to the shareholder, it will notify the shareholder that the
value of the shares is less than the applicable amount and allow the shareholder
sixty days to make an additional investment in an amount which will increase the
value of the account to at least the applicable amount 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.
23
<PAGE>
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
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
24
<PAGE>
and are not intended to indicate future performance. The yield of the Fund is
computed by dividing the Fund's net investment income over a 30-day period by an
average value (using the average number of shares entitled to receive dividends
and the 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 periods of one, five and ten
years, or over the life of the Fund, if less than any of the foregoing. Average
annual total return reflects all income earned by the Fund, any appreciation or
depreciation of the Fund's assets, all expenses incurred by the Fund and all
sales charges incurred by 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.
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 Short-Term Bond Fund
Dean Witter Liquid Asset Fund Inc. Dean Witter National Municipal Trust
Dean Witter U.S. Government Money Dean Witter High Income Securities
Market Trust Dean Witter Balanced Income Fund
Dean Witter Tax-Free Daily Income Trust Dean Witter Hawaii Municipal Trust
Dean Witter California Tax-Free Daily DEAN WITTER RETIREMENT SERIES
Income Trust Liquid Asset Series
Dean Witter New York Municipal Money U.S. Government Money Market Series
Market Trust U.S. Government Securities Series
EQUITY FUNDS Intermediate Income Securities Series
Dean Witter American Value Fund American Value Series
Dean Witter Natural Resource Capital Growth Series
Development Securities Inc. Dividend Growth Series
Dean Witter Dividend Growth Securities Strategist Series
Inc. Utilities Series
Dean Witter Developing Growth Value-Added Market Series
Securities Trust Global Equity Series
Dean Witter World Wide Investment Trust ASSET ALLOCATION FUNDS
Dean Witter Value-Added Market Series Dean Witter Strategist Fund
Dean Witter Utilities Fund Dean Witter Global Asset Allocation
Dean Witter Capital Growth Securities Fund
Dean Witter European Growth Fund Inc. ACTIVE ASSETS ACCOUNT PROGRAM
Dean Witter Precious Metals and Active Assets Money Trust
Minerals Trust Active Assets Tax-Free Trust
Dean Witter Pacific Growth Fund Inc. Active Assets California Tax-Free Trust
Dean Witter Health Services Trust Active Assets Government Securities
Dean Witter Global Dividend Growth Trust
Securities
Dean Witter Global Utilities Fund
Dean Witter International SmallCap Fund
Dean Witter Mid-Cap Growth Fund
Dean Witter Balanced Growth Fund
Dean Witter Capital Appreciation Fund
Dean Witter Information Fund
FIXED-INCOME FUNDS
Dean Witter High Yield Securities Inc.
Dean Witter Tax-Exempt Securities Trust
Dean Witter U.S. Government Securities
Trust
Dean Witter Intermediate Term U.S.
Treasury Trust
Dean Witter 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
<PAGE>
Dean Witter
Premier Income Trust
Two World Trade Center Dean Witter
New York, New York 10048
TRUSTEES Premier
Michael Bozic Income
Charles A. Fiumefreddo Trust
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,
Inc.
PROSPECTUS -- FEBRUARY 1, 1996
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DEAN WITTER
FEBRUARY 1, 1996
PREMIER INCOME TRUST
- ---------------------------------------------------------
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
Mortgage-Backed Securities and securities backed by other assets ("Asset-Backed
Securities").
A Prospectus for the Fund dated February 1, 1996, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge from the Fund at the address or telephone numbers listed below or
from the Fund's Distributor, Dean Witter Distributors Inc. or from Dean Witter
Reynolds Inc., at any of its branch offices. This Statement of Additional
Information is not a Prospectus. It contains information in addition to and more
detailed than that set forth in the Prospectus. It is intended to provide
additional information regarding the activities and operations of the Fund, and
should be read in conjunction with the Prospectus.
Dean Witter
Premier Income Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The Fund and its Management............................................................ 3
Trustees and Officers.................................................................. 8
Investment Practices and Policies...................................................... 13
Investment Restrictions................................................................ 22
Portfolio Transactions and Brokerage................................................... 22
The Distributor........................................................................ 24
Determination of Net Asset Value....................................................... 27
Shareholder Services................................................................... 27
Redemptions and Repurchases............................................................ 30
Dividends, Distributions and Taxes..................................................... 31
Performance Information................................................................ 32
Description of Shares.................................................................. 33
Custodian and Transfer Agent........................................................... 34
Independent Accountants................................................................ 34
Reports to Shareholders................................................................ 35
Legal Counsel.......................................................................... 35
Experts................................................................................ 35
Registration Statement................................................................. 35
Financial Statements -- October 31, 1995............................................... 36
Report of Independent Accountants...................................................... 47
</TABLE>
2
<PAGE>
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
THE FUND
The Fund is a Trust of the type commonly known as a "Massachusetts business
trust" and was organized under the laws of the Commonwealth of Massachusetts on
March 27, 1991.
THE INVESTMENT MANAGER
Dean Witter InterCapital Inc., a Delaware corporation, (the "Investment
Manager" or "InterCapital"), whose address is Two World Trade Center, New York,
New York 10048, is the Fund's Investment Manager. InterCapital is a wholly-owned
subsidiary of Dean Witter, Discover & Co. ("DWDC"), a Delaware corporation. In
an internal reorganization which took place in January, 1993, InterCapital
assumed the investment advisory, administrative and management activities
previously performed by the InterCapital Division of Dean Witter Reynolds Inc.
("DWR"), a broker-dealer affiliate of InterCapital. (As hereinafter used in this
Statement of Additional Information, the terms "InterCapital" and "Investment
Manager" refer to DWR's InterCapital Division prior to the internal
reorganization and Dean Witter InterCapital Inc. thereafter.) The daily
management of the Fund is conducted by or under the direction of officers of the
Fund and of the Investment Manager and Sub-Advisor, subject to review by the
Fund's Board of Trustees. In addition, Trustees of the Fund provide guidance on
economic factors and interest rate trends. Information as to these Trustees and
officers is contained under the caption "Trustees and Officers".
InterCapital is also the investment manager or investment adviser of the
following management investment companies: Active Assets Money Trust, Active
Assets Tax-Free Trust, Active Assets California Tax-Free Trust, Active Assets
Government Securities Trust, InterCapital Income Securities Inc., InterCapital
Insured Municipal Bond Trust, InterCapital Insured Municipal Trust, InterCapital
Insured Municipal Income Trust, InterCapital Insured Municipal Securities,
InterCapital California Insured Municipal Income Trust, InterCapital Insured
California Municipal Securities, InterCapital Quality Municipal Investment
Trust, InterCapital Quality Municipal Income Trust, InterCapital Quality
Municipal Securities, InterCapital California Quality Municipal Securities,
InterCapital New York Quality Municipal Securities, High Income Advantage Trust,
High Income Advantage Trust II, High Income Advantage Trust III, Dean Witter
Government Income Trust, Dean Witter High Yield Securities Inc., Dean Witter
Tax-Free Daily Income Trust, Dean Witter Tax-Exempt Securities Trust, Dean
Witter Dividend Growth Securities Inc., Dean Witter Natural Resource Development
Securities Inc., Dean Witter American Value Fund, Dean Witter Developing Growth
Securities Trust, Dean Witter U.S. Government Money Market Trust, Dean Witter
Variable Investment Series, Dean Witter World Wide Investment Trust, Dean Witter
Select Municipal Reinvestment Fund, Dean Witter U.S. Government Securities
Trust, Dean Witter World Wide Income Trust, Dean Witter California Tax-Free
Income Fund, Dean Witter New York Tax-Free Income Fund, Dean Witter Convertible
Securities Trust, Dean Witter Federal Securities Trust, Dean Witter Value-Added
Market Series, Dean Witter Utilities Fund, Dean Witter California Tax-Free Daily
Income Trust, Dean Witter Strategist Fund, Dean Witter Intermediate Income
Securites, Dean Witter Capital Growth Securities, Dean Witter Precious Metals
and Minerals Trust, Dean Witter New York Municipal Money Market Trust, Dean
Witter European Growth Fund Inc., Dean Witter Global Short-Term Income Fund
Inc., Dean Witter Pacific Growth Fund Inc., Dean Witter Multi-State Municipal
Series Trust, Dean Witter Short-Term U.S. Treasury Trust, Dean Witter Premier
Income Trust, Dean Witter Diversified Income Trust, Dean Witter Health Sciences
Trust, Dean Witter Retirement Series, Dean Witter Global Dividend Growth
Securities, Dean Witter Limited Term Municipal Trust, Dean Witter Short-Term
Bond Fund, Dean Witter Global Utilities Fund, Dean Witter High Income
Securities, Dean Witter National Municipal Trust, Dean Witter International
SmallCap Fund, Dean Witter Mid-Cap Growth Fund, Dean Witter Select Dimensions
Investment Series, Dean Witter Balanced Growth Fund, Dean Witter Balanced Income
Fund, Dean Witter Hawaii Municipal Trust, Dean Witter Capital Appreciation Fund,
Dean Witter Intermediate Term U.S. Treasury Trust, Dean Witter Information Fund,
Municipal Income Trust, Municipal Income Trust II, Municipal Income Trust III,
Municipal Income Opportunities Trust, Municipal Income Opportunities Trust II,
3
<PAGE>
Municipal Income Opportunities Trust III, Municipal Premium Income Trust and
Prime Income Trust. The foregoing investment companies, together with the Fund,
are collectively referred to as the Dean Witter Funds.
In addition, Dean Witter Services Company Inc. ("DWSC"), a wholly-owned
subsidiary of InterCapital, serves as manager for the following investment
companies for which TCW Funds Management, Inc. is the investment adviser: TCW/DW
Core Equity Trust, TCW/DW North American Government Income Trust, TCW/DW Latin
American Growth Fund, TCW/DW Income and Growth Fund, TCW/DW Small Cap Growth
Fund, TCW/DW Balanced Fund, TCW/DW Mid-Cap Equity Trust, TCW/DW Total Return
Trust, TCW/DW Emerging Markets Opportunities Trust, TCW/DW Term Trust 2000,
TCW/DW Term Trust 2002 and TCW/DW Term Trust 2003 (the "TCW/DW Funds").
InterCapital also serves as: (i) sub-adviser to Templeton Global Opportunities
Trust, an open-end investment company; (ii) administrator of The BlackRock
Strategic Term Trust Inc., a closed-end investment company; and (iii)
sub-administrator of MassMutual Participation Investors and Templeton Global
Governments Income Trust, closed-end investment companies.
Pursuant to an Investment Management Agreement (the "Management Agreement")
with the Investment Manager, the Fund has retained the Investment Manager to
supervise the investment of the Fund's assets. The Investment Manager, through
consultation with BlackRock Financial Management Inc. (the "Sub-Advisor") and
through its own portfolio management staff, obtains and evaluates such
information and advice relating to the economy, securities markets, and specific
securities as it considers necessary or useful to continuously oversee the
management of the assets of the Fund in a manner consistent with its investment
objective.
Under the terms of the Management Agreement, the Investment Manager also
maintains certain of the Fund's books and records and furnishes, at its own
expense, such office space, facilities, equipment, clerical help and bookkeeping
and certain legal services as the Fund may reasonably require in the conduct of
its business, including the preparation of prospectuses, statements of
additional information, proxy statements and reports required to be filed with
federal and state securities commissions (except insofar as the participation or
assistance of independent accountants and attorneys is, in the opinion of the
Investment Manager, necessary or desirable). In addition, the Investment Manager
pays the salaries of all personnel, including officers of the Fund, who are
employees of the Investment Manager. The Investment Manager also bears the cost
of telephone service, heat, light, power and other utilities provided to the
Fund.
Effective December 31, 1993, pursuant to a Services Agreement between
InterCapital and DWSC, DWSC began to provide the administrative services to the
Fund that were previously performed directly by InterCapital. On April 17, 1995,
DWSC was reorganized in the State of Delaware, necessitating the entry into a
new Services Agreement by InterCapital and DWSC on such date. The foregoing
internal reorganizations did not result in any change of the nature or scope of
the administrative services being provided to the Fund or any of the fees being
paid by the Fund for the overall services being performed under the terms of the
existing Management Agreement.
Expenses not expressly assumed by the Investment Manager under the
Management Agreement, by the Sub-Advisor pursuant to the Sub-Advisory Agreement
(see below), or by the Distributor of the Fund's shares (see "The Distributor")
will be paid by the Fund. The expenses borne by the Fund include, but are not
limited to: expenses of the Plan of Distribution pursuant to Rule 12b-1 (see
"The Distributor"), charges and expenses of any registrar, custodian, stock
transfer and dividend disbursing agent; brokerage commissions; taxes; engraving
and printing of share certificates; registration costs of the Fund and its
shares under federal and state securities laws; the cost and expense of
printing, including typesetting, and distributing Prospectuses and Statements of
Additional Information of the Fund and supplements thereto to the Fund's
shareholders; all expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing of proxy statements and reports to shareholders;
fees and travel expenses of Trustees or members of any advisory board or
committee who are not employees of the Investment Manager or Sub-Advisor or any
corporate affiliate of the Investment Manager or Sub-Advisor;
4
<PAGE>
all expenses incident to any dividend, withdrawal or redemption options; charges
and expenses of any outside service used for pricing of the Fund's shares; fees
and expenses of the Fund's legal counsel, including counsel to the Trustees who
are not interested persons of the Fund or of the Investment Manager or
Sub-Advisor (not including compensation or expenses of attorneys who are
employees of the Investment Manager or Sub-Advisor) and independent accountants;
membership dues of industry associations; interest on Fund borrowings; postage;
insurance premiums on property or personnel (including officers and directors)
of the Fund which inure to its benefit; extraordinary expenses (including, but
not limited to, legal claims and liabilities and litigation costs and any
indemnification relating thereto); and all other costs of the Fund's operation.
The Management Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Investment Manager is not liable to the Fund or any
of its investors for any act or omission by the Investment Manager or for any
losses sustained by the Fund or its investors. The Management Agreement in no
way restricts the Investment Manager from acting as investment manager or
adviser to others.
As full compensation for the services and facilities furnished to the Fund
and expenses of the Fund assumed by the Investment Manager, the Fund pays the
Investment Manager monthly compensation calculated daily by applying the annual
rate of 0.50% to the Fund's daily net assets. For the fiscal years ended October
31, 1995, 1994 and 1993, the Fund accrued to the Investment Manager total
compensation under the Management Agreement in the amounts of $178,248, $306,372
and $657,860, respectively.
Pursuant to a Sub-Advisory Agreement between the Investment Manager and the
Sub-Advisor, the Sub-Advisor has been retained, subject to the overall
supervision of the Investment Manager and the Trustees of the Fund, to
continuously furnish investment advice concerning individual portfolio security
selections.
The Sub-Advisor provides asset management services with respect to high
quality fixed income instruments, with particular emphasis on Mortgage-Backed
Securities. The Sub-Advisor currently serves as the investment adviser to fixed
income investors in the United States and overseas through several funds with
combined net assets under management in excess of $34 billion. These include
twenty-one closed-end investment companies traded on either the New York or
American Stock Exchanges: The BlackRock Income Trust Inc., The BlackRock Target
Term Trust Inc., The BlackRock Advantage Term Trust Inc., The BlackRock
Strategic Term Trust Inc., The BlackRock 1998 Term Trust Inc., The BlackRock
Municipal Term Trust Inc., The BlackRock Insured Municipal Term Trust Inc., The
BlackRock North American Government Income Trust Inc., The BlackRock Investment
Quality Term Trust Inc., The BlackRock Insured Municipal 2008 Term Trust Inc.,
The BlackRock California Insured Municipal 2008 Term Trust Inc., The BlackRock
Florida Insured Municipal 2008 Term Trust Inc., The BlackRock New York Insured
Municipal 2008 Term Trust Inc., The BlackRock 1999 Term Trust Inc., The
BlackRock Investment Quality Municipal Trust Inc., The BlackRock California
Investment Quality Municipal Trust Inc., The BlackRock Florida Investment
Quality Municipal Trust Inc., The BlackRock New York Investment Quality
Municipal Trust Inc., The BlackRock New Jersey Investment Quality Municipal
Trust Inc., The BlackRock Investment Grade 2009 Term Trust Inc. and The
BlackRock 2001 Term Trust Inc., which were designed for individual investors.
