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Filed Pursuant to Rule 497(e)
Registration File No.: 33-44782
DEAN WITTER
DIVERSIFIED INCOME TRUST
PROSPECTUS -- JULY 28, 1997
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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.")
The Fund offers four classes of shares (each, a "Class"), each with a
different combination of sales charges, ongoing fees and other features. The
different distribution arrangements permit an investor to choose the method
of purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of the Fund held prior to
July 28, 1997 have been designated Class B shares. (See "Purchase of Fund
Shares--Alternative Purchase Arrangements.")
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 July 28, 1997, which has been filed with the
Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone numbers listed on this page.
The Statement of Additional Information is incorporated herein by reference.
TABLE OF CONTENTS
Prospectus Summary .................................................... 2
Summary of Fund Expenses .............................................. 4
Financial Highlights .................................................. 5
The Fund and its Management ........................................... 6
Investment Objectives and Policies .................................... 6
Risk Considerations .................................................. 11
Investment Restrictions ............................................... 18
Purchase of Fund Shares ............................................... 18
Shareholder Services .................................................. 27
Redemptions and Repurchases ........................................... 29
Dividends, Distributions and Taxes .................................... 30
Performance Information ............................................... 31
Additional Information ................................................ 31
Appendix--Ratings of Investments ...................................... 33
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 OR
(800) 869-NEWS (TOLL-FREE)
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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
31). The Fund offers four Classes of shares, each with a
different combination of sales charges, ongoing fees and
other features (see pages 18-26).
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Minimum The minimum initial investment for each Class is $1000 ($100
Purchase if the account is opened through EasyInvest(Service Mark)).
Class D shares are only available to persons investing $5
million or more and to certain other limited categories of
investors. For the purpose of meeting the minimum $5 million
investment for Class D shares, and subject to the $1,000
minimum initial investment for each Class of the Fund, an
investor's existing holdings of Class A shares and shares of
funds for which Dean Witter InterCapital Inc. serves as
investment manager ("Dean Witter Funds") that are sold with
a front-end sales charge, and concurrent investments in
Class D shares of the Fund and other Dean Witter Funds that
are multiple class funds, will be aggregated. The minimum
subsequent investment is $100 (see page 18).
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Investment A high level of current income; total return (income plus
Objectives capital appreciation) is a secondary objective.
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Investment A balanced allocation of assets consisting of approximately
Policies one-third of the Fund'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, U.S. Treasury securities and U.S. Government
Agency 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 6-18).
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Investment Dean Witter InterCapital Inc. ("InterCapital"), the
Manager Investment Manager of the Fund, and its wholly-owned
subsidiary, Dean Witter Services Company Inc., serve in
various investment management, advisory, management and
administrative capacities to 100 investment companies and
other portfolios with assets of approximately $96.6 billion
at June 30, 1997 (see page 6).
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Management Fee The Investment Manager receives a monthly fee at the annual
rate of 0.40% of daily net assets (see page 6).
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Distributor and Dean Witter Distributors Inc. (the "Distributor"). The Fund
Distribution Fee has adopted a distribution plan pursuant to Rule 12b-1 under
the Investment Company Act (the "12b-1 Plan") with respect
to the distribution fees paid by the Class A, Class B and
Class C shares of the Fund to the Distributor. The entire
12b-1 fee payable by Class A and a portion of the 12b-1 fee
payable by each of Class B and Class C equal to 0.20% of the
average daily net assets of Class B and 0.25% of the average
daily net assets of Class C are currently each characterized
as a service fee within the meaning of the National
Association of Securities Dealers, Inc. guidelines. The
remaining portion of the 12b-1 fee, if any, is characterized
as an asset-based sales charge (see pages 18 and 25).
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Alternative Four classes of shares are offered:
Purchase
Arrangements o Class A shares are offered with a front-end sales charge,
starting at 4.25% and reduced for larger purchases.
Investments of $1 million or more (and investments by
certain other limited categories of investors) are not
subject to any sales charge at the time of purchase but a
contingent deferred sales charge ("CDSC") of 1.0% may be
imposed on redemptions within one year of purchase. The Fund
is authorized to reimburse the Distributor for specific
expenses incurred in promoting the distribution of the
Fund's Class A shares and servicing shareholder accounts
pursuant to the Fund's 12b-1 Plan. Reimbursement may in no
event exceed an amount equal to payments at an annual rate
of 0.25% of average daily net assets of the Class (see pages
18, 21 and 25).
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2
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o Class B shares are offered without a front-end sales
charge, but will in most cases be subject to a CDSC (scaled
down from 5.0% to 1.0%) if redeemed within six years after
purchase. The CDSC will be imposed on any redemption of
shares if after such redemption the aggregate current value
of a Class B account with the Fund falls below the aggregate
amount of the investor's purchase payments made during the
six years preceding the redemption. A different CDSC
schedule applies to investments by certain qualified plans.
Class B shares are also subject to a 12b-1 fee assessed at
the annual rate of 0.85% of the lesser of: (a) the average
daily net sales of the Fund's Class B shares or (b) the
average daily net assets of Class B. All shares of the Fund
held prior to July 28, 1997 have been designated Class B
shares. Shares held before May 1, 1997 will convert to Class
A shares in May, 2007. In all other instances, Class B
shares convert to Class A shares approximately ten years
after the date of the original purchase (see pages 18, 23
and 25).
o Class C shares are offered without a front-end sales
charge, but will in most cases be subject to a CDSC of 1.0%
if redeemed within one year after purchase. The Fund is
authorized to reimburse the Distributor for specific
expenses incurred in promoting the distribution of the
Fund's Class C shares and servicing shareholder accounts
pursuant to the Fund's 12b-1 Plan. Reimbursement may in no
event exceed an amount equal to payments at an annual rate
of 0.85% of average daily net assets of the Class (see pages
18, 24 and 25).
o Class D shares are offered only to investors meeting an
initial investment minimum of $5 million and to certain
other limited categories of investors. Class D shares are
offered without a front-end sales charge or CDSC and are not
subject to any 12b-1 fee (see pages 18 and 25). Dividends
and Dividends from net investment income are declared and
paid monthly. Capital gains distributions, if any, are paid
Capital Gains at least once a year or are retained for
reinvestment by the Fund. Dividends and capital gains
distributions paid Distributions on shares of a Class are
automatically invested in additional shares of the same
class at net asset value unless the shareholder elects to
receive cash. Shares acquired by dividend and distribution
reinvestment will not be subject to any sales charge or CDSC
(see pages 27 and 30).
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Redemption Shares are redeemable by the shareholder at net asset value
less any applicable CDSC on Class A, Class B or Class C
shares. An account may be involuntarily redeemed if the
total value of the account is less than $100 or, if the
account was opened through EasyInvest(Service Mark), if
after twelve months the shareholder has invested less than
$1,000 in the account. (see page 29).
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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 6 through 18).
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The above is qualified in its entirety by the detailed information appearing
elsewhere in the Prospectus and in the Statement of Additional Information.
3
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SUMMARY OF FUND EXPENSES
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The following table illustrates all expenses and fees that a shareholder
of the Fund will incur. The expenses and fees set forth in the table are
based on the expenses and fees for the fiscal year ended October 31, 1996.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
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<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price) ................................................ 4.25%(1) None None None
Sales Charge Imposed on Dividend Reinvestments .................. None None None None
Maximum Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds)................. None(2) 5.00%(3) 1.00%(4) None
Redemption Fees.................................................. None None None None
Exchange Fee..................................................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET
ASSETS)
Management Fees ................................................. 0.40% 0.40% 0.40% 0.40%
12b-1 Fees (5)(6)................................................ 0.25% 0.85% 0.85% None
Other Expenses .................................................. 0.17% 0.17% 0.17% 0.17%
Total Fund Operating Expenses (7)................................ 0.82% 1.42% 1.42% 0.57%
</TABLE>
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(1) Reduced for purchases of $25,000 and over (see "Purchase of Fund
Shares--Initial Sales Charge Alternative--Class A Shares").
(2) Investments that are not subject to any sales charge at the time of
purchase are subject to a CDSC of 1.00% that will be imposed on
redemptions made within one year after purchase, except for certain
specific circumstances (see "Purchase of Fund Shares--Initial Sales
Charge Alternative--Class A Shares").
(3) The CDSC is scaled down to 1.00% during the sixth year, reaching zero
thereafter.
(4) Only applicable to redemptions made within one year after purchase (see
"Purchase of Fund Shares--Level Load Alternative--Class C Shares").
