<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1997
REGISTRATION NOS.: 33-46049
811-6572
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 5 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 [X]
AMENDMENT NO. 6 [X]
-------------
TCW/DW NORTH AMERICAN GOVERNMENT 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
SHELDON CURTIS, 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 effective date of the registration statement.
-------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on February 5, 1997 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a) of rule 485.
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO SECTION (A)(1) OF RULE 24F-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940. PURSUANT TO SECTION (B)(2) OF RULE 24F-2, THE
REGISTRANT FILED A RULE 24F-2 NOTICE FOR ITS FISCAL YEAR ENDED OCTOBER 31, 1996
WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 21, 1996.
AMENDING THE PROSPECTUS AND UPDATING FINANCIAL STATEMENTS
===============================================================================
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
CROSS-REFERENCE SHEET
FORM N-1A
PART A
ITEM CAPTION PROSPECTUS
- ---- ------------------
1. .............. Cover Page
2. .............. Summary of Fund Expenses; Prospectus Summary
3. .............. Performance Information
4. .............. Investment Objective and Policies; The Fund and its
Management; Cover Page; Investment Restrictions; Prospectus
Summary
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; Repurchases
and Redemptions
8. .............. Repurchases and Redemptions; Shareholder Services
9. .............. Litigation
PART B
ITEM STATEMENT OF ADDITIONAL INFORMATION
- ---- -----------------------------------
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; Custodian and Transfer Agent;
Independent Accountants
17. ............. Portfolio Transactions and Brokerage
18. ............. Description of Shares
19. ............. Repurchases and Redemptions; Shareholder Services
20. ............. Dividends, Distributions and Taxes
21. ............. The Distributor
22. ............. Performance Information
23. ............. Experts; Statement of Assets and Liabilities
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 5, 1997
TCW/DW North American Government Income Trust (the "Fund") is an open-end,
non-diversified management investment company whose investment objective is to
earn a high level of current income while maintaining relatively low volatility
of principal. The Fund seeks to achieve its investment objective by investing
primarily in investment grade fixed-income securities issued or guaranteed by
the U.S., Canadian or Mexican governments, or their subdivisions, or agencies
or instrumentalities of any of the foregoing. Shares of the Fund are not
issued, insured or guaranteed, as to value or yield, by the U.S. or any other
government.
Shares of the Fund are sold and redeemed at net asset value. The Fund pays a
distribution fee of up to 0.75% of its average daily net assets in accordance
with a Plan of Distribution pursuant to Rule 12b-1 under the Investment Company
Act of 1940.
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 5, 1997, which has been filed with the
Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone numbers listed on this page.
The Statement of Additional Information is incorporated herein by reference.
TCW/DW NORTH AMERICAN
GOVERNMENT 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/ 5
The Fund and its Management/ 6
Investment Objective and Policies/ 7
Risk Considerations/ 13
Investment Restrictions/ 20
Purchase of Fund Shares/ 21
Shareholder Services/ 22
Repurchases and Redemptions/ 25
Dividends, Distributions and Taxes/ 26
Performance Information/ 27
Additional Information/ 28
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
- -------------------------------------------------------------------------------
THE The Fund is organized as a Massachusetts business trust, and
FUND is an open-end, non-diversified management investment company
investing primarily in investment grade fixed-income
securities issued or guaranteed by the U.S., Canadian or
Mexican governments or their subdivisions, or the agencies or
instrumentalities of any of the foregoing.
- -------------------------------------------------------------------------------
SHARES OFFERED Shares of beneficial interest with $0.01 par value (see
page 28).
- -------------------------------------------------------------------------------
OFFERING The price of the shares offered by this Prospectus is
PRICE determined once daily as of 4:00 p.m., New York time, on each
day that the New York Stock Exchange is open, and is equal to
the net asset value per share (see page 21).
- -------------------------------------------------------------------------------
MINIMUM The minimum initial investment is $1,000 ($100 if the account
PURCHASE is opened through EasyInvest (Service Mark) ); minimum
subsequent investment is $100 (see page 21).
- -------------------------------------------------------------------------------
INVESTMENT The investment objective of the Fund is to earn a high level
OBJECTIVE of current income while maintaining relatively low volatility
of principal.
- -------------------------------------------------------------------------------
MANAGER Dean Witter Services Company Inc. (the "Manager"), a
wholly-owned subsidiary of Dean Witter InterCapital Inc.
("InterCapital"), is the Fund's manager. The Manager also
serves as Manager to thirteen other investment companies which
are advised by TCW Funds Management, Inc. (the "TCW/DW
Funds"). The Manager and InterCapital serve in various
investment management, advisory, management and administrative
capacities to a total of 101 investment companies and other
portfolios with assets of approximately $90 billion at
December 31, 1996.
- -------------------------------------------------------------------------------
ADVISER TCW Funds Management, Inc. (the "Adviser") is the Fund's
investment adviser. In addition to the Fund, the Adviser
serves as investment adviser to thirteen other TCW/DW Funds.
As of December 31, 1996, the Adviser and its affiliates had
approximately $53 billion under management or committed to
management in various fiduciary or advisory capacities,
primarily from institutional investors.
- -------------------------------------------------------------------------------
MANAGEMENT AND The Manager receives a monthly fee at the annual rate of 0.39%
ADVISORY of daily net assets, scaled down on assets over $3 billion.
FEES The Adviser receives a monthly fee at an annual rate of 0.26%
of daily net assets, scaled down on assets over $3 billion
(see page 6).
- -------------------------------------------------------------------------------
DIVIDENDS AND Dividends are declared and paid monthly. Capital gains
CAPITAL GAINS distributions, if any, are paid at least once a year or are
DISTRIBUTIONS retained for reinvestment by the Fund. Dividends and any
capital gains distributions are automatically invested in
additional shares at net asset value unless the shareholder
elects to receive cash (see page 26).
- -------------------------------------------------------------------------------
2
<PAGE>
- -------------------------------------------------------------------------------
DISTRIBUTOR AND The Fund is authorized to reimburse Dean Witter Distributors
PLAN OF Inc., the Fund's Distributor, for specific expenses incurred
DISTRIBUTION in promoting the distribution of the Fund's shares, including
personal services to shareholders and maintenance of
shareholder accounts, in accordance with a Plan of
Distribution pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Reimbursement may in no event exceed an
amount equal to payments at an annual rate of 0.75% of average
daily net assets of the Fund (see page 20).
- -------------------------------------------------------------------------------
REDEMPTION Shares are redeemable by the shareholder at net asset value.
An account may be involuntarily redeemed if the total value of
the account is less than $100 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 25).
- -------------------------------------------------------------------------------
SPECIAL The net asset value of the Fund's shares will fluctuate with
RISK changes in the market value of its portfolio securities. A
CONSIDERATIONS decline in prevailing interest rates will generally increase
the value of fixed-income securities, while an increase in
rates usually reduces the value of those securities. The
Fund's yield also will vary based on the yield of the Fund's
portfolio securities. The Fund may invest in mortgage-backed
securities issued in the United States and Canada; these
securities have different characteristics than traditional
debt securities, primarily in that interest and principal
payments are made more frequently, usually monthly, and that
principal may be prepaid at any time. Certain derivative
mortgage-backed securities in which the Fund invests are
extremely sensitive to changes in interest rates and in
prepayment rates on the underlying mortgage assets, and as a
result may be highly volatile (see page 13). The Canadian
mortgage-backed securities market is of recent origin and is
less well developed and less liquid than the U.S. market. The
Fund may invest a significant portion of its assets in
securities issued and guaranteed by the governments of Canada
and Mexico. It should be recognized that the Canadian and
Mexican debt securities in which the Fund will invest pose
different and greater risks than those customarily associated
with U.S. debt securities, including (i) the risks associated
with international investments generally, such as fluctuations
in foreign currency exchange rates, (ii) the risks of
investing in Canada and Mexico, which have smaller, less
liquid debt markets, such as limited liquidity, price
volatility, custodial and settlement issues, and (iii)
specific risks associated with the Mexican economy, including
high levels of inflation, large amounts of debt and political
and social uncertainties (see page 14). The Fund is a
non-diversified investment company and, as such, is not
subject to the diversification requirements of the Investment
Company Act of 1940. As a result, a relatively high percentage
of the Fund's assets may be invested in a limited number of
issuers. However, the Fund intends to continue to qualify as a
regulated investment company under the federal income tax laws
and, as such, is subject to the diversification requirements
of the Internal Revenue Code (see page 15). In addition, the
Fund may utilize certain investment techniques, including
forward foreign currency exchange contracts, options and
futures, and the speculative technique known as leverage
through the use of reverse repurchase agreements and dollar
rolls, which entail additional risks (see pages 13-19).
- -------------------------------------------------------------------------------
The above is qualified in its entirety by the detailed information appearing
elsewhere in this 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 for the
fiscal year ended October 31, 1996.
Shareholder Transaction Expenses
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Charge Imposed on Purchases ............... None
Maximum Sales Charge Imposed on Reinvested Dividends ... None
Deferred Sales Charge ................................... None
Redemption Fees ......................................... None
Exchange Fee ............................................ None
</TABLE>
Annual Fund Operating Expenses (as a Percentage of Average Net Assets)
<TABLE>
<CAPTION>
<S> <C>
Management and Advisory Fees . 0.65%
12b-1 Fees* .................. 0.73%
Other Expenses ............... 0.26%
Total Fund Operating Expenses 1.64%
</TABLE>
- --------------
* A portion of the 12b-1 fee equal to 0.25% of the Fund's average daily
net assets is characterized as a service fee within the meaning of National
Association of Securities Dealers ("NASD") guidelines (see "Purchase of Fund
Shares").
<TABLE>
<CAPTION>
Example 1 year 3 years 5 years 10 years
------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period: $17 $52 $89 $194
</TABLE>
The above example should not be considered a representation of past or
future expenses or performance. Actual expenses of the Fund may be more or less
than those shown.
The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"The Fund and its Management" and "Purchase of Fund Shares--Plan of
Distribution" in this Prospectus.
Long-term shareholders of the Fund may pay more in distribution fees than
the economic equivalent of the maximum front-end sales charges permitted by the
NASD.
4
<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 ratios and per share data should be read in
conjunction with the financial statements, notes thereto and the unqualified
report of independent accountants, which are contained in the Statement of
Additional Information. Further information about the performance of the Fund
is contained in the Fund's Annual Report to Shareholders, which may be obtained
without charge upon request to the Fund.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31, JULY 31, 1992*
--------------------------------------- THROUGH
1996 1995 1994 1993 OCTOBER 31, 1992
-------- -------- --------- -------- ----------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period . $ 8.33 $ 8.89 $10.11 $ 9.96 $10.00
-------- -------- --------- -------- ----------------
Net investment income ................. 0.47 0.69 0.68 0.77 0.18
Net realized and unrealized gain
(loss) ............................... 0.04 (0.59) (1.18) 0.14 (0.05)
-------- -------- --------- -------- ----------------
Total from investment operations ..... 0.51 0.10 (0.50) 0.91 0.13
-------- -------- --------- -------- ----------------
Less dividends and distributions from:
Net investment income ................ (0.45) -- (0.47) (0.76) (0.17)
Net capital gain ..................... -- -- (0.02) -- --
Paid-in-capital ...................... -- (0.66) (0.23) -- --
-------- -------- --------- -------- ----------------
Total dividends and distributions .... (0.45) (0.66) (0.72) (0.76) (0.17)
-------- -------- --------- -------- ----------------
Net asset value, end of period ....... $ 8.39 $ 8.33 $ 8.89 $10.11 $ 9.96
======== ======== ========= ======== ================
TOTAL INVESTMENT RETURN+ ............. 6.38% 1.61% (5.06)% 9.35% 1.28%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .............................. 1.64% 1.59% 1.52% 1.54% 1.80%(2)
Net investment income ................. 5.71% 8.28% 6.85% 7.78% 8.36%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in millions $351 $658 $1,360 $2,986 $762
Portfolio turnover rate ............... 13% 44% 27% 77% 2%(1)
</TABLE>
- ------------
* Commencement of operations.
+ Calculated based on the net asset value as of the last business day of
the period.
(1) Not annualized.
(2) Annualized.
5
<PAGE>
THE FUND AND ITS MANAGEMENT
- -------------------------------------------------------------------------------
TCW/DW North American Government Income Trust (the "Fund") is an open-end,
non-diversified management investment company. The Fund is a trust of the type
commonly known as a "Massachusetts business trust" and was organized under the
laws of Massachusetts on February 19, 1992.
Dean Witter Services Company Inc. (the "Manager"), whose address is Two
World Trade Center, New York, New York 10048, is the Fund's Manager. The
Manager is a wholly-owned subsidiary of Dean Witter InterCapital Inc.
("InterCapital"). InterCapital is a wholly-owned subsidiary of Dean Witter,
Discover & Co. ("DWDC"), a balanced financial services organization providing
a broad range of nationally marketed credit and investment products.
The Manager acts as manager to thirteen other TCW/DW Funds. The Manager and
InterCapital act in various investment management, advisory, management and
administrative capacities to a total of 101 investment companies, thirty of
which are listed on the New York Stock Exchange, with combined assets of
approximately $86.9 billion as of December 31, 1996. InterCapital also manages
and advises portfolios of pension plans, other institutions and individuals
which aggregated approximately $3.1 billion at such date.
The Fund has retained the Manager to manage its business affairs, supervise
its overall day-to-day operations (other than providing investment advice) and
provide all administrative services.
TCW Funds Management, Inc. (the "Adviser"), whose address is 865 South
Figueroa Street, Suite 1800, Los Angeles, California 90017, is the Fund's
investment adviser. The Adviser was organized in 1987 as a wholly-owned
subsidiary of The TCW Group, Inc. ("TCW"), whose subsidiaries, including Trust
Company of the West and TCW Asset Management Company, provide a variety of
trust, investment management and investment advisory services. Robert A. Day,
who is Chairman of the Board of Directors of TCW, may be deemed to be a control
person of the Adviser by virtue of the aggregate ownership of Mr. Day and his
family of more than 25% of the outstanding voting stock of TCW. The Adviser
serves as investment adviser to thirteen other TCW/DW Funds in addition to the
Fund. As of December 31, 1996, the Adviser and its affiliated companies had
approximately $53 billion under man-agement or committed to management,
primarily from institutional investors.
The Fund has retained the Adviser to invest the Fund's assets.
The Fund's Trustees review the various services provided by the Manager and
the Adviser 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 Manager, the Fund pays the Manager
monthly compensation calculated daily by applying the annual rate of 0.39% to
the Fund's net assets up to $3 billion, scaled down to 0.36% on assets over $3
billion. As compensation for its investment advisory services, the Fund pays
the Adviser monthly compensation calculated daily by applying an annual rate of
0.26% to the Fund's net assets up to $3 billion, scaled down to 0.24% on assets
over $3 billion. For the fiscal year ended October 31, 1996, the Fund accrued
total compensation to the Manager and the Adviser amounting to 0.39% and 0.26%,
respectively, of the Fund's average daily net assets. During that period, the
Fund's total expenses amounted to 1.64% of the Fund's average daily net assets.
6
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
- -------------------------------------------------------------------------------
The investment objective of the Fund is to earn a high level of current
income while maintaining relatively low volatility of principal. This objective
is fundamental and may not be changed without shareholder approval. There is no
assurance that the objective will be achieved.
The Fund seeks to achieve its investment objective by investing under normal
circumstances at least 65% of its total assets in investment grade fixed-income
securities issued or guaranteed by the U.S., Canadian or Mexican governments or
their subdivisions, or the agencies or instrumentalities of any of the
foregoing ("Government Securities"). In the case of the United States and
Canada, a substantial portion of such investments will be fixed rate and
adjustable rate mortgage-backed securities, including collateralized mortgage
obligations ("Mortgage-Backed Securities"). The term investment grade consists
of fixed-income securities rated Baa or higher by Moody's Investors Service,
Inc. ("Moody's") or BBB or higher by Standard & Poor's Corporation ("S&P") or,
if not rated, determined to be of comparable quality by the Adviser.
Investments in securities rated either Baa by Moody's or BBB by S&P may have
speculative characteristics and, therefore, changes in economic conditions or
other circumstances are more likely to weaken their capacity to make principal
and interest payments than would be the case with investments in securities
with higher credit ratings. If a fixed-income security held by the Fund is
rated BBB or Baa and is subsequently downgraded by a rating agency, the Fund
will retain such security in its portfolio until the Adviser determines that it
is practicable to sell the security without undue market or tax consequences to
the Fund. In the event that such downgraded securities constitute 5% or more of
the Fund's total assets, the Adviser will seek to sell immediately sufficient
securities to reduce the total to below 5%. A description of fixed-income
security ratings is contained in the Appendix to the Statement of Additional
Information.
The Fund may invest up to 35% of its total assets in securities which are
not Government Securities, including corporate debt securities and securities
backed by other assets, such as automobile or credit card receivables and home
equity loans ("Asset-Backed Securities"), and money market instruments, which
are short-term (maturities of up to thirteen months) fixed-income securities,
issued by private institutions. Such securities (except for Eurodollar
certificates of deposit) must be issued by U.S., Canadian or Mexican issuers
and (except for money market instruments) must be rated at least Aa by Moody's
or AA by S&P or, if not rated, determined to be of comparable quality by the
Adviser.
The Fund expects that under normal circumstances the market value dollar
weighted average life (or period until the next reset date) of the Fund's
portfolio securities will be no greater than three years. In addition, the Fund
will purchase only Mexican Government Securities with remaining maturities of
one year or less. The Fund seeks to achieve relatively low volatility by
investing in a portfolio of securities which the Adviser believes will, in the
aggregate, be resistant to significant fluctuations in market value. Although
the values of fixed-income securities generally increase during periods of
declining interest rates and decrease during periods of increasing interest
rates, the extent of these fluctuations has historically generally been smaller
for short term securities than for securities with longer maturities.
Conversely, the yield available on shorter term securities has also
historically been lower on average than those available from longer term
securities.
Under normal circumstances the Fund will invest at least 50% of its total
assets in U.S. Government Securities. The Fund will invest no more than 25% of
its total assets in Canadian Government Securities and no more than 25% of its
total assets in Mexican Government Securities. Subject to the foregoing
guidelines, the Adviser will invest the Fund's assets, and allocate its
investments from time to time among U.S., Canadian and Mexican Government
Securities, based on its analysis of market conditions and changes in general
economic conditions in the United States, Canada and Mexico. In such analysis,
the Adviser will consider various factors, including its expectations
7
<PAGE>
regarding interest rate changes and changes in currency exchange rates among
the U.S. dollar, the Canadian dollar and the Mexican peso, as well as general
market, economic and political factors, to attempt to take advantage of
favorable investment opportunities in each country.
