Filed Pursuant to Rule 497(e)
Registration File Nos.: 33-44782
811-6515
DEAN WITTER
DIVERSIFIED INCOME TRUST
Prospectus--December 30, 1993
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Dean Witter Diversified Income Trust (the "Fund") is an open-end diversified
management investment company whose primary investment objective is a high
level of current income. As a secondary objective, the Fund seeks to maximize
total return but only to the extent consistent with its primary objective. The
Fund seeks to achieve its objectives by equally allocating its assets among
three separate groupings of various types of fixed income securities. Up to
one-third of the securities in which the Fund may invest will include
securities rated Baa/BBB or lower. (See "Investment Objective and Policies.")
Shares of the Fund are continuously offered at net asset value without the
imposition of a sales charge. However, redemptions and/or repurchases are
subject in most cases to a contingent deferred sales charge, scaled down from
5% to 1% of the amount redeemed, if made within six years of purchase, which
charge will be paid to the Fund's Distributor, Dean Witter Distributors Inc.
See "Redemptions and Repurchases--Contingent Deferred Sales Charge." In
addition, the Fund pays the Distributor a Rule 12b-1 distribution fee pursuant
to a Plan of Distribution at the annual rate of 0.85% of the lesser of the (i)
average daily aggregate net sales or (ii) average daily net assets of the Fund.
See "Purchase of Fund Shares--Plan of Distribution."
This Prospectus sets forth concisely the information you should know before
investing in the Fund. It should be read and retained for future reference.
Additional information about the Fund is contained in the Statement of
Additional Information, dated December 30, 1993, 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 below. The
Statement of Additional Information is incorporated herein by reference.
TABLE OF CONTENTS
Prospectus Summary ................................... 2
Summary of Fund Expenses ............................. 3
Financial Highlights ................................. 4
The Fund and its Management .......................... 5
Investment Objective and Policies .................... 5
Investment Restrictions .............................. 16
Purchase of Fund Shares .............................. 17
Shareholder Services ................................. 18
Redemptions and Repurchases .......................... 20
Dividends, Distributions and Taxes ................... 22
Performance Information .............................. 22
Additional Information ............................... 23
Appendix ............................................. 24
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and the shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
DEAN WITTER
DIVERSIFIED INCOME TRUST
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 392-2550
(800) 526-3143
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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 Distributors Inc., Distributor
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PROSPECTUS SUMMARY
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The Fund
The Fund is organized as a Massachusetts business trust, and is
an open-end diversified management investment company which
allocates an equal portion of its total assets among three
groupings of fixed-income securities.
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Shares Offered
Shares of beneficial interest with $0.01 par value (see page
23).
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Offering Price
At net asset value without sales charge (see page 17). Shares
redeemed within six years of purchase are subject to a
contingent deferred sales charge under most circumstances (see
pages 20-21).
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Minimum
Purchase
Minimum initial investment, $1,000; minimum subsequent
investment, $100 (see page 17).
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Investment
Objectives
A high level of current income; total return (income plus
capital appreciation) is a secondary objective.
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Investment
Policies
A balanced allocation of assets consisting of approximately one-
third of the Trust's assets invested equally in each of the
following categories: 1. high quality fixed-income securities
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities, issued or guaranteed by foreign governments,
or issued by foreign or U.S. companies which include bank
instruments, commercial paper, loan participation interests and
certain indexed securities, which have remaining maturities at
the time of purchase of not more than three years; 2. high
quality fixed rate and adjustable rate mortgage-backed
securities and asset-backed securities; and 3. high yield, high
risk fixed-income securities, primarily rated Baa/BBB or lower,
and non-rated securities of comparable quality. (see pages 5-
15).
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Investment
Manager
Dean Witter InterCapital Inc. ("InterCapital"), the Investment
Manager of the Fund, serves as investment manager, manager,
investment adviser, sub-adviser, administrator or sub-
administrator to seventy-nine investment companies and other
portfolios with assets of approximately $70.7 billion at
November 30, 1993 (see page 5).
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Management
Fee
The Investment Manager receives a monthly fee at the annual rate
of 0.40% of the daily net assets (see page 5).
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Dividends and
Capital Gains
Distributions
Dividends are declared and paid monthly. Capital gains
distributions, if any, are paid at least once a year or are
retained for reinvestment by the Fund. Dividends and capital
gains distributions are automatically invested in additional
shares at net asset value unless the shareholder elects to
receive cash (see page 22).
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Distributor
and
Distribution
Fee
Dean Witter Distributors Inc. (the "Distributor"). The
Distributor receives from the Fund a distribution fee accrued
daily and payable monthly at the rate of 0.85% per annum of the
lesser of (i) the Fund's average daily aggregate net sales or
(ii) the Fund's average daily net assets. This fee compensates
the Distributor for the services provided in distributing shares
of the Fund and for sales-related expenses. The Distributor also
receives the proceeds of any contingent deferred sales charges
(see pages 17-18).
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Redemption--
Contingent
Deferred
Sales
Charge
Shares are redeemable by the shareholder at net asset value. An
account may be involuntarily redeemed if the total value of the
account is less than $100. Although no commission or sales load
is imposed upon the purchase of shares, a contingent deferred
sales charge (scaled down from 5% to 1%) is imposed on any
redemption of shares if after such redemption the aggregate
current value of an account with the Fund falls below the
aggregate amount of the investor's purchase payments made during
the six years preceding the redemption. However, there is no
charge imposed on redemption of shares purchased through
reinvestment of dividends or distributions (see pages 20-21).
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Risks
The value of the Fund's portfolio securities, and therefore the
net asset value of the Fund's shares, may increase or decrease
due to various factors, principally changes in prevailing
interest rates. Generally, a rise in interest rates will result
in a decrease in net asset value, while a drop in interest rates
will result in an increase in net asset value. Mortgage-backed
securities are subject to prepayments or refinancings of the
mortgage pools underlying such securities which may have an
impact upon the yield and the net asset value of the Fund's
shares. Asset-backed securities involve risks resulting mainly
from the fact that such securities do not usually contain the
complete benefit of a security interest in the related
collateral. Certain of the high yield, high risk fixed-income
securities in which the Fund may invest are subject to greater
risk of loss of income and principal than the higher rated lower
yielding fixed-income securities. The foreign securities and
markets in which the Fund will invest pose different and
generally greater risks than those risks customarily associated
with domestic securities and markets including fluctuations in
foreign currency exchange rates, foreign tax rates and foreign
securities exchange controls. The Fund may enter into repurchase
agreements and reverse repurchase agreements, may purchase
securities on a when-issued and delayed delivery basis and may
utilize certain investment techniques including options and
futures for hedging purposes all of which involve certain
special risks (see pages 9 through 15).
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The above is qualified in its entirety by the detailed information appearing
elsewhere in this Prospectus and in the Statement of Additional Information.
2
<PAGE>
SUMMARY OF FUND EXPENSES
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The following table illustrates all expenses and fees that a shareholder of the
Fund will incur. The expenses and fees set forth in the table are for the
fiscal year ended October 31, 1993.
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases................................ None
Maximum Sales Charge Imposed on Reinvested Dividends..................... None
Deferred Sales Charge
(as a percentage of the lesser of original purchase price or
redemption proceeds).................................................... 5.0%
A contingent deferred sales charge is imposed at the
following declining rates:
Year Since Purchase Payment Made Percentage
-------------------------------- ---------------
First............................................ 5.0%
Second .......................................... 4.0%
Third ........................................... 3.0%
Fourth........................................... 2.0%
Fifth............................................ 2.0%
Sixth ........................................... 1.0%
Seventh and thereafter........................... None
Redemption Fees........................................................ None
Exchange Fee........................................................... None
Annual Fund Operating Expenses (as a Percentage of Average Net Assets)
Management Fees* (after fee waiver)..................................... 0.36%
12b-1 Fees**............................................................ 0.85%
Other Expenses*......................................................... 0.37%
Total Fund Operating Expenses........................................... 1.58%
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* The Investment Manager had undertaken to assume all expenses (except the
12b-1 fee and brokerage fees) and to waive the compensation provided for
in its Management Agreement until January 1, 1993. "Management Fees"
(after fee waiver) as shown above, is for the fiscal year of the Fund
ended October 31, 1993 (assuming no fee waiver, the management fee would
be 0.40%). "Other Expenses" (after expense assumption) as shown above is
for the fiscal year of the Fund ended October 31, 1993. (assuming no
expense assumption, "Other Expenses" would have been 0.41%).
** A portion of the 12b-1 fee equal to 0.20% of the Fund's average daily net
assets is characterized as a service fee within the meaning of National
Association of Securities Dealers, Inc. ("NASD") guidelines.
Example*** 1 year 3 years 5 years 10 years
- ------------ ------ ------- ------- --------
You would pay the following
expenses on a $1,000 investment,
assuming (1) 5% annual return and
(2) redemption at the end of each
time period: ..................... $66 $80 $106 $188
You would pay the following
expenses on the same investment,
assuming no redemption: ......... $16 $50 $ 86 $188
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*** The expenses disclosed above do not reflect the assumption or waiver of
any expenses or the waiver of any compensation by the Investment Manager.
The above example should not be considered a representation of past or
future expenses or performance. Actual expenses of the Fund may be greater or
less than those shown.
The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"The Fund and its Management," "Plan of Distribution" and "Redemptions and
Repurchases."
Long-term shareholders of the Fund may pay more in sales charges and
distribution fees than the economic equivalent of the maximum front-end sales
charges permitted by the NASD.
3
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FINANCIAL HIGHLIGHTS
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The following per share data and ratios for a share of beneficial interest
outstanding throughout each period have been audited by Price Waterhouse,
independent accountants. The per share data and ratios should be read in
conjunction with the financial statements, notes thereto and the 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.