(5) The 12b-1 fee is accrued daily and payable monthly. The entire 12b-1
fee payable by Class A and a portion of the 12b-1 fee payable by each
of Class B and Class C equal to 0.20% of the average daily net assets
of Class B and 0.25% of the average daily net assets of Class C are
currently each characterized as a service fee within the meaning of
National Association of Securities Dealers, Inc. ("NASD") guidelines
and are payments made for personal service and/or maintenance of
shareholder accounts. The remainder of the 12b-1 fee, if any, is an
asset-based sales charge, and is a distribution fee 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 (see "Purchase of Fund Shares--Plan of Distribution").
(6) Upon conversion of Class B shares to Class A shares, such shares will
be subject to the lower 12b-1 fee applicable to Class A shares. No
sales charge is imposed at the time of conversion of Class B shares to
Class A shares. Class C shares do not have a conversion feature and,
therefore, are subject to an ongoing 0.85% distribution fee (see
"Purchase of Fund Shares--Alternative Purchase Arrangements").
(7) There were no outstanding shares of Class A, Class C or Class D prior
to the date of this Prospectus. Accordingly, "Total Fund Operating
Expenses," as shown above with respect to those Classes, are based upon
the sum of 12b-1 Fees, Management Fees and estimated "Other Expenses."
<TABLE>
<CAPTION>
EXAMPLES 1 Year 3 Years 5 Years 10 Years
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<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1)
a 5% annual return and (2) redemption at the end of each time period:
Class A ................................................................ $51 $68 $86 $140
Class B ................................................................ $64 $75 $98 $170
Class C................................................................. $24 $45 $78 $170
Class D ................................................................ $ 6 $18 $32 $ 71
You would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of the period:
Class A ................................................................ $51 $68 $86 $140
Class B ................................................................ $14 $45 $78 $170
Class C ................................................................ $14 $45 $78 $170
Class D ................................................................ $ 6 $18 $32 $ 71
</TABLE>
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THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF EACH CLASS 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," "Purchase of Fund Shares--Plan of
Distribution" and "Redemptions and Repurchases."
Long-term shareholders of Class B and Class C may pay more in sales charges,
including distribution fees, than the economic equivalent of the maximum
front-end sales charges permitted by the NASD.
4
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FINANCIAL HIGHLIGHTS
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The following ratios and per share data for a share of beneficial interest
outstanding throughout each of the periods through October 31, 1996 have been
audited by Price Waterhouse LLP, independent accountants. The information for
the six-month period ended April 30, 1997 is unaudited. The financial
highlights should be read in conjunction with the financial statements, the
notes thereto and the unqualified report of independent accountants, which
are contained in the Statement of Additional Information. Further information
about the performance of the Fund is contained in the Fund's Annual Report to
Shareholders, which may be obtained without charge upon request to the Fund.
All shares of the Fund held prior to July 28, 1997 have been designated Class
B shares.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31 APRIL 9, 1992*
MONTHS ENDED ----------------------------------------- THROUGH
APRIL 30, 1997 1996 1995 1994 1993 OCTOBER 31, 1992
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(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period......... $9.78 $9.62 $9.37 $10.20 $10.01 $10.00
----- ----- ----- ------ ------ ------
Net investment income........ 0.36 0.78 0.77 0.74 0.77 0.37
Net realized and
unrealized gain (loss) .... (0.36) 0.10 0.20 (0.80) 0.20 --
----- ----- ----- ------ ------ ------
Total from investment
operations ................. 0.00 0.88 0.97 (0.06) 0.97 0.37
----- ----- ----- ------ ------ ------
Less dividends and
distributions from:
Net investment income....... (0.55) (0.72) (0.72) (0.64) (0.73) (0.36)
Net realized gain .......... -- -- -- (0.01) (0.05) --
Paid-in-capital ............ -- -- -- (0.12) -- --
----- ----- ----- ------ ------ ------
Total dividends and
distributions............... (0.55) (0.72) (0.72) (0.77) (0.78) (0.36)
----- ----- ----- ------ ------ ------
Net asset value,
end of period............... $9.23 $9.78 $9.62 $ 9.37 $10.20 $10.01
===== ===== ===== ====== ====== ======
TOTAL INVESTMENT RETURN+ .... (0.03)%(1) 9.49% 10.76% (0.69)% 10.00% 3.73%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses..................... 1.39%(2) 1.42% 1.44% 1.51% 1.58%(4) 0.85%(2)(3)
Net investment income........ 7.88%(2) 8.38% 8.30% 7.91% 7.92%(4) 7.86%(2)(3)
SUPPLEMENTAL DATA:
Net assets, end of period,
in thousands................ $828,465 $745,581 $542,544 $407,038 $167,137 $55,297
Portfolio turnover rate .... 33%(1) 82% 87% 60% 117% 37%(1)
</TABLE>
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* Commencement of operations.
+ Does not reflect the deduction of sales charge. Calculated based on
the net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) If the Fund had borne all expenses that were assumed or waived by the
Investment Manager, the annualized expense and net investment income
ratios would have been 2.08% and 6.63%, respectively.
(4) If the Fund had borne all expenses that were assumed or waived by the
Investment Manager, the annualized expense and net investment income
ratios would have been 1.66% and 7.84%, respectively.
5
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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 Morgan Stanley,
Dean Witter, Discover & Co., a preeminent global financial services firm that
maintains leading market positions in each of its three primary
businesses--securities, asset management and credit services.
InterCapital and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to 100 investment companies, thirty of which are
listed on the New York Stock Exchange, with combined total assets of
approximately $93.1 billion as of June 30, 1997. The Investment Manager also
manages portfolios of pension plans, other institutions and individuals which
aggregated approximately $3.5 billion at such date.
The Fund has retained the Investment Manager to provide administrative
services, manage its business affairs and manage the investment of the Fund's
assets, including the placing of orders for the purchase and sale of
portfolio securities. InterCapital has retained Dean Witter Services Company
Inc. to perform the aforementioned administrative services for the Fund. The
Fund's Trustees review the various services provided by or under the
direction of the Investment Manager to ensure that the Fund's general
investment policies and programs are being properly carried out and that
administrative services are being provided to the Fund in a satisfactory
manner.
As full compensation for the services and facilities furnished to the Fund
and for expenses of the Fund assumed by the Investment Manager, the Fund pays
the Investment Manager monthly compensation calculated daily by applying the
annual rate of 0.40% to the Fund's net assets determined as of the close of
each business day. For the fiscal year ended October 31, 1996, the Fund
accrued total compensation to the Investment Manager amounting to 0.40% of
the Fund's average daily net assets and the Fund's total expenses amounted to
1.42% of the Fund's average daily net assets.
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 (including zero coupon
securities) 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 companies having
outstanding debt securities rated A or higher by S&P or Moody's; and in loan
participation interests
6
<PAGE>
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 "Investment
Objective and Policies--Portfolio Management," in the Prospectus). 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 securities. 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 (including
zero coupon securities). In such cases, the securities which the Fund is 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 Investment Manager does not believe that such
adjustments will adversely
7
<PAGE>
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; (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; (iii) U.S Treasury securities (bills, notes, bonds and
zero coupon securities) (without restrictions as to remaining maturity at
time of purchase) and (iv) U.S. Government agency securities (discount notes,
medium-term notes, debentures and zero coupon securities) (without
restrictions as to remaining maturity at time of purchase). 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
8
<PAGE>
contain limitations on changes in the required monthly payment. In the event
that a monthly payment is not sufficient to pay the interest accruing on an
ARM, any such excess interest is added to the principal balance of the
mortgage loan, which is repaid through future monthly payments. If the
monthly payment for such an instrument exceeds the sum of the interest
accrued at the applicable mortgage interest rate and the principal payment
required at such point to amortize the outstanding principal balance over the
remaining term of the loan, the excess is utilized to reduce the then
outstanding principal balance of the ARM.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage pass-through
securities are structured similarly to the GNMA, FNMA and FHLMC mortgage
pass-through securities and are issued by originators of and investors in
mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing. These securities usually are backed by a pool of conventional
fixed rate or adjustable rate mortgage loans. Since private mortgage
pass-through securities typically are not guaranteed by an entity having the
credit status of GNMA, FNMA and FHLMC, such 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
9
<PAGE>
or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities
having the highest priority after interest has been paid to all classes.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped Mortgage-Backed Securities are
derivative multiclass mortgage securities. Stripped Mortgage-Backed
Securities may be issued by agencies or instrumentalities of the United
States Government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
Stripped Mortgage-Backed Securities usually are structured with two
classes that receive different proportions of the interest and principal
distribution on a pool of Mortgage Assets. A common type of Stripped
Mortgage-Backed Securities will have one class receiving some of the interest
and most of the principal from the Mortgage Assets, while the other class
will receive most of the interest and the remainder of the principal. In the
most extreme case, one class will receive all of the interest (the
interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). PO classes generate income
through the accretion of the deep discount at which such securities are
purchased, and, while PO classes do not receive periodic payments of
interest, they receive monthly payments associated with scheduled
amortization and principal prepayment from the Mortgage Assets underlying the
PO class. The yield to maturity on an IO class is extremely sensitive to the
rate of principal payments (including prepayments) on the related underlying
Mortgage Assets, and a rapid rate of principal 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.