Money market instruments in which the Fund may invest are securities issued
or guaranteed by the U.S. Government (Treasury bills, notes and bonds,
including zero coupon securities); obligations of banks subject to regulation
by the U.S. Government and having total assets of $1 billion or more;
Eurodollar certificates of deposit; obligations of savings banks and savings
and loan associations having total assets of $1 billion or more; fully insured
certificates of deposit; and commercial paper rated within the two highest
grades by Moody's or S&P or, if not rated, issued by a company having an
outstanding debt issue rated AAA by S&P or Aaa by Moody's.
In an effort to increase investment return or to hedge the Fund's portfolio,
the Fund may engage in various investment techniques, including reverse
repurchase agreements, dollar rolls, purchasing and selling call and put
options, entering into futures contracts and related options, purchasing
securities on a when-issued, delayed delivery or forward commitment basis and
lending portfolio securities (see "Other Investment Policies" below).
There may be periods during which, in the opinion of the Adviser, market
conditions warrant reduction of some or all of the Fund's securities holdings.
During such periods, the Fund may adopt a temporary "defensive" posture in
which greater than 35% of its total assets are invested in U.S.
money market instruments or cash.
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. However,
the Fund will invest in zero coupon securities only when the Adviser believes
that there will be cash in the Fund's portfolio representing return of principal
on portfolio securities of the Fund at least equal to the imputed income on the
zero coupon securities. The Adviser believes that a limited use of zero coupon
securities in the Fund's portfolio may enable the Fund to increase the income
available to shareholders (as a result of the yield premium often obtainable on
such securities) without significantly increasing the volatility of the Fund's
net asset value, although there is no assurance this can be achieved. The
Fund intends to limit its use of zero coupon securities (other than Treasury
bills with one year or less to maturity) to 10% of its total assets.
GOVERNMENT SECURITIES
The Fund will invest at least 65% of its total assets in Government
Securities. Government Securities are securities issued or guaranteed by the
governments of the United States, Canada or Mexico, their political
subdivisions and agencies and instrumentalities of any of the foregoing. Such
securities may include U.S. Treasury securities, U.S. Mortgage-Backed
Securities, the sovereign debt of Canada or any of its Provinces, Canadian
Mortgage-Backed Securities, and the sovereign debt of Mexico or any of its
government agencies.
A portion of the Government 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.
The zero coupon securities in which the Fund may invest are primarily
Canadian Government Securities with remaining maturities of two years or less
issued by Canadian provinces. Such securities generally are currently readily
available only in the form of zero coupon securities.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities include: (i) U.S. Treasury obligations, all of which are
backed by the full faith and credit of the United States and which differ only
in their interest rates, maturities and times of issuance: 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); and (ii) obligations issued or guaranteed by U.S. Government agencies
or instrumentalities, including government guaranteed Mortgage-Backed
Securities, some of which are backed by the full faith and credit of the U.S.
Treasury (e.g., Government National Mortgage Association direct pass-through
certificates), some of which are supported by the right of the issuer to borrow
from the U.S. Government (e.g., obligations of Federal Home Loan Banks), and
some of which are backed only by the credit of the issuer itself (e.g.,
obligations of the
8
<PAGE>
Student Loan Marketing Association). The U.S. Government may also guarantee
other debt obligations of special purpose borrowers.
CANADIAN GOVERNMENT SECURITIES
Canadian Government Securities include securities issued or guaranteed by
the Government of Canada, the Government of a Province of Canada or their
agencies and Crown corporations. These securities may be denominated or payable
in U.S. dollars or Canadian dollars.
The Bank of Canada, acting on behalf of the federal government, is
responsible for the distribution of Government of Canada Treasury bills and
federal bond issues. The Bank of Canada holds weekly auctions of Treasury bills
(maturities of one year or less) and offers new issues of federal bonds through
investment dealers and banks. An offering of Government of Canada bonds
frequently consists of several different issues with various maturity dates,
representing different segments of the yield curve and generally having
maturities ranging from three to 25 years. The Bank of Canada usually purchases
a previously announced amount of each offering of bonds. Mortgage-Backed
Securities issued pursuant to the program established under the National
Housing Act of Canada are also Canadian Government Securities because they
benefit from a guarantee by the Canada Mortgage and Housing Corporation, but
are not distributed by the Bank of Canada.
All Canadian Provinces have outstanding bond issues and several Provinces
also guarantee bond issues of Provincial authorities, agencies and provincial
Crown corporations. Spreads in the marketplace are determined by various
factors, including the relative supply and the rating assigned by the rating
agencies. Most Provinces also issue treasury bills.
Many municipalities and municipal financial authorities in Canada raise
funds through the bond market in order to finance capital expenditures. Unlike
U.S. municipal securities, which have special tax status, Canadian municipal
securities have the same tax status as other Canadian Government Securities and
trade similarly to such securities. The Canadian municipal market may be less
liquid than the Provincial bond market.
The Fund will only invest in Canadian Government Securities which are rated
at least A by Moody's or S&P, or, if not rated, are determined to be of
comparable quality by the Adviser.
MEXICAN GOVERNMENT SECURITIES
Mexican Government Securities include those securities which are issued or
guaranteed by the Mexican Treasury or by Mexican government agencies or
instrumentalities. These securities may be denominated and payable in Mexican
pesos or U.S. dollars.
The debt market in Mexico began to develop rapidly after the promulgation of
the Securities Market Law in 1975. Since 1975, the government has authorized a
range of Mexican government issued debt securities, all of which are traded on
the Mexican Stock Exchange: (i) Cetes -peso-denominated discount debt
securities having maturities of two years or less sold through auctions
regulated by Banco de Mexico; (ii) Bondes -peso-denominated long-term
development bonds sold through auctions regulated by Banco de Mexico; (iii)
Ajustabonos -peso-denominated bonds with a fixed coupon rate on a variable face
amount which is adjusted in proportion to fluctuations in the Mexican consumer
price index; (iv) Tesobonos -- U.S. dollar-denominated securities sold at
auctions which are paid in pesos equal to the value of the U.S. dollar
calculated at the prevailing exchange rate and (v) Nafinsa Pagares--peso
denominated promissory notes, with maturities approximating those of Cetes,
issued by the Nacional Financiera (Nafinsa), an agency of the Mexican
government.
In addition, a variety of other special purpose bonds are issued by the
Mexican federal government or its agencies, such as development bonds, bank
indemnity bonds and urban renovation bonds, as well as bank development bonds
and industrial development bonds.
The Fund will only invest in Mexican Government Securities which are rated
at least Baa by Moody's or BBB by S&P or, if not rated, are determined to be of
comparable quality by the Adviser.
MORTGAGE-BACKED SECURITIES
Mortgage-Backed Securities are securities that directly or indirectly
represent a participation in, or
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are secured by and payable from, mortgage loans secured by real property. The
term Mortgage-Backed Securities as used herein includes adjustable rate
mortgage securities and derivative mortgage products such as collateralized
mortgage obligations, stripped Mortgage-Backed Securities and other products
described below.
U.S. MORTGAGE-BACKED SECURITIES
There are currently three basic types of U.S. 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 latter category of Mortgage-Backed Securities
are not considered Government Securities for purposes of this Prospectus.
The mortgage pass-through securities in which the Fund may invest include
those issued or guaranteed by GNMA, FNMA and FHLMC. GNMA certificates are
direct obligations of the U.S. Government and, as such, are backed by the "full
faith and credit" of the United States. FNMA is a federally chartered,
privately owned corporation and FHLMC is a corporate instrumentality of the
United States. FNMA and FHLMC certificates are not backed by the full faith and
credit of the United States but the issuing agency or instrumentality has the
right to borrow, to meet its obligations, from an existing line of credit with
the U.S. Treasury. The U.S. Treasury has no legal obligation to provide such
line of credit and may choose not to do so. Each of GNMA, FNMA and FHLMC
guarantee timely distribution of interest to certificate holders. GNMA and FNMA
also guarantee timely distribution of scheduled principal payments. FHLMC
generally guarantees only the ultimate collection of principal of the
underlying mortgage loans.
The Fund may also invest in adjustable rate mortgage securities, which are
pass-through mortgage securities collateralized by mortgages with adjustable
rather than fixed rates.
Collateralized Mortgage Obligations and Multiclass Pass-Through Securities.
The Fund may invest in collateralized mortgage obligations or "CMOs." 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 is 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. The Fund may invest without limitation in
CMOs.
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In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semiannual basis. Certain CMOs may have variable or
floating interest rates and others may be stripped (securities which provide
only the principal or interest feature of the underlying security).
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of a CMO series in a number of different ways. Generally,
the purpose of the allocation of the cash flow of a CMO to the various classes
is to obtain a more predictable cash flow to the individual tranches than
exists with the underlying collateral of the CMO. As a general rule, the more
predictable the cash flow is on a CMO tranche, the lower the anticipated yield
will be on that tranche at the time of issuance relative to prevailing market
yields on Mortgage-Backed Securities. As part of the process of creating more
predictable cash flows on most of the tranches in a series of CMOs, one or more
tranches generally must be created that absorb most of the volatility in the
cash flows on the underlying mortgage loans. The yields on these tranches,
which may include inverse floaters and Stripped Mortgage-Backed Securities as
described below, may be higher than prevailing market yields on Mortgage-Backed
Securities with similar maturities. As a result of the uncertainty of the cash
flows of these tranches, the market prices of and yield on these tranches
generally are more volatile.
The Fund may invest up to 10% of its total assets in inverse floaters.
Inverse floaters constitute a class of CMOs with a coupon rate that moves
inversely to a designated index, such as the LIBOR (London Inter-Bank Offered
Rate) Index. Inverse floaters have coupon rates that typically change at a
multiple of the changes of the relevant index rate. Any rise in the index rate
(as a consequence of an increase in interest rates) causes a drop in the coupon
rate of an inverse floater while any drop in the index rate causes an increase
in the coupon of an inverse floater. In addition, like most other fixed-income
securities, the value of inverse floaters will decrease as interest rates
increase. Inverse floaters exhibit greater price volatility than the majority
of mortgage pass-through securities or CMOs. In addition, some inverse floaters
exhibit extreme sensitivity to changes in prepayments. As a result, the yield
to maturity of an inverse floater is sensitive not only to changes in interest
rates but also to changes in prepayment rates on the related underlying
Mortgage Assets. The Adviser believes that, notwithstanding the fact that
inverse floaters exhibit price volatility, the use of inverse floaters as a
component of the Fund's overall portfolio, in light of the Fund's anticipated
portfolio composition in the aggregate, is compatible with the Fund's objective
to earn a high level of current income while maintaining relatively low
volatility of principal.
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 pro-
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portions of the interest and principal distribution on a pool of Mortgage
Assets. A common type of Stripped Mortgage-Backed Securities will have one
class receiving some of the interest and most of the principal from the
Mortgage Assets, while the other class will receive most of the interest and
the remainder of the principal. In the most extreme case, one class will
receive all of the interest (the interest-only or "IO" class), while the other
class will receive all of the principal (the principal-only or "PO" class). PO
classes generate income through the accretion of the deep discount at which
such securities are purchased, and, while PO classes do not receive periodic
payments of interest, they receive monthly payments associated with scheduled
amortization and principal prepayment from the Mortgage Assets underlying the
PO class. The yield to maturity on an IO class is extremely sensitive to the
rate of principal payments (including prepayments) on the related underlying
Mortgage Assets, and a rapid rate of principal payments may have a material
adverse effect on the Fund's yield to maturity. If the underlying Mortgage
Assets experience greater than anticipated prepayments of principal, the Fund
may fail to fully recoup its initial investment in these securities even if the
securities are rated Aaa by Moody's or AAA by S&P.
The Fund may purchase Stripped Mortgage-Backed Securities for income, or for
hedging purposes to protect the Fund's portfolio against interest rate
fluctuations. For example, since an IO class will tend to increase in value as
interest rates rise, it may be utilized to hedge against a decrease in value of
other fixed-income securities in a rising interest rate environment. The Fund's
management understands that the staff of the Securities and Exchange Commission
considers privately issued Stripped Mortgage-Backed Securities representing
interest only or principal only components of U.S. Government or other debt
securities to be illiquid securities. The Fund will treat such securities as
illiquid so long as the staff maintains such position. Stripped Mortgage-Backed
Securities issued by the U.S. Government or its agencies, and which are backed
by fixed-rate mortgages, will be treated as liquid provided they are so
determined by, or under procedures approved by, the Board of Trustees. The Fund
may not invest more than 15% of its net assets in illiquid securities.
CANADIAN MORTGAGE-BACKED SECURITIES
Canadian Mortgage-Backed Securities may be issued in several ways, the most
common of which is a modified pass-through vehicle issued pursuant to the
program established under the National Housing Act of Canada. Certificates
issued pursuant to this program have some structural similarities to GNMA
securities and benefit from the guarantee of the Canada Mortgage and Housing
Corporation, a federal Crown corporation that is (except for certain limited
purposes) an agent of the Government of Canada.
Canadian private issuers such as banks and trust companies also issue
Mortgage-Backed Securities backed by private insurance or other forms of credit
support. Such Mortgage-Backed Securities are not considered Government
Securities for purposes of this Prospectus.
While most Canadian Mortgage-Backed Securities are subject to voluntary
prepayments, some pools are not subject to such prepayments and thus have yield
characteristics similar to bonds.
As the Canadian Mortgage-Backed Securities market was only recently
established, it is less well developed and less liquid than its U.S.
counterpart.
RISK CONSIDERATIONS
The net asset value of the Fund's shares will fluctuate with changes in the
market value of the Fund's portfolio securities. The market value of the Fund's
portfolio securities will increase or decrease due to a variety of economic,
market and political factors which cannot be predicted, in particular movements
in interest rates and, with respect to foreign currencies, currency exchange
rates. A decline in prevailing interest rates generally increases the value of
fixed-income securities, while an increase in rates usually reduces the value
of those securities. (The Fund's yield also will vary based on the yield of the
Fund's portfolio securities.)
Mortgage-Backed Securities. Mortgage-Backed Securities have certain
different characteristics than traditional debt securities. Among the major
differences are that interest and principal payments are
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<PAGE>
made more frequently, usually monthly, and that principal may be prepaid at any
time because the underlying mortgage loans or other assets generally may be
prepaid at any time. As a result, if the Fund purchases such a security at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity. Alternatively, if the Fund
purchases these securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, yield to
maturity. The Fund may invest a portion of its assets in derivative
Mortgage-Backed Securities such as Stripped Mortgage-Backed Securities which
are highly sensitive to changes in prepayment and interest rates. The Adviser
seeks to manage these risks (and potential benefits) by investing in a variety
of such securities.
Mortgage-Backed Securities, like all fixed income securities, generally
decrease in value as a result of increases in interest rates. In addition,
although generally the value of fixed-income securities increases during
periods of falling interest rates and, as stated above, decreases during
periods of rising interest rates, as a result of prepayments and other factors,
this is not always the case with respect to Mortgage-Backed Securities.
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. Mortgage-Backed
Securities generally decrease in value as a result of increases in interest
rates and may benefit less than other fixed-income securities from declining
interest rates because of the risk of prepayment.
The Fund may invest in mortgage derivative securities, such as CMOs, the
average life of which is determined using mathematical models that incorporate
prepayment assumptions and other factors that involve estimates of future
economic and market conditions. These estimates may vary from actual future
results, particularly during periods of extreme market volatility. In addition,
under certain market conditions, such as those that developed in 1994, the
average weighted life of mortgage derivative securities may not accurately
reflect the price volatility of such securities. For example, in periods of
supply and demand imbalances in the market for such securities and/or in
periods of sharp interest rate movements, the prices of mortgage derivative
securities may fluctuate to a greater extent than would be expected from
interest rate movements alone.
The Fund's investments in mortgage derivative securities also subject the
Fund to extension risk. Extension risk is the possibility that rising interest
rates may cause prepayments to occur at a slower than expected rate. This
particular risk may effectively change a security which was considered short or
intermediate-term at the time of purchase into a long-term security. Long-term
securities generally fluctuate more widely in response to changes in interest
rates than short or intermediate-term securities.
There are certain risks associated specifically with CMOs. CMOs issued by
private entities are not U.S. Government Securities and are not guaranteed by
any government agency, although the securities underlying a CMO may be subject
to a guarantee. Therefore, if the collateral securing the CMO, as well as any
third party credit support or guarantees, is insufficient to make payment, the
holder could sustain a loss. However, as stated above, the Fund will invest in
CMOs issued by private entities only if the CMOs are rated at least AA by S&P
or Aa 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. In addition, as stated above,
inverse floaters, a class of CMOs in which the Fund may invest up to 10% of its
net assets, exhibit greater price volatility than the majority of CMOs.
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CURRENCY RISKS
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 among the currencies of the United States,
Canada and Mexico will 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 total return on such assets.
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.
RISKS OF INTERNATIONAL INVESTING
Investments in foreign securities will 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
securities are not subject to the regulatory requirements of U.S. securities
and, as such, there may be less publicly available information about such
securities. Moreover, issuers of foreign securities are not subject to uniform
accounting, auditing and financial standards and requirements comparable to
those applicable to issuers of U.S.
securities.
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 in 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.
Canada. The Canadian debt securities market is significantly smaller than
the U.S. debt securities market. In particular, the Canadian Mortgage-Backed
Securities market is of recent origin, and, although continued growth is
anticipated, is less well developed and less liquid than its U.S.
counterpart.
Mexico. Because the Fund intends to invest in Mexican debt instruments,
investors in the Fund should be aware of certain special considerations
associated with investing in debt obligations of the Mexican government.
The Mexican government has exercised and continues to exercise a significant
influence over many aspects of the private sector in Mexico. Mexican government
actions concerning the economy could have a significant effect on market
conditions and prices and yields of Mexican debt obligations, including those
in which the Fund invests. Mexico is currently a major debtor nation (among
developing countries) to commercial banks and foreign governments.
The value of the Fund's portfolio investments may be affected by changes in
oil prices, interest rates, taxation and other political or economic
developments in Mexico, including recent rates of inflation which have exceeded
the rates of inflation in the U.S. and Canada. The Fund can provide no
assurance that future developments in the Mexican economy will not impair its
investment flexibility, operations or ability to achieve its investment
objective.
