<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 6, 1998
REGISTRATION NOS.: 33-44782
811-6515
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 7 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 [X]
AMENDMENT NO. 8 [X]
---------
DEAN WITTER DIVERSIFIED INCOME TRUST
(A MASSACHUSETTS BUSINESS TRUST)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 392-1600
BARRY FINK, ESQ.
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(NAME AND ADDRESS OF AGENT FOR SERVICE)
Copy to:
DAVID M. BUTOWSKY, ESQ.
GORDON ALTMAN BUTOWSKY
WEITZEN SHALOV & WEIN
114 WEST 47TH STREET
NEW YORK, NEW YORK 10036
---------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Post-Effective Amendment becomes effective.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
X immediately upon filing pursuant to paragraph (b)
-----
on (Date) pursuant to paragraph (b)
-----
60 days after filing pursuant to paragraph (a)
-----
on (date) pursuant to paragraph (a) of rule 485.
-----
---------
AMENDING THE PROSPECTUS AND UPDATING FINANCIAL STATEMENTS
===============================================================================
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
PART A
ITEM CAPTION PROSPECTUS
- --------- ------------------
<S> <C>
1. ......... Cover Page
2. ......... Summary of Fund Expenses; Prospectus Summary
3. ......... Financial Highlights; Performance Information
4. ......... Investment Objective and Policies; The Fund and its Management;
Cover Page; Investment Restrictions; Prospectus Summary;
Financial Highlights
5. ......... The Fund and Its Management; Back Cover; Investment Objective
and Policies
6. ......... Dividends, Distributions and Taxes; Additional
Information
7. ......... Purchase of Fund Shares; Shareholder Services
8. ......... Purchase of Fund Shares; Redemptions and Repurchases;
Shareholder Services
9. ......... Not Applicable
</TABLE>
<TABLE>
<CAPTION>
PART B
ITEM STATEMENT OF ADDITIONAL INFORMATION
- ------ -----------------------------------
<S> <C>
10. ......... Cover Page
11. ......... Table of Contents
12. ......... The Fund and Its Management
13. ......... Investment Practices and Policies; Investment
Restrictions; Portfolio Transactions and Brokerage
14. ......... The Fund and Its Management; Trustees and Officers
15. ......... Trustees and Officers
16. ......... The Fund and Its Management; The Distributor; Custodian
and Transfer Agent; Independent Accountants
17. ......... Portfolio Transactions and Brokerage
18. ......... Description of Shares of the Fund;
19. ......... The Distributor; Purchase of Fund Shares; Redemption and
Repurchases; Financial Statements; Shareholder Services
20. ......... Dividends, Distributions and Taxes
21. ......... The Distributor
22. ......... Performance Information
23. ......... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
PROSPECTUS
FEBRUARY 6, 1998
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. (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 February 6, 1998, which has been
filed with the Securities and Exchange Commission, and which is available at
no charge upon request of the Fund at the address or telephone numbers listed
on this page. The Statement of Additional Information is incorporated herein
by reference.
Dean Witter
Diversified Income Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550 OR
(800) 869-NEWS (toll-free)
TABLE OF CONTENTS
Prospectus Summary /2
Summary of Fund Expenses /4
Financial Highlights /6
The Fund and its Management /9
Investment Objectives and Policies /9
Risk Considerations /16
Investment Restrictions /25
Purchase of Fund Shares /26
Shareholder Services /37
Redemptions and Repurchases /39
Dividends, Distributions and Taxes /40
Performance Information /42
Additional Information /42
Appendix--Ratings of Investments /44
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and the shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
DEAN WITTER DISTRIBUTORS INC.,
DISTRIBUTOR
<PAGE>
PROSPECTUS SUMMARY
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
The The Fund is organized as a Massachusetts business trust, and is an open-end diversified management investment
Fund company which allocates an equal portion of its total assets among three groupings of fixed-income securities.
- ---------------------------------------------------------------------------------------------------------------------------------
Shares Shares of beneficial interest with $0.01 par value (see page 42). The Fund offers four Classes of shares,
Offered each with a different combination of sales charges, ongoing fees and other features (see pages 26-36).
- ---------------------------------------------------------------------------------------------------------------------------------
Minimum The minimum initial investment for each Class is $1000 ($100 if the account is opened through EasyInvest
Purchase (Service Mark)). Class D shares are only available to persons investing $5 million ($25 million for certain
qualified plans) or more and to certain other limited categories of investors. For the purpose of meeting the
minimum $5 million (or $25 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 26).
- ---------------------------------------------------------------------------------------------------------------------------------
Investment A high level of current income; total return (income plus capital appreciation) is a secondary objective.
Objectives
- ---------------------------------------------------------------------------------------------------------------------------------
Investment A balanced allocation of assets consisting of approximately one-third of the Fund's assets invested equally
Policies 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 9-24).
- ---------------------------------------------------------------------------------------------------------------------------------
Investment Dean Witter InterCapital Inc. ("InterCapital"), the Investment Manager of the Fund, and its wholly-owned
Manager subsidiary, Dean Witter Services Company Inc., serve in various investment management, advisory, management and
administrative capacities to 103 investment companies and other portfolios with assets of approximately $105
billion at January 31, 1998 (see page 9).
- ---------------------------------------------------------------------------------------------------------------------------------
Management The Investment Manager receives a monthly fee at the annual rate of 0.40% of daily net assets (see page 9).
Fee
- ---------------------------------------------------------------------------------------------------------------------------------
Distributor Dean Witter Distributors Inc. (the "Distributor"). The Fund has adopted a distribution plan pursuant to Rule
and 12b-1 under the Investment Company Act (the "12b-1 Plan") with respect to the distribution fees paid by the
Distribution Class A, Class B and Class C shares of the Fund to the Distributor. The entire 12b-1 fee payable by Class A and
Fee 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 26
and 34).
- ---------------------------------------------------------------------------------------------------------------------------------
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 up to 0.25% of average daily net assets of the Class (see pages 26, 29 and 34).
- ---------------------------------------------------------------------------------------------------------------------------------
2
<PAGE>
- ----------------------------------------------------------------------------------------------------------------------------
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 26, 31 and 34).
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 up to 0.85% of average daily net assets of the Class (see pages 26, 33 and 34).
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 26 and 34).
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends and Dividends from net investment income are declared and paid monthly. Capital gains distributions, if any, are
Capital Gains paid at least once a year or are retained for reinvestment by the Fund. Dividends and capital gains
Distributions distributions paid 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 37 and 40).
- ---------------------------------------------------------------------------------------------------------------------------------
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 39).
- ---------------------------------------------------------------------------------------------------------------------------------
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 16 through 24).
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The above is qualified in its entirety by the detailed information appearing
elsewhere in the Prospectus and in the Statement of Additional Information.
3
<PAGE>
SUMMARY OF FUND EXPENSES
- -----------------------------------------------------------------------------
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, 1997.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ------------ -----------
<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 ..................................... 0.15% 0.15% 0.15% 0.15%
Total Fund Operating Expenses (7)................... 0.80% 1.40% 1.40% 0.55%
</TABLE>
- ------------
(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 July 28, 1997. Accordingly, "Total Fund Operating Expenses," as
shown above with respect to those Classes, are estimates based upon the
sum of 12b-1 Fees, Management Fees and estimated "Other Expenses."
4
<PAGE>
<TABLE>
<CAPTION>
EXAMPLES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------- -------- --------- --------- ----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment
assuming (1) a 5% annual return and (2) redemption at the end
of each time period:
Class A ...................................................... $50 $67 $85 $137
Class B ...................................................... $64 $74 $97 $168
Class C....................................................... $24 $44 $77 $168
Class D ...................................................... $ 6 $18 $31 $ 69
You would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A ...................................................... $50 $67 $85 $137
Class B ...................................................... $14 $44 $77 $168
Class C ...................................................... $14 $44 $77 $168
Class D ...................................................... $ 6 $18 $31 $ 69
</TABLE>
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.
5
<PAGE>
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------
The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by Price Waterhouse LLP,
independent accountants. The financial highlights should be read in
conjunction with the financial statements, 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.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31 APRIL 9, 1992*
-------------------------------------------------------------- THROUGH
1997** ++ 1996 1995 1994 1993 OCTOBER 31, 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
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................... 0.74 0.78 0.77 0.74 0.77 0.37
Net realized and unrealized gain
(loss)................................. (0.15) 0.10 0.20 (0.80) 0.20 --
----------- ----------- ----------- ----------- ----------- ----------------
Total from investment operations ....... 0.59 0.88 0.97 (0.06) 0.97 0.37
----------- ----------- ----------- ----------- ----------- ----------------
Less dividends and distributions from:
Net investment income.................. (0.91) (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 ...... (0.91) (0.72) (0.72) (0.77) (0.78) (0.36)
----------- ----------- ----------- ----------- ----------- ----------------
Net asset value, end of period.......... $ 9.46 $ 9.78 $ 9.62 $ 9.37 $10.20 $10.01
=========== =========== =========== =========== =========== ================
TOTAL INVESTMENT RETURN+................ 6.46% 9.49% 10.76% (0.69)% 10.00% 3.73%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ 1.40% 1.42% 1.44% 1.51% 1.58% (4) 0.85%(2)(3)
Net investment income................... 7.90% 8.38% 8.30% 7.91% 7.92% (4) 7.86%(2)(3)
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands.............................. $915,899 $745,581 $542,544 $407,038 $167,137 $55,297
Portfolio turnover rate ................ 104% 82% 87% 60% 117% 37%(1)
</TABLE>
- ------------
* Commencement of operations.
** Prior to July 28, 1997, the Fund issued one class of shares. All
shares of the Fund held prior to that date have been designated Class
B shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ 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.
6
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
OCTOBER 31,
1997++
- ------------------------------------------------------------
<S> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..... $ 9.40
-----------------
Net investment income..................... 0.22
Net realized and unrealized gain.......... 0.04
-----------------
Total from investment operations.......... 0.26
-----------------
Less dividends from net investment
income................................... (0.20)
-----------------
Net asset value, end of period............ $ 9.46
=================
TOTAL INVESTMENT RETURN+.................. 2.74%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................. 0.85%(2)
Net investment income..................... 8.98%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .. $4,933
Portfolio turnover rate................... 104%
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..... $ 9.40
-----------------
Net investment income..................... 0.20
Net realized and unrealized gain.......... 0.04
-----------------
Total from investment operations.......... 0.24
-----------------
Less dividends from net investment
income................................... (0.19)
-----------------
Net asset value, end of period............ $ 9.45
=================
TOTAL INVESTMENT RETURN+.................. 2.52%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................. 1.44%(2)
Net investment income..................... 8.17%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .. $3,773
Portfolio turnover rate................... 104%
</TABLE>
- ------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ 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.
7
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
OCTOBER 31,
1997++
- ------------------------------------------------------------
<S> <C>
CLASS D SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..... $ 9.40
-----------------
Net investment income .................... 0.23
Net realized and unrealized gain ........ 0.02
-----------------
Total from investment operations ........ 0.25
-----------------
Less dividends from net investment
income................................... (0.20)
-----------------
Net asset value, end of period ........... $ 9.45
=================
TOTAL INVESTMENT RETURN+.................. 2.69%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................. 0.59%(2)
Net investment income .................... 9.26%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands . $ 99
Portfolio turnover rate .................. 104%
</TABLE>
- ------------
* The date the shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day
of the period.
(1) Not annualized.
(2) Annualized.
8
<PAGE>
THE FUND AND ITS MANAGEMENT
- -----------------------------------------------------------------------------
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 103 investment companies, twenty-nine of which
are listed on the New York Stock Exchange, with combined total assets of
approximately $101 billion as of January 31, 1998. The Investment Manager
also manages portfolios of pension plans, other institutions and individuals
which aggregated approximately $4 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, 1997, the Fund
accrued total compensation to the Investment Manager amounting to 0.40% of
the Fund's average daily net assets and the total expenses of Class B
amounted to 1.40% of the average daily net assets of Class B. Shares of Class
A, Class C and Class D were first issued on July 28, 1997. The expenses of
the Fund include: the fee of the Investment Manager; the fee pursuant to the
Plan of Distribution (see "Purchase of Fund Shares"); taxes; transfer agent,
custodian and auditing fees; certain legal fees; and printing and other
expenses relating to the Fund's operations which are not expressly assumed by
the Investment Manager under its Investment Management Agreement with the
Fund.
INVESTMENT OBJECTIVES AND POLICIES
- -----------------------------------------------------------------------------
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 approxi-
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mately 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 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 Govern-
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ment 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 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)
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(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 inter-
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<PAGE>
est rate may adjust for any single adjustment period. Alternatively, certain
ARMs contain limitations on changes in the required monthly payment. In the
event that a monthly payment is not sufficient to pay the interest accruing
on an ARM, any such excess interest is added to the principal balance of the
mortgage loan, which is repaid through future monthly payments. If the
monthly payment for such an instrument exceeds the sum of the interest
accrued at the applicable mortgage interest rate and the principal payment
required at such point to amortize the outstanding principal balance over the
remaining term of the loan, the excess is utilized to reduce the then
outstanding principal balance of the ARM.
Private Mortgage Pass-Through Securities. Private mortgage pass-through
securities are structured similarly to the GNMA, FNMA and FHLMC mortgage
pass-through securities and are issued by originators of and investors in
mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing. These securities usually are backed by a pool of conventional
fixed rate or adjustable rate mortgage loans. Since private mortgage
pass-through securities typically are not guaranteed by an entity having the
credit status of GNMA, FNMA and FHLMC, such 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
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<PAGE>
of a CMO series in a number of different ways. Generally, the purpose of the
allocation of the cash flow of a CMO to the various classes is to obtain a
more predictable cash flow to the individual tranches than exists with the
underlying collateral of the CMO. As a general rule, the more predictable the
cash flow is on a CMO tranche, the lower the anticipated yield will be on
that tranche at the time of issuance relative to prevailing market yields on
Mortgage-Backed Securities. As part of the process of creating more
predictable cash flows on most of the tranches in a series of CMOs, one or
more tranches generally must be created that absorb most of the volatility in
the cash flows on the underlying mortgage loans. The yields on these tranches
are generally higher than prevailing market yields on Mortgage-Backed
Securities with similar maturities. As a result of the uncertainty of the
cash flows of these tranches, the market prices of and yield on these
tranches generally are more volatile.
The Fund also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are
structured to provide payments of principal on each payment date to more than
one class. These simultaneous payments are taken into account in calculating
the stated maturity date or final distribution date of each class, which, as
with other CMO structures, must be retired by its stated maturity date or
final distribution date but may be retired earlier. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds always are parallel pay CMOs with the required principal payment on
such securities having the highest priority after interest has been paid to
all classes.
Stripped Mortgage-Backed Securities. Stripped Mortgage-Backed Securities
are derivative multiclass mortgage securities. Stripped Mortgage-Backed
Securities may be issued by agencies or instrumentalities of the United
States 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.
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<PAGE>
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 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
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<PAGE>
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.
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
16
<PAGE>
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
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<PAGE>
sustain a loss. However, as stated above, the Fund will invest only in CMOs
which are rated AAA by S&P or Aaa by Moody's or, if unrated, are determined
to be of comparable quality. Also, a number of different factors, including
the extent of prepayment of principal of the Mortgage Assets, affect the
availability of cash for principal payments by the CMO issuer on any payment
date and, accordingly, affect the timing of principal payments on each CMO
class.
Asset-Backed Securities involve certain risks that are not posed by
Mortgage-Backed Securities, resulting mainly from the fact that Asset-Backed
Securities do not usually contain the complete benefit of a security interest
in the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, some of which may reduce the ability to
obtain full payment. In the case of automobile receivables, due to various
legal and economic factors, proceeds from repossessed collateral may not
always be sufficient to support payments on these securities.
High Yield Securities. Because of the special nature of the Fund's
investment in high yield securities, commonly known as "junk bonds," the
Investment Manager must take account of certain special considerations in
assessing the risks associated with such investments. Although the growth of
the high yield securities market in the 1980s had paralleled a long economic
expansion, recently many issuers have been affected by adverse economic and
market conditions. It should be recognized that an economic downturn or
increase in interest rates is likely to have a negative effect on the high
yield bond market and on the value of the high yield securities held by the
Fund, as well as on the ability of the securities' issuers to repay principal
and interest on their borrowings.
The prices of high yield securities have been found to be less sensitive
to changes in prevailing interest rates than higher-rated investments, but
are likely to be more sensitive to adverse economic changes or individual
corporate developments. During an economic downturn or substantial period of
rising interest rates, highly leveraged issuers may experience financial
stress which would adversely affect their ability to service their principal
and interest payment obligations, to meet their projected business goals or
to obtain additional financing. If the issuer of a fixed-income security
owned by the Fund defaults, the Fund may incur additional expenses to seek
recovery. In addition, periods of economic uncertainty and change can be
expected to result in an increased volatility of market prices of high yield
securities and a concomitant volatility in the net asset value of a share of
the Fund. Moreover, the market prices of certain of the Fund's portfolio
securities which are structured as zero coupon and payment-in-kind securities
are affected to a greater extent by interest rate changes and thereby tend to
be more volatile than securities which pay interest periodically and in cash
(see "Dividends, Distributions and Taxes" for a discussion of the tax
ramifications of investments in such securities).
The secondary market for high yield securities may be less liquid than the
markets for higher quality securities and, as such, may have an adverse
effect on the market prices of certain securities. The limited liquidity of
the market may also adversely affect the ability of the Fund's Trustees to
arrive at a fair value for certain high yield securities at certain times and
could make it difficult for the Fund to sell certain securities.
New laws and proposed new laws may have a potentially negative impact on
the market for high yield bonds. For example, present legislation requires
federally-insured savings and loan associations to divest their investments
in high yield bonds. This legislation and other proposed legislation may have
an adverse effect upon the value of high yield securities and a concomitant
negative impact upon the net asset value of a share of the Fund.
18
<PAGE>
During the fiscal year ended October 31, 1997, 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 54%
AA/Aa 1.6%
A/A 1.0%
BBB/Baa 0.0%
BB/Ba 1.3%
B/B 19.2%
CCC/Caa 1.1%
CC/Ca 0.0%
C/C 0.0%
D 0.0%
Unrated 21.8%
</TABLE>
Year 2000. The investment management services provided to the Fund by the
Investment Manager and the services provided to shareholders by the
Distributor and the Transfer Agent depend on the smooth functioning of their
computer systems. Many computer software systems in use today cannot
recognize the year 2000, but revert to 1900 or some other date, due to the
manner in which dates were encoded and calculated. That failure could have a
negative impact on the handling of securities trades, pricing and account
services. The Investment Manager, the Distributor and the Transfer Agent have
been actively working on necessary changes to their own computer systems to
prepare for the year 2000 and expect that their systems will be adapted
before that date, but there can be no assurance that they will be successful,
or that interaction with other non-complying computer systems will not impair
their services at that time.
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.
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 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
19
<PAGE>
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,
20
<PAGE>
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 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.
21
<PAGE>
Government securities and mortgage-backed securities and on various foreign
currencies which are listed on several U.S. and foreign securities exchanges
and are written in over-the-counter transactions ("OTC options"). Listed
options are issued or guaranteed by the exchange on which they trade or by a
clearing corporation such as the Options Clearing Corporation ("OCC"). The
Fund is permitted to write covered call options on portfolio securities which
are denominated in either U.S. dollars or foreign currencies, without limit,
in order to hedge against the decline in the value of a security or currency
in which such security is denominated and to close out long call option
positions. The Fund may purchase listed and OTC call and put options in
amounts equalling up to 5% of its total assets. The Fund may purchase call
options only to close out a covered call position or to protect against an
increase in the price of a security it anticipates purchasing or, in the case
of call options on a foreign currency, to hedge against an adverse exchange
rate change of the currency in which the security it anticipates purchasing
is denominated vis-a-vis the currency in which the exercise price is
denominated. The Fund may purchase put options on securities which it holds
in its portfolio only to protect itself against a decline in the value of the
security. The Fund may also purchase put options to close out written put
positions. There are no other limits on the Fund's ability to purchase call
and put options.
The Fund may purchase and sell financial futures contracts that are
currently traded, or may in the future be traded, on U.S. and foreign
commodity exchanges on such underlying fixed-income securities as U.S.
Treasury bonds, notes, 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
22
<PAGE>
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
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
23
<PAGE>
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"), Morgan Stanley & Co.
Incorporated and other broker-dealer affiliates of InterCapital, the views of
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 23 funds and
fund portfolios, with approximately $13.3 billion in assets at December 31,
1997. Peter M. Avelar, Rajesh K. Gupta, Anne Pickrell and Peter J. Seeley are
the primary portfolio managers of the Fund, Mr. Avelar and Mr. Gupta since its
inception and Mr. Pickrell and Mr. Seeley since February, 1998. 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. Ms. Pickrell has been a portfolio manager at InterCapital for over
five years. Prior to joining InterCapital in July 1994, Mr. Seeley was a
portfolio manager at Nikko Capital Management.
Securities purchased by the Fund are generally sold by dealers acting as
principal for their own accounts. Brokerage commissions are not normally
charged but such transactions generally involve costs in the form of spreads
between bid and asked prices. Orders for transactions in other portfolio
securities and commodities are placed for the Fund with a number of brokers
and dealers, including DWR, Morgan Stanley & Co. Incorporated and other
broker-dealers that are 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
24
<PAGE>
commissions on transactions conducted through DWR, Morgan Stanley & Co.
Incorporated 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 in
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 securi-ties 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.
25
<PAGE>
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 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 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 ($25 million for certain
qualified plans) 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 ($25
million for certain qualified plans) or more and to certain other limited
categories of investors. For the purpose of meeting the minimum $5 million
(or $25 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 FSB (the "Transfer Agent" or "DWT") 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. The minimum initial purchase in
the case of an "Education IRA" is $500, if the Distributor has reason to
believe that additional investments will increase the investment in the
account to $1,000 within three years. In the case of investments pursuant to
(i) Systematic Payroll Deduction Plans (including Individual Retirement
Plans), (ii) the InterCapital mutual fund asset allocation program and (iii)
fee-based programs approved by the Distributor, pursuant to which
participants pay an asset based fee for services in the nature of investment
advisory or administrative services, the Fund, in its discre-
26
<PAGE>
tion, may accept investments without regard to any minimum amounts which
would otherwise be required, provided, in the case of Systematic Payroll
Deduction Plans, that the Distributor 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 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 plans are subject to a CDSC scaled down from 2.0% to 1.0%
if redeemed within three years after purchase.) This
27
<PAGE>
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 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 (or $25 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.
28
<PAGE>
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:
<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>
<PAGE>
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.
29
<PAGE>
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 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 that, together with the
current investment amount, is equal to at least $5 million ($25 million for
certain qualified plans), 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:
30
<PAGE>
(1) trusts for which DWT (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, mandatory redemption upon
termination and such other circumstances as specified in the programs'
agreements, and restrictions on transferability of Fund shares);
(3) employer-sponsored 401(k) and other plans qualified under Section
401(a) of the Internal Revenue Code ("Qualified Retirement Plans") with at
least 200 eligible employees and for which DWT serves as Trustee or DWR's
Retirement Plan Service serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement;
(4) Qualified Retirement Plans for which DWT serves as Trustee or DWR's
Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement 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.
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 Se lected 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 Qualified
Retirement 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
31
<PAGE>
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 purchased on or after July 28,
1997 by Qualified Retirement Plans for which DWT serves as Trustee or DWR's
Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement, 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 Qualified Retirement 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
Qualified Retirement 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:
(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 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
Qualified Retirement Plan 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 DWT serves as Trustee or
DWR's Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement ("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.
32
<PAGE>
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 Qualified Retirement Plan for which DWT serves as Trustee or DWR's
Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement, 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.
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 assessed on an
amount equal to the lesser of the current market
33
<PAGE>
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 ($25 million
for Qualified Retirement Plans for which DWT serves as Trustee or DWR's
Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement) 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 referred to in (i) and (ii) above, which may
include termination fees, mandatory redemption upon termination and such
other circumstances as specified in the programs' agreements, 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 (or $25 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 (or $25 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
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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, 1997, Class B shares of the Fund
accrued payments under the Plan amounting to $7,104,223, which amount is
equal to 0.85% of the average daily net assets of Class B for the fiscal
year. 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. For the fiscal period July 28
through October 31, 1997, Class A and Class C shares of the Fund accrued
payments under the Plan amounting to $1,658 and $3,998, respectively, which
amounts on an annualized basis are equal to 0.25% and 0.85% of the average
daily net assets of Class A and Class C, respectively, for such period.
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 $14,622,156 at October 31, 1997, which was equal to 1.60% of the net
assets of Class B 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. The
Distributor has advised the Fund that unreimbursed expenses representing
a gross sales commission credited to account executives at the time of sale
totalled $48,120 in the case of Class C at December 31, 1997, which amount
was equal to 0.82% of the net assets of Class C on such date, and that there
were no such expenses that may be reimbursed in the subsequent year in the
case of Class A on such date. 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.
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<PAGE>
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 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
share-
36
<PAGE>
holder 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. ("Global Short-Term"), which is a Dean
Witter Fund offered with a CDSC. Exchanges may be made after the shares of
the Fund acquired by purchase (not by exchange or dividend reinvestment) have
been held
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<PAGE>
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, Global
Short-Term 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, Global
Short-Term 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 Global Short-Term, 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
Global Short-Term 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 Global Short-Term (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. 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 shares of
Global Short-Term or Class B shares of another Dean Witter Multi-Class 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 share-
38
<PAGE>
holders 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 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
39
<PAGE>
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 netasset value the shares of any shareholder
(other than shares held in an Individual Retirement Account or Custodial
Account under Section 403(b)(7) of the Internal Revenue Code) whose shares
have a value of less than $100 as a result of redemptions or repurchases, or
such lesser amount as may be fixed by the Board of Trustees or, in the case
of an account opened through 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 or more 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
40
<PAGE>
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.
Any dividends declared in the last quarter of any calendar year which are
paid in the following calendar year prior to February 1 will be deemed, for
tax purposes, to have been received by the shareholder in the prior calendar
year.
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. Shareholders will also be notified of their proportionate share of
long-term capital gains distributions that are eligible for a reduced rate of
tax under the Taxpayer Relief Act of 1997.
To avoid being subject to a 31% federal backup withholding tax on taxable
dividends, capital gains distributions and the proceeds of redemptions and
repurchases, shareholders' taxpayer identification numbers must be furnished
and certified as to their accuracy. Shareholders who are not citizens or
residents of, or entities organized in, the United States may be subject to
withholding taxes of up to 30% on certain payments received from the Fund.
Dividends, interest and gains received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. If it qualifies for
and has made the appropriate election with the Internal Revenue Service, the
Fund will report annually to its shareholders the amount per share of such
taxes, to enable shareholders to claim United States foreign tax credits or
deductions with respect to such taxes. In the absence of such an election,
the Fund would deduct foreign tax in computing the amount of its
distributable income.
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<PAGE>
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
- -----------------------------------------------------------------------------
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 share-
42
<PAGE>
holder held personally liable for the obligations of the Fund. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability
is limited to circumstances in which the Fund itself would be unable to meet
its obligations. Given the above limitations on shareholder personal
liability and the nature of the Fund's assets and operations, the possibility
of the Fund being unable to meet its obligations is remote and, in the
opinion of Massachusetts counsel to the Fund, the risk to Fund shareholders
of personal liability is remote.
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 companies be 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.
43
<PAGE>
APPENDIX--RATINGS OF INVESTMENTS
- -----------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")
BOND RATINGS
<TABLE>
<CAPTION>
<S> <C>
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.
</TABLE>
44
<PAGE>
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.
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.
<TABLE>
<CAPTION>
<S> <C>
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.
45
<PAGE>
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.
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.
</TABLE>
46
<PAGE>
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.
<TABLE>
<CAPTION>
<S> <C>
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.
</TABLE>
47
<PAGE>
THE DEAN WITTER FAMILY OF FUNDS
MONEY MARKET FUNDS
Dean Witter California Tax-Free Daily Income Trust
Dean Witter Liquid Asset Fund Inc.
Dean Witter New York Municipal Money Market Trust
Dean Witter Tax-Free Daily Income Trust
Dean Witter U.S. Government Money Market Trust
EQUITY FUNDS
Dean Witter American Value Fund
Dean Witter Balanced Growth Fund
Dean Witter Capital Appreciation Fund
Dean Witter Capital Growth Securities
Dean Witter Developing Growth Securities Trust
Dean Witter Dividend Growth Securities Inc.
Dean Witter European Growth Fund Inc.
Dean Witter Financial Services Trust
Dean Witter Fund of Funds
Dean Witter Global Dividend Growth Securities
Dean Witter Global Utilities Fund
Dean Witter Health Sciences Trust
Dean Witter Income Builder Fund
Dean Witter Information Fund
Dean Witter International SmallCap Fund
Dean Witter Japan Fund
Dean Witter Market Leader Trust
Dean Witter Mid-Cap Growth Fund
Dean Witter Natural Resource Development
Securities Inc.
Dean Witter Pacific Growth Fund Inc.
Dean Witter Precious Metals and Minerals Trust
Dean Witter Special Value Fund
Dean Witter S&P 500 Index Fund
Dean Witter Utilities Fund
Dean Witter Value-Added Market Series
Dean Witter World Wide Investment Trust
Morgan Stanley Dean Witter Competitive Edge Fund,
"Best Ideas" Portfolio
ASSET ALLOCATION FUNDS
Dean Witter Global Asset Allocation Fund
Dean Witter Strategist Fund
FIXED-INCOME FUNDS
Dean Witter Balanced Income Fund
Dean Witter California
Tax-Free Income Fund
Dean Witter Convertible
Securities Trust
Dean Witter Diversified
Income Trust
Dean Witter Federal
Securities Trust
Dean Witter Global
Short-Term Income Fund Inc.
Dean Witter Hawaii Municipal Trust
Dean Witter High Yield
Securities Inc.
Dean Witter Intermediate
Income Securities
Dean Witter Intermediate Term
U.S. Treasury Trust
Dean Witter Limited Term
Municipal Trust
Dean Witter Multi-State
Municipal Series Trust
Dean Witter New York
Tax-Free Income Fund
Dean Witter Short-Term Bond Fund
Dean Witter Short-Term U.S.
Treasury Trust
Dean Witter Tax-Exempt
Securities Trust
Dean Witter U.S. Government
Securities Trust
Dean Witter World Wide
Income Trust
DEAN WITTER RETIREMENT
SERIES
American Value Series
Capital Growth Series
Dividend Growth Series
Global Equity Series
Intermediate Income
Securities Series
Liquid Asset Series
Strategist Series
U.S. Government Money Market
Series
U.S. Government Securities
Series
Utilities Series
Value-Added Market Series
ACTIVE ASSETS ACCOUNT
PROGRAM
Active Assets California
Tax-Free Trust
Active Assets Government
Securities Trust
Active Assets Money Trust
Active Assets Tax-Free Trust
<PAGE>
Dean Witter DEAN WITTER
Diversified Income Trust DIVERSIFIED
Two World Trade Center INCOME TRUST
New York, New York 10048
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
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
Anne Pickrell
Vice President
Peter J. Seeley
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 FSB
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc. PROSPECTUS--FEBRUARY 6, 1998
<PAGE>
DEAN WITTER
DIVERSIFIED
INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 6, 1998
- -----------------------------------------------------------------------------
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 investment objectives by equally
allocating its assets among three separate groupings of various types of
fixed income securities. Certain of the securities in which the Fund may
invest will include securities rated Baa/BBB or lower.
A Prospectus for the Fund dated February 6, 1998, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge from the Fund at the address or telephone numbers listed below
or from the Fund's Distributor, Dean Witter Distributors Inc., or from Dean
Witter Reynolds Inc. at any of its branch offices. This Statement of
Additional Information is not a Prospectus. It contains information in
addition to and more detailed than that set forth in the Prospectus. It is
intended to provide additional information regarding the activities and
operations of the Fund, and should be read in conjunction with the
Prospectus.
Dean Witter
Diversified Income Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
<PAGE>
TABLE OF CONTENTS
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
The Fund and its Management............................................ 3
Trustees and Officers.................................................. 6
Investment Practices and Policies ..................................... 12
Investment Restrictions................................................ 32
Portfolio Transactions and Brokerage ................................. 33
The Distributor........................................................ 34
Determination of Net Asset Value ...................................... 39
Purchase of Fund Shares................................................ 39
Shareholder Services................................................... 42
Redemptions and Repurchases............................................ 46
Dividends, Distributions and Taxes .................................... 47
Performance Information................................................ 49
Description of Shares of the Fund ..................................... 51
Custodian and Transfer Agent ......................................... 51
Independent Accountants................................................ 52
Reports to Shareholders................................................ 52
Legal Counsel.......................................................... 52
Experts................................................................ 52
Registration Statement................................................. 52
Financial Statements--October 31, 1997................................. 53
Report of Independent Accountants ..................................... 76
</TABLE>
2
<PAGE>
THE FUND AND ITS MANAGEMENT
- -----------------------------------------------------------------------------
THE FUND
The Fund is a trust of the type commonly known as a "Massachusetts
business trust" and was organized under the laws of the Commonwealth of
Massachusetts on December 20, 1991.
THE INVESTMENT MANAGER
Dean Witter InterCapital Inc. ("InterCapital" or the "Investment
Manager"), a Delaware corporation, whose address is Two World Trade Center,
New York, New York 10048, is the Fund's Investment Manager. InterCapital is a
wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co.
("MSDWD") a Delaware corporation. In an internal reorganization which took
place in January, 1993, InterCapital assumed the investment advisory,
administrative and management activities previously performed by the
InterCapital Division of Dean Witter Reynolds Inc. ("DWR"), a broker-dealer
affiliate of InterCapital. (As used in this Statement of Additional
Information, the terms "InterCapital" and "Investment Manager" refer to DWR's
InterCapital Division prior to the internal reorganization and to Dean Witter
InterCapital Inc. thereafter). The daily management of the Fund is conducted
by or under the direction of officers of the Fund and of the Investment
Manager, subject to review by the Fund's Board of Trustees. Information as to
these Trustees and officers is contained under the caption "Trustees and
Officers."
InterCapital is the investment manager or investment adviser of the
following investment companies: Dean Witter Liquid Asset Fund Inc.,
InterCapital Income Securities Inc., InterCapital Insured Municipal Bond
Trust, InterCapital Quality Municipal Investment Trust, InterCapital Insured
Municipal Trust, InterCapital Quality Municipal Income Trust, InterCapital
Insured Municipal Income Trust, InterCapital California Insured Municipal
Income Trust, InterCapital Quality Municipal Securities, InterCapital
California Quality Municipal Securities, InterCapital New York Quality
Municipal Securities, InterCapital Insured Municipal Securities, InterCapital
California Insured Municipal Securities, Dean Witter High Yield Securities
Inc., Dean Witter Tax-Free Daily Income Trust, Dean Witter Developing Growth
Securities Trust, Dean Witter Tax-Exempt Securities Trust, Dean Witter
Natural Resource Development Securities Inc., Dean Witter Dividend Growth
Securities Inc., Dean Witter American Value Fund, Dean Witter U.S. Government
Money Market Trust, Dean Witter Variable Investment Series, Dean Witter World
Wide Investment Trust, Dean Witter Select Municipal Reinvestment Fund, Dean
Witter U.S. Government Securities Trust, Dean Witter California Tax-Free
Income Fund, Dean Witter New York Tax-Free Income Fund, Dean Witter
Convertible Securities Trust, Dean Witter Federal Securities Trust, Dean
Witter Value-Added Market Series, High Income Advantage Trust, High Income
Advantage Trust II, High Income Advantage Trust III, Dean Witter Government
Income Trust, Dean Witter Utilities Fund, Dean Witter California Tax-Free
Daily Income Trust, Dean Witter Strategist Fund, Dean Witter World Wide
Income Trust, Dean Witter Intermediate Income Securities, Dean Witter New
York Municipal Money Market Trust, Dean Witter Capital Growth Securities,
Dean Witter European Growth Fund Inc., Dean Witter Precious Metals and
Minerals Trust, Dean Witter Global Short-Term Income Fund Inc., Dean Witter
Pacific Growth Fund Inc., Dean Witter Multi-State Municipal Series Trust,
Dean Witter Short-Term U.S. Treasury Trust, Dean Witter Health Sciences
Trust, Dean Witter Retirement Series, Dean Witter Limited Term Municipal
Trust, Dean Witter Short-Term Bond, Dean Witter Global Dividend Growth
Securities, Dean Witter Global Utilities Fund, Dean Witter International
Small Cap Fund, Dean Witter Mid-Cap Growth Fund, Dean Witter Select
Dimensions Investment Series, Dean Witter Global Asset Allocation Fund, Dean
Witter Balanced Growth Fund, Dean Witter Balanced Income Fund, Dean Witter
Hawaii Municipal Trust, Dean Witter Capital Appreciation Fund, Dean Witter
Intermediate Term U.S. Treasury Trust, Dean Witter Information Fund, Dean
Witter Japan Fund, Dean Witter Income Builder Fund, Dean Witter Special Value
Fund, Dean Witter Financial Services Trust, Dean Witter Market Leader Trust,
Dean Witter S&P 500 Index Fund, Dean Witter Fund of Funds, Morgan Stanley
Dean Witter Competitive Edge Fund--"Best Ideas" Portfolio, Active Assets
Money Trust, Active Assets Tax-Free Trust, Active Assets California Tax-Free
Trust, Active Assets Government Securities Trust, Municipal Income Trust,
Municipal Income Trust II, Municipal Income Trust III, Municipal Income
Opportunities
3
<PAGE>
Trust, Municipal Income Opportunities Trust II, Municipal Income
Opportunities Trust III, Prime Income Trust and Municipal Premium Income
Trust. The foregoing investment companies, together with the Fund, are
collectively referred to as the Dean Witter Funds. In addition, Dean Witter
Services Company Inc. ("DWSC"), a wholly-owned subsidiary of InterCapital
serves as manager for the following companies for which TCW Funds Management,
Inc. is the investment adviser: TCW/DW Core Equity Trust, TCW/DW North
American Government Income Trust, TCW/DW Latin American Growth Fund, TCW/DW
Income and Growth Fund, TCW/DW Small Cap Growth Fund, TCW/DW Balanced Fund,
TCW/DW Total Return Trust, TCW/DW Mid-Cap Equity Trust, TCW/DW Global Telecom
Trust, TCW/DW Strategic Income Trust, TCW/DW Emerging Market Opportunities
Trust, TCW/DW Term Trust 2000, TCW/DW Term Trust 2002 and TCW/DW Term Trust
2003 (the "TCW/DW Funds"). InterCapital also serves as (i) administrator of
The Black Rock Strategic Term Trust Inc., a closed-end investment company;
(ii) sub-administrator of Mass Mutual Participation Investors and Templeton
Global Governments Income Trust, closed-end investment companies; and (iii)
investment adviser of Offshore Dividend Growth Fund and Offshore Money Market
Fund, mutual funds established under the laws of the Cayman Islands and
available only to investors who are participants in DWR's International
Active Assets Account program and are neither citizens nor residents of the
United States.
Pursuant to an Investment Management Agreement (the "Agreement") with the
Investment Manager, the Fund has retained the Investment Manager to manage
the investment of the Fund's assets, including the placing of orders for the
purchase and sale of portfolio securities. The Investment Manager obtains and
evaluates such information and advice relating to the economy, securities
markets and specific securities as it considers necessary or useful to
continuously manage the assets of the Fund in a manner consistent with its
investment objective.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, such office space, facilities,
equipment, clerical help, bookkeeping and certain legal services as the Fund
may reasonably require in the conduct of its business, including the
preparation of prospectuses, proxy statements and reports required to be
filed with Federal and state securities commissions (except insofar as the
participation or assistance of independent accountants and attorneys is, in
the opinion of the Investment Manager, necessary or desirable). In addition,
the Investment Manager pays the salaries of all personnel, including officers
of the Fund, who are employees of the Investment Manager. The Investment
Manager also bears the cost of telephone service, heat, light, power and
other utilities provided to the Fund.
Effective December 31, 1993, pursuant to a Services Agreement between
InterCapital and DWSC, DWSC began to provide the administrative services to
the Fund which were previously performed directly by InterCapital. On April
17, 1995, DWSC was reorganized in the State of Delaware, necessitating the
entry into a new Services Agreement by InterCapital and DWSC on that date.
The foregoing internal reorganizations did not result in any change in the
nature or scope of the administrative services being provided to the Fund or
any of the fees being paid by the Fund for the overall services being
performed under the terms of the existing Management Agreement.
Expenses not expressly assumed by the Investment Manager under the
Agreement (see "The Fund and its Management" in the Prospectus), or by the
Distributor of the Fund's shares (see "The Distributor") will be paid by the
Fund. These expenses will be allocated among the four classes of shares of
the Fund (each, a "Class") pro rata based on the net assets of the Fund
attributable to each Class except as described below. Such expenses include,
but are not limited to: expenses of the Plan of Distribution pursuant to Rule
12b-1 (the "Rule 12b-1 fee") (see "The Distributor"); charges and expenses of
any registrar, custodian, stock transfer and dividend disbursing agent;
brokerage commissions; taxes; engraving and printing share certificates;
registration costs of the Fund and its shares under Federal and state
securities laws; the cost and expense of printing, including typesetting, and
distributing prospectuses and statements of additional information of the
Fund and supplements thereto to the Fund's shareholders; all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing
proxy statements and reports to shareholders; fees and travel expenses of
Trustees or members of any advisory board or committee who are not employees
of the Investment Manager or any corporate
4
<PAGE>
affiliate of the Investment Manager; all expenses incident to any dividend,
withdrawal or redemption options; charges and expenses of any outside service
used for pricing of the Fund's shares; fees and expenses of legal counsel,
including counsel to the Trustees who are not interested persons of the Fund
or of the Investment Manager (not including compensation or expenses of
attorneys who are employees of the Investment Manager) and independent
accountants; membership dues of industry associations; interest on Fund
borrowings; postage; insurance premiums on property or personnel (including
officers and Trustees) of the Fund which inure to its benefit; extraordinary
expenses (including, but not limited to, legal claims and liabilities and
litigation costs and any indemnification relating thereto); and all other
costs of the Fund's operation. The 12b-1 fees relating to a particular Class
will be allocated directly to that Class. In addition, other expenses
associated with a particular Class (except advisory or custodial fees) may be
allocated directly to that Class, provided that such expenses are reasonably
identified as specifically attributable to that Class and the direct
allocation to that Class is approved by the Trustees.
As full compensation for the services and facilities furnished to the Fund
and expenses of the Fund assumed by the Investment Manager, the Fund pays the
Investment Manager monthly compensation calculated daily by applying the
annual rate of 0.40% to the net assets of the Fund, determined as of the
close of each business day. The management fee is allocated among the Classes
pro rata based on the net assets of the Fund attributable to each Class.
Total compensation accrued to the Investment Manager under the Agreement for
the fiscal years ended October 31, 1995, October 31, 1996 and October 31,
1997, amounted to $1,875,972, $2,533,576 and $3,347,731, respectively.