ZERO COUPON SECURITIES. A portion of the fixed-income securities purchased by
the Fund may be zero coupon securities. Such securities are purchased at a
discount from their face amount, giving the purchaser the right to receive
their full value at maturity. The interest earned on such securities is,
implicitly, automatically compounded and paid out at maturity. While such
compounding at a constant rate eliminates the risk of receiving lower yields
upon reinvestment of interest if prevailing interest rates decline, the owner
of a zero coupon security will be unable to participate in higher yields upon
reinvestment of interest received on interest-paying securities if prevailing
interest rates rise.
A zero coupon security pays no interest to its holder during its life.
Therefore, to the extent the Fund invests in zero coupon securities, it will
not receive current cash available for distribution to shareholders. In
addition, zero coupon securities generally are subject to substantially
greater price fluctuations during periods of changing prevailing interest
rates than are comparable securities which pay interest on a current basis.
Current federal tax law requires that a holder (such as the Fund) of a zero
coupon security accrue a portion of the discount at which the security was
purchased as income each year even though the Fund receives no interest
payments in cash on the security during the year.
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
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<PAGE>
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.
During temporary defensive periods when market conditions warrant
reduction of some or all of the Fund's securities holdings or when
temporarily holding cash pending investment, this portion of the Fund may
invest in U.S. Treasury securities or other money market instruments. Under
such circumstances the money market instruments in which this portion of the
Fund may invest, in addition to U.S. Treasury securities (bills, notes, bonds
and zero coupons securities), are American bank obligations, such as
certificates of deposit; Eurodollar certificates of deposit; obligations of
American savings institutions; and commercial paper of American issuers rated
within the two highest grades by Moody's or S&P or, if not rated, are issued
by a company having an outstanding debt issue rated at least AA by S&P or Aa
by Moody's.
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 creditworthiness 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.
RISK CONSIDERATIONS
The net asset value of the Fund's shares will fluctuate with changes in the
market value of its portfolio securities. The market value of the Fund's
portfolio securities will increase or decrease due to a variety of economic,
market or political factors which cannot be predicted. The Fund's yield will
also vary based on the yield of the Fund's portfolio securities.
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 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.
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<PAGE>
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 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
12
<PAGE>
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.
During the fiscal year ended October 31, 1996, the monthly dollar weighted
average ratings of the debt obligations held by the Fund, expressed as a
percentage of the Fund's total investments, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
RATINGS TOTAL INVESTMENTS
- ------- -----------------
<S> <C>
AAA/Aaa 53.2%
AA/Aa 0.2%
A/A 1.1%
BBB/Baa 0.0%
BB/Ba 2.4%
B/B 23.0%
CCC/Caa 1.7%
CC/Ca 0.0%
C/C 0.0%
D 0.0%
Unrated 18.4%
</TABLE>
OTHER INVESTMENT POLICIES
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements, which
may be viewed as a type of secured lending by the Fund, and which typically
involve the acquisition by the Fund of debt securities from a selling
financial institution such as a bank, savings and loan association or
broker-dealer. The agreement provides that the Fund will sell back to the
institution, and that the institution will repurchase, the underlying
security at a specified price and at a fixed time in the future, usually not
more than seven days from the date of purchase. While repurchase agreements
involve certain risks not associated with direct investments in debt
securities, the Fund follows procedures designed to minimize those risks.
These procedures include effecting repurchase transactions only with large,
well-capitalized and well-established financial institutions whose financial
condition will be continually monitored by the Investment Manager subject to
procedures established by the Board of Trustees of the Fund. In addition, the
value of the collateral underlying the repurchase agreement will be at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement.
<PAGE>
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
securities. Generally, the
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<PAGE>
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
portfolio securities 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.
The securities so purchased are subject to market fluctuation and no interest
accrues to the purchaser during this period. At the time of delivery of the
securities, the value may be more or less than the purchase price. 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 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.
However, investing in Rule 144A securities could have the effect of
increasing the level of Fund illiquidity to the extent the Fund, at a
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particular point in time, may be unable to find qualified institutional
buyers interested in purchasing such securities.
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 circumstances is consistent with the Fund's
investment objectives.
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
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bonds, notes, bills, and zero coupon securities, 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
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
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<PAGE>
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. The Fund may, however, close out the forward
contract prior to purchasing the security which was the subject of the
anticipatory hedge.
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. ("DWR"), and other broker-dealer
affiliates of InterCapital 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 Taxable Income
Group, which manages 24 funds and fund portfolios, with approximately $13
billion in assets at June 30, 1997. 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 for over five years. 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 for over five years.
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
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are placed for the Fund with a number of brokers and dealers, including DWR
and other broker-dealer affiliates of InterCapital. 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
and other brokers and dealers that are affiliates of InterCapital.
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.
Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objectives by investing all or substantially
all of its assets in another investment company having substantially the same
investment objectives and policies as the Fund.
PURCHASE OF FUND SHARES
- -------------------------------------------------------------------------------
GENERAL
The Fund offers each class of 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 Fund offers four classes of shares (each, a "Class"). Class A shares
are sold to investors with an
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<PAGE>
initial sales charge that declines to zero for larger purchases; however,
Class A shares sold without an initial sales charge are subject to a
contingent deferred sales charge ("CDSC") of 1.0% if redeemed within one year
of purchase, except for certain specific circumstances. Class B shares are
sold without an initial sales charge but are subject to a CDSC (scaled down
from 5.0% to 1.0%) payable upon most redemptions within six years after
purchase. (Class B shares purchased by certain qualified employer-sponsored
benefit plans are subject to a CDSC scaled down from 2.0% to 1.0% if redeemed
within three years after purchase.) Class C shares are sold without an
initial sales charge but are subject to a CDSC of 1.0% on most redemptions
made within one year after purchase. Class D shares are sold without an
initial sales charge or CDSC and are available only to investors meeting an
initial investment minimum of $5 million, and to certain other limited
categories of investors. At the discretion of the Board of Trustees of the
Fund, Class A shares may be sold to categories of investors in addition to
those set forth in this prospectus at net asset value without a front-end
sales charge, and Class D shares may be sold to certain other categories of
investors, in each case as may be described in the then current prospectus of
the Fund. See "Alternative Purchase Arrangements--Selecting a Particular
Class" for a discussion of factors to consider in selecting which Class of
shares to purchase.
The minimum initial purchase is $1,000 for each Class of shares, although
Class D shares are only available to persons investing $5 million or more and
to certain other limited categories of investors. For the purpose of meeting
the minimum $5 million initial investment for Class D shares, and subject to
the $1,000 minimum initial investment for each Class of the Fund, an
investor's existing holdings of Class A shares of the Fund and other Dean
Witter Funds that are multiple class funds ("Dean Witter Multi-Class Funds")
and shares of Dean Witter Funds sold with a front-end sales charge ("FSC
Funds") and concurrent investments in Class D shares of the Fund and other
Dean Witter Multi-Class Funds will be aggregated. 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. When purchasing
shares of the Fund, investors must specify whether the purchase is for Class
A, Class B, Class C or Class D shares. If no Class is specified, the Transfer
Agent will not process the transaction until the proper Class is identified.
The minimum initial purchase in the case of investments through EasyInvest,
an automatic purchase plan (see "Shareholder Services"), is $100, provided
that the schedule of automatic investments will result in investments
totalling at least $1,000 within the first twelve months. In the case of
investments pursuant to Systematic Payroll Deduction Plans (including
Individual Retirement Plans), the Fund, in its discretion, may accept
investments without regard to any minimum amounts which would otherwise be
required if the Fund has reason to believe that additional investments will
increase the investment in all accounts under such Plans to at least $1,000.
Certificates for shares purchased will not be issued unless a request is made
by the shareholder in writing to the Transfer Agent.