For the period
For the year April 9, 1992*
ended through
October 31, 1993 October 31, 1992
---------------- ----------------
Per Share Operating Performance:
Net asset value, beginning of period... $ 10.01 $ 10.00
-------- -------
Investment income--net................ 0.77 0.37
Realized and unrealized gain--net..... 0.20 -0-
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Total from investment operations....... 0.97 0.37
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Less dividends and distributions:
Dividends from net investment income.. (0.73) (0.36)
Distributions to shareholders from
net realized gains on investments.... (0.05) -0-
-------- -------
Total dividends and distributions..... (0.78) (0.36)
-------- -------
Net asset value, end of period......... $ 10.20 $ 10.01
======== =======
Total Investment Return+................ 10.00% 3.73%(1)
Ratios/Supplemental Data:
Net assets, end of period
(in thousands)........................ $167,137 $55,297
Ratio of expenses to average
net assets............................ 1.58%(4) 0.85%(2)(3)
Ratio of net investment income to
average net assets.................... 7.92%(4) 7.86%(2)(3)
Portfolio turnover rate..................... 117% 37%
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* Date of 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
Investment Manager, the above annualized expense ratio would have been
2.08% and the above annualized investment income--net ratio would have
been 6.63%.
(4) If the Fund had borne all expenses that were assumed or waived by the
Investment Manager (Note 2), the above annualized expense ratio would
have been 1.66% and the above annualized investment income--net ratio
would have been 7.84%.
See Notes to Financial Statements
4
<PAGE>
THE FUND AND ITS MANAGEMENT
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Dean Witter Diversified 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 The
Commonwealth of Massachusetts on December 20, 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.
The Investment Manager acts as investment manager, manager, investment
adviser, sub-adviser, administrator or sub-administrator to seventy-nine
investment companies, twenty-seven of which are listed on the New York Stock
Exchange, with combined total assets of approximately $68.7 billion as of
November 30, 1993. The Investment Manager also manages portfolios of pension
plans, other institutions and individuals which aggregated approximately $2.0
billion at such date.
The Fund has retained the Investment Manager, pursuant to an Investment
Management Agreement, to provide administrative services, manage its business
affairs and manage the investment of the Fund's assets, including the placing
of orders for the purchase and sale of portfolio securities. The Fund's Board
of Trustees reviews the various services provided by the Manager to ensure that
the Fund's general investment policies and programs are being properly carried
out and that administrative services are being provided to the Fund in a
satisfactory manner.
As full compensation for the services and facilities furnished to the Fund
and for expenses of the Fund assumed by the Investment Manager, the Fund pays
the Investment Manager monthly compensation calculated daily by applying the
annual rate of 0.40% to the Fund's net assets determined as of the close of
each business day.
The Fund's expenses include: the fee of the Investment Manager, the fee
pursuant to the Plan and Agreement of Distribution (see "Purchase of Fund
Shares"); taxes; certain legal, transfer agent, custodian and auditing fees;
and printing and other expenses relating to the Fund's operations which are not
expressly assumed by the Investment Manager under its Management Agreement
with the Fund. The Investment Manager assumed all operating expenses (except
for the Plan of Distribution fee and brokerage fees) and waive the compensation
provided for in its Investment Management Agreement until January 1, 1993.
INVESTMENT OBJECTIVES AND POLICIES
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The primary investment objective of the Fund is to provide a high level of
current income. As a secondary objective the Fund seeks to maximize total
return but only to the extent consistent with its primary objective. The
investment objectives of the Fund are fundamental policies and may not be
changed without the approval of the holders of a majority of the Fund's shares.
There is no assurance that the Fund's investment objectives will be achieved.
The Fund will seek to achieve its investment objectives by investing at least
65% of its total assets in fixed-income securities and by equally allocating,
under normal circumstances, an approximately one-third portion of its total
assets among three separate groupings of various types of fixed-income
securities. The Investment Manager will adjust the Fund's assets not less than
quarterly to reflect any changes in the relative values of the securities in
each grouping so that following the adjustment the value of the Fund's
investments in each grouping will be equal to the extent practicable.
The three groupings in which the Fund will invest its total assets are as
follows:
1. High quality fixed-income securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities or high quality fixed income
securities issued or guaranteed by a foreign government or supranational
organization or any of their political subdivisions, authorities, agencies or
instrumentalities or fixed income securities issued by a corporation, all of
which are rated AAA or AA by Standard & Poor's Corporation ("S&P") or Aaa or Aa
by Moody's Investors Service, Inc. ("Moody's") or, if unrated, are determined
by the Investment Manager to be of equivalent quality; in certificates of
deposit and bankers' acceptances issued or guaranteed by, or time deposits
maintained at, banks (including foreign branches of U.S. banks or U.S. or
foreign branches of foreign banks) having total assets of more than $500
million and determined by the Investment Manager to be of high
creditworthiness; commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2
by Moody's or Duff 1 or Duff 2 by Duff & Phelps Inc. or, if unrated, issued by
U.S. or foreign
5
<PAGE>
companies having outstanding debt securities rated A or higher by S&P or
Moody's; and in loan participation interests having a remaining term not
exceeding one year in loans extended by banks to such companies. Certain
foreign securities purchased by the Fund will not have received ratings by a
recognized U.S. rating agency. In such cases the Investment Manager will review
the issuers of such securities with respect to the quality of their management,
balance sheet and financial ratios, cash flows and earnings to establish that
the securities purchased by the Fund are of a comparable quality to
issuers receiving high quality ratings by a recognized U.S.
rating agency. All of the securities described above will have remaining
maturities, at the time of purchase, of not more than
three years.
The Investment Manager will actively manage the Fund's assets in this
grouping in accordance with a global market strategy (see "Portfolio
Management," page 18). Consistent with such a strategy, the Investment Manager
intends to allocate the Fund's investments among securities denominated in the
currencies of a number of foreign countries and, within each such country,
among different types of debt se curities. The Investment Manager will adjust
the Fund's exposure to different currencies based on its perception of the most
favorable markets and issuers. In allocating the Fund's assets among various
markets, the Investment Manager will assess the relative yield and anticipated
direction of interest rates in particular markets, the level of inflation,
liquidity and financial soundness of each market, and the general market and
economic conditions existing in each market as well as the relationship of
currencies of various countries to the U.S. dollar and to each other. In its
evaluations, the Investment Manager will utilize its internal financial,
economic and credit analysis resources as well as information obtained from
other sources.
A portion of the Fund's investments in securities of U.S. issuers are likely
to be in commercial paper, bankers acceptances and other short-term debt
instruments issued by U.S. corporations. However, at times during which there
exists large-scale political or economic uncertainty, the Fund is likely to
increase its investments in U.S. Government securities. In such cases, the
securities which the Fund are most likely to purchase are U.S. Treasury bills
and U.S. Treasury notes with remaining maturities of under three years, both of
which are direct obligations of the U.S. Government. The Fund may also purchase
securities issued by various agencies and instrumentalities of the U.S.
Government. These will include obligations backed by the full faith and credit
of the United States (such as those issued by the Government National Mortgage
Association); obligations 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 (such as those issued by the Federal National Mortgage
Association); and obligations backed by the credit of the issuing agency or
instrumentality (such as those issued by the Federal Farm Credit System).
The securities in which the Fund will be investing may be denominated in any
currency or multinational currency, including the U.S. dollar. In addition to
the U.S. dollar, such currencies will include, among others: the Australian
dollar; Deutsche mark; Japanese yen; French franc; British pound; Canadian
dollar; Swiss franc; Dutch guilder; Austrian schilling; Spanish peseta; Swedish
krona; and European Currency
Unit ("ECU").
The Fund may invest, without limitation in this grouping, in notes and
commercial paper, the principal amount of which is indexed to certain specific
foreign currency exchange rates. Indexed notes and commercial paper typically
provide that their principal amount is adjusted upwards or downwards (but not
below zero) at maturity to reflect fluctuations in the exchange rate between
two currencies during the period the obligation is outstanding, depending on
the terms of the specific security. In selecting the two currencies, the
Investment Manager will consider the correlation and relative yields of various
currencies. The Fund will purchase an indexed obligation using the currency in
which it is denominated and, at maturity, will receive interest and principal
payments thereon in that currency. The amount of principal payable by the
issuer at maturity, however, will vary (i.e., increase or decrease) in response
to the change (if any) in the exchange rates between the two specified
currencies during the period from the date the instrument is issued to its
maturity date. The potential for realizing gains as a result of changes in
foreign currency exchange rates may enable the Fund to hedge the currency in
which the obligation is denominated (or to effect cross-hedges against other
currencies) against a decline in the U.S. dollar value of investments
denominated in foreign currencies, while providing an attractive money market
rate of return. The Fund will purchase such indexed obligations to generate
current income or for hedging purposes and will not speculate in such
obligations.
As indicated above, the Fund may invest in securities denominated in a multi-
national currency unit. An illustration of a multi-national currency unit is
the ECU, which is a "basket" consisting of specified amounts of the currencies
of the member states of the European Community, a Western European economic
cooperative organization that includes, among other countries, France, West
Germany, The Netherlands and the United Kingdom. The specific amounts of
currencies comprising the ECU may be adjusted by the Council of Ministers of
the European Community to reflect changes in relative values of the underlying
currencies. The
6
<PAGE>
Investment Manager does not believe that such adjustments will adversely affect
holders of ECU-denominated obligations or the marketability of such securities.