Each of these funds is a closed-end management investment company that invests
primarily in investment grade Mortgage-Backed and Asset-Backed Securities and in
securities that are issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities or invests in Municipal Securities. The
Sub-Advisor also serves as the investment advisor to three offshore funds:
BlackRock Fund for Fannie Mae Mortgage Securities, BlackRock Freddie Mac
Mortgage Securities Fund, and BSY Financial Corp. Each of these funds invests
primarily in U.S. Mortgage-Backed Securities. In addition, the Sub-Advisor
serves as investment advisor to several institutional investors in separate
accounts.
5
<PAGE>
The Sub-Advisor's general and limited partners and employees include several
individuals with extensive experience in creating, evaluating and investing in
Mortgage-Backed Securities, Asset-Backed Securities and hedging products. Prior
to co-founding the Sub-Advisor (of which he is a general partner), from July
1976 to March 1988, Laurence D. Fink was employed by The First Boston
Corporation where he had been a Managing Director since January 1979. At First
Boston, he was a member of the Management Committee and co-head of its Taxable
Fixed Income Division. He also managed the Financial Futures and Fixed Income
Options Department and the Mortgage and Real Estate Products Group. Ralph L.
Schlosstein, President and a co-founder of the Sub-Advisor (of which he is a
general partner), was employed by Shearson Lehman Brothers Inc. from February
1981 to March 1988 and became a Managing Director in August, 1984. At Shearson
Lehman, he was co-head of the Mortgage and Savings Institutions Group. Messrs.
Fink and Schlosstein, along with other members of the Sub-Advisor, were
instrumental in many of the major innovations in these securities markets,
including the creation of the fixed and floating rate collateralized mortgage
obligation, asset-backed securities and the senior-subordinated mortgage
pass-through securities.
On June 16, 1994, the partners of the Sub-Adviser entered into a definitive
agreement to sell their partnership interests in the Sub-Advisor to PNC Bank,
N.A. ("PNC"), headquartered in Pittsburgh, Pennsylvania (the "Transaction"). The
Transaction, which was subject to bank regulatory approval, closed on February
28, 1995 and was subject to various conditions, including the following:
BlackRock will retain its name and will continue to operate out of its New York
office. All members of the Sub-Advisor's senior management team agreed to sign
long-term employment contracts and be responsible for managing the day-to-day
affairs of the Sub-Advisor. Following the closing of the Transaction, the Sub-
Advisor became 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. 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 Trust
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 Trust and its shareholders for InterCapital to enter into a sub-advisory
agreement with the Sub-Advisor (the "current 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 Trust, as
that term is defined in the 1940 Act (the "Independent Trustees"), unanimously
approved the current Sub-Advisory Agreement and recommended it for approval by
Shareholders. The current Sub-Advisory Agreement is identical to the former
Sub-Advisory Agreement except for the effective date and the stated expiration
date. At the meeting of shareholders which took place on February 17, 1995, the
shareholders of the Fund voted to approve the Sub-Advisory Agreement effective
February 27, 1995.
Both the Investment Manager and the Sub-Advisor have authorized any of their
directors, partners, officers and employees who have been elected as Trustees or
officers of the Fund to serve in the capacities in which they have been elected.
Services furnished by directors, the Investment Manager and the Sub-Advisor may
be furnished by directors, partners, officers and employees of the Investment
Manager and the Sub-Advisor. In connection with the services rendered by the
Sub-Advisor, the Sub-Advisor bears the following expenses: (a) the salaries and
expenses of its personnel; and (b) all expenses incurred by it in connection
with performing the services provided by it as Sub-Advisor, as described above.
As full compensation for the services and facilities furnished to the Fund
and the Investment Manager and expenses of the Fund and the Investment Manager
assumed by the Sub-Advisor, the Investment Manager pays the Sub-Advisor monthly
compensation equal to 40% of the Investment Manager's monthly compensation
payable under the Management Agreement. For the fiscal years
6
<PAGE>
ended October 31, 1995, 1994 and 1993, the Investment Manager informed the Fund
that the Investment Manager accrued to the Sub-Advisor total compensation under
the Sub-Advisory Agreement of $71,299 $122,549 and $263,144, respectively.
Pursuant to the Management Agreement and the Sub-Advisory Agreement, total
operating expenses of the Fund are subject to applicable limitations under rules
and regulations of states where the Fund is authorized to sell its shares.
Therefore, operating expenses are effectively subject to the most restrictive of
such limitations as the same may be amended from time to time. Presently, the
most restrictive limitation is as follows. If, in any fiscal year, the Fund's
total operating expenses, exclusive of taxes, interest, brokerage fees,
distribution fees and extraordinary expenses (to the extent permitted by
applicable state securities laws and regulations), exceed 2 1/2% of the first
$30,000,000 of average daily net assets, 2% of the next $70,000,000 and 1 1/2%
of any excess over $100,000,000, the Investment Manager will reimburse the Fund
for the amount of such excess. Pursuant to the Sub-Advisory Agreement, if any
such reimbursement is made by the Investment Manager, the Investment Manager
will, in turn, be reimbursed for 40% of such payment by the Sub-Advisor. The
reimbursement, if any, will be calculated daily and credited on a monthly basis.
The Fund's expenses did not exceed the limitation set forth above during the
fiscal years ended October 31, 1995, 1994 and 1993.
The Investment Manager paid the organizational expenses of the Fund incurred
prior to the offering of the Fund's shares. The Fund reimbursed the Investment
Manager for $150,000 of such expenses, in accordance with the terms of the
Underwriting Agreement between the Fund and DWR. The Fund has deferred and is
amortizing the reimbursed expenses on the straight line method over a period not
to exceed five years from the date of commencement of the Fund's operations.
The Management Agreement and the Sub-Advisory Agreement (the "Agreements")
were initially approved by the Board of Trustees on October 30, 1992 and by the
shareholders of the Fund at a Meeting of Shareholders held on January 12, 1993.
The Agreements are substantially identical to the prior investment management
agreement and sub-advisory agreement which were initially approved by the Fund's
Trustees on April 16, 1991 and by DWR as the then sole shareholder on May 15,
1991. The Agreements took effect on June 30, 1993, upon the spin-off of Sears,
Roebuck and Co. of its remaining shares of DWDC. Both Agreements may be
terminated at any time, without penalty, on thirty days notice by the Trustees
of the Fund, by the holders of a majority, as defined in the Investment Company
Act of 1940, as amended (the "Act"), of the outstanding shares of the Fund, by
the Investment Manager, or the Sub-Advisor (Sub-Advisory Agreement only). The
Agreements will automatically terminate in the event of their assignment (as
defined in the Act).
Under its terms, the current Sub-Advisory Agreement had an initial term
ending April 30, 1995 and the Management Agreement had an initial term ending
April 30, 1994, and each provides that it will continue from year to year
thereafter, provided continuance of each Agreement is approved at least annually
by the vote of the holders of a majority, as defined in the Act, of the
outstanding shares of the Fund, or by the Trustees of the Fund; provided that in
either event such continuance is approved annually by the vote of a majority of
the Trustees of the Fund who are not parties to the Agreements or "interested
persons" (as defined in the Act) of any such party (the "Independent Trustees"),
which votes must be cast in person at a meeting called for the purpose of voting
on such approval. At their meeting held on April 20, 1995, the Fund's Board of
Trustees, including a majority of the Independent Trustees, approved
continuation of each Agreement until April 30, 1996.
The Fund has acknowledged that the name "Dean Witter" is a property right of
DWR. The Fund has agreed that DWR or its parent company may use, or at any time
permit others to use, the name "Dean Witter". The Fund has also agreed that in
the event the Management Agreement is terminated, or if the affiliation between
InterCapital and its parent company is terminated, the Fund will eliminate the
name "Dean Witter" from its name if DWR or its parent company shall so request.
7
<PAGE>
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The Trustees and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with
InterCapital and with the 79 Dean Witter Funds and the 12 TCW/DW Funds are shown
below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- --------------------------------------------- ------------------------------------------------------------------
<S> <C>
Michael Bozic (55) Chairman and Chief Executive Officer of Levitz Furniture
Trustee Corporation (since November, 1995); Director or Trustee of the
c/o Levitz Furniture Corporation Dean Witter Funds; formerly President and Chief Executive Officer
6111 Broken Sound Parkway, N.W. of Hills Department Stores (May, 1991-July, 1995) formerly
Boca Raton, Florida Chairman and Chief Executive Officer (January, 1987-August, 1990)
and President and Chief Operating Officer (August, 1990-February,
1991) of the Sears Merchandise Group of Sears, Roebuck and Co.;
Director of Eaglemark Financial Services, Inc., the United Negro
College Fund, Weirton Steel Corporation and Domain Inc. (home
decor retailer).
Charles A. Fiumefreddo* (62) Chairman, Chief Executive Officer and Director of InterCapital,
Chairman of the Board, Dean Witter Distributors Inc. ("Distributors") and DWSC; Executive
President, Chief Executive Officer Vice President and Director of DWR; Chairman, Director or Trustee,
and Trustee President and Chief Executive Officer of the Dean Witter Funds;
Two World Trade Center Chairman, Chief Executive Officer and Trustee of the TCW/DW Funds;
New York, New York Chairman and Director of Dean Witter Trust Company ("DWTC");
Director and/or officer of various DWDC subsidiaries; formerly
Executive Vice President and Director of DWDC (until February,
1993).
Edwin J. Garn (63) Director or Trustee of the Dean Witter Funds; formerly United
Trustee States Senator (R-Utah) (1974-1992) and Chairman, Senate Banking
c/o Huntsman Chemical Corporation Committee (1980-1986); formerly Mayor of Salt Lake City, Utah
500 Huntsman Way (1971-1974); formerly Astronaut, Space Shuttle Discovery (April
Salt Lake City, Utah 12-19, 1985); Vice Chairman, Huntsman Chemical Corporation (since
January, 1993); member of the board of various civic and
charitable organizations.
John R. Haire (70) Chairman of the Audit Committee and Chairman of the Committee of
Trustee the Independent Directors or Trustees and Director or Trustee of
Two World Trade Center the Dean Witter Funds; Trustee of the TCW/DW Funds; formerly
New York, NY President, Council for Aid to Education (1978-October, 1989) and
Chairman and Chief Executive Officer of Anchor Corporation, an
Investment Adviser (1964-1978); Director of Washington National
Corporation (insurance).
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- --------------------------------------------- ------------------------------------------------------------------
<S> <C>
Dr. Manuel H. Johnson (46) Senior Partner, Johnson Smick International, Inc., a consulting
Trustee firm; Koch Professor of International Economics and Director of
c/o Johnson Smick International, Inc. the Center for Global Market Studies at George Mason University
1133 Connecticut Avenue, N.W. (since September, 1990); Co- Chairman and a founder of the Group
Washington, DC of Seven Council (G7C), an international economic commission
(since September, 1990); Director or Trustee of the Dean Witter
Funds; Trustee of the TCW/DW Funds; Director of NASDAQ (since
June, 1995); Director of Greenwich Capital Markets, Inc.
(broker-dealer); formerly Vice Chairman of the Board of Governors
of the Federal Reserve System (February, 1986-August, 1990) and
Assistant Secretary of the U.S. Treasury (1982-1986).
Paul Kolton (72) Director or Trustee of the Dean Witter Funds; Chairman of the
Trustee Audit Committee and Chairman of the Committee of the Independent
c/o Gordon Altman Butowsky Weitzen Trustees and Trustee of the TCW/DW Funds; formerly Chairman of the
Shalov & Wein Financial Accounting Standards Advisory Council; formerly Chairman
Counsel to the Independent Trustees and Chief Executive Officer of the American Stock Exchange;
114 West 47th Street Director of UCC Investors Holding Inc. (Uniroyal Chemical
New York, New York Company); director or trustee of various not-for-profit
organizations.
Michael E. Nugent (59) General Partner, Triumph Capital, L.P., a private investment
Trustee partnership (since April, 1988); Director or Trustee of the Dean
c/o Triumph Capital, L.P. Witter Funds, and Trustee of the TCW/DW Funds; formerly Vice
237 Park Avenue President, Bankers Trust Company and BT Capital Corporation
New York, New York (1984-1988); Director of various business organizations.
Philip J. Purcell* (52) Chairman of the Board of Directors and Chief Executive Officer of
Trustee DWDC, DWR and Novus Credit Services, Inc.; Director of
Two World Trade Center InterCapital, DWSC and Distributors; Director or Trustee of the
New York, New York Dean Witter Funds; Director and/or officer of various DWDC
subsidiaries.
John L. Schroeder (65) Retired; Director or Trustee of the Dean Witter Funds; Director of
Trustee Citizens Utilities Company; Executive Vice President and Chief
c/o Gordon Altman Butowsky Weitzen Investment Officer of the Home Insurance Company (since August,
Shalov & Wein 1991); formerly Chairman and Chief Investment Officer of
Counsel to the Independent Trustees Axe-Houghton Management and the Axe-Houghton Funds (April,
114 West 47th Street 1983-June, 1991) and President of USF&G Financial Services, Inc.
New York, New York (June, 1990-June, 1991).
Sheldon Curtis (64) Senior Vice President, Secretary and General Counsel of
Vice President, Secretary and InterCapital and DWSC; Senior Vice President and Secretary of
General Counsel DWTC; Senior Vice President, Assistant Secretary and Assistant
Two World Trade Center General Counsel of Distributors; Assistant Secretary of DWR; Vice
New York, New York President, Secretary and General Counsel of the Dean Witter Funds
and the TCW/DW Funds.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- --------------------------------------------- ------------------------------------------------------------------
<S> <C>
Thomas F. Caloia (49) First Vice President (since May 1991) and Assistant Treasurer
Treasurer (since January, 1993) of InterCapital; First Vice President and
Two World Trade Center Assistant Treasurer of DWSC; Treasurer of the Dean Witter Funds
New York, New York and the TCW/DW Funds; previously Vice President of InterCapital.
<FN>
- ------------------------
*Denotes Trustees who are "interested persons" of the Fund, as defined in the
Act.
</TABLE>
In addition, Robert M. Scanlan, President and Chief Operating Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWTC and
Director of DWTC, David A. Hughey, Executive Vice President and Chief
Administrative Officer of InterCapital, DWSC, Distributors and DWTC and Director
of DWTC, Edmund C. Puckhaber, Executive Vice President of InterCapital and
Director of DWTC and Robert S. Giambrone, Senior Vice President of InterCapital,
DWSC, Distributors and DWTC, Joseph J. McAlinden, Senior Vice Presidents of
InterCapital, are Vice Presidents of the Fund. Barry Fink and Marilyn K.
Cranney, First Vice Presidents and Assistant General Counsels of InterCapital
and DWSC, and Lou Anne D. McInnis and Ruth Rossi, Vice Presidents and Assistant
General Counsels of InterCapital and DWSC, and Carsten Otto, a Staff Attorney
with InterCapital, are Assistant Secretaries of the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees consists of nine (9) trustees. These same individuals
also serve as directors or trustees for all of the Dean Witter Funds, and are
referred to in this section as Trustees. As of the date of this Statement of
Additional Information, there are a total of 79 Dean Witter Funds, comprised of
119 portfolios. As of December 31, 1995, the Dean Witter Funds had total net
assets of approximately $71.5 billion and more than five million shareholders.
Seven Trustees (77% of the total number) have no affiliation or business
connection with InterCapital or any of its affiliated persons and do not own any
stock or other securities issued by InterCapital's parent company, DWDC. These
are the "disinterested" or "independent" Trustees. The other two Trustees (the
"management Trustees") are affiliated with InterCapital. Five of the seven
independent Trustees are also Independent Trustees of the TCW/DW Funds.
Law and regulation establish both general guidelines and specific duties for
the Independent Trustees. The Dean Witter Funds seek as Independent Trustees
individuals of distinction and experience in business and finance, government
service or academia; these are people whose advice and counsel are in demand by
others and for whom there is often competition. To accept a position on the
Funds' Boards, such individuals may reject other attractive assignments because
the Funds make substantial demands on their time. Indeed, by serving on the
Funds' Boards, certain Trustees who would otherwise be qualified and in demand
to serve on bank boards would be prohibited by law from doing so.
All of the Independent Trustees serve as members of the Audit Committee and
the Committee of the Independent Trustees. Three of them also serve as members
of the Derivatives Committee. During the calendar year ended December 31, 1995,
the three Committees held a combined total of fifteen meetings. The Committees
hold some meetings at InterCapital's offices and some outside InterCapital.
Management Trustees or officers do not attend these meetings unless they are
invited for purposes of furnishing information or making a report.