Shares of the Fund are sold through the Distributor on a normal three
business day settlement basis; that is payment is due on the third business
day (settlement date) after the order is placed with the Distributor. Since
DWR and other Selected Broker-Dealers forward investors' funds on settlement
date, they will benefit from the temporary use of the funds if payment is
made prior thereto. As noted above, orders placed directly with the Transfer
Agent must be accompanied by payment. Investors will be entitled to receive
income 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
dividends and distributions. Sales personnel of a Selected Broker-Dealer are
compensated for selling shares of the Fund by the Distributor or any of its
affiliates and/or the Selected Broker-Dealer. In addition, some sales
personnel of the Selected Broker-Dealer will receive various types of
non-cash compensation as special sales incentives, including trips,
educational and/or business seminars and merchandise. The Fund and the
Distributor reserve the right to reject any purchase orders.
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund offers several Classes of shares to investors designed to provide
them with the flexibility of selecting an investment best suited to their
needs. The general public is offered three Classes of shares: Class A shares,
Class B shares and Class C shares, which differ principally in terms of sales
charges and rate of expenses to which they are subject. A fourth Class of
shares, Class D shares, is offered only to limited categories of investors
(see "No Load Alternative--Class D Shares" below).
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund except that Class
A, Class B and Class C shares bear the expenses of the ongoing shareholder
service fees, Class B and Class C shares bear the expenses of the ongoing
distribution fees and Class A, Class B and Class C shares which are redeemed
subject to a CDSC bear the expense of the additional incremental distribution
costs resulting from the CDSC
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<PAGE>
applicable to shares of those Classes. The ongoing distribution fees that are
imposed on Class A, Class B and Class C shares will be imposed directly
against those Classes and not against all assets of the Fund and,
accordingly, such charges against one Class will not affect the net asset
value of any other Class or have any impact on investors choosing another
sales charge option. See "Plan of Distribution" and "Redemptions and
Repurchases."
Set forth below is a summary of the differences between the Classes and
the factors an investor should consider when selecting a particular Class.
This summary is qualified in its entirety by detailed discussion of each
Class that follows this summary.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.25%. The initial sales charge is reduced for certain
purchases. Investments of $1 million or more (and investments by certain
other limited categories of investors) are not subject to any sales charges
at the time of purchase but are subject to a CDSC of 1.0% on redemptions made
within one year after purchase, except for certain specific circumstances.
Class A shares are also subject to a 12b-1 fee of up to 0.25% of the average
daily net assets of the Class. See "Initial Sales Charge Alternative--Class A
Shares."
CLASS B SHARES. Class B shares are offered at net asset value with no initial
sales charge but are subject to a CDSC (scaled down from 5.0% to 1.0%) if
redeemed within six years of purchase. (Class B shares purchased by certain
qualified employer-sponsored benefit plans are subject to a CDSC scaled down
from 2.0% to 1.0% if redeemed within three years after purchase.) This CDSC
may be waived for certain redemptions. Class B shares are also subject to an
annual 12b-1 fee of 0.85% of the lesser of: (a) the average daily aggregate
gross sales of the Fund's Class B 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 Class B shares
redeemed since the Fund's inception upon which a CDSC has been imposed or
waived, or (b) the average daily net assets of Class B. The Class B shares'
distribution fee will cause that Class to have higher expenses and pay lower
dividends than Class A or Class D shares.
After approximately ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund, based on the relative net asset
values of the shares of the two Classes on the conversion date. In addition,
a certain portion of Class B shares that have been acquired through the
reinvestment of dividends and distributions will be converted at that time.
See "Contingent Deferred Sales Charge Alternative--Class B Shares."
CLASS C SHARES. Class C shares are sold at net asset value with no initial
sales charge but are subject to a CDSC of 1.0% on redemptions made within one
year after purchase. This CDSC may be waived for certain redemptions. They
are subject to an annual 12b-1 fee of up to 0.85% of the average daily net
assets of the Class C shares. The Class C shares' distribution fee may cause
that Class to have higher expenses and pay lower dividends than Class A or
Class D shares. See "Level Load Alternative--Class C Shares."
CLASS D SHARES. Class D shares are available only to limited categories of
investors (see "No Load Alternative--Class D Shares" below). Class D shares
are sold at net asset value with no initial sales charge or CDSC. They are
not subject to any 12b-1 fees. See "No Load Alternative--Class D Shares."
SELECTING A PARTICULAR CLASS. In deciding which Class of Fund shares to
purchase, investors should consider the following factors, as well as any
other relevant facts and circumstances:
The decision as to which Class of shares is more beneficial to an investor
depends on the amount and intended length of his or her investment. Investors
who prefer an initial sales charge alternative may elect to purchase Class A
shares. Investors qualifying for significantly reduced or, in the case of
purchases of $1 million or more, no initial sales charges may find Class A
shares particularly attractive because similar sales charge reductions are
not available with respect to Class B or Class C shares. Moreover, Class A
shares are subject to lower ongoing expenses than are Class B or Class C
shares over the term of the investment. As an alternative, Class B and Class
C shares are sold without any initial sales charge so the entire purchase
price is immediately invested in the Fund. Any investment return on these
additional investment amounts may partially or wholly offset the higher
annual expenses of these Classes. Because the Fund's future return cannot be
predicted, however, there can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, although Class C shares are subject to a significantly
lower CDSC upon redemptions, they do not, unlike Class B shares, convert into
Class A shares after approximately ten years, and, therefore, are subject to
an ongoing 12b-1 fee of 0.85% (rather than the 0.25% fee applicable to Class
A shares) for an indefinite period of time. Thus, Class B shares may be more
attractive than Class C shares to investors with longer term investment
outlooks. Other investors, however, may elect to purchase Class C shares if,
for example, they determine that they
20
<PAGE>
do not wish to be subject to a front-end sales charge and they are uncertain
as to the length of time they intend to hold their shares.
For the purpose of meeting the $5 million minimum investment amount for
Class D shares, holdings of Class A shares in all Dean Witter Multi-Class
Funds, shares of FSC Funds and shares of Dean Witter Funds for which such
shares have been exchanged, will be included together with the current
investment amount.
Sales personnel may receive different compensation for selling each Class
of shares. Investors should understand that the purpose of a CDSC is the same
as that of the initial sales charge in that the sales charges applicable to
each Class provide for the financing of the distribution of shares of that
Class.
Set forth below is a chart comparing the sales charge, 12b-1 fees and
conversion options applicable to each Class of shares:
<TABLE>
<CAPTION>
Conversion
Class Sales Charge 12b-1 Fee Feature
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
A Maximum 4.25% 0.25% No
initial sales charge
reduced for
purchases of
$25,000 and over;
shares sold without
an initial sales
charge generally
subject to a 1.0%
CDSC during first
year.
- -------------------------------------------------------------------------------
B Maximum 5.0% 0.85% B shares convert
CDSC during the first to A shares
year decreasing automatically
to 0 after six years after
approximately
ten years
- -------------------------------------------------------------------------------
C 1.0% CDSC during 0.85% No
first year
- -------------------------------------------------------------------------------
D None None No
- -------------------------------------------------------------------------------
</TABLE>
See "Purchase of Fund Shares" and "The Fund and its Management" for a
complete description of the sales charges and service and distribution fees
for each Class of shares and "Determination of Net Asset Value," "Dividends,
Distributions and Taxes" and "Shareholder Services--Exchange Privilege" for
other differences between the Classes of shares.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
Class A shares are sold at net asset value plus an initial sales charge. In
some cases, reduced sales charges may be available, as described below.
Investments of $1 million or more (and investments by certain other limited
categories of investors) are not subject to any sales charges at the time of
purchase but are subject to a CDSC of 1.0% on redemptions made within one
year after purchase (calculated from the last day of the month in which the
shares were purchased), except for certain specific circumstances. The CDSC
will be assessed on an amount equal to the lesser of the current market value
or the cost of the shares being redeemed. The CDSC will not be imposed (i) in
the circumstances set forth below in the section "Contingent Deferred Sales
Charge Alternative--Class B Shares--CDSC Waivers," except that the references
to six years in the first paragraph of that section shall mean one year in
the case of Class A shares, and (ii) in the circumstances identified in the
section "Additional Net Asset Value Purchase Options" below. Class A shares
are also subject to an annual 12b-1 fee of up to 0.25% of the average daily
net assets of the Class.