The Agreement provides that in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations thereunder,
the Investment Manager is not liable to the Fund or any of its investors for
any act or omission by the Investment Manager or for any losses sustained by
the Fund or its investors. The Agreement in no way restricts the Investment
Manager from acting as investment manager or adviser to others.
The Investment Manager has paid the organizational expenses of the Fund
prior to the offering of the Fund's shares. The Fund has reimbursed the
Investment Manager for such expenses.
The Agreement was initially approved by the Board of Trustees on February
21, 1997 and by the shareholders of the Fund at a Special Meeting of
Shareholders held on May 21, 1997. The Agreement is substantially identical
to a prior investment management agreement which was initially approved by
the Board of Trustees on October 30, 1992, and by the shareholders of the
Fund at a Special Meeting of Shareholders held on January 12, 1993. The
Agreement took effect on May 31, 1997 upon the consummation of the merger of
Dean Witter, Discover & Co. with Morgan Stanley Group Inc. The Agreement may
be terminated at any time, without penalty, on thirty days' notice by the
Board of Trustees of the Fund, by the holders of a majority, as defined in
the Investment Company Act of 1940, as amended (the "Act"), of the
outstanding shares of the Fund, or by the Investment Manager. The Agreement
will automatically terminate in the event of its assignment (as defined in
the Act). Under its terms, the Agreement has an initial term ending April 30,
1999 and will remain in effect from year to year thereafter, provided
continuance of the Agreement is approved at least annually by the vote of the
holders of a majority, as defined in the Act, of the outstanding shares of
the Fund, or by the Board of Trustees of the Fund; provided that in either
event such continuance is approved annually by the vote of a majority of the
Trustees of the Fund who are not parties to the Agreement or "interested
persons" (as defined in the Act) of any such party, which vote must be cast
in person at a meeting called for the purpose of voting on such approval.
The following owned 5% or more of the outstanding shares of Class A on
February 3, 1998: DWT trustee for Robinson Nugent Inc., Retirement Plan,
P.O. Box 957, Jersey City, NJ 07303.
The following owned 5% or more of the outstanding shares of Class D on
February 3, 1998: DWR Custodian for Larry A. Westlake, IRA Rollover dated
11/07/96, 596 Second Street East, Sonoma, CA 95476 -- 6.15%; Marjory P.
Vannatta, 286 Lewfield Circle, Winter Park, FL 32792 -- 6.71%; Victor J.
Ziembo, Separate Property Account, 219 Chew Road, Sealy, TX 77474 -- 7.11%;
Jeffrey T. Stannard, Trustee, under will of Dorothy Stannard for benefit of
Bruce M. Stannard III, dated 3/31/97, 6 Ballantine
5
<PAGE>
Road, Mendham, NJ 07945 -- 14.70%; Rose G. S. Chang and Esther C. Ambo, Joint
Tenants, 4151 248th Court S.E., Issaquah, WA 98029 -- 14.90%; and the Estate of
Raymond M. Long, Jr., Anne M. Long, personal representative, 1400 Brightwaters
Blvd. N.E., St. Petersburg, FL 33704 -- 31.45%.
The Fund has acknowledged that the name "Dean Witter" is a property right
of DWR. The Fund has agreed that DWR or its parent company may use or, at any
time, permit others to use, the name "Dean Witter." The Fund has also agreed
that in the event the Agreement is terminated, or if the affiliation between
InterCapital and its parent is terminated, the Fund will eliminate the name
"Dean Witter" from its name if DWR or its parent company shall so request.
TRUSTEES AND OFFICERS
- -----------------------------------------------------------------------------
The Trustees and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with
InterCapital and with the 84 Dean Witter Funds and the 14 TCW/DW Funds are
shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- -------------------------------------------------- -----------------------------------------------------------
<S> <C>
Michael Bozic (57)................................ Chairman and Chief Executive Officer of Levitz Furniture
Trustee Corporation (since November, 1995); Director or Trustee of
c/o Levitz Furniture Corporation the Dean Witter Funds; formerly President and Chief
6111 Broken Sound Parkway, N.W. Executive Officer of Hills Department Stores (May,
Boca Raton, Florida 1991-July, 1995); formerly variously Chairman, Chief
Executive Officer, President and Chief Operating Officer
(1987-1991) of the Sears Merchandise Group of Sears,
Roebuck and Co.; Director or Trustee of the Dean Witter
Funds; Director of Eaglemark Financial Services Inc., the
United Negro College Fund and Weirton Steel Corporation.
Charles A. Fiumefreddo* (64)...................... Chairman, Chief Executive Officer and Director of
Chairman of the Board, InterCapital, Dean Witter Distributors Inc. and DWSC;
President, Chief Executive Officer and Trustee Executive Vice President and Director of DWR; Chairman,
Two World Trade Center Director or Trustee, President and Chief Executive Officer
New York, New York of the Dean Witter Funds; Chairman, Chief Executive Officer
and Trustee of the TCW/DW Funds; Chairman and Director of
Dean Witter Trust FSB ("DWT"); Director and/or officer of
various MSDWD subsidiaries.
Edwin J. Garn (65)................................ Director or Trustee of the Dean Witter Funds; formerly
Trustee United States Senator (R-Utah)(1974-1992) and Chairman,
c/o Huntsman Corporation Senate Banking Committee (1980-1986); formerly Mayor of
500 Huntsman Way Salt Lake City, Utah (1971-1974); formerly Astronaut, Space
Salt Lake City, Utah Shuttle Discovery (April 12-19, 1985); Vice Chairman,
Huntsman Corporation; Director of Franklin Covey (time
management systems), John Alden Financial Corporation
(health insurance), United Space Alliance (joint venture
between Lockheed Martin and the Boeing Company) and Nuskin
Asia Pacific (multilevel marketing); member of the board of
various civic and charitable organizations.
6
<PAGE>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- -------------------------------------------------- -----------------------------------------------------------
John R. Haire (72)................................ Chairman of the Audit Committee and Chairman of the
Trustee Committee of the Independent Directors or Trustees and
Two World Trade Center Director or Trustee of the Dean Witter Funds; Chairman of
New York, New York the Audit Committee and Chairman of the Committee of the
Independent Trustees and Trustee of the TCW/DW Funds;
formerly President, Council for Aid to Education
(1978-1989), Chairman and Chief Executive Officer of Anchor
Corporation, an Investment Adviser (1964-1978).
Wayne E. Hedien (63).............................. Retired; Director or Trustee of the Dean Witter Funds;
Trustee Director of The PMI Group, Inc. (private mortgage
c/o Gordon Altman Butowsky insurance); Trustee and Vice Chairman of The Field Museum
Weitzen Shalov & Wein of Natural History; formerly associated with the Allstate
Counsel to the Independent Trustees Companies (1966-1994), most recently as Chairman of The
114 West 47th Street Allstate Corporation (March, 1993-December, 1994) and
New York, New York Chairman and Chief Executive Officer of its wholly-owned
subsidiary, Allstate Insurance Company (July,
1989-December, 1994); director of various other business
and charitable organizations.
Dr. Manuel H. Johnson (48) ....................... Senior Partner, Johnson Smick International, Inc., a
Trustee consulting firm; Director or Trustee of the Dean Witter
c/o Johnson Smick International, Inc. Funds; Trustee of the TCW/DW Funds; Co-Chairman and a
1133 Connecticut Avenue, N.W. founder of the Group of Seven Council (G7C), an
Washington, D.C. international economic commission (since September, 1990);
Director of NASDAQ (since June, 1995); Chairman and Trustee
of the Financial Accounting Foundation (oversight
organization for the Financial Accounting Standards Board);
Director of Greenwich Capital Markets, Inc.
(broker-dealer); formerly Vice Chairman of the Board of
Governors of the Federal Reserve System (1986-1990) and
Assistant Secretary of the U.S. Treasury (1982-1986).
Michael E. Nugent (61)............................ General Partner, Triumph Capital, L.P., a private
Trustee investment partnership; Director or Trustee of the Dean
c/o Triumph Capital, L.P. Witter Funds; Trustee of the TCW/DW Funds; formerly Vice
237 Park Avenue President, Bankers Trust Company and BT Capital Corporation
New York, New York (1984-1988); Director of various business organizations.
Philip J. Purcell* (54)........................... Chairman of the Board of Directors and Chief Executive
Trustee Officer of MSDWD, DWR and Novus Credit Services Inc.;
1585 Broadway Director of InterCapital, DWSC and Distributors; Director
New York, New York or Trustee of the Dean Witter Funds; Director and/or
officer of various MSDWD subsidiaries.
7
<PAGE>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- -------------------------------------------------- -----------------------------------------------------------
John L. Schroeder (67)............................ Retired; Director or Trustee of the Dean Witter Funds;
Trustee Director of Citizens Utilities Company; formerly Executive
c/o Gordon Altman Butowsky Vice President and Chief Investment Officer of the Home
Weitzen, Shalov & Wein Insurance Company (August, 1991-September, 1995).
Counsel to the Independent Trustees
114 West 47th Street
New York, New York
Barry Fink (43)................................... Senior Vice President (since March, 1997) and Secretary and
Vice President, Secretary General Counsel (since February, 1997) of InterCapital and
and General Counsel DWSC; Senior Vice President (since March, 1997) and
Two World Trade Center Assistant Secretary and Assistant General Counsel (since
New York, New York February, 1997) of Distributors; Assistant Secretary of DWR
(since August, 1996); Vice President, Secretary and General
Counsel of the Dean Witter Funds and the TCW/DW Funds
(since February, 1997); previously First Vice President
(June, 1993-February, 1997), Vice President (until June,
1993) and Assistant Secretary and Assistant General Counsel
of InterCapital and DWSC and Assistant Secretary of the
Dean Witter Funds and the TCW/DW Funds.
Peter M. Avelar (39).............................. Senior Vice President of InterCapital; Vice President of
Vice President various Dean Witter Funds.
Two World Trade Center
New York, New York
Rajesh K. Gupta (37).............................. Senior Vice President of InterCapital; Vice President of
Vice President various Dean Witter Funds.
Two World Trade Center
New York, New York
Anne Pickrell (44)................................ Vice President of InterCapital (since April, 1996); formerly
Vice President Assistant Vice President (April 1992 - April 1996); Vice
Two World Trade Center President of various Dean Witter Funds.
New York, New York
Peter J. Seeley (48).............................. Vice President of InterCapital (since April, 1996); formerly
Vice President Senior Fixed-Income Portfolio Manager (July, 1994-April, 1996);
Two World Trade Center formerly Senior Vice President at Nikko Capital Management;
New York, New York Vice President of various Dean Witter Funds.
Thomas F. Caloia (51)............................. First Vice President and Assistant Treasurer of
Treasurer InterCapital and DWSC; and Treasurer of the Dean Witter
Two World Trade Center Funds and the TCW/DW Funds.
New York, New York
</TABLE>
- ------------
* Denotes Trustees who are "interested persons" of the Fund, as defined in
the Act.
In addition, Robert M. Scanlan, President of InterCapital and Chief
Operating Officer of InterCapital and DWSC, Executive Vice President of
Distributors and DWT and Director of DWT, Mitchell M. Merin,
8
<PAGE>
President and Chief Strategic Officer of InterCapital and DWSC, Executive Vice
President of Distributors and DWT and Director of DWT, Executive Vice
President, Chief Administrative Officer and Director of DWR, and Director of
SPS Transaction Services, Inc. and various other MSDWD subsidiaries, Joseph J.
McAlinden, Executive Vice President and Chief Investment Officer of
InterCapital and Director of DWT and Robert S. Giambrone, Senior Vice President
of InterCapital, DWSC, Distributors and DWT and Director of DWT are Vice
Presidents of the Fund. In addition, Marilyn K. Cranney, First Vice President
and Assistant General Counsel of InterCapital and DWSC, and Lou Anne D.
McInnis, Carsten Otto and Ruth Rossi, Vice Presidents and Assistant General
Counsels of InterCapital and DWSC, and Frank Bruttomesso and Todd Lebo, Staff
Attorneys with InterCapital and DWSC, are Assistant Secretaries of the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees consists of nine (9) trustees. These same
individuals also serve as directors or trustees for all of the Dean Witter
Funds, and are referred to in this section as Trustees. As of the date of
this Statement of Additional Information, there are a total of 84 Dean Witter
Funds, comprised of 128 portfolios. As of January 31, 1998, the Dean Witter
Funds had total net assets of approximately $96 billion and more than six
million shareholders.
Seven Trustees (77% of the total number) have no affiliation or business
connection with InterCapital or any of its affiliated persons and do not own
any stock or other securities issued by InterCapital's parent company, MSDWD.
These are the "disinterested" or "independent" Trustees. The other two
Trustees (the "management Trustees") are affiliated with InterCapital. Four
of the seven independent Trustees are also Independent Trustees of the TCW/DW
Funds.
Law and regulation establish both general guidelines and specific duties
for the Independent Trustees. The Dean Witter Funds seek as Independent
Trustees individuals of distinction and experience in business and finance,
government service or academia; these are people whose advice and counsel are
in demand by others and for whom there is often competition. To accept a
position on the Funds' Boards, such individuals may reject other attractive
assignments because the Funds make substantial demands on their time. Indeed,
by serving on the Funds' Boards, certain Trustees who would otherwise be
qualified and in demand to serve on bank boards would be prohibited by law
from doing so.
All of the Independent Trustees serve as members of the Audit Committee
and the Committee of the Independent Trustees. Three of them also serve as
members of the Derivatives Committee. During the calendar year ended December
31, 1997, the three Committees held a combined total of seventeen meetings.
The Committees hold some meetings at InterCapital's offices and some outside
InterCapital. Management Trustees or officers do not attend these meetings
unless they are invited for purposes of furnishing information or making a
report.
The Committee of the Independent Trustees is charged with recommending to
the full Board approval of management, advisory and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing Fund performance; checking on the pricing of portfolio securities,
brokerage commissions, transfer agent costs and performance, and trading
among Funds in the same complex; and approving fidelity bond and related
insurance coverage and allocations, as well as other matters that arise from
time to time. The Independent Trustees are required to select and nominate
individuals to fill any Independent Trustee vacancy on the Board of any Fund
that has a Rule 12b-1 plan of distribution. Most of the Dean Witter Funds have
such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing
engagement; approving professional services provided by the independent
accountants and other accounting firms prior to the performance of such
services; reviewing the independence of the independent accountants;
considering the range of audit and non-audit fees; reviewing the adequacy of
the Fund's system of internal controls; and preparing and submitting
Committee meeting minutes to the full Board.
Finally, the Board of each Fund has formed a Derivatives Committee to
establish parameters for and oversee the activities of the Fund with respect
to derivative investments, if any, made by the Fund.
9
<PAGE>
DUTIES OF CHAIRMAN OF COMMITTEE OF THE INDEPENDENT TRUSTEES AND AUDIT
COMMITTEE
The Chairman of the Committee of the Independent Trustees and the Audit
Committee maintains an office at the Funds' headquarters in New York. He is
responsible for keeping abreast of regulatory and industry developments and
the Funds' operations and management. He screens and/or prepares written
materials and identifies critical issues for the Independent Trustees to
consider, develops agendas for Committee meetings, determines the type and
amount of information that the Committees will need to form a judgment on
various issues, and arranges to have that information furnished to Committee
members. He also arranges for the services of independent experts and
consults with them in advance of meetings to help refine reports and to focus
on critical issues. Members of the Committees believe that the person who
serves as Chairman of both Committees and guides their efforts is pivotal to
the effective functioning of the Committees.
The Chairman of the Committees also maintains continuous contact with the
Funds' management, with independent counsel to the Independent Trustees and
with the Funds' independent auditors. He arranges for a series of special
meetings involving the annual review of investment advisory, management and
other operating contracts of the Funds and, on behalf of the Committees,
conducts negotiations with the Investment Manager and other service
providers. In effect, the Chairman of the Committees serves as a combination
of chief executive and support staff of the Independent Trustees.
The Chairman of the Committee of the Independent Trustees and the Audit
Committee is not employed by any other organization and devotes his time
primarily to the services he performs as Committee Chairman and Independent
Trustee of the Dean Witter Funds and as an Independent Trustee and as
Chairman of the Committee of the Independent Trustees and the Audit Committee
of the TCW/DW Funds. The current Committee Chairman has had more than 35
years experience as a senior executive in the investment company industry.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL DEAN
WITTER FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the Dean Witter Funds avoids the
duplication of effort that would arise from having different groups of
individuals serving as Independent Trustees for each of the Funds or even of
sub-groups of Funds. They believe that having the same individuals serve as
Independent Trustees of all the Funds tends to increase their knowledge and
expertise regarding matters which affect the Fund complex generally and
enhances their ability to negotiate on behalf of each Fund with the Fund's
service providers. This arrangement also precludes the possibility of
separate groups of Independent Trustees arriving at conflicting decisions
regarding operations and management of the Funds and avoids the cost and
confusion that would likely ensue. Finally, having the same Independent
Trustees serve on all Fund Boards enhances the ability of each Fund to
obtain, at modest cost to each separate Fund, the services of Independent
Trustees, and a Chairman of their Committees, of the caliber, experience and
business acumen of the individuals who serve as Independent Trustees of the
Dean Witter Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Fund pays each Independent Trustee an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Trustees or committees of the
Board of Trustees attended by the Trustee (the Fund pays the Chairman of the
Audit Committee an annual fee of $750 and pays the Chairman of the Committee
of the Independent Trustees an additional annual fee of $1,200). If a Board
meeting and a Committee meeting, or more than one Committee meeting, take
place on a single day, the Trustees are paid a single meeting fee by the
Fund. The Fund also reimburses such Trustees for travel and other
out-of-pocket expenses incurred by them in connection with attending such
meetings. Trustees and officers of the Fund who are or have been employed by
the Investment Manager or an affiliated company receive no compensation or
expense reimbursement from the Fund.
10
<PAGE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees by the Fund for the fiscal year ended October 31, 1997.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
NAME OF COMPENSATION
INDEPENDENT TRUSTEE FROM THE FUND
- ------------------- ---------------
<S> <C>
Michael Bozic ..................... $1,700
Edwin J. Garn ..................... 1,900
John R. Haire ..................... 3,850
Wayne E. Hedien.................... 482
Dr. Manuel H. Johnson ............ 1,850
Michael E. Nugent ................. 1,900
John L. Schroeder.................. 1,900
</TABLE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1997 for
services to the 84 Dean Witter Funds and, in the case of Messrs. Haire,
Johnson, Nugent and Schroeder, the 14 TCW/DW Funds that were in operation at
December 31, 1997. With respect to Messrs. Haire, Johnson, Nugent and
Schroeder, the TCW/DW Funds are included solely because of a limited exchange
privilege between those Funds and five Dean Witter Money Market Funds. Mr.
Hedien's term as Director or Trustee of each Dean Witter Fund commenced on
September 1, 1997.
CASH COMPENSATION FROM DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
FOR SERVICE AS
CHAIRMAN OF
COMMITTEES OF FOR SERVICE AS
INDEPENDENT CHAIRMAN OF
FOR SERVICE DIRECTORS/ COMMITTEES OF TOTAL CASH
AS DIRECTOR OR FOR SERVICE AS TRUSTEES AND INDEPENDENT COMPENSATION
TRUSTEE AND TRUSTEE AND AUDIT TRUSTEES FOR SERVICES TO
COMMITTEE MEMBER COMMITTEE MEMBER COMMITTEES OF 84 AND AUDIT 84 DEAN WITTER
NAME OF OF 84 DEAN WITTER OF 14 TCW/DW DEAN WITTER COMMITTEES OF 14 FUNDS AND 14
INDEPENDENT TRUSTEE FUNDS FUNDS FUNDS TCW/DW FUNDS TCW/DW FUNDS
- --------------------- ----------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Michael Bozic ........ $133,602 -- -- -- $133,602
Edwin J. Garn ........ 149,702 -- -- -- 149,702
John R. Haire ........ 149,702 $73,725 $157,463 $25,350 406,240
Wayne E. Hedien....... 39,010 -- -- -- 39,010
Dr. Manuel H. Johnson 145,702 71,125 -- -- 216,827
Michael E. Nugent ... 149,702 73,725 -- -- 223,427
John L. Schroeder .... 149,702 73,725 -- -- 223,427
</TABLE>
As of the date of this Statement of Additional Information, 57 of the Dean
Witter Funds, including the Fund, have adopted a retirement program under
which an Independent Trustee who retires after serving for at least five
years (or such lesser period as may be determined by the Board) as an
Independent Director or Trustee of any Dean Witter Fund that has adopted the
retirement program (each such Fund referred to as an "Adopting Fund" and each
such Trustee referred to as an "Eligible Trustee") is entitled to retirement
payments upon reaching the eligible retirement age (normally, after attaining
age 72). Annual payments are based upon length of service. Currently, upon
retirement, each Eligible Trustee is entitled to receive from the Adopting
Fund, commencing as of his or her retirement date and continuing for the
remainder of his or her life, an annual retirement benefit (the "Regular
Benefit") equal to 25.0% of his or her Eligible Compensation plus 0.4166666% of
such Eligible Compensation for each full month of service as an Independent
Director or Trustee of any Adopting Fund in excess of five years up to a
maximum of 50.0% after ten years of service. The foregoing percentages may be
changed by the Board.(1) "Eligible Compensation" is one-fifth of the total
compensation earned by such Eligible Trustee for service to the Adopting Fund
in the five year period prior to the date of the Eligible Trustee's retirement.
Benefits under the retirement program are not secured or funded by the Adopting
Funds.
11
<PAGE>
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the Fund for the fiscal year ended October 31,
1997 and by the 57 Dean Witter Funds (including the Fund) for the year ended
December 31, 1997, and the estimated retirement benefits for the Fund's
Independent Trustees, to commence upon their retirement, from the Fund as of
October 31, 1997 and from the 57 Dean Witter Funds as of December 31, 1997.
RETIREMENT BENEFITS FROM THE FUND AND ALL DEAN WITTER FUNDS
<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS
------------------------------- ESTIMATED ANNUAL
ESTIMATED RETIREMENT BENEFITS BENEFITS
CREDITED ACCRUED AS EXPENSES UPON RETIREMENT(2)
YEARS ESTIMATED ---------------------- -------------------
OF SERVICE AT PERCENTAGE OF BY ALL FROM FROM ALL
NAME OF RETIREMENT ELIGIBLE BY THE ADOPTING THE ADOPTING
INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS
- ------------------- --------------- --------------- -------- ------------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic ............. 10 50.0% $ 372 $ 20,499 $ 925 $ 47,025
Edwin J. Garn ............. 10 50.0 620 30,878 925 47,025
John R. Haire ............. 10 50.0 1,956 (19,823)(3) 2,246 127,897
Wayne E. Hedien............ 9 42.5 0 0 794 39,971
Dr. Manuel H. Johnson .... 10 50.0 250 12,832 925 47,025
Michael E. Nugent ......... 10 50.0 468 22,546 925 47,025
John L. Schroeder.......... 8 41.7 714 39,350 771 39,504
</TABLE>
(1) An Eligible Trustee may elect alternate payments of his or her
retirement benefits based upon the combined life expectancy of such
Eligible Trustee and his or her spouse on the date of such Eligible
Trustee's retirement. The amount estimated to be payable under this
method, through the remainder of the later of the lives of such
Eligible Trustee and spouse, will be the actuarial equivalent of the
Regular Benefit. In addition, the Eligible Trustee may elect that the
surviving spouse's periodic payment of benefits will be equal to either
50% or 100% of the previous periodic amount, an election that,
respectively, increases or decreases the previous periodic amount so
that the resulting payments will be the actuarial equivalent of the
Regular Benefit.
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1)
above.
(3) This number reflects the effect of the extension of Mr. Haire's term as
Director or Trustee until June 1, 1998.
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's
officers and Trustees as a group was less than 1 percent of the Fund's shares
of beneficial interest outstanding.
INVESTMENT PRACTICES AND POLICIES
- -----------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES
As discussed in the Prospectus, the Fund may invest in, among other
securities, securities issued by the U.S. Government, its agencies or
instrumentalities. Such securities include:
(1) U.S. Treasury bills (maturities of one year or less), U.S. Treasury
notes (maturities of one to ten years) and U.S. Treasury bonds (generally
maturities of greater than ten years), all of which are direct obligations
of the U.S. Government and, as such, are backed by the "full faith and
credit" of the United States.
(2) Securities issued by agencies and instrumentalities of the U.S.
Government which are backed by the full faith and credit of the United
States. Among the agencies and instrumentalities issuing such obligations
are the Federal Housing Administration, the Government National Mortgage
Association ("GNMA"), the Department of Housing and Urban Development, the
Export-Import Bank, the Farmers Home Administration, the General Services
Administration, the Maritime Administration and the Small Business
Administration. The maturities of such obligations range from three months
to 30 years.
12
<PAGE>
(3) Securities issued by agencies and instrumentalities which are not
backed by the full faith and credit of the United States, but whose
issuing agency or instrumentality has the right to borrow, to meet its
obligations, from an existing line of credit with the U.S. Treasury. Among
the agencies and instrumentalities issuing such obligations are the
Tennessee Valley Authority, the Federal National Mortgage Association
("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and the
U.S. Postal Service. The U.S. Treasury has no legal obligation to provide
such line of credit and may choose not to do so.
(4) Securities issued by agencies and instrumentalities which are not
backed by the full faith and credit of the United States, but which are
backed by the credit of the issuing agency or instrumentality. Among the
agencies and instrumentalities issuing such obligations are the Federal
Farm Credit System and the Federal Home Loan Banks.
Neither the value nor the yield of the U.S. Government securities which
may be invested in by the Fund are guaranteed by the U.S. Government. Such
values and yield will fluctuate with changes in prevailing interest rates,
economic factors and fiscal and monetary policies. Generally, as prevailing
interest rates rise, the value of any U.S. Government securities held by the
Fund will fall. Such securities with longer maturities generally tend to
produce higher yields and are subject to greater market fluctuation as a
result of changes in interest rates than debt securities with shorter
maturities.
MORTGAGE-BACKED SECURITIES
Certain of the U.S. Government securities in which the Fund may invest,
e.g., certificates issued by GNMA, FNMA and FHLMC, are "mortgage-backed
securities," which 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 timely payment of the principal and
interest on mortgages underlying the certificates, whether or not such
amounts are collected by the issuer on the underlying mortgages. (A
pass-through security is formed when mortgages are pooled together and
undivided interests in the pool or pools are sold. The cash flow from the
mortgages is passed through to the holders of the securities in the form of
periodic payments of interest, principal and prepayments net of a service
fee).
The average life of such certificates varies with the maturities of the
underlying mortgage instruments, which may be up to thirty years but which
may include mortgage instruments with maturities of fifteen years, adjustable
rate mortgage instruments, variable rate mortgage instruments, graduated rate
mortgage instruments and/or other types of mortgage instruments. The assumed
average life of mortgages backing the majority of GNMA and FNMA certificates
is twelve years, and of FHLMC certificates is ten years. This average life is
likely to be substantially shorter than the original maturity of the mortgage
pools underlying the certificates, as a pool's duration may be shortened by
unscheduled or early payments of principal on the underlying mortgages. (Such
prepayments occur when the holder of an individual mortgage prepays the
remaining principal before the mortgage's scheduled maturity date.) In
periods of falling interest rates, the rate of prepayment tends to increase
thereby shortening the actual average life of a pool of mortgage-related
securities. Conversely, in periods of rising rates, the rate of prepayment
tends to decrease, thereby lengthening the actual average life of the pool.
Prepayment rates vary widely, and therefore it is not possible to accurately
predict the average life or realized yield of a particular pool.
The occurrence of mortgage prepayments is affected by factors including
the prevailing level of interest rates, general economic conditions, the
location and age of the mortgage and other social and demographic conditions.
Prepayment rates are important because of their effect on the yield and price
of the securities. If the Fund has purchased securities backed by pools
containing mortgages whose yields exceed the prevailing interest rate, any
premium (i.e., a price in excess of principal amount) paid for such
securities may be lost. As a result, the net asset value of shares of the
Fund and the Fund's ability to achieve its investment objectives may be
adversely affected by mortgage prepayments.
GNMA Certificates. Certificates of the Government National Mortgage
Association ("GNMA Certificates") are mortgage-backed securities, which
evidence an undivided interest in a pool or pools of mortgages insured by the
Federal Housing Administration ("FHA") or the Farmers Home Administration
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or guaranteed by the Veterans Administration ("VA"). The GNMA Certificates that
the Fund will invest in are the "modified pass-through" type in that GNMA
guarantees the timely payment of monthly installments of principal and interest
due on the mortgage pool whether or not such amounts are collected by the
issuer on the underlying mortgages. The National Housing Act provides that the
full faith and credit of the United States is pledged to the timely payment of
principal and interest by GNMA of the amounts due on the GNMA Certificates.
Additionally, GNMA is empowered to borrow without limitation from the U.S.
Treasury if necessary to make any payments required under its guarantee.
The average life of GNMA Certificates varies with the maturities of the
underlying mortgage instruments some of which have maturities of 30 years.
The average life of the GNMA Certificate is likely to be substantially less
than the original maturity of the underlying mortgage pool because of
prepayments or refinancing of the mortgages or foreclosure. (Due to GNMA
guarantee, foreclosures impose no risk to principal investments.) Statistics
indicate that the average life of the type of mortgages backing the majority
of GNMA Certificates is approximately 12 years and for this reason it is
standard practice to treat GNMA Certificates as 30-year mortgage-backed
securities which prepay fully in the twelfth year.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the actual maturities of the underlying
instruments and the associated average life assumption. Historically, actual
average life has been consistent with the 12-year assumption referred to
above. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificates. Such
prepayments are passed through to the registered holder of the Certificate
along with the regular monthly payments of principal and interest, which has
the effect of reducing future payments, and consequently the yield.
Reinvestment by the Fund of prepayments may occur at higher or lower interest
rates than the original investment.
FHLMC Certificates. FHLMC is a corporate instrumentality of the United
States created pursuant to the Emergency Home Finance Act of 1970, as amended
(the "FHLMC Act"). FHLMC was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of needed
housing. The principal activity of FHLMC currently consists of the purchase
of first lien, conventional, residential mortgage loans and participation
interests in such mortgage loans and the resale of the mortgage loans so
purchased in the form of mortgage securities, primarily FHLMC Certificates.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest at the rate provided for by such FHLMC
Certificate, whether or not received. FHLMC also guarantees to each
registered holder of a FHLMC Certificate ultimate collection of all principal
of the related mortgage loans, without any offset or deduction, but does not,
generally, guarantee the timely payment of scheduled principal. FHLMC may
remit the amount due on account of its guarantee of collection of principal
at any time after default on an underlying mortgage loan, but not later than
30 days following (i) foreclosure sale, (ii) payment of a claim by any
mortgage insurer or (iii) the expiration of any right of redemption,
whichever occurs later, but in any event no later than one year after demand
has been made upon the mortgagor for accelerated payment of principal. The
obligations of FHLMC under its guarantee are obligations solely of FHLMC and
are not backed by the full faith and credit of the U.S. Government. The FHLMC
has the right, however, to borrow from an existing line of credit with the
U.S. Treasury in order to meet its obligations.
FHLMC Certificates represent a pro rata interest in a group of mortgage
loans (a "FHLMC Certificate group") purchased by FHLMC. The mortgage loans
underlying the FHLMC Certificates will consist of fixed rate or adjustable
rate mortgage loans with original terms to maturity of between ten and thirty
years, substantially all of which are secured by first liens on one-to
four-family residential properties or multifamily projects. Each mortgage
loan must meet the applicable standards set forth in the FHLMC Act. A FHLMC
Certificate group may include whole loans, participation interests in whole
loans and undivided interests in whole loans and participations comprising
another FHLMC Certificate group.
FNMA Certificates. The Federal National Mortgage Association ("FNMA") is a
federally chartered and privately owned corporation organized and existing
under the Federal National Mortgage Association Charter Act. FNMA was
originally established in 1938 as a U.S. Government agency to provide
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supplemental liquidity to the mortgage market and was transformed into a
stockholder owned and privately managed corporation by legislation enacted in
1968. FNMA provides funds to the mortgage market primarily by purchasing home
mortgage loans from local lenders, thereby replenishing their funds for
additional lending. FNMA acquires funds to purchase home mortgage loans from
many capital market investors that may not ordinarily invest in mortgage
loans directly, thereby expanding the total amount of funds available for
housing.
Each FNMA Certificate will entitle the registered holder thereof to
receive amounts representing such holder's pro rata interest in scheduled
principal payments and interest payments (at such FNMA Certificate's
pass-through rate, which is net of any servicing and guarantee fees on the
underlying mortgage loans), and any principal prepayments on the mortgage
loans in the pool represented by such FNMA Certificate and such holder's
proportionate interest in the full principal amount of any foreclosed or
otherwise finally liquidated mortgage loan. The full and timely payment of
principal of and interest on each FNMA Certificate will be guaranteed by
FNMA, which guarantee is not backed by the full faith and credit of the U.S.
Government.
Each FNMA Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable
rate mortgage loans; and (vi) fixed rate mortgage loans secured by
multifamily projects. FNMA Certificates have an assumed average life similar
to GNMA Certificates.
ZERO COUPON SECURITIES
Zero coupon securities are debt obligations which do not entitle the
holder to any periodic payments prior to maturity and are issued and trade at
a discount from their face amounts. The discount varies depending on the time
remaining until maturity, prevailing interest rates, liquidity of the
security and perceived credit quality of the issuer. There are currently two
basic types of zero coupon securities, those created by separating the
interest and principal components of a previously issued interest-paying
security and those originally issued in the form of a face amount only
security with no interest payments prior to maturity. Zero coupon securities
may be created by separating the interest and principal components of
securities (i) issued or guaranteed by the U.S. Government or one of its
agencies or instrumentalities or (ii) issued or guaranteed by municipal
issuers or (iii) issued by private corporate issuers. In addition, they may
be issued directly by private corporate or tax-exempt issuers. The U.S.
Treasury zero coupon securities in which the Trust may invest will either be
acquired through the U.S. Treasury's STRIPS program in which selected
Treasury securities are maintained in the book-entry system operated by the
Federal Reserve Banks in a manner that permits separate trading and ownership
of the component interest and principal payments on such Treasury securities
or through the acquisition of deposit receipts which evidence ownership of
direct interests in such component parts. Investment banks may strip U.S.
Treasury and municipal securities and sell the strips under proprietary
names. Zero coupon securities of the U.S. Government and certain of its
agencies and instrumentalities, foreign governments, private issuers and
municipal issuers, including state and local governments and certain of their
agencies and instrumentalities, are currently available.
Zero coupon securities do not entitle the holder to any periodic payments
prior to maturity and therefore are issued and trade at a discount from their
face or par value. The discount, in the absence of financial difficulties of
the issuer, decreases as the final maturity of the security approaches. Zero
coupon securities can be sold prior to their due date in the secondary market
at the then prevailing market price, which depends primarily on the time
remaining to maturity, prevailing levels of interest rates and the perceived
credit quality of the issuer. The market prices of zero coupon securities are
more volatile than the market prices of securities of comparable quality and
similar maturity that pay interest periodically and may respond to a greater
degree to fluctuations in interest rates than do such non-zero coupon
securities.
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Because accrued income on zero coupon securities of municipal issuers is
generally not taxable to holders, zero coupon securities of municipal issuers
have lower yields than other zero coupon securities. The accrued income on
securities in which the Trust intends to invest will generally not be taxable
to the Trust; however, when distributed to shareholders, the accrued income
will be taxed in the same manner as other distributions. Any accrued income
from zero coupon securities of municipal issuers which is not distributed
will increase the net asset value of the Trust's shares. Tax-exempt income
attributable to zero coupon securities of municipal issuers and retained by
the Trust is expected to constitute a portion of the liquidating distribution
returned to investors at the termination of the Trust. See "Dividends and
Distributions; Dividend Reinvestment Plan."
Current federal income tax law requires that a holder of a zero coupon
security report as income each year the portion of the original issue
discount on such security (other than tax-exempt original issue discount from
a zero coupon security of a municipal issuer) that accrues during that year
even though the holder receives no cash payments during the year. Current
federal income tax law also requires that companies such as the Trust which
seek to qualify for pass-through federal income tax treatment as regulated
investment companies distribute substantially all of their net investment
income each year, including tax-exempt and non-cash income. See "Taxation."
Accordingly, although the Trust will receive no payments on its zero coupon
securities prior to their maturity, it will be required, in order to maintain
its desired tax treatment, to include in its distribution calculation the
income attributable to its zero coupon securities. If the income attributable
to zero coupon securities exceeds 10% of the Trust's net investment income
each year, the Trust may have to liquidate portfolio securities at a time
when it may not be advantageous to do so in order to raise cash to meet such
distribution requirements. See "Dividends and Distributions; Dividend
Reinvestment Plan."
HIGH YIELD SECURITIES
As discussed in the Prospectus, the Fund will also invest in high yield,
high risk fixed-income securities rated Baa or lower by Moody's Investors
Service Inc. ("Moody's"), or BBB or lower by Standard & Poor's Corporation
("Standard & Poor's). The ratings of fixed-income securities by Moody's and
Standard & Poor's are a generally accepted barometer of credit risk. They
are, however, subject to certain limitations from an investor's standpoint.
Such limitations include the following: the rating of an issuer is heavily
weighted by past developments and does not necessarily reflect probable
future conditions; there is frequently a lag between the time a rating is
assigned and the time it is updated; and there may be varying degrees of
difference in credit risk of securities in each rating category. The
Investment Manager will attempt to reduce the overall portfolio credit risk
through diversification and selection of portfolio securities based on
considerations mentioned below.
While the ratings provide a generally useful guide to credit risks, they
do not, nor do they purport to, offer any criteria for evaluating the
interest rate risk. Changes in the general level of interest rates cause
fluctuations in the prices of fixed-income securities already outstanding and
will therefore result in fluctuation in net asset value of the Fund's shares.
The extent of the fluctuation is determined by a complex interaction of a
number of factors. The Investment Manager will evaluate those factors it
considers relevant and will make portfolio changes when it deems it
appropriate in seeking to reduce the risk of depreciation in the value of the
Fund's portfolio. However, in seeking to achieve the Fund's primary
objective, there will be times, such as during periods of rising interest
rates, when depreciation and realization of capital losses on securities in
the portfolio will be unavoidable. Moreover, medium and lower-rated securities
and non-rated securities of comparable quality tend to be subject to wider
fluctuations in yield and market values than higher rated securities. Such
fluctuations after a security is acquired do not affect the cash income
received from that security but are reflected in the net asset value of the
Fund's portfolio.
FOREIGN SECURITIES
Foreign investments involve certain risks, including the political or
economic instability of the issuer or of the country of issue, the difficulty
of predicting international trade patterns and the possibility of
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imposition of exchange controls. Such securities may also be subject to greater
fluctuations in price than securities of United States corporations or of the
United States Government. In addition, there may be less publicly available
information about a foreign company than about a domestic company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. There is generally less government regulation of stock exchanges,
brokers and listed companies abroad than in the United States, and with respect
to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, or diplomatic developments which could affect investment
in those countries. Finally, in the event of a default of any such foreign debt
obligations, it may be more difficult for the Fund to obtain or to enforce a
judgment against the issuers of such securities. In addition to the
above-mentioned risks, securities denominated in foreign currency, whether
issued by a foreign or a domestic issuer, may be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations,
and costs may be incurred in connection with conversions between various
currencies. It may not be possible to hedge against the risks of currency
fluctuation.
OTHER INVESTMENT POLICIES
Repurchase Agreements. When cash may be available for only a few days, it
may be invested by the Fund in repurchase agreements until such time as it
may otherwise be invested or used for payments of obligations of the Fund. A
repurchase agreement may be viewed as a type of secured lending by the Fund
which typically involves the acquisition by the Fund of government securities
from a selling financial institution such as a bank, savings and loan
association or broker-dealer. The agreement provides that the Fund will sell
back to the institution, and that the institution will repurchase, the
underlying security ("collateral") at a specified price and at a fixed time
in the future, usually not more than seven days from the date of purchase.
The collateral will be maintained in a segregated account and will be
marked-to-market daily to determine whether the full value of the collateral,
as specified in the agreement, is always at least equal to the purchase price
plus accrued interest. If required, additional collateral will be requested
from the counterparty and when received added to the account to maintain full
collateralization. In the event the original seller defaults on its
obligations to repurchase, as a result of its 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 dispose of the collateral to
recover its investment may be restricted or delayed. The Fund will accrue
interest from the institution until the time when the repurchase is to occur.
Although such date is deemed by the Fund to be the maturity date of a
repurchase agreement, the maturities of securities subject to repurchase
agreements are not subject to any limits and may exceed one year.
While repurchase agreements involve certain risks not associated with
direct investments in debt securities, the Fund follows procedures designed
to minimize such risks. Repurchase agreements will be transacted only with
large, well-capitalized and well-established financial institutions whose
financial condition will be continuously monitored by the management of the
Fund subject to procedures established by the Trustees. The procedures also
require that the collateral underlying the agreement be specified. The Fund
does not presently intend to enter into repurchase agreements so that more
than 5% of the Fund's total assets are subject to such agreements. For the
fiscal year ended October 31, 1997, the Fund did not enter into repurchase
agreements in an amount exceeding 5% of its total assets.
Reverse Repurchase Agreements. The Fund may also use reverse repurchase
agreements for purposes of meeting redemptions or as part of its investment
strategy. Reverse repurchase agreements involve sales by the Fund of portfolio
assets concurrently with an agreement by the Fund to repurchase the same assets
at a later date at a fixed price. Generally, the effect of such a transaction
is that the Fund can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are only advantageous if the interest cost to the
Fund of the reverse repurchase transaction is less than the cost of obtaining
the cash otherwise. Opportunities to achieve this advantage may not always be
available, and the Fund intends to use the reverse repurchase technique only
when it will be to its advantage to do so. The Fund will establish a segregated
account with its custodian bank in which it will maintain cash or cash
equivalents or other liquid portfolio securities
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(i.e., U.S. Government securities) equal in value to its obligations in respect
of reverse repurchase agreements. Reverse repurchase agreements are considered
borrowings by the Fund and, in accordance with legal requirements, the Fund
will maintain an asset coverage (including the proceeds) of at least 300% with
respect to all reverse repurchase agreements. Reverse repurchase agreements may
not exceed 10% of the Fund's total assets. For the fiscal year ended October
31, 1997, the Fund did not enter into any reverse repurchase agreements.
When-Issued and Delayed Delivery Securities and Forward Commitments. As
discussed in the Prospectus, from time to time, in the ordinary course of
business, the Fund may purchase securities on a when-issued or delayed
delivery basis and 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. While the Fund will only purchase securities on a when-issued,
delayed delivery or forward commitment basis with the intention of acquiring
the securities, the Fund may sell the securities before the settlement date,
if it is deemed advisable. At the time the Fund makes the commitment to
purchase securities on a when-issued or delayed delivery basis, the Fund will
record the transaction and thereafter reflect the value, each day, of such
security in determining the net asset value of the Fund. At the time of
delivery of the securities, the value may be more or less than the purchase
price. The Fund will also establish a segregated account with the Fund's
custodian bank in which it will continuously maintain cash or U.S. Government
securities or other liquid portfolio securities equal in value to commitments
of such when-issued or delayed delivery securities; subject to the
requirement, the Fund may purchase securities on such basis without limit. An
increase in the percentage of the Fund's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of the Fund's net asset value. For the fiscal year ended October
31, 1997, the Fund's investments in securities on a when-issued, delayed
delivery or forward commitment basis exceeded 5% of the Fund's total assets.