In September, 1982, Mexico imposed foreign exchange controls and maintained
a dual foreign exchange rate system, with a "controlled" rate and a "free
market" rate. Under economic policy initiatives implemented since December,
1987, the Mexican
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government introduced a schedule of gradual devaluation of the controlled rate
which initially amounted to an average depreciation of the Mexican peso against
the U.S. dollar of one Mexican peso per day. The extended initiatives included
an adjustment in the scheduled devaluation rate of the Mexican peso against the
U.S. dollar. The Fund's net asset value and its computation and distribution of
income to its shareholders will be adversely affected by continued reductions
in the value of the Mexican peso relative to the U.S. dollar because all Fund
assets must be converted to U.S. dollars prior to any distributions to
shareholders. On December 22, 1994, the Mexican government determined to allow
the Mexican peso to trade freely against the U.S. dollar rather than within a
controlled band, which action resulted in a significant devaluation of the
Mexican peso against the U.S. dollar.
Non-Diversified Status. The Fund is classified as a non-diversified
investment company under the Investment Company Act of 1940, as amended (the
"Act"), and as such is not limited by the Act in the proportion of its assets
that it may invest in the obligations of a single issuer. However, the Fund
intends to conduct its operations so as to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code. See "Dividends,
Distributions and Taxes." In order to qualify, among other requirements, the
Fund will limit its investments so that at the close of each quarter of the
taxable year, (i) not more than 25% of the market value of the Fund's total
assets will be invested in the securities of a single issuer (other than U.S.
Government Securities) and, (ii) with respect to 50% of the market value of its
total assets not more than 5% will be invested in the securities of a single
issuer (other than U.S. Government Securities) and the Fund will not own more
than 10% of the outstanding voting securities of a single issuer. To the extent
that a relatively high percentage of the Fund's assets may be invested in the
obligations of a limited number of issuers, the Fund's portfolio securities may
be more susceptible to any single economic, political or regulatory occurrence
than the portfolio securities of a diversified investment company. The
limitations described in this paragraph are not fundamental policies and may be
revised to the extent applicable Federal income tax requirements are revised.
Debt securities which are issued or guaranteed by an agency or
instrumentality of the United States, including certificates issued by GNMA,
are treated like U.S. Government Securities for purposes of the diversification
tests. However, securities issued or guaranteed by foreign governments, their
political subdivisions, agencies and instrumentalities, including Canadian NHA
Mortgage-Backed Securities, are not treated like U.S. Government Securities for
purposes of the diversification tests described in the preceding paragraph, but
instead are subject to these tests in the same manner as the securities of
non-governmental issuers. In this regard, securities issued or guaranteed by a
foreign government, its political subdivisions, agencies or instrumentalities
may in certain circumstances be treated as issued by a single issuer for
purposes of these diversification tests. Thus, in order to meet the
diversification tests and thereby maintain its status as a regulated investment
company, the Fund will be required to diversify its portfolio of Canadian
Government Securities and Mexican Government Securities in a manner which would
not be necessary if the Fund limited its investments to U.S. Government
Securities.
The risks of other investment techniques which may be utilized by the Fund,
including options and futures transactions, are described under "Other
Investment Policies," below.
OTHER INVESTMENT POLICIES
Asset-Backed Securities. The Fund may invest in Asset-Backed Securities.
Asset-Backed Securities represent the securitization techniques used to develop
Mortgage-Backed Securities 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.
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
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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, including the
bankruptcy 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 for repossessed collateral may not always be sufficient to
support payments on these securities.
New instruments and variations of existing Mortgage-Backed Securities and
Asset-Backed Securities continue to be developed. The Fund, following revision
to this Prospectus, may invest in any such instruments or variations as may be
developed, to the extent consistent with its investment objective and policies
and applicable regulatory requirements.
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 such risks. These procedures include effecting repurchase transactions
only with large, well-capitalized and well-established financial institutions
whose financial condition will be continually monitored by the Adviser 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. In the event of a default or bankruptcy by a selling
financial institution, the Fund will seek to liquidate such collateral.
However, the exercising of the Fund's right to liquidate such collateral could
involve certain costs or delays and, to the extent that proceeds from any sale
upon a default of the obligation to repurchase were less than the repurchase
price, the Fund could suffer a loss. It is the current policy of the Fund not
to invest in repurchase agreements that do not mature within seven days if any
such investment, together with any other illiquid assets held by the Fund,
amounts to more than 15% of its net assets.
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. 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. 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
proceeds of the agreement may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the Fund's
obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls are speculative techniques
involving leverage, and are considered borrowings by the Fund. The Fund does
not expect to engage in reverse repurchase agreements and dollar rolls with
respect to greater than 25% of the Fund's total assets.
Private Placements. The Fund may invest up to 5% of its total assets in
securities which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), or which are otherwise not readily marketable. (Securities eligible for
resale pursuant to Rule 144A under the Securities Act, and
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<PAGE>
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
Securites Act, which permits the Fund to sell restricted securities to
qualified institutional buyers without limitation. The Adviser, pursuant to
procedures adopted by the Trustees of the Fund, will make a determination as to
the liquidity of each restricted security purchased by the Fund. If a
restricted security is determined to be "liquid," such security will not be
included within the category "illiquid securities," which under current policy
may not exceed 15% of the Funds net assets. However, investing in Rule 144A
securities could have the effect of increasing the level of Fund illiquidity to
the extent that the Fund, at a particular point in time, may be unable to find
qualified institutional buyers interested in purchasing such securities.
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. The securities so purchased or sold
are subject to market fluctuation and no interest or dividends accrue to the
purchaser prior to the settlement date. 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. At the time of
delivery of the securities, the value may be more or less than the purchase or
sale price. 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. 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 when-issued or delayed delivery
securities and forward commitments. The Fund's ability to enter into such
transactions is not otherwise limited, but the Fund expects that under normal
circumstances no more than 15% of the Fund's total assets will be so invested.
When, As and If Issued Securities. The Fund may purchase securities on a
"when, as and if issued" basis under which the issuance of the security depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization, leveraged 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. 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 sale.
FORWARD FOREIGN CURRENCY EXCHANGE
CONTRACTS
The Fund may engage in transactions in forward foreign currency exchange
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.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also limit the opportunity
for gain if the value of the hedged currency should rise. Moreover, it may not
be possible for the Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation level it anticipates.
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The Fund may enter into forward contracts under various circumstances. When
the Fund enters into a contract for the purchase or sale of a security
denominated in either the Canadian dollar or Mexican peso ("foreign currency"),
it may, for example, desire to "lock in" the price of the security in U.S.
dollars, Canadian dollars or Mexican pesos. At other times, when, for example,
the Adviser believes that the Canadian dollar or the Mexican peso may suffer a
substantial decline against the U.S. dollar, the Fund may enter into a forward
contract to sell, for a fixed amount of dollars or pesos, 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.
If the Fund enters into forward contract transactions, and the currency in
which the Fund's portfolio securities (or anticipated portfolio securities) are
denominated rises in value with respect to the currency which is being
purchased (or sold), then the Fund will have realized fewer gains than had the
Fund not entered into the forward contracts. Moreover, the precise matching of
the forward contract amounts and the value of the securities involved will not
generally be possible, since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The 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 Adviser. Currently, only a limited market exists for
certain hedging transactions in future foreign exchange rates. This may limit
the Fund's ability to effectively hedge its investments in Mexico.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may engage in transactions involving options on securities and
currencies and futures contracts on securities, currencies and indexes, each as
described below.
Options. The Fund may purchase and sell (write) call and put options on U.S.
Treasury notes, bonds and bills and on the Canadian dollar or Mexican peso
which are or may in the future be listed on several U.S. and foreign securities
exchanges or 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. OTC options
are purchased from or sold (written) to dealers or financial institutions which
have entered into direct agreements with the Fund. The Fund is permitted to
write covered call options on portfolio securities and the U.S. dollar, the
Canadian dollar and the Mexican peso, without limit, in order to aid it in
achieving its investment objective. The Fund may also write covered put
options; however, the aggregate value of the obligations underlying the puts
determined as of the date the options are sold will not exceed 50% of the
Fund's net assets.
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 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.
Futures Contracts. The Fund may purchase and sell futures contracts that are
currently traded, or may in the future be traded, on U.S. and foreign commodity
exchanges on such underlying fixed-income securities as U.S. Treasury bonds,
notes, and bills and/or any Canadian or Mexican government fixed-income
security ("interest rate" futures), on the Canadian or Mexican 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"
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<PAGE>
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 also 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.
New futures contracts, options and other financial products and various
combinations thereof continue to be developed. The Fund may invest in any such
futures, options or products as may be developed, to the extent consistent with
its investment objective and applicable regulatory requirements.
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 may 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.
Participation in the options or futures markets involves investment risks
and transaction costs to which the Fund would not be subject absent the use of
these strategies. If the Adviser's prediction of movements in the direction of
the securities, currency or interest rate markets are inaccurate, the adverse
consequences to the Fund (e.g., a reduction in the Fund's net asset value or a
reduction in the amount of income available for distribution) may leave the
Fund in a worse position than if such strategies were not used. Risks inherent
in the use of options, futures contracts and options on futures contracts
include (a) dependence on the Adviser's ability to predict correctly movements
in the direction of interest rates, as well as securities and/or currency
markets; (b) imperfect correlation between the price of options and futures
contracts and options thereon and movements in the prices of the securities or
currencies being hedged; (c) the fact that skills needed to use these
strategies are different from those needed to select portfolio securities; (d)
the possible absence of a liquid secondary market for any particular instrument
at any time; and (e) the possible need to defer closing out certain hedged
positions to avoid adverse tax consequences.
PORTFOLIO MANAGEMENT
The Fund's portfolio is actively managed by the Adviser with a view to
achieving the Fund's investment objective. Philip A. Barach, James M.
Goldberg, Jeffrey E. Gundlach and Frederick H. Horton, Managing Directors of
the Adviser, are the Fund's primary portfolio managers, and, with the
exception of Mr. Horton, have been so since the Fund's inception. Mr. Horton
has been a primary portfolio manager since December, 1994. Messrs. Barach,
Gundlach and Goldberg have each been portfolio managers with affiliates of
TCW for over five years. Mr. Horton has been a portfolio manager with
affiliates of TCW since October, 1993. From June 1991--September, 1993, he
was Senior Portfolio Manager for Dewey Square Investors.
In determining which securities to purchase for the Fund or hold in the
Fund's portfolio, the Adviser will rely on information from various sources,
including research, analysis and appraisals of brokers and dealers, including
Dean Witter Reynolds Inc. ("DWR"), a broker-dealer affiliate of the Manager,
and others regarding economic developments and interest rate trends; and the
Adviser's own analysis of factors it deems relevant.
Brokerage commissions are not normally charged on the purchase or sale of
U.S., Canadian or Mexican Government Securities, but such transactions
generally involve costs in the form of spreads between bid and asked prices.
Orders for transactions in portfolio securities are placed for the Fund with
a number of brokers and dealers, which may include DWR. In
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addition, the Fund may incur brokerage commissions on transactions conducted
through DWR. Under normal circumstances it is not anticipated that the
portfolio trading will result in the Fund's portfolio turnover rate exceeding
100% in any one year.
Except as specifically noted, all investment policies and practices
discussed in this Prospectus are not fundamental policies of the Fund and, as
such, may be changed without shareholder approval.
INVESTMENT RESTRICTIONS
- -------------------------------------------------------------------------------
The investment restrictions listed below are among the restrictions that
have been adopted by the Fund as fundamental policies. Under the Act, a
fundamental policy may not be changed without the vote of a majority of the
outstanding voting securities of the Fund, as defined in the Act.
The Fund may not:
1. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry, except that the Fund will concentrate in
Mortgage-Backed Securities (unless it has adopted a temporary "defensive"
posture). This restriction does not apply to obligations issued or
guaranteed by the United States Government or 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 Securities or Asset-Backed Securities or to any obligation
of the United States Government, its agencies or instrumentalities.
3. Purchase or sell commodities or commodities contracts except that
the Fund may purchase and sell financial futures contracts and related
options thereon.
In addition, as a non-fundamental policy, the Fund may not, as to 75% of its
total assets, purchase more than 10% of the voting securities of any issuer.
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.
PURCHASE OF FUND SHARES
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The Fund offers its shares for sale to the public on a continuous basis.
Pursuant to a Distribution Agreement between the Fund and Dean Witter
Distributors Inc. (the "Distributor"), an affiliate of the Manager, shares of
the Fund are distributed by the Distributor and offered by DWR and others
(which may include TCW Brokerage Services, an affiliate of the Adviser) which
have entered into selected dealer agreements with the Distributor ("Selected
Broker-Dealers"). The principal executive office of the Distributor is located
at Two World Trade Center, New York, New York 10048.
The minimum initial purchase is $1,000 and subsequent purchases of $100 or
more may be made by sending a check, payable to TCW/DW North American
Government Income Trust, directly to Dean Witter Trust Company (the "Transfer
Agent") at P.O. Box 1040, Jersey City, NJ 07303, or by contacting an account
executive of DWR or another Selected Broker-Dealer. The minimum initial
purchase in the case of investments through EasyInvest (Service Mark), an
automatic purchase plan (see "Shareholder Services"), is $100, provided that
the schedule of automatic investments will result in investments totalling at
least $1,000 within the first twelve months. In the case of investments
pursuant to Systematic Payroll Deduction Plans (including Individual Retirement
Plans), the Fund, in its discretion, may accept investments without regard to
any minimum amounts which would otherwise be
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<PAGE>
required if the Fund has reason to believe that additional investments will
increase the investment in all accounts under such Plans to at least $1,000.
Certificates for shares purchased will not be issued unless a request is made
by the shareholder in writing to the Transfer Agent. The offering price will be
the net asset value per share next determined following receipt of an order
(see "Determination of Net Asset Value" below).
Shares of the Fund are sold through the Distributor on a normal three
business day settlement basis; that is, payment generally is due on or before
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 may benefit from the temporary use of the funds
where payment is made prior thereto. As noted above, orders placed directly
with the Transfer Agent must be accompanied by payment. Investors will be
entitled to receive dividends and capital gains distributions if their order is
received by the close of business on the day prior to the record date for such
distributions.
Sales personnel of a Selected Broker-Dealer are compensated for shares of
the Fund sold by them 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 order.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is determined once daily at 4:00
p.m., New York time (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 by taking the value of all assets of the Fund, subtracting all
its liabilities, dividing by the number of shares outstanding and adjusting to
the nearest cent. The net asset value per share will not be determined on Good
Friday and on such other federal and non-federal holidays as are observed by
the New York Stock Exchange.
In the calculation of the Fund's net asset value: (1) an equity portfolio
security listed or traded on the New York or American Stock Exchange or other
stock exchange is valued at its latest sale price on that exchange; if there
were no sales that day, the security is valued at the latest bid price (in
cases where a security is traded on more than one exchange, the security is
valued on the exchange designated as the primary market pursuant to procedures
adopted by the Trustees); and (2) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest bid price prior to the time of valuation. When market quotations are not
readily available, including circumstances under which it is determined by the
Adviser that sale or bid prices are not reflective of a security's market
value, portfolio securities are valued at their fair value as determined in
good faith under procedures established by and under the general supervision of
the Fund's Trustees (valuation of securities for which market quotations are
not readily available may also be based upon current market prices of
securities which are comparable in coupon, rating and maturity or an
appropriate matrix utilizing similar factors). 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.
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 and 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.
Short-term debt securities with remaining maturities of sixty days or less
at the time of purchase are
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<PAGE>
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.
PLAN OF DISTRIBUTION
The Fund has entered into a Plan of Distribution pursuant to Rule 12b-1
under the Act with the Distributor whereby the expenses of certain activities
and services, including personal services to shareholders and maintenance of
shareholder accounts, in connection with the distribution of the Fund's shares
are reimbursed. The principal activities and services which may be provided by
DWR, its affiliates or any other Selected Broker-Dealer under the Plan include:
(1) compensation to, and expenses of, account executives and others, including
overhead and telephone expenses; (2) sales incentives and bonuses to sales
representatives and to marketing personnel in connection with promoting sales
of the Fund's shares; (3) expenses incurred in connection with promoting sales
of the Fund's shares; (4) preparing and distributing sales literature; and (5)
providing advertising and promotional activities, including direct mail
solicitation and television, radio, newspaper, magazine and other media
advertisements. Reimbursements for these services will be made in monthly
payments by the Fund, which will in no event exceed an amount equal to a
payment at the annual rate of 0.75% of the Fund's average daily net assets. A
portion of the amount payable pursuant to the Plan, which may not exceed 0.25%
of the Fund's average daily net assets, is characterized as a service fee
within NASD guidelines. The service fee is a payment made for personal service
and/or the maintenance of shareholder accounts. Expenses incurred pursuant to
the Plan in any fiscal year in excess of 0.75% of the Fund's average daily net
assets will not be reimbursed by the Fund through payments accrued in any
subsequent fiscal year. The Fund accrued $3,601,742 to the Distributor pursuant
to the Plan for the fiscal year ended October 31, 1996. This is an accrual at
the annual rate of 0.73% of the Fund's average daily net assets.
SHAREHOLDER SERVICES
- -------------------------------------------------------------------------------
Automatic Investment of Dividends and Distributions. All income dividends
and capital gains distributions are automatically paid in full and fractional
shares of the Fund (or, if specified by the shareholder, any other open-end
TCW/DW Fund), unless the shareholder requests that they be paid in cash.
Investment of Distributions Received in Cash. Any shareholder who receives a
cash payment representing a dividend or capital gains distribution may invest
such dividend or distribution at the net asset value 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.
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, on a
semi-monthly, monthly or quarterly basis, to the Transfer Agent for investment
in shares of the Fund (see "Purchase of Fund Shares" and "Repurchases and
Redemptions -- 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 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. Only shareholders
having accounts in which no share certificates have been issued will be
permitted to enroll in the Withdrawal Plan.
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 for use by
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.
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For further information regarding plan administration, custodial fees and
other details, investors should contact their account executive or the Transfer
Agent.
EXCHANGE PRIVILEGE
An "Exchange Privilege," that is, the privilege of exchanging shares of
certain Funds for shares of the Fund, exists whereby shares of TCW/DW Funds
which are open-end investment companies sold with a contingent deferred (at
time of redemption) sales charge ("CDSC Funds"), may be exchanged for shares of
the Fund, for shares of TCW/DW Income and Growth Fund, TCW/DW Balanced Fund,
and for shares of five money market funds for which InterCapital serves as
investment manager, Dean Witter Liquid Asset Fund Inc., Dean Witter U.S.