The offering price of Class A shares will be the net asset value per share
next determined following receipt of an order (see "Determination of Net
Asset Value" below), plus a sales charge (expressed as a percentage of the
offering price) on a single transaction as shown in the following table:
<PAGE>
<TABLE>
<CAPTION>
Sales Charge
------------
Percentage of Approximate
Amount of Single Public Offering Percentage of
Transaction Price Amount Invested
----------- ----- ---------------
<S> <C> <C>
Less than $25,000 .. 4.25% 4.44%
$25,000 but less
than $50,000 ...... 4.00% 4.17%
$50,000 but less
than $100,000 ..... 3.50% 3.63%
$100,000 but less
than $250,000 ..... 2.75% 2.83%
$250,000 but less
than $1 million .. 1.75% 1.78%
$1 million and over 0 0
</TABLE>
Upon notice to all Selected Broker-Dealers, the Distributor may reallow up
to the full applicable sales charge as shown in the above schedule during
periods specified in such notice. During periods when 90% or more of the
sales charge is reallowed, such Selected Broker-Dealers may be deemed to be
underwriters as that term is defined in the Securities Act of 1933.
The above schedule of sales charges is applicable to purchases in a single
transaction by, among others: (a) an individual; (b) an individual, his or
her spouse and their children under the age of 21 purchasing shares for his,
her or their own accounts; (c) a trustee or other fiduciary purchasing shares
for a single trust estate or a single fiduciary account; (d) a pension,
profit-sharing or other employee benefit plan qualified or non-qualified
under Section 401 of the Internal Revenue Code; (e) tax-exempt organizations
enumerated in Section 501(c)(3) or (13) of the Internal Revenue Code; (f)
employee benefit plans qualified under Section 401 of the Internal Revenue
Code
21
<PAGE>
of a single employer or of employers who are "affiliated persons" of each
other within the meaning of Section 2(a)(3)(c) of the Act; and for
investments in Individual Retirement Accounts of employees of a single
employer through Systematic Payroll Deduction plans; or (g) any other
organized group of persons, whether incorporated or not, provided the
organization has been in existence for at least six months and has some
purpose other than the purchase of redeemable securities of a registered
investment company at a discount.
COMBINED PURCHASE PRIVILEGE. Investors may have the benefit of reduced sales
charges in accordance with the above schedule by combining purchases of Class
A shares of the Fund in single transactions with the purchase of Class A
shares of other Dean Witter Multi-Class Funds and shares of FSC Funds. The
sales charge payable on the purchase of the Class A shares of the Fund, the
Class A shares of other Dean Witter Multi-Class Funds and the shares of the
FSC Funds will be at their respective rates applicable to the total amount of
the combined concurrent purchases of such shares.
RIGHT OF ACCUMULATION. The above persons and entities may benefit from a
reduction of the sales charges in accordance with the above schedule if the
cumulative net asset value of Class A shares purchased in a single
transaction, together with shares of the Fund and other Dean Witter Funds
previously purchased at a price including a front-end sales charge (including
shares of the Fund and other Dean Witter Funds acquired in exchange for those
shares, and including in each case shares acquired through reinvestment of
dividends and distributions), which are held at the time of such transaction,
amounts to $25,000 or more. If such investor has a cumulative net asset value
of shares of FSC Funds and Class A and Class D shares equal to at least $5
million, such investor is eligible to purchase Class D shares subject to the
$1,000 minimum initial investment requirement of that Class of the Fund. See
"No Load Alternative--Class D Shares" below.
The Distributor must be notified by DWR or a Selected Broker-Dealer or the
shareholder at the time a purchase order is placed that the purchase
qualifies for the reduced charge under the Right of Accumulation. Similar
notification must be made in writing by the dealer or shareholder when such
an order is placed by mail. The reduced sales charge will not be granted if:
(a) such notification is not furnished at the time of the order; or (b) a
review of the records of the Selected Broker-Dealer or the Transfer Agent
fails to confirm the investor's represented holdings.
LETTER OF INTENT. The foregoing schedule of reduced sales charges will also
be available to investors who enter into a written Letter of Intent providing
for the purchase, within a thirteen-month period, of Class A shares of the
Fund from DWR or other Selected Broker-Dealers. The cost of Class A shares of
the Fund or shares of other Dean Witter Funds which were previously purchased
at a price including a front-end sales charge during the 90-day period prior
to the date of receipt by the Distributor of the Letter of Intent, or of
Class A shares of the Fund or shares of other Dean Witter Funds acquired in
exchange for shares of such funds purchased during such period at a price
including a front-end sales charge, which are still owned by the shareholder,
may also be included in determining the applicable reduction.
ADDITIONAL NET ASSET VALUE PURCHASE OPTIONS. In addition to investments of $1
million or more, Class A shares also may be purchased at net asset value by
the following:
(1) trusts for which Dean Witter Trust Company ("DWTC") or Dean Witter
Trust FSB ("DWTFSB") (each of which is an affiliate of the Investment
Manager) provides discretionary trustee services;
(2) persons participating in a fee-based program approved by the
Distributor, pursuant to which such persons pay an asset based fee for
services in the nature of investment advisory or administrative services
(such investments are subject to all of the terms and conditions of such
programs, which may include termination fees and restrictions on
transferability of Fund shares);
(3) retirement plans qualified under Section 401(k) of the Internal
Revenue Code ("401(k) plans") and other employer-sponsored plans qualified
under Section 401(a) of the Internal Revenue Code with at least 200 eligible
employees and for which DWTC or DWTFSB serves as Trustee or the 401(k)
Support Services Group of DWR serves as recordkeeper;
(4) 401(k) plans and other employer-sponsored plans qualified under
Section 401(a) of the Internal Revenue Code for which DWTC or DWTFSB serves
as Trustee or the 401(k) Support Services Group of DWR serves as recordkeeper
whose Class B shares have converted to Class A shares, regardless of the
plan's asset size or number of eligible employees;
(5) investors who are clients of a Dean Witter account executive who
joined Dean Witter from another investment firm within six months prior to
the date of purchase of Fund shares by such investors, if the shares are
being purchased with the proceeds from a redemption of shares of an open-end
proprietary mutual fund of the account executive's previous firm which
imposed either a front-end or deferred sales charge, provided such purchase
was made within sixty days after the redemption and the proceeds of the
redemption had been maintained in the interim in cash or a money market fund;
and
(6) other categories of investors, at the discretion of the Board, as
disclosed in the then current prospectus of the Fund.
22
<PAGE>
No CDSC will be imposed on redemptions of shares purchased pursuant to
paragraphs (1), (2) or (5), above.
For further information concerning purchases of the Fund's shares, contact
DWR or another Selected Broker-Dealer or consult the Statement of Additional
Information.
CONTINGENT DEFERRED SALES
CHARGE ALTERNATIVE--CLASS B SHARES
Class B shares are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, will be imposed on most
Class B shares redeemed within six years after purchase. The CDSC will be
imposed on any redemption of shares if after such redemption the aggregate
current value of a Class B account with the Fund falls below the aggregate
amount of the investor's purchase payments for Class B shares made during the
six years (or, in the case of shares held by certain employer-sponsored
benefit plans, three years) preceding the redemption. In addition, Class B
shares are subject to an annual 12b-1 fee of 0.85% of the lesser of: (a) the
average daily aggregate gross sales of the Fund's Class B 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 Class B shares redeemed since the Fund's inception upon which a CDSC
has been imposed or waived, or (b) the average daily net assets of Class B.