The Committee of the Independent Trustees is charged with recommending to
the full Board approval of management, advisory and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing Fund performance; checking on the pricing of portfolio securities,
brokerage commissions, transfer agent costs and performance, and trading among
Funds in the same complex; and approving fidelity bond and related insurance
coverage and allocations, as well
10
<PAGE>
as other matters that arise from time to time. The Independent Trustees are
required to select and nominate individuals to fill any Independent Trustee
vacancy on the Board of any Fund that has a Rule 12b-1 plan of distribution.
Most of the Dean Witter Funds have such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of such services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; reviewing the adequacy of the Fund's system of internal
controls; and preparing and submitting Committee meeting minutes to the full
Board.
Finally, the Board of each Fund has formed a Derivatives Committee to
establish parameters for and oversee the activities of the Fund with respect to
derivative investments, if any, made by the Fund.
DUTIES OF CHAIRMAN OF COMMITTEES
The Chairman of the Committees maintains an office at the Funds'
headquarters in New York. He is responsible for keeping abreast of regulatory
and industry developments and the Funds' operations and management. He screens
and/or prepares written materials and identifies critical issues for the
Independent Trustees to consider, develops agendas for Committee meetings,
determines the type and amount of information that the Committees will need to
form a judgment on various issues, and arranges to have that information
furnished to Committee members. He also arranges for the services of independent
experts and consults with them in advance of meetings to help refine reports and
to focus on critical issues. Members of the Committees believe that the person
who serves as Chairman of all three Committees and guides their efforts is
pivotal to the effective functioning of the Committees.
The Chairman of the Committees also maintains continuous contact with the
Funds' management, with independent counsel to the Independent Trustees and with
the Funds' independent auditors. He arranges for a series of special meetings
involving the annual review of investment advisory, management and other
operating contracts of the Funds and, on behalf of the Committees, conducts
negotiations with the Investment Manager and other service providers. In effect,
the Chairman of the Committees serves as a combination of chief executive and
support staff of the Independent Trustees.
The Chairman of the Committees is not employed by any other organization and
devotes his time primarily to the services he performs as Committee Chairman and
Independent Trustee of the Dean Witter Funds and as an Independent Trustee of
the TCW/DW Funds. The current Committee Chairman has had more than 35 years
experience as a senior executive in the investment company industry.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL DEAN
WITTER FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the Dean Witter Funds avoids the
duplication of effort that would arise from having different groups of
individuals serving as Independent Trustees for each of the Funds or even of
sub-groups of Funds. They believe that having the same individuals serve as
Independent Trustees of all the Funds tends to increase their knowledge and
expertise regarding matters which affect the Fund complex generally and enhances
their ability to negotiate on behalf of each Fund with the Fund's service
providers. This arrangement also precludes the possibility of separate groups of
Independent Trustees arriving at conflicting decisions regarding operations and
management of the Funds and avoids the cost and confusion that would likely
ensue. Finally, having the same Independent Trustees serve on all Fund Boards
enhances the ability of each Fund to obtain, at modest cost to each separate
Fund, the services of Independent Trustees, and a Chairman of their Committees,
of the caliber, experience and business acumen of the individuals who serve as
Independent Trustees of the Dean Witter Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Fund pays each Independent Trustee an annual fee of $1,000 ($1,200 prior
to September 30, 1995) plus a per meeting fee of $50 for meetings of the Board
of Trustees or committees of the Board of
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Trustees attended by the Trustee (the Fund pays the Chairman of the Audit
Committee an annual fee of $750 ($1,000 prior to January 1, 1995) and pays the
Chairman of the Committee of the Independent Trustees an additional annual fee
of $2,400, in each case inclusive of the Committee meeting fees). The Fund also
reimburses such Trustees for travel and other out-of-pocket expenses incurred by
them in connection with attending such meetings. Trustees and officers of the
Fund who are or have been employed by the Investment Manager or an affiliated
company receive no compensation or expense reimbursement from the Fund.
The Fund has adopted a retirement program under which an Independent Trustee
who retires after serving for at least five years (or such lesser period as may
be determined by the Board) as an Independent Director or Trustee of any Dean
Witter Fund that has adopted the retirement program (each such Fund referred to
as an "Adopting Fund" and each such Trustee referred to as an "Eligible
Trustee") is entitled to retirement payments upon reaching the eligible
retirement age (normally, after attaining age 72). Annual payments are based
upon length of service. Currently, upon retirement, each Eligible Trustee is
entitled to receive from the Fund, commencing as of his or her retirement date
and continuing for the remainder of his or her life, an annual retirement
benefit (the "Regular Benefit") equal to 25.0% of his or her Eligible
Compensation plus 0.4166666% of such Eligible Compensation for each full month
of service as an Independent Director or Trustee of any Adopting Fund in excess
of five years up to a maximum of 50.0% after ten years of service. The foregoing
percentages may be changed by the Board.(1) "Eligible Compensation" is one-fifth
of the total compensation earned by such Eligible Trustee for service to the
Fund in the five year period prior to the date of the Eligible Trustee's
retirement. Benefits under the retirement program are not secured or funded by
the Fund. As of the date of this Statement of Additional Information, 57 Dean
Witter Funds have adopted the retirement program.
The following table illustrates the compensation paid and the retirement
benefits accrued to the Fund's Independent Trustees by the Fund for the fiscal
year ended October 31, 1995 and the estimated retirement benefits for the Fund's
Independent Trustees as of October 31, 1995.
<TABLE>
<CAPTION>
FUND COMPENSATION ESTIMATED RETIREMENT BENEFITS
------------------------------- --------------------------------------------------------------------
ESTIMATED ESTIMATED
RETIREMENT CREDIT YEARS ESTIMATED ANNUAL
AGGREGATE BENEFITS OF SERVICE AT PERCENTAGE OF ESTIMATED BENEFITS
NAME OF INDEPENDENT COMPENSATION ACCRUED AS RETIREMENT ELIGIBLE ELIGIBLE UPON
TRUSTEE FROM THE FUND FUND EXPENSES (MAXIMUM 10) COMPENSATION COMPENSATION(2) RETIREMENT(3)
- -------------------- -------------- -------------- ---------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic....... $ 1,900 $ 379 10 57.5% $1,950 $ 1,121
Edwin J. Garn....... 2,000 740 10 57.5 1,950 1,121
John R. Haire(4).... 4,600 7,176 10 57.5 5,162 2,968
Dr. Manuel H.
Johnson............ 2,000 291 10 57.5 1,950 1,121
Paul Kolton......... 2,000 3,338 10 57.0 2,155 1,229
Michael E. Nugent... 1,850 553 10 57.5 1,950 1,121
John L. Schroeder... 2,000 744 8 47.9 1,950 934
</TABLE>
- ------------------------
(1) An Eligible Trustee may elect alternate payments of his or her retirement
benefits based upon the combined life expectancy of such Eligible Trustee
and his or her spouse on the date of such Eligible Trustee's retirement. The
amount estimated to be payable under this method, through the remainder of
the later of the lives of such Eligible Trustee and spouse, will be the
actuarial equivalent of the Regular Benefit. In addition, the Eligible
Trustee may elect that the surviving spouse's periodic payment of benefits
will be equal to either 50% or 100% of the previous periodic amount, an
election that, respectively, increases or decreases the previous periodic
amount so that the resulting payments will be the actuarial equivalent of
the Regular Benefit.
(2) Based on current levels of compensation.
(3) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1) above.
(4) Of Mr. Haire's compensation from the Fund, $3,400 was paid to him as
Chairman of the Committee of the Independent Trustees ($2,400) and as
Chairman of the Audit Committee ($1,000).
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<PAGE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1995 for services
to the 79 Dean Witter Funds and, in the case of Messrs. Haire, Johnson, Kolton
and Nugent, the 11 TCW/DW Funds that were in operation at December 31, 1995.
With respect to Messrs. Haire, Johnson, Kolton and Nugent, the TCW/DW Funds are
included solely because of a limited exchange privilege between those Funds and
five Dean Witter Money Market Funds. Mr. Schroeder was elected as a Trustee of
the TCW/DW Funds on April 20, 1995.
CASH COMPENSATION FROM DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
FOR SERVICE AS TOTAL CASH
FOR SERVICE CHAIRMAN OF COMPENSATION
AS DIRECTOR OR COMMITTEES OF FOR SERVICES
TRUSTEE AND FOR SERVICE AS INDEPENDENT TO
COMMITTEE MEMBER TRUSTEE AND DIRECTORS/ 79 DEAN
OF 79 DEAN COMMITTEE MEMBER TRUSTEES AND WITTER
WITTER OF 11 TCW/DW AUDIT FUNDS AND 11
NAME OF INDEPENDENT TRUSTEE FUNDS FUNDS COMMITTEES TCW/DW FUNDS
- --------------------------- ---------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
Michael Bozic.............. $126,050 -- -- $126,050
Edwin J. Garn.............. 136,450 -- -- 136,450
John R. Haire.............. 98,450 $82,038 $217,350(5) 397,838
Dr. Manuel H. Johnson...... 136,450 82,038 -- 218,488
Paul Kolton................ 136,450 54,788 36,900(6) 228,138
Michael E. Nugent.......... 124,200 75,038 -- 199,238
John L. Schroeder.......... 136,450 46,964 -- 183,414
</TABLE>
- ------------------------
(5) For the 79 Dean Witter Funds in operation at December 31, 1995.
(6) For the 11 TCW/DW Funds in operation at December 31, 1995.
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's officers
and Trustees as a group was less than 1 percent of the Fund's shares of
beneficial interest outstanding.
INVESTMENT PRACTICES AND POLICIES
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES
As discussed in the Prospectus, the Fund may invest in, among other
securities, securities issued by the U.S. Government, its agencies or
instrumentalities. Such securities include:
(1) U.S. Treasury bills (maturities of one year or less), U.S. Treasury
notes (maturities of one to ten years) and U.S. Treasury bonds (generally
maturities of greater than ten years), all of which are direct obligations
of the U.S. Government and, as such, are backed by the "full faith and
credit" of the United States.
(2) Securities issued by agencies and instrumentalities of the U.S.
Government which are backed by the full faith and credit of the United
States. Among the agencies and instrumentalities issuing such obligations
are the Federal Housing Administration, the Government National Mortgage
Association ("GNMA"), the Department of Housing and Urban Development, the
Export-Import Bank, the Farmers Home Administration, the General Services
Administration, the Maritime Administration and the Small Business
Administration. The maturities of such obligations range from three months
to 30 years.
(3) Securities issued by agencies and instrumentalities which are not
backed by the full faith and credit of the United States, but whose issuing
agency or instrumentality has the right to borrow, to meet its obligations,
from an existing line of credit with the U.S. Treasury. Among the agencies
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<PAGE>
and instrumentalities issuing such obligations are the Tennessee Valley
Authority, the Federal National Mortgage Association ("FNMA"), the Federal
Home Loan Mortgage Corporation ("FHLMC") and the U.S. Postal Service.
(4) Securities issued by agencies and instrumentalities which are not
backed by the full faith and credit of the United States, but which are
backed by the credit of the issuing agency or instrumentality. Among the
agencies and instrumentalities issuing such obligations are the Federal Farm
Credit System and the Federal Home Loan Banks.
Neither the value nor the yield of the U.S. Government securities which may
be invested in by the Fund are guaranteed by the U.S. Government. Such values
and yield will fluctuate with changes in prevailing interest rates and other
factors. Generally, as prevailing interest rates rise, the value of any U.S.
Government securities held by the Fund will fall. Such securities with longer
maturities generally tend to produce higher yields and are subject to greater
market fluctuation as a result of changes in interest rates than debt securities
with shorter maturities. The Fund is not limited as to the maturities of the
U.S. Government securities in which it may invest with respect to 35% of its
total assets.
MORTGAGE-BACKED SECURITIES
As discussed in the Prospectus, the Mortgage-Backed Securities purchased by
the Fund evidence an interest in a specific pool of mortgages. Such securities
are issued by GNMA, FNMA and FHLMC.
GNMA CERTIFICATES. GNMA is a wholly-owned corporate instrumentality of the
United States within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the "Housing Act"), authorized GNMA to
guarantee the timely payment of the principal of and interest on certificates
that are based on and backed by a pool of mortgage loans insured by the Federal
Housing Administration under the Housing Act, or Title V of the Housing Act of
1949 ("FHA Loans"), or guaranteed by the Veterans' Administration under the
Servicemen's Readjustment Act of 1944, as amended ("VA Loans"), or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith and
credit of the U.S. Government is pledged to the payment of all amounts that may
be required to be paid under any guarantee. In order to meet its obligations
under such guarantee, GNMA is authorized to borrow from the U.S. Treasury with
no limitations as to amount.
The GNMA Certificates will represent a pro rata interest in one or more
pools of the following types of mortgage loans; (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed
rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multifamily residential
properties under construction; (vi) mortgage loans on completed multifamily
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on one-to
four-family housing units.
FNMA CERTIFICATES. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. FNMA was originally established in 1938 as a U.S.
Government agency to provide supplemental liquidity to the mortgage market and
was transformed into a stockholder owned and privately managed corporation by
legislation enacted in 1968. FNMA provides funds to the mortgage market
primarily by purchasing home mortgage loans from local lenders, thereby
replenishing their funds for additional lending. FNMA acquires funds to purchase
home mortgage loans from many capital market investors that may not ordinarily
invest in mortgage loans directly, thereby expanding the total amount of funds
available for housing.
Each FNMA Certificate will entitle the registered holder thereof to receive
amounts representing such holder's pro rata interest in scheduled principal
payments and interest payments (at such FNMA Certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying
14
<PAGE>
mortgage loans), and any principal prepayments on the mortgage loans in the pool
represented by such FNMA Certificate and such holder's proportionate interest in
the full principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal of and interest on each
FNMA Certificate will be guaranteed by FNMA, which guarantee is not backed by
the full faith and credit of the U.S. Government.
Each FNMA Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate mortgage loans secured by multifamily
projects.
FHLMC CERTIFICATES. FHLMC is a corporate instrumentality of the United
States created pursuant to the Emergency Home Finance Act of 1970, as amended
(the "FHLMC Act"). FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of needed housing. The
principal activity of FHLMC currently consists of the purchase of first lien,
conventional, residential mortgage loans and participation interests in such
mortgage loans and the resale of the mortgage loans so purchased in the form of
mortgage securities, primarily FHLMC Certificates.
FHLMC guarantees to each registered holder of a FHLMC Certificate the timely
payment of interest at the rate provided for by such FHLMC Certificate, whether
or not received. FHLMC also guarantees to each registered holder of a FHLMC
Certificate ultimate collection of all principal of the related mortgage loans,
without any offset or deduction, but does not, generally, guarantee the timely
payment of scheduled principal. FHLMC may remit the amount due on account of its
guarantee of collection of principal at any time after default on an underlying
mortgage loan, but not later than 30 days following (i) foreclosure sale, (ii)
payment of a claim by any mortgage insurer or (iii) the expiration of any right
of redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. The obligations of FHLMC under its guarantee are obligations solely
of FHLMC and are not backed by the full faith and credit of the U.S. Government.
FHLMC Certificates represent a pro rata interest in a group of mortgage
loans (a "FHLMC Certificate group") purchased by FHLMC. The mortgage loans
underlying the FHLMC Certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one- to four-family
residential properties or multifamily projects. Each mortgage loan must meet the
applicable standards set forth in the FHLMC Act. A FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another FHLMC Certificate
group.
CORPORATE DEBT SECURITIES
As described in the Prospectus, the Fund may purchase corporate debt
securities rated Aaa by Moody's or AAA by S&P or, if unrated, deemed to be of
comparable quality by the Fund's Trustees. These debt securities may have
adjustable or fixed rates of interest and in certain instances may be secured by
assets of the issuer. Adjustable rate corporate debt securities, which the Fund
may purchase up to 5% of its total assets, may have features similar to those of
adjustable rate Mortgage-Backed Securities, but corporate debt securities,
unlike Mortgage-Backed Securities, are not subject to prepayment risk other than
through contractual call provisions which generally impose a penalty for
prepayment. Fixed rate debt securities also may be subject to call provisions.
MUNICIPAL OBLIGATIONS
The Fund may invest up to 5% of its total assets in Municipal Obligations
(consisting of Municipal Bonds, Municipal Notes and Municipal Commercial Paper)
rated in the highest rating category by Moody's Investor Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P"). The Municipal Obligations
in which the Fund may invest include "zero coupon" Municipal Obligations. Any
Municipal Obligation which depends directly or indirectly on the credit of the
United States Government shall be considered to have the highest rating by
Moody's and S&P.