When, As and If Issued Securities. As discussed in the Prospectus, 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. The commitment for the purchase of any such
security will not be recognized in the portfolio of the Fund until the
Investment Manager determines that issuance of the security is probable. At
such time, the Fund will record the transaction and, in determining its net
asset value, will reflect the value of the security daily. At such time, the
Fund will also establish a segregated account with its custodian bank in
which it will continuously maintain cash or U.S. Government securities or
other liquid portfolio securities equal in value to recognized commitments
for such securities. Settlement of the trade will occur within five business
days of the occurrence of the subsequent event. The value of the Fund's
commitments to purchase the securities of any one issuer, together with the
value of all securities of such issuer owned by the Fund, may not exceed 5%
of the value of the Fund's total assets at the time the initial commitment to
purchase such securities is made (see "Investment Restrictions"). Subject to
the foregoing restrictions, the Fund may purchase securities on such basis
without limit. An increase in the percentage of the Fund's assets committed
to the purchase of securities on a "when, as and if issued" basis may
increase the volatility of its net asset value. The Fund may also sell
securities on a "when, as and if issued" basis provided that the issuance of
the security will result automatically from the exchange or conversion of a
security owned by the Fund at the time of the sale. For the fiscal year ended
October 31, 1997 the Fund did not purchase any securities on a when, as and
if issued basis.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to brokers, dealers
and other financial institutions, provided that such loans are callable at
any time by the Fund (subject to notice provisions described below), and are
at all times secured by cash or appropriate high-grade debt obligations,
which are maintained in a segregated account pursuant to applicable
regulations and that are at least equal to the market value, determined
daily, of the loaned securities. The advantage of such loans is that the Fund
continues to receive the
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income on the loaned securities while at the same time earning interest or a
portion of the interest on the cash amounts deposited as collateral, which will
be invested in short-term obligations. The Fund will not lend its portfolio
securities if such loans are not permitted by the laws or regulations of any
state in which its shares are qualified for sale and will not lend more than
25% of the value of its total assets. A loan may be terminated by the borrower
on one business day's notice, or by the Fund on two business days' notice. If
the borrower fails to deliver the loaned securities within two days after
receipt of notice, the Fund could use the collateral to replace the securities
while holding the borrower liable for any excess of replacement cost over
collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will be made only to firms deemed by the Fund's management to be
creditworthy and when the income which can be earned from such loans justifies
the attendant risks. Upon termination of the loan, the borrower is required to
return the securities to the Fund. Any gain or loss in the market price during
the loan period would inure to the Fund. The creditworthiness of firms to which
the Fund lends it portfolio securities will be monitored on an ongoing basis by
the Fund's management pursuant to procedures adopted and reviewed, on an
ongoing basis, by the Board of Trustees of the Fund.
When voting or consent rights which accompany loaned securities pass to
the borrower, the Fund will follow the policy of calling the loaned
securities, to be delivered within one day after notice, to permit the
exercise of such rights if the matters involved would have a material effect
on the Fund's investment in such loaned securities. The Fund will pay
reasonable finder's, administrative and custodial fees in connection with a
loan of its securities. For the fiscal year ended October 31, 1997, the Fund
did not lend any of its portfolio securities.
Common Stocks. As stated in the Prospectus, consistent with the Fund's
investment objectives, the Fund will invest in common stocks only in certain
circumstances. First, the Fund may purchase common stock which is included in
a unit with fixed-income securities purchased by the Fund. Second, the Fund
may acquire common stock when fixed-income securities owned by the Fund are
converted by the issuer into common stock. Third, the Fund may exercise
warrants attached to fixed-income securities purchased by the Fund. Finally,
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, a transaction
involving the issuance of newly issued fixed-income securities to holders of
such common stock. Purchasing the common stock directly in the last
circumstance enables the Fund to acquire the fixed-income securities directly
from the issuer at face value, thereby eliminating the payment of a
third-party dealer mark-up. The maximum percentage of the Fund's total assets
which may be invested in common stocks at any one time is 20%.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
As discussed in the Prospectus, the Fund may enter into forward foreign
currency exchange contracts ("forward contracts") as a hedge against
fluctuations in future foreign exchange rates. The Fund will conduct its
foreign currency exchange transaction either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. A
forward contract involves an obligation to purchase or sell a specific
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. These contracts are traded in the interbank market conducted
directly between currency traders and their customers. Such forward contracts
will be entered into only with United States banks and their foreign
branches, insurance companies and other dealers whose assets total $1 billion
or more, or foreign banks whose assets total $1 billion or more. A forward
contract generally has no deposit requirement, and no commissions are charged
at any stage for trades.
When the Fund's Investment Manager believes that the currency of a
particular foreign country may experience a substantial movement against the
U.S. dollar, it may enter into a forward contract to purchase or 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
denominated in such foreign
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currency. The Fund will also not enter into such forward contracts or maintain
a net exposure to such contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities or other assets denominated in that
currency. Under normal circumstances, consideration of the prospect for
currency parities will be incorporated into the longer term investment
decisions made with regard to overall diversification strategies. However, the
management of the Fund believes that it is important to have the flexibility to
enter into such forward contracts when it determines that the best interests of
the Fund will be served. The Fund's custodian bank will place cash, U.S.
Government securities or other appropriate liquid portfolio securities in a
segregated account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of forward contracts entered into
under the circumstances set forth above. If the value of the securities placed
in the segregated account declines, additional cash or securities will be
placed in the account on a daily basis so that the value of the account will
equal the amount of the Fund's commitments with respect to such contracts.
Where, for example, the Fund is hedging a portfolio position consisting of
foreign fixed-income securities denominated in a foreign currency against
adverse exchange rate moves vis-a-vis the U.S. dollar, at the maturity of the
forward contract for delivery by the Fund of a foreign currency, the Fund may
either sell the portfolio security and make delivery of the foreign currency,
or it may retain the security and terminate its contractual obligation to
deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date,
the same amount of the foreign currency. It is impossible to forecast the
market value of portfolio securities at the expiration of the contract.
Accordingly, it may be necessary for the Fund to purchase additional foreign
currency on the spot market (and bear the expense of such purchase) if the
market value of the security is less than the amount of foreign currency the
Fund is obligated to deliver and if a decision is made to sell the security
and make delivery of the foreign currency. Conversely, it may be necessary to
sell on the spot market some of the foreign currency received upon the sale
of the portfolio securities if its market value exceeds the amount of foreign
currency the Fund is obligated to deliver.
If the Fund retains the portfolio securities and engages in an offsetting
transaction, the Fund will incur a gain or loss to the extent that there has
been movement in spot or forward contract prices. If the Fund engages in an
offsetting transaction, it may subsequently enter into a new forward contract
to sell the foreign currency. Should forward prices decline during the period
between the Fund's entering into a forward contract for the sale of a foreign
currency and the date it enters into an offsetting contract for the purchase
of the foreign currency, the Fund will realize a gain to the extent the price
of the currency it has agreed to sell exceeds the price of the currency it
has agreed to purchase. Should forward prices increase, the Fund will suffer
a loss to the extent the price of the currency it has agreed to purchase
exceeds the price of the currency it has agreed to sell.
If the Fund purchases a fixed-income security which is denominated in U.S.
dollars but which will pay out its principal based upon a formula tied to the
exchange rate between the U.S. dollar and a foreign currency, it may hedge
against a decline in the principal value of the security by entering into a
forward contract to sell or purchase an amount of the relevant foreign
currency equal to some or all of the principal value of the security.
At times when the Fund has written a call or put option on a fixed-income
security or the currency in which it is denominated, it may wish to enter
into a forward contract to purchase or sell the foreign currency in which the
security is denominated. A forward contract would, for example, hedge the
risk of the security on which a call currency option has been written
declining in value to a greater extent than the value of the premium received
for the option. The Fund will maintain with its Custodian at all times, cash,
U.S. Government securities or other liquid portfolio securities in a
segregated account equal in value to all forward contract obligations and
option contract obligations entered into in hedge situations such as this.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will, however, do so from time to time, and
investors should be aware of the costs of currency conversion. Although
foreign exchange dealers
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do not charge a fee for conversion, they do realize a profit based on the
spread between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may write covered call options against securities held in its
portfolio and covered put options on eligible portfolio securities and
purchase options of the same series to effect closing transactions, and may
hedge against potential changes in the market value of its investments (or
anticipated investments) by purchasing put and call options on portfolio (or
eligible portfolio) securities (and the currencies in which they are
denominated) and engaging in transactions involving futures contracts and
options on such contracts.
Call and put options on U.S. Treasury notes, bonds and bills and on
various foreign currencies 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"). Ownership of a listed call option gives the Fund the right to buy
from the OCC (in the U.S.) or other clearing corporation or exchange, the
underlying security or currency covered by the option at the stated exercise
price (the price per unit of the underlying security or currency) by filing
an exercise notice prior to the expiration date of the option. The writer
(seller) of the option would then have the obligation to sell, to the OCC (in
the U.S.) or other clearing corporation or exchange, the underlying security
or currency at that exercise price prior to the expiration date of the
option, regardless of its then current market price. Ownership of a listed
put option would give the Fund the right to sell the underlying security or
currency to the OCC (in the U.S.) or other clearing corporation or exchange
at the stated exercise price. Upon notice of exercise of the put option, the
writer of the option would have the obligation to purchase the underlying
security or currency from the OCC (in the U.S.) or other clearing corporation
or exchange at the exercise price.
Options on Treasury Bonds and Notes. Because trading interest in options
written on Treasury bonds and notes tends to center on the most recently
auctioned issues, the exchanges on which such securities trade will not
continue indefinitely to introduce options with new expirations to replace
expiring options on particular issues. Instead, the expirations introduced at
the commencement of options trading on a particular issue will be allowed to
run their course, with the possible addition of a limited number of new
expirations as the original ones expire. Options trading on each issue of
bonds or notes will thus be phased out as new options are listed on more
recent issues, and options representing a full range of expirations will not
ordinarily be available for every issue on which options are traded.
Options on Treasury Bills. Because a deliverable Treasury bill changes
from week to week, writers of Treasury bill calls cannot provide in advance
for their potential exercise settlement obligations by acquiring and holding
the underlying security. However, if the Fund holds a long position in
Treasury bills with a principal amount of the securities deliverable upon
exercise of the option, the position may be hedged from a risk standpoint by
the writing of a call option. For as long as the call option is outstanding,
the Fund will hold the Treasury bills in a segregated account with its
Custodian, so that they will be treated as being covered.
Options on GNMA Certificates. Currently, options on GNMA Certificates are
only traded over-the-counter. Since the remaining principal balance of GNMA
Certificates declines each month as a result of mortgage payments, the Fund,
as a writer of a GNMA call holding GNMA Certificates as "cover" to satisfy
its delivery obligation in the event of exercise, may find that the GNMA
Certificates it holds no longer have a sufficient remaining principal balance
for this purpose. Should this occur, the Fund will purchase additional GNMA
Certificates from the same pool (if obtainable) or replacement GNMA
Certificates in the cash market in order to maintain its cover. A GNMA
Certificate held by the Fund to cover an option position in any but the
nearest expiration month may cease to represent cover for the option in the
event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time, as such decline may
increase the prepayments made on other mortgage pools. If this should occur,
the Fund will no longer be covered, and the Fund will either enter into a
closing
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purchase transaction or replace such Certificate with a Certificate which
represents cover. When the Fund closes out its position or replaces such
Certificate, it may realize an unanticipated loss and incur transaction costs.
Options on Foreign Currencies. The Fund may purchase and write options on
foreign currencies for purposes similar to those involved with investing in
forward foreign currency exchange contracts. For example, in order to protect
against declines in the dollar value of portfolio securities which are
denominated in a foreign currency, the Fund may purchase put options on an
amount of such foreign currency equivalent to the current value of the
portfolio securities involved. As a result, the Fund would be enabled to sell
the foreign currency for a fixed amount of U.S. dollars, thereby "locking in"
the dollar value of the portfolio securities (less the amount of the premiums
paid for the options). Conversely, the Fund may purchase call options on
foreign currencies in which securities it anticipates purchasing are
denominated to secure a set U.S. dollar price for such securities and protect
against a decline in the value of the U.S. dollar against such foreign
currency. The Fund may also purchase call and put options to close out
written options positions.
The Fund may also write call options on foreign currency to protect
against potential declines in its portfolio securities which are denominated
in foreign currencies. If the U.S. dollar value of the portfolio securities
falls as a result of a decline in the exchange rate between the foreign
currency in which it is denominated and the U.S. dollar, then a loss to the
Fund occasioned by such value decline would be ameliorated by receipt of the
premium on the option sold. At the same time, however, the Fund gives up the
benefit of any rise in value of the relevant portfolio securities above the
exercise price of the option and, in fact, only receives a benefit from the
writing of the option to the extent that the value of the portfolio
securities falls below the price of the premium received. The Fund may also
write options to close out long call option positions. A put option on a
foreign currency would be written by the Fund for the same reason it would
purchase a call option, namely, to hedge against an increase in the U.S.
dollar value of a foreign security which the Fund anticipates purchasing.
Here, the receipt of the premium would offset, to the extent of the size of
the premium, any increased cost to the Fund resulting from an increase in the
U.S. dollar value of the foreign security. However, the Fund could not
benefit from any decline in the cost of the foreign security which is greater
than the price of the premium received. The Fund may also write options to
close out long put and call option positions.
The markets in foreign currency options are relatively new and the Fund's
ability to establish and close out positions on such options is subject to
the maintenance of a liquid secondary market. Although the Fund will not
purchase or write such options unless and until, in the opinion of the
Investment Manager, the market for them has developed sufficiently to ensure
that the risks in connection with such options are not greater than the risks
in connection with the underlying currency, there can be no assurance that a
liquid secondary market will exist for a particular option at any specific
time. In addition, options on foreign currencies are affected by all of those
factors which influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of
the option position may vary with changes in the value of either or both
currencies and have no relationship to the investment merits of a foreign
security, including foreign securities held in a "hedged" investment
portfolio. Because foreign currency transactions occurring in the interbank
market involve substantially larger amounts than those that may be involved
in the use of foreign currency options, investors may be disadvantaged by
having to deal in an odd lot market (generally consisting of transactions of
less than $1 million) for the underlying foreign currencies at prices that
are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information available is generally representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller transactions (i.e., less than $1 million) where rates may be less
favorable. The interbank market in foreign currencies is a global,
around-the-clock market. To the extent that the U.S. options markets are closed
while the markets for the underlying currencies remain open, significant price
and rate movements may take place in the underlying markets that are not
reflected in the options market.
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OTC Options. Exchange-listed options are issued by the OCC (in the U.S.)
or other clearing corporation or exchange which assures that all transactions
in such options are properly executed. OTC options are purchased from or sold
(written) to dealers or financial institutions which have entered into direct
agreements with the Fund. With OTC options, such variables as expiration
date, exercise price and premium will be agreed upon between the Fund and the
transacting dealer, without the intermediation of a third party such as the
OCC. If the transacting dealer fails to make or take delivery of the
securities or amount of foreign currency underlying an option it has written,
in accordance with the terms of that option, the Fund would lose the premium
paid for the option as well as any anticipated benefit of the transaction.
The Fund will engage in OTC option transactions only with member banks of the
Federal Reserve System or primary dealers in U.S. Government securities or
with affiliates of such banks or dealers which have capital of at least $50
million or whose obligations are guaranteed by an entity having capital of at
least $50 million.
Covered Call Writing. The Fund is permitted to write covered call options
on portfolio securities and the currencies in which they are denominated,
without limit, in order to aid in achieving its investment objectives.
Generally, a call option is "covered" if the Fund owns, or has the right to
acquire, without additional cash consideration (or for additional cash
consideration held for the Fund by its Custodian in a segregated account) the
underlying security (currency) subject to the option except that in the case
of call options on U.S. Treasury bills, the Fund might own U.S. Treasury
bills of a different series from those underlying the call option, but with a
principal amount and value corresponding to the exercise price and a maturity
date no later than that of the security (currency) deliverable under the call
option. A call option is also covered if the Fund holds a call on the same
security as the underlying security (currency) of the written option, where
the exercise price of the call used for coverage is equal to or less than the
exercise price of the call written or greater than the exercise price of the
call written if the mark to market difference is maintained by the Fund in
cash, U.S. Government securities or other liquid portfolio securities which
the Fund holds in a segregated account maintained with its Custodian.
The Fund will receive from the purchaser, in return for a call it has
written, a "premium"; i.e., the price of the option. Receipt of these
premiums may better enable the Fund to earn a higher level of current income
than it would earn from holding the underlying securities (currencies) alone.
Moreover, the premium received will offset a portion of the potential loss
incurred by the Fund if the securities (currencies) underlying the option are
ultimately sold (exchanged) by the Fund at a loss. Furthermore, a premium
received on a call written on a foreign currency will ameliorate any
potential loss of value on the portfolio security due to a decline in the
value of the currency. However, during the option period, the covered call
writer has, in return for the premium on the option, given up the opportunity
for capital appreciation above the exercise price should the market price of
the underlying security (or the exchange rate of the currency in which it is
denominated) increase, but has retained the risk of loss should the price of
the underlying security (or the exchange rate of the currency in which it is
denominated) decline. The premium received will fluctuate with varying
economic market conditions. If the market value of the portfolio securities
(or the currencies in which they are denominated) upon which call options
have been written increases, the Fund may receive a lower total return from
the portion of its portfolio upon which calls have been written than it would
have had such calls not been written.
As regards listed options and certain OTC options, during the option
period, the Fund may be required, at any time, to deliver the underlying
security (currency) against payment of the exercise price on any calls it has
written (exercise of certain listed and OTC options may be limited to
specific expiration dates). This obligation is terminated upon the expiration
of the option period or at such earlier time when the writer effects a
closing purchase transaction. A closing purchase transaction is accomplished
by purchasing an option of the same series as the option previously written.
However, once the Fund has been assigned an exercise notice, the Fund will be
unable to effect a closing purchase transaction.
Closing purchase transactions are ordinarily effected to realize a profit
on an outstanding call option, to prevent an underlying security (currency)
from being called, to permit the sale of an underlying security (or the
exchange of the underlying currency) or to enable the Fund to write another
call option on the underlying security (currency) with either a different
exercise price or expiration date or both. The Fund may realize a net gain or
loss from a closing purchase transaction depending upon whether the amount
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of the premium received on the call option is more or less than the cost of
effecting the closing purchase transaction. Any loss incurred in a closing
purchase transaction may be wholly or partially offset by unrealized
appreciation in the market value of the underlying security (currency).
Conversely, a gain resulting from a closing purchase transaction could be
offset in whole or in part or exceeded by a decline in the market value of the
underlying security (currency).
If a call option expires unexercised, the Fund realizes a gain in the
amount of the premium on the option less the commission paid. Such a gain,
however, may be offset by depreciation in the market value of the underlying
security (currency) during the option period. If a call option is exercised,
the Fund realizes a gain or loss from the sale of the underlying security
(currency) equal to the difference between the purchase price of the
underlying security (currency) and the proceeds of the sale of the security
(currency) plus the premium received on the option less the commission paid.
Options written by the Fund will normally have expiration dates of up to
eighteen months from the date written. The exercise price of a call option
may be below, equal to or above the current market value of the underlying
security at the time the option is written. See "Risks of Options and Futures
Transactions," below.
Covered Put Writing. As stated in the Prospectus, as a writer of a covered
put option, the Fund incurs an obligation to buy the security underlying the
option from the purchaser of the put, at the option's exercise price at any
time during the option period, at the purchaser's election (certain listed
and OTC put options written by the Fund will be exercisable by the purchaser
on a specific date). A put is "covered" if, at all times, the Fund maintains,
in a segregated account maintained on its behalf at the Fund's Custodian,
cash, U.S. Government securities or other liquid portfolio securities in an
amount equal to at least the exercise price of the option, at all times
during the option period. Similarly, a short put position could be covered by
the Fund by its purchase of a put option on the same security (currency) as
the underlying security of the written option, where the exercise price of
the purchased option is equal to or more than the exercise price of the put
written or less than the exercise price of the put written if the marked to
market difference is maintained by the Fund in cash, U.S. Government
securities or other liquid portfolio securities which the Fund holds in a
segregated account maintained at its Custodian. In writing puts, the Fund
assumes the risk of loss should the market value of the underlying security
(currency) decline below the exercise price of the option (any loss being
decreased by the receipt of the premium on the option written). In the case
of listed options, during the option period, the Fund may be required, at any
time, to make payment of the exercise price against delivery of the
underlying security (currency). The operation of and limitations on covered
put options in other respects are substantially identical to those of call
options.
The Fund will write put options for three purposes: (1) to receive the
income derived from the premiums paid by purchasers; (2) when the Investment
Manager wishes to purchase the security (or a security denominated in the
currency underlying the option) underlying the option at a price lower than
its current market price, in which case it will write the covered put at an
exercise price reflecting the lower purchase price sought; and (3) to close
out a long put option position. The potential gain on a covered put option is
limited to the premium received on the option (less the commissions paid on
the transaction) while the potential loss equals the differences between the
exercise price of the option and the current market price of the underlying
securities (currencies) when the put is exercised, offset by the premium
received (less the commissions paid on the transaction).
Purchasing Call and Put Options. The Fund may purchase listed and OTC call
and put options in amounts equalling up to 5% of its total assets. The Fund may
purchase a call option in order to close out a covered call position (see
"Covered Call Writing" above), to protect against an increase in price of a
security it anticipates purchasing or, in the case of a call option on foreign
currency, to hedge against an adverse exchange rate move 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 purchase of the call
option to effect a closing transaction on a call written over-the-counter may
be listed or an OTC option. In either case, the call purchased is likely to be
on the same securities (currencies) and have the same terms as the written
option. If purchased over-the-counter, the option would generally be acquired
from the dealer or financial institution which purchased the call written by
the Fund.
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The Fund may purchase put options on securities (currencies) which it
holds in its portfolio to protect itself against a decline in the value of
the security and to close out written put option positions. If the value of
the underlying security (currency) were to fall below the exercise price of
the put purchased in an amount greater than the premium paid for the option,
the Fund would incur no additional loss. In addition, the Fund may sell a put
option which it has previously purchased prior to the sale of the securities
(currencies) underlying such option. Such a sale would result in a net gain
or loss depending on whether the amount received on the sale is more or less
than the premium and other transaction costs paid on the put option which is
sold. And such gain or loss could be offset in whole or in part by a change
in the market value of the underlying security (currency). If a put option
purchased by the Fund expired without being sold or exercised, the premium
would be lost.
Risks of Options Transactions. During the option period, the covered call
writer has, in return for the premium on the option, given up the opportunity
for capital appreciation above the exercise price should the market price of
the underlying security (or the value of its denominated currency) increase,
but has retained the risk of loss should the price of the underlying security
(or the value of its denominated currency) decline. The writer has no control
over the time when it may be required to fulfill its obligation as a writer
of the option. Once an option writer has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver or receive the underlying
securities at the exercise price.
Prior to exercise or expiration, an option position can only be terminated
by entering into a closing purchase or sale transaction. If the covered call
option writer is unable to effect a closing purchase transaction or to
purchase an offsetting OTC option, it cannot sell the underlying security
until the option expires or the option is exercised. Accordingly, a covered
call option writer may not be able to sell an underlying security at a time
when it might otherwise be advantageous to do so. A secured put option writer
who is unable to effect a closing purchase transaction or to purchase an
offsetting OTC option would continue to bear the risk of decline in the
market price of the underlying security until the option expires or is
exercised. In addition, a secured put writer would be unable to utilize the
amount held in cash or U.S. Government or other liquid portfolio securities
as security for the put option for other investment purposes until the
exercise or expiration of the option.
The Fund's ability to close out its position as a writer of an option is
dependent upon the existence of a liquid secondary market on Option
Exchanges. There is no assurance that such a market will exist, particularly
in the case of OTC options, as such options will generally only be closed out
by entering into a closing purchase transaction with the purchasing dealer.
However, the Fund may be able to purchase an offsetting option which does not
close out its position as a writer but constitutes an asset of equal value to
the obligation under the option written. If the Fund is not able to either
enter into a closing purchase transaction or purchase an offsetting position,
it will be required to maintain the securities subject to the call, or the
collateral underlying the put, even though it might not be advantageous to do
so, until a closing transaction can be entered into (or the option is
exercised or expires).
Among the possible reasons for the absence of a liquid secondary market on
an Exchange are: (i) insufficient trading interest in certain options; (ii)
restrictions on transactions imposed by an Exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes
or series of options or underlying securities; (iv) interruption of the
normal operations on an Exchange; (v) inadequacy of the facilities of an
Exchange or the Options Clearing Corporation ("OCC") to handle current
trading volume; or (vi) a decision by one or more Exchanges to discontinue
the trading of options (or a particular class or series of options), in which
event the secondary market on that Exchange (or in that class or series of
options) would cease to exist, although outstanding options on that Exchange
that had been issued by the OCC as a result of trades on that Exchange would
generally continue to be exercisable in accordance with their terms.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in options, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. Similarly, in the
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event of the bankruptcy of the writer of an OTC option purchased by the
Fund, the Fund could experience a loss of all or part of the value of the
option. Transactions are entered into by the Fund only with brokers or
financial institutions deemed creditworthy by the Fund's management.
Each of the Exchanges has established limitations governing the maximum
number of options on the same underlying security or futures contract
(whether or nor covered) which may be written by a single investor, whether
acting alone or in concert with others (regardless of whether such options
are written on the same or different Exchanges or are held or written on one
or more accounts or through one or more brokers). An Exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. These position limits may restrict
the number of listed options which the Fund may write.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying market that cannot be
reflected in the option markets.
The extent to which the Fund may enter into transactions involving options
may be limited by the Internal Revenue Code's requirements for qualification
as a regulated investment company and the Fund's intention to qualify as such
(see "Dividends, Distributions and Taxes" in the Prospectus).
Futures Contracts and Options On Futures. The Fund may invest in financial
futures contracts ("futures contracts") and related options thereon. These
futures contracts and related options thereon will be used only as a hedge
against anticipated interest rate changes. A futures contract sale creates an
obligation by the Fund, as seller, to deliver the specific type of instrument
called for in the contract at a specified future time for a specified price.
A futures contract purchase would create an obligation by the Fund, as
purchaser, to take delivery of the specific type of financial instrument at a
specified future time at a specified price. The specific securities delivered
or taken, respectively, at settlement date, would not be determined until or
near that date. The determination would be in accordance with the rules of
the exchange on which the futures contract sale or purchase was effected.
Although the terms of futures contracts specify actual delivery or receipt
of securities, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the securities.
Closing out of a futures contract is usually effected by entering into an
offsetting transaction. An offsetting transaction for a futures contract sale
is effected by the Fund entering into a futures contract purchase for the
same aggregate amount of the specific type of financial instrument and same
delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is immediately paid the difference and thus realizes a
gain. If the offsetting purchase price exceeds the sale price, the Fund pays
the difference and realizes a loss. Similarly, the closing out of a futures
contract purchase is effected by the Fund entering into a futures contract
sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain, and if the offsetting sale price is less than the purchase
price, the Fund realizes a loss.
Unlike a futures contract, which requires the parties to buy and sell a
security on a set date, an option on a futures contract entitles its holder
to decide on or before a future date whether to enter into such a contract.
If the holder decides not to enter into the contract, the premium paid for
the contract is lost. Since the price of the option is fixed at the point of
sale, there are no daily payments of cash to reflect the change in the value
of the underlying contract, as discussed below for futures contracts. The
value of the option does change and is reflected in the net asset value of
the Fund.
The Fund is required to maintain margin deposits with brokerage firms
through which it effects futures contracts and options thereon. The initial
margin requirements vary according to the type of the underlying security. In
addition, due to current industry practice, daily variations in gains and
losses on open contracts are required to be reflected in cash in the form of
variation margin payments. The Fund may be required to make additional margin
payments during the term of the contract.
Financial futures contracts are traded in an auction environment on the
floors of several Exchanges--principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New
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York Futures Exchange. Each Exchange guarantees performance under contract
provisions through a clearing corporation, a nonprofit organization managed by
the Exchange membership which is also responsible for handling daily accounting
of deposits or withdrawals of margin.
Interest Rate Futures Contracts. As stated in the Prospectus, the Fund may
purchase and sell interest rate, currency, and index futures contracts
("futures contracts"), that are traded on U.S. and foreign commodity
exchanges, on such underlying securities as U.S. Treasury bonds, notes and
bills and/or any foreign government fixed-income security ("interest rate"
futures), on various currencies ("currency futures") and on such indexes of
U.S. and foreign securities as may exist or come into being ("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. If the Investment Manager anticipates that interest rates may rise and
concomitantly, the price of certain of its portfolio securities fall, the
Fund may sell an interest rate futures contract. If declining interest rates
are anticipated, the Fund may purchase an interest rate futures contract to
protect against a potential increase in the price of securities the Fund
intends to purchase. Subsequently, appropriate securities may be purchased by
the Fund in an orderly fashion; as securities are purchased, corresponding
futures positions would be terminated by offsetting sales of contracts.
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. If the Investment Manager anticipates that
the prices of securities held by the Fund may fall, the Fund may sell an
index futures contract. Conversely, if the Fund wishes to hedge against
anticipated price rises in those securities which the Fund intends to
purchase, the Fund may purchase an index futures contract.
The Fund will purchase or sell currency futures on currencies in which its
portfolio securities (or anticipated portfolio securities) are denominated
for the purposes of hedging against anticipated changes in currency exchange
rates. The Fund will enter into currency futures contracts for the same
reasons as set forth above for entering into forward foreign currency
contracts; namely, to "lock-in" the value of a security purchased or sold in
a given currency vis-a-vis a different currency or to hedge against an
adverse currency exchange rate movement of a portfolio security's (or
anticipated portfolio security's) denominated currency vis-a-vis a different
currency.
In addition to the above, interest rate, index and currency futures will
be bought or sold in order to close out a short or long position maintained
by the Fund in a corresponding futures contract.
Although most interest rate futures contracts call for actual delivery or
acceptance of securities, the contracts usually are closed out before the
settlement date without the making or taking of delivery. A futures contract
sale is closed out by effecting a futures contract purchase for the same
aggregate amount of the specific type of security (currency) and the same
delivery date. If the sale price exceeds the offsetting purchase price, the
seller would be paid the difference and would realize a gain. If the
offsetting purchase price exceeds the sale price, the seller would pay the
difference and would realize a loss. Similarly, a futures contract purchase
is closed out by effecting a futures contract sale for the same aggregate
amount of the specific type of security (currency) and the same delivery
date. If the offsetting sale price exceeds the purchase price, the purchaser
would realize a gain, whereas if the purchase price exceeds the offsetting
sale price, the purchaser would realize a loss. There is no assurance that
the Fund will be able to enter into a closing transaction.
When the Fund enters into an interest rate futures contract, it is
initially required to deposit with the Fund's Custodian, in a segregated
account in the name of the broker performing the transaction, an "initial
margin" of cash or U.S. Government securities or other liquid portfolio
securities equal to approximately 2% of the contract amount. Initial margin
requirements are established by the Exchanges on which futures contracts
trade and may, from time to time, change. (In addition, brokers may establish
margin deposit requirements in excess of those required by the Exchanges.)
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing
of funds by a brokers' client but is, rather, a good faith deposit on
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the futures contract which will be returned to the Fund upon the proper
termination of the futures contract. The margin deposits made are marked to
market daily and the Fund may be required to make subsequent deposits of cash
or U.S. Government securities called "variation margin," with the Fund's
futures contract clearing broker, which are reflective of price fluctuations in
the futures contract. Currently, interest rate futures contracts can be
purchased on debt securities such as U.S. Treasury Bills and Bonds, U.S.
Treasury Notes with Maturities between 6 1/2 and 10 years, GNMA Certificates
and Bank Certificates of Deposit.
Additionally, the Fund may invest in Mortgage-Backed Securities, such as
floating rate CMOs or adjustable rate Mortgage-Backed Securities, which have
interest rates subject to periodic adjustment based on changes to a
designated index. One index which may serve as such a benchmark is the London
Interbank Offered Rate, or LIBOR. In order for the Fund to hedge its exposure
to fluctuations in short-term interest rates for its portfolio securities
subject to the LIBOR rate, the Fund may purchase or sell futures contracts on
U.S. dollar denominated Eurodollar instruments linked to the LIBOR rate.
Currency Futures. Generally, foreign currency futures provide for the
delivery of a specified amount of a given currency, on the exercise date, for
a set exercise price denominated in U.S. dollars or other currency. Foreign
currency futures contracts would be entered into for the same reason and
under the same circumstances as forward foreign currency exchange contracts.
The Investment Manager will assess such factors as cost spreads, liquidity
and transaction costs in determining whether to utilize futures contracts or
forward contracts in its foreign currency transactions and hedging strategy.
Currently, currency futures exist for, among other foreign currencies, the
Japanese yen, West German marks, Canadian dollars, British pounds, Swiss
francs and European currency unit.
Purchasers and sellers of foreign currency futures contracts are subject
to the same risks that apply to the buying and selling of futures generally.
In addition, there are risks associated with foreign currency futures
contracts and their use as a hedging device similar to those associated with
options on foreign currencies described above. Further, settlement of a
foreign currency futures contract must occur within the country issuing the
underlying currency. Thus, the Fund must accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign
restrictions or regulations regarding the maintenance of foreign banking
arrangements by U.S. residents and may be required to pay any fees, taxes or
charges associated with such delivery which are assessed in the issuing
country.
Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures contracts is
relatively new. The ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary market. To reduce
this risk, the Fund will not purchase or write options on foreign currency
futures contracts unless and until, in the Investment Manager's opinion, the
market for such options has developed sufficiently that the risks in
connection with such options are not greater than the risks in connection
with transactions in the underlying foreign currency futures contracts.
Index Futures Contracts. As discussed in the Prospectus, the Fund may
invest in index futures contracts. An index futures contract sale creates an
obligation by the Fund, as seller, to deliver cash at a specified future
time. An index futures contract purchase would create an obligation by the
Fund, as purchaser, to take delivery of cash at a specified future time.
Futures contracts on indexes do not require the physical delivery of
securities, but provide for a final cash settlement on the expiration date
which reflects accumulated profits and losses credited or debited to each
party's account.
The Fund is required to maintain margin deposits with brokerage firms
through which it effects index futures contracts in a manner similar to that
described above for interest rate futures contracts. Currently, the initial
margin requirements range from 3% to 10% of the contract amount for index
futures. In addition, due to current industry practice, daily variations in
gains and losses on open contracts are required to be reflected in cash in
the form of variation margin payments. The Fund may be required to make
additional margin payments during the term of the contract.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will operate
to terminate the Fund's position in the futures contract. A final
determination of variation margin is then made, additional cash is required
to be paid by or released to the Fund and the Fund realizes a loss or gain.
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Options on Futures Contracts. The Fund may purchase and write call and put
options on futures contracts which are traded on an exchange and enter into
closing transactions with respect to such options to terminate an existing
position. An option on a futures contract gives the purchaser the right (in
return for the premium paid) to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the term of the option.
Upon exercise of the option, the delivery of the futures position by the
writer of the option to the holder of the option is accompanied by delivery
of the accumulated balance in the writer's futures margin account, which
represents the amount by which the market price of the futures contract at
the time of exercise exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the option on the futures contract.
The Fund will purchase and write options on futures contracts for
identical purposes to those set forth above for the purchase of a futures
contract (purchase of a call option or sale of a put option) and the sale of
a futures contract (purchase of a put option or sale of a call option), or to
close out a long or short position in futures contracts. If, for example, the
Investment Manager wished to protect against an increase in interest rates
and the resulting negative impact on the value of a portion of its
fixed-income portfolio, it might write a call option on an interest rate
futures contract, the underlying security of which correlates with the
portion of the portfolio the Investment Manager seeks to hedge. Any premiums
received in the writing of options on futures contracts may, of course,
provide a further hedge against losses resulting from price declines in
portions of the Fund's portfolio.
Limitations on Futures Contracts and Options on Futures. The Fund may not
enter into futures contracts or purchase related options thereon if,
immediately thereafter, the amount committed to margin plus the amount paid
for premiums for unexpired options on futures contracts exceeds 5% of the
value of the Fund's total assets, after taking into account unrealized gains
and unrealized losses on such contracts it has entered into, provided,
however, that in the case of an option that is in-the-money (the exercise
price of the call (put) option is less (more) than the market price of the
underlying security) at the time of purchase, the in-the-money amount may be
excluded in calculating the 5%. However, there is no overall limitation on
the percentage of the Fund's assets which may be subject to a hedge position.
In addition, in accordance with the regulations of the Commodity Futures
Trading Commission ("CFTC") under which the Fund is exempted from
registration as a commodity pool operator, the Fund may only enter into
futures contracts and options on futures contracts transactions for purposes
of hedging a part or all of its portfolio. If the CFTC changes its
regulations so that the Fund would be permitted to write options on futures
contracts for purposes other than hedging the Fund's investments without CFTC
registration, the Fund may engage in such transactions for those purposes.
Except as described above, there are no other limitations on the use of
futures and options thereon by the Fund.
The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an
option on a futures contract are included in initial margin deposits.
Risks of Transactions in Futures Contracts and Related Options. As stated
in the Prospectus, the Fund may sell a futures contract to protect against
the decline in the value of securities (or the currency in which they are
denominated) held by the Fund. However, it is possible that the futures
market may advance and the value of securities (or the currency in which they
are denominated) held in the portfolio of the Fund may decline. If this
occurred, the Fund would lose money on the futures contract and also
experience a decline in value of its portfolio securities. However, while
this could occur for a very brief period or to a very small degree, over time
the value of a diversified portfolio will tend to move in the same direction
as the futures contracts.
If the Fund purchases a futures contract to hedge against the increase in
value of securities it intends to buy (or the currency in which they are
denominated), and the value of such securities (currencies) decreases, then
the Fund may determine not to invest in the securities as planned and will
realize a loss on the futures contract that is not offset by a reduction in
the price of the securities.
In order to assure that the Fund is entering into transactions in futures
contracts for hedging purposes as defined by the Commodity Futures Trading
Commission either: 1) a substantial majority
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<PAGE>
(i.e., approximately 75%) of all anticipatory hedge transactions (transactions
in which the Fund does not own at the time of the transaction, but expects to
acquire, the securities underlying the relevant futures contract) involving the
purchase of futures contracts will be completed by the purchase of securities
which are the subject of the hedge or 2) the underlying value of all long
positions in futures contracts will not exceed the total value of a) all
short-term debt obligations held by the Fund; b) cash held by the Fund; c) cash
proceeds due to the Fund on investments within thirty days; d) the margin
deposited on the contracts; and e) any unrealized appreciation in the value of
the contracts.
If the Fund has sold a call option on a futures contract, it will cover
this position by holding, in a segregated account maintained at its
Custodian, cash, U.S. Government securities or other liquid portfolio
securities equal in value (when added to any initial or variation margin on
deposit) to the market value of the securities (currencies) underlying the
futures contract or the exercise price of the option. Such a position may
also be covered by owning the securities (currencies) underlying the futures
contract, or by holding a call option permitting the Fund to purchase the
same contract at a price no higher than the price at which the short position
was established.
In addition, if the Fund holds a long position in a futures contract it
will hold cash, U.S. Government securities or other liquid portfolio
securities equal to the purchase price of the contract (less the amount of
initial or variation margin on deposit) in a segregated account maintained
for the Fund by its Custodian. Alternatively, the Fund could cover its long
position by purchasing a put option on the same futures contract with an
exercise price as high as or higher than the price of the contract held by
the Fund.
Exchanges limit the amount by which the price of a futures contract may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased. In the event of adverse price movements, the Fund
would continue to be required to make daily cash payments of variation margin
on open futures positions. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In addition,
the Fund may be required to take or make delivery of the instruments
underlying interest rate futures contracts it holds at a time when it is
disadvantageous to do so. The inability to close out options and futures
positions could also have an adverse impact on the Fund's ability to
effectively hedge its portfolio.
Futures contracts and options thereon which are purchased or sold on
foreign commodities exchanges may have greater price volatility than their
U.S. counterparts. Furthermore, foreign commodities exchanges may be less
regulated and under less governmental scrutiny than U.S. exchanges. Brokerage
commissions, clearing costs and other transaction costs may be higher on
foreign exchanges. Greater margin requirements may limit the Fund's ability
to enter into certain commodity transactions on foreign exchanges. Moreover,
differences in clearance and delivery requirements on foreign exchanges may
occasion delays in the settlement of the Fund's transactions effected on
foreign exchanges.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in futures or options thereon, the Fund could experience
delays and/or losses in liquidating open positions purchased or sold through
the broker and/or incur a loss of all or part of its margin deposits with the
broker. Similarly, in the event of the bankruptcy of the writer of an OTC
option purchased by the Fund, the Fund could experience a loss of all or part
of the value of the option. Transactions are entered into by the Fund only
with brokers or financial institutions deemed creditworthy by the Investment
Manager.
While the futures contracts and options transactions to be engaged in by
the Fund for the purpose of hedging the Fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such
instruments. One such risk which may arise in employing futures contracts to
protect against the price volatility of portfolio securities (and the
currencies in which they are denominated) is that the prices of securities
and indexes subject to futures contracts (and thereby the futures contract
prices) may correlate imperfectly with the behavior of the cash prices of the
Fund's portfolio securities (and the currencies in which they are denominated).
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
30
<PAGE>
seeks a hedge. A correlation may also be distorted by the fact that the futures
market is dominated by short-term traders seeking to profit from the difference
between a contract or security price objective and their cost of borrowed
funds. Such distortions are generally minor and would diminish as the contract
approached maturity.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Fund and the movements in the prices of
the securities (currencies) which are the subject of the hedge. If
participants in the futures market elect to close out their contracts through
offsetting transactions rather than meet margin deposit requirements,
distortions in the normal relationship between the debt securities or
currency markets and futures markets could result. Price distortions could
also result if investors in futures contracts opt to make or take delivery of
underlying securities rather than engage in closing transactions due to the
resultant reduction in the liquidity of the futures market. In addition, due
to the fact that, from the point of view of speculators, the deposit
requirements in the futures markets are less onerous than margin requirements
in the cash market, increased participation by speculators in the futures
market could cause temporary price distortions. Due to the possibility of
price distortions in the futures market and because of the imperfect
correlation between movements in the prices of securities and movements in
the prices of futures contracts, a correct forecast of interest rate trends
may still not result in a successful hedging transaction.