Except as noted below, Class B 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 CDSC upon
redemption. Shares redeemed earlier than six years after purchase may,
however, be subject to a 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 following table:
<TABLE>
<CAPTION>
Year Since
Purchase CDSC as a Percentage
Payment Made of Amount Redeemed
------------ ------------------
<S> <C>
First...................... 5.0%
Second..................... 4.0%
Third...................... 3.0%
Fourth..................... 2.0%
Fifth...................... 2.0%
Sixth...................... 1.0%
Seventh and thereafter .... None
</TABLE>
In the case of Class B shares of the Fund held by 401 (k) plans or other
employer-sponsored plans qualified under Section 401(a) of the Internal
Revenue Code for which DWTC or DWTFSB serves as Trustee or the 401(k) Support
Services Group of DWR serves as recordkeeper and whose accounts are opened on
or after July 28, 1997, shares held for three years or more after purchase
(calculated as described in the paragraph above) will not be subject to any
CDSC upon redemption. However, shares redeemed earlier than three years after
purchase may be subject to a CDSC (calculated as described in the paragraph
above), the percentage of which will depend on how long the shares have been
held, as set forth in the following table:
<TABLE>
<CAPTION>
Year Since
Purchase CDSC as a Percentage
Payment Made of Amount Redeemed
------------ ------------------
<S> <C>
First ..................... 2.0%
Second .................... 2.0%
Third ..................... 1.0%
Fourth and thereafter .... None
</TABLE>
CDSC WAIVERS. A CDSC will not be imposed on: (i) any amount which represents
an increase in value of shares purchased within the six years (or, in the
case of shares held by certain employer-sponsored benefit plans, three years)
preceding the redemption; (ii) the current net asset value of shares
purchased more than six years (or, in the case of shares held by certain
employer-sponsored benefit plans, three years) prior to the redemption; and
(iii) the current net asset value of shares purchased through reinvestment of
dividends or distributions and/or shares acquired in exchange for shares of
FSC Funds 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:
<PAGE>
(1) redemptions of shares held at the time a shareholder dies or becomes
disabled, only if the shares are: (A) registered either in the name of an
individual shareholder (not a trust), or in the names of such shareholder and
his or her spouse as joint tenants with right of survivorship; or (B) held in
a qualified corporate or self-employed retirement plan, Individual Retirement
Account ("IRA") or Custodial Account under Section 403(b)(7) of the Internal
Revenue Code ("403(b) Custodial Account"), provided in either case that the
redemption is requested within one year of the death or initial determination
of disability;
(2) redemptions in connection with the following retirement plan
distributions: (A) lump-sum or other distributions from a qualified
corporate or self-employed
23
<PAGE>
retirement plan following retirement (or, in the case of a "key employee" of
a "top heavy" plan, following attainment of age 59 1/2); (B) distributions
from an IRA or 403(b) Custodial Account following attainment of age 59 1/2;
or (C) a tax-free return of an excess contribution to an IRA; and
(3) all redemptions of shares held for the benefit of a participant in a
401(k) plan or other employer-sponsored plan qualified under Section 401(a)
of the Internal Revenue Code which offers investment companies managed by the
Investment Manager or its subsidiary, Dean Witter Services Company Inc., as
self-directed investment alternatives and for which DWTC or DWTFSB serves as
Trustee or the 401(k) Support Services Group of DWR serves as recordkeeper
("Eligible Plan"), provided that either: (A) the plan continues to be an
Eligible Plan after the redemption; or (B) the redemption is in connection
with the complete termination of the plan involving the distribution of all
plan assets to participants.
With reference to (1) above, for the purpose of determining disability,
the Distributor utilizes the definition of disability contained in Section
72(m)(7) of the Internal Revenue Code, which relates to the inability to
engage in gainful employment. With reference to (2) above, the term
"distribution" does not encompass a direct transfer of IRA, 403(b) Custodial
Account or retirement plan assets to a successor custodian or trustee. All
waivers will be granted only following receipt by the Distributor of
confirmation of the shareholder's entitlement.
CONVERSION TO CLASS A SHARES. All shares of the Fund held prior to July 28,
1997 have been designated Class B shares. Shares held before May 1, 1997 will
convert to Class A shares in May, 2007. In all other instances Class B shares
will convert automatically to Class A shares, based on the relative net asset
values of the shares of the two Classes on the conversion date, which will be
approximately ten (10) years after the date of the original purchase. The ten
year period is calculated from the last day of the month in which the shares
were purchased or, in the case of Class B shares acquired through an exchange
or a series of exchanges, from the last day of the month in which the
original Class B shares were purchased, provided that shares originally
purchased before May 1, 1997 will convert to Class A shares in May, 2007. The
conversion of shares purchased on or after May 1, 1997 will take place in the
month following the tenth anniversary of the purchase. There will also be
converted at that time such proportion of Class B shares acquired through
automatic reinvestment of dividends and distributions owned by the
shareholder as the total number of his or her Class B shares converting at
the time bears to the total number of outstanding Class B shares purchased
and owned by the shareholder. In the case of Class B shares held by a 401(k)
plan or other employer-sponsored plan qualified under Section 401(a) of the
Internal Revenue Code and for which DWTC or DWTFSB serves as Trustee or the
401(k) Support Services Group of DWR serves as recordkeeper, the plan is
treated as a single investor and all Class B shares will convert to Class A
shares on the conversion date of the first shares of a Dean Witter
Multi-Class Fund purchased by that plan. In the case of Class B shares
previously exchanged for shares of an "Exchange Fund" (see "Shareholder
Services--Exchange Privilege"), the period of time the shares were held in
the Exchange Fund (calculated from the last day of the month in which the
Exchange Fund shares were acquired) is excluded from the holding period for
conversion. If those shares are subsequently re-exchanged for Class B shares
of a Dean Witter Multi-Class Fund, the holding period resumes on the last day
of the month in which Class B shares are reacquired.
If a shareholder has received share certificates for Class B shares, such
certificates must be delivered to the Transfer Agent at least one week prior
to the date for conversion. Class B shares evidenced by share certificates
that are not received by the Transfer Agent at least one week prior to any
conversion date will be converted into Class A shares on the next scheduled
conversion date after such certificates are received.
Effectiveness of the conversion feature is subject to the continuing
availability of a ruling of the Internal Revenue Service or an opinion of
counsel that (i) the conversion of shares does not constitute a taxable event
under the Internal Revenue Code, (ii) Class A shares received on conversion
will have a basis equal to the shareholder's basis in the converted Class B
shares immediately prior to the conversion, and (iii) Class A shares received
on conversion will have a holding period that includes the holding period of
the converted Class B shares. The conversion feature may be suspended if the
ruling or opinion is no longer available. In such event, Class B shares would
continue to be subject to Class B 12b-1 fees.
Class B shares purchased before July 28, 1997 by trusts for which DWTC or
DWTFSB provides discretionary trustee services will convert to Class A shares
on or about August 29, 1997. The CDSC will not be applicable to such shares.
LEVEL LOAD ALTERNATIVE--CLASS C SHARES
Class C shares are sold at net asset value next determined without an initial
sales charge but are subject to a CDSC of 1.0% on most redemptions made
within one year after purchase (calculated from the last day of the month in
which the shares were purchased). The CDSC will be
24
<PAGE>
assessed on an amount equal to the lesser of the current market value or the
cost of the shares being redeemed. The CDSC will not be imposed in the
circumstances set forth above in the section "Contingent Deferred Sales
Charge Alternative--Class B Shares--CDSC Waivers," except that the references
to six years in the first paragraph of that section shall mean one year in
the case of Class C shares. Class C shares are subject to an annual 12b-1 fee
of up to 0.85% of the average daily net assets of the Class. Unlike Class B
shares, Class C shares have no conversion feature and, accordingly, an
investor that purchases Class C shares will be subject to 12b-1 fees
applicable to Class C shares for an indefinite period subject to annual
approval by the Fund's Board of Trustees and regulatory limitations.
NO LOAD ALTERNATIVE--CLASS D SHARES
Class D shares are offered without any sales charge on purchase or redemption
and without any 12b-1 fee. Class D shares are offered only to investors
meeting an initial investment minimum of $5 million and the following
categories of investors: (i) investors participating in the InterCapital
mutual fund asset allocation program pursuant to which such persons pay an
asset based fee; (ii) persons participating in a fee-based program approved
by the Distributor, pursuant to which such persons pay an asset based fee for
services in the nature of investment advisory or administrative services
(subject to all of the terms and conditions of such programs, which may
include termination fees and restrictions on transferability of Fund shares);
(iii) 401(k) plans established by DWR and SPS Transaction Services, Inc. (an
affiliate of DWR) for their employees; (iv) certain Unit Investment Trusts
sponsored by DWR; (v) certain other open-end investment companies whose
shares are distributed by the Distributor; and (vi) other categories of
investors, at the discretion of the Board, as disclosed in the then current
prospectus of the Fund. Investors who require a $5 million minimum initial
investment to qualify to purchase Class D shares may satisfy that requirement
by investing that amount in a single transaction in Class D shares of the
Fund and other Dean Witter Multi-Class Funds, subject to the $1,000 minimum
initial investment required for that Class of the Fund. In addition, for the
purpose of meeting the $5 million minimum investment amount, holdings of
Class A shares in all Dean Witter Multi-Class Funds, shares of FSC Funds and
shares of Dean Witter Funds for which such shares have been exchanged, will
be included together with the current investment amount. If a shareholder
redeems Class A shares and purchases Class D shares, such redemption may be a
taxable event.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Act with respect to the distribution of Class A, Class B and Class C shares
of the Fund. In the case of Class A and Class C shares, the Plan provides
that the Fund will reimburse the Distributor and others for the expenses of
certain activities and services incurred by them specifically on behalf of
those shares. Reimbursements for these expenses will be made in monthly
payments by the Fund to the Distributor, which will in no event exceed
amounts equal to payments at the annual rates of 0.25% and 0.85% of the
average daily net assets of Class A and Class C, respectively. In the case of
Class B shares, the Plan provides that the Fund will pay the Distributor a
fee, which is accrued daily and paid monthly, at the annual rate of 0.85% of
the lesser of: (a) the average daily aggregate gross sales of the Fund's
Class B 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 Class B shares redeemed since the
Fund's inception upon which a CDSC has been imposed or waived, or (b) the
average daily net assets of Class B. The fee is treated by the Fund as an
expense in the year it is accrued. In the case of Class A shares, the entire
amount of the fee currently represents a service fee within the meaning of
the NASD guidelines. In the case of Class B and Class C shares, a portion of
the fee payable pursuant to the Plan, equal to 0.20% and 0.25% of the average
daily net assets of each of these Classes, respectively, is currently
characterized as a service fee. A service fee is a payment made for personal
service and/or the maintenance of shareholder accounts.