15
<PAGE>
Municipal Bonds and Municipal Notes are debt obligations of a state, its
cities, municipalities and municipal agencies which generally have maturities,
at the time of their issuance, of either one year or more (Bonds) or from six
months to three years (Notes). Municipal Commercial Paper consists of short-term
obligations of municipalities which may be issued at a discount and are
sometimes referred to as Short-Term Discount Notes. An obligation shall be
considered a Municipal Bond, Municipal Note or Municipal Commercial Paper only
if, in the opinion of bond counsel, the interest payable thereon is exempt from
federal income tax.
The two principal classifications of Municipal Bonds, Notes and Commercial
Paper are "general obligation" and "revenue" bonds, notes or commercial paper.
General obligation bonds, notes or commercial paper are secured by the issuer's
pledge of its faith, credit and taxing power for the payment of principal and
interest. Issuers of general obligation bonds, notes or commercial paper include
a state, its counties, cities, towns and other governmental units. Revenue
bonds, notes or commercial paper are payable from the revenues derived from a
particular facility or class of facilities or, in some cases, from specific
revenue sources. Revenue bonds, notes or commercial paper are issued for a wide
variety of purposes, including the financing of electric, gas, water and sewer
systems and other public utilities; industrial development and pollution control
facilities; single and multi-family housing units; public buildings and
facilities; air and marine ports, transportation facilities such as toll roads,
bridges and tunnels; and health and educational facilities such as hospitals and
dormitories. They rely primarily on user fees to pay debt service, although the
principal revenue source is often supplemented by additional security features
which are intended to enhance the creditworthiness of the issuer's obligations.
In some cases, particularly revenue bonds issued to finance housing and public
buildings, a direct or implied "moral obligation" of a governmental unit may be
pledged to the payment of debt service. In other cases, a special tax or other
charge may augment user fees.
Included within the revenue bonds category are participations in lease
obligations or installment purchase contracts (hereinafter collectively called
"lease obligations") of municipalities. State and local governments issue lease
obligations to acquire equipment and facilities.
Lease obligations may have risks not normally associated with general
obligation or other revenue bonds. Leases and installment purchase or
conditional sale contracts (which may provide for title to the leased asset to
pass eventually to the issuer) have developed as a means for governmental
issuers to acquire property and equipment without the necessity of complying
with the constitutional and statutory requirements generally applicable for the
issuance of debt. Certain lease obligations contain "non-appropriation" clauses
that provide that the governmental issuer has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on an annual or other periodic
basis. Consequently, continued lease payments on those lease obligations
containing "non-appropriation" clauses are dependent on future legislative
actions. If such legislative actions do not occur, the holders of the lease
obligation may experience difficulty in exercising their rights, including
disposition of the property.
LENDING OF PORTFOLIO SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions,
provided that such loans are callable at any time by the Fund (subject to notice
provisions described below), and are at all times secured by cash or cash
equivalents, which are maintained in a segregated account pursuant to applicable
regulations and that are at least equal to the market value, determined daily,
of the loaned securities. The advantage of such loans is that the Fund continues
to receive the income on the loaned securities while at the same time earning
interest on the cash amounts deposited as collateral, which will be invested in
short-term obligations. The Fund will not lend its portfolio securities if such
loans are not permitted by the laws or regulations of any state in which its
shares are qualified for sale and will not lend more than 25% of the value of
its total assets. The Fund did not lend any of its portfolio securities during
its fiscal year ended October 31, 1995.
16
<PAGE>
A loan may be terminated by the borrower on one business day's notice, or by
the Fund on two business days' notice. If the borrower fails to deliver the
loaned securities within two days after receipt of notice, the Trust could use
the collateral to replace the securities while holding the borrower liable for
any excess of replacement cost over collateral. As with any extensions of
credit, there are risks of delay in recovery and in some cases even loss of
rights in the collateral should the borrower of the securities fail financially.
However, these loans of portfolio securities will only be made to firms deemed
by the Fund's management to be creditworthy and when the income which can be
earned from such loans justifies the attendant risks. Upon termination of the
loan, the borrower is required to return the securities to the Fund. Any gain or
loss in the market price during the loan period would inure to the Fund. The
creditworthiness of firms to which the Fund lends its portfolio securities will
be monitored on an ongoing basis by the Investment Manager pursuant to
procedures adopted and reviewed, on an ongoing basis, by the Board of Trustees
of the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of such rights
if the matters involved would have a material effect on the Fund's investment in
such loaned securities. The Fund will pay reasonable finder's, administrative
and custodial fees in connection with a loan of its securities.
OPTIONS AND FUTURES TRANSACTIONS
OPTIONS ON TREASURY BONDS AND NOTES. Because trading interest in options
written on Treasury bonds and notes tends to center mostly on the most recently
auctioned issues, the exchanges on which such securities trade will not continue
indefinitely to introduce options with new expirations to replace expiring
options on particular issues. Instead, the expirations introduced at the
commencement of options trading on a particular issue will be allowed to run
their course, with the possible addition of a limited number of new expirations
as the original ones expire. Options trading on each issue of bonds or notes
will thus be phased out as new options are listed on more recent issues, and
options representing a full range of expirations will not ordinarily be
available for every issue on which options are traded.
PURCHASING CALL AND PUT OPTIONS. As stated in the Prospectus, the Fund may
purchase listed and OTC call and put options in amounts equalling up to 5% of
its total assets. The Fund may purchase put options on securities which it holds
(or has the right to acquire) in its portfolio only to protect itself against a
decline in the value of the security. If the value of the underlying security
were to fall below the exercise price of the put purchased in an amount greater
than the premium paid for the option, the Fund would incur no additional loss.
In addition, the Fund may sell a put option which it has previously purchased
prior to the sale of the securities underlying such option. Such a sale would
result in a net gain or loss depending on whether the amount received on the
sale is more or less than the premium and other transaction costs paid on the
put option which is sold. Any such gain or loss could be offset in whole or in
part by a change in the market value of the underlying security. If a put option
purchased by the Fund expired without being sold or exercised, the premium would
be lost.
RISKS OF OPTIONS TRANSACTIONS. In the event of the bankruptcy of a broker
through which the Fund engages in transactions in options, the Fund could
experience delays and/or losses in liquidating open positions purchased or sold
through the broker and/or incur a loss of all or part of its margin deposits
with the broker. Similarly, in the event of the bankruptcy of the writer of an
OTC option purchased by the Fund, the Fund could experience a loss of all or
part of the value of the option. Transactions are entered into by the Fund only
with brokers or financial institutions deemed creditworthy by the Investment
Manager and the Sub-Advisor.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
17
<PAGE>
INTEREST RATE FUTURES CONTRACTS. As a purchaser of an interest rate futures
contract ("futures contract"), the Fund incurs an obligation to take delivery of
a specified amount of the obligation underlying the futures contract at a
specified time in the future for a specified price. As a seller of a futures
contract, the Fund incurs an obligation to deliver the specified amount of the
underlying obligation at a specified time in return for an agreed upon price.
The Fund will purchase or sell futures contracts for the purpose of hedging
its portfolio (or anticipated portfolio) securities against changes in
prevailing interest rates. If the Investment Manager and the Sub-Advisor
anticipate that interest rates may rise and, concomitantly, the price of U.S.
Government or other debt securities fall, the Fund may sell a futures contract.
If declining interest rates are anticipated, the Fund may purchase a futures
contract to protect against a potential increase in the price of U.S. Government
or other debt securities the Fund intends to purchase. Subsequently, appropriate
U.S. Government or other debt securities may be purchased by the Fund in an
orderly fashion; as securities are purchased, corresponding futures positions
would be terminated by offsetting sales of contracts. In addition, futures
contracts will be bought or sold in order to close out a short or long position
in a corresponding futures contract.
As discussed in the Prospectus, the Fund may invest in Mortgage-Backed
Securities, such as floating rate CMOs or adjustable rate Mortgage-Backed
Securities, which have interest rates subject to periodic adjustment based on
changes to a designated index. One index which may serve as such a benchmark is
the London Interbank Offered Rate, or LIBOR. In order for the Fund to hedge its
exposure to fluctuations in short-term interest rates for its portfolio
securities subject to the LIBOR rate, the Fund may purchase or sell futures
contracts on U.S. dollar denominated Eurodollar instruments linked to the LIBOR
rate.
Although most futures contracts call for actual delivery or acceptance of
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. A futures contract sale is closed out
by effecting a futures contract purchase for the same aggregate amount of the
specific type of security and the same delivery date. If the sale price exceeds
the offsetting purchase price, the seller would be paid the difference and would
realize a gain. If the offsetting purchase price exceeds the sale price, the
seller would pay the difference and would realize a loss. Similarly, a futures
contract purchase is closed out by effecting a futures contract sale for the
same aggregate amount of the specific type of security and the same delivery
date. If the offsetting sale price exceeds the purchase price, the purchaser
would realize a gain, whereas if the purchase price exceeds the offsetting sale
price, the purchaser would realize a loss. There is no assurance that the Fund
will be able to enter into a closing transaction.
When the Fund enters into a futures contract it is initially required to
deposit with its Custodian, in a segregated account in the name of the broker
performing the transaction an "initial margin" of cash or U.S. Government
securities equal to approximately 2-3% of the contract amount. Initial margin
requirements are established by the Exchanges on which futures contracts trade
and may, from time to time, change. In addition, brokers may establish margin
deposit requirements in excess of those required by the Exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a brokers' client but is, rather, a good faith deposit on the futures
contract which will be returned to the Fund upon the proper termination of the
futures contract. The margin deposits made are marked to market daily and the
Fund may be required to make subsequent deposits into the segregated account,
maintained at its Custodian for that purpose, of cash or U.S. Government
securities, called "variation margin", in the name of the broker, which are
reflective of price fluctuations in the futures contract. Currently, interest
rate futures contracts can be purchased on debt securities such as U.S. Treasury
Bills and Bonds, Eurodollar instruments, U.S. Treasury Notes with Maturities
between 6 1/2 and 10 years, GNMA Certificates and Bank Certificates of Deposit.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase call and put options on
futures contracts which are traded on an Exchange and enter into closing
transactions with respect to such options to
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terminate an existing position. An option on a futures contract gives the
purchaser the right (in return for the premium paid), and the writer the
obligation, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option is accompanied by delivery of the accumulated balance in
the writer's futures margin account, which represents the amount by which the
market price of the futures contract at the time of exercise exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.
The Fund will purchase options on futures contracts for identical purposes
to those set forth above for the purchase of a futures contract (purchase of a
call option or sale of a put option) and the sale of a futures contract
(purchase of a put option or sale of a call option), or to close out a long or
short position in futures contracts. If, for example, the Investment Manager and
the Sub-Advisor wished to protect against an increase in interest rates and the
resulting negative impact on the value of a portion of its U.S. Government
securities portfolio, it might purchase a put option on an interest rate futures
contract, the underlying security of which correlates with the portion of the
portfolio the Investment Manager seeks to hedge.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Fund may not
enter into futures contracts or purchase related options thereon if, immediately
thereafter, the amount committed to margin plus the amount paid for premiums for
unexpired options on futures contracts exceeds 5% of the value of the Fund's
total assets, after taking into account unrealized gains and unrealized losses
on such contracts it has entered into, provided, however, that in the case of an
option that is in-the-money (the exercise price of the call (put) option is less
(more) than the market price of the underlying security) at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%.
However, there is no overall limitation on the percentage of the Fund's assets
which may be subject to a hedge position.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. As stated
in the Prospectus, the Fund may sell a futures contract to protect against the
decline in the value of U.S. Government securities held by the Fund. However, it
is possible that the futures market may advance and the value of securities held
in the Fund's portfolio may decline. If this were to occur, the Fund would lose
money on the futures contracts and also experience a decline in value in its
portfolio securities. However, while this could occur for a very brief period or
to a very small degree, over time the market prices of the securities of a
diversified portfolio will tend to move in the same direction as the prices of
futures contracts.
If the Fund purchases a futures contract to hedge against the increase in
value of U.S. Government securities it intends to buy, and the value of such
securities decreases, then the Fund may determine not to invest in the
securities as planned and will realize a loss on the futures contract that is
not offset by a reduction in the price of the securities.
If the Fund maintains a short position in a futures contract, it will cover
this position by holding, in a segregated account maintained at its Custodian,
cash, U.S. Government securities or other high grade debt obligations equal in
value (when added to any initial or variation margin on deposit) to the market
value of the securities underlying the futures contract. Such a position may
also be covered by owning the securities underlying the futures contract, or by
holding a call option permitting the Fund to purchase the same contract at a
price no higher than the price at which the short position was established.
In addition, if the Fund holds a long position in a futures contract, it
will hold cash, U.S. Government securities or other high grade debt obligations
equal to the purchase price of the contract (less the amount of initial or
variation margin on deposit) in a segregated account maintained for the Fund by
its Custodian. Alternatively, the Fund could cover its long position by
purchasing a put option on the same futures contract with an exercise price as
high or higher than the price of the contract held by the Fund.
Exchanges limit the amount by which the price of a futures contract may move
on any day. If the price moves equal the daily limit on successive days, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, the Fund
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<PAGE>
would continue to be required to make daily cash payments of variation margin on
open futures positions. In such situations, if the Fund has insufficient cash,
it may have to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In addition, the
Fund may be required to take or make delivery of the instruments underlying
interest rate futures contracts it holds at a time when it is disadvantageous to
do so. The inability to close out options and futures positions could also have
an adverse impact on the Fund's ability to effectively hedge its portfolio.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
Transactions are entered into by the Fund only with broker or financial
institutions deemed creditworthy by the Investment Manager and the Sub-Advisor.
While the futures contracts and options transactions to be engaged in by the
Fund for the purpose of hedging the Fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such instruments.
One such risk which may arise in employing futures contracts to protect against
the price volatility of portfolio securities is that the prices of securities
subject to futures contracts (and thereby the futures contract prices) may
correlate imperfectly with the behavior of the cash prices of the Fund's
portfolio securities. Another such risk is that prices of interest rate futures
contracts may not move in tandem with the changes in prevailing interest rates
against which the Fund seeks a hedge. A correlation may also be distorted by the
fact that the futures market is dominated by short-term traders seeking to
profit from the difference between a contract or security price objective and
their cost of borrowed funds. Such distortions are generally minor and would
diminish as the contract approached maturity.
As stated in the Prospectus, there may exist an imperfect correlation
between the price movements of futures contracts purchased by the Fund and the
movements in the prices of the securities which are the subject of the hedge. If
participants in the futures market elect to close out their contracts through
offsetting transactions rather than meet margin deposit requirements,
distortions in the normal relationships between the debt securities and futures
market could result. Price distortions could also result if investors in futures
contracts opt to make or take delivery of underlying securities rather than
engage in closing transactions due to the resultant reduction in the liquidity
of the futures market. In addition, due to the fact that, from the point of view
of speculators, the deposit requirements in the futures markets are less onerous
than margin requirements in the cash market, increased participation by
speculators in the futures market could cause temporary price distortions. Due
to the possibility of price distortions in the futures market and because of the
imperfect correlation between movements in the prices of U.S. Government
securities and movements in the prices of futures contracts, a correct forecast
of interest rate trends by the Investment Manager may still not result in a
successful hedging transaction.
There is no assurance that a liquid secondary market will exist for futures
contracts and related options in which the Fund may invest. In the event a
liquid market does not exist, it may not be possible to close out a futures
position, and in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin. In addition,
limitations imposed by an exchange or board of trade on which futures contracts
are traded may compel or prevent the Fund from closing out a contract which may
result in reduced gain or increased loss to the Fund. The absence of a liquid
market in futures contracts might cause the Fund to make or take delivery of the
underlying securities at a time when it may be disadvantageous to do so.
Compared to the purchase or sale of futures contracts, the purchase of call
or put options on futures contracts involves less potential risk to the Fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a futures contract would result in a loss to the Fund
notwithstanding that the purchase or sale of a futures contract would not result
in a loss, as in the instance where there is no movement in the prices of the
futures contracts or underlying U.S. Government securities.