There is no assurance that a liquid secondary market will exist for
futures contracts and related options in which the Fund may invest. In the
event a liquid market does not exist, it may not be possible to close out a
futures position, and in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin. In
addition, limitations imposed by an exchange or board of trade on which
futures contracts are traded may compel or prevent the Fund from closing out
a contract which may result in reduced gain or increased loss to the Fund.
The absence of a liquid market in futures contracts might cause the Fund to
make or take delivery of the underlying securities (currencies) at a time
when it may be disadvantageous to do so.
The extent to which the Fund may enter into transactions involving futures
contracts and options thereon may be limited by the Internal Revenue Code's
requirements for qualification as a regulated investment company and the
Fund's intention to qualify as such (see "Dividends, Distributions and Taxes"
in the Prospectus).
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on futures contracts involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances when the
purchase of a call or put option on a futures contract would result in a loss
to the Fund notwithstanding that the purchase or sale of a futures contract
would not result in a loss, as in the instance where there is no movement in
the prices of the futures contract or underlying securities (currencies).
The Investment Manager has substantial experience in the use of the
investment techniques described above under the heading "Options and Futures
Transactions," which techniques require skills different from those needed to
select the portfolio securities underlying various options and futures
contracts.
PORTFOLIO TURNOVER
The Fund may sell portfolio securities without regard to the length of
time they have been held whenever such sale will, in the Investment Manager's
opinion, strengthen the Fund's position and contribute to its investment
objective. As a result, the Fund's portfolio turnover rate may exceed 100%. A
100% turnover rate would occur, for example, if 100% of the securities held
in the Fund's portfolio (excluding all securities whose maturities at
acquisition were one year or less) were sold and replaced within one year.
During the fiscal years ended October 31, 1996 and October 31, 1997, the
Fund's portfolio turnover rates were approximately 82% and 104%,
respectively.
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<PAGE>
INVESTMENT RESTRICTIONS
- -----------------------------------------------------------------------------
In addition to the investment restrictions enumerated in the Prospectus,
the investment restrictions listed below have been adopted by the Fund as
fundamental policies, except as otherwise indicated. Under the Act, a
fundamental policy may not be changed without the vote of a majority of the
outstanding voting securities of the Fund, as defined in the Act. Such a
majority is defined as the lesser of (a) 67% or more of the shares present at
a meeting of shareholders, if the holders of 50% of the outstanding shares of
the Fund are present or represented by proxy or (b) more than 50% of the
outstanding shares of the Fund.
The Fund may not:
1. Purchase or sell real estate or interests therein, although the Fund
may purchase securities of issuers which engage in real estate operations
and securities secured by real estate or interests therein.
2. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may invest in
the securities of companies which operate, invest in, or sponsor such
programs.
3. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets. For this purpose, Mortgage-Backed Securities and Asset-Backed
Securities are not deemed to be investment companies.
4. Issue senior securities as defined in the Act except insofar as the
Fund may be deemed to have issued a senior security by reason of (a)
entering into any repurchase or reverse repurchase agreement; (b)
purchasing any securities on a when-issued or delayed delivery basis; (c)
purchasing or selling futures contracts, forward foreign exchange
contracts or options; (d) borrowing money in accordance with restrictions
described above; or (e) lending portfolio securities.
5. Make loans of money or securities, except: (a) by the purchase of
publicly distributed debt obligations in which the Fund may invest
consistent with its investment objectives and policies; (b) by investment
in repurchase or reverse repurchase agreements; or (c) by lending its
portfolio securities.
6. Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security.
7. Invest for the purpose of exercising control or management of any
other issuer.
8. Purchase or sell commodities or commodities contracts except that the
Fund may purchase or write interest rate, currency and stock and bond
index futures contracts and related options thereon.
9. Pledge its assets or assign or otherwise encumber them except to
secure permitted borrowings. (For the purpose of this restriction,
collateral arrangements with respect to the writing of options and
collateral arrangements with respect to initial or variation margin for
futures are not deemed to be pledges of assets.)
10. Purchase securities on margin (but the Fund may obtain short-term
loans as are necessary for the clearance of transactions). The deposit or
payment by the Fund of initial or variation margin in connection with
futures contracts or related options thereon is not considered the
purchase of a security on margin.
11. Invest in securities of any company if, to the knowledge of the Fund,
any officer or trustee of the Fund or of the Investment Manager owns more
than 1/2 of 1% of the outstanding securities of such company, and such
officers and directors who own more than 1/2 of 1% own in the aggregate
more than 5% of the outstanding securities of such company; and
12. Invest more than 5% of its net assets in warrants (valued at the
lower of cost or market), including not more than 2% of such assets which
are not listed on the New York or American Stock Exchange. However,
warrants acquired by the Fund in units or attached to other securities may
be deemed to be without value.
13. Make short sales of securities.
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<PAGE>
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of total or net assets will not be considered
a violation of any of the foregoing restrictions.
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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
- -----------------------------------------------------------------------------
Subject to the general supervision of the Board of Trustees, the
Investment Manager is responsible for decisions to buy and sell securities
for the Fund, the selection of brokers and dealers to effect the
transactions, and the negotiation of brokerage commissions, if any. Purchases
and sales of securities on a stock exchange are effected through brokers who
charge a commission for their services. The Fund expects that the primary
market for the securities in which it intends to invest will generally be the
over-the-counter market. In the over-the-counter market, securities are
generally traded on a "net" basis with dealers acting as principal for their
own accounts without a stated commission, although the price of the security
usually includes a profit to the dealer. The Fund expects that securities
will be purchased at times in underwritten offerings where the price includes
a fixed amount of compensation, generally referred to as the underwriter's
concession or discount. Options and futures transactions will usually be
effected through a broker and a commission will be charged. On occasion, the
Fund may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid. During the fiscal
years ended October 31, 1995, 1996 and 1997, the Fund paid $85,553, $91,481
and $6,634, respectively, in brokerage commissions.
The Investment Manager currently serves as investment manager to a number
of clients, including other investment companies, and may in the future act
as investment manager or adviser to others. It is the practice of the
Investment Manager to cause purchase and sale transactions to be allocated
among the Fund and others whose assets it manages in such manner as it deems
equitable. In making such allocations among the Fund and other client
accounts, various factors are considered including the respective investment
objectives, the relative size of portfolio holdings of the same or comparable
securities, the availability of cash for investment, the size of investment
commitments generally held and the opinions of the persons responsible for
managing the portfolios of the Fund and other client accounts. In the case of
certain initial and secondary public offerings, the Investment Manager may
utilize a pro rata allocation process based on the size of the Dean Witter
Funds involved and the number of shares available from the public offering.
The policy of the Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with
this policy, when securities transactions are effected on a stock exchange,
the Fund's policy is to pay commissions which are considered fair and
reasonable without necessarily determining that the lowest possible
commissions are paid in all circumstances. The Fund believes that a
requirement always to seek the lowest possible commission cost could impede
effective portfolio management and preclude the Fund and the Investment
Manager from obtaining a high quality of brokerage and research services. In
seeking to determine the reasonableness of brokerage commissions paid in any
transaction, the Investment Manager relies upon its experience and knowledge
regarding commissions generally charged by various brokers and on its
judgment in evaluating the brokerage and research services received from the
broker effecting the transaction. Such determinations are necessarily
subjective and imprecise, as in most cases an exact dollar value for those
services is not ascertainable.
The Fund anticipates that certain of its transactions involving foreign
securities will be effected on securities exchanges. Fixed commissions on
such transactions are generally higher than negotiated commissions on
domestic transactions. There is also generally less government supervision
and regulation of foreign securities exchanges and brokers than in the United
States.
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<PAGE>
In seeking to implement the Fund's policies, the Investment Manager
effects transactions with those brokers and dealers who the Investment
Manager believes provide the most favorable prices and are capable of
providing efficient executions. If the Investment Manager believes such
prices and executions are obtainable from more than one broker or dealer, it
may give consideration to placing portfolio transactions with those brokers
and dealers who also furnish research and other services to the Fund or the
Investment Manager. Such services may include, but are not limited to, any
one or more of the following: information as to the availability of
securities for purchase or sale; statistical or factual information or
opinions pertaining to investment; wire services; and appraisals or
evaluations of portfolio securities. The Fund will not purchase at a higher
price or sell at a lower price in connection with transactions effected with
a dealer, acting as principal, who furnishes research services to the Fund
than would be the case if no weight were given by the Fund to the dealer's
furnishing of such services. During the fiscal year ended October 31, 1997,
the Fund did not direct the payment of any brokerage commissions because of
research services provided.
The information and services received by the Investment Manager from
brokers and dealers may be of benefit to the Investment Manager in the
management of accounts of some of its other clients and may not in all cases
benefit the Fund directly. While the receipt of such information and services
is useful in varying degrees and would generally reduce the amount of
research or services otherwise performed by the Investment Manager and
thereby reduce its expenses, it is of indeterminable value and the management
fee paid to the Investment Manager is not reduced by any amount that may be
attributable to the value of such services.
Pursuant to an order of the Securities and Exchange Commission, the Fund
may effect principal transactions in certain money market instruments with
DWR. The Fund will limit its transactions with DWR to U.S. Government and
Government Agency Securities, Bank Money Instruments (i.e., Certificates of
Deposit and Bankers' Acceptances) and Commercial Paper. Such transactions
will be effected with DWR only when the price available from DWR is better
than that available from other dealers.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may
be effected through DWR, Morgan Stanley & Co. Incorporated and other
affiliated brokers and dealers. In order for an affiliated broker or dealer
to effect any portfolio transactions for the Fund, the commissions, fees or
other remuneration received by DWR must be reasonable and fair compared to
the commissions, fees or other remuneration paid to other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on an exchange during a comparable period of time. This
standard would allow the affiliated broker or dealer to receive no more than
the remuneration which would be expected to be received by an unaffiliated
broker in a commensurate arm's-length transaction. Furthermore, the Trustees
of the Fund, including a majority of the Trustees who are not "interested"
persons of the Fund, as defined in the Act, have adopted procedures which are
reasonably designed to provide that any commissions, fees or other
remuneration paid to an affiliated broker or dealer are consistent with the
foregoing standard. The Fund does not reduce the management fee it pays to
the Investment Manager by the amount of the brokerage commissions it may pay
to an affiliated broker or dealer. During the fiscal year ended October 31,
1997 the Fund did not pay any brokerage commissions to any affiliated broker
or dealer.
THE DISTRIBUTOR
- -----------------------------------------------------------------------------
As discussed in the Prospectus, shares of the Fund are distributed
exclusively by Dean Witter Distributors Inc. (the "Distributor"). The
Distributor has entered into a selected dealer agreement with DWR, which
through its own sales organization sells shares of the Fund. In addition, the
Distributor may enter into selected dealer agreements with other selected
broker-dealers. The Distributor, a Delaware corporation, is a wholly-owned
subsidiary of MSDWD. The Trustees of the Fund, including a majority of the
Trustees who are not, and were not at the time they voted, interested persons
of the Fund, as defined in the Act (the "Independent Trustees"), approved, at
their meeting held on June 30, 1993, the current Distribution Agreement
appointing the Distributor as exclusive distributor of the Fund's shares and
providing for the Distributor to bear distribution expenses not borne by the
Fund. By its terms, the Distribution Agreement has an initial term ending
April 30, 1998 and will remain in effect from year to year thereafter if
approved by the Board.
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<PAGE>
The Distributor bears all expenses it may incur in providing services
under the Distribution Agreement. Such expenses include the payment of
commissions for sales of the Fund's shares and incentive compensation to
account executives. The Distributor also pays certain expenses in connection
with the distribution of the Fund's shares, including the costs of preparing,
printing and distributing advertising or promotional materials, and the costs
of printing and distributing prospectuses and supplements thereto to
prospective shareholders. The Fund bears the costs of initial typesetting,
printing and distribution of prospectuses and supplements thereto to
shareholders. The Fund bears the costs of registering the Fund and its shares
under federal and state securities laws and pays filing fees in accordance
with state securities laws. The Fund and the Distributor have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. Under the Distribution Agreement, the
Distributor uses its best efforts in rendering services to the Fund, but in
the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations, the Distributor is not liable to the Fund or
any of its shareholders for any error of judgment or mistake of law or for
any act or omission or for any losses sustained by the Fund or its
shareholders.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under
the Act (the "Plan") pursuant to which each Class other than Class D pays the
Distributor compensation accrued daily and payable monthly at the annual
rates: 0.25% and 0.85% of the average daily net assets of Class A and Class C
respectively, and, with regard to Class B, 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 reinvestment of dividends or
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
contingent deferred sales charge has been imposed or waived, or (b) the
average daily net assets of Class B. The Distributor also receives the
proceeds of front-end sales charges and of contingent deferred sales charges
imposed on certain redemptions of shares, which are separate and apart from
payments made pursuant to the Plan. (see "Purchase of Fund Shares" in the
Prospectus). The Distributor has informed the Fund that it and/or DWR
received (a) approximately $1,025,982, $1,128,359 and $1,414,909 in
contingent deferred sales charges from Class B for the fiscal years ended
October 31, 1995, 1996 and 1997, (b) approximately $0 and $630 in contingent
deferred sales charges from Class A and Class C, respectively, for the fiscal
year ended October 31, 1997, and (c) approximately $38,753 in front-end sales
charges from Class A for the fiscal year ended October 31, 1997, none of
which was retained by the Distributor.
The Distributor has informed the Fund that the entire fee payable by Class
A and a portion of the fees payable by each of Class B and Class C each year
pursuant to the Plan 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" under the Rules of the Association of the
National Association of Securities Dealers, Inc. (of which the Distributor is
a member). The "service fee" is a payment made for personal service and/or
the maintenance of shareholder accounts. The remaining portion of the Plan
fees payable by a Class, if any, is characterized as an "asset-based sales
charge" as such is defined by the aforementioned Rules of the Association.
Under its terms, the Plan had an initial term ending April 30, 1992, and
it will remain in effect from year to year thereafter, provided such
continuance is approved annually by a vote of the Trustees, including a
majority of the Trustees who are not "interested persons" of the Fund (as
defined in the Act) and who have no direct or indirect financial interest in
the operation of the Plan (the "Independent 12b-1 Trustees"). The Plan was
initially adopted on January 23, 1992 at a meeting of the Trustees called for
the purpose of voting on such Plan. In determining to approve the Plan, the
Trustees of the Fund, including each of the Independent 12b-1 Trustees,
concluded that the Plan would be in the best interest of the Fund and would
have a reasonable likelihood of benefiting the Fund and its shareholders. The
Plan was approved by DWR, as the then sole shareholder of the Fund, on
February 25, 1992 and by the shareholders of the Fund at a Special Meeting of
Shareholders held on January 12, 1993.
At their meeting held on October 30, 1992, the Trustees of the Fund,
including all of the Independent 12b-1 Trustees, approved certain amendments
to the Plan which took effect in January, 1993 and were
35
<PAGE>
designed to reflect the fact that upon an internal reorganization, the share
distribution activities theretofore performed for the Fund by DWR were
assumed by the Distributor and DWR's sales activities are now being performed
pursuant to the terms of a selected dealer agreement between the Distributor
and DWR. The amendments provide that payments under the Plan will be made to
the Distributor rather than to DWR as before the Amendment and that the
Distributor in turn is authorized to make payments to DWR or other selected
broker-dealers (or direct that the Fund pay such entities directly). The
Distributor is also authorized to retain part of such fee as compensation for
its own distribution-related expenses. At their meeting held on April 28,
1993, the Trustees, including a majority of the Independent 12b-1 Trustees,
also approved certain technical amendments to the Plan in connection with
recent amendments adopted by the National Association of Securities Dealers,
Inc. to its Rules of the Association. At their meeting held on October 26,
1995, the Trustees of the Fund, including all of the Independent 12b-1
Trustees, approved an amendment to the Plan to permit payments to be made
under the Plan with respect to certain distribution expenses incurred in
connection with the distribution of shares, including personal services to
shareholders with respect to holdings of such shares, of an investment
company whose assets are acquired by the Fund in a tax-free reorganization.
At their meeting held on June 30, 1997, the Trustees, including a majority of
Independent 12b-1 Trustees, approved amendments to the Plan to reflect the
multiple-class structure for the Fund, which took effect on July 28, 1997.
Under the Plan and as required by Rule 12b-1, the Trustees receive and
review promptly after the end of each calendar quarter a written report
provided by the Distributor of the amounts expended under the Plan and the
purpose for which such expenditures were made. Class B shares of the Fund
accrued amounts payable to the Distributor under the Plan, during the fiscal
year ended October 31, 1997, of $7,104,223. This amount is equal to 0.85% of
the average daily net assets of Class B for the fiscal year and was
calculated pursuant to clause (b) of the compensation formula under the Plan.
For the fiscal period July 28 through October 31, 1997, Class A and Class C
shares of the Fund accrued payments under the Plan amounting to $1,658 and
$3,998, respectively, which amounts are equal to 0.25% and 0.85% of the
average daily net assets of Class A and Class C, respectively, for such
period.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method, the Fund offers four
Classes of shares, each with a different distribution arrangement as set
forth in the Prospectus.
With respect to Class A shares, DWR compensates its account executives by
paying them, from proceeds of the front-end sales charge, commissions for the
sale of Class A shares, currently a gross sales credit of up to 4.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.20% of the current value
of the respective accounts for which they are the account executives or
dealers of record in all cases. On orders of $1 million or more (for which no
sales charge was paid) or net asset value purchases by employer-sponsored
401(k) and other plans qualified under Section 401(a) of the Internal Revenue
Code ("Qualified Retirement Plans") for which Dean Witter Trust FSB ("DWT")
serves as Trustee or DWR's Retirement Plan Services serves as recordkeeper
pursuant to a written Recordkeeping Services Agreement, the Investment
Manager compensates DWR's account executives by paying them, from its own
funds, a gross sales credit of 1.0% of the amount sold.
With respect to Class B shares, DWR compensates its account executives by
paying them, from its own funds, commissions for the sale of Class B shares,
currently a gross sales credit of up to 4.0% of the amount sold (except as
provided in the following sentence) and an annual residual commission,
currently a residual of up to 0.20% of the current value (not including
reinvested dividends or distributions) of the amount sold in all cases. In
the case of Class B shares purchased on or after July 28, 1997 by Qualified
Retirement Plans for which DWT serves as Trustee or DWR's Retirement Plan
Services serves as recordkeeper pursuant to a written Recordkeeping Services
Agreement, DWR compensates its account executives by paying them, from its
own funds, a gross sales credit of 3.0% of the amount sold.
With respect to Class C shares, DWR compensates its account executives by
paying them, from its own funds, commissions for the sale of Class C shares,
currently a gross sales credit of up to 1.0% of the amount sold and an annual
residual commission, currently a residual of up to 0.85% of the current value
of the respective accounts for which they are the account executives of
record.
36
<PAGE>
With respect to Class D shares other than shares held by participants in
the InterCapital mutual fund asset allocation program, the Investment Manager
compensates DWR's account executives by paying them, from its own funds,
commissions for the sale of Class D shares, currently a gross sales credit of
up to 1.0% of the amount sold. There is a chargeback of 100% of the amount
paid if the Class D shares are redeemed in the first year and a chargeback of
50% of the amount paid if the Class D shares are redeemed in the second year
after purchase. The Investment Manager also compensates DWR's account
executives by paying them, from its own funds, an annual residual commission,
currently a residual of up to 0.10% of the current value of the respective
accounts for which they are the account executives of record (not including
accounts of participants in the InterCapital mutual fund asset allocation
program).
The gross sales credit is a charge which reflects commissions paid by DWR
to its account executives and DWR's Fund associated distribution-related
expenses, including sales compensation, and overhead. The term "overhead and
other branch office distribution-related expenses" represents (a) the
expenses of operating DWR's branch offices in connection with the sale of
Fund shares, including lease costs, the salaries and employee benefits of
operations and sales support personnel, utility costs, communications costs
and the costs of stationery and supplies; (b) the costs of client sales
seminars; (c) travel expenses of mutual fund sales coordinators to promote
the sale of Fund shares; and (d) other expenses relating to branch promotion
of Fund share sales. The distribution fee that the Distributor receives from
the Fund under the Plan, in effect, offsets distribution expenses incurred
under the Plan on behalf of the Fund and, in the case of Class B shares,
opportunity costs, such as the gross sales credit and an assumed interest
charge thereon ("carrying charge"). In the Distributor's reporting of the
distribution expenses to the Fund, in the case of Class B shares, such
assumed interest (computed at the "broker's call rate") is calculated on the
gross sales credit as it is reduced by amounts received by the Distributor
under the Plan and any contingent deferred sales charge received by the
Distributor upon redemption of shares of the Fund. No other interest charge
is included as a distribution expense in the Distributor's calculation of its
distribution costs for this purpose. The broker's call rate is the interest
rate charged to securities brokers on loans secured by exchange-listed
securities.
The Fund is authorized to reimburse expenses incurred or to be incurred in
promoting the distribution of the Fund's Class A and Class C shares and in
servicing shareholder accounts. Reimbursement will be made through payments
at the end of each month. The amount of each monthly payment may in no event
exceed an amount equal to a payment at the annual rate of 0.25%, in the case
of Class A, and 0.85%, in the case of Class C, of the average net assets of
the respective Class during the month. No interest or other financing
charges, if any, incurred on any distribution expenses on behalf of Class A
and Class C will be reimbursable under the Plan. With respect to Class A, in
the case of all expenses other than expenses representing the service fee,
and, with respect to Class C, in the case of all expenses other than expenses
representing a gross sales credit or a residual to account executives, such
amounts shall be determined at the beginning of each calendar quarter by the
Trustees, including, a majority of the Independent 12b-1 Trustees. Expenses
representing the service fee (for Class A) or a gross sales credit or a
residual to account executives (for Class C) may be reimbursed without prior
determination. In the event that the Distributor proposes that monies shall
be reimbursed for other than such expenses, then in making quarterly
determinations of the amounts that may be reimbursed by the Fund, the
Distributor will provide and the Trustees will review a quarterly budget of
projected distribution expenses to be incurred on behalf of the Fund,
together with a report explaining the purposes and anticipated benefits of
incurring such expenses. The Trustees will determine which particular
expenses, and the portions thereof, that may be borne by the Fund, and in
making such a determination shall consider the scope of the Distributor's
commitment to promoting the distribution of the Fund's Class A and Class C
shares.
Each Class paid 100% of the amounts accrued under the Plan with respect to
that Class for the fiscal year ended October 31, 1997, to the Distributor.
The Distributor and DWR estimate that they have spent, pursuant to the Plan,
$39,312,610 on behalf of Class B since the inception of the Plan. It is
estimated that this amount was spent in approximately the following ways: (i)
6.37% ($2,503,906)--advertising and promotional expenses; (ii) 0.54%
($211,099)--printing of prospectuses for distribution to
37
<PAGE>
other than current shareholders; and (iii) 93.09% ($36,597,605)--other
expenses, including the gross sales credit and the carrying charge, of which
5.17% ($1,892,555) represents carrying charges, 38.08% ($13,937,548)
represents commission credits to DWR branch offices for payments of
commissions to account executives and 56.75% ($20,767,502) represents
overhead and other branch office distribution-related expenses. The amounts
accrued by Class A and Class C for distribution during the fiscal period July
28 through October 31, 1997 were for expenses which relate to compensation of
sales personnel and associated overhead expenses.
In the case of Class B shares, the expenses in distributing shares of the
Fund which may be more or less than the total of (i) the payments made by the
Fund pursuant to the Plan and (ii) the proceeds of contingent deferred sales
charges paid by investors upon redemption of shares. The Distributor has
advised the Fund that in the case of Class B shares, the excess distribution
expenses, including the carrying charge designed to approximate the
opportunity costs incurred by DWR which arise from it having advanced monies
without having received the amount of any sales charges imposed at the time
of sale of the Fund's Class B shares, totalled $14,622,156 at October 31,
1997. Because there is no requirement under the Plan that the Distributor be
reimbursed for all distribution expenses with respect to Class B shares or
any requirement that the Plan be continued from year to year, this excess
amount does not constitute a liability of the Fund. Although there is no
legal obligation for the Fund to pay expenses incurred in excess of payments
made to the Distributor under the Plan, and the proceeds of contingent
deferred sales charges paid by investors upon redemption of shares, if for
any reason the Plan is terminated, the Trustees will consider at that time
the manner in which to treat such expenses. Any cumulative expenses incurred,
but not yet recovered through distribution fees or contingent deferred sales
charges, may or may not be recovered through future distribution fees or
contingent deferred sales charges.
No interested person of the Fund nor any Trustee of the Fund who is not an
interested person of the Fund, as defined in the Act, has any direct or
indirect financial interest in the operation of the Plan except to the extent
that the Distributor, InterCapital, DWR, DWSC or certain of their employees
may be deemed to have such an interest as a result of benefits derived from
the successful operation of the Plan or as a result of receiving a portion of
the amounts expended thereunder by the Fund.
Under its terms, the Plan had an initial term ending April 30, 1992 and
will remain in effect from year to year thereafter, provided such continuance
is approved annually by a vote of the Trustees in the manner described above.
Prior to the Board's approval of amendments to the Plan to reflect the
multiple-class structure for the Fund, the most recent continuance of the
Plan for one year, until April 30, 1998, was approved by the Trustees of the
Fund, including a majority of the Independent 12b-1 Trustees, at a meeting
held on April 24, 1997. Prior to approving the continuation of the Plan, the
Trustees requested and received from the Distributor and reviewed all the
information which they deemed necessary to arrive at an informed
determination. In making their determination to continue the Plan, the
Trustees considered: (1) the Fund's experience under the Plan and whether
such experience indicates that the Plan is operating as anticipated; (2) the
benefits the Fund had obtained, was obtaining and would be likely to obtain
under the Plan; and (3) what services had been provided and were continuing
to be provided under the Plan to the Fund and its shareholders. Based upon
their review, the Trustees of the Fund, including each of the Independent
12b-1 Trustees, determined that continuation of the Plan would be in the best
interest of the Fund and would have a reasonable likelihood of continuing to
benefit the Fund and its shareholders. In the Trustees' quarterly review of
the Plan, they will consider its continued appropriateness and the level of
compensation provided therein.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of
the affected Class or Classes of the Fund, and all material amendments to the
Plan must also be approved by the Trustees in the manner described above. The
Plan may be terminated at any time, without payment of any penalty, by vote
of a majority of the Independent 12b-1 Trustees or by a vote of a majority of
the outstanding voting securities of the Fund (as defined in the Act) on not
more than thirty days' written notice to any other party to the Plan. The
Plan will automatically terminate in the event of its assignment (as defined
in the Act). So long as the Plan is in effect, the election and nomination of
Independent 12b-1 Trustees shall be committed to the discretion of the
Independent 12b-1 Trustees.
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<PAGE>
DETERMINATION OF NET ASSET VALUE
- -----------------------------------------------------------------------------
As stated in the Prospectus, short-term securities with remaining
maturities of sixty days or less at the time of purchase are valued at
amortized cost, unless the Trustees determine such does not reflect the
securities' market value, in which case these securities will be valued at
their fair value as determined by the Trustees. Other short-term debt
securities will be valued on a mark-to-market basis until such time as they
reach a remaining maturity of sixty days, whereupon they will be valued at
amortized cost using their value on the 61st day unless the Trustees
determine such does not reflect the securities' market value, in which case
these securities will be valued at their fair value as determined by the
Trustees. Listed options on debt securities are valued at the latest sale
price on the exchange on which they are listed unless no sales of such
options have taken place that day, in which case they will be valued at the
mean between their latest bid and asked prices. Unlisted options on debt
securities and all options on equity securities are valued at the mean
between their latest bid and asked prices. Futures are valued at the latest
sale price on the commodities exchange on which they trade unless the
Trustees determine such price does not reflect their market value, in which
case they will be valued at their fair value as determined by the Trustees.
All other securities and other assets are valued at their fair value as
determined in good faith under procedures established by and under the
supervision of the Trustees.
The net asset value per share for each Class of shares of the Fund is
determined at 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 the
New York Stock Exchange is open. The New York Stock Exchange currently
observes the following holidays: New Year's Day, Reverend Dr. Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
PURCHASE OF FUND SHARES
- -----------------------------------------------------------------------------
As discussed in the Prospectus, the Fund offers four Classes of shares as
follows:
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
Class A shares are sold to investors with an 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 in the
circumstances discussed in the Prospectus.
Right of Accumulation. As discussed in the Prospectus, investors may
combine the current value of shares purchased in separate transactions for
purposes of benefiting from the reduced sales charges available for purchases
of shares of the Fund totalling at least $25,000 in net asset value. For
example, if any person or entity who qualifies for this privilege holds Class
A shares of the Fund and/or other Dean Witter Funds that are multiple class
funds ("Dean Witter Multi-Class Funds") or shares of other Dean Witter Funds
sold with a front-end sales charge purchased at a price including a front-end
sales charge having a current value of $5,000, and purchases $20,000 of
additional shares of the Fund, the sales charge applicable to the $20,000
purchase would be 4.0% of the offering price.
The Distributor must be notified by the 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 selected broker-dealer or
shareholder when such an order is placed by mail. The reduced sales charge
will not be granted if: (a) such notification is not furnished at the time of
the order; or (b) a review of the records of the Distributor or Dean Witter
Trust FSB (the "Transfer Agent") fails to confirm the investor's represented
holdings.
Letter of Intent. As discussed in the Prospectus, reduced sales charges
are available to investors who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of Class A shares
of the Fund from the Distributor or from a single Selected Broker-Dealer.
A Letter of Intent permits an investor to establish a total investment
goal to be achieved by any number of purchases over a thirteen-month period.
Each purchase of Class A shares made during the period will receive the
reduced sales commission applicable to the amount represented by the goal, as
39
<PAGE>
if it were a single purchase. A number of shares equal in value to 5% of the
dollar amount of the Letter of Intent will be held in escrow by the Transfer
Agent, in the name of the shareholder. The initial purchase under a Letter of
Intent must be equal to at least 5% of the stated investment goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the investor is required to
pay the difference between the sales charge otherwise applicable to the
purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the
Distributor is authorized by the shareholder to liquidate a sufficient number
of his or her escrowed shares to obtain such difference.
If the goal is exceeded and purchases pass the next sales charge level,
the sales charge on the entire amount of the purchase that results in passing
that level and on subsequent purchases will be subject to further reduced
sales charges in the same manner as set forth above under "Right of
Accumulation," but there will be no retroactive reduction of sales charges on
previous purchases. For the purpose of determining whether the investor is
entitled to a further reduced sales charge applicable to purchases at or
above a sales charge level which exceeds the stated goal of a Letter of
Intent, the cumulative current net asset value of any shares owned by the
investor in any other Dean Witter Funds held by the shareholder which were
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) will be added to the cost or net asset value of
shares of the Fund owned by the investor. However, shares of "Exchange Funds"
(see "Shareholder Services--Exchange Privilege") and the purchase of shares
of other Dean Witter Funds will not be included in determining whether the
stated goal of the Letter of Intent has been reached.
At any time while a Letter of Intent is in effect, a shareholder may, by
written notice to the Distributor, increase the amount of the stated goal. In
that event, only shares purchased during the previous 90-day period and still
owned by the shareholder will be included in the new sales charge reduction.
The 5% escrow and minimum purchase requirements will be applicable to the new
stated goal. Investors electing to purchase shares of the Fund pursuant to a
Letter of Intent should carefully read such Letter of Intent.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Class B shares are sold without an initial sales charge but are subject to
a CDSC payable upon most redemptions within six years after purchase. As
stated in the Prospectus, a CDSC will be imposed on any redemption by an
investor if after such redemption the current value of the investor's Class B
shares of the Fund is less than the dollar amount of all payments by the
shareholder for the purchase of Class B shares during the preceding six years
(or, in the case of shares held by certain Qualified Retirement Plans, three
years). However, no CDSC will be imposed to the extent that the net asset
value of the shares redeemed does not exceed: (a) the current net asset value
of shares purchased more than six years (or, in the case of shares held by
certain Qualified Retirement Plans, three years) prior to the redemption,
plus (b) the current net asset value of shares purchased through reinvestment
of dividends or distributions of the Fund or another Dean Witter Fund (see
"Shareholder Services--Targeted Dividends"), plus (c) the current net asset
value of shares acquired in exchange for (i) shares of Dean Witter front-end
sales charge funds, or (ii) shares of other Dean Witter Funds for which
shares of front-end sales charge funds have been exchanged (see "Shareholder
Services--Exchange Privilege"), plus (d) increases in the net asset value of
the investor's shares above the total amount of payments for the purchase of
Fund shares made during the preceding six (three) years. The CDSC will be
paid to the Distributor.
In determining the applicability of the CDSC to each redemption, the
amount which represents an increase in the net asset value of the investor's
shares above the amount of the total payments for the purchase of shares
within the last six years (or, in the case of shares held by certain
Qualified Retirement Plans, three years) will be redeemed first. In the event
the redemption amount exceeds such increase in value, the next portion of the
amount redeemed will be the amount which represents the net asset value of
the investor's shares purchased more than six (three) years prior to the
redemption and/or
40
<PAGE>
shares purchased through reinvestment of dividends or distributions and/or
shares acquired in exchange for shares of Dean Witter front-end sales charge
funds, or for shares of other Dean Witter funds for which shares of front-end
sales charge funds have been exchanged. A portion of the amount redeemed
which exceeds an amount which represents both such increase in value and the
value of shares purchased more than six years (or, in the case of shares held
by certain Qualified Retirement Plans, three years) prior to the redemption
and/or shares purchased through reinvestment of dividends or distributions
and/or shares acquired in the above-described exchanges will be subject to a
CDSC.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Class B shares of the Fund until
the time of redemption of such shares. For purposes of determining the number
of years from the time of any payment for the purchase of shares, all
payments made during a month will be aggregated and deemed to have been made
on the last day of the month. The following table sets forth the rates of the
CDSC applicable to most Class B shares of the Fund:
<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>
The following table sets forth the rates of the CDSC applicable to Class B
shares of the Fund purchased on or after July 28, 1997 by Qualified
Retirement Plans for which DWT serves as Trustee or DWR's Retirement Plan
Services serves as recordkeeper pursuant to a written Recordkeeping Services
Agreement:
<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>
In determining the rate of the CDSC, it will be assumed that a redemption
is made of shares held by the investor for the longest period of time within
the applicable six-year or three-year period. This will result in any such
CDSC being imposed at the lowest possible rate. The CDSC will be imposed, in
accordance with the table shown above, on any redemptions within six years
(or, in the case of shares held by certain Qualified Retirement Plans, three
years) of purchase which are in excess of these amounts and which redemptions
do not qualify for waiver of the CDSC, as described in the Prospectus.
LEVEL LOAD ALTERNATIVE--CLASS C SHARES
Class C shares are sold without a sales charge but are subject to a CDSC
of 1.0% on most redemptions made within one year after purchase, except in
the circumstances discussed in the Prospectus.
NO LOAD ALTERNATIVE--CLASS D SHARES
Class D shares are offered without any sales charge on purchase or
redemption. Class D shares are offered only to those persons meeting the
qualifications set forth in the Prospectus.
41
<PAGE>
SHAREHOLDER SERVICES
- -----------------------------------------------------------------------------
Upon the purchase of shares of the Fund, a Shareholder Investment Account
is opened for the investor on the books of the Fund, maintained by the
Transfer Agent. This is an open account in which shares owned by the investor
are credited by the Transfer Agent in lieu of issuance of a share
certificate. If a share certficate is desired, it must be requested in
writing for each transaction. Certificates are issued only for full shares
and may be redeposited in the account at any time. There is no charge to the
investor for issuance of a certificate. Whenever a transaction takes place in
the Shareholder Investment Account, the shareholder will be mailed a
confirmation of the transaction from the Fund or from DWR or other selected
broker-dealer.
Automatic Investment of Dividends and Distributions. As stated in the
Prospectus, all income dividends and capital gains distributions are
automatically paid in full and fractional shares of the applicable Class of
the Fund, unless the shareholder requests that they be paid in cash. Each
purchase of shares of the Fund is made upon the condition that the Transfer
Agent is thereby automatically appointed as agent of the investor to receive
all dividends and capital gains distributions on shares owned by the
investor. Such dividends and distributions will be paid, at the net asset
value per share, in shares of the applicable Class of the Fund (or in cash if
the shareholder so requests) as of the close of business on the record date.
At any time an investor may request the Transfer Agent, in writing, to have
subsequent dividends and/or capital gains distributions paid to him or her in
cash rather than shares. To assure sufficient time to process the change,
such request should be received by the Transfer Agent at least five business
days prior to the record date of the dividend or distribution. In the case of
recently purchased shares for which registration instructions have not been
received on the record date, cash payments will be made to DWR or other
selected broker-dealer, and will be forwarded to the shareholder, upon the
receipt of proper instructions. It has been and remains the Fund's policy and
practice that, if checks for dividends or distributions paid in cash remain
uncashed, no interest will accrue on amounts represented by such uncashed
checks.
Targeted Dividends. (Service Mark) In states where it is legally
permissible, shareholders may also have all income dividends and capital
gains distributions automatically invested in shares of any Class of an
open-end Dean Witter Fund other than Dean Witter Diversified Income Trust or
in another Class of Dean Witter Diversified Income Trust. Such investment
will be made as described above for automatic investment in shares of the
applicable Class of the Fund, at the net asset value per share of the
selected Dean Witter Fund as of the close of business on the payment date of
the dividend or distribution and will begin to earn dividends, if any, in the
selected Dean Witter Fund the next business day. To participate in the
Targeted Dividends program, shareholders should contact their DWR or other
selected broker-dealer account executive or the Transfer Agent. Shareholders
of the Fund must be shareholders of the selected Class of the Dean Witter
Fund targeted to receive investments from dividends at the time they enter
the Targeted Dividends program. Investors should review the prospectus of the
targeted Dean Witter Fund before entering the program.
EasyInvest. (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 Transfer Agent for investment in shares of
the Fund. Shares purchased through EasyInvest will be added to the
shareholder's existing account at the net asset value calculated the same
business day the transfer of funds is effected (subject to any applicable
sales charges). Shares of the Dean Witter money market funds redeemed in
connection with EasyInvest are redeemed on the business day preceding the
transfer of funds. For further information or to subscribe to EasyInvest,
shareholders should contact their DWR or other selected broker-dealer account
executive or the Transfer Agent.
Investment of Dividends or Distributions Received in Cash. Any shareholder
who receives a cash payment representing a dividend or distribution may
invest such dividend or distribution in shares of the applicable Class at net
asset value, without the imposition of a CDSC upon redemption, by returning
the check or the proceeds to the Transfer Agent within thirty days after the
payment date. If the shareholder
42
<PAGE>
returns the proceeds of a dividend or distribution, such funds must be
accompanied by a signed statement indicating that the proceeds constitute a
dividend or distribution to be invested. Such investment will be made at the
net asset value per share next determined after receipt of the check or the
proceeds by the Transfer Agent.
Direct Investments through Transfer Agent. A shareholder may make
additional investments in any Class of shares of the Fund for which they
qualify at any time by sending a check in any amount, not less than $100,
payable to Dean Witter Diversified Income Trust, and indicating the selected
Class directly to the Fund's Transfer Agent. In the case of Class A shares,
after deduction of any applicable sales charge, the balance will be applied
to the purchase of Fund shares, and, in the case of shares of the other
Classes, the entire amount will be applied to the purchase of Fund shares at
the net asset value per share next determined after receipt of the check or
purchase payment by the Transfer Agent. The shares so purchased will be
credited to the investor's account.
Systematic Withdrawal Plan. As discussed in the Prospectus, a systematic
withdrawal plan ("Withdrawal Plan") is available for shareholders who own or
purchase shares of the Fund having a minimum value of $10,000 based upon the
then current net asset value. The Withdrawal Plan provides for monthly or
quarterly (March, June, September and December) checks in any dollar amount,
not less than $25, or in any whole percentage of the account balance, on an
annualized basis. Any applicable 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.
The Transfer Agent acts as agent for the shareholder in tendering to the
Fund for redemption sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment designated in the application. The
shares will be redeemed at their net asset value determined, at the
shareholder's option, on the tenth or twenty-fifth day (or next following
business day) of the relevant month or quarter and normally a check for the
proceeds will be mailed by the Transfer Agent or amounts credited to a
shareholder's DWR or other selected broker-dealer brokerage account, within
five business days after the date of redemption. The Withdrawal Plan may be
terminated at any time by the Fund.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continously exceed net
investment income and net capital gains, the shareholder's original
investment will be correspondingly reduced and ultimately exhausted.
Each withdrawal constitutes a redemption of shares and any gain or loss
realized must be recognized for federal income tax purposes. Although the
shareholder may make additional investments of $2,500 or more under the
Withdrawal Plan, withdrawals made concurrently with purchases of additional
shares may be inadvisable because of sales charges which may be applicable to
purchases or redemptions of shares (see "Purchase of Fund Shares").
Any shareholder who wishes to have payments under the Withdrawal Plan made
to a third party or sent to an address other than the one listed on the
account must send complete written instructions to the Transfer Agent to
enroll in the Withdrawal Plan. The shareholder's signature on such
instructions must be guaranteed by an eligible guarantor acceptable to the
Transfer Agent (shareholders should contact the Transfer Agent for a
determination as to whether a particular institution is such an eligible
guarantor). A shareholder may, at any time, change the amount and interval of
withdrawal payments through his or her account executive or by written
notification to the Transfer Agent. In addition, the party and/or the address
to which checks are mailed may be changed by written notification to the
Transfer Agent, with signature guarantees required in the manner described
above. The shareholder may also terminate the Withdrawal Plan at any time by
written notice to the Transfer Agent. In the event of such termination, the
account will be continued as a regular shareholder investment account. The
shareholder may also redeem all or part of the shares held in the Withdrawal
Plan account (see "Redemptions and Repurchases" in the Prospectus) at any
time.
EXCHANGE PRIVILEGE
As discussed in the Prospectus, the Fund makes available to its
shareholders an Exchange Privilege whereby shareholders of each Class of
shares of the Fund may exchange their shares for the
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shares of same Class of shares of any other Dean Witter Multi-Class Fund
without the imposition of an exchange fee. Shares may also be exchanged for
shares of any 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 foregoing nine non-CDSC funds are
hereinafter referred to as 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. ("Global
Short-Term"), which is a Dean Witter Fund offered with a CDSC. Exchanges may
be made after the shares of the Fund acquired by purchase (not by exchange or
dividend reinvestment) have been held for thirty days. There is no waiting
period for exchanges of shares acquired by exchange or dividend reinvestment.
An exchange will be treated for federal income tax purposes the same as a
repurchase or redemption of shares, on which the shareholder may realize a
capital gain or loss.
Any new account established through the Exchange Privilege will have the
same registration and cash dividend or dividend reinvestment plan as the
present account, unless the Transfer Agent receives written notification to
the contrary. For telephone exchanges, the exact registration of the existing
account and the account number must be provided.
Any shares held in certificate form cannot be exchanged but must be
forwarded to the Transfer Agent and deposited into the shareholder's account
before being eligible for exchange. (Certificates mailed in for deposit
should not be endorsed.)