Government Money Market Trust, Dean Witter Tax-Free Daily Income Trust, Dean
Witter California Tax Free Daily Income Trust and Dean Witter New York
Municipal Money Market Trust (the foregoing eight investment companies,
including the Fund, are hereinafter collectively referred to as "Exchange
Funds"). An exchange from a CDSC Fund to an Exchange Fund that is not a money
market fund is on the basis of the next calculated net asset value per share of
each fund after the exchange order is received. When exchanging into a money
market fund from a CDSC Fund, shares of the CDSC Fund are redeemed at their
next calculated net asset value and exchanged for shares of the money market
fund at their net asset value determined the following business day.
Additionally, shares of any Exchange Fund received in an exchange for shares of
a CDSC Fund (regardless of the type of fund originally purchased) may be
redeemed and exchanged for shares of an Exchange Fund or a CDSC Fund. Any
applicable contingent deferred sales charge ("CDSC") will have to be paid upon
ultimate redemption of shares originally purchased from a CDSC Fund. During the
period of time the shares originally purchased from a CDSC Fund remain in the
Exchange Fund, the holding period (for the purpose of determining the rate of
CDSC) is frozen so that the charge is based upon the period of time the
shareholder held shares of a CDSC Fund. If those shares are subsequently
re-exchanged for shares of a CDSC Fund, the holding period previously frozen
when the first exchange was made resumes on the last day of the month in which
shares of a CDSC Fund are reacquired. Thus, the CDSC is based upon the time
(calculated as described above) the shareholder was invested in a CDSC Fund.
However, in the case of shares 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 (see
"Purchase of Fund Shares--Plan of Distribution" in this Prospectus or the
respective other Exchange Fund prospectus for a description of Exchange Fund
12b-1 distribution fees). Exchanges involving CDSC Funds may be made after the
shares of the CDSC 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.
Purchases and exchanges should be made for investment purposes only. A
pattern of frequent exchanges may be deemed by the Manager to be abusive and
contrary to the best interests of the Fund's other shareholders and, at the
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, each of the other
TCW/DW Funds and each of the money market 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 other TCW/DW
Funds or money market funds for which shares of the Fund may be exchanged, upon
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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 pledged in the margin account.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain a copy and examine it carefully
before investing. Exchanges are subject to the minimum investment requirement
and any other conditions imposed by each fund. An exchange will be treated for
federal income tax purposes the same as a repurchase or redemption of shares,
on which the shareholder may realize a capital gain or loss. However, the
ability to deduct capital losses on an exchange may be limited in situations
where there is an exchange of shares within ninety days after the shares are
purchased. The Exchange Privilege is only available in states where an exchange
may legally be made.
If DWR or another Selected Broker-Dealer is the current dealer of record and
its account numbers are part of the account information, shareholders may
initiate an exchange of shares of the Fund for shares of any of the Funds for
which the Exchange Privilege is available by contacting their DWR or other
Selected Broker-Dealer account executive (no Exchange Privilege Authorization
Form is required). Other shareholders (and those shareholders who are clients
of DWR or another Selected Broker-Dealer but who wish to make exchanges
directly by writing or telephoning the Transfer Agent) must complete and
forward to the Transfer Agent an Exchange Privilege Authorization Form, copies
of which may be obtained from the Transfer Agent, to initiate an exchange. If
the Authorization Form is used, exchanges may be made in writing or by
contacting the Transfer Agent at (800) 869-NEWS (toll-free). The Fund will
employ reasonable procedures to confirm that exchange instructions communicated
over the telephone are genuine. Such procedures may include requiring various
forms of personal identification such as name, mailing address, social security
or other tax identification number and DWR or other Selected Broker-Dealer
account number (if any). Telephone instructions may also be recorded. If such
procedures are not employed, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions.
Telephone exchange instructions will be accepted if received by the Transfer
Agent between 9:00 a.m. and 4:00 p.m. New York time, on any day the New York
Stock Exchange is open. Any shareholder wishing to make an exchange who has
previously filed an Exchange Privilege Authorization Form and who is unable to
reach the Fund by telephone should contact his or her DWR or other Selected
Broker-Dealer account executive, if appropriate, or make a written exchange
request. Shareholders are advised that during periods of drastic economic or
market changes it is possible that the telephone exchange procedures may be
difficult to implement, although this has not been the experience in the past
with other funds managed by the Manager.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about the
Exchange Privilege.
REPURCHASES AND REDEMPTIONS
- -------------------------------------------------------------------------------
Repurchases. DWR and other Selected Broker-Dealers are authorized to
repurchase, as agent for the Fund, 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 determined (see "Purchase of Fund
Shares--Determination of Net Asset Value") after such repurchase order is
received by DWR or the other Selected Broker-Dealer. The offers by DWR and
other Selected Broker-Dealers to repurchase shares from shareholders may be
suspended by them at any time. In that
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event, shareholders may redeem their shares through the Fund's Transfer Agent
as set forth below under "Redemptions."
Redemptions. Shares of the Fund can be redeemed for cash at any time at net
asset value per share next determined. If shares are held in a shareholder's
account at the Transfer Agent without a share certificate, a written request
for redemption must be sent to the Fund's Transfer Agent at P.O. Box 983,
Jersey City, NJ 07303. 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
determined as described under "Purchase of Fund Shares--Determination of Net
Asset Value" after it receives the request, and certificate, if any, in good
order. Any redemption request received after such determination will be
redeemed at the next determined net asset value. 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. If
redemption is requested by a corporation, partnership, trust or fiduciary, the
Transfer Agent may require that written evidence of authority acceptable to the
Transfer Agent be submitted before such request is accepted. With regard to
shares of the Fund acquired pursuant to the Exchange Privilege, any applicable
contingent deferred sales charge will be imposed upon the redemption of such
shares (see "Purchase of Fund Shares--Exchange Privilege").
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 DWR or another 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 revised
prospectus.
Payment for Shares Repurchased or Redeemed. Payment for shares presented for
repurchase or redemption will be made by check within seven days after receipt
by the Transfer Agent of the certificate and/or written request in good order.
Such payment may be postponed or the right of redemption suspended under
unusual circumstances. If the shares to be redeemed have recently been
purchased by check, payment of the redemption proceeds may be delayed for the
minimum time needed to verify that the check used for investment has been
honored (not more than fifteen days from the time of receipt of the check by
the Transfer Agent). Shareholders maintaining margin accounts with DWR or
another Selected Broker-Dealer are referred to their account executive
regarding restrictions on redemption of shares of the Fund pledged in the
margin account.
Reinstatement Privilege. A shareholder who has had his or her shares
redeemed or repurchased and has not previously exercised this reinstatement
privilege may, within thirty days after the date of the redemption or
repurchase, reinstate any portion or all of the proceeds of such redemption or
repurchase in shares of the Fund at net asset value next determined after a
reinstatement request, together with the proceeds, is received by the Transfer
Agent.
Involuntary Redemption. The Fund reserves the right to redeem, on sixty
days' notice and at net asset value, the shares of any shareholder (other than
shares held in an Individual Retirement Account or Custodial Account under
Section 403(b)(7) of the Internal Revenue Code) whose shares have a value of
less than $100 as a result of redemptions or repurchases, or such lesser amount
as may be fixed by the Trustees or, in the case of an account opened through
EasyInvest, if after twelve months the shareholder has invested less than
$1,000 in the account. However, before the Fund
25
<PAGE>
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 60 days to make an additional investment in an amount
which will increase the value of the account to at least the applicable amount
before the redemption is processed.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
Dividends and Distributions. The Fund intends to pay monthly income
dividends and to distribute net short-term and net long-term capital gains, if
any, at least once each year. The Fund may, however, determine either to
distribute or to retain all or part of any long-term capital gains in any year
for reinvestment.
The Fund may, at times, make payments from sources other than net investment
income, net realized short-term capital gains and net realized long-term
capital gains. Payments from such sources would, in effect, represent a return
of a portion of each shareholder's investment. All, or a portion, of such
payments would not be taxable to shareholders.
All dividends and any capital gains distributions will be paid in additional
Fund shares and automatically credited to the shareholder's account without
issuance of a share certificate unless the shareholder requests in writing that
all dividends and/or distributions be paid in cash. (See "Shareholder
Services--Automatic Investment of Dividends and Distributions.")
Taxes. Because the Fund intends to distribute all of its net investment
income and net short-term capital gains to shareholders and otherwise remain
qualified as a regulated investment company under Subchapter M of the Internal
Revenue Code, it is not expected that the Fund will be required to pay any
federal income tax on such income and capital gains.
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. It is not anticipated that any
portion of the Fund's distributions will be eligible for the dividends received
deduction to corporate shareholders.
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
and the portion taxable as long-term capital gains.
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.
26
<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
- -------------------------------------------------------------------------------
From time to time the Fund may quote its "yield" and/or its "total return"
in advertisements and sales literature. Both the yield and the total return of
the Fund are based on historical earnings and yield of the Fund is computed by
dividing the net investment income of the Fund over a 30-day period by an
average value (using the average number of shares entitled to receive dividends
and the net asset value per share at the end of the period), all in accordance
with applicable regulatory requirements. Such amount is compounded for six
months and then annualized for a twelve-month period to derive the yield of the
Fund.
The "average annual total return" of the Fund refers to a figure reflecting
the average annualized percentage increase (or decrease) in the value of an
initial investment in the Fund of $1,000 over one, five and ten years or 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 assets of the Fund, and all expenses incurred by the Fund, for the
stated periods. It also assumes reinvestment of all dividends and distributions
paid by the Fund.
In addition to the foregoing, the Fund may advertise its total return over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. The Fund may also advertise the growth of
hypothetical investments of $10,000, $50,000 and $100,000 in shares of the
Fund. The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent
organizations(such as mutual fund performance rankings of Lipper Analytical
Services, Inc.).
ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
Voting Rights. All shares of beneficial interest of the Fund are of $0.01
par value and are equal as to earnings, assets and voting privileges.
The Fund is not required to hold Annual Meetings of Shareholders and, in
ordinary circumstances, the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances, the Trustees may be removed by action of the Trustees or by the
shareholders.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that Fund
obligations include such disclaimer, and provides indemnification and
reimbursement of expenses out of the Fund's property for any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability, and
the nature of the Fund's assets and operations, the possibility of the Fund
being unable to meet its obligations is remote and thus, in the opinion of
Massachusetts counsel to the Fund, the risk to Fund shareholders of personal
liability is remote.
Code of Ethics. The Adviser is subject to a Code of Ethics with respect to
investment transactions in which the Adviser's officers, directors and certain
other persons have a beneficial interest to avoid any actual or potential
conflict or abuse of their fiduciary position. The Code of Ethics, as it
pertains to the
27
<PAGE>
TCW/DW Funds, contains several restrictions and procedures designed to
eliminate conflicts of interest including: (a) pre-clearance of personal
investment transactions to ensure that personal transactions by employees are
not being conducted at the same time as the Adviser's clients; (b) quarterly
reporting of personal securities transactions; (c) a prohibition against
personally acquiring securities in an initial public offering, entering into
uncovered short sales and writing uncovered options; (d) a seven day "black-out
period" prior or subsequent to a TCW/DW Fund transaction during which portfolio
managers are prohibited from making certain transactions in securities which
are being purchased or sold by a TCW/DW Fund; (e) a prohibition, with respect
to certain investment personnel, from profiting in the purchase and sale, or
sale and purchase, of the same (or equivalent) securities within 60 calendar
days; and (f) a prohibition against acquiring any security which is subject to
firm wide or, if applicable, a department restriction of the Adviser. The Code
of Ethics provides that exemptive relief may be given from certain of its
requirements, upon application. The Adviser's Code of Ethics complies with
regulatory requirements and, insofar as it relates to persons associated with
registered investment companies, the 1994 Report of the Advisory Group on
Personal Investing of the Investment Company Institute.
Litigation. Several class action lawsuits, which have been consolidated,
were instituted in 1995 in the United States District Court, in New York,
against the Fund, some of its Trustees and officers, its underwriter and
distributor, the Adviser, the Manager, and other defendants, by certain
shareholders of the Fund. The consolidated amended complaint asserts claims
under the Securities Act of 1933 and generally alleges that the defendants
made inadequate and misleading disclosures in the prospectuses for the Fund,
in particular as such disclosures relate to the nature and risks of the Fund's
investments in mortgage-backed securities and Mexican securities. The
plaintiffs also challenge certain fees paid by the Fund as excessive.
Damages are sought in an unspecified amount. All defendants moved to dismiss
the consolidated amended complaint, and on May 8, 1996 the motions to dismiss
were denied. The defendants moved for reargument and on August 28, 1996 the
Court issued a second opinion which granted the motion to dismiss in part. The
Court has also certified a plaintiff class pursuant to the Federal Rules of
Civil Procedure. On December 4, 1996, the defendants filed a renewed motion to
dismiss. The Adviser and the Manager believe that the litigation will not have
a material adverse effect on their ability to perform under their respective
agreements with the Fund or a material adverse effect on the Fund and its
shareholders.
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.
28
<PAGE>
TCW/DW
North American
Government Income Trust
Two World Trade Center
New York, New York 10048
TRUSTEES
John C. Argue
Richard M. DeMartini
Charles A. Fiumefreddo
John R. Haire
Dr. Manuel H. Johnson
Thomas E. Larkin, Jr.
Michael E. Nugent
John L. Schroeder
Marc I. Stern
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Thomas E. Larkin, Jr.
President
Sheldon Curtis
Vice President, Secretary and
General Counsel
Philip A. Barach
Vice President
James M. Goldberg
Vice President
Jeffrey E. Gundlach
Vice President
Frederick H. Horton
Vice President
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Dean Witter Trust Company
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
MANAGER
Dean Witter Services Company Inc.
ADVISER
TCW Funds Management, Inc.
TCW/DW
NORTH AMERICAN
GOVERNMENT
INCOME TRUST
PROSPECTUS
FEBRUARY 5, 1997
<PAGE>
TCW/DW
NORTH AMERICAN
GOVERNMENT INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
February 5, 1997
- -----------------------------------------------------------------------------
TCW/DW North American Government Income Trust (the "Fund") is an open-end,
non-diversified management investment company, whose investment objective is to
earn a high level of current income while maintaining relatively low volatility
of principal. The Fund seeks to achieve its investment objective by investing
primarily in investment grade securities issued or guaranteed by the U.S.
Government, Canada or Mexico, or their subdivisions, or the agencies or
instrumentalities of any of the foregoing. See "Investment Practices and
Policies."
A Prospectus for the Fund dated February 5, 1997, 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.
TCW/DW North American Government Income Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
The Fund and its Management .............................................. 3
Trustees and Officers .................................................... 6
Investment Practices and Policies ....................................... 12
Investment Restrictions .................................................. 26
Portfolio Transactions and Brokerage ..................................... 27
The Distributor .......................................................... 28
Shareholder Services ..................................................... 31
Repurchases and Redemptions .............................................. 35
Dividends, Distributions and Taxes ...................................... 35
Performance Information .................................................. 37
Description of Shares .................................................... 38
Custodian and Transfer Agent ............................................ 39
Independent Accountants .................................................. 39
Reports to Shareholders .................................................. 39
Legal Counsel ............................................................ 39
Experts .................................................................. 39
Registration Statement ................................................... 39
Financial Statements--October 31, 1996 ................................... 40
Report of Independent Accountants ....................................... 50
Appendix ................................................................. 51
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
February 19, 1992. The Fund is one of the TCW/DW Funds, which currently
consist, in addition to the Fund, of TCW/DW Core Equity Trust, TCW/DW Latin
American Growth Fund, TCW/DW Income and Growth Fund, TCW/DW Small Cap Growth
Fund, TCW/DW Balanced Fund, TCW/DW Mid-Cap Equity Trust, TCW/DW Global Telecom
Trust, TCW/DW Strategic Income Trust, TCW/DW Term Trust 2002, TCW/DW Term Trust
2003, TCW/DW Term Trust 2000, TCW/DW Emerging Markets Opportunities Trust and
TCW/DW Total Return Trust.
THE MANAGER
Dean Witter Services Company Inc. (the "Manager"), a Delaware corporation,
whose address is Two World Trade Center, New York, New York 10048, is the
Fund's Manager. The Manager is a wholly-owned subsidiary of Dean Witter
InterCapital Inc. ("InterCapital"), a Delaware corporation. InterCapital is a
wholly-owned subsidiary of Dean Witter, Discover & Co. ("DWDC"), a Delaware
corporation. In an internal reorganization which took place in January, 1993,
InterCapital assumed the investment advisory, management and administrative
activities previously performed by the InterCapital Division of Dean Witter
Reynolds Inc. ("DWR"), a broker-dealer affiliate of the Manager. (As
hereinafter used in this Statement of Additional Information, the term
"InterCapital" refers 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 Manager and Adviser (see below), 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."
Pursuant to a management agreement (the "Management Agreement") with the
Manager, the Fund has retained the Manager to manage the Fund's business
affairs, supervise the overall day-to-day operations of the Fund (other than
rendering investment advice) and provide all administrative services to the
Fund. Under the terms of the Management Agreement, the Manager also maintains
certain of the Fund's books and records and furnishes, at its own expense, such
office space, facilities, equipment, supplies, clerical help and bookkeeping
and legal services as the Fund may reasonably require in the conduct of its
business, including the preparation of prospectuses, statements of additional
information, proxy statements and reports required to be filed with federal and
state securities commissions (except insofar as the participation or assistance
of independent accountants and attorneys is, in the opinion of the Manager,
necessary or desirable). In addition, the Manager pays the salaries of all
personnel, including officers of the Fund, who are employees of the Manager.
The Manager also bears the cost of the Fund's telephone service, heat, light,
power and other utilities.
As full compensation for the services and facilities furnished to the Fund
and expenses of the Fund assumed by the Manager, the Fund pays the Manager
monthly compensation calculated daily by applying the following annual rates to
the Fund's daily net assets determined as of the close of each business day:
0.39% of the portion of daily net assets not exceeding $3 billion; and 0.36% of
the portion of daily net assets exceeding $3 billion. While the fee payable
under the Management Agreement may be higher than that paid by other investment
companies for similar services, the Board of Trustees determined that the total
fees payable under the Management Agreement and the Advisory Agreement (as
defined below) are reasonable in relation to the scope and quality of services
to be provided thereunder. In this regard, in evaluating the Management
Agreement, the Board of Trustees recognized that the Manager and the Adviser
had, pursuant to an agreement described under the section entitled "The
Adviser," agreed to a division as between themselves of the total fees
necessary for the management of the business affairs of and the furnishing of
investment advice to the Fund. Accordingly, in reviewing the Management
Agreement and Advisory Agreement, the Board viewed as most significant the
question as to whether the total fees payable under the Management and Advisory
Agreements were in the aggregate reasonable in relation to the services to be
provided thereunder. For the fiscal years ended October 31, 1994, 1995 and
1996, the Fund accrued to the Manager and/or (under previous management
agreements) InterCapital, total compensation of $6,068,227, $3,166,169 and
$1,912,210, respectively.