European supranational entities, in particular, issue ECU-denominated
obligations. The Fund may invest in securities denominated in the currency of
one nation although issued by a governmental entity, corporation or financial
institution of another nation. For example, the Fund may invest in a British
pound-denominated obligation issued by a United States corporation. Such
investments involve credit risks associated with the issuer and currency risks
associated with the currency in which the obligation is denominated.
2. (i) Fixed-rate and adjustable rate mortgage-backed securities ("Mortgage-
Backed Securities") which are issued or guaranteed by the United States
Government, its agencies or instrumentalities or by private issuers which are
rated Aaa by Moody's or AAA by S&P or, if not rated, are determined to be of
comparable quality by the Investment Manager and (ii) securities backed by
other assets such as automobile or credit card receivables and home equity
loans ("Asset-Backed Securities") which are rated Aaa by Moody's or AAA by S&P
or, if not rated are determined to be of comparable quality by the Investment
Manager. The term Mortgage-Backed Securities as used herein includes adjustable
rate mortgage securities and derivative mortgage products such as
collateralized mortgage obligations and stripped mortgage-backed securities,
all as described below.
There are currently three basic types of Mortgage-Backed Securities: (i)
those issued or guaranteed by the United States Government or one of its
agencies or instrumentalities, such as the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and
the Federal Home Loan Mortgage Corporation ("FHLMC") (securities issued by
GNMA, but not those issued by FNMA or FHLMC, are backed by the "full faith and
credit" of the United States); (ii) those issued by private issuers that
represent an interest in or are collateralized by Mortgage-Backed Securities
issued or guaranteed by the United States Government or one of its agencies or
instrumentalities; and (iii) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or Mortgage-Backed
Securities without a government guarantee but usually having some form of
private credit enhancement.
The Fund will invest in mortgage pass-through securities representing
participation interests in pools of residential mortgage loans originated by
United States governmental or private lenders such as banks, broker-dealers and
financing corporations 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 guaranteed mortgage pass-through securities in which the Fund may invest
include those issued or guaranteed by GNMA, FNMA and FHLMC. GNMA certificates
are direct obligations of the U.S. Government and, as such, are backed by the
"full faith and credit" of the United States. FNMA 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.
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
7
<PAGE>
required at such point to amortize the outstanding principal balance over the
remaining term of the loan, the excess is utilized to reduce the then
outstanding principal balance
of the ARM.
Private Mortgage Pass-Through Securities. Private mortgage pass-through
securities are structured similarly to the GNMA, FNMA and FHLMC mortgage pass-
through securities and are issued by originators of and investors in mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
These securities usually are backed by a pool of conventional fixed rate or
adjustable rate mortgage loans. Since private mortgage pass-through securities
typically are not guaranteed by an entity having the credit status of GNMA,
FNMA and FHLMC, such securities generally are structured with one or more types
of credit enhancement.
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 addition, in reliance upon a recent
interpretation by the staff of the Securities and Exchange Commission, the Fund
may invest without limitation in CMOs and other Mortgage-Backed Securities
which are not by definition excluded from the provisions of the Investment
Company Act of 1940, as amended, and which have obtained exemptive orders from
such provisions from the Securities and Exchange Commission.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche", is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semi-annual basis. Certain CMOs may have variable or
floating interest rates and others may be stripped (securities which provide
only the principal or interest feature of the underlying security).
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of a CMO series in a number of different ways. Generally,
the purpose of the allocation of the cash flow of a CMO to the various classes
is to obtain a more predictable cash flow to the individual tranches than
exists with the underlying collateral of the CMO. As a general rule, the more
predictable the cash flow is on a CMO tranche, the lower the anticipated yield
will be on that tranche at the time of issuance relative to prevailing market
yields on Mortgage-Backed Securities. As part of the process of creating more
predictable cash flows on most of the tranches in a series of CMOs, one or more
tranches generally must be created that absorb most of the volatility in the
cash flows on the underlying mortgage loans. The yields on these tranches are
generally higher than prevailing market yields on Mortgage-Backed Securities
with similar maturities. As a result of the uncertainty of the cash flows of
these tranches, the market prices of and yield on these tranches generally are
more volatile.
The Fund also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other
CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier. PAC Bonds generally require
payments of a specified amount of principal on each payment date. PAC Bonds
always are parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes.
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
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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 repayments
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
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 a position. The Fund may not invest more than 10% of its
total assets in illiquid securities.
Asset-Backed Securities. The securitization techniques used to develop
Mortgage-Backed Securities are also applied to a broad range of other assets.
Through the use of trusts and special purpose corporations, various types of
assets, primarily automobile and credit card receivables and home equity loans,
are being securitized in pass-through structures similar to the mortgage pass-
through structures described above or in a pay-through structure similar to the
CMO structure.
New instruments and variations of existing Mortgage-Backed Securities and
Asset-Backed Securities continue to be developed. The Fund may invest in any
such instruments or variations as may be developed, to the extent consistent
with its investment objectives and policies and applicable regulatory
requirements.
3. High yield, high risk fixed-income securities rated Baa or lower by
Moody's or BBB or lower by S&P or, if not rated, are determined by the
Investment Manager to be of comparable quality. The high yield, high risk
fixed-income securities in this grouping may include both convertible and
nonconvertible debt securities and preferred stock. Fixed-income securities
rated Baa by Moody's or BBB by S&P have speculative characteristics greater
than those of more highly rated bonds, while fixed-income securities rated Ba
or BB or lower by Moody's and Standard & Poor's, respectively, are considered
to be speculative investments. Furthermore, the Fund does not have any minimum
quality rating standard for its investments. As such, the Fund may invest in
securities rated as low as Caa, Ca or C by Moody's or CCC, CC, C or C1 by
Standard & Poor's. Fixed-income securities rated Caa or Ca by Moody's may
already be in default on payment of interest or principal, while bonds rated C
by Moody's, their lowest bond rating, can be regarded as having extremely poor
prospects of ever attaining any real investment standing. Bonds rated C1
by S&P, their lowest bond rating, are no longer making
interest payments.
A description of corporate bond ratings is contained in the Appendix. Non-
rated securities will also be considered for investment by the Fund when the
terms of the securities themselves makes them appropriate investments for the
Fund.
The ratings of fixed-income securities by Moody's and S&P are a generally
accepted barometer of credit risk. However, as the credit worthiness of issuers
of lower-rated fixed-income securities is more problematical than that of
issuers of higher-rated fixed-income securities, the achievement of the Fund's
investment objectives will be more dependent upon the Investment Manager's own
credit analysis than would be the case with a mutual fund investing primarily
in higher quality bonds. The Investment Manager will utilize a security's
credit rating as simply one indication of an issuer's creditworthiness and will
principally rely upon its own analysis of any security currently held by the
Fund or potentially purchasable by the Fund for its portfolio.
SPECIAL RISK CONSIDERATIONS
All fixed-income securities are subject to two types of risks: the credit
risk and the interest rate risk. The credit risk relates to the ability of the
issuer to meet interest or principal payments or both as they come due.
Generally, higher yielding
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fixed-income securities are subject to a credit risk to a greater extent than
lower yielding fixed-income securities. The interest rate risk refers to the
fluctuations in the net asset value of any portfolio of fixed-income securities
resulting from the inverse relationship between price and yield of fixed-income
securities; that is, when the general level of interest rates rises, the prices
of outstanding fixed-income securities decline, and when interest rates fall,
prices rise.
Foreign Securities. Investors should carefully consider the risks of investing
in securities of foreign issuers and securities denominated in non-U.S.
currencies. Fluctuations in the relative rates of exchange between the
currencies of different nations may affect the value of the Fund's investments.
Changes in foreign currency exchange rates relative to the U.S. dollar will
affect the U.S. dollar value of the Fund's assets denominated in that currency
and thereby impact upon the Fund's yield on such assets and the net asset value
of a share of the Fund as well as the value of the Fund's distributions. For
example, if a substantial portion of the Fund's assets are denominated in
Japanese yen and the relative exchange rate of the yen falls with respect to
the U.S. dollar (i.e., a yen is worth a smaller fraction of a dollar than it
had been) then the Fund will be receiving a lesser amount of interest on its
fixed-income securities denominated in yen (when converted into U.S. dollars)
and when the Fund's assets are valued for purposes of determining the net asset
value per share of the Fund, the net assets of the Fund reflected by the yen-
denominated securities will have declined in U.S. dollar value and the net
asset value of the Fund (always stated in U.S. dollars) may have also declined.
Foreign currency exchange rates are determined by forces of supply and demand
on the foreign exchange markets. These forces are themselves affected by the
international balance of payments and other economic and financial conditions,
government intervention, speculation and other factors. Moreover, foreign
currency exchange rates may be affected by the regulatory control of the
exchanges on which the currencies trade. The foreign currency transactions of
the Fund will be conducted on a spot basis or through forward contracts or
futures contracts (see below). The Fund may incur certain costs in connection
with these currency transactions.
Investments in foreign securities will also occasion risks relating to
political and economic developments abroad, including the possibility of
expropriations or confiscatory taxation, limitations on the use or transfer of
Fund assets and any effects of foreign social, economic or political
instability. Foreign companies are not subject to the regulatory requirements
of U.S. companies and, as such, there may be less publicly available
information about such companies. Moreover, foreign companies are generally not
subject to uniform accounting, auditing and financial standards and
requirements comparable to those applicable to U.S. companies.
Securities of foreign issuers may be less liquid than comparable securities
of U.S. issuers and, as such, their price changes may be more volatile.
Furthermore, foreign exchanges and broker-dealers are generally subject to less
government and exchange scrutiny and regulation than their American
counterparts. Brokerage commissions, dealer concessions and other transaction
costs may be higher on foreign markets than the U.S. In addition, differences
in clearance and settlement procedures on foreign markets may occasion delays
in settlements of Fund trades effected in such markets. Inability to dispose of
portfolio securities due to settlement delays could result in losses to the
Fund due to subsequent declines in value of such securities and the inability
of the Fund to make intended security purchases due to settlement problems
could result in a failure of the Fund to make potentially advantageous
investments.