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<PAGE>
REPURCHASE AGREEMENTS
When cash may be available for only a few days, it may be invested by the
Fund in repurchase agreements until such time as it may otherwise be invested or
used for payments of obligations of the Fund. These agreements, which may be
viewed as a type of secured lending by the Fund, typically involve the
acquisition by the Fund of debt securities from a selling financial institution
such as a bank, savings and loan association or broker-dealer. The agreement
provides that the Fund will sell back to the institution, and that the
institution will repurchase, the underlying security ("collateral") at a
specified price and at a fixed time in the future, usually not more than seven
days from the date of purchase. The collateral will be maintained in a
segregated account and will be marked to market daily to determine that the
value of the collateral, as specified in the agreement, does not decrease below
the purchase price plus accrued interest. If such decrease occurs, additional
collateral will be requested and, when received, added to the account to
maintain full collateralization. The Fund will accrue interest from the
institution until the time when the repurchase is to occur. Although such date
is deemed by the Fund to be the maturity date of a repurchase agreement, the
maturities of securities subject to repurchase agreements are not subject to any
limits.
While repurchase agreements involve certain risks not associated with direct
investment in debt securities, the Fund follows procedures designed to minimize
such risks. These procedures include effecting repurchase transactions only with
large, well-capitalized and well-established financial institutions whose
financial condition will be continually monitored by the Investment Manager and
Sub-Advisor subject to procedures established by the Board of Trustees of the
Fund. In addition, as described above, the value of the collateral underlying
the repurchase agreement will be at least equal to the repurchase price,
including any accrued interest earned on the repurchase agreement. In the event
of a default or bankruptcy by a selling financial institution, the Fund will
seek to liquidate such collateral. However, the exercising of the Fund's right
to liquidate such collateral could involve certain costs or delays and, to the
extent that proceeds from any sale upon a default of the obligation to
repurchase were less than the repurchase price, the Fund could suffer a loss. It
is the current policy of the Fund not to invest in repurchase agreements that do
not mature within seven days if any such investment, together with any other
illiquid assets held by the Fund, amounts to more than 10% of its total assets.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
As discussed in the Prospectus, from time to time, in the ordinary course of
business, the Fund may purchase securities on a when-issued or delayed delivery
basis -- i.e., delivery and payment can take place a month or more after the
date of the transactions. The securities so purchased are subject to market
fluctuation and no interest accrues to the purchaser during this period. While
the Fund will only purchase securities on a when-issued, delayed delivery or
forward commitment basis with the intention of acquiring the securities, the
Fund may sell the securities before the settlement date, if it is deemed
advisable. At the time the Fund makes the commitment to purchase securities on a
when-issued or delayed delivery basis, the Fund will record the transaction and
thereafter reflect the value, each day, of such security in determining the net
asset value of the Fund. At the time of delivery of the securities, the value
may be more or less than the purchase price. The Fund will also establish a
segregated account with the Fund's custodian bank in which it will continuously
maintain cash, U.S. Government securities or other high grade debt portfolio
securities equal in value to commitments for such when-issued or delayed
delivery securities; subject to this requirement, the Fund may purchase
securities on such basis without limit. An increase in the percentage of the
Fund's assets committed to the purchase of securities on a when-issued or
delayed delivery basis may increase the volatility of the Fund's net asset
value. The Investment Manager and the Sub-Advisor and the Board of Trustees do
not believe that the Fund's net asset value or income will be adversely affected
by its purchase of securities on such basis.
PORTFOLIO TURNOVER
The Fund may sell portfolio securities without regard to the length of time
they have been held whenever such sale will, in the opinions of the Investment
Manager and the Sub-Advisor, strengthen the Fund's position and contribute to
its investment objective. As a result of the Fund's investment objective
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<PAGE>
and policies, and the nature of the Mortgage-Backed Securities and Asset-Backed
Securities markets, the Fund's portfolio turnover rate may exceed 200%. During
the fiscal years ended October 31, 1994 and 1995, the Fund's portfolio turnover
rates were 393% and 366%, respectively.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
In addition to the investment restrictions enumerated in the Prospectus, the
investment restrictions listed below have been adopted by the Fund as
fundamental policies, except as otherwise indicated. Under the Act, a
fundamental policy may not be changed without the vote of a majority of the
outstanding voting securities of the Fund, as defined in the Act. Such a
majority is defined as the lesser of (a) 67% or more of the shares present at a
meeting of shareholders, if the holders of 50% of the outstanding shares of the
Fund are present or represented by proxy or (b) more than 50% of the outstanding
shares of the Fund.
The Fund may not:
1. Purchase or sell real estate or interests therein (including limited
partnership interests), although the Fund may purchase securities of issuers
which engage in real estate operations and securities secured by real estate
or interests therein.
2. Purchase oil, gas or other mineral leases, rights or royalty
contracts, or exploration or development programs, except that the Fund may
invest in the securities of companies which operate, invest in, or sponsor
such programs.
3. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets. For this purpose, Mortgage-Backed Securities and Asset-Backed
Securities are not deemed to be investment companies.
4. Issue senior securities as defined in the Act, except insofar as the
Fund may be deemed to have issued a senior security by reason of: (a)
entering into any reverse repurchase agreement or dollar roll; (b) borrowing
money or other leveraging; or (c) purchasing any securities on a when-
issued, delayed delivery or forward commitment basis.
5. Make loans of money or securities, except: (a) by the purchase of
portfolio securities in which the Fund may invest consistent with its
investment objective and policies; (b) by investment in repurchase or
reverse purchase agreements; or (c) by lending its portfolio securities.
6. Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security.
7. Invest for the purpose of exercising control or management of any
other issuer.
8. Make short sales of securities or maintain a short position.
9. Invest in securities of any issuer if, to the knowledge of the Fund,
any officer or trustee of the Fund, or any officer, director or partner of
the Investment Manager or Sub-Advisor owns more than 1/2 of 1% of the
outstanding voting securities of such issuer, and such officers, trustees
and directors who own more than 1/2 of 1% own in the aggregate more than 5%
of the outstanding voting securities of such issuers.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of total or net assets will not be considered a
violation of the foregoing restrictions.
PORTFOLIO TRANSACTIONS AND BROKERAGE
- --------------------------------------------------------------------------------
Subject to the general supervision of the Trustees of the Fund, the
Investment Manager and the Sub-Advisor are responsible for the investment
decisions and the placing of the orders for portfolio transactions for the Fund.
The Fund's portfolio transactions will occur primarily with issuers,
underwriters or major dealers acting as principals. Such transactions are
normally on a net basis and do not involve
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<PAGE>
payment of brokerage commissions. The cost of securities purchased from an
underwriter usually includes a commission paid by the issuer to the
underwriters; transactions with dealers normally reflect the spread between bid
and asked prices. Options and futures transactions will usually be effected
through a broker and a commission will be charged. During the fiscal years ended
October 31, 1995, 1994 and 1993, the Fund did not pay any brokerage commissions.
The Investment Manager and the Sub-Advisor currently serve as investment
manager to a number of clients, including other investment companies, and may in
the future act as investment manager or adviser to others. It is the practice of
the Investment Manager and the Sub-Advisor to cause purchase or sale
transactions to be allocated among the Fund and others whose assets it manages
in such manner as it deems equitable. In making such allocations among the Fund
and other client accounts, the main factors considered are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the Fund and other client accounts.
The policy of the Fund regarding purchases and sales of securities and
futures contracts for its portfolio is that primary consideration will be given
to obtaining the most favorable prices and efficient execution of transactions.
In seeking to implement the Fund's policies, the Investment Manager and the
Sub-Advisor effect transactions with those brokers and dealers who the
Investment Manager and the Sub-Advisor believe provide the most favorable prices
and are capable of providing efficient executions. If the Investment Manager or
the Sub-Advisor believes such price and execution are obtainable from more than
one broker or dealer, it may give consideration to placing portfolio
transactions with those brokers and dealers who also furnish research and other
services to the Fund or the Investment Manager and/or the Sub-Advisor. Such
services may include, but are not limited to, any one or more of the following:
information as to the availability of securities for purchase or sale;
statistical or factual information or opinions pertaining to investment; wire
services; and appraisals or evaluations of portfolio securities.
The information and services received by the Investment Manager and the
Sub-Advisor from brokers and dealers may be of benefit to the Investment Manager
and the Sub-Advisor in the management of accounts of some of its other clients
and may not in all cases benefit the Fund directly. While the receipt of such
information and services is useful in varying degrees and would generally reduce
the amount of research or services otherwise performed by the Investment Manager
and the Sub-Advisor and thereby reduce its expenses, it is of indeterminable
value and the fees paid to the Investment Manager and the Sub-Advisor are not
reduced by any amount that may be attributable to the value of such services.
Pursuant to an order of the Securities and Exchange Commission, the Fund may
effect principal transactions in certain money market instruments with DWR. The
Fund will limit its transactions with DWR to U.S. Government and Government
Agency Securities, Bank Money Instruments (I.E., Certificates of Deposit and
Bankers' Acceptances) and Commercial Paper. Such transactions will be effected
with DWR only when the price available from DWR is better than that available
from other dealers. During the fiscal year ended October 31, 1995, the Fund did
not effect any principal transactions with DWR.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may be
effected through DWR. In order for DWR to effect portfolio transactions for the
Fund, the commissions, fees or other remuneration received by DWR must be
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers in connection with comparable transactions involving similar
securities being purchased or sold on an exchange during a comparable period of
time. This standard would allow DWR to receive no more than the remuneration
which would be expected to be received by an unaffiliated broker in a
commensurate arm's-length transaction. Furthermore, the Trustees of the Fund,
including a majority of the Trustees who are not "interested" Trustees, have
adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to DWR are consistent with the
foregoing standard.
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THE DISTRIBUTOR
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As discussed in the Prospectus, shares of the Fund are distributed by Dean
Witter Distributors Inc. (the "Distributor"). The Distributor has entered into a
selected dealer agreement with DWR, which through its own sales organization
sells shares of the Fund. In addition, the Distributor may enter into selected
dealer agreements with other selected broker-dealers. The Distributor, a
Delaware corporation, is a wholly-owned subsidiary of DWDC. The Trustees of the
Fund, including a majority of the Trustees who are not, and were not at the time
they voted, interested persons of the Fund, as defined in the Act (the
"Independent Trustees"), approved, at their meeting held on October 30, 1992,
the current Distribution Agreement appointing the Distributor as exclusive
distributor of the Fund's shares and providing for the Distributor to bear
distribution expenses not borne by the Fund. The current Distribution Agreement
took effect on June 30, 1993, upon the spin-off by Sears, Roebuck and Co. of its
remaining shares of DWDC. The current Distribution Agreement is substantively
identical to the Fund's previous distribution agreement in all material
respects, except for the dates of effectiveness. By its terms, the Distribution
Agreement had an initial term ending April 30, 1994, and provides that it will
remain in effect from year to year thereafter if approved by the Trustees,
including a majority of the Independent Trustees.
The Distributor bears all expenses it may incur in providing services under
the Distribution Agreement. Such expenses include the payment of commissions for
sales of the Fund's shares and incentive compensation to account executives. The
Distributor also pays certain expenses in connection with the distribution of
the Fund's shares, including the costs of preparing, printing and distributing
advertising or promotional materials, and the costs of printing and distributing
prospectuses and supplements thereto used in connection with the offering and
sale of the Fund's shares. The Fund bears the costs of initial typesetting,
printing and distribution of prospectuses and supplements thereto to
shareholders. The Fund also bears the costs of registering the Fund and its
shares under federal and state securities laws. The Fund and the Distributor
have agreed to indemnify each other against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. Under the Distribution
Agreement, the Distributor uses its best efforts in rendering services to the
Fund, but in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations, the Distributor is not liable to the Fund
or any of its shareholders for any error of judgment or mistake of law or for
any act or omission or for any losses sustained by the Fund or its shareholders.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Act (the "Plan"). The Plan was approved by the Trustees on April 16, 1991, and
by DWR as the Fund's then sole shareholder on May 15, 1991 and by the
shareholders holding a majority, as defined in the Act, of the outstanding
voting securities of the Fund at a Special Meeting of Shareholders of the Fund
held on June 29, 1992. The vote of the Trustees, which was cast in person at a
meeting called for the purpose of voting on such Plan, included a majority of
the Trustees who are not and were not at the time of their voting interested
persons of the Fund and who have and had at the time of their votes no direct or
indirect financial interest in the operation of the Plan (the "Independent 12b-1
Trustees"). In making their decision to adopt the Plan, the Trustees requested
from DWR and received such information as they deemed necessary to make an
informed determination as to whether or not adoption of the Plan was in the best
interests of the shareholders of the Fund. After due consideration of the
information received, the Trustees, including the Independent 12b-1 Trustees,
determined that adoption of the Plan would benefit the shareholders of the Fund.
At their meeting held on October 30, 1992, the Trustees of the Fund, including
all of the independent 12b-1 Trustees, approved certain amendments to the Plan
which took effect in January, 1993 and were designed to reflect the fact that
upon the reorganization described above, the share distribution activities
theretofore performed for the Fund by DWR were assumed by the Distributor and
DWR's sales activities are now being performed pursuant to the terms of a
selected dealer agreement between the Distributor and DWR. The amendments
provide that payments under the Plan will be made to the Distributor rather than
to DWR as before the amendment, and that the Distributor in turn is authorized
to
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<PAGE>
make payments to DWR, its affiliates or other selected broker-dealers (or direct
that the Fund pay such entities directly). The Distributor is also authorized to
retain part of such fee as compensation for its own distribution-related
expenses.
The Fund is authorized to reimburse the Distributor for specific expenses
the distributor incurs or plans to incur in promoting the distribution of the
Fund's shares. Reimbursement is made through monthly payments in amounts
determined in advance of each fiscal quarter by the Trustees, including a
majority of the Independent 12b-1 Trustees. The amount of each monthly payment
may 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 shares of the Fund during the
month. Such payment is treated by the Fund as an expense in the year it is
accrued. No interest or other financing charges will be incurred by the
Distributor for which reimbursement payments under the Plan will be made. In
addition, no interest charges, if any, incurred on any distribution expense
incurred by the Distributor pursuant to the Plan, will be reimbursable under the
Plan.
The Distributor has informed the Fund that the fee payable by the Fund each
year pursuant to the Plan not to exceed to 0.20% of the Fund's average daily net
assets is characterized as a "service fee" under the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. (of which the Distributor
is a member). The fee is a payment made for personal service and/or the
maintenance of shareholder accounts.
Under the Plan, the Distributor uses its best efforts in rendering services
to the Fund, but in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations, the Distributor is not
liable to the Fund or any of its shareholders for any error of judgment or
mistake of law or for any act or omission or for any losses sustained by the
Fund or its shareholders.
For the fiscal year ended October 31, 1995, the Fund paid a total of $64,994
pursuant to the Plan. Such payment amounted to an annual rate of 0.18% of the
Fund's average daily net assets for such fiscal period. It is estimated that the
amount paid by the Fund for distribution was for expenses which relate to
compensation of sales personnel and associated overhead expenses. The
Distributor has informed the Fund that it received sales charges on sales of the
Fund's shares in the approximate amounts of $224,000, $19,200 and $6,600 for the
fiscal years ended 1993, 1994 and 1995, respectively.
The Plan has an initial term which ended April 30, 1992, and provides that
from year to year thereafter it will continue in effect, provided such
continuance is approved annually by a vote of the Trustees, including a majority
of the Independent 12b-1 Trustees. Most recent continuance of the Plan for one
year, until April 30, 1994, was approved by the Board of Trustees of the Fund,
including a majority of the Independent 12b-1 Trustees, at a Board meeting held
on April 28, 1993. At that meeting, the Trustees, including a majority of the
Independent 12b-1 Trustees, also approved certain technical amendments to the
Plan in connection with recent amendments adopted by the National Association of
Securities Dealers, Inc. to its Rules of Fair Practice. Prior to approving the
continuation of the Plan, the Trustees requested and received from the
Distributor and reviewed all the information which they deemed necessary to
arrive at an informed determination. In making their determination to continue
the Plan, the Trustees considered: (1) the Fund's experience under the Plan and
whether such experience indicates that the Plan is operating as anticipated: (2)
the benefits the Fund had obtained, was obtaining and would be likely to obtain
under the Plan; and (3) what services had been provided and were continuing to
be provided under the Plan to the Fund and its shareholders. Based upon their
review, the Trustees of the Fund, including each of the independent 12b-1
Trustees, determined that continuation of the Plan would be in the best interest
of the Fund and would have a reasonable likelihood of continuing to benefit the
Fund and its shareholders. In the Trustees' quarterly review of the Plan, they
will consider its continued appropriateness and the level of compensation
provided herein. An amendment to increase materially the maximum amount
authorized to be spent under the Plan and Agreement on behalf of the Fund must
be approved by the shareholders of the Fund, and all material amendments to the
Plan must be approved by the Trustees in the manner described above. The Plan
may be terminated on behalf of the Fund at any time, without payment of any
penalty, by vote of the holders of a majority of the
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Independent 12b-1 Trustees or by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the Act) on not more than 30 days written
notice to any other party to the Plan. So long as the Plan is in effect, the
selection or nomination of the Independent 12b-1 Trustees is committed to the
discretion of the Independent 12b-1 Trustees.