The Management Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Manager is not liable to the Fund or any of its
investors for
3
<PAGE>
any act or omission by the Manager or for any losses sustained by the Fund or
its investors. The Management Agreement in no way restricts the Manager from
acting as manager to others.
InterCapital paid the organizational expenses of the Fund incurred prior to
the offering of the Fund's shares. The Fund has reimbursed the Manager for
$200,000 of such expenses, in accordance with the terms of the Underwriting
Agreement between the Fund and DWR. The Fund has deferred and is amortizing the
reimbursed expenses on the straight line method over a period not to exceed
five years from the date of commencement of the Fund's operations.
The Management Agreement was initially approved by the Trustees on June 4,
1994 and became effective on April 17, 1995. The Management Agreement replaced
a prior management agreement in effect between the Fund and the Manager, which
in turn had replaced a management agreement between the Fund and InterCapital,
the parent company of the Manager. (That management agreement in turn had
replaced, on June 30, 1993 upon the spin-off by Sears, Roebuck and Co. of its
remaining shares of DWDC, an earlier substantially identical management
agreement (originally with DWR, and assumed by InterCapital effective January,
1993) which was approved by the Trustees on October 30, 1992.) The nature and
scope of services provided to the Fund, and the formula to determine fees paid
by the Fund under the Management Agreement, are identical to those of the
Fund's previous management agreements. The Management Agreement may be
terminated at any time, without penalty, on thirty days' notice by the Trustees
of the Fund.
Under its terms, the Management Agreement had an initial term ending April
30, 1995, and will continue in effect from year to year thereafter, provided
continuance of the Agreement is approved at least annually by the Trustees of
the Fund, including the vote of a majority of the Independent Trustees who are
not parties to the Management or Advisory Agreement or "interested persons" (as
defined in the Investment Company Act of 1940, as amended (the "Act")) of any
such party (the "Independent Trustees"). Continuation of the Management
Agreement until April 30, 1997 was approved by the Trustees, including a
majority of the Independent Trustees, at a meeting held on April 17, 1996.
THE ADVISER
TCW Funds Management, Inc. (the "Adviser"), a California corporation, is a
wholly-owned subsidiary of The TCW Group, Inc. ("TCW"), whose subsidiaries,
including Trust Company of the West and TCW Asset Management Company, provide a
variety of trust, investment management and investment advisory services. As of
December 31, 1996, the Adviser and its affiliates had approximately $53 billion
under management or committed to management. Trust Company of the West and its
affiliates have managed securities portfolios for institutional investors since
1971. The Adviser is headquartered at 865 South Figueroa Street, Suite 1800,
Los Angeles, California 90017 and is registered as an investment adviser under
the Investment Advisers Act of 1940. In addition to the Fund, the Adviser
currently serves as investment adviser to thirteen other TCW/DW Funds: TCW/DW
Core Equity Trust, TCW/DW Latin American Growth Fund, TCW/DW Term Trust 2002,
TCW/DW Income and Growth Fund, TCW/DW Term Trust 2003, TCW/DW Small Cap Growth
Fund, TCW/DW Balanced Fund, TCW/DW Term Trust 2000, TCW/DW Emerging Markets
Opportunities Trust, TCW/DW Mid-Cap Equity Trust, TCW/DW Global Telecom Trust,
TCW/DW Total Return Trust and TCW/DW Strategic Income Trust. The Adviser also
serves as investment adviser to TCW Convertible Securities Fund, Inc., a
closed-end investment company listed on the New York Stock Exchange, and to The
TCW Galileo Funds, Inc., an open-end investment company, and acts as adviser or
sub-adviser to other investment companies.
Robert A. Day, who is Chairman of the Board of Directors of TCW, may be
deemed to be a control person of the Adviser by virtue of the aggregate
ownership of Mr. Day and his family of more than 25% of the outstanding voting
stock of TCW.
Pursuant to an investment advisory agreement (the "Advisory Agreement") with
the Adviser, the Fund has retained the Adviser to invest the Fund's assets,
including the placing of orders for the purchase and sale of portfolio
securities. The Adviser 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. In addition, the Adviser
pays the salaries of all personnel, including officers of the Fund, who are
employees of the Adviser.
4
<PAGE>
As full compensation for the services and facilities furnished to the Fund
and expenses of the Fund assumed by the Adviser, the Fund pays the Adviser
monthly compensation calculated daily by applying the following annual rates to
the Fund's daily net assets determined as of the close of each business day:
0.26% of the portion of daily net assets not exceeding $3 billion; and 0.24% of
the portion of daily net assets exceeding $3 billion. For the fiscal years
ended October 31, 1994, 1995 and 1996, the Fund accrued to the Adviser total
compensation under the Advisory Agreement of $9,102,341, $2,110,779 and
$1,274,806, respectively.
The Advisory Agreement provides that in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations
thereunder, the Adviser is not liable to the Fund or any of its investors for
any act or omission by the Adviser or for any losses sustained by the Fund or
its investors. The Advisory Agreement in no way restricts the Adviser from
acting as investment adviser to others.
The Advisory Agreement was initially approved by the Trustees on May 1, 1992
and by DWR, as then sole shareholder, on May 11, 1992. The Advisory Agreement
may be terminated at any time, without penalty, on thirty days' notice by the
Trustees of the Fund, by the holders of a majority, as defined in the Act, of
the outstanding shares of the Fund, or by the Adviser. The Agreement will
automatically terminate in the event of its assignment (as defined in the Act).
Under its terms, the Advisory Agreement had an initial term ending April 30,
1994, and provides that it will continue 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 Trustees of the Fund; provided that in either event such
continuance is approved annually by the vote of a majority of the Independent
Trustees of the Fund, which vote must be cast in person at a meeting called for
the purpose of voting on such approval. Continuation of the Advisory Agreement
until April 30, 1997 was approved by the Trustees, including a majority of the
Independent Trustees, at a meeting called for that purpose on April 17, 1996.
Expenses not expressly assumed by the Manager under the Management
Agreement, by the Adviser under the Advisory Agreement or by the Distributor of
the Fund's shares Dean Witter Distributors Inc. ("Distributors" or the
"Distributor") (see "The Distributor"), will be paid by the Fund. The expenses
borne by the Fund include, but are not limited to: expenses of the Plan of
Distribution pursuant to Rule 12b-1 (see "The Distributor"); charges and
expenses of any registrar; custodian, stock transfer and dividend disbursing
agent; brokerage commissions and securities transaction costs; taxes; engraving
and printing of share certificates; registration costs of the Fund and its
shares under federal and state securities laws; the cost and expense of
printing, including typesetting, and distributing Prospectuses and Statements
of Additional Information of the Fund and supplements thereto to the Fund's
shareholders; all expenses of shareholders' and trustees' meetings and of
preparing, printing and mailing of proxy statements and reports to
shareholders; fees and travel expenses of trustees or members of any advisory
board or committee who are not employees of the Manager or Adviser or any
corporate affiliate of either; 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 Manager or the Adviser (not including compensation or expenses of
attorneys who are employees of the Manager or the Adviser) 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.
DWR and TCW have entered into an agreement for the purpose of creating,
managing, administering and distributing a family of investment companies and
other managed pooled investment vehicles offered on a retail basis within the
United States. The Agreement contemplates that, subject to approval of the
board of trustees or directors of a particular investment entity, DWR or its
affiliates will provide management and distribution services and TCW or its
affiliates will provide investment advisory services for each such investment
entity. The Agreement sets forth the terms and conditions of the relationship
between TCW and its affiliates and DWR or its affiliates and the manner in
which the parties will implement the creation and maintenance of the investment
entities, including the parties' expectations as to respective allocation of
fees to be paid by an investment entity to each party for the services to be
provided to it by such party.
5
<PAGE>
The Fund has acknowledged that each of DWR and TCW owns its own name,
initials and logo. The Fund has agreed to change its name at the request of
either the Manager or the Adviser, if the Management Agreement between the
Manager and the Fund or the Advisory Agreement between the Adviser and the Fund
is terminated.
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 the
Manager or the Adviser, and the affiliated companies of either, and with the 14
TCW/DW Funds and with the 83 investment companies of which InterCapital serves
as investment manager or as investment adviser (the "Dean Witter Funds"), are
shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ----------------------------------------------- -------------------------------------------------
<S> <C>
John C. Argue (65) Of Counsel, Argue Pearson Harbison & Myers (law
Trustee firm); Director, Avery Dennison Corporation
c/o Argue Pearson Harbison & Myers (manufacturer of self-adhesive products and
801 South Flower Street office supplies) and CalMat Company (producer of
Los Angeles, California aggregates, asphalt and ready mixed concrete);
Chairman, Rose Hills Foundation (charitable
foundation); advisory director, LAACO Ltd. (owner
and operator of private clubs and real estate);
director or trustee of various business and
not-for-profit corporations; Director, Coast
Savings Financial Inc. and Coast Federal Bank (a
subsidiary of Coast Savings Financial Inc.);
Director, TCW Galileo Funds, Inc.; Trustee,
University of Southern California, Occidental
College and Pomona College; Trustee of the TCW/DW
Funds.
Richard M. DeMartini* (44) President and Chief Operating Officer of Dean
Trustee Witter Capital, a division of DWR; Director of
Two World Trade Center DWR, the Manager, InterCapital, Distributors and
New York, New York Dean Witter Trust Company ("DWTC"); Executive
Vice President of Dean Witter Discover & Co.
("DWDC"); Member of the DWDC Management
Committee; Trustee of the TCW/DW Funds; Member
(since January, 1993) and Chairman (since
January, 1995) of the Board of Directors of
NASDAQ.
Charles A. Fiumefreddo* (63) Chairman and Chief Executive Officer of the
Chairman of the Board, Chief Manager, InterCapital and Distributors; Executive
Executive Officer and Trustee Vice President and Director of DWR; Chairman of
Two World Trade Center the Board, Chief Executive Officer and Trustee of
New York, New York the TCW/DW Funds; Chairman of the Board, Director
or Trustee, President and Chief Executive Officer
of the Dean Witter Funds; Chairman and Director
of DWTC; Director and/or officer of various DWDC
subsidiaries; Formerly Executive Vice President
and Director of DWDC (until February, 1993).
6
<PAGE>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ----------------------------------------------- -------------------------------------------------
John R. Haire (71) Chairman of the Audit Committee and Chairman of
Trustee the Committee of Independent Trustees and Trustee
Two World Trade Center of the TCW/DW Funds; Chairman of the Audit
New York, New York Committee and Chairman of the Committee of
Independent Directors or Trustees and Director or
Trustee of each of the Dean Witter Funds;
formerly President, Council for Aid to Education
(1978-1989) and Chairman and Chief Executive
Officer of Anchor Corporation, an Investment
Adviser (1964-1978); Director of Washington
National Corporation (insurance); Trustee of the
TCW/DW Funds.
Dr. Manuel H. Johnson (47) Senior Partner, Johnson Smick International,
Trustee Inc., a consulting firm; Koch Professor of
c/o Johnson Smick International, Inc. International Economics and Director of the
1133 Connecticut Avenue, N.W. Center for Global Market Studies at George Mason
Washington, D.C. University; Co-Chairman and a founder of the
Group of Seven Council (G7C), an international
economic commission; Director of NASDAQ (since
June, 1995); Director of Greenwich Capital
Markets, Inc. (broker-dealer); formerly Vice
Chairman of the Board of Governors of the Federal
Reserve System (1986-1990) and Assistant
Secretary of the U.S. Treasury (1982-1986);
Trustee of the TCW/DW Funds; Director or Trustee
of the Dean Witter Funds.
Thomas E. Larkin, Jr.* (57) Executive Vice President and Director, The TCW
President and Trustee Group, Inc.; President, and Director of Trust
865 South Figueroa Street Company of the West and Vice Chairman and
Los Angeles, California Director of TCW Asset Management Company;
Chairman of the Adviser; President and Director
of TCW Galileo Funds, Inc.; Senior Vice President
of TCW Convertible Securities Fund, Inc.; Member
of the Board of Trustees of the University of
Notre Dame; Director of Orthopaedic Hospital of
Los Angeles; President and Trustee of the TCW/DW
Funds.
Michael E. Nugent (60) General Partner, Triumph Capital, L.P., a private
Trustee investment partnership; formerly Vice President,
c/o Triumph Capital, L.P. Bankers Trust Company and BT Capital Corporation
237 Park Avenue (1984-1988); Director of various business
New York, New York organizations; Trustee of the TCW/DW Funds;
Director or Trustee of the Dean Witter Funds.
John L. Schroeder (66) Retired; Director or Trustee of the Dean Witter
Trustee Funds; Trustee of the TCW/DW Funds; Director of
c/o Gordon Altman Butowsky Weitzen Citizens Utilities Company; formerly Executive
Shalov & Wein Vice President and Chief Investment Officer of
Counsel to the Independent Trustees the Home Insurance Company (August,
114 West 47th Street 1991-September, 1995) and Chairman and Chief
New York, New York Investment Officer of Axe-Houghton Management and
the Axe-Houghton Funds (1983-1991).
7
<PAGE>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ----------------------------------------------- -------------------------------------------------
Marc. I. Stern* (52) President, The TCW Group, Inc. (since May, 1992);
Trustee President and Director of the Adviser (since May,
865 South Figueroa Street 1992); Vice Chairman and Director of TCW Asset
Los Angeles, California Management Company (since May, 1992); Executive
Vice President and Director of Trust Company of
the West; Chairman and Director of the TCW
Galileo Funds, Inc.; Trustee of the TCW/DW Funds;
Chairman of TCW Americas Development, Inc. (since
November, 1990); Chairman of TCW Asia, Limited
(since January 1993); Chairman of TCW London
International, Limited (since March, 1993);
formerly President and Director of SunAmerica,
Inc. (financial services company); Director of
Qualcomm, Incorporated (wireless communications);
director or trustee of various not-for-profit
organizations.
Sheldon Curtis (64) Senior Vice President, Secretary and General
Vice President, Secretary and General Counsel Counsel of InterCapital and the Manager; Senior
Two World Trade Center Vice President and Secretary of DWTC; Senior Vice
New York, New York President, Assistant Secretary and Assistant
General Counsel of Distributors; Assistant
Secretary of DWR and Vice President, Secretary
and General Counsel of the TCW/DW Funds and of
the Dean Witter Funds.
Philip A. Barach (44) Managing Director of the Adviser; Managing
Vice President Director, Mortgage-Backed Securities of Trust
865 South Figueroa Street Company of the West and TCW Asset Management
Los Angeles, California Company; Vice President of various TCW/DW Funds.
James M. Goldberg (51) Managing Director of the Adviser; Managing
Vice President Director and Chairman of the Fixed Income Policy
865 South Figueroa Street Committee of Trust Company of the West and TCW
Los Angeles, California Asset Management Company; Vice President of
various TCW/DW Funds.
Jeffrey E. Gundlach (37) Managing Director of the Adviser; Managing
Vice President Director, Mortgage-Backed Securities of Trust
865 South Figueroa Street Company of the West and TCW Asset Management
Los Angeles, California Company; Vice President of various TCW/DW Funds.
Frederick H. Horton (38) Managing Director of the Adviser, Trust Company
Vice President of the West and TCW Asset Management Company
865 South Figueroa Street (since October, 1993); previously Senior
Los Angeles, California Portfolio Manager for Dewey Square Investors
(June, 1991-September, 1993).
Thomas F. Caloia (50) First Vice President and Assistant Treasurer of
Treasurer the Manager and InterCapital and Treasurer of the
Two World Trade Center TCW/DW Funds and the Dean Witter Funds; Assistant
New York, New York Treasurer of Distributors.
</TABLE>
- --------------
* Denotes Trustees who are "interested persons" of the Fund, as defined in
the Act.
8
<PAGE>
In addition, Robert M. Scanlan, President and Chief Operating Officer of the
Manager and InterCapital, Executive Vice President of Distributors and DWTC and
Director of DWTC, Robert S. Giambrone, Senior Vice President of InterCapital,
DWSC, Distributors and DWTC and Director of DWTC are Vice Presidents of the
Fund, and Marilyn K. Cranney and Barry Fink, First Vice Presidents and
Assistant General Counsels of the Manager and InterCapital, Lou Anne D. McInnis
and Ruth Rossi, Vice Presidents and Assistant General Counsels of the Manager
and InterCapital, and Carsten Otto and Frank Bruttomesso, Staff Attorneys with
InterCapital, are Assistant Secretaries of the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees consists of nine (9) trustees. These same individuals
also serve as trustees for all of the TCW/DW Funds. As of the date of this
Statement of Additional Information, there are a total of 14 TCW/DW Funds. As
of December 31, 1996, the TCW/DW Funds had total net assets of approximately
$4.3 billion and approximately a quarter of a million shareholders.
Five Trustees (56% of the total number) have no affiliation or business
connection with TCW Funds Management, Inc. or Dean Witter Services Company Inc.
or any of their affiliated persons and do not own any stock or other securities
issued by DWDC or TCW, the parent companies of Dean Witter Services Company
Inc. and TCW Funds Management, Inc., respectively. These are the
"disinterested" or "independent" Trustees. The other four Trustees (the
"management Trustees") are affiliated with either Dean Witter Services Company
Inc. or TCW. Four of the five independent Trustees are also Independent
Trustees of the Dean Witter Funds.
Law and regulation establish both general guidelines and specific duties for
the Independent Trustees. The TCW/DW 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, 1996,
the three Committees held a combined total of fifteen meetings. The Committees
hold some meetings at the offices of the Manager or Adviser and some outside
those offices. 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. Each of the open-end TCW/DW Funds has 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
On July 1, 1996, Mr. Haire became Chairman of the Committee of the
Independent Trustees and the Audit Committee of the TCW/DW Funds. The Chairman
of the Committees maintains an office in 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 Adviser and the 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 TCW/DW Funds and as Chairman of the Committee of the Independent
Trustees and the Audit Committee and Independent Director or Trustee of the
Dean Witter 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 TCW/DW
FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the TCW/DW 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
TCW/DW Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Fund pays each Independent Trustee an annual fee of $2,225 plus a per
meeting fee of $200 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). 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 Manager or the Adviser or an
affiliated company of either receive no compensation or expense reimbursement
from the Fund. The Trustees of the TCW/DW Funds do not have retirement or
deferred compensation plans.