----------------------------------
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 may
reduce yield to maturity, while a prepayment rate that is slower than expected
may have the opposite effect of increasing yield to maturity. Alternatively, if
the Fund purchases these securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments may reduce,
yield to maturity. 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 will seek to manage these risks (and potential benefits) by
investing in a variety of such securities and through hedging techniques.
Mortgage-Backed 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
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
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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 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.
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.
----------------------------------
High Yield Securities. Because of the special nature of the Fund's investment
in high yield securities, commonly known as "junk bonds", the Investment
Manager must take account of certain special considerations in assessing the
risks associated with such investments. Although the growth of the high yield
securities market in the 1980s had paralleled a long economic expansion,
recently many issuers have been affected by adverse economic and market
conditions. It should be recognized that an economic downturn or increase in
interest rates is likely to have a negative effect on the high yield bond
market and on the value of the high yield securities held by the Fund, as well
as on the ability of the securities' issuers to repay principal and interest on
their borrowings.
The prices of high yield securities have been found to be less sensitive to
changes in prevailing interest rates than higher-rated investments, but are
likely to be more sensitive to adverse economic changes or individual corporate
developments. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress which
would adversely affect their ability to service their principal and interest
payment obligations, to meet their projected business goals or to obtain
additional financing. If the issuer of a fixed-income security owned by the
Fund defaults, the Fund may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty and change can be expected to result
in an increased volatility of market prices of high yield securities and a
concomitant volatility in the net asset value of a share of the Fund. Moreover,
the market prices of certain of the Fund's portfolio securities which are
structured as zero coupon and payment-in-kind securities are affected to a
greater extent by interest rate changes and thereby tend to be more volatile
than securities which pay interest periodically and in cash (see "Dividends,
Distributions and Taxes" for a discussion of the tax ramifications of
investments in such securities).
The secondary market for high yield securities may be less liquid than the
markets for higher quality securities and, as such, may have an adverse effect
on the market prices of certain securities. The limited liquidity of the market
may also adversely affect the ability of the Fund's Trustees to arrive at a
fair value for certain high yield securities at certain times and could make it
difficult for the Fund to sell certain securities.
New laws and proposed new laws may have a potentially negative impact on the
market for high yield bonds. For example, present legislation requires
federally-insured savings and loan associations to divest their investments in
high yield bonds. This legislation and other proposed legislation may have an
adverse effect upon the value of high yield securities and a concomitant
negative impact upon the net asset value of a share of the Fund.
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During the fiscal period ended October 31, 1993, the monthly dollar weighted
average ratings of the debt obligations held by the Fund, expressed as a
percentage of the Fund's total investments, were as follows:
Percentage of
Ratings Total Investments
------- ----------------
AAA/Aaa 48.2%
AA/Aa 6.4%
A/A 0%
BBB/Baa 0%
BB/Ba 4.8%
B/B 22.0%
CCC/Caa 4.9%
CC/Ca 0%
C/C 0%
D 0%
Unrated 18.8%
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.
Reverse Repurchase Agreements and Dollar Rolls. The Fund may also use reverse
repurchase agreements and dollar rolls as part of its investment strategy.
Reverse repurchase agreements involve sales by the Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. During the reverse repurchase agreement period,
the Fund continues to receive principal and interest payments on these se cu ri
ties. Generally, the effect of such a transaction is that the Fund can recover
all or most of the cash invested in the portfolio securities involved during
the term of the reverse repurchase agreement, while it will be able to keep the
interest income associated with those portfolio securities. Such transactions
are only advantageous if the interest cost to the Fund of the reverse
repurchase transaction is less than the cost of obtaining the cash otherwise.
The Fund may enter into dollar rolls in which the Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Fund foregoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the lower forward price for the future purchase (often referred
to as the "drop") as well as by the interest earned on the cash proceeds of the
initial sale.
The Fund will establish a segregated account with its custodian bank in
which it will maintain cash, U.S. Government securities or other liquid 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. Under the requirements of the Investment Company Act of
1940, as amended (the "Act"), the Fund is required to maintain an asset
coverage (including the proceeds of the borrowings) of at least 300% of all
borrowings. The Fund does not expect to engage in reverse repurchase agreements
and dollar rolls with respect to greater than 25% of the Fund's
total assets.
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. There is no overall limit on
the percentage of the Fund's assets which may be committed to the purchase of
securities on a when-issued, delayed delivery or forward commitment basis. An
increase in the percentage of the Fund's assets committed to the purchase of
securities on a when-issued, delayed delivery or forward commitment basis may
increase the volatility of the Fund's net asset value.
When, As and If Issued Securities. The Fund may purchase securities on a "when,
as and if issued" basis under which the issuance of the security depends upon
the occurrence of a subsequent event, such as approval of a merger, corporate
reorganization, leveraged buyout or debt restructuring. If the anticipated
event does not occur and the
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<PAGE>
securities are not issued, the Fund will have lost an investment opportunity.
There is no overall limit on the percentage of the Fund's assets which may be
committed to the purchase of securities on a "when, as and if issued" basis. An
increase in the percentage of the Fund's assets committed to the purchase of
securities on a "when, as and if issued" basis may increase the volatility of
its net asset value.
Restricted Securities. The Fund may invest up to 5% of its total assets in
securities for which there is no readily available market including certain of
those which are subject to restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act")
or which are otherwise not readily marketable. (Securities eligible for resale
pursuant to Rule 144A under the Securities Act, and determined to be liquid
pursuant to the procedures discussed in the following paragraph, are not
subject to the foregoing restriction.) These securities are generally referred
to as private placements or restricted securities. Limitations on the resale of
such securities may have an adverse effect on their marketability, and may
prevent the Fund from disposing of them promptly at reasonable prices. The Fund
may have to bear the expense of registering such securities for resale and the
risk of substantial delays in effecting such registration.
The Securities and Exchange Commission has adopted Rule 144A under the
Securities Act of 1933, which permits the Fund to sell restricted securities to
qualified institutional buyers without limitation. The Investment Manager,
pursuant to procedures adopted by the Trustees of the Fund, will make a
determination as to the liquidity of each restricted security purchased by the
Fund. If a restricted security is determined to be "liquid," such security will
not be included within the category "illiquid securities," which under current
policy may not exceed 15% of the Fund's total assets.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to brokers, dealers
and other financial institutions, provided that such loans are callable at any
time by the Fund (subject to certain notice provisions described in the
Statement of Additional Information), and are at all times secured by cash or
cash equivalents such as money market instruments, 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. In the
event the borrower defaults on its obligation to return the loaned securities,
as a result of bankruptcy or otherwise, the Fund will seek to sell the
collateral, which action could involve costs or delays. In such case the Fund's
ability to recover its investment may be restricted or delayed.
Common Stocks. The Fund may invest in common stocks in an amount up to 20% of
its total assets in the circumstances described below when consistent with the
Fund's investment objectives.
The Fund may acquire common stocks when attached to or included in a unit
with fixed-income securities, or when acquired upon conversion of fixed-income
securities or upon exercise of warrants attached to fixed-income securities and
may purchase common stocks directly when such acquisitions are determined by
the Investment Manager to further the Fund's investment objectives.
For example, the Fund may purchase the common stock of companies involved in
takeovers or recapitalizations where the issuer, or a controlling stockholder,
has offered, or pursuant to a "going private" transaction is effecting, an
exhange of its common stock for newly-issued fixed-income securities. By
purchasing the common stock of the company issuing the fixed-income securities
prior to the consummation of the transaction or exchange offer, the Fund will
be able to obtain the fixed-income securities directly from the issuer at their
face value, eliminating the payment of a dealer's mark-up otherwise payable
when fixed-income securities are acquired from third parties, thereby
increasing the net yield to the shareholders of the Fund. While the Fund will
incur brokerage commissions in connection with its purchase of common stocks,
it is anticipated that the amount of such commissions will be significantly
less than the amount of such mark-up.
Fixed-income securities acquired by the Fund through the purchase of common
stocks under the circumstances described in the preceding paragraph are subject
to the general credit risks and interest rate risks to which all fixed-income
securities purchased by the Fund are subject. Such securities generally will be
rated Baa/BBB or lower as are the other high yield, high risk fixed income
securities in which the Fund may invest. In addition, since corporations
involved in takeover situations are often highly leveraged, that factor will be
evaluated by the Investment Manager as part of its credit risk determination
with respect to the purchase of particular common stocks for the Fund's
investment portfolio. In the event the Fund purchases common stock of a
corporation in anticipation of a transaction (pursuant to which the common
stock is to be exchanged for fixed-income securities) which fails to take
place, the Investment Manager will continue to hold such common stocks for the
Fund's portfolio only if it determines that continuing to hold such common
stock under those cir cum stances is consistent with the Fund's investment
objectives.
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<PAGE>
OPTIONS AND FUTURES TRANSACTIONS
The Fund is permitted to enter into call and put options on its portfolio
securities, including U.S. Government Securities and Mortgage-Backed Securities
and on various foreign currencies which are listed on several U.S. and foreign
securities exchanges and are written in over-the-counter transactions ("OTC
options"). Listed options are issued or guaranteed by the exchange on which
they trade or by a clearing corporation such as the Options Clearing
Corporation ("OCC"). The Fund is permitted to write covered call options on
portfolio securities which are denominated in either U.S. dollars or foreign
currencies, without limit, in order to hedge against the decline in the value
of a security or currency in which such security is denominated and to close
out long call option positions. The Fund may purchase listed and OTC call and
put options in amounts equalling up to 5% of its total assets. The Fund may
purchase call options only to close out a covered call position or to protect
against an increase in the price of a security it anticipates purchasing or, in
the case of call options on a foreign currency, to hedge against an adverse
exchange rate change of the currency in which the security it anticipates
purchasing is denominated vis-a-vis the currency in which the exercise price is
denominated. The Fund may purchase put options on securities which it holds in
its portfolio only to protect itself against a decline in the value of the
security. The Fund may also purchase put options to close out written put
positions. There are no other limits on the Fund's ability to purchase call and
put options.