As described below, and in the Prospectus under the caption "Purchase of
Fund Shares", a CDSC may be imposed upon a redemption, depending on a number
of factors, including the number of years from the time of purchase until the
time of redemption or exchange ("holding period"). When shares of a Dean
Witter Multi-Class Fund or Global Short-Term are exchanged for shares of an
Exchange Fund, the exchange is executed at no charge to the shareholder,
without the imposition of the CDSC at the time of the exchange. During the
period of time the shareholder remains in the Exchange Fund (calculated from
the last day of the month in which the Exchange Fund shares were acquired),
the holding period or "year since purchase payment made" is frozen. When
shares are redeemed out of the Exchange Fund, they will be subject to a CDSC
which would be based upon the period of time the shareholder held shares in a
Dean Witter Multi-Class Fund or Global Short-Term. However, in the case of
shares exchanged into an Exchange Fund on or after April 23, 1990, upon a
redemption of shares which results in a CDSC being imposed, a credit (not to
exceed the amount of the CDSC) will be given in an amount equal to the
Exchange Fund 12b-1 distribution fees incurred on or after that date which
are attributable to those shares. Shareholders acquiring shares of an
Exchange Fund pursuant to this exchange privilege may exchange those shares
back into a Dean Witter Multi-Class Fund or Global Short-Term from the
Exchange Fund, with no CDSC being imposed on such exchange. The holding
period previously frozen when shares were first exchanged for shares of the
Exchange Fund resumes on the last day of the month in which shares of a Dean
Witter Multi-Class Fund or Global Short-Term are reacquired. A CDSC is
imposed only upon an ultimate redemption, based upon the time (calculated as
described above) the shareholder was invested in a Dean Witter Multi-Class
Fund or in Global Short-Term. 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 a FSC Fund.
When shares initially purchased in a Dean Witter Multi-Class Fund or in
Global Short-Term are exchanged for shares of a Dean Witter Multi-Class Fund,
shares of Global Short-Term, shares of a FSC Fund or shares of an Exchange
Fund, the date of purchase of the shares of the fund exchanged into, for
purposes of the CDSC upon redemption, will be the last day of the month in
which the shares being exchanged were originally purchased. In allocating the
purchase payments between funds for purposes of the CDSC, the amount which
represents the current net asset value of shares at the time of the exchange
which were (i) purchased more than one, three or six years (depending on the
CDSC schedule applicable to the shares) prior to the exchange, (ii)
originally acquired through reinvestment of dividends or distributions and
(iii) acquired in exchange for shares of FSC Funds, or for shares of other
Dean Witter
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Funds for which shares of FSC Funds have been exchanged (all such shares
called "Free Shares"), will be exchanged first. After an exchange, all
dividends earned on shares in an Exchange Fund will be considered Free
Shares. If the exchanged amount exceeds the value of such Free Shares, an
exchange is made, on a block-by-block basis, of non-Free Shares held for the
longest period of time (except that, with respect to Class B shares, if
shares held for identical periods of time but subject to different CDSC
schedules are held in the same Exchange Privilege Account, the shares of that
block that are subject to a lower CDSC rate will be exchanged prior to the
shares of that block that are subject to a higher CDSC rate). Shares equal to
any appreciation in the value of non-Free Shares exchanged will be treated as
Free Shares, and the amount of the purchase payments for the non-Free Shares
of the fund exchanged into will be equal to the lesser of (a) the purchase
payments for, or (b) the current net asset value of, the exchanged non-Free
Shares. If an exchange between funds would result in exchange of only part of
a particular block of non-Free Shares, then shares equal to any appreciation
in the value of the block (up to the amount of the exchange) will be treated
as Free Shares and exchanged first, and the purchase payment for that block
will be allocated on a pro rata basis between the non-Free Shares of that
block to be retained and the non-Free Shares to be exchanged. The prorated
amount of such purchase payment attributable to the retained non-Free Shares
will remain as the purchase payment for such shares, and the amount of
purchase payment for the exchanged non-Free Shares will be equal to the
lesser of (a) the prorated amount of the purchase payment for, or (b) the
current net asset value of, those exchanged non-Free Shares. Based upon the
procedures described in the CDSC fund Prospectus under the caption "Purchase
of Fund Shares", any applicable CDSC will be imposed upon the ultimate
redemption of shares of any fund, regardless of the number of exchanges since
those shares were originally purchased.
With respect to the repurchase of shares of the Fund, the application of
proceeds to the purchase of new shares in the Fund or any other of the funds
and the general administration of the Exchange Privilege, the Transfer Agent
acts as agent for the Distributor and for the shareholder's selected
broker-dealer, if any, in the performance of such functions. With respect to
exchanges, redemptions or repurchases, the Transfer Agent shall be liable for
its own negligence and not for the default or negligence of its
correspondents or for losses in transit. The Fund shall not be liable for any
default or negligence of the Transfer Agent, the Distributor or any selected
broker-dealer.
The Distributor and any selected broker-dealer have authorized and
appointed the Transfer Agent to act as their agent in connection with the
application of proceeds of any redemption of Fund shares to the purchase of
the shares of any other fund and the general administration of the Exchange
Privilege. No commission or discounts will be paid to the Distributor or any
selected broker-dealer for any transactions pursuant to this Exchange
Privilege.
Exchanges are subject to the minimum investment requirement and any other
conditions imposed by each fund. (The minimum initial investment for the
Exchange Privilege account of each Class is $5,000 for Dean Witter Liquid
Asset Fund Inc., Dean Witter Tax-Free Daily Income Trust, Dean Witter
California Tax-Free Daily Income Trust, and Dean Witter New York Municipal
Money Market Trust, although those funds may, at their discretion, accept
initial investments of as low as $1,000. The minimum initial investment for
the Exchange Privilege account of each Class is $10,000 for Dean Witter
Short-Term U.S. Treasury Trust although that Fund, in its discretion, may
accept initial purchases of as low as $5,000. The minimum initial investment
for the Exchange Privilege account of each Class is $5,000 for Dean Witter
Special Value Fund. The minimum initial investment for the Exchange Privilege
account of each Class of all other Dean Witter Funds for which the Exchange
Privilege is available is $1,000.) Upon exchange into an Exchange Fund, the
shares of that fund will be held in a special Exchange Privilege Account
separately from accounts of those shareholders who have acquired their shares
directly from that fund. As a result, certain services normally available to
shareholders of those funds, including the check writing feature, will not be
available for funds held in that account.
The Fund and each of the other Dean Witter Funds may limit the number of
times this Exchange Privilege may be exercised by any investor within a
specified period of time. Also, the Exchange Privilege may be terminated or
revised at any time by the Fund and/or any of the Dean Witter Funds for which
shares of the Fund have been exchanged, upon such notice as may be required
by applicable regulatory
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agencies (presently sixty days' prior written notice for termination or
material revision), provided that six months' prior written notice of
termination will be given to the shareholders who hold shares of the Exchange
Funds pursuant to this Exchange Privilege, and provided further that the
Exchange Privilege may be terminated or materially revised at times (a) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (b) when trading on that Exchange is restricted, (c) when an
emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, (d) during any
other period when the Securities and Exchange Commission by order so permits
(provided that applicable rules and regulations of the Securities and
Exchange Commission shall govern as to whether the conditions prescribed in
(b) or (c) exist), or (e), if the Fund would be unable to invest amounts
effectively in accordance with its investment objective(s), policies and
restrictions.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain a copy and examine it carefully
before investing. An exchange will be treated for federal income tax purposes
the same as a repurchase or redemption of shares, on which the shareholder
may realize a capital gain or loss. However, the ability to deduct capital
losses on an exchange may be limited in situations where there is an exchange
of shares within ninety days after the shares are purchased. The Exchange
Privilege is only available in states where an exchange may legally be made.
For further information regarding the Exchange Privilege, shareholders
should contact their DWR or other selected broker-dealer account executive or
the Transfer Agent.
REDEMPTIONS AND REPURCHASES
- -----------------------------------------------------------------------------
Redemption. As stated in the Prospectus, shares of each Class of the Fund
can be redeemed for cash at any time at the net asset value per share next
determined; however, such redemption proceeds will be reduced by the amount
of any applicable CDSC. If shares are held in a shareholder's account without
a share certificate, a written request for redemption to the Fund's Transfer
Agent at P.O. Box 983, Jersey City, NJ 07303 is required. If certificates are
held by the shareholder, the shares may be redeemed by surrendering the
certificates with a written request for redemption. The share certificate, or
an accompanying stock power, and the request for redemption, must be signed
by the shareholder or shareholders exactly as the shares are registered. Each
request for redemption, whether or not accompanied by a share certificate,
must be sent to the Fund's Transfer Agent, which will redeem the shares at
their net asset value next computed (see "Purchase of Fund Shares" in the
Prospectus) after it receives the request, and certificate, if any, in good
order. The term good order means that the share certificate, if any, and
request for redemption are properly signed, accompanied by any documentation
required by the Transfer Agent, and bear signature guarantees when required
by the Fund or the Transfer Agent. Any redemption request received after such
computation will be redeemed at the next determined net asset value.
Whether certificates are held by the shareholder or shares are held in a
shareholder's account, if the proceeds are to be paid to any person other
than the record owner, or if the proceeds are to be paid to a corporation
(other than the Distributor or a selected broker-dealer for the account of
the shareholder), partnership, trust or fiduciary, or sent to the shareholder
at an address other than the registered address, signatures must be
guaranteed by an eligible guarantor acceptable to the Transfer Agent
(shareholders should contact the Transfer Agent for a determination as to
whether a particular institution is such an eligible guarantor). A stock
power may be obtained from any dealer or commercial bank. The Fund may change
the signature guarantee requirements from time to time upon notice to
shareholders, which may be by means of a new prospectus.
Repurchase. As stated in the Prospectus, 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 after
such purchase order is received by DWR or other selected broker-dealer
reduced by any applicable CDSC.
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Payment for Shares Redeemed or Repurchased. As discussed in the
Prospectus, payment for shares of any Class presented for repurchase or
redemption will be made by check within seven days after receipt by the
Transfer Agent of the certificate and/or written request in good order. Such
payment may be postponed or the right of redemption suspended at times (a)
when the New York Stock Exchange is closed for other than customary weekends
and holidays, (b) when trading on that Exchange is restricted, (c) when an
emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or (d) during
any other period when the Securities and Exchange Commission by order so
permits; provided that applicable rules and regulations of the Securities and
Exchange Commission shall govern as to whether the conditions prescribed in
(b) or (c) exist. If the shares to be redeemed have recently been purchased
by check (including a certified or bank cashier's check), payment of
redemption proceeds may be delayed for the minimum time needed to verify that
the check used for investment has been honored (not more than fifteen days
from the time of receipt of the check by the Transfer Agent). It has been and
remains the Fund's policy and practice that, if checks for redemption
proceeds remain uncashed, no interest will accrue on amounts represented by
such uncashed checks. 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.
Transfers of Shares. In the event a shareholder requests a transfer of
shares to a new registration, such shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the CDSC or free of such charge (and with regard to the
length of time shares subject to the charge have been held), any transfer
involving less than all of the shares in an account will be made on a pro
rata basis (that is, by transferring shares in the same proportion that the
transferred shares bear to the total shares in the account immediately prior
to the transfer). The transferred shares will continue to be subject to any
applicable CDSC as if they had not been so transferred.
Reinstatement Privilege. As described in the Prospectus, a shareholder who
has had his or her shares redeemed or repurchased and has not previously
exercised this reinstatement privilege may, within 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 at net
asset value (without sales charge) next determined after a reinstatement
request, together with the proceeds, is received by the Transfer Agent.
Exercise of the reinstatement privilege will not affect the federal income
tax treatment of any gain or loss realized upon the redemption or repurchase,
except that if the redemption or repurchase resulted in a loss and
reinstatement is made in shares of the Fund, some or all of the loss,
depending on the amount reinstated, will not be allowed as a deduction for
federal income tax purposes but will be applied to adjust the cost basis of
the shares acquired upon reinstatement.
DIVIDENDS, DISTRIBUTIONS AND TAXES
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As discussed in the Prospectus, the Fund will determine either to
distribute or to retain all or part of any net long-term capital gains in any
year for reinvestment. If any such gains are retained, the Fund will pay
federal income tax thereon, and will notify shareholders that, following an
election by the Fund, the shareholders will be required to include such
undistributed gains in determining their taxable income and may claim their
share of the tax paid by the Fund as a credit against their individual
federal income tax.
Gains or losses on sales of securities by the Fund will generally be
long-term capital gains or losses if the securities have been held by the
Fund for more than twelve months. Gains or losses on the sale of securities
held for twelve months or less will be generally short-term gains or losses.
At October 31, 1997, the Fund had a net capital loss carryover of
approximately $16,314,000 of which $3,024,000 will be available through
October 31, 2002, $3,677,000 will be available through October 31, 2003,
$2,482,000 will be available through 2004 and $7,131,000 will be available
through 2005 to offset future capital gains to the extent provided by
regulations. To the extent that these carryover losses are used to offset
future capital gains, it is probable that the gains so offset will not be
distributed to shareholders.
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<PAGE>
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder
has held the Fund's shares and regardless of whether the distribution is
received in additional shares or in cash. Capital gains distributions are not
eligible for the dividends received deduction. It is expected that the
Treasury will issue regulations or other guidance to permit shareholders to
take into account their proportionate share of the Fund's capital gains
distributions that will be subject to a reduced rate under the Taxpayer
Relief Act of 1997. The Taxpayer Relief Act reduces the maximum tax on
long-term capital gains from 28% to 20%; however, it also lengthens the
required holding period to obtain the lower rate from more than 12 months to
more than 18 months. The lower rates do not apply to collectibles and certain
other assets. Additionally, the maximum capital gain rate for assets that are
held more than five years and that are acquired after December 31, 2000 is
18%.
The Fund has qualified and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code (the
"Code"). If so qualified, the Fund will not be subject to federal income tax
on its net investment income and capital gains, if any, realized during any
fiscal year in which it distributes such income and capital gains to its
shareholders. In addition, the Fund intends to distribute to its shareholders
each calendar year a sufficient amount of ordinary income and capital gains
to avoid the imposition of a 4% excise tax. Shareholders will normally have
to pay federal income taxes, and any state and/or local income taxes, on the
dividends and distributions they receive from the Fund. Such dividends and
distributions, to the extent that they are derived from net investment income
or short-term capital gains, are taxable to the shareholder as ordinary
income regardless of whether the shareholder receives such payments in
additional shares or in cash. Any dividends declared in the last quarter of
any calendar year which are paid in the following year prior to February 1
will be deemed received by the shareholder in the prior year.
Any dividend or capital gains distribution received by a shareholder from
any investment company will have the effect of reducing the net asset value
of the shareholder's stock in that company by the exact amount of the
dividend or capital gains distribution. Furthermore, capital gains
distributions and dividends are subject to federal income taxes. If the net
asset value of the shares should be reduced below a shareholder's cost as a
result of the payment of dividends or the distribution of realized net
long-term capital gains, such payment or distribution would be in part a
return of the shareholder's investment to the extent of such reduction below
the shareholder's cost, but nonetheless would be fully taxable. Therefore, an
investor should consider the tax implications of purchasing Fund shares
immediately prior to a dividend or distribution record date.
Any loss realized by shareholders upon a redemption of shares within six
months of the date of their purchase will be treated as a long-term capital
loss to the extent of any distributions of net long-term capital gains during
the six-month period.
Dividends, interest and capital gains received by the Fund may give rise
to withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. Investors may be entitled to claim United States foreign tax credits
or deductions with respect to such taxes, subject to certain provisions and
limitations contained in the Code. If more than 50% of the Fund's total
assets at the close of its fiscal year consist of securities of foreign
corporations, the Fund would be eligible and would determine whether or not
to file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their respective pro
rata portions of such withholding taxes in their United States income tax
returns as gross income, treat such respective pro rata portions as taxes
paid by them, and deduct such respective pro rata portions in computing their
taxable income or, alternatively, use them as foreign tax credits against
their United States income taxes. If the Fund makes such election, it will
report annually to its shareholders the amount per share of such withholding.
Special Rules for Certain Foreign Currency Transactions. In general, gains
from foreign currencies and from foreign currency options, foreign currency
futures and forward foreign exchange contracts relating to investments in
stock, securities or foreign currencies are currently considered to be
qualifying income for purposes of determining whether the Fund qualifies as a
regulated investment company. It is
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<PAGE>
currently unclear, however, who will be treated as the issuer of certain
foreign currency instruments or how foreign currency options, futures, or
forward foreign currency contracts will be valued for purposes of the
regulated investment company diversification requirements applicable to the
Fund.
Under Code Section 988, special rules are provided for certain
transactions in a foreign currency other than the taxpayer's functional
currency (i.e., unless certain special rules apply, currencies other than the
U.S. dollar). In general, foreign currency gains or losses from forward
contracts, from futures contracts, and from options will be treated as
ordinary income or loss under Code Section 988. Also, certain foreign
exchange gains or losses derived with respect to foreign fixed-income
securities are also subject to Section 988 treatment. In general, therefore,
Code Section 988 gains or losses will increase or decrease the amount of the
Fund's investment company taxable income available to be distributed to
shareholders as ordinary income, rather than increasing or decreasing the
amount of the Fund's net capital gain. Additionally, if Code Section 988
losses exceed other investment company taxable income during a taxable year,
the Fund would not be able to make any ordinary dividend distributions.
After the end of the calendar year, shareholders will be sent full
information on their dividends and capital gains distributions for tax
purposes, including information as to the portion taxable as ordinary income,
the portion taxable as long-term capital gains and the portion eligible for
the dividends received deduction. To avoid being subject to a 31% federal
backup withholding tax on taxable dividends, capital gains distributions and
the proceeds of redemptions and repurchases, shareholders' taxpayer
identification numbers must be furnished and certified as to their accuracy.
Shareholders are urged to consult their attorneys or tax advisers
regarding specific questions as to federal, state or local taxes.
PERFORMANCE INFORMATION
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As discussed in the Prospectus, from time to time the Fund may quote its
"yield" and/or its "total return" in advertisements and sales literature.
These figures are computed separately for Class A, Class B, Class C and Class
D shares. Yield is calculated for any 30-day period as follows: the amount of
interest income for each security in the Fund's portfolio is determined in
accordance with regulatory requirements; the total for the entire portfolio
constitutes the Fund's gross income for the period. Expenses accrued during
the period are subtracted to arrive at "net investment income" of each Class.
The resulting amount is divided by the product of the maximum offering price
per share on the last day of the period multiplied by the average number of
shares of the applicable Class outstanding during the period that were
entitled to dividends. This amount is added to 1 and raised to the sixth
power. 1 is then subtracted from the result and the difference is multiplied
by 2 to arrive at the annualized yield. For the 30-day period ended October
31, 1997, the yield, calculated pursuant to the formula described above, was
approximately 7.53%, 7.29%, 7.27% and 8.03% for Class A, Class B, Class C and
Class D, respectively.
The Fund's "average annual total return" represents an annualization of
the Fund's total return over a particular period and is computed by finding
the annual percentage rate which will result in the ending redeemable value
of a hypothetical $1,000 investment made at the beginning of a one, five or
ten year period, or for the period from the date of commencement of the
Fund's operations, if shorter than any of the foregoing. The ending
redeemable value is reduced by any CDSC at the end of the one, five, or ten
year or other period. For the purpose of this calculation, it is assumed that
all dividends and distributions are reinvested. The formula for computing the
average annual total return involves a percentage obtained by dividing the
ending redeemable value by the amount of the initial investment, taking a
root of the quotient (where the root is equivalent to the number of years in
the period) and subtracting 1 from the result. The average annual total
return of Class B for the fiscal year ended October 31, 1997, the five year
period ended October 31, 1997 and for the period April 9, 1992 (commencement
of operations) through October 31, 1997 was 1.62%, 6.83% and 6.96%,
respectively.
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For periods of less than one year, the Fund quotes its total return on a
non-annualized basis. Accordingly, the Fund may compute its aggregate total
return for each of Class A, Class C and Class D for specified periods by
determining the aggregate percentage rate which will result in the ending
value of a hypothetical $1,000 investment made at the beginning of the
period. For the purpose of this calculation, it is assumed that all dividends
and distributions are reinvested. The formula for computing aggregate total
return involves a percentage obtained by dividing the ending value by the
initial $1,000 investment and subtracting 1 from the result. The ending
redeemable value is reduced by any CDSC at the end of the period. Based on
the foregoing calculations, the total returns for the period July 28, 1997
through October 31, 1997 were -1.62%, 1.52% and 2.69% for Class A, Class C
and Class D, respectively.
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,
year-by-year or other types or total return figures. Such calculations may or
may not reflect the imposition of the maximum front-end sales charge for
Class A or the deduction of the CDSC for each of Class B and Class C which,
if reflected, would reduce the performance quoted. For example, the average
annual total return of the Fund may be calculated in the manner described
above, but without deduction for any applicable sales charge. Based on this
calculation, the average annual total return of Class B for the fiscal year
ended October 31, 1997, the five year period ended October 31, 1997 and for
the period April 9, 1992 (commencement of operations) through October 31,
1997 was 6.46%, 7.12% and 7.08%, respectively.
In addition, the Fund may compute its aggregate total return for each
Class for specified periods by determining the aggregate percentage rate
which will result in the ending value of a hypothetical $1,000 investment
made at the beginning of the period. For the purpose of this calculation, it
is assumed that all dividends and distributions are reinvested. The formula
for computing aggregate total return involves a percentage obtained by
dividing the ending value (without reduction for any sales charge) by the
initial $1,000 investment and subtracting 1 from the result. Based upon the
foregoing calculations, the total returns of Class B for the fiscal year
ended October 31, 1997, the five year period ended October 31, 1997 and for
the period April 9, 1992 through October 31, 1997 was 6.46%, 41.03%, and
46.29%, respectively. Based on the foregoing calculations, the total returns
for Class A, Class C and Class D for the period July 28 through October 31,
1997 were 2.74%, 2.52% and 2.69%, respectively.
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 by adding
1 to the Fund's aggregate total return to date (expressed as a decimal and
without taking into account the effect of any applicable CDSC) and
multiplying by $9,575, $48,250 and $97,250 in the case of Class A
(investments of $10,000, $50,000 and $100,000 adjusted for the initial sales
charge) or by $10,000, $50,000, and $100,000 in the case of each of Class B,
Class C and Class D, as the case may be. Investments of $10,000, $50,000 or
$100,000 in each Class at inception of the Class would have grown (declined)
to the following amounts at October 31, 1997:
<TABLE>
<CAPTION>
INVESTMENT AT INCEPTION OF:
INCEPTION ---------------------------------------
CLASS DATE: $10,000 $50,000 $100,000
- ------- --------- --------- --------- ----------
<S> <C> <C> <C> <C>
Class A 07/28/97 $ 9,838 $49,572 $ 99,915
Class B 04/09/92 14,629 73,145 146,290
Class C 07/28/97 10,252 51,260 102,520
Class D 07/28/97 10,269 51,345 102,690
</TABLE>
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent
organizations.
50
<PAGE>
DESCRIPTION OF SHARES OF THE FUND
- -----------------------------------------------------------------------------
The shareholders of the Fund are entitled to a full vote for each full
share held. All of the Trustees have been elected by the shareholders of the
Fund most recently at a Special Meeting of Shareholders held on May 21, 1997.
On that date, Wayne E. Hedien was also elected as a Trustee of the Fund, with
his term to commence on September 1, 1997. The Trustees themselves have the
power to alter the number and the terms of office of the Trustees, and they
may at any time lengthen their own terms or make their terms of unlimited
duration and appoint their own successors, provided that always at least a
majority of the Trustees has been elected by the shareholders of the Fund.
Under certain circumstances the Trustees may be removed by action of the
Trustees. The shareholders also have the right under certain circumstances to
remove the Trustees in accordance with the provisions of Section 16(c) of the
Investment Company Act of 1940. The voting rights of shareholders are not
cumulative, so that holders of more than 50 percent of the shares voting can,
if they choose, elect all Trustees being selected, while the holders of the
remaining shares would be unable to elect any Trustees.
The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios) and additional classes of shares
within any series. The Trustees have not presently authorized any such
additional series or classes of shares other than as set forth in the
Prospectus.
The Declaration of Trust further provides that no Trustee, officer,
employee or agent of the Fund is liable to the Fund or to a shareholder, nor
is any Trustee, officer, employee or agent liable to any third persons in
connection with the affairs of the Fund, except as such liability may arise
from his or its own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his duties. It also provides that all third persons
shall look solely to the Fund's property for satisfaction of claims arising
in connection with the affairs of the Fund. With the exceptions stated, the
Declaration of Trust provides that a Trustee, officer, employee or agent is
entitled to be indemnified against all liability in connection with the
affairs of the Fund.
The Fund is authorized to issue an unlimited number of shares of
beneficial interest. The Fund shall be of unlimited duration subject to the
provisions in the Declaration of Trust concerning termination by action of
the shareholders.
CUSTODIAN AND TRANSFER AGENT
- -----------------------------------------------------------------------------
The Bank of New York, 90 Washington Street, New York, New York 10286 is
the Custodian of the Fund's assets as described in groupings 2 and 3 in the
Prospectus. The Chase Manhattan Bank, One Chase Plaza, New York, New York
10005 is the Custodian of the Fund's assets as described in grouping 1 in the
Prospectus. As Custodian, The Chase Manhattan Bank has contracted with
various foreign banks and depositaries to hold portfolio securities of
non-U.S. issuers on behalf of the Fund. Any Fund cash balances with either
Custodian in excess of $100,000 are unprotected by Federal deposit insurance.
Such amounts may, at times, be substantial.
Dean Witter Trust FSB, Harborside Financial Center, Plaza Two, Jersey
City, New Jersey 07311 is the Transfer Agent of the Trust's shares and
Dividend Disbursing Agent for payment of dividends and distributions on Trust
shares and Agent for shareholders under various investment plans described
herein. Dean Witter Trust FSB is an affiliate of Dean Witter InterCapital
Inc., the Fund's Investment Manager, and Dean Witter Distributors Inc., the
Fund's Distributor. As Transfer Agent and Dividend Disbursing Agent, Dean
Witter Trust FSB's responsibilities include maintaining shareholder accounts,
disbursing cash dividends and reinvesting dividends, processing account
registration changes, handling purchase and redemption transactions, mailing
prospectuses and reports, mailing and tabulating proxies, processing share
certificate transactions, and maintaining shareholder records and lists. For
these services Dean Witter Trust FSB receives a per shareholder account fee
from the Fund.
51
<PAGE>
INDEPENDENT ACCOUNTANTS
- -----------------------------------------------------------------------------
Price Waterhouse LLP serves as the independent accountants of the Fund.
The independent accountants are responsible for auditing the annual financial
statements of the Fund.
REPORTS TO SHAREHOLDERS
- -----------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports
showing the Fund's portfolio and other information. An annual report,
containing financial statements audited by independent accountants, will be
sent to shareholders each year.
The Fund's fiscal year ends on October 31. The financial statements of the
Fund must be audited at least once a year by independent accountants whose
selection is made annually by the Fund's Board of Trustees.
LEGAL COUNSEL
- -----------------------------------------------------------------------------
Barry Fink, Esq., who is an officer and the General Counsel of the
Investment Manager, is an officer and the General Counsel of the Fund.
EXPERTS
- -----------------------------------------------------------------------------
The Financial Statements of the Fund for the fiscal year ended October 31,
1997 included in this Statement of Additional Information and incorporated by
reference in the Prospectus have been so included and incorporated in
reliance on the report of Price Waterhouse LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
REGISTRATION STATEMENT
- -----------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the Information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
52
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- --------- ----------- --------------
<S> <C> <C> <C> <C>
GOVERNMENT & CORPORATE BONDS (90.3%)
DENMARK (a)(3.2%)
Government Obligation
DKr 183,277 Denmark Treasury Note .......................................... 9.00% 11/15/98 $29,175,789
--------------
FRANCE (a)(0.4%)
Government Obligation
FRF 19,830 France Treasury Note ............................................ 7.75 04/12/00 3,682,665
--------------
ITALY (a)(1.4%)
Government Obligations
ITL 19,070M Italy Treasury Bond ............................................ 10.50 07/15/98 11,581,884
1,725M Italy Treasury Bond ............................................ 10.50 04/01/00 1,125,922
--------------
TOTAL ITALY .......................................................................... 12,707,806
--------------
NETHERLANDS (a)(0.0%)
Banks
ITL 160,000 Rabobank Nederland .............................................. 11.00 02/01/98 95,355
--------------
NEW ZEALAND (a)(1.2%)
Government Obligations
NZ$ 2,220 New Zealand Treasury Bond ....................................... 8.00 07/15/98 1,385,321
16,308 New Zealand Treasury Bond ...................................... 6.50 02/15/00 10,066,868
--------------
TOTAL NEW ZEALAND .................................................................... 11,452,189
--------------
SPAIN (a)(2.3%)
Government Obligations
ESP 2,009M Spain Treasury Bond ............................................ 9.90 10/31/98 14,425,039
990M Spain Treasury Bond ............................................ 9.40 04/30/99 7,216,429
--------------
TOTAL SPAIN .......................................................................... 21,641,468
--------------
SWEDEN (a)(2.8%)
Government Obligation
SEK 180,800 Sweden Treasury Bond ........................................... 11.00 01/21/99 25,721,743
--------------
UNITED KINGDOM (a)(1.9%)
Government Obligations
pounds 7,435 United Kingdom Treasury Bond ................................... 15.50 09/30/98 13,336,678
sterling 2,270 United Kingdom Treasury Bond (Conv.) ............................ 9.00 03/03/00 3,962,673
--------------
TOTAL UNITED KINGDOM ................................................................. 17,299,351
--------------
SEE NOTES TO FINANCIAL STATEMENTS
53
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- --------- ----------- --------------
UNITED STATES (77.1%)
Aerospace (0.3%)
$3,000 Sabreliner Corp. (Series B) ..................................... 12.50 % 04/15/03 $3,150,000
--------------
Automotive (0.4%)
3,000 Toyota Motor Credit Corp. ...................................... 15.00 09/25/98 3,241,080
--------------
Broadcast Media (2.6%)
45 Australis Media Ltd. ........................................... 15.75 ++ 05/15/03 34,180
5,500 Australis Media Ltd. (Units)++ .................................. 15.75 ++ 05/15/03 4,180,000
3,200 Digital Television Services -144A* .............................. 12.50 08/01/07 3,440,000
3,100 Echostar DBS Corp. -144A* ....................................... 12.50 07/01/02 3,286,000
3,000 Paxson Communications Corp. ..................................... 11.625 10/01/02 3,240,000
4,000 Spanish Broadcasting System, Inc. ............................... 12.50 06/15/02 4,620,000
8,700 TCI Satellite Entertainment Corp. -144A* ........................ 12.25 ++ 02/15/07 5,568,000
--------------
24,368,180
--------------
Business Services (0.8%)
5,000 Anacomp, Inc. (Series B) ........................................ 10.875 04/01/04 5,150,000
2,000 Xerox Credit Corp. .............................................. 15.00 06/26/98 2,119,760
--------------
7,269,760
--------------
Cable & Telecommunications (10.6%)
4,000 Adelphia Communications Corp.
-144A* ......................................................... 9.25 10/01/02 3,980,000
5,675 Advanced Radio Telecommunication ................................ 14.00 02/15/07 5,221,000
4,000 American Communications Services, Inc. -144A* ................... 13.75 07/15/07 4,600,000
6,500 Clearnet Communications Inc. .................................... 14.75 ++ 12/15/05 4,810,000
3,850 FrontierVision LP/Capital ....................................... 11.00 10/15/06 4,158,000
7,000 Hyperion Telecommunication, Inc. (Series B) ..................... 13.00 ++ 04/15/03 4,795,000
28,500 In-Flight Phone Corp. (Series B)(b) ............................ 14.00 ++ 05/15/02 3,135,000
3,000 IXC Communications, Inc. (Series B) ............................. 12.50 10/01/05 3,397,500
7,300 McCaw International Ltd. ........................................ 13.00 ++ 04/15/07 4,307,000
3,000 Metronet Communications (Units)++ -144A* ........................ 12.00 08/15/07 3,337,500
8,500 Nextel Communications -144A* .................................... 10.65 ++ 09/15/07 4,823,750
3,350 Nextlink Communications LLC ..................................... 12.50 04/15/06 3,777,125
4,000 Orbcomm Global LP/Capital ...................................... 14.00 08/15/04 4,220,000
4,000 Paging Network, Inc. ............................................ 10.125 08/01/07 4,090,000
6,000 Peoples Telephone Co., Inc. ..................................... 12.25 07/15/02 6,360,000
10,000 Price Communications Cellular Holdings -144A* ................... 13.50 ++ 08/01/07 5,700,000
SEE NOTES TO FINANCIAL STATEMENTS
54
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- --------- ----------- --------------
$3,500 Primus Telecommunications Group (Units)++ ....................... 11.75 % 08/01/04 $3,815,000
5,000 Source Media Inc. -144A* ........................................ 12.00 11/01/04 5,000,000
4,000 Transtel Pass-Thru Trust -144A* ................................. 12.50 11/01/07 3,800,000
4,000 UIH Australia/Pacific (Series B) ................................ 14.00 ++ 05/15/06 2,820,000
4,000 USA Mobile Communications Holdings, Inc. ....................... 14.00 11/01/04 4,500,000
5,000 Winstar Communications ......................................... 14.00 ++ 10/15/05 3,650,000
3,250 Winstar Equipment Corp. ......................................... 12.50 03/15/04 3,542,500
--------------
97,839,375
--------------
Computer Equipment (0.3%)
2,500 IBM Credit Corp. ................................................ 15.00 03/04/98 2,576,100
--------------
Consumer Products (1.1%)
2,500 J.B. Williams Holdings, Inc. .................................... 12.00 03/01/04 2,575,000
3,500 North Atlantic Trading -144A* ................................... 11.00 06/15/04 3,570,000
4,000 Renaissance Cosmetics, Inc. ..................................... 11.75 02/15/04 3,950,000
--------------
10,095,000
--------------
Electrical & Alarm Systems (0.4%)
4,980 Mosler, Inc. ................................................... 11.00 04/15/03 3,436,200
--------------
Entertainment/Gaming & Lodging (4.2%)
3,800 101 Main Street Ltd. -144A* ..................................... 13.00 08/15/00 3,857,000
3,250 Argosy Gaming Co. ............................................... 13.25 06/01/04 3,315,000
2,700 Aztar Corp. .................................................... 13.75 10/01/04 3,105,000
5,400 Fitzgeralds Gaming Corp. (Units)++ .............................. 13.00 12/31/02 5,346,000
4,000 Lady Luck Gaming Finance Corp. .................................. 11.875 03/01/01 4,050,000
5,670 Motels of America, Inc. (Series B) .............................. 12.00 04/15/04 5,443,200
3,000 Players International, Inc. ..................................... 10.875 04/15/05 3,210,000
5,000 PRT Funding Corp. ............................................... 11.625 04/15/04 4,100,000
4,800 Stuart Entertainment, Inc. (Series B) ........................... 12.50 11/15/04 4,032,000
3,000 Trump Castle Funding, Inc. ...................................... 11.75 11/15/03 2,835,000
--------------
39,293,200
--------------
Finance (1.4%)
3,500 Cityscape Financial Corp. (Series A) ............................ 12.75 06/01/04 2,450,000
3,000 Household Finance Corp. ......................................... 15.00 09/25/98 3,243,810
3,750 Olympic Financial Ltd. (Units)++ ................................ 11.50 03/15/07 3,778,125
3,000 Wilshire Financial Services -144A* .............................. 13.00 08/15/04 3,082,500
--------------
12,554,435
--------------
SEE NOTES TO FINANCIAL STATEMENTS
55
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- --------- ----------- --------------
Foods & Beverages (1.8%)
$4,050 Envirodyne Industries, Inc. ..................................... 10.25 % 12/01/01 $4,009,500
3,000 Pepsico Inc. .................................................... 15.00 08/06/98 3,210,090
4,500 Specialty Foods Acquisition Corp. (Series B) .................... 11.25 08/15/03 4,286,250
12,125 Specialty Foods Acquisition Corp. (Series B) .................... 13.00 ++ 08/15/05 5,153,125
--------------
16,658,965
--------------
HealthCare (1.5%)
2,800 Imagyn Medical Technologies -144A* .............................. 12.50 04/01/04 2,716,000
4,000 Physician Resource Group -144A* (Conv) .......................... 6.00 12/01/01 3,457,960
4,000 Unilab Corp. .................................................... 11.00 04/01/06 4,100,000
4,350 Unison Healthcare Corp. -144A* .................................. 12.25 11/01/06 3,654,000
--------------
13,927,960
--------------
Manufacturing (0.4%)
3,011 International Semi-Tech Microelectronics ........................ 11.50 ++ 08/15/03 1,400,115
2,500 John Deere Capital Corp. ........................................ 15.00 02/24/98 2,570,100
--------------
3,970,215
--------------
Manufacturing -Diversified (0.9%)
5,000 Interlake Corp. ................................................. 12.00 11/15/01 5,525,000
2,800 J.B. Poindexter & Co., Inc. ..................................... 12.50 05/15/04 2,856,000
--------------
8,381,000
--------------
Metals & Mining (1.3%)
4,700 Gulf States Steel -Alabama (Series B) ........................... 13.50 04/15/03 4,829,250
4,750 Murrin Murrin Holdings -144A* ................................... 9.375 08/31/07 4,856,875
2,706 Weirton Steel Corp. ............................................. 11.50 03/01/98 2,735,793
--------------
12,421,918
--------------
Publishing (0.3%)
2,500 United States Banknote Corp. (Series B) ......................... 10.375 06/01/02 2,606,250
--------------
Restaurants (1.0%)
28 American Restaurant Group Holdings, Inc. ....................... 13.00 09/15/98 26,766
6,000 American Restaurant Group Holdings, Inc. ....................... 14.00 ++ 12/15/05 1,965,000
SEE NOTES TO FINANCIAL STATEMENTS
56
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- --------- ----------- --------------
$13,500 Boston Chicken, Inc. (Conv.) .................................... 0.00 % 06/01/15 $2,683,125
4,000 FRD Acquisition Corp. (Series B) ................................ 12.50 07/15/04 4,300,000
--------------
8,974,891
--------------
Retail (0.6%)
10,450 County Seat Stores Co. (c) ...................................... 12.00 10/01/02 5,486,250
--------------
Retail -Food Chains (0.8%)
3,750 Big V Supermarkets, Inc. (Series B) ............................. 11.00 02/15/04 3,909,375
500 Pathmark Stores, Inc. ........................................... 11.625 06/15/02 492,500
3,000 Pathmark Stores, Inc. ........................................... 9.625 05/01/03 2,835,000
--------------
7,236,875
--------------
Textiles -Apparel Manufacturers (0.5%)
2,850 Apparel Ventures, Inc. (Series B) ............................... 12.25 12/31/00 2,679,000
4,000 U.S. Leather, Inc. .............................................. 10.25 07/31/03 2,120,000
--------------
4,799,000
--------------
Utilities (0.3%)
2,800 Panda Global Energy Co. ........................................ 12.50 04/15/04 2,604,000
--------------
U.S. Government & Agency Obligations (45.6%)
Federal Home Loan Banks (1.8%)
5,000 ................................................................ 0.00 07/02/12 1,633,300
5,000 ................................................................ 6.295 08/15/07 5,046,650
5,000 ................................................................ 6.37 09/25/07 5,073,100
5,000 ................................................................ 6.385 10/23/07 5,078,250
--------------
16,831,300
--------------
Federal Home Loan Mortgage Corp. (1.6%)
10,000 ................................................................ 0.00 08/15/02 7,586,800
3,867 ................................................................ 7.00 04/01/04-
06/01/04 3,920,397
3,160 ................................................................ 8.00 10/01/24-
06/01/25 3,274,217
--------------
14,781,414
--------------
Federal National Mortgage Assoc. (a) (15.4%)
6,000 Principal Strip ................................................ 0.00 02/12/04-
02/01/05 3,918,420
5,000 ................................................................ 5.80 02/22/06 4,905,550
3,565 ................................................................ 6.00 02/01/11-
03/01/11 3,502,696
34,495 ................................................................ 6.50 10/01/08-
03/01/27 34,195,883
37,455 ................................................................ 7.00 08/01/08-
03/01/27 37,585,618
5,000 ................................................................ 7.00 ** 5,014,063
SEE NOTES TO FINANCIAL STATEMENTS
57
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------- ---------------------------------------------------------------- --------- ----------- --------------
$20,617 ................................................................ 7.50 % 02/01/22-
01/01/27 $21,049,083
12,332 ................................................................ 8.00 09/01/01-
06/01/26 12,722,965
18,682 ................................................................ 8.50 07/01/17-
05/01/25 19,540,103
--------------
142,434,381
--------------
Government National Mortgage Assoc. (a) (9.8%)
9,649 ................................................................ 6.50 11/20/23-
02/15/27 9,516,487
24,331 ................................................................ 7.00 12/15/22-
10/15/26 24,430,383
5,000 ................................................................ 7.00 ** 5,001,562
39,726 ................................................................ 7.50 05/15/17-
11/15/26 40,590,659
7,185 ................................................................ 8.00 01/15/22-
10/15/24 7,454,456
3,118 ................................................................ 8.50 08/15/22-
12/15/24 3,267,185
--------------
90,260,732
--------------
Resolution Funding Corp. (a)(2.6%)
37,232 ................................................................ 0.00 10/15/04-
01/15/07 23,798,312
--------------
U.S. Treasury Notes (a)(14.4%)
500 ................................................................ 5.50 11/15/98 499,530
44,500 ................................................................ 6.00 06/30/99-
07/31/02 44,873,915
84,900 ................................................................ 6.375 05/15/00 86,254,155
2,000 ................................................................ 6.25 08/31/00 2,028,040
--------------
133,655,640
--------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS ............................................ 421,761,779
--------------
TOTAL UNITED STATES .................................................................. 712,652,433
--------------
TOTAL GOVERNMENT & CORPORATE BONDS
(Identified Cost $847,574,354) ........................................................ 834,428,799
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
58
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (d)(0.8%)
Entertainment/Gaming & Lodging (0.0%)
12,455 Cobblestone Holdings, Inc. -144A* ....................................................... $ 311,375
2,000 Motels of America, Inc. -144A* .......................................................... 30,000
----------
341,375
----------
Foods & Beverages (0.0%)
198,750 Specialty Foods Acquisition Corp. -144A* ................................................ 198,750
----------
Healthcare (0.2%)
390,000 Unigene Laboratories, Inc. .............................................................. 1,340,625
----------
Manufacturing -Diversified (0.5%)
158,000 Thermadyne Holdings Corp. (e) ........................................................... 4,621,500
----------
Restaurants (0.0%)
6,000 American Restaurant Group Holdings, Inc. -144A* ......................................... 6,000
----------
Textiles (0.1%)
230,000 Ithaca Industries, Inc. ................................................................. 1,150,000
----------
TOTAL COMMON STOCKS
(Identified Cost $6,373,947) ............................................................ 7,658,250
----------
PREFERRED STOCKS (0.4%)
Entertainment/Gaming & Lodging (d) (0.3%)
80,000 Fitzgeralds Gaming Corp. (Units)++ ..................................................... 2,640,000
----------
Oil & Gas (0.1%)
5,000 XCL Ltd (Units) ++ (Conv.)+ 144A* ...................................................... 1,000,000
----------
TOTAL PREFERRED STOCKS
(Identified Cost $3,000,000) ............................................................ 3,640,000
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
59
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
- ----------- ---------------------------------------------------------------- ------------ --------------
<S> <C> <C> <C>
WARRANTS (d)(0.1%)
Aerospace (0.0%)
1,000 Sabreliner Corp. - 144A* ......................................... 04/15/03 $ 10,000
-----------
Cable & Telecommunications (0.1%)
9,000 Hyperion Telecommunication, Inc.