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, 1996.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- --------------------------- -------------
<S> <C>
John C. Argue .................................................. $5,493
John R. Haire .................................................. 6,268
Dr. Manuel H. Johnson ......................................... 5,477
Michael E. Nugent .............................................. 5,257
John L. Schroeder .............................................. 5,693
</TABLE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1996 for services
to the 14 TCW/DW Funds and, in the case of Messrs. Haire, Johnson, Nugent and
Schroeder, the 82 Dean Witter Funds that were in operation at December 31,
1996, and, in the case of Mr. Argue, TCW Galileo Funds, Inc. With respect to
Messrs. Haire, Johnson, Nugent and Schroeder, the Dean Witter Funds are
included solely because of a limited exchange privilege between various TCW/DW
Funds and five Dean Witter Money Market Funds. With respect to Mr. Argue, TCW
Galileo Funds, Inc. is included solely because the Fund's Adviser, TCW Funds
Management, Inc., also serves as Adviser to that investment company.
COMPENSATION FROM FUND GROUPS
<TABLE>
<CAPTION>
FOR SERVICE AS
FOR SERVICES AS CHAIRMAN OF
CHAIRMAN OF COMMITTEES OF
FOR SERVICE COMMITTEES OF INDEPENDENT TOTAL
FOR SERVICE AS AS DIRECTOR OR INDEPENDENT DIRECTORS/ COMPENSATION PAID
TRUSTEE AND TRUSTEE AND TRUSTEES TRUSTEES FOR SERVICES TO
COMMITTEE COMMITTEE AND AUDIT AND AUDIT 82 DEAN WITTER
MEMBER MEMBER FOR SERVICE AS COMMITTEES COMMITTEES FUNDS, 14
OF 14 OF 82 DIRECTOR OF OF 14 OF 82 TCW/DW FUNDS
TCW/DW DEAN WITTER TCW GALILEO TCW/DW DEAN WITTER AND TCW
NAME OF INDEPENDENT TRUSTEE FUNDS FUNDS FUNDS, INC. FUNDS FUNDS GALILEO FUNDS, INC.
- --------------------------- -------------- -------------- -------------- --------------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
John C. Argue ............. $66,483 -- $39,000 -- -- $105,483
John R. Haire ............. 64,283 $106,400 -- $12,187 $195,450 378,320
Dr. Manuel H. Johnson .... 66,483 137,100 -- -- -- 203,583
Michael E. Nugent ......... 64,283 138,850 -- -- -- 203,133
John L. Schroeder ......... 69,083 137,150 -- -- -- 206,233
</TABLE>
As of the date of this Statement of Additional Information, 57 of the Dean
Witter Funds 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 Messrs.
Haire, Johnson, Nugent and Schroeder by the 57 Dean Witter Funds for the year
ended December 31, 1996, and the estimated retirement benefits for Messrs.
Haire, Johnson, Nugent and Schroeder, to commence upon their retirement, from
the 57 Dean Witter Funds as of December 31, 1996.
RETIREMENT BENEFITS FROM ALL DEAN WITTER FUNDS
<TABLE>
<CAPTION>
ESTIMATED
CREDITED YEARS ESTIMATED RETIREMENT BENEFITS ESTIMATED ANNUAL BENEFITS
OF SERVICE AT PERCENTAGE OF ACCRUED AS EXPENSES UPON RETIREMENT
RETIREMENT ELIGIBLE BY ALL ADOPTING FROM ALL ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUNDS FUNDS(2)
- --------------------------- -------------- ------------- ------------------- -------------------------
<S> <C> <C> <C> <C>
John R. Haire ............. 10 50.0% $46,952 $129,550
Dr. Manuel H. Johnson .... 10 50.0 10,926 51,325
Michael E. Nugent ......... 10 50.0 19,217 51,325
John L. Schroeder ......... 8 41.7 38,700 42,771
</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.
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
- -------------------------------------------------------------------------------
Mexican Sovereign Debt. Sovereign Debt differs from debt obligations issued
by private entities in that usually remedies from defaults must be pursued in
the courts of the defaulting party. Legal recourse is therefore somewhat
diminished. Political conditions, in terms of a country or agency's willingness
to meet the terms of its debt obligations, is of considerable significance.
Also, there can be no assurance that the holders of commercial bank debt may
not contest payments to the holders of Sovereign Debt in the event of default
under commercial bank loan agreements.
Sovereign Debt generally offers high yields, reflecting not only perceived
credit risk, but also the need to compete with other local investments in
domestic financial markets. Mexico is among the largest debtors to commercial
banks and foreign governments. A foreign debtor's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the foreign
debtor's policy towards the International Monetary Fund and the political
constraints to which a sovereign debtor may be subject. Mexico may also be
dependent on expected disbursements from foreign governments, multilateral
agencies and others abroad to reduce principal and interest arrearages on their
debt. The commitment on the part of these governments agencies and others to
make such disbursements may be conditioned on its implementation of economic
reforms and/or economic performance and the timely service of its obligations.
Failure to implement such reforms, achieve such levels of economic performance
or repay principal or interest when due, may result in the cancellation of such
third parties' commitments to lend funds to Mexico, which may further impair
its ability or willingness to service its debts.
The ability of the Mexican government to make timely payments on its
Sovereign Debt is likely to be influenced strongly by its balance of trade and
its access to trade and other international credits. In addition, the
occurrence of political, social or diplomatic changes could adversely affect
the Fund's investments. Mexico is faced with social and political issues and
has experienced high rates of inflation in recent years. Among other effects,
high
12
<PAGE>
inflation and internal debt service requirements may adversely affect the cost
and availability of future domestic sovereign borrowing to finance governmental
programs, and may have other adverse social, political and economic
consequences. Political changes or a deterioration of Mexico's domestic economy
or balance of trade may affect its willingness to service its Sovereign Debt.
While the Adviser intends to invest the Fund's portfolio in a manner that will
minimize the exposure to the risks of Sovereign Debt (specifically by limiting
the Fund's investments to investment grade securities with maturities of one
year or less), there can be no assurance that adverse political changes will
not cause the Fund to suffer a loss of all or a portion of interest and/or
principal on any of its holdings.
MONEY MARKET SECURITIES
As stated in the Prospectus, the money market instruments which the Fund may
purchase include U.S. Government securities, bank obligations, Eurodollar
certificates of deposit, obligations of savings institutions, fully insured
certificates of deposit and commercial paper. Such securities include:
U.S. Government Securities. Obligations issued or guaranteed as to
principal and interest by the United States or its agencies (such as the
Export-Import Bank of the United States, Federal Housing Administration and
Government National Mortgage Association) or its instrumentalities (such as
the Federal Home Loan Bank), including Treasury bills, notes and bonds;
Bank Obligations. Obligations (including certificates of deposit, bankers'
acceptances, commercial paper (see below) and other debt obligations) of banks
subject to regulation by the U.S. Government and having total assets of $1
billion or more, and instruments secured by such obligations, not including
obligations of foreign branches of domestic banks except as permitted below;
Eurodollar Certificates of Deposit. Eurodollar certificates of deposit
issued by foreign branches of domestic banks having total assets of $1 billion
or more (investments in Eurodollar certificates may be affected by changes in
currency rates or exchange control regulations, or changes in governmental
administration or economic or monetary policy in the United States and abroad);
Obligations of Savings Institutions. Certificates of deposit of savings
banks and savings and loan associations, having total assets of $1 billion or
more (investments in savings institutions above $100,000 in principal amount
are not protected by federal deposit insurance);
Fully Insured Certificates of Deposit. Certificates of deposit of banks and
savings institutions, having total assets of less than $1 billion, if the
principal amount of the obligation is insured by the Bank Insurance Fund or the
Savings Association Insurance Fund (each of which is administered by the
Federal Deposit Insurance Corporation), limited to $100,000 principal amount
per certificate and to 15% or less of the Fund's total assets in all such
obligations and in all illiquid assets, in the aggregate;
Commercial Paper. Commercial paper rated within the two highest grades by
Standard & Poor's Corporation or the highest grade by Moody's Investors
Service, Inc. or, if not rated, issued by a company having an outstanding debt
issue rated at least AAA by Standard & Poor's or Aaa by Moody's.
MORTGAGE-BACKED SECURITIES
As stated in the Prospectus, the Fund may invest a portion of its assets in
securities that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans secured by real property
("Mortgage-Backed Securities"). The Fund will invest in mortgage pass-through
securities representing participation interests in pools of residential
mortgage loans originated by United States governmental or private lenders and
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 semi-annually) 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.
13
<PAGE>
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.
Private Mortgage Pass-Through Securities. Private mortgage pass-through
securities 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 a governmental entity, such securities
generally are structured with one or more types of credit enhancement.
Adjustable Rate Mortgage Securities. As stated in the Prospectus, 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, twenty-four, thirty-six or longer
scheduled monthly payments. Thereafter, the interest rates are subject to
periodic adjustment based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest
rate may not vary over the lifetime of the security. In addition, certain ARMs
provide for additional limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. Alternatively,
certain ARMs contain limitations on changes in the required monthly payment. In
the event that a monthly payment is not sufficient to pay the interest accruing
on an ARM, any such excess interest is added to the principal balance of the
mortgage loan, which is repaid through future monthly payments. If the monthly
payment for such an instrument exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment required at such
point to amortize the outstanding principal balance over the remaining term of
the loan, the excess is utilized to reduce the then outstanding principal
balance of the ARM.
Types of Credit Enhancement. Mortgage-Backed Securities are often backed by
a pool of assets representing the obligations of a number of different parties.
To lessen the effect of failures by obligors on underlying assets to make
payments, those securities may contain elements of credit support, which fall
into two categories: (i) liquidity protection and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from default ensures ultimate payment of the obligations on at least
a portion of the assets in the pool. This protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. The degree of credit
support provided for each issue is generally based on historical information
regarding the level of credit risk associated with the underlying assets.
Delinquencies or losses in excess of those anticipated could adversely affect
the return on an investment in a security. In addition, any circumstance
adversely affecting the ability of third parties, such as insurance companies,
to satisfy any of their obligations with respect to any Mortgage-Backed
Securities, such as a diminishment of their creditworthiness, could affect the
rating, and thus the value, of the securities. The Fund will not pay any fees
for credit support, although the existence of credit support may increase the
price of a security.
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 transactions 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 (usually
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large commercial and investment banks) and their customers. Such forward
contracts will only be entered into with United States banks and their foreign
branches 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.
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 either the Canadian dollar or Mexican peso ("foreign currency"),
it may, for example, desire to "lock in" the price of the security in U.S.
dollars, Canadian dollars or Mexican pesos. 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 Adviser believes that the Canadian
dollar or Mexican peso 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 U.S. dollars, the amount of that 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.
In addition, when the Adviser 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, 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.
Finally, 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,"
below).
The Fund will 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 Canadian dollars or Mexican pesos in
excess of the value of the Fund's portfolio securities or other assets
denominated in that currency. The Fund's custodian bank will place cash, U.S.
Government securities or other appropriate liquid portfolio debt 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 the Canadian dollar or Mexican
peso 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 the Canadian
dollar or Mexican peso, 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 Canadian dollar or Mexican
peso by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
Canadian dollar or Mexican peso. 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 Canadian dollars or Mexican
pesos 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 Canadian dollars or Mexican pesos. Conversely, it may be
necessary to sell on the spot market some of the Canadian dollars or Mexican
pesos received upon the sale of the portfolio securities if its market value
exceeds the amount of Canadian dollars or Mexican pesos 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
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Canadian dollars or Mexican pesos 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 the Canadian dollar or Mexican peso,
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 appropriate 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 Canadian dollars and Mexican pesos 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 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.
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").
OPTIONS AND FUTURES TRANSACTIONS
As discussed in the Prospectus, 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
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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 so 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
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
option 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 Adviser, 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
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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.
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. As stated in the Prospectus, the Fund is permitted to
write covered call options on portfolio securities and on the U.S. Dollar and
foreign 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)
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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 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 Transactions in Futures
Contracts and Related Options," below.
Covered Put Writing. 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 only 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 Adviser
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
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(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. As stated in the Prospectus, the Fund may
purchase listed and OTC call and put options in amounts equalling up to 5% of
its total assets. The Fund may purchase 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 a 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.
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 a 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 OCC to handle current trading volume; or (vi) a decision by one or more
Exchanges to
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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
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 not 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 markets 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").
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 Adviser 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 Adviser 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
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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.
Interest Rate Futures Contracts. 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 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.
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
Adviser 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, Canadian dollars.
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 Adviser'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. 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.
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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.
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 Adviser
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 Adviser
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. 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.
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.
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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 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 Adviser.
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 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.
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As stated in the Prospectus, 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").
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).
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
As stated in the Prospectus, the Fund may also use reverse repurchase
agreements and dollar rolls as part of its investment strategy. Reverse
repurchase agreements involve sales by the Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. Generally, the effect of such a transaction is
that the Fund can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are only advantageous if the interest cost to the
Fund of the reverse repurchase transaction is less than the cost of obtaining
the cash otherwise.
The Fund may enter into dollar rolls in which the Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Fund foregoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the lower forward price for the future purchase (often referred
to as the "drop") as well as by the interest earned on the cash proceeds of the
initial sale.
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.
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
money market instruments, which are maintained in a segregated account pursuant
to applicable regulations and that are equal to at least the market value,
determined daily, of the loaned securities. The advantage of such loans is that
the Fund continues to receive the income on the loaned securities while at the
same time earning interest on the cash amounts deposited as collateral, which
will be invested in short-term obligations. The Fund will not lend its
portfolio securities if such loans are not permitted by the laws or regulations
of any state in which its shares are qualified for sale and will not lend more
than 25% of the value of its total assets. 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 only be made to firms deemed by the Fund's management to be
creditworthy and when the income which can be earned from such loans justifies
the attendant
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risks. Upon termination of the loan, the borrower is required to return the
securities to the Fund. Any gain or loss in the market price during the loan
period would inure to the Fund. The creditworthiness of firms to which the Fund
lends its portfolio securities will be monitored on an ongoing basis by the
Adviser 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.
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 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 or sold are subject to market fluctuation and no
interest or dividends accrue to the purchaser prior to the settlement date.
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 or sell
securities on a when-issued, delayed delivery or forward commitment basis, the
Fund will record the transaction and thereafter reflect the value, each day, of
such security purchased or, if a sale, the proceeds to be received, in
determining its net asset value. At the time of delivery of the securities, the
value may be more or less than the purchase or sale 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 to purchase securities on a
when-issued, delayed delivery or forward commitment basis; subject to this
requirement, the Fund may purchase securities on such basis without limit. An
increase in the percentage of the Fund's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of the Fund's net asset value.
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. The commitment for the purchase of any such security
will not be recognized in the portfolio of the Fund until the Adviser
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. Once a segregated account has been
established, if the anticipated event does not occur and the securities are not
issued the Fund will have lost an investment opportunity. 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.
PORTFOLIO TURNOVER
It is anticipated that the Fund's portfolio turnover rate generally will not
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.
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INVESTMENT RESTRICTIONS
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In addition to the investment restrictions enumerated in the Prospectus, the
investment restrictions listed below have been adopted by the Fund as
fundamental policies, except as otherwise indicated. Under the Act, a
fundamental policy may not be changed without the vote of a majority of the
outstanding voting securities of the Fund, as defined in the Act. Such a
majority is defined as the lesser of (a) 67% or more of the shares present at a
meeting of shareholders, if the holders of 50% of the outstanding shares of the
Fund are present or represented by proxy or (b) more than 50% of the
outstanding shares of the Fund.
The Fund may not:
1. Purchase or sell real estate or interests therein (including limited
partnership interests), although the Fund may purchase securities of issuers
which engage in real estate operations and securities secured by real estate
or interests therein.
2. Purchase oil, gas or other mineral leases, rights or royalty
contracts or exploration or development programs, except that the Fund may
invest in the securities of companies which operate, invest in, or sponsor
such programs.
3. Borrow money, except that the Fund (i) may borrow from a bank for
temporary or emergency purposes in amounts not exceeding 5% (taken at the
lower of cost or current value) of its total assets (not including the
amount borrowed), and (ii) may engage in reverse repurchase agreements and
dollar rolls.
4. Pledge its assets or assign or otherwise encumber them except to
secure borrowings effected within the limitations set forth in restriction
(3). For the purpose of this restriction, collateral arrangements with
respect to initial or variation margin for futures are not deemed to be
pledges of assets.
5. 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 agreement; (b) purchasing any securities on a
when-issued or delayed delivery basis; (c) purchasing or selling any
financial futures contracts or options thereon; (d) borrowing money in
accordance with restrictions described above; or (e) lending portfolio
securities.
6. Make loans of money or securities, except: (a) by the purchase of
portfolio securities in which the Fund may invest consistent with its
investment objective and policies; (b) by investment in repurchase
agreements; or (c) by lending its portfolio securities.
7. Make short sales of securities.
8. Purchase securities on margin, except for such short-term loans as
are necessary for the clearance of portfolio securities. The deposit or
payment by the Fund of initial or variation margin in connection with
futures contracts is not considered the purchase of a security on margin.
9. 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.
10. Invest for the purpose of exercising control or management of any
other issuer.
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.
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PORTFOLIO TRANSACTIONS AND BROKERAGE
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Subject to the general supervision of the Trustees, the Adviser 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. 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. In addition, securities may 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. 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, 1994, 1995 and
1996, the Fund paid no brokerage commissions.
The Adviser currently serves as investment adviser to a number of clients,
including other investment companies, and may in the future act as investment
adviser to others. It is the practice of the Adviser 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, the main factors considered are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the Fund and other client accounts.
The policy of the Fund regarding purchases and sales of securities 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 Adviser from obtaining a high quality of brokerage
and research services. In seeking to determine the reasonableness of brokerage
commissions paid in any transaction, the Adviser 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.
In seeking to implement the Fund's policies, the Adviser effects
transactions with those brokers and dealers who the Adviser believes provide
the most favorable prices and are capable of providing efficient executions. If
the Adviser 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 Adviser. Such services may include, but are not
limited to, any one or more of the following: reports on industries and
companies, economic analyses and review of business conditions, portfolio
strategy, analytic computer software, account performance services, computer
terminals and various trading and/or quotation equipment. They also include
advice from broker-dealers as to the value of securities, availability of
securities, availability of buyers, and availability of sellers. In addition,
they include recommendations as to purchase and sale of individual securities
and timing of such transactions. 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.