The Fund may purchase and sell financial futures contracts that are currently
traded, or may in the future be traded, on U.S. and foreign commodity exchanges
on such underlying fixed-income securities as U.S. Treasury bonds, notes, and
bills, Mortgage-Backed Securities and/or any foreign government fixed-income
security ("interest rate" futures), on various currencies ("currency" futures)
and on such indexes of U.S. or foreign fixed-income securities as may exist or
come into being, such as the Moody's Investment Grade Corporate Bond Index
("index" futures). The Fund will purchase or sell interest rate futures
contracts for the purpose of hedging some or all of the value of its portfolio
securities (or anticipated portfolio securities) against changes in prevailing
interest rates. The Fund will purchase or sell index futures contracts for the
purpose of hedging some or all of its portfolio (or anticipated portfolio)
securities against changes in their prices.
The Fund may also purchase and write call and put options on futures
contracts which are traded on an exchange and enter into closing transactions
with respect to such options to terminate an existing position. The Fund will
purchase and write options on futures contracts for identical purposes to those
set forth above for the purchase of a futures contract and the sale of a
futures contract or to close out a long or short position in futures contracts.
Risks of Options and Futures Transactions. The Fund may close out its position
as writer of an option, or as a buyer or seller of a futures contract, only if
a liquid secondary market exists for options or futures contracts of that
series. There is no assurance that such a market will exist, particularly in
the case of OTC options, as such options will generally only be closed out by
entering into a closing purchase transaction with the purchasing dealer. Also,
Exchanges may limit the amount by which the price of many futures contracts may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased.
While the futures contracts and options transactions to be engaged in by the
Fund for the purpose of hedging the Fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such instruments.
One such risk is that the Fund's Investment Manager could be incorrect in its
expectations as to the direction or extent of various interest rate or price
movements or the time span within which the movements take place. For example,
if the Fund sold futures contracts for the sale of securities in anticipation
of an increase in interest rates, and then interest rates went down instead,
causing bond prices to rise, the Fund would lose money on the sale. Another
risk which will arise in employing futures contracts to protect against the
price volatility of portfolio securities is that the prices of securities,
currencies and indexes subject to futures contracts (and thereby the futures
contract prices) may correlate imperfectly with the behavior of the U.S. dollar
cash prices of the Fund's portfolio securities and their denominated
currencies. 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. See the Statement of Additional Information for
further discussion of such risks.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
In order to hedge against adverse price movements in the securities held in its
portfolio and the currencies in which they are denominated (as well as the
securities it might wish to purchase and their denominated currencies) the Fund
may engage in transactions in forward foreign currency contracts. A forward
foreign currency exchange contract ("forward contract") involves an obligation
to purchase or sell a currency at a future date, which may be any fixed number
of days from the date of the contract agreed upon by the parties, at a price
set at the time of the contract. The Fund may enter into
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<PAGE>
forward contracts as a hedge against fluctuations in future foreign exchange
rates.
The Fund will enter into forward contracts under various circumstances. When
the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may, for example, desire to "lock in" the
price of the security in U.S. dollars or some other foreign currency which the
Fund is temporarily holding in its portfolio. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars or other
currency, of the amount of foreign currency involved in the underlying security
transactions, the Fund will be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar or
other currency which is being used for the security purchase and the foreign
currency in which the security is denominated during the period between the
date on which the security is purchased or sold and the date on which payment
is made or received.
At other times, when, for example, the Investment Manager believes that the
currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar or some other foreign currency, the Fund may enter into
a forward contract to sell, for a fixed amount of dollars or other currency,
the amount of foreign currency approximating the value of some or all of the
Fund's portfolio securities (or securities which the Fund has purchased for its
portfolio) denominated in such foreign currency. Under identical circumstances,
the Fund may enter into a forward contract to sell, for a fixed amount of U.S.
dollars or other currency, an amount of foreign currency other than the
currency in which the securities to be hedged are denominated approximating the
value of some or all of the portfolio securities to be hedged. This method of
hedging, called "cross-hedging," will be selected by the Investment Manager
when it is determined that the foreign currency in which the portfolio
securities are denominated has insufficient liquidity or are trading at a
discount as compared with some other foreign currency with which it tends to
move in tandem.
In addition, when the Fund's Investment Manager anticipates purchasing
securities at some time in the future, and wishes to lock in the current
exchange rate of the currency in which those securities are denominated against
the U.S. dollar or some other foreign currency, the Fund may enter into a
forward contract to purchase an amount of currency equal to some or all of the
value of the anticipated purchase, for a fixed amount of U.S. dollars or other
currency.
Lastly, the Fund is permitted to enter into forward contracts with respect to
currencies in which certain of its portfolio securities are denominated and on
which options have been written (see "Options and Futures transactions").
In all of the above circumstances, if the currency in which the Fund's
portfolio securities (or anticipated portfolio securities) are denominated
rises in value with respect to the currency which is being purchased (or sold),
then the Fund will have realized fewer gains than had the Fund not entered into
the forward contracts. Moreover, the precise matching of the forward contract
amounts and the value of the securities involved will not generally be
possible, since the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it matures.
The successful use of the foregoing investment practices draws upon the
Investment Manager's special skills and experience with respect to such
instruments and usually depends upon the Investment Manager's ability to
forecast currency exchange rate movements correctly. Should exchange rates move
in an unexpected manner, the Fund may not achieve the anticipated benefits of
forward contracts or may realize losses and thus be in a worse position than if
such strategies had not been used. Unlike many exchange-traded futures
contracts and options on futures contracts, there are no daily price
fluctuation limits with respect to options on currencies and forward contracts,
and adverse market movements could therefore continue to an unlimited extent
over a period of time. In addition, the correlation between movements in the
prices of such instruments and movements in the price of currencies hedged or
used for cover will not be perfect and could produce unanticipated losses.
The Fund is not required to enter into such transactions with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Investment Manager. The Fund generally will not enter into a
forward contract with a term of greater than one year, although it may enter
into forward contracts for periods of up to five years. The Fund may be limited
in its ability to enter into hedging transactions involving forward contracts
by the Internal Revenue Code requirements relating to qualifications as a
regulated investment company (see "Dividends, Distributions and Taxes").
Except as specified, the investment policies and practices discussed above
are not fundamental policies of the Fund and may be changed without shareholder
approval.
PORTFOLIO MANAGEMENT
The Fund's portfolio is actively managed by its Investment Manager with a view
to achieving the Fund's investment objectives. In determining which securities
to purchase for the Fund or hold in the Fund's portfolio, the Investment
Manager will rely on information from various sources, including the rating of
the security, research, analysis and appraisals of brokers and dealers,
including Dean Witter Reynolds Inc.
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<PAGE>
("DWR"), a broker-dealer affiliate of InterCapital, the views of Trustees of
the Fund and others regarding economic developments and interest rate trends,
and the Investment Manager's own analysis of factors they deem relevant. The
Fund is managed within InterCapital's High Yield Bond Group, which manages six
funds and fund portfolios, with approximately $1.3 billion in assets at
November 30, 1993. Peter M. Avelar, Rajesh K. Gupta and Vinh Q. Tran have been
the primary portfolio managers of the Fund since its inception. Peter M.
Avelar, Senior Vice President of InterCapital, has been managing portfolios
comprised of high yield fixed-income securities at InterCapital since December,
1990. Prior to joining InterCapital, Mr. Avelar was affiliated with PaineWebber
Asset Management as a First Vice President and Portfolio Manager. Rajesh K.
Gupta, Senior Vice President of InterCapital, has been managing portfolios
comprised of government securities at InterCapital for over five years. Vinh Q.
Tran, Vice President of InterCapital, has been managing portfolios comprised of
worldwide fixed-income securities at InterCapital since February, 1989. Prior
to joining InterCapital, Mr. Tran was affiliated with Aetna Life and Casualty
Co. as a Director of International Investments.
Securities purchased by the Fund are generally sold by dealers acting as
principal for their own accounts. Brokerage commissions are not normally
charged but such transactions generally involve costs in the form of spreads
between bid and asked prices. Orders for transactions in other portfolio
securities and commodities are placed for the Fund with a number of brokers and
dealers, including DWR. Pursuant to an order of the Securities and Exchange
Commission, the Fund may effect principal transactions in certain money market
instruments with DWR. In addition, the Fund may incur brokerage commissions on
transactions conducted through DWR.
The Fund may sell portfolio securities without regard to the length of time
that they have been held, in order to take advantage of new investment
opportunities or yield differentials, or because the Fund desires to preserve
gains or limit losses due to changing economic conditions, interest rate
trends, or the financial condition of the issuer.
The expenses of the Fund relating to its portfolio management are likely to
be greater than those incurred by other investment companies investing
primarily in securities issued by domestic issuers such as custodial costs,
brokerage commissions and other transaction charges related to investing on
foreign markets are generally higher than in the United States. Short-term
gains and losses may result from the aforementioned portfolio transactions. See
"Dividends, Distributions and Taxes" for a discussion of the tax implications
of the Fund's trading policy.