Under the Plan, the Distributor provides the Fund, for review by the
Trustees, and the Trustees review, promptly after the end of each fiscal
quarter, a written report regarding the incremental distribution expenses
incurred by the Distributor on behalf of the Fund during such fiscal quarter,
which report includes (1) an itemization of the types of expenses and the
purposes therefor; (2) the amounts of such expenses; and (3) a description of
the benefits derived by the Fund. In the Trustees' quarterly review of the Plan
they consider its continued appropriateness and the level of compensation
provided therein.
No interested person of the Fund nor any Trustee of the Fund who is not an
interested person of the Fund, as defined in the Act, had any direct or indirect
financial interest in the operation of the Plan except to the extent that the
Investment Manager or certain of its employees may be deemed to have such an
interest as a result of benefits derived from the successful operation of the
Plan or as a result of receiving a portion of the amounts expended thereunder by
the Fund.
REDUCED SALES CHARGE
RIGHT OF ACCUMULATION. As discussed in the Prospectus, investors may
combine the current value of shares purchased in separate transactions for
purposes of benefitting from the reduced sales charges available for purchases
of shares of the Fund totalling at least $100,000 in net asset value. For
example, if any person or entity who qualifies for this privilege holds shares
of the Fund having a current value of $25,000 and purchases $75,000 of
additional shares of the Fund, the sales charge applicable to the $75,000
purchase would be 2.50% of the offering price.
The Distributor must be notified by the dealer or 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 dealer or 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 Dean Witter Trust Company (the "Transfer Agent") fails to confirm
the investor's represented holdings.
LETTER OF INTENT. As discussed in the prospectus under the caption "Reduced
Sales Charges," reduced sales charges are 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 or from a single dealer which
has entered into a Selected Dealer Agreement with the Distributor.
A Letter of Intent permits an investor to establish a total investment goal
to be achieved by any number of purchases over a thirteen-month period. Each
purchase made during the period will receive the reduced sales commission
applicable to the amount represented by the goal, as if it were a single
purchase. A number of shares equal in value to 5% of the dollar amount of the
Letter of Intent will be held in escrow by the Transfer Agent, in the name of
the shareholder. The initial purchase under a Letter of Intent must be equal to
at least 5% of the stated investment goal.
The Letter of Intent does not obligate the Investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the investor is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and sales charges actually paid. Such payment may be
made directly to the Distributor or, if not paid, the Distributor is authorized
by the shareholder to liquidate a sufficient number of his or her escrowed
shares to obtain such difference.
If the goal is exceeded and purchases pass the next sales charge level, the
sales charge on the entire amount of the purchase that results in passing that
level and on subsequent purchases will be subject to further reduced sales
charges in the same manner as set forth above under RIGHT OF ACCUMULATION, but
there will be no retroactive reduction of sales charges on previous purchases.
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At any time while a Letter of Intent is in effect, a shareholder may, by
written notice to the Distributor, increase the amount of the stated goal. In
that event, only shares purchased during the previous 90-day period and still
owned by the shareholder will be included in the new sales charge reduction. The
5% escrow and minimum purchase requirements will be applicable to the new stated
goal. Investors electing to purchase shares of the Fund pursuant to a Letter of
Intent should carefully read such Letter of Intent.
DETERMINATION OF NET ASSET VALUE
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As stated in the Prospectus, short-term debt securities with remaining
maturities of sixty days or less at the time of purchase are valued at amortized
cost, unless the Trustees determine such does not reflect the securities' market
value, in which case these securities will be valued at their fair value as
determined by the Trustees. Other short-term debt securities will be valued on a
mark-to-market basis until such time as they reach a remaining maturity of sixty
days, whereupon they will be valued at amortized cost using their value on the
61st day unless the Trustees determine such does not reflect the securities'
market value, in which case these securities will be valued at their fair value
as determined by the Trustees. Listed options are valued at the latest sale
price on the exchange on which they are listed unless no sales of such options
have taken place that day, in which case they will be valued at the mean between
their latest bid and asked prices. Unlisted options are valued at the mean
between their latest bid and asked prices. Futures are valued at the latest sale
price on the commodities exchange on which they trade unless the Trustees
determine such price does not reflect their market value, in which case they
will be valued at their fair value as determined by the Trustees. All other
securities and other assets are valued at their fair value as determined in good
faith under procedures established by and under the supervision of the Trustees.
The net asset value per share of the Fund is determined once daily at 4:00
p.m., New York time on each day that the New York Stock Exchange is open or, on
days when the New York Stock Exchange closes prior to 4:00 p.m., at such earlier
time and on each other day in which there is a sufficient degree of trading in
the Fund's investments to affect the net asset value, except that the net asset
value may not be computed on a day on which no orders have been received to
purchase, or tenders to sell or redeem, Fund shares, by taking the value of all
assets of the Fund, subtracting its liabilities, dividing by the number of
shares outstanding and adjusting to the nearest cent. The New York Stock
Exchange currently observes the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
SHAREHOLDER SERVICES
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Upon the purchase of shares of the Fund, a Shareholder Investment Account is
opened for the investor on the books of the Fund and maintained by Dean Witter
Trust Company (the "Transfer Agent"). This is an open account in which shares
owned by the investor are credited by the Transfer Agent in lieu of issuance of
a share certificate. If a share certificate is desired, it must be requested in
writing for each transaction. Certificates are issued only for full shares and
may be redeposited in the account at any time. There is no charge to the
investor for issuance of a certificate. Whenever a transaction takes place in
the Shareholder Investment Account, the shareholder will be mailed a
confirmation of the transaction from the Fund or from DWR or another selected
broker-dealer.
INVESTMENT OF DIVIDENDS OR DISTRIBUTIONS RECEIVED IN CASH. Any shareholder
who receives a cash payment representing a dividend or distribution may invest
such dividend or distribution at the net asset value next determined after
receipt by the Transfer Agent, without the imposition of a sales charge, by
returning the check or the proceeds to the Transfer Agent within thirty days
after the payment date. If the shareholder returns the proceeds of a dividend or
distribution, such funds must be accompanied by a signed statement indicating
that the proceeds constitute a dividend or distribution to be invested. Such
investment will be made at the net asset value per share next determined after
receipt of the check or proceeds by the Transfer Agent.
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<PAGE>
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan (the "Withdrawal
Plan") is available for shareholders who own or purchase shares of the Fund
having a minimum value of $10,000 based upon the then current offering price.
The Withdrawal Plan provides for monthly or quarterly (March, June, September
and December) checks in any dollar amount, not less than $25 or in any whole
percentage of the account balance, on an annualized basis.
The Transfer Agent acts as agent for the shareholder in tendering to the
Fund for redemption sufficient full and fractional shares to provide the amount
of the periodic withdrawal payment designated in the application. The shares
will be redeemed at their net asset value determined, at the shareholder's
option, on the tenth or twenty-fifth day (or next following business day) of the
relevant month or quarter and normally a check for the proceeds will be mailed
by the Transfer Agent within five business days after the date of redemption.
The Withdrawal Plan may be terminated at any time by the Fund.
Withdrawal plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted.
Each withdrawal constitutes a redemption of shares and any gain or loss
realized must be recognized for federal income tax purposes. Although the
shareholder may make additional investments of $2,500 or more under the
Systematic Withdrawal Plan, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the sales charges applicable to the
purchase of additional shares.
Any shareholder who wishes to have payments under the Withdrawal Plan made
to a third party or sent to an address other than the one listed on the account
must send complete written instructions to the Transfer Agent to enroll in the
Withdrawal Plan. The shareholder's signature on such instructions must be
guaranteed by an eligible guarantor acceptable to the Transfer Agent
(shareholders should contact the Transfer Agent for a determination as to
whether a particular institution is such an eligible guarantor). A shareholder
may, at any time, change the amount and interval of withdrawal payments through
his or her Account Executive or by written notification to the Transfer Agent.
In addition, the party and/or the address to which checks are mailed may be
changed by written notification to the Transfer Agent, with signature guarantees
required in the manner described above. The shareholder may also terminate the
Withdrawal Plan at any time by written notice to the Transfer Agent. In the
event of such termination, the account will be continued as a regular
shareholder investment account. The shareholder may also redeem all or part of
the shares held in the Withdrawal Plan account (see "Redemptions and
Repurchases" in the Prospectus) at any time.
DIRECT INVESTMENTS THROUGH TRANSFER AGENT. As discussed in the Prospectus,
a shareholder may make additional investments in Fund shares at any time by
sending a check in any amount, not less than $100, payable to Dean Witter
Premier Income Trust, directly to the Fund's Transfer Agent. Such amounts will
be applied to the purchase of Fund shares at the net asset value per share next
computed after receipt of the check or purchase payment by the Transfer Agent.
The shares so purchased will be credited to the investor's account.
EXCHANGE PRIVILEGE. As discussed in the Prospectus, the Fund makes
available to its shareholders an Exchange Privilege whereby shareholders of the
Fund may exchange their shares for shares of other Dean Witter FESC Funds, for
shares of Dean Witter CDSC Funds, and for shares of Dean Witter Short-Term U.S.
Treasury Trust, Dean Witter Limited Term Municipal Trust, Dean Witter Short-Term
Bond Fund, Dean Witter Balanced Growth Fund, Dean Witter Balanced Income Fund,
Dean Witter Intermediate Term U.S. Treasury Trust, and five Dean Witter Funds
which are money market funds (the foregoing eleven non-CDSC funds are
hereinafter referred to as the "Exchange Funds"). Exchanges may be made after
the shares of the CDSC fund or FESC fund acquired by purchase (not by exchange
or dividend reinvestment) have been held for thirty days. There is no holding
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
28
<PAGE>
those shares for shares of other CDSC funds or Exchange Funds but may not
reacquire FESC fund shares by exchange. An exchange will be treated for federal
income tax purposes the same as a repurchase or redemption of shares, on which
the shareholder may realize a capital gain or loss.
Any new account established through the Exchange Privilege will have the
same registration and cash dividend or dividend reinvestment plan as the present
account, unless the Transfer Agent receives written notification to the
contrary. For telephone exchanges, the exact registration of the existing
account and the account number must be provided.
Any shares held in certificate form cannot be exchanged but must be
forwarded to the Transfer Agent and deposited into the shareholder's account
before being eligible for exchange. (Certificates mailed in for deposit should
not be endorsed).
The Transfer Agent acts as agent for shareholders of the Fund in effecting
redemptions of Fund shares and in applying the proceeds to the purchase of other
fund shares. In the absence of negligence on its part, neither the Transfer
Agent nor the Fund shall be liable for any redemption of Fund shares caused by
unauthorized telephone instructions. Accordingly, in such event, the investor
shall bear the risk of loss. The staff of the Securities and Exchange Commission
is currently considering the propriety of such a policy.
With respect to the redemption or repurchase of shares of the Fund, the
application of proceeds to the purchase of new shares in the Fund or any other
of the funds and the general administration of the Exchange Privilege, the
Transfer Agent acts as agent for the Distributor and for the shareholder's
selected broker-dealer, if any, in the performance of such functions. The
Transfer Agent shall be liable for its own negligence and not for the default or
negligence of its correspondents or for losses in transit. The Fund shall not be
liable for any default or negligence of the Transfer Agent, the Distributor or
any selected broker-dealer.
The Distributor and any selected broker-dealer have authorized and appointed
the Transfer Agent to act as their agent in connection with the application of
proceeds of any redemption of Fund shares to the purchase of shares of any other
fund and the general administration of the Exchange Privilege. No commission or
discounts will be paid to the Distributor or any selected broker-dealer for any
transactions pursuant to this Exchange Privilege.
Exchanges are subject to the minimum investment requirement and any other
conditions imposed by each fund. (The minimum initial investment is $5,000 for
Dean Witter Liquid Asset Fund Inc., Dean Witter Tax-Free Daily Income Trust,
Dean Witter New York Municipal Money Market Trust and Dean Witter California
Tax-Free Daily Income Trust, although those funds may, at their discretion,
accept initial investments of as low as $1,000. The minimum initial investment
for Dean Witter Short-Term U.S. Treasury Trust is $10,000, although that fund,
in its discretion, may accept initial investments of as low as $5,000. The
minimum initial investment for all other Dean Witter Funds for which the
Exchange Privilege is available is $1,000.) Upon exchange into an Exchange Fund,
the shares of that fund will be held in a special Exchange Privilege Account
separately from accounts of those shareholders who have acquired their shares
directly from that fund. As a result, certain services normally available to
shareholders of those funds, including the check writing feature, will not be
available for funds held in that account.
The Fund and each of the other Dean Witter Funds may limit the number of
times this Exchange Privilege may be exercised by any investor within a
specified period of time. Also, the Exchange Privilege may be terminated or
revised at any time by the Fund and/or any of the Dean Witter Funds for which
shares of the Fund have been exchanged, upon such notice as may be required by
applicable regulatory agencies (presently sixty days prior written notice for
termination or material revision), provided that six months' prior written
notice of termination will be given to the shareholders who hold shares of an
Exchange Fund pursuant to the Exchange Privilege and provided further that the
Exchange Privilege may be terminated or materially revised without notice at
times (a) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (b) when trading on that Exchange is restricted, (c) when
an emergency exists as a result of which disposal by the Fund of securities
owned by it
29
<PAGE>
is not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, (d) during any other period
when the Securities and Exchange Commission by order so permits (provided that
applicable rules and regulations of the Securities and Exchange Commission shall
govern as to whether the conditions prescribed in (b) or (c) exist) or (e) if
the Fund would be unable to invest amounts effectively in accordance with its
investment objective(s), policies and restrictions.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain a copy and examine it carefully
before investing. An exchange will be treated for federal income tax purposes
the same as a repurchase or redemption of shares, on which the shareholder may
realize a capital gain or loss. However, the ability to deduct capital losses on
an exchange may be limited in situations where there is an exchange of shares
within ninety days after the shares are purchased. The Exchange Privilege is
only available in states where an exchange may legally be made.
For further information regarding the Exchange Privilege, shareholders
should contact their DWR or other selected broker-dealer account executive or
the Transfer Agent.
REDEMPTIONS AND REPURCHASES
- --------------------------------------------------------------------------------
PAYMENT FOR SHARES REDEEMED OR REPURCHASED. As discussed in the Prospectus,
payment for shares presented for repurchase or redemption will be made by check
within seven days after receipt by the Transfer Agent for the certificate and/or
written request in good order. The term "good order" means that the share
certificate, if any, and request for redemption are properly signed, accompanied
by any documentation required by the Transfer Agent, and bear signature
guarantees when required by the Fund or the Transfer Agent. Such payment may be
postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on that Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the Securities
and Exchange Commission by order so permits; provided that applicable rules and
regulations of the Securities and Exchange Commission shall govern as to whether
the conditions prescribed in (b) or (c) exist. If the shares to be redeemed have
recently been purchased by check (including a certified or bank cashier's
check), payment of redemption proceeds may be delayed for the minimum time
needed to verify that the check used for investment has been honored (not more
than fifteen days from the time of 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 accounts.
REINSTATEMENT PRIVILEGE. As described in the Prospectus, a shareholder who
has had his or her shares redeemed or repurchased and has not previously
exercised this reinstatement privilege may, within 30 days after the date of
redemption or repurchase, reinstate any portion of all of the proceeds of such
redemption or repurchase in shares of the Fund at the net asset value (without
sales charge) next determined after a reinstatement request, together with such
proceeds, is received by the Transfer Agent.
Exercise of the reinstatement privilege will not affect the federal income
tax treatment of any gain or loss realized upon the redemption or repurchase,
except that if the redemption or repurchase resulted in a loss and reinstatement
is made in shares of the Fund, some or all of the loss, depending on the amount
reinstated, will not be allowed as a deduction for federal income tax purposes
but will be applied to adjust the cost basis of the shares acquired upon
reinstatement.
INVOLUNTARY REDEMPTION. As described in the Prospectus, due to the
relatively high cost of handling small investments, the Fund reserves the right
to redeem, at net asset value, the shares of any shareholder whose shares have a
value of less than $100, 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,
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<PAGE>
it will notify the shareholder that the value of the shares is less than $100
and allow him or her 60 days to make an additional investment in an amount which
will increase the value of his or her account to $100 or more before the
redemption is processed.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
As discussed in the Prospectus, the Fund will determine either to distribute
or to retain all or part of any net long-term capital gains in any year for
reinvestment. If any such gains are retained, the Fund will pay federal income
tax thereon, and will notify shareholders that, following an election by the
Fund, the shareholders will be required to include such undistributed gains in
determining their taxable income and may claim their share of the tax paid by
the Fund as a credit against their individual federal income tax.