The information and services received by the Adviser from brokers and
dealers may be of benefit to the Adviser 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 Adviser and thereby reduce its expenses, it is of indeterminable value
and the advisory fee paid to the Adviser is not reduced by any amount that may
be attributable to the value of such services.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may
be effected through DWR. In order for DWR to effect any portfolio
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transactions for the Fund, the commissions, fees or other remuneration received
by DWR must be reasonable and fair compared to the commissions, fees or other
remuneration paid to other brokers in connection with comparable transactions
involving similar securities being purchased or sold on an exchange during a
comparable period of time. This standard would allow DWR to receive no more
than the remuneration which would be expected to be received by an unaffiliated
broker in a commensurate arm's-length transaction. Furthermore, the Board of
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 DWR are consistent with the foregoing standard.
During the fiscal years ended October 31, 1994, 1995 and 1996, the Fund paid no
brokerage commissions to DWR.
THE DISTRIBUTOR
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As discussed in the Prospectus, shares of the Fund are distributed by Dean
Witter Distributors Inc. (the "Distributor"). The Distributor has entered into
a selected dealer agreement with DWR, which through its own sales organization
sells shares of the Fund. In addition, the Distributor may enter into selected
dealer agreements with other selected broker-dealers (including TCW Brokerage
Services, an affiliate of the Adviser). The Distributor, a Delaware
corporation, is a wholly-owned subsidiary of DWDC. The Trustees of the Fund,
including a majority of the Independent Trustees, approved, at their meeting on
October 30, 1992, the current Distribution Agreement appointing the Distributor
exclusive distributor of the Fund's shares and providing for the Distributor to
bear distribution expenses not borne by the Fund. The present Distribution
Agreement is substantively identical to the Fund's previous distribution
agreements. The Distribution Agreement took effect on June 30, 1993 upon the
spin-off by Sears, Roebuck and Co. of its remaining shares of DWDC. By its
terms, the Distribution Agreement had an initial term ending April 30, 1994,
and provides that it will remain in effect from year to year thereafter if
approved by the Trustees. Continuation of the Distribution Agreement until
April 30, 1997 was approved by the Trustees at their meeting on April 17, 1996.
The Distributor bears all expenses it or any selected dealer may incur in
providing services under the Distribution Agreement. Such expenses include the
payment of commissions for sales of the Fund's shares and incentive
compensation to account executives. The Distributor also pays certain expenses
in connection with the distribution of the Fund's shares, including the costs
of preparing, printing and distributing advertising or promotional materials,
and the costs of printing and distributing prospectuses and supplements thereto
used in connection with the offering and sale of the Fund's shares. The Fund
bears the costs of initial typesetting, printing and distribution of
prospectuses and supplements thereto to shareholders. The Fund also bears the
costs of registering the Fund and its shares under federal and state securities
laws. The Fund and the Distributor have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended. Under the Distribution Agreement, the Distributor uses its best
efforts in rendering services to the Fund, but in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations, the Distributor is not liable to the Fund or any of its
shareholders for any error of judgment or mistake of law or for any act or
omission or for any losses sustained by the Fund or its shareholders.
PLAN OF DISTRIBUTION
As discussed in the Prospectus, the Fund has entered into a Plan of
Distribution pursuant to Rule 12b-1 under the Act with the Distributor whereby
the expenses of certain activities in connection with the distribution of
shares of the Fund are reimbursed. The Plan was initially approved by the
Trustees of the Fund on May 1, 1992 and by DWR, the then sole shareholder of
the Fund, on May 11, 1992. The vote of the Trustees included a majority of the
Trustees who are not and were not at the time of their votes interested persons
of the Fund and who have and had at the time of their votes no direct or
indirect financial interest in the operation of the Plan (the "Independent
12b-1 Trustees"), cast in person at a meeting called for the purpose of voting
on such Plan. In determining to approve the Plan, the Trustees, including the
Independent 12b-1 Trustees, concluded that, in their judgment, there is a
reasonable likelihood that the Plan will benefit the Fund and its shareholders.
The Plan provides that the Distributor will bear the expense of all
promotional and distribution related activities on behalf of the Fund, except
for expenses that the Trustees determine to reimburse, as described below. The
following activities and services may be provided by the Distributor and DWR or
any other selected broker-dealer under the Plan: (1) compensation to and
expenses of account executives and other employees of
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DWR and other selected dealers, including overhead and telephone expenses; (2)
sales incentives and bonuses to sales representatives and to marketing
personnel in connection with promoting sales of the Fund's shares; (3) expenses
incurred in connection with promoting sales of the Fund's shares; (4) preparing
and distributing sales literature; and (5) providing advertising and
promotional activities, including direct mail solicitation and television,
radio, newspaper, magazine and other media advertisements.
The Fund is authorized to reimburse specific expenses incurred or to be
incurred in promoting the distribution of the Fund's shares and in servicing
shareholder accounts. Reimbursement is made through monthly payments in amounts
determined in advance of each fiscal quarter by the Trustees, including a
majority of the Independent 12b-1 Trustees. The amount of each monthly payment
may in no event exceed an amount equal to a payment at the annual rate of 0.75
of 1% of the Fund's average daily net assets during the month. No interest or
other financing charges, if any, incurred on any distribution expenses will be
reimbursable under the Plan. In making quarterly determinations of the amounts
that may be expended 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
shares.
The Distributor has informed the Fund that a portion of the fees payable by
the Fund each year pursuant to the Plan equal to 0.25% of the Fund's average
daily net assets is characterized as a "service fee" under the Rules of Fair
Practice of the National Association of Securities Dealers (of which the
Distributor is a member). Such portion of the fee is a payment made for
personal service and/or the maintenance of shareholder accounts. The remaining
portion of the Plan fees payable by the Fund is characterized as an
"asset-based sales charge" as defined in the aforementioned Rules of Fair
Practice.
DWR's account executives are credited with an annual gross residual
commission, currently a gross residual of up to 0.75% of the current value of
the respective accounts for which they are the account executives or dealers of
record. The "gross residual" is a charge which reflects residual commissions
paid by DWR to its account executives and expenses of DWR and its affiliates
associated with the servicing of shareholders' accounts, including the expenses
of operating branch offices in connection with the servicing of shareholders'
accounts, which expenses include lease costs, the salaries and employee
benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies and other
expenses relating to branch office servicing of shareholder accounts. The
portion of an account executive's annual gross residual commission allocated to
servicing of shareholder accounts does not exceed 0.25% of the average annual
net asset value of shares of accounts for which he or she is account executive
of record.
Under the Plan, the Distributor uses its best efforts in rendering services
to the Fund, but in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations, the Distributor is not
liable to the Fund or any of its shareholders for any error of judgment or
mistake of law or for any act or omission or for any losses sustained by the
Fund or its shareholders.
The Fund accrued $3,601,742 to the Distributor, pursuant to the Plan, for
the fiscal year ended October 31, 1996. This amount represents an annual rate
of 0.73 of 1% of the Fund's average daily net assets for the fiscal period.
Based upon the total amounts spent by the Distributor during the period, it is
estimated that the amount paid by the Fund to the Distributor for distribution
was spent in approximately the following ways: (i) advertising--$-0-; (ii)
printing and mailing prospectuses to other than current shareholders--$-0-;
(iii) compensation to underwriters--$-0-; (iv) compensation to dealers--$-0-;
(v) compensation to sales personnel--$-0-; and (vi) other, which includes
payments to DWR for expenses substantially all of which relate to compensation
of sales personnel (including compensation for servicing shareholder accounts
and associated overhead expenses)--$3,601,742.
The Plan remained in effect until April 30, 1993, and under its terms will
continue from year to year thereafter, provided such continuance is approved
annually by a vote of the Trustees, including a majority of the Independent
Trustees. At their meeting held April 17, 1996, the Trustees, including a
majority of the Independent 12b-1 Trustees, approved the continuance of the
Plan until April 30, 1997. Any amendment to increase materially the maximum
amount authorized to be spent under the Plan must be approved by the
shareholders of the Fund,
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<PAGE>
and all material amendments to the Plan must 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 Trustees or by a vote
of the holders of a majority of the outstanding voting securities of the Fund
(as defined in the Act) on not more than 30 days written notice to any other
party to the Plan. So long as the Plan is in effect, the selection or
nomination of the Independent Trustees is committed to the discretion of the
Independent Trustees.
Under the Plan, the Distributor provides the Fund, for review by the
Trustees, and the Trustees review, promptly after the end of each calendar
quarter, a written report regarding the distribution expenses incurred on
behalf of the Fund during such calendar quarter, which report includes (1) an
itemization of the types of expenses and the purposes therefor; (2) the amounts
of such expenses; and (3) a description of the benefits derived by the Fund. In
the Trustees' quarterly review of the Plan they consider its continued
appropriateness and the level of compensation provided therein.
No interested person of the Fund nor any Trustee of the Fund who is not an
interested person of the Fund, as defined in the Act, has any direct or
indirect financial interest in the operation of the Plan except to the extent
that DWR, the Distributor, the Manager or InterCapital or certain of its
employees may be deemed to have such an interest as a result of benefits
derived from the successful operation of the Plan or as a result of receiving a
portion of the amounts expended thereunder by the Fund.
DETERMINATION OF NET ASSET VALUE
As stated in the Prospectus, short-term debt securities with remaining
maturities of sixty days or less at the time of purchase are valued at
amortized cost, unless the Trustees determine such does not reflect the
securities' market value, in which case these securities will be valued at
their fair value as determined by the Trustees. Other short-term debt
securities will be valued on a mark-to-market basis until such time as they
reach a remaining maturity of sixty days, whereupon they will be valued at
amortized cost using their value on the 61st day unless the Trustees determine
such does not reflect the securities' market value, in which case these
securities will be valued at their fair value as determined by the Trustees.
Listed options are valued at the latest sale price on the exchange on which
they are listed unless no sales of such options have taken place that day, in
which case they will be valued at the mean between their latest bid and asked
prices. Unlisted options are valued at the mean between their latest bid and
asked prices. Futures are valued at the latest sale price on the commodities
exchange on which they trade unless the Trustees determine that 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.
As discussed in the Prospectus, the net asset value per share 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, by taking the value of all the assets of the Fund,
subtracting all liabilities, dividing by the number of shares outstanding and
adjusting the result to the nearest cent. The New York Stock Exchange currently
observes the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
SHAREHOLDER SERVICES
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Shareholder Investment Account. Upon purchase of shares of the Fund, a
Shareholder Investment Account is opened for the investor on the books of the
Fund, maintained by Dean Witter Trust Company (the "Transfer Agent"), in full
and fractional shares of the Fund (rounded to the nearest 1/100 of a share).
This is an open account in which shares owned by the investor are credited by
the Transfer Agent in lieu of issuance of a share certificate. If a share
certificate is desired, it must be requested in writing for each transaction.
Certificates are issued only for full shares and may be redeposited in the
account at any time. There is no charge to the investor for issuance of a
certificate. No certificates will be issued for fractional shares or to
shareholders who have elected the Systematic Withdrawal Plan for withdrawing
cash from their accounts. Whenever a shareholder instituted transaction takes
place in the Shareholder Investment Account, the shareholder will be mailed a
confirmation of the transaction from the Fund or from DWR or another selected
broker-dealer.
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<PAGE>
Automatic Investment of Dividends and Distributions. All dividends and
capital gains distributions are automatically paid in full and fractional
shares 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 in shares of the Fund
(or in cash if the shareholder so requests) at the net asset value per share 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 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 (5) business days prior to the record date for
which it commences to take effect. In 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.
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, 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. 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 Distributions Received in Cash. As discussed in the
Prospectus, any shareholder who receives a cash payment representing a dividend
or capital gains distribution may invest such dividend or distribution at net
asset value (without sales charge) by returning the check or the proceeds to
the Transfer Agent within 30 days after the payment date. If the shareholder
returns the proceeds of a dividend or distribution, such funds must be
accompanied by a signed statement indicating that the proceeds constitute a
dividend or distribution to be invested. Such investment will be made at the
net asset value per share next determined after receipt of the check or the
proceeds by the Transfer Agent.
Direct Investments through Transfer Agent. As discussed in the Prospectus, a
shareholder may make additional investments in Fund shares at any time by
sending a check in any amount, not less than $100, payable to TCW/DW North
American Government Income Trust, directly to the Transfer Agent. Such amounts
will be applied to the purchase of Fund shares at the net asset value per share
next computed after receipt of the check or purchase payment by the Transfer
Agent. The shares so purchased will be credited to the investor's account.
Targeted Dividends (Service Mark). In states where it is legally permissible
to do so, shareholders may also have all income dividends and capital gains
distributions automatically invested in shares of an open-end TCW/DW Fund other
than TCW/DW North American Government Income Trust. Such investment will be
made as described above for automatic investment in shares of the Fund, at the
net asset value per share of the selected TCW/DW 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 TCW/DW 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 TCW/DW Fund
targeted to receive investments from dividends at the time they enter the
Targeted Dividends program. Investors should review the prospectus of the
targeted TCW/DW Fund before entering the program.
Systematic Withdrawal Plan. As discussed in the Prospectus, a withdrawal
plan is available for shareholders who own or purchase shares of the Fund
having a minimum value of $10,000 based upon the then current net asset value.
The plan provides for monthly or quarterly (March, June, September and
December) checks in any dollar amount, not less than $25, or in any whole
percentage of the account balance, on an annualized basis. The 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.
Dividends and capital gains distributions on shares held under the
Systematic Withdrawal Plan will be invested in additional full and fractional
shares at net asset value (without a sales charge). Shares will be credited to
an open account for the investor by the Transfer Agent; no share certificates
will be issued. A shareholder is entitled to a share certificate upon written
request to the Transfer Agent, although in that event the shareholder's
Systematic Withdrawal Plan will be terminated.
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<PAGE>
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.
The Transfer Agent acts as agent for the shareholder in tendering to the
Fund for redemption sufficient full and fractional shares to provide the amount
of the periodic withdrawal payment designated in the application. The shares
will be redeemed at their net asset value determined, at the shareholder's
option, on the tenth or twenty-fifth day (or next following business day) of
the relevant month or quarter and normally a check for the proceeds will be
mailed by the Transfer Agent within five business days after the date of
redemption. The Withdrawal Plan may be terminated at any time by the Fund.
A shareholder, may, at any time change the amount and interval of withdrawal
payments and the address to which checks are mailed by written notification to
the Transfer Agent. The shareholder's signature on such notification 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). The
shareholder may also terminate the Systematic 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 Shareholder Investment Account. The shareholder
may also redeem all or part of the shares held in the Systematic Withdrawal
Plan account (see "Repurchases and Redemptions" in the Prospectus) at any time.
EXCHANGE PRIVILEGE
As discussed in the Prospectus under the caption "Exchange Privilege," an
Exchange Privilege exists whereby investors who have purchased shares of any
TCW/DW Fund sold with a contingent deferred sales charge ("CDSC Funds") will be
permitted, after the shares of the fund acquired by purchase (not by exchange
or dividend reinvestment) have been held for thirty days, to redeem all or part
of their shares in that fund, have the proceeds invested in shares of the Fund,
TCW/DW Income and Growth Fund, TCW/DW Balanced Fund, and in shares of five
money market funds for which InterCapital serves as investment manager: Dean
Witter Liquid Asset Fund Inc., Dean Witter Tax-Free Daily Income Trust, Dean
Witter California Tax-Free Daily Income Trust, Dean Witter New York Municipal
Money Market Trust, or Dean Witter U.S. Government Money Market Trust (these
eight funds, including the Fund, are hereinafter collectively referred to as
"Exchange Funds"). There is no waiting period for exchanges of shares acquired
by exchange or dividend reinvestment. Shares of Exchange Funds received in an
exchange for shares of a CDSC Fund (regardless of the type of fund originally
purchased) may be redeemed and exchanged for shares of other Exchange Funds.
Ultimately, any applicable contingent deferred sales charge ("CDSC") will have
to be paid upon redemption of shares originally purchased from a CDSC Fund. An
exchange will be treated for federal income tax purposes the same as a
repurchase or redemption of shares, on which the shareholder may realize a
capital gain or loss.
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.)
When shares of any CDSC Fund 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 Fund or in the money market 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 CDSC Fund. However, in the case of shares of a CDSC Fund exchanged into an
Exchange Fund, upon 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
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Fund 12b-1 distribution fees 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 CDSC Fund 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 CDSC Fund are
reacquired. Thus, a CDSC is imposed only upon an ultimate redemption, based
upon the time (calculated as described above) the shareholder was invested in a
CDSC Fund.
When shares initially purchased in a CDSC Fund are exchanged for shares of
another CDSC Fund or for 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 six years prior to the exchange and (ii) originally acquired through
reinvestment of dividends or distributions (all such shares called "Free
Shares"), will be exchanged first. After an exchange, all dividends earned on
shares in the 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 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 "Contingent Deferred Sales
Charge," 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.
The Transfer Agent acts as agent for shareholders of the Fund in effecting
redemptions of Fund shares and in applying the proceeds to the purchase of
other fund shares. In the absence of negligence on its part, neither the
Transfer Agent nor the Fund shall be liable for any redemption of Fund shares
caused by unauthorized telephone or telegraph instructions. Accordingly, in
such event the investor shall bear the risk of loss. The staff of the
Securities and Exchange Commission is currently considering the propriety of
such a policy.
With respect to the redemption or repurchase of shares of the Fund, the
application of proceeds to the purchase of new shares in the Fund or any other
of the funds and the general administration of the Exchange Privilege, the
Transfer Agent acts as agent for the Distributor and for the shareholder's
selected broker-dealer, if any, in the performance of such functions.
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 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
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Money Market Trust, although those funds may, at their discretion, accept
initial investments of as low as $1,000. The minimum initial investment for
Dean Witter U.S. Government Money Market Trust and all TCW/DW Funds is $1,000.)
Upon exchange into a money market 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 money market
funds, including the check writing feature, will not be available for funds
held in that account.
The Fund, each of the other TCW/DW Funds and each of the money market 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 any of the TCW/DW Funds or the money
market funds, upon such notice as may be required by applicable regulatory
agencies (presently sixty days 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. Exchanges are subject to the minimum investment requirement
and any other conditions imposed by each fund. In the case of any 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 within ninety days after the shares are purchased. The
Exchange Privilege is only available in states where an exchange may legally be
made. 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.
For further information regarding the Fund's Exchange Privilege,
shareholders should contact their DWR or other selected broker-dealer account
executive or the Transfer Agent.
REPURCHASES AND REDEMPTIONS
- -------------------------------------------------------------------------------
Payment for Shares Repurchased or Redeemed. As discussed in the Prospectus,
payment for shares presented for repurchase or redemption will be ordinarily
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 to
fairly 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 and the check
has not yet cleared, payment of redemption proceeds may be delayed until the
check has cleared.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
The Fund intends to continue to qualify and elect to be treated as a
regulated investment company for each taxable year under the Internal Revenue
Code of 1986, as amended (the "Code"). To so qualify, the Fund must meet
certain requirements as to the nature of its income and the nature of its
assets.