(Series B) - 144A* .............................................. 04/01/01 900,000
5,300 McCaw International Ltd. - 144A* ................................ 04/15/07 53
34,400 Price Communications Corp. - 144A* ............................... 08/01/07 344
-----------
900,397
-----------
Containers (0.0%)
2,000 Crown Packaging Holdings, Ltd. (Canada) - 144A* .................. 11/01/03 20
-----------
Entertainment/Gaming & Lodging (0.0%)
10,773 Fitzgeralds Gaming Corp. ......................................... 12/19/98 10,773
3,500 Fitzgeralds South Inc. - 144A* ................................... 03/15/99 35
-----------
10,808
-----------
Healthcare (0.0%)
2,800 Imagyn Medical Technologies - 144A* .............................. 04/10/04 28
-----------
Manufacturing (0.0%)
47,300 Uniroyal Technology Corp. ........................................ 06/01/03 124,162
-----------
Retail (0.0%)
1,500 County Seat Holdings Co. ......................................... 10/15/98 15
-----------
TOTAL WARRANTS
(Identified Cost $325,243) ................................................... 1,045,430
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- ------------- ---------------------------------------------------------------- -------- ----------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS (7.4%)
TIME DEPOSITS (f)(4.2%)
CANADA (0.7%)
Banking -International
Ca$ 8,460 Chase Manhattan Bank ............................................ 3.438% 11/06/97 6,006,816
-------------
ITALY (2.7%)
Banking -International
ITL 43,211M Chase Manhattan Bank ............................................ 6.625 11/10/97 25,528,728
-------------
SPAIN (0.8%)
Banking -International
ESP 1,088M Chase Manhattan Bank ............................................ 4.875 11/10/97 7,464,451
-------------
TOTAL TIME DEPOSITS
(Identified Cost $39,155,294) ...................................................... 38,999,995
-------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
60
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------- ---------------------------------------------------------------- -------- ---------- -------------
<S> <C> <C> <C> <C>
GOVERNMENT & AGENCY
OBLIGATIONS (G)(3.1%)
GERMANY (2.4%)
DEM 39,000 German Treasury Bill ............................................ 3.23% 01/16/98 $ 22,462,010
------------
UNITED STATES (0.7%)
$6,000 FEDERAL HOME LOAN MORTGAGE CORP. ................................ 5.65 11/03/97 5,998,117
------------
TOTAL GOVERNMENT & AGENCY
OBLIGATIONS
(AMORTIZED COST $27,800,404) ........................................................ 28,460,127
------------
REPURCHASE AGREEMENT (0.1%)
927 THE BANK OF NEW YORK (DATED 10/31/97; PROCEEDS $927,122)(H)
(IDENTIFIED COST $926,697) ..................................... 5.50 11/03/97 926,697
------------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $67,882,395) ....................................................... 68,386,819
------------
TOTAL INVESTMENTS
(Identified Cost $925,155,939)(i) ........................................ 99.0% 915,159,298
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES .......................... 1.0 9,545,489
----- ------------
NET ASSETS .............................................................. 100.0% $924,704,787
===== ============
</TABLE>
- ------------
M In millions.
* Resale is restricted to qualified institutional investors.
** Security purchased on a forward commitment basis with an approximate
principal amount and no definite maturity date; the actual principal
amount and maturity date will be determined upon settlement.
++ Consists of one or more class of securities traded together as a unit;
stocks or bonds with attached stocks or warrants.
+ Payment-in-kind security.
++ Currently a zero coupon bond and will pay interest at the rate shown at
a future specified date.
(a) Some or all of these securities are segregated in connection with open
forward foreign currency contracts and securities purchased on a
forward commitment basis.
(b) Non-income producing security; issuer in bankruptcy.
(c) Non-income producing security; issuer in default.
(d) Non-income producing securities.
(e) Acquired through exchange offer.
(f) Subject to withdrawal restrictions until maturity.
(g) Securities were purchased on a discount basis. The interest rates shown
have been adjusted to reflect a money market equivalent yield.
(h) Collateralized by $927,598 Federal National Mortgage Association 6.60%
due 09/20/02 valued at $945,231.
(i) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$23,900,558 and the aggregate gross unrealized depreciation is
$33,897,199, resulting in net unrealized depreciation of $9,996,641.
SEE NOTES TO FINANCIAL STATEMENTS
61
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1997, continued
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT OCTOBER 31, 1997:
<TABLE>
<CAPTION>
CONTRACTS IN EXCHANGE DELIVERY UNREALIZED
TO DELIVER FOR DATE DEPRECIATION
- --------------- ------------- ---------- ------------
<S> <C> <C> <C>
IEP 4,286,582 $6,423,014 11/03/97 $ (14,146)
DEM 46,000,000 $26,797,157 01/30/98 (364,629)
NLG 59,744,250 $30,877,177 01/30/98 (536,329)
pounds sterling
10,800,000 $17,401,230 04/14/98 (561,632)
-----------
Unrealized depreciation .............. $(1,476,736)
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
62
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value (identified cost
$925,155,939).................................................... $915,159,298
Cash (including $1,365,883 in foreign currency)................... 5,080,884
Receivable for:
Investments sold................................................ 45,645,791
Interest........................................................ 16,838,761
Shares of beneficial interest sold ............................. 4,179,477
Compensated forward foreign currency contracts.................. 3,859,211
Prepaid expenses and other assets................................. 72,401
--------------
TOTAL ASSETS ................................................... 990,835,823
--------------
LIABILITIES:
Unrealized depreciation on open forward foreign currency
contracts........................................................ 1,476,736
Payable for:
Investments purchased........................................... 53,710,532
Shares of beneficial interest repurchased....................... 5,492,143
Compensated forward foreign currency contracts.................. 3,293,932
Dividends to shareholders....................................... 857,120
Plan of distribution fee........................................ 660,792
Investment management fee....................................... 311,986
Accrued expenses and other payables .............................. 327,795
--------------
TOTAL LIABILITIES .............................................. 66,131,036
--------------
NET ASSETS...................................................... $924,704,787
==============
COMPOSITION OF NET ASSETS:
Paid-in-capital................................................... $951,576,895
Net unrealized depreciation....................................... (11,004,241)
Accumulated undistributed net investment income .................. 278,119
Accumulated net realized loss..................................... (16,145,986)
--------------
NET ASSETS...................................................... $924,704,787
==============
CLASS A SHARES:
Net Assets........................................................ $4,933,238
Shares Outstanding (unlimited authorized, $.01 par value) ........ 521,437
NET ASSET VALUE PER SHARE....................................... $9.46
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 4.44% of net asset value)................ $9.88
==============
CLASS B SHARES:
Net Assets........................................................ $915,899,370
Shares Outstanding (unlimited authorized, $.01 par value) ........ 96,807,771
NET ASSET VALUE PER SHARE....................................... $9.46
==============
CLASS C SHARES:
Net Assets........................................................ $3,772,746
Shares Outstanding (unlimited authorized, $.01 par value) ........ 399,124
NET ASSET VALUE PER SHARE....................................... $9.45
==============
CLASS D SHARES:
Net Assets........................................................ $99,433
Shares Outstanding (unlimited authorized, $.01 par value) ........ 10,517
NET ASSET VALUE PER SHARE....................................... $9.45
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
63
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended October 31, 1997*
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME (net of $78,100 foreign withholding tax) ...... $ 77,859,573
--------------
EXPENSES
Plan of distribution fee (Class A shares)...................... 1,658
Plan of distribution fee (Class B shares)...................... 7,104,223
Plan of distribution fee (Class C shares)...................... 3,998
Investment management fee...................................... 3,347,731
Transfer agent fees and expenses............................... 509,942
Custodian fees................................................. 419,471
Registration fees.............................................. 122,807
Professional fees.............................................. 81,427
Shareholder reports and notices................................ 73,426
Trustees' fees and expenses.................................... 20,501
Organizational expenses........................................ 13,153
Other.......................................................... 19,702
--------------
TOTAL EXPENSES............................................... 11,718,039
--------------
NET INVESTMENT INCOME........................................ 66,141,534
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments ................................................. (25,552,286)
Foreign exchange transactions................................ 17,508,514
--------------
NET LOSS .................................................... (8,043,772)
--------------
Net change in unrealized depreciation on:
Investments ................................................. (1,303,373)
Translation of forward foreign currency contracts, other
assets and liabilities denominated in foreign currencies ... (2,639,652)
--------------
NET DEPRECIATION............................................. (3,943,025)
--------------
NET LOSS .................................................... (11,986,797)
--------------
NET INCREASE .................................................. $ 54,154,737
==============
</TABLE>
- ------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
64
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1997* OCTOBER 31, 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ......................... $ 66,141,534 $ 53,062,338
Net realized gain (loss)....................... (8,043,772) 4,908,105
Net change in unrealized depreciation ......... (3,943,025) (59,346)
----------------- ----------------
NET INCREASE................................. 54,154,737 57,911,097
----------------- ----------------
DIVIDENDS TO SHAREHOLDERS FROM NET
INVESTMENT INCOME
Class A shares................................. (58,752) --
Class B shares................................. (79,103,939) (47,280,275)
Class C shares................................. (41,777) --
Class D shares................................. (882) --
----------------- ----------------
TOTAL DIVIDENDS ............................. (79,205,350) (47,280,275)
----------------- ----------------
Net increase from transactions in shares of
beneficial interest........................... 204,174,498 192,406,387
----------------- ----------------
NET INCREASE................................. 179,123,885 203,037,209
NET ASSETS:
Beginning of period............................ 745,580,902 542,543,693
----------------- ----------------
END OF PERIOD
(Including undistributed net investment
income of $278,119 and $12,819,524,
respectively)................................ $924,704,787 $745,580,902
================= ================
</TABLE>
- ------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
65
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1997
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter Diversified Income Trust (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's primary investment
objective is to provide a high level of current income and, as a secondary
objective, seeks to maximize total return, but only when consistent with its
primary objective. The Fund was organized as a Massachusetts business trust
on December 20, 1991 and commenced operations on April 9, 1992. On July 28,
1997, the Fund commenced offering three classes of shares, with the then
current shares designated as Class B shares.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase, some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year,
six years and one year, respectively. Class D shares are not subject to a
sales charge. Additionally, Class A shares, Class B shares and Class C shares
incur distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at
its latest sale price on that exchange prior to the time when assets are
valued; if there were no sales that day, the security is valued at the latest
bid price (in cases where securities are traded on more than one exchange,
the securities are valued on the exchange designated as the primary market by
the Trustees); (2) all other portfolio securities for which over-the-counter
market quotations are readily available are valued at the latest available
bid price prior to the time of valuation; (3) when market quotations are not
readily available, including circumstances under which it is determined by
Dean Witter InterCapital Inc. (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 Trustees; (4) certain
portfolio securities may be valued by an outside pricing service approved by
the Trustees. The pricing service may utilize a matrix system incorporating
security quality, maturity and coupon as the evaluation model parameters,
and/or research and evaluations by its staff, including review of
broker-dealer market price quotations, if available, in determining what it
believes is the fair valuation
66
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1997, continued
of the portfolio securities valued by such pricing service; and (5)
short-term debt securities having a maturity date of more than sixty days at
time of purchase are valued on a mark-to-market basis until sixty days prior
to maturity and thereafter at amortized cost based on their value on the 61st
day. Short-term debt securities having a maturity date of sixty days or less
at the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on
the trade date (date the order to buy or sell is executed). Realized gains
and losses on security transactions are determined by the identified cost
method. Discounts are accreted over the life of the respective securities.
Interest income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are
allocated to each class of shares based upon the relative net asset value on
the date such items are recognized. Distribution fees are charged directly to
the respective class.
D. FOREIGN CURRENCY TRANSLATION -- The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value
of investment securities, other assets and liabilities and forward foreign
currency contracts are translated at the exchange rates prevailing at the end
of the period; and (2) purchases, sales, income and expenses are translated
at the exchange rates prevailing on the respective dates of such
transactions. The resultant exchange gains and losses are included in the
Statement of Operations as realized and unrealized gain/loss on foreign
exchange transactions. Pursuant to U.S. Federal income tax regulations,
certain foreign exchange gains/losses included in realized and unrealized
gain/loss are included in or are a reduction of ordinary income for federal
income tax purposes. The Fund does not isolate that portion of the results of
operations arising as a result of changes in the foreign exchange rates from
the changes in the market prices of the securities.
E. FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may enter into forward
foreign currency contracts which are valued daily at the appropriate exchange
rates. The resultant unrealized exchange gains and losses are included in the
Statement of Operations as unrealized foreign currency gain or loss. The Fund
records realized gains or losses on delivery of the currency or at the time
the forward contract is extinguished (compensated) by entering into a closing
transaction prior to delivery.
F. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
67
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1997, continued
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized
capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends
and distributions which exceed net investment income and net realized capital
gains for financial reporting purposes but not for tax purposes are reported
as dividends in excess of net investment income or distributions in excess of
net realized capital gains. To the extent they exceed net investment income
and net realized capital gains for tax purposes, they are reported as
distributions of paid-in-capital.
H. ORGANIZATIONAL EXPENSES -- The Investment Manager paid the organizational
expenses of the Fund in the amount of approximately $151,000 which have been
reimbursed for the full amount thereof. Such expenses have been deferred and
were fully amortized on the straight-line method from the commencement of
operations through April 8, 1997.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.40% to the net assets of the Fund determined as of the close
of each business day.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities,
equipment, clerical, bookkeeping and certain legal services and pays the
salaries of all personnel, including officers of the Fund who are employees
of the Investment Manager. The Investment Manager also bears the cost of
telephone services, heat, light, power and other utilities provided to the
Fund.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Fund has adopted
a Plan of Distribution (the "Plan"), pursuant to Rule 12b-1 under the Act.
The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A -up
to 0.25% of the average daily net assets of Class A; (ii) Class B -0.85% of
the lesser of: (a) the average daily aggregate gross sales of the Class B
68
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1997, continued
shares since inception of the Fund (not including reinvestment of dividend or
capital gain distributions) less the average net asset value of the Class B
shares redeemed since the Fund's inception upon which a contingent deferred
sales charge has been imposed or waived; or (b) the average daily net assets
of Class B; and (iii) Class C -up to 0.85% of the average daily net assets of
Class C. In the case of Class A shares, amounts paid under the Plan are paid
to the Distributor for services provided. In the case of Class B and Class C
shares, amounts paid under the Plan are paid to the Distributor for services
provided and the expenses borne by it and others in the distribution of the
shares of these Classes, including the payment of commissions for sales of
these Classes and incentive compensation to, and expenses of, the account
executives of Dean Witter Reynolds Inc. ("DWR"), an affiliate of the
Investment Manager and Distributor, and others who engage in or support
distribution of the 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 these 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.
In the case of Class B shares, provided that the Plan continues in effect,
any cumulative expenses incurred by the Distributor but not yet recovered may
be recovered through the payment of future distribution fees from the Fund
pursuant to the Plan and contingent deferred sales charges paid by investors
upon redemption of Class B shares. Although there is no legal obligation for
the Fund to pay expenses incurred in excess of payments made to the
Distributor under the Plan and the proceeds of contingent deferred sales
charges paid by investors upon redemption of shares, if for any reason the
Plan is terminated, the Trustees will consider at that time the manner in
which to treat such expenses. The Distributor has advised the Fund that such
excess amounts, including carrying charges, totaled $14,622,156 at October
31, 1997.
In the case of Class A shares 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 credit to account executives may be reimbursed in
the subsequent calendar year. For the period ended October 31, 1997, the
distribution fee was accrued for Class A shares and Class C shares at the
annual rate of 0.25% and 0.85%, respectively.
The Distributor has informed the Fund that for the year ended October 31,
1997, it received contingent deferred sales charges from certain redemptions
of the Fund's Class B shares and Class C shares of
69
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1997, continued
$1,414,909, and $630, respectively and received approximately $39,000 in
front-end sales charges from sales of the Fund's Class A shares. The
respective shareholders pay such charges which are not an expense of the
Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities,
excluding short-term investments, for the year ended October 31, 1997
aggregated $979,183,403 and $828,572,899, respectively. Included in the
aforementioned are purchases and sales of U.S. Government securities of
$408,062,350 and $217,120,322, respectively.
Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At October 31, 1997, the Fund had
transfer agent fees and expenses payable of approximately $2,000.
The Fund has an unfunded noncontributory defined benefit pension plan
covering all independent Trustees of the Fund who will have served as
independent Trustees for at least five years at the time of retirement.
Benefits under this plan are based on years of service and compensation
during the last five years of service. Aggregate pension costs for the year
ended October 31, 1997 included in Trustees' fees and expenses in the
Statement of Operations amounted to $5,793. At October 31, 1997, the Fund had
an accrued pension liability of $32,400 which is included in accrued expenses
in the Statement of Assets and Liabilities.
5. FEDERAL INCOME TAX STATUS
At October 31, 1997, the Fund had an approximate net capital loss carryover
of $16,314,000, which may be used to offset future capital gains to the
extent provided by regulations, which is available through October 31 of the
following years:
<TABLE>
<CAPTION>
AMOUNT IN THOUSANDS
- -------------------------------------
2002 2003 2004 2005
- -------- -------- -------- --------
<S> <C> <C> <C>
$3,024 $3,677 $2,482 $7,131
======== ======== ======== ========
</TABLE>
As of October 31, 1997, the Fund had temporary book/tax differences primarily
attributable to the mark-to-market of open forward foreign currency exchange
contracts and compensated forward foreign currency exchange contracts and
permanent book/tax differences primarily attributable to foreign currency
gains. To reflect reclassifications arising from the permanent differences,
accumulated net realized loss was charged and accumulated undistributed net
investment income was credited $522,411.
70
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1997, continued
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
CLASS A SHARES*
Sold...................... 558,411 $ 5,262,008 -- --
Reinvestment of
dividends................ 1,750 16,494 -- --
Redeemed.................. (38,724) (367,538) -- --
-------------- --------------- -------------- ---------------
Net increase -Class A .... 521,437 4,910,964 -- --
-------------- --------------- -------------- ---------------
CLASS B SHARES
Sold...................... 55,563,733 525,362,254 36,480,365 $ 353,997,564
Reinvestment of
dividends................ 3,620,754 34,158,956 2,052,285 19,859,631
Redeemed.................. (38,605,240) (364,124,514) (18,707,218) (181,450,808)
-------------- --------------- -------------- ---------------
Net increase -Class B .... 20,579,247 195,396,696 19,825,432 192,406,387
-------------- --------------- -------------- ---------------
CLASS C SHARES*
Sold ..................... 404,022 3,813,369 -- --
Reinvestment of
dividends................ 2,302 21,713 -- --
Redeemed.................. (7,200) (68,099) -- --
-------------- --------------- -------------- ---------------
Net increase -Class C .... 399,124 3,766,983 -- --
-------------- --------------- -------------- ---------------
CLASS D SHARES*
Sold...................... 10,494 99,638 -- --
Reinvestment of
dividends................ 23 217 -- --
-------------- --------------- -------------- ---------------
Net increase -Class D .... 10,517 99,855 -- --
-------------- --------------- -------------- ---------------
Net increase in Fund ..... 21,510,325 $ 204,174,498 19,825,432 $ 192,406,387
============== =============== ============== ===============
</TABLE>
- ------------
* For the period July 28, 1997 (issue date) through October 31, 1997.
71
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1997, continued
7. PURPOSE OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward foreign currency contracts ("forward
contracts") to facilitate settlement of foreign currency denominated
portfolio transactions or to manage its foreign currency exposure or to sell,
for a fixed amount of U.S. dollars or other currency, the amount of foreign
currency approximating the value of some or all of its holdings denominated
in such foreign currency or an amount of foreign currency other than the
currency in which the securities to be hedged are denominated approximating
the value of some or all of its holdings to be hedged. Additionally, when the
Investment Manager anticipates purchasing securities at some time in the
future, the Fund may enter into a forward contract to purchase an amount of
currency equal to some or all the value of the anticipated purchase for a
fixed amount of U.S. dollars or other currency.
To hedge against adverse interest rate, foreign currency and market risks,
the Fund may enter into written options on interest rate futures and interest
rate futures contracts ("derivative investments").
Forward contracts and derivative instruments involve elements of market risk
in excess of the amount reflected in the Statement of Assets and Liabilities.
The Fund bears the risk of an unfavorable change in the foreign exchange
rates underlying the forward contracts. Risks may also arise upon entering
into these contracts from the potential inability of the counterparties to
meet the terms of their contracts.
At October 31, 1997, there were outstanding forward contracts used to
facilitate settlement of foreign currency denominated portfolio transactions
and manage foreign currency exposure.
At October 31, 1997, the Fund's cash balance consisted principally of
interest bearing deposits with Chase Manhattan Bank N.A., the Fund's
custodian.
72
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31 APRIL 9, 1992*
-------------------------------------------------------------- THROUGH
1997** ++ 1996 1995 1994 1993 OCTOBER 31, 1992
----------- ----------- ----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
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................... 0.74 0.78 0.77 0.74 0.77 0.37
Net realized and unrealized gain
(loss)................................. (0.15) 0.10 0.20 (0.80) 0.20 --
----------- ----------- ----------- ----------- ----------- ----------------
Total from investment operations ....... 0.59 0.88 0.97 (0.06) 0.97 0.37
----------- ----------- ----------- ----------- ----------- ----------------
Less dividends and distributions from:
Net inivestment income................. (0.91) (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 ...... (0.91) (0.72) (0.72) (0.77) (0.78) (0.36)
----------- ----------- ----------- ----------- ----------- ----------------
Net asset value, end of period.......... $ 9.46 $ 9.78 $ 9.62 $ 9.37 $10.20 $10.01
=========== =========== =========== =========== =========== ================
TOTAL INVESTMENT RETURN+................ 6.46% 9.49% 10.76% (0.69)% 10.00% 3.73%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ 1.40% 1.42% 1.44% 1.51% 1.58% (4) 0.85%(2)(3)
Net investment income................... 7.90% 8.38% 8.30% 7.91% 7.92% (4) 7.86%(2)(3)
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands............................... $915,899 $745,581 $542,544 $407,038 $167,137 $55,297
Portfolio turnover rate ................ 104% 82% 87% 60% 117% 37%(1)
</TABLE>
- ------------
* Commencement of operations.
** Prior to July 28, 1997, the Fund issued one class of shares. All
shares of the Fund held prior to that date have been designated Class
B shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ 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.
SEE NOTES TO FINANCIAL STATEMENTS
73
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
OCTOBER 31,
1997++
- ------------------------------------------------------------
<S> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..... $ 9.40
-----------------
Net investment income..................... 0.22
Net realized and unrealized gain.......... 0.04
-----------------
Total from investment operations.......... 0.26
-----------------
Less dividends from net investment
income................................... (0.20)
-----------------
Net asset value, end of period............ $ 9.46
=================
TOTAL INVESTMENT RETURN+.................. 2.74%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................. 0.85%(2)
Net investment income..................... 8.98%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .. $4,933
Portfolio turnover rate................... 104%
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..... $ 9.40
-----------------
Net investment income..................... 0.20
Net realized and unrealized gain.......... 0.04
-----------------
Total from investment operations.......... 0.24
-----------------
Less dividends from net investment
income................................... (0.19)
-----------------
Net asset value, end of period............ $ 9.45
=================
TOTAL INVESTMENT RETURN+.................. 2.52%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................. 1.44%(2)
Net investment income..................... 8.17%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .. $3,773
Portfolio turnover rate................... 104%
</TABLE>
- ------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ 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.
SEE NOTES TO FINANCIAL STATEMENTS
74
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
OCTOBER 31,
1997++
- ------------------------------------------------------------
<S> <C>
CLASS D SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..... $ 9.40
-----------------
Net investment income .................... 0.23
Net realized and unrealized gain ........ 0.02
-----------------
Total from investment operations ........ 0.25
-----------------
Less dividends from net investment
income................................... (0.20)
-----------------
Net asset value, end of period ........... $ 9.45
=================
TOTAL INVESTMENT RETURN+.................. 2.69%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................. 0.59%(2)
Net investment income .................... 9.26%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands . $ 99
Portfolio turnover rate .................. 104%
</TABLE>
- ------------
* The date the shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day
of the period.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
75
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER DIVERSIFIED INCOME TRUST
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Dean Witter
Diversified Income Trust (the "Fund") at October 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each
of the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits,
which included confirmation of securities at October 31, 1997 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
December 17, 1997
<PAGE>
DEAN WITTER DIVERSIFIED INCOME TRUST
PART C OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
(1) Financial statements and schedules, included
in Prospectus (Part A):
Page in
Prospectus
----------
Financial Highlights for the period April 9, 1992
(commencement of operations) through October 31, 1992 and for
the fiscal years ended October 31, 1993, 1994, 1995, 1996 and
1997 (Class B).................................................. 6
Financial Highlights for the period July 28, 1997 through
October 31, 1997 (Classes A, C and D)........................... 7
(2) Financial statements included in the Statement of Additional
Information (Part B):
Page In
SAI
---
Portfolio of Investments at October 31, 1997.................. 53
Statement of Assets and Liabilities at October 31,1997........ 63
Statement of Operations for the year ended October 31, 1997... 64
Statement of Changes in Net Assets for the years ended
October 31, 1996 and October 31, 1997......................... 65
Notes to Financial Statements at October 31, 1997............. 66
Financial Highlights for the period April 9, 1992 through
October 31, 1992 and for the years ended October 31, 1993,
1994, 1995, 1996 and 1997 (Class B)........................... 73
Financial Highlights for the period July 28, 1997 through
October 31, 1997 (Classes A, C and D)......................... 74
(3) Financial statements included in Part C:
None
<PAGE>
b) Exhibits:
2. By-Laws of the Registrant, Amended and Restated as of October 23,
1997
8. Form of Transfer Agency and Service Agreement between the Registrant
and Dean Witter Trust FSB.
11. Consent of Independent Accountants.
16. Schedules for Computation of Performance Quotations.
27. Financial Data Schedules.
Other. Power of Attorney.
All other exhibits were previously filed via EDGAR and are hereby incorporated
by reference.
Item 25. Persons Controlled by or Under Common Control With Registrant.
None
Item 26. Number of Holders of Securities.
(1) (2)
Number of Record Holders
Title of Class at December 31, 1997
-------------- ------------------------
Share of Beneficial Interest
Class A 135
Class B 41,090
Class C 288
Class D 13
Item 27. Indemnification
Pursuant to Section 5.3 of the Registrant's Declaration of Trust and
under Section 4.8 of the Registrant's By-Laws, the indemnification of the
Registrant's trustees, officers, employees and agents is permitted if it is
determined that they acted under the belief that their actions were in or not
opposed to the best interest of the Registrant, and, with respect to any
criminal proceeding, they had reasonable cause to believe their conduct was not
unlawful. In addition, indemnification is permitted only if it is determined
that the actions in question did not render them liable by reason of willful
misfeasance, bad faith or gross negligence in the performance of their duties
or by reason of reckless disregard of their obligations and duties to the
Registrant. Trustees, officers, employees and agents will be indemnified for
the expense of litigation if it is determined that they are entitled to
indemnification against any liability established in such litigation. The
Registrant may also advance money for these expenses provided that they give
<PAGE>
their undertakings to repay the Registrant unless their conduct is later
determined to permit indemnification.
Pursuant to Section 5.2 of the Registrant's Declaration of Trust and
paragraph 8 of the Registrant's Investment Management Agreement, neither the
Investment Manager nor any trustee, officer, employee or agent of the
Registrant shall be liable for any action or failure to act, except in the case
of bad faith, willful misfeasance, gross negligence or reckless disregard of
duties to the Registrant.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer,
or controlling person of the Registrant in connection with the successful
defense of any action, suit or proceeding) is asserted against the Registrant
by such trustee, officer or controlling person in connection with the shares
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act, and will be governed by the
final adjudication of such issue.
The Registrant hereby undertakes that it will apply the
indemnification provision of its by-laws in a manner consistent with Release
11330 of the Securities and Exchange Commission under the Investment Company
Act of 1940, so long as the interpretation of Sections 17(h) and 17(i) of such
Act remains in effect.
Registrant, in conjunction with the Investment Manager, Registrant's
Trustees, and other registered investment management companies managed by the
Investment Manager, maintains insurance on behalf of any person who is or was a
Trustee, officer, employee, or agent of Registrant, or who is or was serving at
the request of Registrant as a trustee, director, officer, employee or agent of
another trust or corporation, against any liability asserted against him and
incurred by him or arising out of his position. However, in no event will
Registrant maintain insurance to indemnify any such person for any act for
which Registrant itself is not permitted to indemnify him.
Item 28. Business and Other Connections of Investment Adviser.
See "The Fund and Its Management" in the Prospectus regarding the
business of the investment adviser. The following information is given
regarding officers of Dean Witter InterCapital Inc. InterCapital is a
wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co. The
principal address of the Dean Witter Funds is Two World Trade Center, New York,
New York 10048.
The term "Dean Witter Funds" used below refers to the following
registered investment companies:
Closed-End Investment Companies
(1) InterCapital Income Securities Inc.
(2) High Income Advantage Trust
(3) High Income Advantage Trust II
<PAGE>
(4) High Income Advantage Trust III
(5) Municipal Income Trust
(6) Municipal Income Trust II
(7) Municipal Income Trust III
(8) Dean Witter Government Income Trust
(9) Municipal Premium Income Trust
(10) Municipal Income Opportunities Trust
(11) Municipal Income Opportunities Trust II
(12) Municipal Income Opportunities Trust III
(13) Prime Income Trust
(14) InterCapital Insured Municipal Bond Trust
(15) InterCapital Quality Municipal Income Trust
(16) InterCapital Quality Municipal Investment Trust
(17) InterCapital Insured Municipal Income Trust
(18) InterCapital California Insured Municipal Income Trust
(19) InterCapital Insured Municipal Trust
(20) InterCapital Quality Municipal Securities
(21) InterCapital New York Quality Municipal Securities
(22) InterCapital California Quality Municipal Securities
(23) InterCapital Insured California Municipal Securities
(24) InterCapital Insured Municipal Securities
Open-end Investment Companies:
(1) Dean Witter Short-Term Bond Fund
(2) Dean Witter Tax-Exempt Securities Trust
(3) Dean Witter Tax-Free Daily Income Trust
(4) Dean Witter Dividend Growth Securities Inc.
(5) Dean Witter Convertible Securities Trust
(6) Dean Witter Liquid Asset Fund Inc.
(7) Dean Witter Developing Growth Securities Trust
(8) Dean Witter Retirement Series
(9) Dean Witter Federal Securities Trust
(10) Dean Witter World Wide Investment Trust
(11) Dean Witter U.S. Government Securities Trust
(12) Dean Witter Select Municipal Reinvestment Fund
(13) Dean Witter High Yield Securities Inc.
(14) Dean Witter Intermediate Income Securities
(15) Dean Witter New York Tax-Free Income Fund
(16) Dean Witter California Tax-Free Income Fund
(17) Dean Witter Health Sciences Trust
(18) Dean Witter California Tax-Free Daily Income Trust
(19) Dean Witter Global Asset Allocation Fund
(20) Dean Witter American Value Fund
(21) Dean Witter Strategist Fund
(22) Dean Witter Utilities Fund
(23) Dean Witter World Wide Income Trust
(24) Dean Witter New York Municipal Money Market Trust
(25) Dean Witter Capital Growth Securities
(26) Dean Witter Precious Metals and Minerals Trust
(27) Dean Witter European Growth Fund Inc.
(28) Dean Witter Global Short-Term Income Fund Inc.
<PAGE>
(29) Dean Witter Pacific Growth Fund Inc.
(30) Dean Witter Multi-State Municipal Series Trust
(31) Dean Witter Short-Term U.S. Treasury Trust
(32) Dean Witter Diversified Income Trust
(33) Dean Witter U.S. Government Money Market Trust
(34) Dean Witter Global Dividend Growth Securities
(35) Active Assets California Tax-Free Trust
(36) Dean Witter Natural Resource Development Securities Inc.
(37) Active Assets Government Securities Trust
(38) Active Assets Money Trust
(39) Active Assets Tax-Free Trust
(40) Dean Witter Limited Term Municipal Trust
(41) Dean Witter Variable Investment Series
(42) Dean Witter Value-Added Market Series
(43) Dean Witter Global Utilities Fund
(44) Dean Witter International SmallCap Fund
(45) Dean Witter Mid-Cap Growth Fund
(46) Dean Witter Select Dimensions Investment Series
(47) Dean Witter Balanced Growth Fund
(48) Dean Witter Balanced Income Fund
(49) Dean Witter Hawaii Municipal Trust
(50) Dean Witter Capital Appreciation Fund
(51) Dean Witter Intermediate Term U.S. Treasury Trust
(52) Dean Witter Information Fund
(53) Dean Witter Japan Fund
(54) Dean Witter Income Builder Fund
(55) Dean Witter Special Value Fund
(56) Dean Witter Financial Services Trust
(57) Dean Witter Market Leader Trust
(58) Dean Witter S&P 500 Index Fund
(59) Dean Witter Fund of Funds
(60) Morgan Stanley Dean Witter "Competitive Edge" Fund
The term "TCW/DW Funds" refers to the following registered investment
companies:
Open-End Investment Companies
(1) TCW/DW Core Equity Trust
(2) TCW/DW North American Government Income Trust
(3) TCW/DW Latin American Growth Fund
(4) TCW/DW Income and Growth Fund
(5) TCW/DW Small Cap Growth Fund
(6) TCW/DW Balanced Fund
(7) TCW/DW Total Return Trust
(8) TCW/DW Mid-Cap Equity Trust
(9) TCW/DW Global Telecom Trust
(10) TCW/DW Strategic Income Trust
(11) TCW/DW Emerging Markets Opportunities Trust
Closed-End Investment Companies
(1) TCW/DW Term Trust 2000
(2) TCW/DW Term Trust 2002
<PAGE>
(3) TCW/DW Term Trust 2003
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
INTERCAPITAL INC. AND NATURE OF CONNECTION
- ----------------- ---------------------------------------------------
Charles A. Fiumefreddo Executive Vice President and Director of Dean Witter
Chairman, Chief Executive Reynolds Inc. ("DWR"); Chairman, Chief Executive
Officer and Director Officer and Director of Dean Witter Distributors Inc.
("Distributors") and Dean Witter Services Company
Inc. ("DWSC"); Chairman and Director of Dean Witter
Trust FSB ("DWT"); Chairman, Director or Trustee,
President and Chief Executive Officer of the Dean
Witter Funds and Chairman, Chief Executive Officer
and Trustee of the TCW/DW Funds; Director and/or
officer of various Morgan Stanley, Dean Witter,
Discover & Co. ("MSDWD") subsidiaries; Formerly
Executive Vice President and Director of Dean
Witter, Discover & Co.
Philip J. Purcell Chairman, Chief Executive Officer and Director
Director of MSDWD and DWR; Director of DWSC and Distributors;
Director or Trustee of the Dean Witter Funds;
Director and/or officer of various MSDWD
subsidiaries.
Richard M. DeMartini President and Chief Operating Officer of Dean
Director of Dean Witter Capital, a division of DWR; Director
of DWR, DWSC, Distributors and DWT; Trustee of the
TCW/DW Funds.
James F. Higgins President and Chief Operating Officer of
Director Dean Witter Financial; Director of DWR,
DWSC, Distributors and DWT.
Thomas C. Schneider Executive Vice President and Chief Strategic and
Executive Vice Administrative Officer of MSDWD; Executive and Chief
President, Chief Financial Officer of DWSC and Distributors; Director
Vice President of DWR, DWSC, Distributors and MSDWD.
Financial Officer and
Director
Christine A. Edwards Executive Vice President, Chief Legal Officer
Director and Secretary of MSDWD; Executive Vice
President, Secretary and Chief Legal Officer
of Distributors; Director of DWR, DWSC and
Distributors.
Robert M. Scanlan President and Chief Operating Officer of DWSC,
President and Chief Executive Vice President of Distributors;
Operating Officer Executive Vice President and Director of DWT;
Vice President of the Dean Witter Funds and the
TCW/DW Funds.
<PAGE>
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
INTERCAPITAL INC. AND NATURE OF CONNECTION
- ----------------- ---------------------------------------------------
Mitchell M. Merin President and Chief Strategic Officer of DWSC,
President and Chief Executive Vice President of Distributors;
Strategic Officer Executive Vice President and Director of DWT;
Executive Vice President and Director of DWR;
Director of SPS Transaction Services, Inc. and
various other MSDWD subsidiaries.
John B. Van Heuvelen President, Chief Operating Officer and Director
Executive Vice of DWT.
President
Joseph J. McAlinden Vice President of the Dean Witter Funds and
Executive Vice President Director of DWT.
and Chief Investment
Officer
Barry Fink Assistant Secretary of DWR; Senior Vice President,
Senior Vice President, Secretary and General Counsel of DWSC; Senior Vice
Secretary and General President, Assistant Secretary and Assistant
Counsel General Counsel of Distributors; Vice President,
Secretary and General Counsel of the Dean Witter
Funds and the TCW/DW Funds.
Peter M. Avelar
Senior Vice President Vice President of various Dean Witter Funds.
Mark Bavoso
Senior Vice President Vice President of various Dean Witter Funds.
Richard Felegy
Senior Vice President
Edward F. Gaylor
Senior Vice President Vice President of various Dean Witter Funds.
Robert S. Giambrone Senior Vice President of DWSC, Distributors
Senior Vice President and DWT and Director of DWT; Vice President
of the Dean Witter Funds and the TCW/DW Funds.
Rajesh K. Gupta
Senior Vice President Vice President of various Dean Witter Funds.
Kenton J. Hinchliffe
Senior Vice President Vice President of various Dean Witter Funds.
Kevin Hurley
Senior Vice President Vice President of various Dean Witter Funds.
<PAGE>
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
INTERCAPITAL INC. AND NATURE OF CONNECTION
- ----------------- ---------------------------------------------------
Margaret Iannuzzi
Senior Vice President
Jenny Beth Jones Vice President of Dean Witter Special Value Fund.
Senior Vice President
John B. Kemp, III Director of the Provident Savings Bank, Jersey
Senior Vice President City, New Jersey.
Anita H. Kolleeny
Senior Vice President Vice President of various Dean Witter Funds.
Jonathan R. Page
Senior Vice President Vice President of various Dean Witter Funds.
Ira N. Ross
Senior Vice President Vice President of various Dean Witter Funds.
Guy G. Rutherfurd, Jr. Vice President of Dean Witter Market Leader
Senior Vice President Trust.
Rafael Scolari Vice President of Prime Income Trust.
Senior Vice President
Rochelle G. Siegel
Senior Vice President Vice President of various Dean Witter Funds.
Jayne M. Stevlingson Vice President of various Dean Witter Funds.
Senior Vice President
Paul D. Vance
Senior Vice President Vice President of various Dean Witter Funds.
Elizabeth A. Vetell
Senior Vice President
James F. Willison
Senior Vice President Vice President of various Dean Witter Funds.
Ronald J. Worobel
Senior Vice President Vice President of various Dean Witter Funds.
Douglas Brown
First Vice President
<PAGE>
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
INTERCAPITAL INC. AND NATURE OF CONNECTION
- ----------------- ---------------------------------------------------
Thomas F. Caloia First Vice President and Assistant Treasurer of
First Vice President DWSC, Assistant Treasurer of Distributors;
and Assistant Treasurer and Chief Financial Officer of the
Treasurer Dean Witter Funds and the TCW/DW Funds.
Thomas Chronert
First Vice President
Rosalie Clough
First Vice President
Marilyn K. Cranney Assistant Secretary of DWR; First Vice President
First Vice President and Assistant Secretary of DWSC; Assistant
and Assistant Secretary Secretary of the Dean Witter Funds and the TCW/DW
Funds.
Michael Interrante First Vice President and Controller of DWSC;
First Vice President Assistant Treasurer of Distributors; First Vice
and Controller President and Treasurer of DWT.
David Johnson
First Vice President
Stanley Kapica
First Vice President
Robert Zimmerman
First Vice President
Dale Albright
Vice President
Joan G. Allman
Vice President
Andrew Arbenz
Vice President
Joseph Arcieri
Vice President Vice President of various Dean Witter Funds.
Nancy Belza
Vice President
Maurice Bendrihem
Vice President and
Assistant Controller
<PAGE>
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
INTERCAPITAL INC. AND NATURE OF CONNECTION
- ----------------- ---------------------------------------------------
Dale Boettcher
Vice President
Joseph Cardwell
Vice President
Philip Casparius
Vice President
B. Catherine Connelly
Vice President
Salvatore DeSteno
Vice President Vice President of DWSC.
Bruce Dunn
Vice President
Jeffrey D. Geffen
Vice President
Deborah Genovese
Vice President
Michael Geringer
Vice President
Stephen Greenhut
Vice President
Peter W. Gurman
Vice President
Matthew Haynes Vice President of Dean Witter
Vice President Variable Investment Series
Peter Hermann
Vice President Vice President of various Dean Witter Funds
Elizabeth Hinchman
Vice President
David Hoffman
Vice President
<PAGE>
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
INTERCAPITAL INC. AND NATURE OF CONNECTION
- ----------------- ---------------------------------------------------
Christopher Jones
Vice President
James P. Kastberg
Vice President
Michelle Kaufman
Vice President Vice President of various Dean Witter Funds
Paula LaCosta
Vice President Vice President of various Dean Witter Funds.
Thomas Lawlor
Vice President
Gerard J. Lian
Vice President Vice President of various Dean Witter Funds.
Catherine Maniscalco Vice President of Dean Witter Natural
Vice President Resource Development Securities Inc.
Albert McGarity
Vice President
LouAnne D. McInnis Vice President and Assistant Secretary of DWSC;
Vice President and Assistant Secretary of the Dean Witter Funds and
the TCW/DW Funds. Assistant Secretary
Sharon K. Milligan
Vice President
Julie Morrone
Vice President
Mary Beth Mueller
Vice President
David Myers Vice President of Dean Witter Natural
Vice President Resource Development Securities Inc.