INVESTMENT RESTRICTIONS
- -------------------------------------------------------------------------------
The investment restrictions listed below are among the restrictions which have
been adopted by the Fund as fundamental policies. Under the Act, a fundamental
policy may not be changed without the vote of a majority of the outstanding
voting securities of the Fund, as defined in the Act. For purposes of the
following limitations (with the exception of Restriction 4): (i) all percentage
limitations apply immediately after a purchase or initial investment, and (ii)
any subsequent change in any applicable percentage resulting from market
fluctuations or other changes in total or net assets does not require
elimination of any security from the portfolio.
The Fund may not:
1. Invest more than 5% of its total assets in the securities of any one
issuer (other than obligations of, or guaranteed by, the United States
Government, its agencies or instrumentalities).
2. 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 and Asset-Backed Securities or to any obligation issued or guaranteed by
the United States Government, its agencies or instrumentalities.
3. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry, except that the Fund will invest at least 25% of
its total assets in Mortgage-Backed Securities under normal market conditions.
For the purpose of this restriction, gas, electric, water and telephone
utilities will be treated as being a separate industry. This restriction does
not apply to obligations issued or guaranteed by the United States Government
or its agencies or instrumentalities.
4. Borrow money in excess of 33 1/3% of the Fund's total assets (including
the proceeds of the borrowings).
5. Purchase more than 10% of the voting securities, or more than 10% of any
class of securities, of any issuer. For purposes of this restriction, all
outstanding debt securities of an issuer are considered as one class and all
preferred stocks of an issuer are considered as one class.
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<PAGE>
PURCHASE OF FUND SHARES
- -------------------------------------------------------------------------------
The Fund offers its shares for sale to the public on a continuous basis.
Pursuant to a Distribution Agreement between the Fund and Dean Witter
Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager,
shares of the Fund are distributed by the Distributor and offered by DWR and
other dealers who have entered into selected dealer agreements with the
Distributor ("Selected Broker-Dealers"). The principal executive office of the
Distributor is located at Two World Trade Center, New York, New York 10048.
The minimum initial purchase is $1,000. Subsequent purchases of $100 or more
may be made by sending a check, payable to Dean Witter Diversified Income
Trust, directly to Dean Witter Trust Company (the "Transfer Agent") at P.O. Box
1040, Jersey City, NJ 07303 or by contacting an account executive of DWR or
other Selected-Broker Dealer. In the case of investments pursuant to Systematic
Payroll Deduction Plans (including Individual Retirement Plans), the Fund, in
its discretion, may accept investments without regard to any minimum amounts
which would otherwise be required if the Fund has reason to believe that
additional investments will increase the investment in all accounts under such
Plans to at least $1,000. Certificates for shares purchased will not be issued
unless a request is made by the shareholder in writing to the Transfer Agent.
The offering price will be the net asset value per share next determined
following receipt of an order (see "Determination of Net Asset Value").
Shares of the Fund are sold through the Distributor on a normal five business
day settlement basis; that is payment is due on the fifth business day
(settlement date) after the order is placed with the Distributor. Since DWR and
other Selected Broker-Dealers forward investors' funds on settlement date, they
will benefit from the temporary use of the funds if payment is made prior
thereto. As noted above, orders placed directly with the Transfer Agent must be
accompanied by payment. Investors will be entitled to receive dividends and
capital gains distributions if their order is received by the close of business
on the day prior to the record date for such distributions. While no sales
charge is imposed at the time shares are purchased, a contingent deferred sales
charge may be imposed at the time of redemption (see "Redemptions and
Repurchases"). The Fund and the Distributor reserve the right to reject any
purchase orders.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Act (the "Plan"), under which the Fund pays the Distributor a fee, which is
accrued daily and payable monthly, at an annual rate of 0.85% of the lesser of:
(a) the average daily aggregate gross sales of the Fund's shares since the
inception of the Fund (not including reinvestments of dividends or capital
gains distributions), less the average daily aggregate net asset value of the
Fund's shares redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or waived; or (b) the Fund's average
daily net assets. This fee is treated by the Fund as an expense in the year it
is accrued. A portion of the fee payable pursuant to the Plan, equal to 0.20%
of the Fund's average daily net assets, is characterized as a service fee
within the meaning of NASD guidelines.
Amounts paid under the Plan are paid to the Distributor to compensate it for
the services provided and the expenses borne by the Distributor and others in
the distribution of the Fund's shares, including the payment of commissions for
sales of the Fund's shares and incentive compensation to and expenses of DWR's
account executives and others who engage in or support distribution of shares,
including overhead and telephone expenses; printing and distribution of
prospectuses and reports used in connection with the offering of the Fund's
shares to other than current shareholders; and preparation, printing and
distribution of sales literature and advertising materials. In addition, the
Distributor may utilize fees paid pursuant to the Plan to compensate DWR and
other Selected Broker- Dealers for their opportunity costs in advancing such
amounts, which compensation would be in the form of a carrying charge on any
unreimbursed distribution expenses.
For the fiscal year ended October 31, 1993, the Fund accrued payments under
the Plan amounting to $882,934, which amount is equal to 0.85% of the Fund's
average daily net assets for the fiscal period. These payments accrued under
the Plan were calculated pursuant to clause (b) of the compensation formula
under the Plan.
At any given time, the expenses in distributing shares of the Fund may be in
excess of the total of (i) the payments made by the Fund pursuant to the Plan,
and (ii) the proceeds of contingent deferred sales charges paid by investors
upon the redemption of shares (see "Redemptions and Repurchases-- Contin gent
Deferred Sales Charge"). For example, if $1 million in expenses in distributing
shares of the Fund had been incurred and $750,000 had been received as
described in (i) and (ii) above, the excess expense would amount to $250,000.
The Distributor has advised the Fund that such excess amount, including the
carrying charge described above, totalled $4,663,472 at October 31, 1993, which
was equal to 2.79% of the Fund's net assets on such date. Because there is no
17
<PAGE>
requirement under the Plan that the Distributor be reimbursed for all
distribution expenses or any requirement that the Plan be continued from year
to year, this excess amount does not constitute a liability of the Fund.
Although there is no legal obligation for the Fund to pay expenses incurred in
excess of payments made to the Distributor under the Plan, and the proceeds of
contingent deferred sales charges paid by investors upon redemption of shares,
if for any reason the Plan is terminated the Trustees will consider at that
time the manner in which to treat such expenses. Any cumulative expenses
incurred, but not yet recovered through distribution fees or contingent
deferred sales charges, may or may not be recovered through future distribution
fees or contingent deferred sales charges.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is determined by taking the value of
all the assets of the Fund, subtracting all liabilities, dividing by the number
of shares outstanding and adjusting the result to the nearest cent. The net
asset value per share is determined by the Investment Manager as of 4:00 P.M.
New York time on each day that the New York Stock Exchange is open. The net
asset value per share will not be determined on Good Friday and on such other
federal and non-federal holidays as are observed by the New York Stock
Exchange.
In the calculation of the Fund's net asset value: (1) an equity portfolio
security listed or traded on the New York or American Stock Exchange or other
domestic or foreign stock exchange is valued at its latest sale price on that
exchange; if there were no sales that day, the security is valued at the latest
bid price (in cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated as the primary market by the
Trustees); and (2) all other portfolio securities for which over-the-counter
market quotations are readily available are valued at the latest bid price.
When market quotations are not readily available, including circumstances under
which it is determined by the Investment Manager that sale or bid prices are
not reflective of a security's market value, portfolio securities are valued at
their fair value as determined in good faith under procedures established by
and under the general supervision of the Fund's Trustees. For valuation
purposes, quotations of foreign portfolio securities, other assets and
liabilities and forward contracts stated in foreign currency are translated
into U.S. dollar equivalents at the prevailing market rates as of the morning
of valuation.
Short-term debt securities with remaining maturities of sixty days or less at
the time of purchase are valued at amortized cost, unless the Trustees
determine such does not reflect the securities' market value, in which case
these securities will be valued at their fair value as determined by the
Trustees.
Certain of the Fund's portfolio securities may be valued by an outside
pricing service approved by the Fund's Trustees. The pricing service utilizes a
matrix system incorporating security quality, maturity and coupon as the
evaluation model parameters, and/or research evaluations by its staff,
including review of broker-dealer market price quotations in determining what
it believes is the fair valuation of the portfolio securities valued by such
pricing service.
Generally, trading in foreign securities, as well as corporate bonds, United
States Government securities and money market instruments, is substantially
com-pleted each day at various times prior to the regular close of the New York
Stock Exchange. The values of such securities used in computing the net asset
value of the Fund's shares are determined as of such times. Foreign currency
exchange rates are also generally determined prior to the regular close of the
New York Stock Exchange. Occasionally, events which affect the values of such
securities and such exchange rates may occur between the times at which they
are determined and the close of the New York Stock Exchange and will therefore
not be reflected in the computation of the Fund's net asset value. If events
materially affecting the value of such securities occur during such period,
then these securities will be valued at their fair value as determined in good
faith under procedures established by and under the supervision of the
Trustees.
SHAREHOLDER SERVICES
- -------------------------------------------------------------------------------
Automatic Investment of Dividends and Distribu tions. All income dividends and
capital gains distributions are automatically paid in full and fractional
shares of the Fund (or, if specified by the shareholder, any other open-end
investment company for which InterCapital serves as investment manager
(collectively, with the Fund, the "Dean Witter Funds")), unless the shareholder
requests that they be paid in cash. Shares so acquired are not subject to the
imposition of a contingent deferred sales charge upon their redemption (see
"Redemptions and Repurchases").