Because the Fund intends to distribute all of its net investment income and
capital gains to shareholders and otherwise continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code, it is not
expected that the Fund will be required to pay any federal income tax.
Shareholders will normally have to pay federal income taxes, and any state
income taxes, on the dividends and distributions they receive from the Fund.
Such dividends and distributions, to the extent that they are derived from net
investment income or short-term capital gains, are taxable to the shareholder as
ordinary income regardless of whether the shareholder receives such payments in
additional shares or in cash. Any dividends declared in the last quarter of any
year which are paid in the following calendar year prior to February 1 will be
deemed received by the shareholder in the prior year.
Gains or losses on the sales of securities by the Fund generally will be
long-term capital gains or losses if the securities have been held by the Fund
for more than twelve months. Gains or losses on the sale of securities held for
twelve months or less will be short-term capital gains or losses.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder has
held the Fund's shares and regardless of whether the distribution is received in
additional shares or in cash. Capital gains distributions are not eligible for
the dividends received deduction.
One of the requirements for the Fund to remain qualified as a regulated
investment company is that less than 30% of the gross income be derived from
gains from the sale or other disposition of securities held for less than three
months. Accordingly, the Fund may be restricted in the writing of options on
securities held for less than three months, in the writing of options which
expire in less than three months, and in effecting closing transactions with
respect to call or put options which have been written or purchased less than
three months prior to such transactions. The Fund may also be restricted in its
ability to engage in transactions involving futures contracts.
Under current federal law, the Fund will receive net investment income in
the form of interest cash payments by virtue of holding fixed-income securities,
including Treasury bills, notes and bonds, and will recognize income
attributable to it from holding original issue discount securities, including
zero coupon Treasury securities. Current federal tax law requires that a holder
(such as the Fund) of an original issue discount security accrue a portion of
the discount at which the security was purchased as income each year even though
the Fund receives no interest payment in cash on the security during the year.
As an investment company, the Fund must pay out substantially all of its net
investment income each year. Accordingly, the Fund, to the extent it invests in
original issue discount securities, may be required to pay out as an income
distribution each year an amount which is greater than the total amount of cash
receipts of interest the Fund actually received. Such distributions will be made
from the available cash of the Fund or by the liquidation of portfolio
securities if necessary. If a distribution of cash necessitates the liquidation
of portfolio securities, the Investment Manager will select which securities to
sell. The Fund may realize a gain or loss from such sales. In the event the Fund
realizes net capital gains from such transactions, its shareholders may receive
a larger capital gain distribution, if any, than they would in the absence of
such transactions.
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In computing net investment income, the Fund will amortize premiums or
accrue discounts on fixed-income securities in the portfolio. Realized gains and
losses on security transactions are determined on the identified cost method.
Any dividend or capital gains distribution received by a shareholder from
any investment company will have the effect of reducing the net asset value of
the shareholder's stock in that company by the exact amount of the dividend or
capital gains distribution. Furthermore, capital gains distributions and
dividends are subject to federal income taxes. If the net asset value of the
shares should be reduced below a shareholder's cost as a result of the payment
of dividends or the distribution of realized long-term capital gains, such
payment or distribution would be in part a return of the shareholder's
investment to the extent of such reduction below the shareholder's cost, but
nonetheless would be fully taxable at either ordinary or capital gain rates.
Therefore, an investor should consider the tax implications of purchasing Fund
shares immediately prior to a dividend or distribution record date.
The straddle rules of Section 1092 of the Internal Revenue Code where
applicable (i) require the Fund to defer losses incurred on certain transactions
involving securities, options and futures contracts, (ii) may affect the Fund's
holding period on the asset underlying an option or futures contract and (iii)
in certain instances, may convert a short-term capital loss to a long-term
capital loss.
Exchange-traded futures contracts, listed options on futures contracts and
listed options on U.S. Government securities are classified as "Section 1256"
contracts under the Internal Revenue Code. Section 1256 contracts are required
to be marked-to-market at the end of the Fund's fiscal year, for purpose of
Federal income tax calculations. The character of gain or loss resulting from
the sale, disposition, closing out, expiration, other termination or
mark-to-market of Section 1256 contracts is generally treated as long-term
capital gain or loss to the extent of 60 percent thereof and short-term capital
gain or loss to the extent of 40 percent thereof.
Over-the-counter options are not classified as Section 1256 contracts and
are not subject to the mark-to-market or 60 percent-40 percent taxation rules.
When put options purchased by the Fund are exercised, the gain or loss realized
on the sales of the underlying securities may be either short-term or long-term,
generally depending upon the holding period of the securities. In determining
the amount of gain or loss, the sales proceeds are reduced by the premium paid
for over-the-counter puts or increased by the premium received for
over-the-counter calls.
After the end of the calendar year, shareholders will be sent full
information on their dividends and capital gains distributions for tax purposes,
including information as to the portion taxable as ordinary income, any portion
taxable as long-term capital gains and any portion treated as a non-taxable
return of capital. Any such return of capital will reduce the shareholders' tax
basis in their shares. To avoid being subject to a 31% federal backup
withholding tax on taxable dividends, capital gains distributions and the
proceeds of redemptions and repurchases, shareholders' taxpayer identification
numbers must be furnished and certified as to their accuracy.
Shareholders should consult their attorneys or tax advisers regarding
specific questions as to state or local taxes and as to the applicability of the
foregoing to their current federal tax situation.
PERFORMANCE INFORMATION
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As discussed in the Prospectus, from time to time the Fund may quote its
"yield" and/or its "total return" in advertisements and sales literature. Yield
is calculated for any 30-day period as follows: the amount of interest and/or
dividend income for each security in the Fund's portfolio is determined in
accordance with regulatory requirements; the total for the entire portfolio
constitutes the Fund's gross income for the period. Expenses accrued during the
period are subtracted to arrive at "net investment income". The resulting amount
is divided by the product of the maximum offering price per share on the last
day of the period multiplied by the average number of Fund shares outstanding
during the period
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<PAGE>
that were entitled to dividends. This amount is added to 1 and raised to the
sixth power. 1 is then subtracted from the result and the difference is
multiplied by 2 to arrive at the annualized yield. For the 30-day period ended
October 31, 1995, the Fund's yield, calculated pursuant to this formula, was
5.33%.
The Fund's "average annual total return" represents an annualization of the
Fund's total return over a particular period and is computed by finding the
annual percentage rate which will result in the ending redeemable value of a
hypothetical $1,000 investment made at the beginning of a one, five or ten year
period, or for the period from the date of commencement of the Fund's
operations, if shorter than any of the foregoing. For the purpose of this
calculation, it is assumed that all dividends and distributions are reinvested.
The formula for computing the average annual total return involves a percentage
obtained by dividing the ending redeemable value by the amount of the initial
investment, taking a root of the quotient (where the root is equivalent to the
number of years in the period) and subtracting 1 from the result. The average
annual total returns of the Fund for the fiscal year ended October 31, 1995 and
for the period from July 1, 1991 (commencement of operations) through October
31, 1995 were 4.73% and 4.76%, respectively.
In addition to the foregoing, the Fund may advertise its total return over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. Such calculation may or may not reflect the
imposition of the maximum front end sales charge. In addition, the Fund may also
compute its aggregate total return for specified periods by determining the
aggregate percentage rate which will result in the ending value of a
hypothetical $1,000 investment made at the beginning of the period. For the
purpose of this calculation, it is assumed that all dividends and distributions
are reinvested. The formula for computing aggregate total return involves a
percentage obtained by dividing the ending value by the initial $1,000
investment and subtracting 1 from the result. Based on this calculation, the
average annual total return of the Fund, excluding the imposition of the
front-end sales charge, for the fiscal year ended October 31, 1995 and for the
period from July 1, 1991 through October 31, 1994 were 7.97% and 5.50%,
respectively.
In addition, the Fund may compute its aggregate total return for specified
periods by determining the aggregate percentage rate which will result in the
ending value of a hypothetical $1,000 investment made at the beginning of the
period. For the purpose of this calculation, it is assumed that all dividends
and distributions are reinvested. The formula for computing aggregate total
return involves a percentage obtained by dividing the ending value by the
initial $1,000 investment and subtracting 1 from the result. Based on the
foregoing calculation, the Fund's total return for the fiscal year ended October
31, 1995 and for the period from July 1, 1991 through October 31, 1995 were
7.97% and 26.12%, respectively.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in shares of the Fund by adding 1 to the Fund's
aggregate total return to date and multiplying by $9,700, $48,500 or $97,500
($10,000, $50,000 or $100,000 adjusted for a 3%, 3% and 2.5% sales charge,
respectively). Investments of $10,000 and $50,000 adjusted for a 3% sales charge
in the Fund at inception would have grown to $12,234 and $61,168 respectively
and an investment of $100,000 adjusted for a 2.5% sales charge, in the Fund from
inception would have grown to $122,967 at October 31, 1995.
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent organizations.
DESCRIPTION OF SHARES
- --------------------------------------------------------------------------------
The shareholders of the Fund are entitled to a full vote for each full share
held. All of the Trustees except for Messrs. Bozic, Purcell and Schroeder have
been elected by the shareholders of the Fund, most recently at a special meeting
of shareholders held on January 12, 1993. Messrs. Bozic, Purcell and Schroeder
were elected by the other Trustees of the Fund on April 8, 1994. The Trustees
themselves have the power to alter the number and the terms of office of the
Trustees, and they may at any time lengthen their own terms or make their terms
of unlimited duration and appoint their own successors,
33
<PAGE>
provided that always at least a majority of the Trustees has been elected by the
shareholders of the Fund. Under certain circumstances the Trustees may be
removed by action of the Trustees. The shareholders also have the right under
certain circumstances to remove the Trustees. The voting rights of shareholders
are not cumulative, so that holders of more than 50 percent of the shares voting
can, if they choose, elect all Trustees being selected, while the holders of the
remaining shares would be unable to elect any Trustees.
The 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.
The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios) and additional classes of shares
within any series (which would be used to distinguish among the rights of
different categories of shareholders, as might be required by future regulations
or other unforeseen circumstances). However, the Trustees have not authorized
any such additional series or classes of shares.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his/her or
its own bad faith, willful misfeasance, gross negligence, or reckless disregard
of his/her or its duties. It also provides that all third persons shall look
solely to the Fund's property for satisfaction of claims arising in connection
with the affairs of the Fund. With the exceptions stated, the Declaration of
Trust provides that a Trustee, officer, employee or agent is entitled to be
indemnified against all liability in connection with the affairs of the Fund.
The Fund is authorized to issue an unlimited number of shares of beneficial
interest. The Fund shall be of unlimited duration subject to the provisions in
the Declaration of Trust concerning termination by action of the shareholders.
CUSTODIAN AND TRANSFER AGENT
- --------------------------------------------------------------------------------
The Bank of New York, 90 Washington Street, New York, New York 10286 is the
Custodian of the Fund's assets. Any of the Fund's cash balances with the
Custodian in excess of $100,000 are unprotected by federal deposit insurance.
Such balances may, at times, be substantial.
Dean Witter Trust Company, Harborside Financial Center, Plaza Two, Jersey
City, New Jersey 07311 is the Transfer Agent of the Fund's shares and Dividend
Disbursing Agent for payment of dividends and distributions on Fund shares and
Agent for shareholders under various investment plans described herein. Dean
Witter Trust Company is an affiliate of Dean Witter InterCapital Inc., the
Fund's Investment Manager, and of Dean Witter Distributors Inc., the Fund's
Distributor. As Transfer Agent and Dividend Disbursing Agent, Dean Witter Trust
Company's responsibilities include maintaining shareholder accounts; including
providing subaccounting and recordkeeping services for certain retirement
accounts; disbursing cash dividends and reinvesting dividends; processing
account registration changes; handling purchase and redemption transactions;
mailing prospectuses and reports; mailing and tabulating proxies; processing
share certificate transactions; and maintaining shareholder records and lists.
For these services Dean Witter Trust Company receives a per shareholder account
fee from the Fund.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
Price Waterhouse LLP serves as the independent accountants of the Fund. The
independent accountants are responsible for auditing the annual financial
statements of the Fund.
34
<PAGE>
REPORTS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports showing
the Fund's portfolio and other information. An annual report containing
financial statements audited by independent accountants will be sent to
shareholders each year.
The Fund's fiscal year ends on October 31. The financial statements of the
Fund must be audited at least once a year by independent accountants whose
selection is made annually by the Fund's Trustees.
LEGAL COUNSEL
- --------------------------------------------------------------------------------
Sheldon Curtis, Esq., who is an officer and the General Counsel of the
Investment Manager, is an officer and the General Counsel of the Fund.
EXPERTS
- --------------------------------------------------------------------------------
The financial statements of the Fund included in this Statement of
Additional Information and incorporated by reference in the Prospectus have been
so included and incorporated in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
35
<PAGE>
DEAN WITTER PREMIER INCOME TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MORTGAGE-BACKED SECURITIES (99.0%)
U.S. GOVERNMENT AGENCIES
$ 929 Federal Home Loan Mortgage Corp. ARM............... 6.67+ % 02/01/18 $ 931,994
1,391 Federal Home Loan Mortgage Corp. ARM............... 7.90+ 09/01/23 1,419,899
1,805 Federal Home Loan Mortgage Corp. PC GOLD........... 8.50 02/01/00 1,867,849
2,726 Federal Home Loan Mortgage Corp. PC GOLD++......... 9.00 05/01/06 2,866,400
--------------
7,086,142
--------------
1,065 Federal National Mortgage Assoc.................... 8.00 * 1,093,131
2,773 Federal National Mortgage Assoc. ARM............... 6.63+ 04/01/19 2,775,937
1,218 Federal National Mortgage Assoc. ARM............... 7.86+ 12/01/20 1,244,237
1,034 Federal National Mortgage Assoc. ARM............... 7.45+ 12/01/22 1,057,378
554 Federal National Mortgage Assoc. ARM............... 7.19+ 07/01/24 566,269
1,391 Federal National Mortgage Assoc. ARM............... 6.82+ 12/01/24 1,416,156
935 Federal National Mortgage Assoc. ARM............... 6.81+ 01/01/25 955,165
896 Federal National Mortgage Assoc. ARM............... 7.08+ 01/01/25 916,291
887 Federal National Mortgage Assoc. ARM............... 7.41+ 01/01/25 907,664
1,500 Federal National Mortgage Assoc. ARM............... 6.34+ 09/01/25 1,534,688
--------------
12,466,916
--------------
1,517 Government National Mortgage Assoc................. 7.25 11/05/04-
04/15/06 1,547,794
2,171 Government National Mortgage Assoc. II ARM......... 6.50+ 02/20/21-
05/20/25 2,210,657
1,500 Government National Mortgage Assoc. II ARM......... 6.50+ * 1,516,875
927 Government National Mortgage Assoc. II ARM......... 7.25+ 07/20/24 945,576
5,051 Government National Mortgage Assoc. II ARM++....... 7.50+ 03/01/25-
06/20/25 5,170,381
--------------
11,391,283
--------------
TOTAL MORTGAGE-BACKED SECURITIES
(IDENTIFIED COST $30,789,954)............................................... 30,944,341
--------------
ASSET-BACKED SECURITIES (12.1%)
1,160 Chase Manhattan Credit Card........................ 6.00 09/17/01 1,161,183
1,457 First Chicago Master Trust......................... 7.30 10/15/99 1,480,057
1,113 General Motors Acceptance Corp..................... 7.15 03/15/00 1,129,287
--------------
TOTAL ASSET-BACKED SECURITIES
(IDENTIFIED COST $3,765,242)................................................ 3,770,527
--------------
COLLATERALIZED MORTGAGE OBLIGATIONS (9.8%)
U.S. GOVERNMENT AGENCIES (7.5%)
790 Federal National Mortgage Assoc. 1990-60 J (PAC)... 9.00 06/25/17 793,535
340 Federal National Mortgage Assoc. 1991-49 D (PAC)... 8.00 05/25/05 340,776
1,087 Federal National Mortgage Assoc. Strip Series I
Class 2............................................ 11.50 04/01/09 1,213,668
--------------
2,347,979
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
36
<PAGE>
DEAN WITTER PREMIER INCOME TRUST
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1995, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PRIVATE ISSUES (2.3%)
$ 733 Collateralized Mortgage Obligation Trust 59 G...... 9.00 % 07/01/17 $ 737,391
1 Resolution Funding Corp. 1992-S2 A17 (TAC I/O)..... 7.98+ 01/25/22 415
--------------
737,806
--------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(IDENTIFIED COST $6,304,729)................................................ 3,085,785
--------------
U.S. GOVERNMENT OBLIGATIONS (7.6%)
1,800 U.S. Treasury Note ++.............................. 6.00 08/31/97 1,810,406
230 U.S. Treasury Note................................. 6.75 04/30/00 238,266
315 U.S. Treasury Note ++.............................. 6.125 09/30/00 318,790
--------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(IDENTIFIED COST $2,364,823)................................................ 2,367,462
--------------
SHORT-TERM INVESTMENT (1.1%)
REPURCHASE AGREEMENT
350 Nikko Securities Co. International, Inc. (Japan)
(dated 10/31/95; proceeds $350,057; collateralized
by $353,147 Federal Home Loan Mortgage Corp. 7.00%
due 08/01/99 valued at $358,003) (Identified Cost
$350,000).......................................... 5.90 11/01/95 350,000
--------------
TOTAL INVESTMENTS
(IDENTIFIED COST $43,574,748) (A)............... 129.6% 40,518,115
LIABILITIES IN EXCESS OF OTHER ASSETS........... (29.6) (9,259,225)
----- -----------
NET ASSETS...................................... 100.0% $31,258,890
----- -----------
----- -----------
<FN>
- ---------------------
ARM Adjustable rate mortgage.