James Nash
Vice President
<PAGE>
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
INTERCAPITAL INC. AND NATURE OF CONNECTION
- ----------------- ---------------------------------------------------
Richard Norris
Vice President
Carsten Otto Vice President and Assistant Secretary of DWSC;
Vice President and Assistant Secretary of the Dean Witter Funds and
Assistant Secretary the TCW/DW Funds.
George Paoletti
Vice President
Anne Pickrell Vice President of various Dean Witter Funds.
Vice President
Michael Roan
Vice President
John Roscoe
Vice President
Hugh Rose
Vice President
Robert Rossetti Vice President of Dean Witter Precious Metal and
Vice President Minerals Trust.
Ruth Rossi Vice President and Assistant Secretary of DWSC;
Vice President and Assistant Secretary of the Dean Witter Funds and
Assistant Secretary the TCW/DW Funds.
Carl F. Sadler
Vice President
Peter J. Seeley Vice President of various Dean Witter Funds.
Vice President
Naomi Stein
Vice President
Kathleen H. Stromberg
Vice President Vice President of various Dean Witter Funds.
Marybeth Swisher
Vice President
<PAGE>
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION
WITH DEAN WITTER OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
INTERCAPITAL INC. AND NATURE OF CONNECTION
- ----------------- ---------------------------------------------------
Robert Vanden Assem
Vice President
James P. Wallin
Vice President
Alice Weiss
Vice President Vice President of various Dean Witter Funds.
Item 29. Principal Underwriters
(a) Dean Witter Distributors Inc. ("Distributors"), a Delaware
corporation, is the principal underwriter of the Registrant.
Distributors is also the principal underwriter of the following
investment companies:
(1) Dean Witter Liquid Asset Fund Inc.
(2) Dean Witter Tax-Free Daily Income Trust
(3) Dean Witter California Tax-Free Daily Income Trust
(4) Dean Witter Retirement Series
(5) Dean Witter Dividend Growth Securities Inc.
(6) Dean Witter Global Asset Allocation
(7) Dean Witter World Wide Investment Trust
(8) Dean Witter Capital Growth Securities
(9) Dean Witter Convertible Securities Trust
(10) Active Assets Tax-Free Trust
(11) Active Assets Money Trust
(12) Active Assets California Tax-Free Trust
(13) Active Assets Government Securities Trust
(14) Dean Witter Short-Term Bond Fund
(15) Dean Witter Mid-Cap Growth Fund
(16) Dean Witter U.S. Government Securities Trust
(17) Dean Witter High Yield Securities Inc.
(18) Dean Witter New York Tax-Free Income Fund
(19) Dean Witter Tax-Exempt Securities Trust
(20) Dean Witter California Tax-Free Income Fund
(21) Dean Witter Limited Term Municipal Trust
(22) Dean Witter Natural Resource Development Securities Inc.
(23) Dean Witter World Wide Income Trust
(24) Dean Witter Utilities Fund
(25) Dean Witter Strategist Fund
(26) Dean Witter New York Municipal Money Market Trust
(27) Dean Witter Intermediate Income Securities
(28) Prime Income Trust
(29) Dean Witter European Growth Fund Inc.
(30) Dean Witter Developing Growth Securities Trust
<PAGE>
(31) Dean Witter Precious Metals and Minerals Trust
(32) Dean Witter Pacific Growth Fund Inc.
(33) Dean Witter Multi-State Municipal Series Trust
(34) Dean Witter Federal Securities Trust
(35) Dean Witter Short-Term U.S. Treasury Trust
(36) Dean Witter Diversified Income Trust
(37) Dean Witter Health Sciences Trust
(38) Dean Witter Global Dividend Growth Securities
(39) Dean Witter American Value Fund
(40) Dean Witter U.S. Government Money Market Trust
(41) Dean Witter Global Short-Term Income Fund Inc.
(42) Dean Witter Value-Added Market Series
(43) Dean Witter Global Utilities Fund
(44) Dean Witter International SmallCap Fund
(45) Dean Witter Balanced Growth Fund
(46) Dean Witter Balanced Income Fund
(47) Dean Witter Hawaii Municipal Trust
(48) Dean Witter Variable Investment Series
(49) Dean Witter Capital Appreciation Fund
(50) Dean Witter Intermediate Term U.S. Treasury Trust
(51) Dean Witter Information Fund
(52) Dean Witter Japan Fund
(53) Dean Witter Income Builder Fund
(54) Dean Witter Special Value Fund
(55) Dean Witter Financial Services Trust
(56) Dean Witter Market Leader Trust
(57) Dean Witter S&P 500 Index Fund
(58) Dean Witter Fund of Funds
(59) Morgan Stanley Dean Witter "Competitive Edge" Fund
(1) TCW/DW Core Equity Trust
(2) TCW/DW North American Government Income Trust
(3) TCW/DW Latin American Growth Fund
(4) TCW/DW Income and Growth Fund
(5) TCW/DW Small Cap Growth Fund
(6) TCW/DW Balanced Fund
(7) TCW/DW Total Return Trust
(8) TCW/DW Mid-Cap Equity Trust
(9) TCW/DW Global Telecom Trust
(10) TCW/DW Strategic Income Trust
(11) TCW/DW Emerging Markets Opportunities Trust
(b) The following information is given regarding directors and
officers of Distributors not listed in Item 28 above. The principal
address of Distributors is Two World Trade Center, New York, New York
10048. None of the following persons has any position or office with
the Registrant.
Name Positions and Office with Distributors
- ---- --------------------------------------
Fredrick K. Kubler Senior Vice President, Assistant
Secretary and Chief Compliance
Officer.
<PAGE>
Michael T. Gregg Vice President and Assistant
Secretary.
Item 30. Location of Accounts and Records
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder
are maintained by the Investment Manager at its offices, except records
relating to holders of shares issued by the Registrant, which are maintained by
the Registrant's Transfer Agent, at its place of business as shown in the
prospectus.
Item 31. Management Services
Registrant is not a party to any such management-related service
contract.
Item 32. Undertakings
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York on the 6th day of February, 1998.
DEAN WITTER DIVERSIFIED INCOME TRUST
By /s/ Barry Fink
---------------------------------
Barry Fink
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 7 has been signed below by the following persons
in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
(1) Principal Executive Officer President, Chief
Executive Officer,
Trustee and Chairman
By /s/Charles A. Fiumefreddo 02/06/98
------------------------------
Charles A. Fiumefreddo
(2) Principal Financial Officer Treasurer and Principal
Accounting Officer
By /s/Thomas F. Caloia 02/06/98
------------------------------
Thomas F. Caloia
(3) Majority of the Trustees
Charles A. Fiumefreddo (Chairman)
Philip J. Purcell
By /s/Barry Fink 02/06/98
------------------------------
Barry Fink
Attorney-in-Fact
Michael Bozic
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Manuel H. Johnson
Michael E. Nugent
John L. Schroeder
By /s/David M. Butowsky 02/06/98
------------------------------
David M. Butowsky
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
2. By-Laws of the Registrant, Amended and Restated as of October
23, 1997
8. Form of Amended and Restated Transfer Agency and Service
Agreement between the Registrant and Dean Witter Trust FSB.
11. Consent of Independent Accountants.
16. Schedules for Computation of Performance Quotations.
27. Financial Data Schedules.
Other. Power of Attorney.
<PAGE>
BY-LAWS
OF
DEAN WITTER DIVERSIFIED INCOME TRUST
AMENDED AND RESTATED AS OF OCTOBER 23, 1997
ARTICLE I
DEFINITIONS
The terms "Commission," "Declaration," "Distributor," "Investment
Adviser," "Majority Shareholder Vote," "1940 Act," "Shareholder," "Shares,"
"Transfer Agent," "Trust," "Trust Property," and "Trustees" have the
respective meanings given them in the Declaration of Trust of Dean Witter
Diversified Income Trust dated December 20, 1991.
ARTICLE II
OFFICES
SECTION 2.1. Principal Office. Until changed by the Trustees, the
principal office of the Trust in the Commonwealth of Massachusetts shall be
in the City of Boston, County of Suffolk.
SECTION 2.2. Other Offices. In addition to its principal office in the
Commonwealth of Massachusetts, the Trust may have an office or offices in the
City of New York, State of New York, and at such other places within and
without the Commonwealth as the Trustees may from time to time designate or
the business of the Trust may require.
ARTICLE III
SHAREHOLDERS' MEETINGS
SECTION 3.1. Place of Meetings. Meetings of Shareholders shall be held at
such place, within or without the Commonwealth of Massachusetts, as may be
designated from time to time by the Trustees.
SECTION 3.2. Meetings. Meetings of Shareholders of the Trust shall be held
whenever called by the Trustees or the President of the Trust and whenever
election of a Trustee or Trustees by Shareholders is required by the
provisions of Section 16(a) of the 1940 Act, for that purpose. Meetings of
Shareholders shall also be called by the Secretary upon the written request
of the holders of Shares entitled to vote not less than twenty-five percent
(25% ) of all the votes entitled to be cast at such meeting, except to the
extent otherwise required by Section 16(c) of the 1940 Act, as made
applicable to the Trust by the provisions of Section 2.3 of the Declaration.
Such request shall state the purpose or purposes of such meeting and the
matters proposed to be acted on thereat. Except to the extent otherwise
required by Section 16(c) of the 1940 Act, as made applicable to the Trust by
the provisions of Section 2.3 of the Declaration, the Secretary shall inform
such Shareholders of the reasonable estimated cost of preparing and mailing
such notice of the meeting, and upon payment to the Trust of such costs, the
Secretary shall give notice stating the purpose or purposes of the meeting to
all entitled to vote at such meeting. No meeting need be called upon the
request of the holders of Shares entitled to cast less than a majority of all
votes entitled to be cast at such meeting, to consider any matter which is
substantially the same as a matter voted upon at any meeting of Shareholders
held during the preceding twelve months.
SECTION 3.3. Notice of Meetings. Written or printed notice of every
Shareholders' meeting stating the place, date, and purpose or purposes
thereof, shall be given by the Secretary not less than ten (10) nor more than
ninety (90) days before such meeting to each Shareholder entitled to vote at
such meeting. Such notice shall be deemed to be given when deposited in the
United States mail, postage prepaid, directed to the Shareholder at his
address as it appears on the records of the Trust.
<PAGE>
SECTION 3.4 Quorum and Adjournment of Meetings. Except as otherwise
provided by law, by the Declaration or by these By-Laws, at all meetings of
Shareholders, the holders of a majority of the Shares issued and outstanding
and entitled to vote thereat, present in person or represented by proxy,
shall be requisite and shall constitute a quorum for the transaction of
business. In the absence of a quorum, the Shareholders present or represented
by proxy and entitled to vote thereat shall have the power to adjourn the
meeting from time to time. The Shareholders present in person or represented
by proxy at any meeting and entitled to vote thereat also shall have the
power to adjourn the meeting from time to time if the vote required to
approve or reject any proposal described in the original notice of such
meeting is not obtained (with proxies being voted for or against adjournment
consistent with the votes for and against the proposal for which the required
vote has not been obtained). The affirmative vote of the holders of a
majority of the Shares then present in person or represented by proxy shall
be required to adjourn any meeting. Any adjourned meeting may be reconvened
without further notice or change in record date. At any reconvened meeting at
which a quorum shall be present, any business may be transacted that might
have been transacted at the meeting as originally called.
SECTION 3.5. Voting Rights, Proxies. At each meeting of Shareholders, each
holder of record of Shares entitled to vote thereat shall be entitled to one
vote in person or by proxy, executed in writing by the Shareholder or his
duly authorized attorney-in-fact, for each Share of beneficial interest of
the Trust and for the fractional portion of one vote for each fractional
Share entitled to vote so registered in his name on the records of the Trust
on the date fixed as the record date for the determination of Shareholders
entitled to vote at such meeting. No proxy shall be valid after eleven months
from its date, unless otherwise provided in the proxy. At all meetings of
Shareholders, unless the voting is conducted by inspectors, all questions
relating to the qualification of voters and the validity of proxies and the
acceptance or rejection of votes shall be decided by the chairman of the
meeting. Pursuant to a resolution of a majority of the Trustees, proxies may
be solicited in the name of one or more Trustees or Officers of the Trust.
SECTION 3.6. Vote Required. Except as otherwise provided by law, by the
Declaration of Trust, or by these By-Laws, at each meeting of Shareholders at
which a quorum is present, all matters shall be decided by Majority
Shareholder Vote.
SECTION 3.7. Inspectors of Election. In advance of any meeting of
Shareholders, the Trustees may appoint Inspectors of Election to act at the
meeting or any adjournment thereof. If Inspectors of Election are not so
appointed, the chairman of any meeting of Shareholders may, and on the
request of any Shareholder or his proxy shall, appoint Inspectors of Election
of the meeting. In case any person appointed as Inspector fails to appear or
fails or refuses to act, the vacancy may be filled by appointment made by the
Trustees in advance of the convening of the meeting or at the meeting by the
person acting as chairman. The Inspectors of Election shall determine the
number of Shares outstanding, the Shares represented at the meeting, the
existence of a quorum, the authenticity, validity and effect of proxies,
shall receive votes, ballots or consents, shall hear and determine all
challenges and questions in any way arising in connection with the right to
vote, shall count and tabulate all votes or consents, determine the results,
and do such other acts as may be proper to conduct the election or vote with
fairness to all Shareholders. On request of the chairman of the meeting, or
of any Shareholder or his proxy, the Inspectors of Election shall make a
report in writing of any challenge or question or matter determined by them
and shall execute a certificate of any facts found by them.
SECTION 3.8. Inspection of Books and Records. Shareholders shall have such
rights and procedures of inspection of the books and records of the Trust as
are granted to Shareholders under the Corporations and Associations Law of
the State of Maryland.
SECTION 3.9. Action by Shareholders Without Meeting. Except as otherwise
provided by law, the provisions of these By-Laws relating to notices and
meetings to the contrary notwithstanding, any action required or permitted to
be taken at any meeting of Shareholders may be taken without a meeting if a
majority of the Shareholders entitled to vote upon the action consent to the
action in writing and such consents are filed with the records of the Trust.
Such consent shall be treated for all purposes as a vote taken at a meeting
of Shareholders.
2
<PAGE>
SECTION 3.10. Presence at Meetings. Presence at meetings of shareholders
requires physical attendance by the shareholder or his or her proxy at the
meeting site and does not encompass attendance by telephonic or other
electronic means.
ARTICLE IV
TRUSTEES
SECTION 4.1. Meetings of the Trustees. The Trustees may in their
discretion provide for regular or special meetings of the Trustees. Regular
meetings of the Trustees may be held at such time and place as shall be
determined from time to time by the Trustees without further notice. Special
meetings of the Trustees may be called at any time by the President and shall
be called by the President or the Secretary upon the written request of any
two (2) Trustees.
SECTION 4.2. Notice of Special Meetings. Written notice of special
meetings of the Trustees, stating the place, date and time thereof, shall be
given not less than two (2) days before such meeting to each Trustee,
personally, by telegram, by mail, or by leaving such notice at his place of
residence or usual place of business. If mailed, such notice shall be deemed
to be given when deposited in the United States mail, postage prepaid,
directed to the Trustee at his address as it appears on the records of the
Trust. Subject to the provisions of the 1940 Act, notice or waiver of notice
need not specify the purpose of any special meeting.
SECTION 4.3. Telephone Meetings. Subject to the provisions of the 1940
Act, any Trustee, or any member or members of any committee designated by the
Trustees, may participate in a meeting of the Trustees, or any such
committee, as the case may be, by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time. Participation in a meeting by these means
constitutes presence in person at the meeting.
SECTION 4.4. Quorum, Voting and Adjournment of Meetings. At all meetings
of the Trustees, a majority of the Trustees shall be requisite to and shall
constitute a quorum for the transaction of business. If a quorum is present,
the affirmative vote of a majority of the Trustees present shall be the act
of the Trustees, unless the concurrence of a greater proportion is expressly
required for such action by law, the Declaration or these By-Laws. If at any
meeting of the Trustees there be less than a quorum present, the Trustees
present thereat may adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall have been
obtained.
SECTION 4.5. Action by Trustees Without Meeting. The provisions of these
By-Laws covering notices and meetings to the contrary notwithstanding, and
except as required by law, any action required or permitted to be taken at
any meeting of the Trustees may be taken without a meeting if a consent in
writing setting forth the action shall be signed by all of the Trustees
entitled to vote upon the action and such written consent is filed with the
minutes of proceedings of the Trustees.
SECTION 4.6. Expenses and Fees. Each Trustee may be allowed expenses, if
any, for attendance at each regular or special meeting of the Trustees, and
each Trustee who is not an officer or employee of the Trust or of its
investment manager or underwriter or of any corporate affiliate of any of
said persons shall receive for services rendered as a Trustee of the Trust
such compensation as may be fixed by the Trustees. Nothing herein contained
shall be construed to preclude any Trustee from serving the Trust in any
other capacity and receiving compensation therefor.
SECTION 4.7. Execution of Instruments and Documents and Signing of Checks
and Other Obligations and Transfers. All instruments, documents and other
papers shall be executed in the name and on behalf of the Trust and all
checks, notes, drafts and other obligations for the payment of money by the
Trust shall be signed, and all transfer of securities standing in the name of
the Trust shall be executed, by the Chairman, the President, any Vice
President or the Treasurer or by any one or more officers or agents of the
Trust as shall be designated for that purpose by vote of the Trustees;
notwithstanding the above, nothing in this Section 4.7 shall be deemed to
preclude the electronic authorization, by designated persons, of the Trust's
Custodian (as described herein in Section 9.1) to transfer assets of the
Trust, as provided for herein in Section 9.1.
3
<PAGE>
SECTION 4.8. Indemnification of Trustees, Officers, Employees and
Agents. (a) The Trust shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Trust) by
reason of the fact that he is or was a Trustee, officer, employee, or agent
of the Trust. The indemnification shall be against expenses, including
attorneys' fees, judgments, fines, and amounts paid in settlement, actually
and reasonably incurred by him in connection with the action, suit, or
proceeding, if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Trust, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person
did not act in good faith and in a manner which he reasonably believed to be
in or not opposed to the best interests of the Trust, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful.
(b) The Trust shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action
or suit by or on behalf of the Trust to obtain a judgment or decree in its
favor by reason of the fact that he is or was a Trustee, officer, employee,
or agent of the Trust. The indemnification shall be against expenses,
including attorneys' fees actually and reasonably incurred by him in
connection with the defense or settlement of the action or suit, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the Trust; except that no indemnification shall be
made in respect of any claim, issue, or matter as to which the person has
been adjudged to be liable for negligence or misconduct in the performance of
his duty to the Trust, except to the extent that the court in which the
action or suit was brought, or a court of equity in the county in which the
Trust has its principal office, determines upon application that, despite the
adjudication of liability but in view of all circumstances of the case, the
person is fairly and reasonably entitled to indemnity for those expenses
which the court shall deem proper, provided such Trustee, officer, employee
or agent is not adjudged to be liable by reason of his willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in
the conduct of his office.
(c) To the extent that a Trustee, officer, employee, or agent of the Trust
has been successful on the merits or otherwise in defense of any action, suit
or proceeding referred to in subsection (a) or (b) or in defense of any
claim, issue or matter therein, he shall be indemnified against expenses,
including attorneys' fees, actually and reasonably incurred by him in
connection therewith.
(d) (1) Unless a court orders otherwise, any indemnification under
subsections (a) or (b) of this section may be made by the Trust only as
authorized in the specific case after a determination that indemnification of
the Trustee, officer, employee, or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in
subsections (a) or (b).
(2) The determination shall be made:
(i) By the Trustees, by a majority vote of a quorum which consists of
Trustees who were not parties to the action, suit or proceeding; or
(ii) If the required quorum is not obtainable, or if a quorum of
disinterested Trustees so directs, by independent legal counsel in a
written opinion; or
(iii) By the Shareholders.
(3) Notwithstanding any provision of this Section 4.8, no person shall
be entitled to indemnification for any liability, whether or not there is
an adjudication of liability, arising by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of duties as described
in Section 17(h) and (i) of the Investment Company Act of 1940
("disabling conduct"). A person shall be deemed not liable by reason of
disabling conduct if, either:
(i) a final decision on the merits is made by a court or other body
before whom the proceeding was brought that the person to be indemnified
("indemnitee") was not liable by reason of disabling conduct; or
4
<PAGE>
(ii) in the absence of such a decision, a reasonable determination,
based upon a review of the facts, that the indemnitee was not liable by
reason of disabling conduct, is made by either--
(A) a majority of a quorum of Trustees who are neither "interested
persons" of the Trust, as defined in Section 2(a)(19) of the
Investment Company Act of 1940, nor parties to the action, suit or
proceeding, or
(B) an independent legal counsel in a written opinion.
(e) Expenses, including attorneys' fees, incurred by a Trustee, officer,
employee or agent of the Trust in defending a civil or criminal action, suit
or proceeding may be paid by the Trust in advance of the final disposition
thereof if:
(1) authorized in the specific case by the Trustees; and
(2) the Trust receives an undertaking by or on behalf of the Trustee,
officer, employee or agent of the Trust to repay the advance if it is not
ultimately determined that such person is entitled to be indemnified by
the Trust; and
(3) either, (i) such person provides a security for his undertaking,
or
(ii) the Trust is insured against losses by reason of any lawful
advances, or
(iii) a determination, based on a review of readily available
facts, that there is reason to believe that such person ultimately
will be found entitled to indemnification, is made by either--
(A) a majority of a quorum which consists of Trustees who are
neither "interested persons" of the Trust, as defined in Section
2(a)(19) of the 1940 Act, nor parties to the action, suit or
proceeding, or
(B) an independent legal counsel in a written opinion.
(f) The indemnification provided by this Section shall not be deemed
exclusive of any other rights to which a person may be entitled under any
by-law, agreement, vote of Shareholders or disinterested Trustees or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding the office, and shall continue as to a person
who has ceased to be a Trustee, officer, employee, or agent and inure to the
benefit of the heirs, executors and administrators of such person; provided
that no person may satisfy any right of indemnity or reimbursement granted
herein or to which he may be otherwise entitled except out of the property of
the Trust, and no Shareholder shall be personally liable with respect to any
claim for indemnity or reimbursement or otherwise.
(g) The Trust may purchase and maintain insurance on behalf of any person
who is or was a Trustee, officer, employee, or agent of the Trust, against
any liability asserted against him and incurred by him in any such capacity,
or arising out of his status as such. However, in no event will the Trust
purchase insurance to indemnify any officer or Trustee against liability for
any act for which the Trust itself is not permitted to indemnify him.
(h) Nothing contained in this Section shall be construed to protect any
Trustee or officer of the Trust against any liability to the Trust or to its
security holders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
ARTICLE V
COMMITTEES
SECTION 5.1. Executive and Other Committees. The Trustees, by resolution
adopted by a majority of the Trustees, may designate an Executive Committee
and/or committees, each committee to consist of two (2) or more of the
Trustees of the Trust and may delegate to such committees, in the intervals
between meetings of the Trustees, any or all of the powers of the Trustees in
the management of the business and affairs of the Trust. In the absence of
any member of any such committee, the members thereof present
5
<PAGE>
at any meeting, whether or not they constitute a quorum, may appoint a
Trustee to act in place of such absent member. Each such committee shall keep
a record of its proceedings.
The Executive Committee and any other committee shall fix its own rules or
procedure, but the presence of at least fifty percent (50%) of the members of
the whole committee shall in each case be necessary to constitute a quorum of
the committee and the affirmative vote of the majority of the members of the
committee present at the meeting shall be necessary to take action.
All actions of the Executive Committee shall be reported to the Trustees
at the meeting thereof next succeeding to the taking of such action.
SECTION 5.2. Advisory Committee. The Trustees may appoint an advisory
committee which shall be composed of persons who do not serve the Trust in
any other capacity and which shall have advisory functions with respect to
the investments of the Trust but which shall have no power to determine that
any security or other investment shall be purchased, sold or otherwise
disposed of by the Trust. The number of persons constituting any such
advisory committee shall be determined from time to time by the Trustees. The
members of any such advisory committee may receive compensation for their
services and may be allowed such fees and expenses for the attendance at
meetings as the Trustees may from time to time determine to be appropriate.
SECTION 5.3. Committee Action Without Meeting. The provisions of these
By-Laws covering notices and meetings to the contrary notwithstanding, and
except as required by law, any action required or permitted to be taken at
any meeting of any Committee of the Trustees appointed pursuant to Section
5.1 of these By-Laws may be taken without a meeting if a consent in writing
setting forth the action shall be signed by all members of the Committee
entitled to vote upon the action and such written consent is filed with the
records of the proceedings of the Committee.
ARTICLE VI
OFFICERS
SECTION 6.1. Executive Officers. The executive officers of the Trust shall
be a Chairman, a President, one or more Vice Presidents, a Secretary and a
Treasurer. The Chairman shall be selected from among the Trustees but none of
the other executive officers need be a Trustee. Two or more offices, except
those of President and any Vice President, may be held by the same person,
but no officer shall execute, acknowledge or verify any instrument in more
than one capacity. The executive officers of the Trust shall be elected
annually by the Trustees and each executive officer so elected shall hold
office until his successor is elected and has qualified.
SECTION 6.2. Other Officers and Agents. The Trustees may also elect one or
more Assistant Vice Presidents, Assistant Secretaries and Assistant
Treasurers and may elect, or may delegate to the President the power to
appoint, such other officers and agents as the Trustees shall at any time or
from time to time deem advisable.
SECTION 6.3. Term and Removal and Vacancies. Each officer of the Trust
shall hold office until his successor is elected and has qualified. Any
officer or agent of the Trust may be removed by the Trustees whenever, in
their judgment, the best interests of the Trust will be served thereby, but
such removal shall be without prejudice to the contractual rights, if any, of
the person so removed.
SECTION 6.4. Compensation of Officers. The compensation of officers and
agents of the Trust shall be fixed by the Trustees, or by the President to
the extent provided by the Trustees with respect to officers appointed by the
President.
SECTION 6.5. Power and Duties. All officers and agents of the Trust, as
between themselves and the Trust, shall have such authority and perform such
duties in the management of the Trust as may be provided in or pursuant to
these By-Laws, or to the extent not so provided, as may be prescribed by the
Trustees; provided, that no rights of any third party shall be affected or
impaired by any such By-Law or resolution of the Trustees unless he has
knowledge thereof.
6
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SECTION 6.6. The Chairman. The Chairman shall preside at all meetings of
the Shareholders and of the Trustees, shall be a signatory on all Annual and
Semi-Annual Reports as may be sent to shareholders, and he shall perform such
other duties as the Trustees may from time to time prescribe.
SECTION 6.7. The President. (a) The President shall be the chief executive
officer of the Trust; he shall have general and active management of the
business of the Trust, shall see that all orders and resolutions of the
Trustees are carried into effect, and, in connection therewith, shall be
authorized to delegate to one or more Vice Presidents such of his powers and
duties at such times and in such manner as he may deem advisable.
(b) In the absence of the Chairman, the President shall preside at all
meetings of the shareholders and the Board of Trustees; and he shall perform
such other duties as the Board of Trustees may from time to time prescribe.
SECTION 6.8. The Vice Presidents. The Vice Presidents shall be of such
number and shall have such titles as may be determined from time to time by
the Trustees. The Vice President, or, if there be more than one, the Vice
Presidents in the order of their seniority as may be determined from time to
time by the Trustees or the President, shall, in the absence or disability of
the President, exercise the powers and perform the duties of the President,
and he or they shall perform such other duties as the Trustees or the
President may from time to time prescribe.
SECTION 6.9. The Assistant Vice Presidents. The Assistant Vice President,
or, if there be more than one, the Assistant Vice Presidents, shall perform
such duties and have such powers as may be assigned them from time to time by
the Trustees or the President.
SECTION 6.10. The Secretary. The Secretary shall attend all meetings of
the Trustees and all meetings of the Shareholders and record all the
proceedings of the meetings of the Shareholders and of the Trustees in a book
to be kept for that purpose, and shall perform like duties for the standing
committees when required. He shall give, or cause to be given, notice of all
meetings of the Shareholders and special meetings of the Trustees, and shall
perform such other duties and have such powers as the Trustees, or the
President, may from time to time prescribe. He shall keep in safe custody the
seal of the Trust and affix or cause the same to be affixed to any instrument
requiring it, and, when so affixed, it shall be attested by his signature or
by the signature of an Assistant Secretary.
SECTION 6.11. The Assistant Secretaries. The Assistant Secretary, or, if
there be more than one, the Assistant Secretaries in the order determined by
the Trustees or the President, shall, in the absence or disability of the
Secretary, perform the duties and exercise the powers of the Secretary and
shall perform such duties and have such other powers as the Trustees or the
President may from time to time prescribe.
SECTION 6.12. The Treasurer. The Treasurer shall be the chief financial
officer of the Trust. He shall keep or cause to be kept full and accurate
accounts of receipts and disbursements in books belonging to the Trust, and
he shall render to the Trustees and the President, whenever any of them
require it, an account of his transactions as Treasurer and of the financial
condition of the Trust; and he shall perform such other duties as the
Trustees, or the President, may from time to time prescribe.
SECTION 6.13. The Assistant Treasurers. The Assistant Treasurer, or, if
there shall be more than one, the Assistant Treasurers in the order
determined by the Trustees or the President, shall, in the absence or
disability of the Treasurer, perform the duties and exercise the powers of
the Treasurer and shall perform such other duties and have such other powers
as the Trustees, or the President, may from time to time prescribe.
SECTION 6.14. Delegation of Duties. Whenever an officer is absent or
disabled, or whenever for any reason the Trustees may deem it desirable, the
Trustees may delegate the powers and duties of an officer or officers to any
other officer or officers or to any Trustee or Trustees.
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ARTICLE VII
DIVIDENDS AND DISTRIBUTIONS
Subject to any applicable provisions of law and the Declaration, dividends
and distributions upon the Shares may be declared at such intervals as the
Trustees may determine, in cash, in securities or other property, or in
Shares, from any sources permitted by law, all as the Trustees shall from
time to time determine.
Inasmuch as the computation of net income and net profits from the sales
of securities or other properties for federal income tax purposes may vary
from the computation thereof on the records of the Trust, the Trustees shall
have power, in their discretion, to distribute as income dividends and as
capital gain distributions, respectively, amounts sufficient to enable the
Trust to avoid or reduce liability for federal income taxes.
ARTICLE VIII
CERTIFICATES OF SHARES
SECTION 8.1. Certificates of Shares. Certificates for Shares of each
series or class of Shares shall be in such form and of such design as the
Trustees shall approve, subject to the right of the Trustees to change such
form and design at any time or from time to time, and shall be entered in the
records of the Trust as they are issued. Each such certificate shall bear a
distinguishing number; shall exhibit the holder's name and certify the number
of full Shares owned by such holder; shall be signed by or in the name of the
Trust by the President, or a Vice President, and countersigned by the
Secretary or an Assistant Secretary or the Treasurer and an Assistant
Treasurer of the Trust; shall be sealed with the seal; and shall contain such
recitals as may be required by law. Where any certificate is signed by a
Transfer Agent or by a Registrar, the signature of such officers and the seal
may be facsimile, printed or engraved. The Trust may, at its option,
determine not to issue a certificate or certificates to evidence Shares owned
of record by any Shareholder.
In case any officer or officers who shall have signed, or whose facsimile
signature or signatures shall appear on, any such certificate or certificates
shall cease to be such officer or officers of the Trust, whether because of
death, resignation or otherwise, before such certificate or certificates
shall have been delivered by the Trust, such certificate or certificates
shall, nevertheless, be adopted by the Trust and be issued and delivered as
though the person or persons who signed such certificate or certificates or
whose facsimile signature or signatures shall appear therein had not ceased
to be such officer or officers of the Trust.
No certificate shall be issued for any share until such share is fully
paid.
SECTION 8.2. Lost, Stolen, Destroyed and Mutilated Certificates. The
Trustees may direct a new certificate or certificates to be issued in place
of any certificate or certificates theretofore issued by the Trust alleged to
have been lost, stolen or destroyed, upon satisfactory proof of such loss,
theft, or destruction; and the Trustees may, in their discretion, require the
owner of the lost, stolen or destroyed certificate, or his legal
representative, to give to the Trust and to such Registrar, Transfer Agent
and/or Transfer Clerk as may be authorized or required to countersign such
new certificate or certificates, a bond in such sum and of such type as they
may direct, and with such surety or sureties, as they may direct, as
indemnity against any claim that may be against them or any of them on
account of or in connection with the alleged loss, theft or destruction of
any such certificate.
ARTICLE IX
CUSTODIAN
SECTION 9.1. Appointment and Duties. The Trust shall at times employ a
bank or trust company having capital, surplus and undivided profits of at
least five million dollars ($5,000,000) as custodian with authority as its
agent, but subject to such restrictions, limitations and other requirements,
if any, as may be contained in these By-Laws and the 1940 Act:
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(1) to receive and hold the securities owned by the Trust and deliver
the same upon written or electronically transmitted order;
(2) to receive and receipt for any moneys due to the Trust and deposit
the same in its own banking department or elsewhere as the Trustees may
direct;
(3) to disburse such funds upon orders or vouchers;
all upon such basis of compensation as may be agreed upon between the
Trustees and the custodian. If so directed by a Majority Shareholder Vote,
the custodian shall deliver and pay over all property of the Trust held by it
as specified in such vote.
The Trustees may also authorize the custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of
the custodian and upon such terms and conditions as may be agreed upon
between the custodian and such sub-custodian and approved by the Trustees.
SECTION 9.2. Central Certificate System. Subject to such rules,
regulations and orders as the Commission may adopt, the Trustees may direct
the custodian to deposit all or any part of the securities owned by the Trust
in a system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, or such other person as
may be permitted by the Commission, or otherwise in accordance with the 1940
Act, pursuant to which system all securities of any particular class or
series of any issuer deposited within the system are treated as fungible and
may be transferred or pledged by bookkeeping entry without physical delivery
of such securities, provided that all such deposits shall be subject to
withdrawal only upon the order of the Trust.
ARTICLE X
WAIVER OF NOTICE
Whenever any notice of the time, place or purpose of any meeting of
Shareholders, Trustees, or of any committee is required to be given in
accordance with law or under the provisions of the Declaration or these
By-Laws, a waiver thereof in writing, signed by the person or persons
entitled to such notice and filed with the records of the meeting, whether
before or after the holding thereof, or actual attendance at the meeting of
shareholders, Trustees or committee, as the case may be, in person, shall be
deemed equivalent to the giving of such notice to such person.
ARTICLE XI
MISCELLANEOUS
SECTION 11.1. Location of Books and Records. The books and records of the
Trust may be kept outside the Commonwealth of Massachusetts at such place or
places as the Trustees may from time to time determine, except as otherwise
required by law.
SECTION 11.2 Record Date. The Trustees may fix in advance a date as the
record date for the purpose of determining the Shareholders entitled to (i)
receive notice of, or to vote at, any meeting of Shareholders, or (ii)
receive payment of any dividend or the allotment of any rights, or in order
to make a determination of Shareholders for any other proper purpose. The
record date, in any case, shall not be more than one hundred eighty (180)
days, and in the case of a meeting of Shareholders not less than ten (10)
days, prior to the date on which such meeting is to be held or the date on
which such other particular action requiring determination of Shareholders is
to be taken, as the case may be. In the case of a meeting of Shareholders,
the meeting date set forth in the notice to Shareholders accompanying the
proxy statement shall be the date used for purposes of calculating the 180
day or 10 day period, and any adjourned meeting may be reconvened without a
change in record date. In lieu of fixing a record date, the Trustees may
provide that the transfer books shall be closed for a stated period but not
to exceed, in any case, twenty (20) days. If the transfer books are closed
for the purpose of determining Shareholders entitled to notice of a vote at a
meeting of Shareholders, such books shall be closed for at least ten (10)
days immediately preceding the meeting.
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SECTION 11.3. Seal. The Trustees shall adopt a seal, which shall be in
such form and shall have such inscription thereon as the Trustees may from
time to time provide. The seal of the Trust may be affixed to any document,
and the seal and its attestation may be lithographed, engraved or otherwise
printed on any document with the same force and effect as if it had been
imprinted and attested manually in the same manner and with the same effect
as if done by a Massachusetts business corporation under Massachusetts law.
SECTION 11.4. Fiscal Year. The fiscal year of the Trust shall end on such
date as the Trustees may by resolution specify, and the Trustees may by
resolution change such date for future fiscal years at any time and from time
to time.
SECTION 11.5. Orders for Payment of Money. All orders or instructions for
the payment of money of the Trust, and all notes or other evidences of
indebtedness issued in the name of the Trust, shall be signed by such officer
or officers or such other person or persons as the Trustees may from time to
time designate, or as may be specified in or pursuant to the agreement
between the Trust and the bank or trust company appointed as Custodian of the
securities and funds of the Trust.
ARTICLE XII
COMPLIANCE WITH FEDERAL REGULATIONS
The Trustees are hereby empowered to take such action as they may deem to
be necessary, desirable or appropriate so that the Trust is or shall be in
compliance with any federal or state statute, rule or regulation with which
compliance by the Trust is required.
ARTICLE XIII
AMENDMENTS
These By-Laws may be amended, altered, or repealed, or new By-Laws may be
adopted, (a) by a Majority Shareholder Vote, or (b) by the Trustees;
provided, however, that no By-Law may be amended, adopted or repealed by the
Trustees if such amendment, adoption or repeal requires, pursuant to law, the
Declaration, or these By-Laws, a vote of the Shareholders. The Trustees shall
in no event adopt By-Laws which are in conflict with the Declaration, and any
apparent inconsistency shall be construed in favor of the related provisions
in the Declaration.
ARTICLE XIV
DECLARATION OF TRUST
The Declaration of Trust establishing Dean Witter Diversified Income
Trust, dated December 20, 1991, a copy of which is on file in the office of
the Secretary of the Commonwealth of Massachusetts, provides that the name
Dean Witter Diversified Income Trust refers to the Trustees under the
Declaration collectively as Trustees, but not as individuals or personally;
and no Trustee, Shareholder, officer, employee or agent of Dean Witter
Diversified Income Trust shall be held to any personal liability, nor shall
resort be had to their private property for the satisfaction of any
obligation or claim or otherwise, in connection with the affairs of said Dean
Witter Diversified Income Trust, but the Trust Estate only shall be liable.
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AMENDED AND RESTATED
TRANSFER AGENCY AND SERVICE AGREEMENT
WITH
DEAN WITTER TRUST FSB
[OPEN-END FUNDS]
666568
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
Article 1 Terms of Appointment............................... 1
Article 2 Fees and Expenses.................................. 2
Article 3 Representations and Warranties of DWTFSB .......... 3
Article 4 Representations and Warranties of the Fund ........ 3
Article 5 Duty of Care and Indemnification................... 3
Article 6 Documents and Covenants of the Fund and DWTFSB .... 4
Article 7 Duration and Termination of Agreement.............. 5
Article 8 Assignment ........................................ 5
Article 9 Affiliations....................................... 6
Article 10 Amendment.......................................... 6
Article 11 Applicable Law..................................... 6
Article 12 Miscellaneous...................................... 6
Article 13 Merger of Agreement................................ 7
Article 14 Personal Liability................................. 7
</TABLE>
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AMENDED AND RESTATED TRANSFER AGENCY AND SERVICE AGREEMENT
AMENDED AND RESTATED AGREEMENT made as of the 23rd day of October, 1997 by
and between each of the Funds listed on the signature pages hereof, each of
such Funds acting severally on its own behalf and not jointly with any of
such other Funds (each such Fund hereinafter referred to as the "Fund"), each
such Fund having its principal office and place of business at Two World
Trade Center, New York, New York, 10048, and DEAN WITTER TRUST FSB
("DWTFSB"), a federally chartered savings bank, having its principal office
and place of business at Harborside Financial Center, Plaza Two, Jersey City,
New Jersey 07311.
WHEREAS, the Fund desires to appoint DWTFSB as its transfer agent,
dividend disbursing agent and shareholder servicing agent and DWTFSB desires
to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of DWTFSB
1.1 Subject to the terms and conditions set forth in this Agreement, the
Fund hereby employs and appoints DWTFSB to act as, and DWTFSB agrees to act
as, the transfer agent for each series and class of shares of the Fund,
whether now or hereafter authorized or issued ("Shares"), dividend disbursing
agent and shareholder servicing agent in connection with any accumulation,
open-account or similar plans provided to the holders of such Shares
("Shareholders") and set out in the currently effective prospectus and
statement of additional information ("prospectus") of the Fund, including
without limitation any periodic investment plan or periodic withdrawal
program.
1.2 DWTFSB agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and DWTFSB, DWTFSB shall:
(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation therefor to the
custodian of the assets of the Fund (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number of
Shares and issue certificates therefor or hold such Shares in book
form in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation therefor to the
Custodian;
(iv) At the appropriate time as and when it receives monies paid to
it by the Custodian with respect to any redemption, pay over or cause
to be paid over in the appropriate manner such monies as instructed by
the redeeming Shareholders;
(v) Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and distributions
declared by the Fund;
(vii) Calculate any sales charges payable by a Shareholder on
purchases and/or redemptions of Shares of the Fund as such charges may
be reflected in the prospectus;
(viii) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(ix) Record the issuance of Shares of the Fund and maintain pursuant
to Rule 17Ad-10(e) under the Securities Exchange Act of 1934 ("1934
Act") a record of the total number of Shares of the Fund which are
authorized, based upon data provided to it by the Fund, and issued and
outstanding. DWTFSB shall also provide to the Fund on a regular basis
the total number of Shares that are authorized, issued and outstanding
and shall notify the Fund in case any proposed issue of Shares by the
Fund would result in an overissue. In case any issue of Shares
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would result in an overissue, DWTFSB shall refuse to issue such Shares
and shall not countersign and issue any certificates requested for
such Shares. When recording the issuance of Shares, DWTFSB shall have
no obligation to take cognizance of any Blue Sky laws relating to the
issue of sale of such Shares, which functions shall be the sole
responsibility of the Fund.
(b) In addition to and not in lieu of the services set forth in the above
paragraph (a), DWTFSB shall:
(i) perform all of the customary services of a transfer agent,
dividend disbursing agent and, as relevant, shareholder servicing
agent in connection with dividend reinvestment, accumulation,
open-account or similar plans (including without limitation any
periodic investment plan or periodic withdrawal program), including
but not limited to, maintaining all Shareholder accounts, preparing
Shareholder meeting lists, mailing proxies, receiving and tabulating
proxies, mailing shareholder reports and prospectuses to current
Shareholders, withholding taxes on U.S. resident and non-resident
alien accounts, preparing and filing appropriate forms required with
respect to dividends and distributions by federal tax authorities for
all Shareholders, preparing and mailing confirmation forms and
statements of account to Shareholders for all purchases and
redemptions of Shares and other confirmable transactions in
Shareholder accounts, preparing and mailing activity statements for
Shareholders and providing Shareholder account information;
(ii) open any and all bank accounts which may be necessary or
appropriate in order to provide the foregoing services; and
(iii) provide a system that will enable the Fund to monitor the total
number of Shares sold in each State or other jurisdiction.