Additional amounts paid under the Plan in the case of Class B and Class C
shares are paid to the Distributor for services provided and the expenses
borne by the Distributor and others in the distribution of the shares of
those Classes, including the payment of commissions for sales of the shares
of those Classes and incentive compensation to and expenses of DWR's account
executives and others who engage in or support distribution of shares or who
service shareholder accounts, including overhead and telephone expenses;
printing and distribution of prospectuses and reports used in connection with
the offering of the Fund's shares to other than current shareholders; and
preparation, printing and distribution of sales literature and advertising
materials. In addition, the Distributor may utilize fees paid pursuant to the
Plan in the case of Class B shares 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
expenses.
For the fiscal year ended October 31, 1996, Class B shares of the Fund
accrued payments under the Plan amounting to $5,383,849, which amount is
equal to 0.85% of the Fund's average daily net assets for the fiscal year.
25
<PAGE>
The payments accrued under the Plan were calculated pursuant to clause (b) of
the compensation formula under the Plan. All shares held prior to July 28,
1997 have been designated Class B shares.
In the case of Class B shares, at any given time, the expenses in
distributing Class B 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
CDSCs paid by investors upon the redemption of Class B shares. For example,
if $1 million in expenses in distributing Class B shares of the Fund had been
incurred and $750,000 had been received as described in (i) and (ii) above,
the excess expense would amount to $250,000. The Distributor has advised the
Fund that such excess amounts, including the carrying charge described above,
totalled $12,284,935 at October 31, 1996, which was equal to 1.65% of the net
assets of the Fund on such date. Because there is no requirement under the
Plan that the Distributor be reimbursed for all distribution expenses or any
requirement that the Plan be continued from year to year, such 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 CDSCs 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 CDSCs, may or may not be recovered through future
distribution fees or CDSCs.
In the case of Class A and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.85% of the average
daily net assets of Class A or Class C, respectively, will not be reimbursed
by the Fund through payments in any subsequent year, except that expenses
representing a gross sales commission credited to account executives at the
time of sale may be reimbursed in the subsequent calendar year. No interest
or other financing charges will be incurred on any Class A or Class C
distribution expenses incurred by the Distributor under the Plan or on any
unreimbursed expenses due to the Distributor pursuant to the Plan.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined by taking the net assets of the
Fund, dividing by the number of shares outstanding and adjusting the result
to the nearest cent. The assets belonging to the Class A, Class B, Class C
and Class D shares will be invested together in a single portfolio. The net
asset value of each Class, however, will be determined separately by
subtracting each Class's accrued expenses and liabilities. The net asset
value per share is determined by the Investment Manager as of 4:00 P.M. New
York time (or, on days when the New York Stock Exchange closes prior to 4:00
P.M., at such earlier time) on each day that the New York Stock Exchange is
open. 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 prior to the time assets are valued; if there were no sales that
day, the security is valued at the latest bid price (in cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated as the primary market pursuant to procedures adopted
by the Trustees); and (2) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest bid price. When market quotations are not readily available, 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
prior to the close of the New York Stock Exchange.
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 may
utilize 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 completed each day at various times prior to the regular close
of the New York Stock Exchange. The values of such securities
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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
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AUTOMATIC INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. All income dividends and
capital gains distributions are automatically paid in full and fractional
shares of the applicable Class of the Fund (or, if specified by the
shareholder, in shares of any other open-end Dean Witter Fund), unless the
shareholder requests that they be paid in cash. Shares so acquired are acquired
at net asset value and are not subject to the imposition of a front-end sales
charge or a CDSC (see "Redemptions and Repurchases").
INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS RECEIVED IN CASH. Any shareholder
who receives a cash payment representing a dividend or capital gains
distribution may invest such dividend or distribution in shares of the
applicable Class at the net asset value per share next determined after
receipt by the Transfer Agent, by returning the check or the proceeds to the
Transfer Agent within thirty days after the payment date. Shares so acquired
are acquired at net asset value and are not subject to the imposition of a
front-end sales charge or a CDSC (see "Redemptions and Repurchases").
EASYINVEST(SERVICE MARK). 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 or following
redemption of shares of a Dean Witter money market fund, on a semi-monthly,
monthly or quarterly basis, to the Fund's Transfer Agent for investment in
shares of the Fund (see "Purchase of Fund Shares" and "Redemptions and
Repurchases--Involuntary Redemption").
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan (the "Withdrawal
Plan") is available for shareholders who own or purchase shares of the Fund
having a minimum value of $10,000 based upon the then current net asset
value. The Withdrawal Plan provides for monthly or quarterly (March, June,
September, 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 CDSC will be imposed on shares redeemed under the Withdrawal Plan
(see "Purchase of Fund Shares"). 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 CDSC) to the shareholder
will be the designated monthly or quarterly amount. Withdrawal plan payments
should not be considered as dividends, yields or income. If periodic
withdrawal plan payments continuously exceed net investment income and net
capital gains, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted. Each withdrawal constitutes a redemption of
shares and any gain or loss realized must be recognized for federal income
tax purposes.
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
Shares of each Class may be exchanged for shares of the same Class of any
other Dean Witter Multi-Class Fund without the imposition of any exchange
fee. Shares may also be exchanged for shares of the following funds: Dean
Witter Short-Term U.S. Treasury Trust, Dean Witter Limited Term Municipal
Trust, Dean Witter Short-Term Bond Fund, Dean Witter Intermediate Term U.S.
Treasury Trust and five Dean Witter funds which are money market funds (the
"Exchange Funds"). Class A shares may also be exchanged for shares of Dean
Witter Multi-State Municipal Series Trust and Dean Witter Hawaii Municipal
Trust, which are Dean Witter Funds sold with a front-end sales charge ("FSC
Funds"). Class B shares may also be exchanged for shares of Dean Witter
Global Short-Term Income Fund Inc., Dean Witter High Income Securities and
Dean Witter National
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Municipal Trust, which are Dean Witter Funds offered with a CDSC ("CDSC
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 Dean Witter Multi-Class Fund, any FSC Fund, any
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 Dean Witter Multi-Class Funds, FSC Funds or CDSC
Funds or any Exchange Fund that is not a money market fund can be effected on
the same basis.
No CDSC is imposed at the time of any exchange of shares, although any
applicable CDSC will be imposed upon ultimate redemption. During the period
of time the shareholder remains in an 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 re-exchanged for shares of a Dean
Witter Multi-Class Fund or 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 Dean Witter Multi-Class Fund or shares of a
CDSC Fund are reacquired. Thus, the CDSC is based upon the time (calculated
as described above) the shareholder was invested in shares of a Dean Witter
Multi-Class Fund or in shares of a CDSC Fund (see "Purchase of Fund Shares").
In the case of exchanges of Class A shares which are subject to a CDSC, the
holding period also includes the time (calculated as described above) the
shareholder was invested in shares of a FSC Fund. 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.) Class B shares of the Fund acquired in exchange for Class B shares of
another Dean Witter Multi-Class Fund or shares of a CDSC Fund having a
different CDSC schedule than that of this Fund will be subject to the higher
CDSC schedule, even if such shares are subsequently re-exchanged for shares
of the fund with the lower CDSC schedule.
ADDITIONAL INFORMATION REGARDING EXCHANGES. Purchases and exchanges should be
made for investment purposes only. A pattern of frequent exchanges may be
deemed by the Investment Manager to be abusive and contrary to the best
interests of the Fund's other shareholders and, at the Investment Manager's
discretion, may be limited by the Fund's refusal to accept additional
purchases and/or exchanges from the investor. Although the Fund does not have
any specific definition of what constitutes a pattern of frequent exchanges,
and will consider all relevant factors in determining whether a particular
situation is abusive and contrary to the best interests of the Fund and its
other shareholders, investors should be aware that the Fund and each of the
other Dean Witter Funds may in their discretion limit or otherwise restrict
the number of times this Exchange Privilege may be exercised by any investor.