I/O Interest-only security.
PC Participation Certificate.
PAC Planned Amortization Class.
TAC Targeted Amortization Class.
* Securities purchased on a forward commitment basis with an approximate
principal amount and no definite maturity date; the actual principal
amount and maturity date will be determined upon settlement.
+ Floating rate securities. Rate shown is the rate in effect at October 31,
1995.
++ Some or all of these securities are pledged as collateral in connection
with reverse repurchase agreements.
(a) The aggregate cost of investments for federal income tax purposes is
$43,574,748; the aggregate gross unrealized appreciation is $438,577 and
the aggregate gross unrealized depreciation is $3,495,210, resulting in
net unrealized depreciation of $3,056,633.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
37
<PAGE>
DEAN WITTER PREMIER INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1995
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $43,574,748)............................. $40,518,115
Receivable for:
Investments sold........................................ 948,678
Interest................................................ 258,714
Principal paydowns...................................... 149,629
Shares of beneficial interest sold...................... 6,209
Deferred organizational expenses............................ 19,981
Prepaid expenses and other assets........................... 17,593
-----------
TOTAL ASSETS........................................... 41,918,919
-----------
LIABILITIES:
Reverse repurchase agreements............................... 7,863,188
Payable for:
Investments purchased................................... 2,618,826
Shares of beneficial interest repurchased............... 26,172
Dividends to shareholders............................... 18,560
Investment management fee............................... 13,818
Interest................................................ 12,161
Plan of distribution fee................................ 5,527
Accrued expenses and other payables......................... 101,777
-----------
TOTAL LIABILITIES...................................... 10,660,029
-----------
NET ASSETS:
Paid-in-capital............................................. 40,453,131
Net unrealized depreciation................................. (3,056,633)
Accumulated undistributed net investment income............. 41,898
Accumulated net realized loss............................... (6,179,506)
-----------
NET ASSETS............................................. $31,258,890
-----------
-----------
NET ASSET VALUE PER SHARE,
3,556,853 SHARES OUTSTANDING (UNLIMITED SHARES AUTHORIZED
OF $.01 PAR VALUE)........................................
$8.79
-----------
-----------
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 3.09% OF NET ASSET VALUE)*..........
$9.06
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
<FN>
- ---------------------
* On sales of $100,000 or more, the offering price is reduced.
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1995
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $2,871,101
----------
EXPENSES
Investment management fee................................... 178,248
Professional fees........................................... 92,129
Shareholder reports and notices............................. 67,163
Plan of distribution fee.................................... 64,994
Transfer agent fees and expenses............................ 40,013
Registration fees........................................... 38,233
Organizational expenses..................................... 29,936
Trustees' fees and expenses................................. 21,870
Custodian fees.............................................. 15,941
Other....................................................... 11,244
----------
TOTAL OPERATING EXPENSES............................... 559,771
Interest expense............................................ 232,495
----------
TOTAL EXPENSES......................................... 792,266
----------
NET INVESTMENT INCOME.................................. 2,078,835
----------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain........................................... 238,067
Net change in unrealized depreciation....................... 367,857
----------
NET GAIN............................................... 605,924
----------
NET INCREASE................................................ $2,684,759
----------
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
38
<PAGE>
DEAN WITTER PREMIER INCOME TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1995 OCTOBER 31, 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income....................................... $ 2,078,835 $ 3,268,827
Net realized gain (loss).................................... 238,067 (1,183,176)
Net change in unrealized depreciation....................... 367,857 (1,276,352)
---------------- ----------------
NET INCREASE........................................... 2,684,759 809,299
Dividends from net investment income........................ (2,713,438) (3,900,882)
Net decrease from transactions in shares of beneficial
interest.................................................. (12,587,691) (43,293,361)
---------------- ----------------
TOTAL DECREASE......................................... (12,616,370) (46,384,944)
NET ASSETS:
Beginning of period......................................... 43,875,260 90,260,204
---------------- ----------------
END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF
$41,898 AND $676,501, RESPECTIVELY)..................... $ 31,258,890 $ 43,875,260
---------------- ----------------
---------------- ----------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
39
<PAGE>
DEAN WITTER PREMIER INCOME TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 1995
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH:
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net investment income................................................................. $ 2,078,835
Adjustments to reconcile net investment income to net cash from operating activites:
Decrease in receivables and other assets related to operations........................ 132,205
Increase in payables related to operations............................................ 16,214
Net amortization of premium/discount.................................................. (21,927)
---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................................ 2,205,327
---------------
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Purchases of investments.............................................................. (143,207,512)
Principal prepayments/sales of investments............................................ 144,781,748
Net sales of short-term investments................................................... 3,752,385
---------------
NET CASH PROVIDED BY INVESTING ACTIVITIES........................................ 5,326,621
---------------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Net proceeds from shares of beneficial interest sold.................................. 492,733
Net payments from shares of beneficial interest repurchased........................... (14,831,196)
Net proceeds from issuance of reverse repurchase agreements........................... 7,863,188
Dividends to shareholders from net investment income.................................. (1,062,353)
---------------
NET CASH USED FOR FINANCING ACTIVITIES........................................... (7,537,628)
---------------
NET DECREASE IN CASH.................................................................. (5,680)
CASH AT BEGINNING OF YEAR............................................................. 5,680
---------------
CASH BALANCE AT END OF YEAR........................................................... $ --
---------------
---------------
CASH PAID DURING THE YEAR FOR INTEREST................................................ $ 220,334
---------------
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
40
<PAGE>
DEAN WITTER PREMIER INCOME TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1995
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter Premier Income Trust (the "Fund") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a diversified, open-end
management investment company. The Fund was organized as a Massachusetts
business trust on March 27, 1991 and commenced operations on July 1, 1991.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest available bid price prior to the time of valuation; (2) when market
quotations are not readily available, portfolio securities are valued at their
fair value as determined in good faith under procedures established by and under
the general supervision of the Trustees (valuation of debt securities for which
market quotations are not readily available may be based upon current market
prices of securities which are comparable in coupon, rating and maturity or an
appropriate matrix utilizing similar factors); (3) certain of the Fund's
portfolio securities may be valued by an outside pricing service approved by the
Trustees. The pricing service utilizes a matrix system incorporating security
quality, maturity and coupon as the evaluation model parameters, and/or research
and evaluations by its staff, including review of broker-dealer market price
quotations, if available, in determining what it believes is the fair valuation
of the portfolio securities valued by such pricing service; and (4) short-term
debt securities having a maturity date of more than sixty days at time of
purchase are valued on a mark-to-market basis until sixty days prior to maturity
and thereafter at amortized cost based on their value on the 61st day.
Short-term debt securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
The Fund amortizes premiums and accretes discounts based on the respective life
of the securities. Interest income is accrued daily.
C. DOLLAR ROLLS -- The Fund may enter into dollar rolls in which the Fund sells
securities for delivery and simultaneously contracts to repurchase substantially
similar securities at the current sales price on a specified future date. The
difference between the current sales price and the lower forward price for the
future purchase (often referred to as the "drop") is amortized over the life of
the dollar roll.
41
<PAGE>
DEAN WITTER PREMIER INCOME TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1995, CONTINUED
D. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
F. ORGANIZATIONAL EXPENSES -- Dean Witter InterCapital Inc. (the "Investment
Manager") paid the organizational expenses of the Fund in the amount of
approximately $150,000 which have been reimbursed for the full amount thereof.
Such expenses have been deferred and are being amortized on the straight-line
method over a period not to exceed five years from the commencement of
operations.
2. INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS
Pursuant to an Investment Management Agreement, the Fund pays a management fee,
accrued daily and payable monthly, by applying the annual rate of 0.50% to the
net assets of the Fund determined as of the close of each business day.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
42
<PAGE>
DEAN WITTER PREMIER INCOME TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1995, CONTINUED
Under a Sub-Advisory Agreement between BlackRock Financial Management Inc. (the
"Sub-Advisor") and the Investment Manager, the Sub-Advisor provides the Fund
with investment advice and portfolio management relating to the Fund's
investment in securities, subject to the overall supervision of the Investment
Manager. 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.
On February 28, 1995, the Sub-Advisor was acquired by PNC Bank, NA ("PNC").
Following the acquisition, the Sub-Advisor has become a wholly-owned corporate
subsidiary of PNC Asset Management Group, the holding company for PNC's asset
management businesses.
3. PLAN OF DISTRIBUTION
Dean Witter Distributors Inc. (the "Distributor"), an affiliate of the
Investment Manager, is the distributor of the Fund's shares and, in accordance
with a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act,
finances certain expenses in connection with the distribution of shares of the
Fund.
Under the Plan, the Distributor bears the expense of all promotional and
distribution related activities on behalf of the Fund, except for expenses that
the Trustees determine to reimburse, as described below. The following
activities and services may be provided by the Distributor under the Plan: (1)
compensation to, and expenses of, account executives of Dean Witter Reynolds
Inc., an affiliate of the Investment Manager and Distributor, and other
employees and selected broker-dealers; (2) sales incentives and bonuses to sales
representatives and to marketing personnel in connection with promoting sales of
the Fund's shares; (3) expenses incurred in connection with promoting sales of
the Fund's shares; (4) preparing and distributing sales literature; and (5)
providing advertising and promotional activities, including direct mail
solicitation and television, radio, newspaper, magazine and other media
advertisements.
The Fund is authorized to reimburse the Distributor for specific expenses the
Distributor incurs or plans to incur in promoting the distribution of the Fund's
shares. The amount of each monthly reimbursement payment may in no event exceed
an amount equal to a payment at the annual rate of 0.20% of the Fund's average
daily net assets during the month. For the year ended October 31, 1995, the
distribution fee was accrued at the annual rate of 0.18%.
43
<PAGE>
DEAN WITTER PREMIER INCOME TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1995, CONTINUED
The Distributor has informed the Fund that for the year ended October 31, 1995,
it received approximately $6,600 in commissions from the sale of the Fund's
shares of beneficial interest. Such commissions are not an expense of the Fund;
they are deducted from the proceeds of sales of beneficial interest.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales/prepayments of portfolio
securities, excluding short-term investments, for the year ended October 31,
1995 were $141,460,352, and $141,900,701, respectively. Included in the
aforementioned are purchases and sales of U.S. Government securities of
$126,482,829 and $119,915,639, respectively.
Dean Witter Trust Company, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At October 31, 1995, the Fund had
transfer agent fees and expenses payable of approximately $3,000.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended October 31, 1995 included
in Trustees' fees and expenses in the Statement of Operations amounted to
$2,186. At October 31, 1995, the Fund had an accrued pension liability of
$11,000 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
OCTOBER 31, 1995 OCTOBER 31, 1994
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Sold............................................................. 56,943 $ 496,711 188,157 $ 1,689,901
Reinvestment of dividends........................................ 191,193 1,658,690 251,787 2,249,370
----------- -------------- ----------- ------------
248,136 2,155,401 439,944 3,939,271
Repurchased...................................................... (1,692,442) (14,743,092) (5,271,058) (47,232,632)
----------- -------------- ----------- ------------
Net decrease..................................................... (1,444,306) $ (12,587,691) (4,831,114) $(43,293,361)
----------- -------------- ----------- ------------
----------- -------------- ----------- ------------
</TABLE>
6. FEDERAL INCOME TAX STATUS
During the year ended October 31, 1995, the Fund utilized approximately $228,000
of its net capital loss carryover.
44
<PAGE>
DEAN WITTER PREMIER INCOME TRUST
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1995, CONTINUED
At October 31, 1995, the Fund had a net capital loss carryover of approximately
$6,180,000 of which $5,009,000 will be available through October 31, 2001 and
$1,171,000 will be available through October 31, 2002 to offset future capital
gains to the extent provided by regulations.
7. REVERSE REPURCHASE AND DOLLAR ROLL AGREEMENTS
Reverse repurchase and dollar roll agreements 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 or dollar roll agreement files for bankruptcy or
becomes insolvent, the Fund's use of proceeds may be restricted pending a
determination by the other party, its trustee or receiver, whether to enforce
the Fund's obligation to repurchase the securities.
Reverse repurchase agreements are collateralized by Fund securities with a
market value in excess of the Fund's obligation under the contract. Securities
valued at $8,025,466 were pledged as collateral.
At October 31, 1995, the reverse repurchase agreements outstanding* were
$7,863,188 with a weighted average interest rate of 5.80% maturing within 22
days. The maximum and average daily amounts outstanding during the period were
$11,409,000 and $5,574,786, respectively. The weighted average interest rate
during the period was 5.88%*.
- -------
* Computation is based on those days when such agreements were outstanding.
45
<PAGE>
DEAN WITTER PREMIER INCOME TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE
PERIOD
JULY 1,
1991*
FOR THE YEAR ENDED OCTOBER 31 THROUGH
------------------------------------------ OCTOBER
1995 1994 1993 1992 31, 1991
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of period............... $ 8.77 $ 9.18 $ 9.69 $ 9.95 $ 9.60
--------- --------- --------- --------- ---------
Net investment income.............. 0.53 0.54 0.73 0.71 0.26
Net realized and unrealized gain
(loss)............................ 0.14 (0.41) (0.45) (0.21) 0.37
--------- --------- --------- --------- ---------
Total from investment operations... 0.67 0.13 0.28 0.50 0.63
--------- --------- --------- --------- ---------
Dividends and distributions from:
Net investment income........... (0.65) (0.54) (0.61) (0.71) (0.26)
Net realized gain............... -- -- (0.18) (0.05) (0.02)
--------- --------- --------- --------- ---------
Total dividends and
distributions..................... (0.65) (0.54) (0.79) (0.76) (0.28)
--------- --------- --------- --------- ---------
Net asset value, end of period..... $ 8.79 $ 8.77 $ 9.18 $ 9.69 $ 9.95
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN+........... 7.97% 1.44% 2.87% 5.18% 6.41%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses:
Operating.......................... 1.57% 1.24% 0.95% 0.99% 0.85%(2)
Interest........................... 0.65% 0.34% 0.65% 0.61% 0.84%(2)
Total.............................. 2.22% 1.58% 1.60% 1.60% 1.69%(2)(3)
Net investment income.............. 5.83% 5.32% 7.32% 7.05% 7.50%(2)(3)
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands......................... $31,259 $43,875 $90,260 $154,860 $132,219
Portfolio turnover rate............ 366% 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 or waived by the the
Investment Manager, the above annualized expense and net investment income
ratios would have been 1.85% and 7.34%, respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
46
<PAGE>
DEAN WITTER PREMIER INCOME TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER PREMIER INCOME TRUST
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations, of cash
flows and of changes in net assets and the financial highlights present fairly,
in all material respects, the financial position of Dean Witter Premier Income
Trust (the "Fund") at October 31, 1995, the results of its operations and its
cash flows for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the four years in the period then ended and for the period July 1, 1991
(commencement of operations) through October 31, 1991, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1995 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
DECEMBER 14, 1995
47