(c) In addition, the Fund shall:
(i) identify to DWTFSB in writing those transactions and assets to be
treated as exempt from Blue Sky reporting for each State; and
(ii) verify the inclusion on the system prior to activation of each
State in which Fund shares may be sold and thereafter monitor the
daily purchases and sales for shareholders in each State. The
responsibility of DWTFSB for the Fund's status under the securities
laws of any State or other jurisdiction is limited to the inclusion on
the system of each State as to which the Fund has informed DWTFSB that
shares may be sold in compliance with state securities laws and the
reporting of purchases and sales in each such State to the Fund as
provided above and as agreed from time to time by the Fund and DWTFSB.
(d) DWTFSB shall provide such additional services and functions not
specifically described herein as may be mutually agreed between DWTFSB and
the Fund. Procedures applicable to such services may be established from
time to time by agreement between the Fund and DWTFSB.
Article 2 Fees and Expenses
2.1 For performance by DWTFSB pursuant to this Agreement, each Fund agrees
to pay DWTFSB an annual maintenance fee for each Shareholder account and
certain transactional fees, if applicable, as set out in the respective fee
schedule attached hereto as Schedule A. Such fees and out-of-pocket expenses
and advances identified under Section 2.2 below may be changed from time to
time subject to mutual written agreement between the Fund and DWTFSB.
2.2 In addition to the fees paid under Section 2.1 above, the Fund agrees
to reimburse DWTFSB for out of pocket expenses in connection with the
services rendered by DWTFSB hereunder. In addition, any other expenses
incurred by DWTFSB at the request or with the consent of the Fund will be
reimbursed by the Fund.
2.3 The Fund agrees to pay all fees and reimbursable expenses within a
reasonable period of time following the mailing of the respective billing
notice. Postage for mailing of dividends, proxies, Fund reports and other
mailings to all Shareholder accounts shall be advanced to DWTFSB by the Fund
upon request prior to the mailing date of such materials.
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<PAGE>
Article 3 Representations and Warranties of DWTFSB
DWTFSB represents and warrants to the Fund that:
3.1 It is a federally chartered savings bank whose principal office is in
New Jersey.
3.2 It is and will remain registered with the U.S. Securities and Exchange
Commission ("SEC") as a Transfer Agent pursuant to the requirements of
Section 17A of the 1934 Act.
3.3 It is empowered under applicable laws and by its charter and By-Laws
to enter into and perform this Agreement.
3.4 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
3.5 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
Article 4 Representations and Warranties of the Fund
The Fund represents and warrants to DWTFSB that:
4.1 It is a corporation duly organized and existing and in good standing
under the laws of Delaware or Maryland or a trust duly organized and existing
and in good standing under the laws of Massachusetts, as the case may be.
4.2 It is empowered under applicable laws and by its Articles of
Incorporation or Declaration of Trust, as the case may be, and under its
By-Laws to enter into and perform this Agreement.
4.3 All corporate proceedings necessary to authorize it to enter into and
perform this Agreement have been taken.
4.4 It is an investment company registered with the SEC under the
Investment Company Act of 1940, as amended (the "1940 Act").
4.5 A registration statement under the Securities Act of 1933 (the "1933
Act") is currently effective and will remain effective, and appropriate state
securities law filings have been made and will continue to be made, with
respect to all Shares of the Fund being offered for sale.
Article 5 Duty of Care and Indemnification
5.1 DWTFSB shall not be responsible for, and the Fund shall indemnify and
hold DWTFSB harmless from and against, any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liability arising out of or
attributable to:
(a) All actions of DWTFSB or its agents or subcontractors required to be
taken pursuant to this Agreement, provided that such actions are taken in
good faith and without negligence or willful misconduct.
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's lack of good faith, negligence
or willful misconduct or which arise out of breach of any representation
or warranty of the Fund hereunder.
(c) The reliance on or use by DWTFSB or its agents or subcontractors of
information, records and documents which (i) are received by DWTFSB or its
agents or subcontractors and furnished to it by or on behalf of the Fund,
and (ii) have been prepared and/or maintained by the Fund or any other
person or firm on behalf of the Fund.
(d) The reliance on, or the carrying out by DWTFSB or its agents or
subcontractors of, any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any requirement under the
federal securities laws or regulations or the securities or Blue Sky laws
of any State or other jurisdiction that notice of
3
<PAGE>
offering of such Shares in such State or other jurisdiction or in
violation of any stop order or other determination or ruling by any
federal agency or any State or other jurisdiction with respect to the
offer or sale of such Shares in such State or other jurisdiction.
5.2 DWTFSB shall indemnify and hold the Fund harmless from or against any
and all losses, damages, costs, charges, counsel fees, payments, expenses and
liability arising out of or attributable to any action or failure or omission
to act by DWTFSB as a result of the lack of good faith, negligence or willful
misconduct of DWTFSB, its officers, employees or agents.
5.3 At any time, DWTFSB may apply to any officer of the Fund for
instructions, and may consult with legal counsel to the Fund, with respect to
any matter arising in connection with the services to be performed by DWTFSB
under this Agreement, and DWTFSB and its agents or subcontractors shall not
be liable and shall be indemnified by the Fund for any action taken or
omitted by it in reliance upon such instructions or upon the opinion of such
counsel. DWTFSB, its agents and subcontractors shall be protected and
indemnified in acting upon any paper or document furnished by or on behalf of
the Fund, reasonably believed to be genuine and to have been signed by the
proper person or persons, or upon any instruction, information, data, records
or documents provided to DWTFSB or its agents or subcontractors by machine
readable input, telex, CRT data entry or other similar means authorized by
the Fund, and shall not be held to have notice of any change of authority of
any person, until receipt of written notice thereof from the Fund. DWTFSB,
its agents and subcontractors shall also be protected and indemnified in
recognizing stock certificates which are reasonably believed to bear the
proper manual or facsimile signature of the officers of the Fund, and the
proper countersignature of any former transfer agent or registrar, or of a
co-transfer agent or co-registrar.
5.4 In the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to
the other for any damages resulting from such failure to perform or otherwise
from such causes.
5.5 Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or for any act or
failure to act hereunder.
5.6 In order that the indemnification provisions contained in this Article
5 shall apply, upon the assertion of a claim for which either party may be
required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The
party who may be required to indemnify shall have the option to participate
with the party seeking indemnification in the defense of such claim. The
party seeking indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to indemnify
it except with the other party's prior written consent.
Article 6 Documents and Covenants of the Fund and DWTFSB
6.1 The Fund shall promptly furnish to DWTFSB the following, unless
previously furnished to Dean Witter Trust Company, the prior transfer agent
of the Fund:
(a) If a corporation:
(i) A certified copy of the resolution of the Board of Directors of
the Fund authorizing the appointment of DWTFSB and the execution and
delivery of this Agreement;
(ii) A certified copy of the Articles of Incorporation and By-Laws of
the Fund and all amendments thereto;
(iii) Certified copies of each vote of the Board of Directors
designating persons authorized to give instructions on behalf of the
Fund and signature cards bearing the signature of any officer of the
Fund or any other person authorized to sign written instructions on
behalf of the Fund;
(iv) A specimen of the certificate for Shares of the Fund in the form
approved by the Board of Directors, with a certificate of the
Secretary of the Fund as to such approval;
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<PAGE>
(b) If a business trust:
(i) A certified copy of the resolution of the Board of Trustees of
the Fund authorizing the appointment of DWTFSB and the execution and
delivery of this Agreement;
(ii) A certified copy of the Declaration of Trust and By-Laws of the
Fund and all amendments thereto;
(iii) Certified copies of each vote of the Board of Trustees
designating persons authorized to give instructions on behalf of the
Fund and signature cards bearing the signature of any officer of the
Fund or any other person authorized to sign written instructions on
behalf of the Fund;
(iv) A specimen of the certificate for Shares of the Fund in the form
approved by the Board of Trustees, with a certificate of the Secretary
of the Fund as to such approval;
(c) The current registration statements and any amendments and
supplements thereto filed with the SEC pursuant to the requirements of the
1933 Act or the 1940 Act;
(d) All account application forms or other documents relating to
Shareholder accounts and/or relating to any plan, program or service
offered or to be offered by the Fund; and
(e) Such other certificates, documents or opinions as DWTFSB deems to be
appropriate or necessary for the proper performance of its duties.
6.2 DWTFSB hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of Share
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such
certificates, forms and devices.
6.3 DWTFSB shall prepare and keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable and as
required by applicable laws and regulations. To the extent required by
Section 31 of the 1940 Act, and the rules and regulations thereunder, DWTFSB
agrees that all such records prepared or maintained by DWTFSB relating to the
services performed by DWTFSB hereunder are the property of the Fund and will
be preserved, maintained and made available in accordance with such Section
31 of the 1940 Act, and the rules and regulations thereunder, and will be
surrendered promptly to the Fund on and in accordance with its request.
6.4 DWTFSB and the Fund agree that all books, records, information and
data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement
shall remain confidential and shall not be voluntarily disclosed to any other
person except as may be required by law or with the prior consent of DWTFSB
and the Fund.
6.5 In case of any request or demands for the inspection of the
Shareholder records of the Fund, DWTFSB will endeavor to notify the Fund and
to secure instructions from an authorized officer of the Fund as to such
inspection. DWTFSB reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may be
held liable for the failure to exhibit the Shareholder records to such
person.
Article 7 Duration and Termination of Agreement
7.1 This Agreement shall remain in full force and effect until August 1,
2000 and from year-to-year thereafter unless terminated by either party as
provided in Section 7.2 hereof.
7.2 This Agreement may be terminated by the Fund on 60 days written
notice, and by DWTFSB on 90 days written notice, to the other party without
payment of any penalty.
7.3 Should the Fund exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and other materials will be
borne by the Fund. Additionally, DWTFSB reserves the right to charge for any
other reasonable fees and expenses associated with such termination.
Article 8 Assignment
8.1 Except as provided in Section 8.3 below, neither this Agreement nor
any rights or obligations hereunder may be assigned by either party without
the written consent of the other party.
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8.2 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
8.3 DWTFSB may, in its sole discretion and without further consent by the
Fund, subcontract, in whole or in part, for the performance of its
obligations and duties hereunder with any person or entity including but not
limited to companies which are affiliated with DWTFSB; provided, however,
that such person or entity has and maintains the qualifications, if any,
required to perform such obligations and duties, and that DWTFSB shall be as
fully responsible to the Fund for the acts and omissions of any agent or
subcontractor as it is for its own acts or omissions under this Agreement.
Article 9 Affiliations
9.1 DWTFSB may now or hereafter, without the consent of or notice to the
Fund, function as transfer agent and/or shareholder servicing agent for any
other investment company registered with the SEC under the 1940 Act and for
any other issuer, including without limitation any investment company whose
adviser, administrator, sponsor or principal underwriter is or may become
affiliated with Morgan Stanley, Dean Witter, Discover & Co. or any of its
direct or indirect subsidiaries or affiliates.
9.2 It is understood and agreed that the Directors or Trustees (as the
case may be), officers, employees, agents and shareholders of the Fund, and
the directors, officers, employees, agents and shareholders of the Fund's
investment adviser and/or distributor, are or may be interested in DWTFSB as
directors, officers, employees, agents and shareholders or otherwise, and
that the directors, officers, employees, agents and shareholders of DWTFSB
may be interested in the Fund as Directors or Trustees (as the case may be),
officers, employees, agents and shareholders or otherwise, or in the
investment adviser and/or distributor as directors, officers, employees,
agents, shareholders or otherwise.
Article 10 Amendment
10.1 This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution of the
Board of Directors or the Board of Trustees (as the case may be) of the Fund.
Article 11 Applicable Law
11.1 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the State of New York.
Article 12 Miscellaneous
12.1 In the event that one or more additional investment companies managed
or administered by Dean Witter InterCapital Inc. or any of its affiliates
("Additional Funds") desires to retain DWTFSB to act as transfer agent,
dividend disbursing agent and/or shareholder servicing agent, and DWTFSB
desires to render such services, such services shall be provided pursuant to
a letter agreement, substantially in the form of Exhibit A hereto, between
DWTFSB and each Additional Fund.
12.2 In the event of an alleged loss or destruction of any Share
certificate, no new certificate shall be issued in lieu thereof, unless there
shall first be furnished to DWTFSB an affidavit of loss or non-receipt by the
holder of Shares with respect to which a certificate has been lost or
destroyed, supported by an appropriate bond satisfactory to DWTFSB and the
Fund issued by a surety company satisfactory to DWTFSB, except that DWTFSB
may accept an affidavit of loss and indemnity agreement executed by the
registered holder (or legal representative) without surety in such form as
DWTFSB deems appropriate indemnifying DWTFSB and the Fund for the issuance of
a replacement certificate, in cases where the alleged loss is in the amount
of $1,000 or less.
12.3 In the event that any check or other order for payment of money on
the account of any Shareholder or new investor is returned unpaid for any
reason, DWTFSB will (a) give prompt notification to the Fund's distributor
("Distributor") (or to the Fund if the Fund acts as its own distributor) of
such non-payment; and (b) take such other action, including imposition of a
reasonable processing or handling fee, as DWTFSB may, in its sole discretion,
deem appropriate or as the Fund and, if applicable, the Distributor may
instruct DWTFSB.
6
<PAGE>
12.4 Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Fund or to DWTFSB shall be
sufficiently given if addressed to that party and received by it at its
office set forth below or at such other place as it may from time to time
designate in writing.
To the Fund:
[Name of Fund]
Two World Trade Center
New York, New York 10048
Attention: General Counsel
To DWTFSB:
Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
Attention: President
Article 13 Merger of Agreement
13.1 This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject matter
hereof whether oral or written.
Article 14 Personal Liability
14.1 In the case of a Fund organized as a Massachusetts business trust, a
copy of the Declaration of Trust of the Fund is on file with the Secretary of
The Commonwealth of Massachusetts, and notice is hereby given that this
instrument is executed on behalf of the Board of Trustees of the Fund as
Trustees and not individually and that the obligations of this instrument are
not binding upon any of the Trustees or shareholders individually but are
binding only upon the assets and property of the Fund; provided, however,
that the Declaration of Trust of the Fund provides that the assets of a
particular Series of the Fund shall under no circumstances be charged with
liabilities attributable to any other Series of the Fund and that all persons
extending credit to, or contracting with or having any claim against, a
particular Series of the Fund shall look only to the assets of that
particular Series for payment of such credit, contract or claim.
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Agreement to be executed in their names and on their behalf by and
through their duly authorized officers, as of the day and year first above
written.
DEAN WITTER FUNDS
MONEY MARKET FUNDS
1. Dean Witter Liquid Asset Fund Inc.
2. Active Assets Money Trust
3. Dean Witter U.S. Government Money Market Trust
4. Active Assets Government Securities Trust
5. Dean Witter Tax-Free Daily Income Trust
6. Active Assets Tax-Free Trust
7. Dean Witter California Tax-Free Daily Income Trust
8. Dean Witter New York Municipal Money Market Trust
9. Active Assets California Tax-Free Trust
EQUITY FUNDS
10. Dean Witter American Value Fund
11. Dean Witter Mid-Cap Growth Fund
7
<PAGE>
12. Dean Witter Dividend Growth Securities Inc.
13. Dean Witter Capital Growth Securities
14. Dean Witter Global Dividend Growth Securities
15. Dean Witter Income Builder Fund
16. Dean Witter Natural Resource Development Securities Inc.
17. Dean Witter Precious Metals and Minerals Trust
18. Dean Witter Developing Growth Securities Trust
19. Dean Witter Health Sciences Trust
20. Dean Witter Capital Appreciation Fund
21. Dean Witter Information Fund
22. Dean Witter Value-Added Market Series
23. Dean Witter World Wide Investment Trust
24. Dean Witter European Growth Fund Inc.
25. Dean Witter Pacific Growth Fund Inc.
26. Dean Witter International SmallCap Fund
27. Dean Witter Japan Fund
28. Dean Witter Utilities Fund
29. Dean Witter Global Utilities Fund
30. Dean Witter Special Value Fund
31. Dean Witter Financial Services Trust
32. Dean Witter Market Leader Trust
33. Dean Witter Managers' Select Fund
34. Dean Witter Fund of Funds
35. Dean Witter S&P 500 Index Fund
BALANCED FUNDS
36. Dean Witter Balanced Growth Fund
37. Dean Witter Balanced Income Trust
ASSET ALLOCATION FUNDS
38. Dean Witter Strategist Fund
39. Dean Witter Global Asset Allocation Fund
FIXED INCOME FUNDS
40. Dean Witter High Yield Securities Inc.
41. Dean Witter High Income Securities
42. Dean Witter Convertible Securities Trust
43. Dean Witter Intermediate Income Securities
44. Dean Witter Short-Term Bond Fund
45. Dean Witter World Wide Income Trust
46. Dean Witter Global Short-Term Income Fund Inc.
47. Dean Witter Diversified Income Trust
48. Dean Witter U.S. Government Securities Trust
49. Dean Witter Federal Securities Trust
50. Dean Witter Short-Term U.S. Treasury Trust
51. Dean Witter Intermediate Term U.S. Treasury Trust
52. Dean Witter Tax-Exempt Securities Trust
53. Dean Witter National Municipal Trust
55. Dean Witter Limited Term Municipal Trust
55. Dean Witter California Tax-Free Income Fund
56. Dean Witter New York Tax-Free Income Fund
57. Dean Witter Hawaii Municipal Trust
58. Dean Witter Multi-State Municipal Series Trust
59. Dean Witter Select Municipal Reinvestment Fund
8
<PAGE>
SPECIAL PURPOSE FUNDS
60. Dean Witter Retirement Series
61. Dean Witter Variable Investment Series
62. Dean Witter Select Dimensions Investment Series
TCW/DW FUNDS
63. TCW/DW Core Equity Trust
64. TCW/DW North American Government Income Trust
65. TCW/DW Latin American Growth Fund
66. TCW/DW Income and Growth Fund
67. TCW/DW Small Cap Growth Fund
68. TCW/DW Balanced Fund
69. TCW/DW Total Return Trust
70. TCW/DW Global Telecom Trust
71. TCW/DW Strategic Income Trust
72. TCW/DW Mid-Cap Equity Trust
By:
--------------------------
Barry Fink
Vice President and
General Counsel
ATTEST:
- ---------------------------------
Assistant Secretary
DEAN WITTER TRUST FSB
By:
--------------------------
John Van Heuvelen
President
ATTEST:
- ----------------------------------
Executive Vice President
9
<PAGE>
EXHIBIT A
Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, NJ 07311
Gentlemen:
The undersigned, (insert name of investment company) a (Massachusetts
business trust/Maryland corporation) (the "Fund"), desires to employ and
appoint Dean Witter Trust FSB ("DWTFSB") to act as transfer agent for each
series and class of shares of the Fund, whether now or hereafter authorized
or issued ("Shares"), dividend disbursing agent and shareholder servicing
agent, registrar and agent in connection with any accumulation, open-account
or similar plan provided to the holders of Shares, including without
limitation any periodic investment plan or periodic withdrawal plan.
The Fund hereby agrees that, in consideration for the payment by the Fund
to DWTFSB of fees as set out in the fee schedule attached hereto as Schedule
A, DWTFSB shall provide such services to the Fund pursuant to the terms and
conditions set forth in the Transfer Agency and Service Agreement annexed
hereto, as if the Fund was a signatory thereto.
Please indicate DWTFSB's acceptance of employment and appointment by the
Fund in the capacities set forth above by so indicating in the space provided
below.
Very truly yours,
(name of fund)
By:
-------------------------------
Barry Fink
Vice President and General
Counsel
ACCEPTED AND AGREED TO:
DEAN WITTER TRUST FSB
By:
----------------------------------
Its:
--------------------------------
Date:
--------------------------------
10
<PAGE>
SCHEDULE A
Fund: Dean Witter Diversified Income Trust
Fees: (1) Annual maintenance fee of $13.20 per shareholder account, payable
monthly.
(2) A fee equal to 1/12 of the fee set forth in (1) above, for
providing Forms 1099 for accounts closed during the year, payable
following the end of the calendar year.
(3) Out-of-pocket expenses in accordance with Section 2.2 of the
Agreement.
(4) Fees for additional services not set forth in this Agreement
shall be as negotiated between the parties.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 7 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
December 17, 1997, relating to the financial statements and financial
highlights of Dean Witter Diversified Income Trust, which appears in such
Statement of Additional Information, and to the incorporation by reference of
our report into the Prospectus which constitutes part of this Registration
Statement. We also consent to the reference to us under the headings
"Independent Accountants" and "Experts" in such Statement of Additional
Information and to the reference to us under the heading "Financial Highlights"
in such Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
January 30, 1998
<PAGE>
SCHEDULE OF COMPUTATION OF YIELD QUOTATION
DW DIVERSIFIED INCOME TRUST
30 day Yield as of 10/31/97
CLASS A
6
YIELD = 2{ [ ((a-b)/c * d) + 1] -1}
WHERE: a = Dividends and interest earned during the period
b = Expenses accrued for the period
c = The average daily number of shares outstanding during the
period that were entitled to receive dividends
d = The maximum offering price per share on the last
day of the period
6
YIELD = 2{ [(( 30237.66-2859.55)/448820.206*9.877140)+1] -1}
= 7.526445%
<PAGE>
SCHEDULE OF COMPUTATION OF YIELD QUOTATION
DW DIVERSIFIED INCOME TRUST
30 day Yield as of 10/31/97
CLASS B
6
YIELD = 2{ [ ((a-b)/c * d) + 1] -1}
WHERE: a = Dividends and interest earned during the period
b = Expenses accrued for the period
c = The average daily number of shares outstanding during the
period that were entitled to receive dividends
d = The maximum offering price per share on the last
day of the period
6
YIELD = 2{ [(( 6493128.82-1064092.06)/95998433.414*9.4531)+1] -1}
= 7.287260%
<PAGE>
SCHEDULE OF COMPUTATION OF YIELD QUOTATION
DW DIVERSIFIED INCOME TRUST
30 day Yield as of 10/31/97
CLASS C
6
YIELD = 2{ [ ((a-b)/c * d) + 1] -1}
WHERE: a = Dividends and interest earned during the period
b = Expenses accrued for the period
c = The average daily number of shares outstanding
during the period that were entitled to receive
dividends
d = The maximum offering price per share on the last
day of the period
6
YIELD = 2{ [(( 22997.34-3752.09)/341675.942*9.43711)+1] -1}
= 7.270007%
<PAGE>
SCHEDULE OF COMPUTATION OF YIELD QUOTATION
DW DIVERSIFIED INCOME TRUST
30 day Yield as of 10/31/97
CLASS D
6
YIELD = 2{ [ ((a-b)/c * d) + 1] -1}
WHERE: a = Dividends and interest earned during the period
b = Expenses accrued for the period
c = The average daily number of
shares outstanding during the
period that were entitled to
receive dividends
d = The maximum offering price per share on the last
day of the period
6
YIELD = 2{ [(( 521.55-34.72)/7843.487*9.43417)+1] -1}
= 8.025880%
<PAGE>
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS
DIVERSIFIED INCOME TRUST (A)
(A) AVERAGE ANNUAL TOTAL RETURNS (I.E. STANDARDIZED COMPUTATIONS)
- -
| ---------------------- |
FORMULA: | | |
| /\ n | ERV |
T = | \ | ------------ | - 1
| \ | P |
| \| |
|_ _|
T = AVERAGE ANNUAL TOTAL RETURN
n = NUMBER OF YEARS
ERV = ENDING REDEEMABLE VALUE
P = INITIAL INVESTMENT
(A)
$1,000 ERV AS OF AGGREGATE NUMBER OF AVERAGE ANNUAL
INVESTED - P 31-Oct-97 TOTAL RETURN YEARS - n TOTAL RETURN - T
- ----------- ----------- -------------- ----------- ----------------
28-Jul-97 $983.80 -1.62% 0.26 NA
(B) AVERAGE ANNUAL TOTAL RETURNS WITHOUT DEDUCTION FOR APPLICABLE
SALES CHARGE (NON STANDARD COMPUTATIONS)
(C) TOTAL RETURN WITHOUT DEDUCTION FOR APPLICABLE SALES CHARGE
(NON STANDARD COMPUTATIONS)
- -
| ---------------------- |
FORMULA: | | |
| /\ n | EV |
t = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
EV
TR = ---------- - 1
P
t = AVERAGE ANNUAL TOTAL RETURN
(NO DEDUCTION FOR APPLICABLE SALES CHARGE)
n = NUMBER OF YEARS
EV = ENDING VALUE (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
P = INITIAL INVESTMENT
TR = TOTAL RETURN (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
<TABLE>
<CAPTION>
(C) (B)
$1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL
INVESTED - P 31-Oct-97 RETURN - TR YEARS - n TOTAL RETURN - t
- ----------- ----------- ------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
28-Jul-97 $1,027.40 2.74% 0.26 NA
</TABLE>
(D) GROWTH OF $10,000*
(E) GROWTH OF $50,000*
(F) GROWTH OF $100,000*
FORMULA: G= (TR+1)*P
G= GROWTH OF INITIAL INVESTMENT
P= INITIAL INVESTMENT
TR= TOTAL RETURN SINCE INCEPTION
<PAGE>
<TABLE>
<CAPTION>
TOTAL (D) GROWTH OF (E) GROWTH OF (D) GROWTH OF
INVESTED - P RETURN - TR $10,000 INVESTMENT-G $50,000 INVESTMENT - G $100,000 INVESTMENT - G
- ----------- ----------- -------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
28-Jul-97 2.74 $9,838 $49,572 $99,915
</TABLE>
*INITIAL INVESTMENT $9,575, $48,250 & 97,250 RESPECTIVELY REFLECTS A 4.25%,
3.5% & 2.75% SALES CHARGE
<PAGE>
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS
DIVERSIFIED INCOME TRUST (B)
(A) AVERAGE ANNUAL TOTAL RETURNS (I.E. STANDARDIZED COMPUTATIONS)
- -
| ---------------------- |
FORMULA: | | |
| /\ n | ERV |
T = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
T = AVERAGE ANNUAL TOTAL RETURN
n = NUMBER OF YEARS
ERV = ENDING REDEEMABLE VALUE
P = INITIAL INVESTMENT
(A)
$1,000 ERV AS OF AGGREGATE NUMBER OF AVERAGE ANNUAL
INVESTED - P 31-Oct-97 TOTAL RETURN YEARS - n TOTAL RETURN - T
- ----------- ----------- -------------- ----------- -----------------
31-Oct-96 $1,016.20 1.62% 1.00 1.62%
31-Oct-92 $1,391.40 39.14% 5.00 6.83%
09-Apr-92 $1,453.40 45.34% 5.56 6.96%
(B) AVERAGE ANNUAL TOTAL RETURNS WITHOUT DEDUCTION FOR APPLICABLE
SALES CHARGE (NON STANDARD COMPUTATIONS)
(C) TOTAL RETURN WITHOUT DEDUCTION FOR APPLICABLE SALES CHARGE
(NON STANDARD COMPUTATIONS)
- -
| ---------------------- |
FORMULA: | | |
| /\ n | EV |
t = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
EV
TR = ---------- - 1
P
t = AVERAGE ANNUAL TOTAL RETURN
(NO DEDUCTION FOR APPLICABLE SALES CHARGE)
n = NUMBER OF YEARS
EV = ENDING VALUE (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
P = INITIAL INVESTMENT
TR = TOTAL RETURN (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
<TABLE>
<CAPTION>
(C) (B)
$1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL
INVESTED - P 31-Oct-97 RETURN - TR YEARS - n TOTAL RETURN - t
- ----------- ----------- ----------- ----------------- ---------------------
<S> <C> <C> <C> <C>
31-Oct-96 $1,064.60 6.46% 1.00 6.46%
31-Oct-92 $1,410.30 41.03% 5.00 7.12%
09-Apr-92 $1,462.90 46.29% 5.56 7.08%
</TABLE>
(D) GROWTH OF $10,000
(E) GROWTH OF $50,000
(F) GROWTH OF $100,000
FORMULA: G= (TR+1)*P
G= GROWTH OF INITIAL INVESTMENT
P= INITIAL INVESTMENT
TR= TOTAL RETURN SINCE INCEPTION
<TABLE>
<CAPTION>
$10,000 TOTAL (D) GROWTH OF (E) GROWTH OF (F) GROWTH OF
INVESTED - P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT - G $100,000 INVESTMENT - G
- ----------- ----------- ---------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
09-Apr-92 46.29 $14,629 $73,145 $146,290
</TABLE>
<PAGE>
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS
DIVERSIFIED INCOME TRUST (C)
(A) AVERAGE ANNUAL TOTAL RETURNS (I.E. STANDARDIZED COMPUTATIONS)
- -
| ---------------------- |
FORMULA: | | |
| /\ n | ERV |
T = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
T = AVERAGE ANNUAL TOTAL RETURN
n = NUMBER OF YEARS
ERV = ENDING REDEEMABLE VALUE
P = INITIAL INVESTMENT
(A)
$1,000 ERV AS OF AGGREGATE NUMBER OF AVERAGE ANNUAL
INVESTED - P 31-Oct-97 TOTAL RETURN YEARS - n TOTAL RETURN - T
- ----------- ----------- -------------- ----------- ----------------
28-Jul-97 $1,015.20 1.52% 0.26 NA
(B) AVERAGE ANNUAL TOTAL RETURNS WITHOUT DEDUCTION FOR APPLICABLE
SALES CHARGE (NON STANDARD COMPUTATIONS)
(C) TOTAL RETURN WITHOUT DEDUCTION FOR APPLICABLE SALES CHARGE
(NON STANDARD COMPUTATIONS)
- -
| ---------------------- |
FORMULA: | | |
| /\ n | EV |
t = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
EV
TR = ---------- - 1
P
t = AVERAGE ANNUAL TOTAL RETURN
(NO DEDUCTION FOR APPLICABLE SALES CHARGE)
n = NUMBER OF YEARS
EV = ENDING VALUE (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
P = INITIAL INVESTMENT
TR = TOTAL RETURN (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
(C) (B)
$1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL
INVESTED - P 31-Oct-97 RETURN - TR YEARS - n TOTAL RETURN - t
- ----------- ----------- -------------- ------------ ----------------
28-Jul-97 $1,025.20 2.52% 0.26 NA
(D) GROWTH OF $10,000
(E) GROWTH OF $50,000
(F) GROWTH OF $100,000
FORMULA: G= (TR+1)*P
G= GROWTH OF INITIAL INVESTMENT
P= INITIAL INVESTMENT
TR= TOTAL RETURN SINCE INCEPTION
<TABLE>
<CAPTION>
TOTAL (D) GROWTH OF (E) GROWTH OF (D) GROWTH OF
INVESTED - P RETURN - TR $10,000 INVESTMENT-G $50,000 INVESTMENT - G $100,000 INVESTMENT - G
- ------------ ----------- -------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
28-Jul-97 2.52 10252 $51,260 $102,520
</TABLE>
<PAGE>
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS
DIVERSIFIED INCOME TRUST (D)
(A) TOTAL RETURN (NO LOAD FUND)
(B) AVERAGE ANNUAL TOTAL RETURNS (NO LOAD FUND)
- -
| ---------------------- |
FORMULA: | | |
| /\ n | EV |
t = | \ | ------------- | - 1
| \ | P |
| \| |
|- -|
EV
TR = ---------- - 1
P
t = AVERAGE ANNUAL COMPOUND RETURN
n = NUMBER OF YEARS
EV = ENDING VALUE
P = INITIAL INVESTMENT
TR = TOTAL RETURN
(A) (B)
$1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL
INVESTED - P 31-Oct-97 RETURN - TR YEARS - n COMPOUND RETURN - t
- ----------- ----------- ----------- ------------ -------------------
28-Jul-97 $1,026.90 2.69% 0.26 NA
(C) GROWTH OF $10,000
(D) GROWTH OF $50,000
(E) GROWTH OF $100,000
FORMULA: G= (TR+1)*P
G= GROWTH OF INITIAL INVESTMENT
P= INITIAL INVESTMENT
TR= TOTAL RETURN SINCE INCEPTION
<TABLE>
<CAPTION>
$10,000 TOTAL (C) GROWTH OF (D) GROWTH OF (E) GROWTH OF
INVESTED - P RETURN - TR $10,000 INVESTMENT- G $50,000 INVESTMENT- G $100,000 INVESTMENT- G
- ----------- ----------- --------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
28-Jul-97 2.69 $10,269 $51,345 $102,690
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 01
<NAME> Diversified Income Trust Class A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 925,155,939
<INVESTMENTS-AT-VALUE> 915,159,298
<RECEIVABLES> 70,523,240
<ASSETS-OTHER> 5,153,285
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 990,835,823
<PAYABLE-FOR-SECURITIES> 53,710,532
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12,420,504
<TOTAL-LIABILITIES> 66,131,036
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 951,576,895
<SHARES-COMMON-STOCK> 521,437
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 278,119
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (16,145,986)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (11,004,241)
<NET-ASSETS> 4,933,238
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 77,859,573
<OTHER-INCOME> 0
<EXPENSES-NET> 11,718,039
<NET-INVESTMENT-INCOME> 66,141,534
<REALIZED-GAINS-CURRENT> (8,043,772)
<APPREC-INCREASE-CURRENT> (3,943,025)
<NET-CHANGE-FROM-OPS> 54,154,737
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (58,752)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 558,411
<NUMBER-OF-SHARES-REDEEMED> (38,724)
<SHARES-REINVESTED> 1,750
<NET-CHANGE-IN-ASSETS> 179,123,885
<ACCUMULATED-NII-PRIOR> 12,819,524
<ACCUMULATED-GAINS-PRIOR> (7,579,803)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,347,731
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,718,039
<AVERAGE-NET-ASSETS> 2,575,260
<PER-SHARE-NAV-BEGIN> 9.40
<PER-SHARE-NII> .22
<PER-SHARE-GAIN-APPREC> .04
<PER-SHARE-DIVIDEND> (.20)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.46
<EXPENSE-RATIO> .85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 02
<NAME> Diversified Income Trust Class B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 925,155,939
<INVESTMENTS-AT-VALUE> 915,159,298
<RECEIVABLES> 70,523,240
<ASSETS-OTHER> 5,153,285
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 990,835,823
<PAYABLE-FOR-SECURITIES> 53,710,532
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12,420,504
<TOTAL-LIABILITIES> 66,131,036
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 951,576,895
<SHARES-COMMON-STOCK> 96,807,771
<SHARES-COMMON-PRIOR> 76,228,524
<ACCUMULATED-NII-CURRENT> 278,119
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (16,145,986)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (11,004,241)
<NET-ASSETS> 915,899,370
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 77,859,573
<OTHER-INCOME> 0
<EXPENSES-NET> 11,718,039
<NET-INVESTMENT-INCOME> 66,141,534
<REALIZED-GAINS-CURRENT> (8,043,772)
<APPREC-INCREASE-CURRENT> (3,943,025)
<NET-CHANGE-FROM-OPS> 54,154,737
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (79,103,939)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 55,563,733
<NUMBER-OF-SHARES-REDEEMED> (38,605,240)
<SHARES-REINVESTED> 3,620,754
<NET-CHANGE-IN-ASSETS> 179,123,885
<ACCUMULATED-NII-PRIOR> 12,819,524
<ACCUMULATED-GAINS-PRIOR> (7,579,803)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,347,731
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,718,039
<AVERAGE-NET-ASSETS> 835,790,933
<PER-SHARE-NAV-BEGIN> 9.78
<PER-SHARE-NII> .74
<PER-SHARE-GAIN-APPREC> (.15)
<PER-SHARE-DIVIDEND> (.91)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.46
<EXPENSE-RATIO> 1.40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 03
<NAME> Diversified Income Trust Class C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 925,155,939
<INVESTMENTS-AT-VALUE> 915,159,298
<RECEIVABLES> 70,523,240
<ASSETS-OTHER> 5,153,285
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 990,835,823
<PAYABLE-FOR-SECURITIES> 53,710,532
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12,420,504
<TOTAL-LIABILITIES> 66,131,036
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 951,576,895
<SHARES-COMMON-STOCK> 399,124
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 278,119
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (16,145,986)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (11,004,241)
<NET-ASSETS> 3,772,746
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 77,859,573
<OTHER-INCOME> 0
<EXPENSES-NET> 11,718,039
<NET-INVESTMENT-INCOME> 66,141,534
<REALIZED-GAINS-CURRENT> (8,043,772)
<APPREC-INCREASE-CURRENT> (3,943,025)
<NET-CHANGE-FROM-OPS> 54,154,737
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (41,777)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 404,022
<NUMBER-OF-SHARES-REDEEMED> (7,200)
<SHARES-REINVESTED> 2,302
<NET-CHANGE-IN-ASSETS> 179,123,885
<ACCUMULATED-NII-PRIOR> 12,819,524
<ACCUMULATED-GAINS-PRIOR> (7,579,803)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,347,731
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,718,039
<AVERAGE-NET-ASSETS> 1,826,227
<PER-SHARE-NAV-BEGIN> 9.40
<PER-SHARE-NII> .20
<PER-SHARE-GAIN-APPREC> .03
<PER-SHARE-DIVIDEND> (.18)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.45
<EXPENSE-RATIO> 1.44
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 04
<NAME> Diversified Income Trust Class D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 925,155,939
<INVESTMENTS-AT-VALUE> 915,159,298
<RECEIVABLES> 717,523,240
<ASSETS-OTHER> 5,153,285
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 990,835,823
<PAYABLE-FOR-SECURITIES> 53,710,532
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12,420,504
<TOTAL-LIABILITIES> 66,131,036
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 951,576,895
<SHARES-COMMON-STOCK> 10,517
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 278,119
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (16,145,986)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (11,004,241)
<NET-ASSETS> 99,433
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 77,859,573
<OTHER-INCOME> 0
<EXPENSES-NET> 11,718,039
<NET-INVESTMENT-INCOME> 66,141,534
<REALIZED-GAINS-CURRENT> (8,043,772)
<APPREC-INCREASE-CURRENT> (3,943,025)
<NET-CHANGE-FROM-OPS> 54,154,737
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (882)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,494
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 23
<NET-CHANGE-IN-ASSETS> 179,123,885
<ACCUMULATED-NII-PRIOR> 12,819,524
<ACCUMULATED-GAINS-PRIOR> (7,579,803)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,347,731
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,718,039
<AVERAGE-NET-ASSETS> 31,950
<PER-SHARE-NAV-BEGIN> 9.40
<PER-SHARE-NII> .23
<PER-SHARE-GAIN-APPREC> .02
<PER-SHARE-DIVIDEND> (.20)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.45
<EXPENSE-RATIO> .59
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT: OTHER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that WAYNE E. HEDIEN, whose signature
appears below, constitutes and appoints David M. Butowsky, Ronald Feiman and
Stuart Strauss, or any of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution among himself and each of the persons
appointed herein, for him and in his name, place and stead, in any and all
capacities, to sign any amendments to any registration statement of ANY OF
THE DEAN WITTER FUNDS SET FORTH ON SCHEDULE A ATTACHED HERETO, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
Dated: September 1, 1997
/s/ Wayne E. Hedien
------------------------------
Wayne E. Hedien
<PAGE>
Schedule A
1. Active Assets Money Trust
2. Active Assets Tax-Free Trust
3. Active Assets Government Securities Trust
4. Active Assets California Tax-Free Trust
5. Dean Witter New York Municipal Money Market Trust
6. Dean Witter American Value Fund
7. Dean Witter Tax-Exempt Securities Trust
8. Dean Witter Tax-Free Daily Income Trust
9. Dean Witter Capital Growth Securities
10. Dean Witter U.S. Government Money Market Trust
11. Dean Witter Precious Metals and Minerals Trust
12. Dean Witter Developing Growth Securities Trust
13. Dean Witter World Wide Investment Trust
14. Dean Witter Value-Added Market Series
15. Dean Witter Utilities Fund
16. Dean Witter Strategist Fund
17. Dean Witter California Tax-Free Daily Income Trust
18. Dean Witter Convertible Securities Trust
19. Dean Witter Intermediate Income Securities
20. Dean Witter World Wide Income Trust
21. Dean Witter S&P 500 Index Fund
22. Dean Witter U.S. Government Securities Trust
23. Dean Witter Federal Securities Trust
24. Dean Witter Multi-State Municipal Series Trust
25. Dean Witter California Tax-Free Income Fund
26. Dean Witter New York Tax-Free Income Fund
27. Dean Witter Select Municipal Reinvestment Fund
28. Dean Witter Variable Investment Series
29. High Income Advantage Trust
30. High Income Advantage Trust II
31. High Income Advantage Trust III
32. InterCapital Insured Municipal Bond Trust
33. InterCapital Insured Municipal Trust
34. InterCapital Insured Municipal Income Trust
35. InterCapital Quality Municipal Investment Trust
36. InterCapital Quality Municipal Income Trust
37. Dean Witter Government Income Trust
38. Municipal Income Trust
39. Municipal Income Trust II
40. Municipal Income Trust III
41. Municipal Income Opportunities Trust
42. Municipal Income Opportunities Trust II
43. Municipal Income Opportunities Trust III
44. Municipal Premium Income Trust
45. Prime Income Trust
46. Dean Witter Short-Term U.S. Treasury Trust
47. Dean Witter Diversified Income Trust
<PAGE>
48. InterCapital California Insured Municipal Income Trust
49. Dean Witter Health Sciences Trust
50. Dean Witter Global Dividend Growth Securities
51. InterCapital Quality Municipal Securities
52. InterCapital California Quality Municipal Securities
53. InterCapital New York Quality Municipal Securities
54. Dean Witter Retirement Series
55. Dean Witter Limited Term Municipal Trust
56. Dean Witter Short-Term Bond Fund
57. Dean Witter Global Utilities Fund
58. InterCapital Insured Municipal Securities
59. InterCapital Insured California Municipal Securities
60. Dean Witter High Income Securities
61. Dean Witter National Municipal Trust
62. Dean Witter International SmallCap Fund
63. Dean Witter Mid-Cap Growth Fund
64. Dean Witter Select Dimensions Investment Series
65. Dean Witter Global Assets Allocation Fund
66. Dean Witter Balanced Growth Fund
67. Dean Witter Balanced Income Fund
68. Dean Witter Intermediate Term U.S. Treasury Trust
69. Dean Witter Hawaii Municipal Trust
70. Dean Witter Japan Fund
71. Dean Witter Capital Appreciation Fund
72. Dean Witter Information Fund
73. Dean Witter Fund of Funds
74. Dean Witter Special Value Fund
75. Dean Witter Income Builder Fund
76. Dean Witter Financial Services Trust
77. Dean Witter Market Leader Trust
78. Dean Witter Managers' Select Fund
79. Dean Witter Liquid Asset Fund Inc.
80. Dean Witter Natural Resources Development Securities Inc.
81. Dean Witter Divided Growth Securities Inc.
82. Dean Witter European Growth Fund Inc.
83. Dean Witter Pacific Growth Fund Inc.
84. Dean Witter High Yield Securities Inc.
85. Dean Witter Global Short-Term Income Fund Inc.
86. InterCapital Income Securities Inc.