Any such restriction will be made by the Fund on a prospective basis only,
upon notice to the shareholder not later than ten days following such
shareholder's most recent exchange. Also, the Exchange Privilege may be
terminated or revised at any time by the Fund and/or any of such Dean Witter
Funds for which shares of the Fund may be exchanged, upon such notice as may
be required by applicable regulatory agencies. Shareholders maintaining
margin accounts with DWR or another Selected Broker-Dealer are referred to
their account executive regarding restrictions on exchange of shares of the
Fund pledged in the margin account.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain a copy and examine it carefully
before investing. Exchanges are subject to the minimum investment requirement
of each Class of shares and any other conditions imposed by each fund. In the
case of a Shareholder holding a share certificate or certificates, no
exchanges may be made until all applicable share certificates have been
received by the Transfer Agent and deposited in the Shareholder's account. An
exchange will be treated for federal income tax purposes the same as a
repurchase or redemption of shares, on which the shareholder may realize a
capital gain or loss. However, the ability to deduct capital losses on an
exchange may be limited in situations where there is an exchange of shares
wihin ninety days after the shares are purchased. The Exchange Privilege is
only available in states where an exchange may legally be made.
If DWR or other Selected Broker-Dealer is the current dealer of record and
its account numbers are part of the account information, shareholders may
initiate an exchange of shares of the Fund for shares of any of the Dean
Witter Funds (for which the Exchange Privilege is
28
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available) pursuant to this Exchange Privilege by contacting their account
executive (no Exchange Privilege Authorization Form is required). Other
shareholders (and those shareholders who are clients of DWR or another
Selected Broker-Dealer but who wish to make exchanges directly by writing or
telephoning the Transfer Agent) must complete and forward to the Transfer
Agent an Exchange Privilege Authorization Form, copies of which may be
obtained from the Transfer Agent, to initiate an exchange. If the
Authorization Form is used, exchanges may be made in writing or by contacting
the Transfer Agent at (800) 869-NEWS (toll free). The Fund will employ
reasonable procedures to confirm that exchange instructions communicated over
the telephone are genuine. Such procedures may include requiring various
forms of personal identification such as name, mailing address, social
security or other tax identification number and DWR or other Selected
Broker-Dealer account number (if any). Telephone instructions may also be
recorded. If such procedures are not employed, the Fund may be liable for any
losses due to unauthorized or fraudulent instructions. Telephone exchange
instructions will be accepted if received by the Transfer Agent between 9:00
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 each Class of the Fund can be redeemed for cash at any
time at the net asset value per share next determined less the amount of any
applicable CDSC in the case of Class A, Class B or Class C shares (see
"Purchase of Fund Shares"). If shares are held in a shareholder's account
without a share certificate, a written request for redemption sent to the
Fund's Transfer Agent at P.O. Box 983, Jersey City, NJ 07303 is required. If
certificates are held by the shareholder(s), the shares may be redeemed by
surrendering the certificate(s) with a written request for redemption, along
with any additional information required by the Transfer Agent.
REPURCHASE. DWR and other Selected Broker-Dealers are authorized to
repurchase shares represented by a share certificate which is delivered to
any of their offices. Shares held in a shareholder's account without a share
certificate may 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 or the
Distributor. 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 35 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 in the same Class from which such shares were redeemed or
repurchased, 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
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the shares of any shareholder (other than shares held in an Individual
Retirement Account or Custodial Account under Section 403(b)(7) of the
Internal Revenue Code) whose shares have a value of less than $100 as a
result of redemptions or repurchases, or such lesser amount as may be fixed
by the Board of Trustees or, in the case of an account opened through
EasyInvest(Service Mark), if after twelve months the shareholder has
invested less than $1,000 in the account. However, before the Fund redeems
such shares and sends the proceeds to the shareholder, it will notify the
shareholder that the value of the shares is less than the applicable amount
and allow the shareholder sixty days to make an additional investment in an
amount which will increase the value of the account to at least the
applicable amount before the redemption is processed. No CDSC will be imposed
on any involuntary redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
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DIVIDENDS AND DISTRIBUTIONS. The Fund declares dividends separately for each
Class of shares and intends to declare and pay monthly income dividends and to
distribute net realized 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
shares of the same Class 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.
Shares acquired by dividend and distribution reinvestments will not be
subject to any front-end sales charge or CDSC. Class B shares acquired
through dividend and distribution reinvestments will become eligible for
conversion to Class A shares on a pro rata basis. Distributions paid on Class
A and Class D shares will be higher than for Class B and Class C shares
because distribution fees paid by Class B and Class C shares are higher. (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.
The Fund may at times make payments from sources other than income or net
capital gains. Payments from such sources will, in effect, represent a return
of a portion of each shareholder's investment. All, or a portion, of such
payments will not be taxable to 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.
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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
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From time to time the Fund may quote its "yield" and/or its "total return" in
advertisements and sales literature. These figures are computed separately for
Class A, Class B, Class C and Class D shares. 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 each Class of the Fund is computed by
dividing the Class's net investment income over a 30-day period by an average
value (using the average number of shares entitled to receive dividends and the
maximum offering price per share at the end of the period), all in accordance
with applicable regulatory requirements. Such amount is compounded for six
months and then annualized for a twelve-month period to derive the Fund's yield
for each Class.
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 a Class of the Fund of $1,000 over periods
of one, five and ten years, or over the life of the Fund if less than any of
the foregoing. Average annual total return reflects all income earned by the
Fund, any appreciation or depreciation of the Fund's assets, all expenses
incurred by the applicable Class, and all sales charges which will be
incurred by shareholders, for the stated periods. It also assumes
reinvestment of all dividends and distributions paid by the Fund.
In addition to the foregoing, the Fund may advertise its total return for
each Class over different periods of time by means of aggregate, average, and
year-by-year or other types of total return figures. Such calculations may or
may not reflect the deduction of any sales charge which, if reflected, would
reduce the performance quoted. The Fund may also advertise the growth of
hypothetical investments of $10,000, $50,000 and $100,000 in each Class of
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
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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 except that
each Class will have exclusive voting privileges with respect to matters
relating to distribution expenses borne solely by such Class or any other
matter in which the interests of one Class differ from the interests of any
other Class. In addition, Class B shareholders will have the right to vote on
any proposed material increase in Class A's expenses, if such proposal is
submitted separately to Class A shareholders. Also, as discussed herein, Class
A, Class B and Class C bear the expenses related to the distribution of their
respective shares.
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
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Massachusetts counsel to the Fund, the risk to Fund shareholders of personal
liability is remote.
CODE OF ETHICS. Directors, officers and employees of InterCapital, Dean
Witter Services Company Inc. and the Distributor are subject to a strict Code
of Ethics adopted by those companies. The Code of Ethics is intended to
ensure that the interests of shareholders and other clients are placed ahead
of any personal interest, that no undue personal benefit is obtained from a
person's employment activities and that actual and potential conflicts of
interest are avoided. To achieve these goals and comply with regulatory
requirements, the Code of Ethics requires, among other things, that personal
securities transactions by employees of the companiesbe subject to an advance
clearance process to monitor that no Dean Witter Fund is engaged at the same
time in a purchase or sale of the same security. The Code of Ethics bans the
purchase of securities in an initial public offering, and also prohibits
engaging in futures and options transactions and profiting on short-term
trading (that is, a purchase within sixty days of a sale or a sale within
sixty days of a purchase) of a security. In addition, investment personnel
may not purchase or sell a security for their personal account within thirty
days before or after any transaction in any Dean Witter Fund managed by them.
Any violations of the Code of Ethics are subject to sanctions, including
reprimand, demotion or suspension or termination of employment. The Code of
Ethics comports with regulatory requirements and the recommendations in the
1994 report by the Investment Company Institute Advisory Group on Personal
Investing.
MASTER/FEEDER CONVERSION. The Fund reserves the right to seek to achieve its
investment objectives by investing all of its investable assets in a
diversified, open-end management investment company having the same
investment objectives and policies and substantially the same investment
restrictions as those applicable to the Fund.
SHAREHOLDER INQUIRIES. All inquiries regarding the Fund should be directed to
the Fund at the telephone numbers or address set forth on the front cover of
this Prospectus.
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APPENDIX--RATINGS OF INVESTMENTS
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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.
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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.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC--debt rating.
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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.
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DEAN WITTER
DIVERSIFIED INCOME TRUST
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
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
90 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 LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