EasyInvestSM. Shareholders may subscribe to EasyInvest, an automatic purchase
plan which provides for any amount from $100 to $5,000 to be transferred
automatically from a checking or savings account, on a semi-monthly, monthly or
quarterly
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basis, to the Fund's Transfer Agent for investment in shares of the Fund.
Systematic Withdrawal Plan. A systematic withdrawal plan (the "Withdrawal
Plan") is available for shareholders who own or purchase shares of the Fund
having a minimum value of $10,000 based upon the then current net asset value.
The Withdrawal Plan provides for monthly or quarterly (March, June, September,
December) checks in any dollar amount, not less than $25, or in any whole
percentage of the account balance, on an annualized basis. Any applicable
contingent deferred sales charge will be imposed on shares redeemed under the
Withdrawal Plan (see "Redemptions and Repurchases--Contingent Deferred Sales
Charge"). Therefore, any shareholder participating in the Withdrawal Plan will
have sufficient shares redeemed from his or her account so that the proceeds
(net of any applicable contingent deferred sales charge) to the shareholder
will be the designated monthly or quarterly amount.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about any of
the above services.
Tax Sheltered Retirement Plans. Retirement plans are available through the
Distributor for use by corporations, the self-employed, eligible Individual
Retirement Accounts and Custodial Accounts under Section 403(b)(7) of the
Internal Revenue Code. Adoption of such plans should be on advice of legal
counsel or tax adviser.
For further information regarding plan administration, custodial fees and
other details, investors should contact their account executive or the Transfer
Agent.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders an "Exchange Privilege" allowing
the exchange of shares of the Fund for shares of other Dean Witter Funds sold
with a contingent deferred sales charge ("CDSC funds"), and for shares of Dean
Witter Short-Term U.S. Treasury Trust, Dean Witter Limited Term Municipal
Trust, Dean Witter Short-Term Bond Fund and five Dean Witter Funds which are
money market funds (the foregoing eight non-CDSC funds are hereinafter referred
to as the "Exchange Funds"). Exchanges may be made after the shares of the Fund
acquired by purchase (not by exchange or dividend reinvestment) have been held
for thirty days. There is no waiting period for exchanges of shares acquired by
exchange or dividend reinvestment.
An exchange to another CDSC fund or any Exchange Fund that is not a money
market fund is on the basis of the next calculated net asset value per share of
each fund after the exchange order is received. When exchanging into a money
market fund from the Fund, shares of the Fund are redeemed out of the Fund at
their next calculated net asset value and the proceeds of the redemption are
used to purchase shares of the money market fund at their net asset value
determined the following business day. Subsequent exchanges between any of the
money market funds and any of the CDSC funds can be effected on the same basis.
No contingent deferred sales charge ("CDSC") is imposed at the time of any
exchange, although any applicable CDSC will be imposed upon ultimate
redemption. Shares of the Fund acquired in exchange for shares of another CDSC
fund having a different CDSC schedule than that of this Fund will be subject to
the CDSC schedule of this Fund, even if such shares are subsequently re-
exchanged for shares of the CDSC fund originally purchased. During the period
of time the shareholder remains in the Exchange Fund (calculated from the last
day of the month in which the Exchange Fund shares were acquired), the holding
period (for the purpose of determining the rate of the CDSC) is frozen. If
those shares are subsequently reexchanged for shares of a CDSC fund, the
holding period previously frozen when the first exchange was made resumes on
the last day of the month in which shares of a CDSC fund are reacquired. Thus,
the CDSC is based upon the time (calculated as described above) the shareholder
was invested in a CDSC fund (see "Redemptions and Repurchases--Contingent
Deferred Sales Charge"). However, in the case of shares of the Fund exchanged
into an Exchange Fund, upon a redemption of shares which results in a CDSC
being imposed, a credit (not to exceed the amount of the CDSC) will be given in
an amount equal to the Exchange Fund 12b-1 distribution fees which are
attributable to those shares. (Exchange Fund 12b-1 distribution fees are
described in the prospectuses for those funds.)
In addition, shares of the Fund may be acquired in exchange for shares of
Dean Witter Funds sold with a front-end sales charge ("front-end sales charge
funds") but shares of the Fund, however acquired, may not be exchanged for
shares of front-end sales charge funds. Shares of a CDSC fund acquired in
exchange for shares of a front-end sales charge fund (or in exchange for shares
of other Dean Witter Funds for which shares of a front-end sales charge fund
have been exchanged) are not subject to any CDSC upon their redemption.
Purchases and exchanges should be made for investment purposes only. A
pattern of frequent exchanges may be deemed by the Investment Manager to be
abusive and contrary to the best interests of the Fund's other shareholders
and, at the Investment Manager's discretion, may be limited by the Fund's
refusal to accept additional purchases and/or exchanges from the investor.
Although the Fund does not have any specific definition of what constitutes a
pattern of frequent
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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.
If DWR or other Selected Broker-Dealer is the current dealer of record and
its account numbers are part of the account information, shareholders may
initiate an exchange of shares of the Fund for shares of any of the Dean Witter
Funds (for which the Exchange Privilege is available) pursuant to this Exchange
Privilege by contacting their account executive (no Exchange Privilege
Authorization Form is required). Other shareholders (and those shareholders who
are clients of DWR or another Selected Broker-Dealer but who wish to make
exchanges directly by writing or telephoning the Transfer Agent) must complete
and forward to the Transfer Agent an Exchange Privilege Authorization Form,
copies of which may be obtained from the Transfer Agent, to initiate an
exchange. If the Authorization Form is used, exchanges may be made in writing
or by contacting the Transfer Agent at (800) 526-3143 (toll free). The Fund
will employ reasonable procedures to confirm that exchange instructions
communicated over the telephone are genuine. Such procedures may include
requiring various forms of personal identification such as name, mailing
address, social security or other tax identification number and DWR or other
Selected Broker-Dealer account number (if any). Telephone instructions may also
be recorded. If such procedures are not employed, the Fund may be liable for
any losses due to unauthorized or fraudulent instructions. Telephone exchange
instructions will be accepted if received by the Transfer Agent between 9:00
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 experience of the Dean Witter Funds in the past.
Shareholders should contact their DWR or other Selected Broker-Dealer account
executive or the Transfer Agent for further information about the Exchange
Privilege.
REDEMPTIONS AND REPURCHASES
- -------------------------------------------------------------------------------
Redemption. Shares of the Fund can be redeemed for cash at any time at their
current net asset value per share next determined; however, such redemption
proceeds may be reduced by the amount of any applicable contingent deferred
sales charges (see below). If shares are held in a shareholder's account
without a share certificate, a written request for redemption sent to the
Fund's Transfer Agent at P.O. Box 983, Jersey City, NJ 07303 is required. If
certificates are held by the shareholder(s), the shares may be redeemed by
surrendering the certificate(s) with a written request for redemption, along
with any additional information required by the Transfer Agent.
Contingent Deferred Sales Charge. Shares of the Fund which are held for six
years or more after purchase (calculated from the last day of the month in
which the shares were purchased) will not be subject to any charge upon
redemption. Shares redeemed sooner than six years after purchase may, however,
be subject to a charge upon redemption. This charge is called a "contingent
deferred sales charge" ("CDSC"), which will be a percentage of the dollar
amount of shares redeemed and will be assessed on an amount equal to the lesser
of the current market value or the cost of the shares being redeemed. The size
of this percentage will depend upon how long the shares have been held, as set
forth in the table below:
Contingent Deferred
Year Since Sales Charge
Purchase as a Percentage of
Payment Made Amount Redeemed
- ------------- -----------------
First.......................... 5.0%
Second......................... 4.0%
Third.......................... 3.0%
Fourth......................... 2.0%
Fifth.......................... 2.0%
Sixth.......................... 1.0%
Seventh and thereafter......... None
A CDSC will not be imposed on: (i) any amount which represents an increase
in value of shares purchased within the six years preceding the redemption;
(ii) the current net asset value of shares purchased more than six years prior
to the redemption; and (iii) the current net asset value of shares
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purchased through reinvestment of dividends or distributions and/or shares
acquired in exchange for shares of Dean Witter Funds sold with a front-end
sales charge or of other Dean Witter Funds acquired in exchange for such
shares. Moreover, in determining whether a CDSC is applicable it will be
assumed that amounts described in (i), (ii) and (iii) above (in that order) are
redeemed first.
In addition, the CDSC, if otherwise applicable, will be waived in the case
of: (i) redemptions of shares held at the time a shareholder dies or becomes
disabled, only if the shares are (a) registered either in the name of an
individual shareholder (not a trust), or in the names of such shareholder and
his or her spouse as joint tenants with right of survivorship, or (b) held in a
qualified corporate or self-employed retirement plan, Individual Retirement
Account or Custodial Account under Section 403(b)(7) of the Internal Revenue
Code, provided in either case that the redemption is requested within one year
of the death or initial determination of disability, and (ii) redemptions in
connection with the following retirement plan distributions: (a) lump-sum or
other distributions from a qualified corporate or self-employed retirement plan
following retirement (or in the case of a "key employee" of a "top heavy" plan,
following attainment of age 59 1/2); (b) distributions from an Individual
Retirement Account or Custodial Account under Section 403(b)(7) of the Internal
Revenue Code following attainment of age 59 1/2; and (c) a tax-free return of
an excess contribution to an IRA. For the purpose of determining disability,
the Distributor utilizes the definition of disability contained in Section
72(m)(7) of the Internal Revenue Code, which relates to the inability to engage
in gainful employment. All waivers will be granted only following receipt by
the Distributor of confirmation of the shareholder's entitlement.
Repurchase. DWR and other Selected Broker-Dealers are authorized to repurchase
shares represented by a share certificate which is delivered to any of their
offices. Shares held in a shareholder's account without a share certificate may
also be repurchased by DWR and other Selected Broker-Dealers upon the
telephonic request of the shareholder. The repurchase price is the net asset
value next computed (see "Purchase of Fund Shares") after such repurchase order
is received by DWR or other Selected Broker-Dealer, reduced by any applicable
CDSC.
The CDSC, if any, will be the only fee imposed by the Fund, the Distributor,
DWR, and other Selected Broker-Dealers. The offer by DWR and other Selected
Broker-Dealers to repurchase shares may be suspended without notice by them at
any time. In that event, shareholders may redeem their shares through the
Fund's Transfer Agent as set forth above under "Redemption."
Payment for Shares Redeemed or Repurchased. Payment for shares presented for
repurchase or redemption will be made by check within seven days after receipt
by the Transfer Agent of the certificate and/or written request in good order.
Such payment may be postponed or the right of redemption suspended under
unusual circumstances. If the shares to be redeemed have recently been
purchased by check, payment of the redemption proceeds may be delayed for the
minimum time needed to verify that the check used for investment has been
honored (not more than fifteen days from the time of receipt of the check by
the Transfer Agent). Shareholders maintaining margin accounts with DWR or
another Selected Broker-Dealer are referred to their account executive
regarding restrictions on redemption of shares of the Fund pledged in the
margin account.
Reinstatement Privilege. A shareholder who has had his or her shares redeemed
or repurchased and has not previously exercised this reinstatement privilege
may, within thirty days after the date of the redemption or repurchase,
reinstate any portion or all of the proceeds of such redemption or repurchase
in shares of the Fund at the net asset value next determined after a
reinstatement request, together with the proceeds, is received by the Transfer
Agent and receive a pro rata credit for any CDSC paid in connection with such
redemption or repurchase.
Involuntary Redemption. The Fund reserves the right, on sixty days' notice, to
redeem at their net asset value the shares of any shareholder (other than
shares held in an Individual Retirement Account or custodial account under
Section 403(b)(7) of the Internal Revenue Code) whose shares have a value of
less than $100 as a result of redemptions or repurchases, or such lesser amount
as may be fixed by the Board of Trustees. However, before the Fund redeems such
shares and sends the proceeds to the shareholder, it will notify the
shareholder that the value of the shares is less than $100 and allow the
shareholder sixty days to make an additional investment in an amount which will
increase the value of the account to $100 or more before the redemption is
processed. No CDSC will be imposed on any involuntary redemption.
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<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
Dividends and Distributions. The Fund intends to declare and pay monthly income
dividends and to distribute net short-term and net long-term capital gains, if
any, at least once each year. The Fund may, however, determine either to
distribute or to retain all or a portion of any long-term capital gains in any
year for reinvestment.
All dividends and capital gains distributions will be paid in additional
Fund shares and automatically credited to the shareholder's account without
issuance of a share certificate unless the shareholder requests in writing that
all dividends and/or distributions be paid in cash. (See "Shareholder
Services--Automatic Investment of Dividends and Distributions".)
Taxes. Because the Fund intends to distribute all of its net investment income
and net capital gains to shareholders and otherwise remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code,
it is not expected that the Fund will be required to pay any federal income tax
on such income and capital gains.
Gains or losses on the Fund's transactions in certain listed options on and
futures and options on futures traded on U.S. exchanges generally are 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 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.
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. Since the Fund's income is expected
to be derived primarily from interest rather than dividends, only a small
portion, if any, of the Fund's dividends and distributions is expected to be
eligible for the dividends received deduction to corporation shareholders.
After the end of the calendar year, shareholders will receive full
information on their dividends and capital gains distributions for tax
purposes.
To avoid being subject to a 31% federal backup withholding tax on taxable
dividends, capital gains distributions and the proceeds of redemptions and
repurchases, shareholders' taxpayer identification numbers must be furnished
and certified as to their accuracy. Shareholders who are not citizens or
residents of, or entities organized in, the United States may be subject to
withholding taxes of up to 30% on certain payments received from the Fund.
Dividends, interest and gains received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. If it qualifies for
and has made the appropriate election with the Internal Revenue Service, the
Fund will report annually to its shareholders the amount per share of such
taxes, to enable shareholders to claim United States foreign tax credits or
deductions with respect to such taxes. In the absence of such an election, the
Fund would deduct foreign tax in computing the amount of its distributable
income.
The foregoing discussion relates solely to the federal income tax
consequences of an investment in the Fund. Distributions may also be subject to
state and local taxes; therefore, each shareholder is advised to consult his or
her own tax adviser.
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
From time to time the Fund may quote its "yield" and/or its "total return" in
advertisements and sales literature. Both the yield and the total return of the
Fund are based on historical earnings and are not intended to indicate future
performance. The yield of the Fund is computed by dividing the Fund's net
investment income over a 30-day period by an average value (using the average
number of shares entitled to receive dividends and the net asset value per
share at the end of the period), all in accordance with applicable regulatory
requirements. Such amount is compounded for six months and then annualized for
a twelve-month period to derive the Fund's yield.
22
<PAGE>
The "average annual total return" of the Fund refers to a figure reflecting
the average annualized percentage increase (or decrease) in the value of an
initial investment in the Fund of $1,000 over the life of the Fund. Average
annual total return reflects all income earned by the Fund, any appreciation or
depreciation of the Fund's assets and all expenses incurred by the Fund, for
the stated periods. It 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, and year-by-year or
other types of total return figures. The Fund may also advertise the growth of
hypothetical investments of $10,000, $50,000 and $100,000 in shares of the
Fund. The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent organizations
(such as mutual fund performance rankings of Lipper Analytical Services, Inc.).
ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
Voting Rights. All shares of beneficial interest of the Fund are of $0.01 par
value and are equal as to earnings, assets and voting privileges.
The Fund is not required to hold Annual Meetings of Shareholders and in
ordinary circumstances the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances, the Trustees may be removed by action of the Trustees or by the
shareholders.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that Fund
obligations include such disclaimer and provides for indemnification and
reimbursement of expenses out of the Fund's property for any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability and
the nature of the Fund's assets and operations, the possibility of the Fund
being unable to meet its obligations is remote and, in the opinion of
Massachusetts counsel to the Fund, the risk to Fund shareholders of personal
liability is remote.
Shareholder Inquiries. All inquiries regarding the Fund should be directed to
the Fund at the telephone number or address set forth on the front cover of
this Prospectus.
23
<PAGE>
APPENDIX--RATINGS OF INVESTMENTS
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")
BOND RATINGS
-------------------
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate,
and therefore not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this
class.
B Bonds which are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca present obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Conditional Rating: Municipal bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its corporate and
municipal bond rating system. The modifier 1 indicates that the security ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and a modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
24
<PAGE>
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1, Prime-2, Prime-3.
Issuers rated Prime-1 have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 have a strong capacity for
repayment of short-term promissory obligations; and Issuers rated Prime-3 have
an acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S")
BOND RATINGS
------------------
A Standard & Poor's bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. The
ratings are based, in varying degrees, on the following considerations: (1)
likelihood of default-capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with any rating
and may, on occasion, rely on unaudited financial information. The ratings may
be changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or for other reasons.
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher-rated categories.
Bonds rated AAA, AA, A and BBB are considered investment grade bonds.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties
or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and
principal payment.
B Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions would likely
impair capacity or willingness to pay interest and repay principal.
CCC Debt rated CCC has a current identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic
conditions to meet timely payments of interest and repayments of
principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal.
CC The rating CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC rating.
25
<PAGE>
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC--debt rating.
CI The rating CI is reserved for income bonds on which no interest is
being paid.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
Bonds rated BB, B, CCC, CC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest
and repay principal. BB indicates the least degree of speculation and
C the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within
the major ratings categories.
In the case of municipal bonds, the foregoing ratings are sometimes
followed by a "p" which indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project
being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of
the project, makes no comment on the likelihood or risk of default
upon failure of such completion.
COMMERCIAL PAPER RATINGS
Standard and Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. The commercial paper rating is not a recommendation to purchase
or sell a security. The ratings are based upon current information furnished by
the issuer or obtained by S&P from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information. Ratings are graded into group categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Ratings are applicable to both taxable and tax-exempt commercial paper. The
categories are as follows:
Issues assigned A ratings are regarded as having the greatest capacity for
timely payment. Issues in this category are further refined with the
designation 1, 2 and 3 to indicate the relative degree of safety.
A-1 indicates that the degree of safety regarding timely payment is very
strong.
A-2 indicates capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1".
A-3 indicates a satisfactory capacity for timely payment. Obligations
carrying this designation are, however, somewhat more vulnerable to
the adverse effects of changes in circumstances than obligations
carrying the higher designations.
26
<PAGE>
DEAN WITTER
DIVERSIFIED INCOME TRUST
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
TRUSTEES
Jack F. Bennett
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. John E. Jeuck
Dr. Manuel H. Johnson
Paul Kolton
Michael E. Nugent
Albert T. Sommers
Edward R. Telling
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Sheldon Curtis
Vice President, Secretary and
General Counsel
Peter M. Avelar
Vice President
Rajesh K. Gupta
Vice President
Vinh Q. Tran
Vice President
Thomas F. Caloia
Treasurer
CUSTODIANS
The Bank of New York
110 Washington Street
New York, New York 10286
The Chase Manhattan Bank
One Chase Plaza
New York, New York 10005
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Dean Witter Trust Company
Harborside Financial Center,
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
DEAN WITTER
DIVERSIFIED INCOME
TRUST
PROSPECTUS--DECEMBER 30, 1993
DEAN WITTER
DIVERSIFIED INCOME TRUST
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 392-2550
(800) 526-3143