35
<PAGE>
As a regulated investment company, the Fund will not be subject to United
States federal income tax on its income that it distributes to its
shareholders, provided that an amount equal to at least 90% of its investment
company taxable income (i.e., 90% of its taxable income minus the excess, if
any, of its net realized long-term capital gains over its net realized
short-term capital losses including any capital loss carryovers), plus or
minuscertain other adjustments as specified in section 852 of the Code) for the
taxable year is distributed, but will be subject to tax at regular corporate
rates on any income or gains that it does not distribute. Furthermore, the Fund
will be subject to a United States corporate income tax with respect to such
distributed amounts in any year that it fails to qualify as a regulated
investment company or fails to meet this distribution requirement.
Gains or losses on the Fund's transactions in certain listed options on
securities and on 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.
As a regulated investment company, the Fund is subject to the requirement
that less than 30% of its gross income be derived from the sale of certain
investments held for less than three months. This requirement may limit the
Fund's ability to engage in options and futures transactions and to engage in a
large number of short-term transactions.
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 expects to designate
such retained amounts as undistributed capital gains in a notice to its
shareholders who (a) will be required to include in income for United States
federal income tax purposes, as long-term capital gains, their proportionate
shares of the undistributed amount, (b) will be entitled to credit their
proportionate shares of the 35% tax paid by the Fund on the undistributed
amount against their United States federal income tax liabilities, if any, and
to claim refunds to the extent their credits exceed their liabilities, if any,
and (c) will be entitled to increase their tax basis, for United States federal
income tax purposes, in their shares by an amount equal to 65% of the amount of
undistributed capital gains included in the shareholder's income.
The Code imposes a 4% nondeductible excise tax on the Fund to the extent the
Fund does not distribute by the end of any calendar year at least 98% of its
net investment income for that year and 98% of the net amount of its capital
gains (both long-and short-term) for the one-year period ending, as a general
rule, on October 31 of that year. For this purpose, however, any income or gain
retained by the Fund that is subject to corporate income tax will be considered
to have been distributed by year-end. The Fund anticipates that it will pay
such dividends and will make such distributions as are necessary in order to
avoid the application of this 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.
The Fund may invest in securities having original issue discount which may
generate income in excess of the cash received by the Fund. Consequently, the
Fund may be required to borrow or to liquidate securities in order to make
distributions.
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 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.
36
<PAGE>
Dividends, interest and capital gains received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax treaties 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. The Fund 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 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. The Fund may request a private letter ruling from the
Internal Revenue Service on some or all of these issues.
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 that are not "regulated futures contracts", and from unlisted 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 may not be able to make any ordinary dividend
distributions and distributions paid during the year may be characterized for
tax purposes as a return of capital.
Exchange control regulations may restrict repatriations of investment income
and capital or the proceeds of securities sales by foreign investors such as
the Fund and may limit the Fund's ability to pay sufficient dividends and to
make sufficient distributions to satisfy the 90% and excise tax distribution
requirements.
The Fund's transactions, if any, in foreign currencies, forward contracts,
options and futures contracts (including options and futures contracts on
foreign currencies) may be subject to special provisions of the Code that,
among other things, may affect the character of gains and losses realized by
the Fund (i.e., may affect whether gains or losses are ordinary or capital),
accelerate recognition of income to the Fund and defer Fund losses. These rules
could therefore affect the character, amount and timing of distributions to
shareholders. These rules also (a) could require the Fund to mark-to-market
certain types of the positions in its portfolio (i.e., treat them as they were
closed out) and (b) may cause the Fund to recognize income without receiving
cash with which to pay dividends or make distributions in amounts necessary to
satisfy the distribution requirements for avoiding income and excise taxes.
If the Fund invests in an entity which is classified as a "passive foreign
investment company" ("PFIC") for U.S. tax purposes, the application of certain
technical tax provisions applying to such companies could result in the
imposition of federal income tax with respect to such investments at the Fund
level which could not be eliminated by distributions to shareholders. The U.S.
Treasury is currently considering various solutions to this problem and, in any
event, it is not anticipated that any taxes on the Fund with respect to
investments in PFIC's would be significant.
Distributions in excess of the Fund's current and accumulated earnings and
profits will, as to each shareholder, be treated as a tax-free return of
capital, to the extent of a shareholder's basis in his shares of the Fund, and
as a capital gain thereafter (if the shareholder held his or her shares of the
Fund as capital assets).
37
<PAGE>
Shareholders receiving dividends or distributions in the form of additional
Fund shares should be treated for United States federal income tax purposes as
receiving a distribution in an amount equal to the amount of money that the
shareholders receiving cash dividends or distributions will receive, and should
have a cost basis in the shares received equal to such amount.
Any loss realized on the redemption by a shareholder of his shares will be
disallowed to the extent the shares disposed of are replaced, including
replacement through the reinvesting of dividends and capital gains
distributions in the Fund, within a period (of 61 days) beginning 30 days
before and ending 30 days after the disposition of the shares. In such a case,
the basis of the shares acquired will be increased to reflect the disallowed
loss. Any loss realized by a shareholder on the sale of a Fund share held by
the shareholder for six months or less will be treated for United States income
tax purposes as a long-term capital loss to the extent of any distributions or
deemed distributions of long-term capital gains received by the shareholder
with respect to such share.
Distributions may also be subject to state, local and foreign taxes
depending on each shareholder's particular situation.
The foregoing discussion is a general summary of certain of the current
Federal income tax laws regarding the Fund and investors. The discussion does
not purport to deal with all of the Federal income tax consequences applicable
to the Fund, or to all categories of investors, some of which may be subject to
special rules. Investors should consult their own tax advisors regarding the
tax consequences to them of investments in shares.
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
As discussed in the Prospectus, from time to time the Fund may quote its
"yield" and/or its "total return" in advertisements and sales literature. Yield
is calculated for any 30-day period as follows: the amount of interest and/or
dividend income for each security in the Fund's portfolio is determined in
accordance with regulatory requirements; the total for the entire portfolio
constitutes the Fund's gross income for the period. Expenses accrued during the
period are subtracted to arrive at "net investment income." The resulting
amount is divided by the product of the net asset value per share on the last
day of the period multiplied by the average number of Fund shares 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. The Fund's
yield for the 30-day period ended October 31, 1996 was 5.56%.
The Fund's "average annual total return" represents an annualization of the
Fund's total return over a particular period and is computed by finding the
annual percentage rate which will result in the ending redeemable value of a
hypothetical $1,000 investment made at the beginning of a one, five or ten year
period, or for the period from the date of commencement of the Fund's
operations, if shorter than any of the foregoing. For the purpose of this
calculation, it is assumed that all dividends and distributions are reinvested.
The formula for computing the average annual total return involves a percentage
obtained by dividing the ending redeemable value by the amount of the initial
investment, taking a root of the quotient (where the root is equivalent to the
number of years in the period) and subtracting 1 from the result. The average
annual total returns for the Fund for the year ended October 31, 1996 and for
the period from July 31, 1992 (commencement of operations) through October 31,
1996, were 6.38% and 3.06%, respectively.
In addition to the foregoing, the Fund may advertise its total return over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. The Fund may compute its aggregate total return
for specified periods by determining the aggregate percentage rate which will
result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is assumed
that all dividends and distributions are reinvested. The formula for computing
aggregate total return involves a percentage obtained by dividing the ending
value by the initial $1,000 investment and subtracting 1 from the result. The
Fund's total returns for the year ended October 31, 1996 and for the period
from July 31, 1992 through October 31, 1996, were 6.38% and 13.66%,
respectively.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in shares of the Fund by adding 1 to the Fund's
aggregate total return and multiplying by $10,000, $50,000 or $100,000, as the
case may be. Investments of $10,000, $50,000 and $100,000 in the Fund at
inception would have grown to $11,366, $56,830 and $113,660, respectively, at
October 31, 1996.
38
<PAGE>
Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent organizations.
DESCRIPTION OF SHARES
- -------------------------------------------------------------------------------
The shareholders of the Fund are entitled to a full vote for each full share
held. The Trustees have been elected by DWR as the then sole shareholder of the
Fund on May 11, 1992, or, in the case of Messrs. Schroeder and Stern, by the
other Trustees of the Fund on April 20, 1995. 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 to remove the Trustees following a meeting
called for that purpose requested in writing by the record holders of not less
than ten percent of the Fund's outstanding shares. 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 (which would be used to distinguish among the rights of
different categories of shareholders, as might be required by future
regulations or other unforeseen circumstances). The Trustees have not presently
authorized any such additional series or classes of shares.
The Declaration of Trust 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 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
liabilities in connection with the affairs of the Fund.
The Fund is authorized to issue an unlimited number of shares of beneficial
interest. The Fund shall be of unlimited duration subject to the provisions in
the Declaration of Trust concerning termination by action of the shareholders.
CUSTODIAN AND TRANSFER AGENT
- -------------------------------------------------------------------------------
The Bank of New York, 90 Washington Street, New York, New York 10286 is the
Custodian of the Fund's assets. Any of the Fund's cash balances with the
Custodian in excess of $100,000 are unprotected by federal deposit insurance.
Such balances may, at times, be substantial.
Dean Witter Trust Company, Harborside Financial Center, Plaza Two, Jersey
City, New Jersey 07311 is the Transfer Agent of the Fund's shares and Dividend
Disbursing Agent for payment of dividends and distributions on Fund shares and
Agent for shareholders under various investment plans described herein. Dean
Witter Trust Company is an affiliate of Dean Witter Services Company Inc., the
Fund's Manager, and Dean Witter Distributors Inc., the Fund's Distributor. As
Transfer Agent and Dividend Disbursing Agent, Dean Witter Trust Company's
responsibilities include maintaining shareholder accounts, disbursing cash
dividends and reinvesting dividends, processing account registration changes,
handling purchase and redemption transactions, mailing prospectuses and
reports, mailing and tabulating proxies, processing share certificate
transactions, and maintaining shareholder records and lists. For these services
Dean Witter Trust Company receives a per shareholder account fee.
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.
39
<PAGE>
REPORTS TO SHAREHOLDERS
- -------------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports showing
the Fund's portfolio and other information. An annual report containing
financial statements audited by independent accountants will be sent to
shareholders each year.
The Fund's fiscal year ends on October 31. The financial statements of the
Fund must be audited at least once a year by independent accountants whose
selection is made annually by the Fund's Board of Trustees.
LEGAL COUNSEL
- -------------------------------------------------------------------------------
Sheldon Curtis, Esq., who is an officer and the General Counsel of the
Manager, is an officer and the General Counsel of the Fund.
EXPERTS
- -------------------------------------------------------------------------------
The financial statements of the Fund included in this Statement of
Additional Information and incorporated by reference in the Prospectus have
been so included and incorporated in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
REGISTRATION STATEMENT
- -------------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
40
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount (In Coupon Maturity
thousands) Rate Date Value
- ---------- ---- ---- -----
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES (54.9%)
$ 9,493 Federal Home Loan Mortgage Corp. ARM ..................... 7.781++ % 03/01/25 $ 9,742,873
11,344 Federal Home Loan Mortgage Corp. ARM ..................... 7.796++ 08/01/23 11,528,871
22,968 Federal Home Loan Mortgage Corp. PC GOLD ................. 6.00 11/01/00-
12/01/00 22,444,164
10,038 Federal Home Loan Mortgage Corp. PC GOLD ................. 7.00 02/01/98 10,144,926
1,580 Federal National Mortgage Assoc. ......................... 9.50 06/01/20 1,671,517
60,466 Government National Mortgage Assoc. II ARM ............... 7.00++ 08/20/22-
06/20/25 61,588,700
62,306 Government National Mortgage Assoc. II ARM ............... 7.125++ 06/20/22-
05/20/25 63,503,158
11,415 Small Business Administration ARM ........................ 6.75++ 03/25/16 11,802,583
--------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(IDENTIFIED COST $191,786,955) ................................................. 192,426,792
--------------
COLLATERALIZED MORTGAGE OBLIGATIONS (37.7%)
U.S. GOVERNMENT AGENCIES (32.6%)
29 Federal Home Loan Mortgage Corp. 1370 K (PAC I/O) .......1089.16 09/15/22 921,734
10,372 Federal Home Loan Mortgage Corp. 1504 A (PAC) ........... 7.00 07/15/22 10,345,996
2,258 Federal Home Loan Mortgage Corp. 1508 Q .................. 8.25+ 05/15/23 1,727,602
12,003 Federal Home Loan Mortgage Corp. 1560 A (PAC) ........... 6.50 02/15/23 11,536,891
13,420 Federal Home Loan Mortgage Corp. 1606 LB ................. 7.573+ 05/15/08 11,432,358
12,335 Federal Home Loan Mortgage Corp. G 15 P .................. 6.50 08/25/20 12,230,592
30,920 Federal Home Loan Mortgage Corp. G 21 M .................. 6.50 10/25/23 30,002,709
9,653 Federal National Mortgage Assoc. 1993-163 A .............. 7.00 03/25/23 9,630,942
9,017 Federal National Mortgage Assoc. 1993-165 SE ............. 8.243+ 09/25/23 6,665,672
20,705 Federal National Mortgage Assoc. 1993-167 M (PAC) ....... 6.00 09/25/23 19,877,522
--------------
TOTAL U.S GOVERNMENT AGENCIES
(IDENTIFIED COST $121,529,343) ................................................. 114,372,018
--------------
PRIVATE ISSUES (5.1%)
1,319 Citicorp Mortgage Securities, Inc. 1991-1 A .............. 8.50 03/25/06 1,279,249
12,232 CountryWide Funding Corp. 1993-7 AS3 (TAC) ............... 9.836+ 11/25/23 9,709,939
3,453 General Electric Capital Mortgage Services, Inc.
1992-11 M ................................................ 8.00 09/25/22 3,520,905
3,456 Resolution Trust Corp. 1991-6 C1 ......................... 9.00 09/25/28 3,351,387
--------------
TOTAL PRIVATE ISSUES
(IDENTIFIED COST $21,220,962) .................................................. 17,861,480
--------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(IDENTIFIED COST $142,750,305) ................................................. 132,233,498
--------------
41
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1996 (continued)
- -------------------------------------------------------------------------------
Principal
Amount (In Coupon Maturity
thousands) Rate Date Value
- ---------- ---- ---- -----
SHORT-TERM INVESTMENTS (6.9%)
U.S. GOVERNMENT AGENCY (a) (2.7%)
$ 5,000 Federal National Mortgage Assoc .......................... 5.16 % 11/05/96 $ 4,997,133
4,525 Federal National Mortgage Assoc .......................... 5.16 11/15/96 4,515,920
--------------
TOTAL U.S. GOVERNMENT AGENCY (Amortized Cost $9,513,053) ........................ 9,513,053
--------------
REPURCHASE AGREEMENT (4.2%)
14,487 The Bank of New York (dated 10/31/96; proceeds 5.375 11/01/96
$14,489,514; collateralized by $9,840,479 U.S. Treasury
Bond 11.25% due 02/15/15 valued at $14,777,098)
(Identified Cost $14,487,351) .......................... 14,487,351
--------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST $24,000,404) .................................................. 24,000,404
--------------
TOTAL INVESTMENTS (IDENTIFIED COST $358,537,664) (B) ................ 99.5% 348,660,694
OTHER ASSETS IN EXCESS OF LIABILITIES ............................... 0.5 1,868,917
------ --------------
NET ASSETS .......................................................... 100.0% $350,529,611
====== ==============
</TABLE>
- --------------
ARM Adjustable rate mortgage.
I/O Interest-only securities.
PAC Planned Amortization Class.
PC Participation Certificate.
TAC Targeted Amortization Class.
+ Inverse floater: interest rate moves inversely to a designated
index, such as LIBOR (London Inter-Bank Offered Rate) or COFI (Cost
of Funds Index), typically at a multiple of the changes of the
relevant index rate.
++ Floating rate security. Rate shown is the rate in effect at
October 31, 1996.
(a) Securities were purchased on a discount basis. The interest rate
shown has been adjusted to reflect a money market equivalent
yield.
(b) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation was
$1,797,745 and the aggregate gross unrealized depreciation was
$11,674,715, resulting in net unrealized depreciation of
$9,876,970.
See Notes to Financial Statements
42
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $358,537,664) .... $ 348,660,694
Receivable for:
Interest ........................... 2,026,502
Principal paydowns ................. 1,035,144
Shares of beneficial interest sold 191,243
Deferred organizational expenses ... 30,208
Prepaid expenses and other assets .. 55,555
---------------
TOTAL ASSETS ...................... 351,999,346
---------------
LIABILITIES:
Payable for:
Shares of beneficial interest
repurchased ....................... 751,515
Plan of distribution fee ........... 227,928
Dividends to shareholders .......... 154,619
Management fee ..................... 118,522
Investment advisory fee ............ 79,015
Accrued expenses and other payables 138,136
Contingencies (Note 10) ............. --
---------------
TOTAL LIABILITIES ................. 1,469,735
---------------
NET ASSETS:
Paid-in-capital ..................... 588,531,889
Net unrealized depreciation ......... (9,876,970)
Accumulated undistributed net
investment income .................. 236,650
Accumulated net realized loss ...... (228,361,958)
---------------
NET ASSETS ........................ $ 350,529,611
===============
NET ASSET VALUE PER SHARE,
41,762,133 shares outstanding
(unlimited shares authorized of
$.01 par value) .................... $ 8.39
===============
</TABLE>
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the year ended October 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME .................. $ 36,010,522
--------------
EXPENSES
Plan of distribution fee ........ 3,601,742
Management fee .................. 1,912,210
Investment advisory fee ......... 1,274,806
Transfer agent fees and expenses 560,557
Professional fees ............... 235,585
Registration fees ............... 205,937
Insurance expense ............... 76,679
Shareholder reports and notices 63,158
Organizational expenses ......... 40,000
Trustees' fees and expenses .... 32,776
Custodian fees .................. 8,965
Other ........................... 10,764
--------------
TOTAL EXPENSES ................. 8,023,179
--------------
NET INVESTMENT INCOME .......... 27,987,343
--------------
NET REALIZED AND UNREALIZED GAIN
(LOSS):
Net realized loss ............... (14,716,492)
Net change in unrealized
depreciation ................... 13,910,483
--------------
NET LOSS ....................... (806,009)
--------------
NET INCREASE ................... $ 27,181,334
==============
</TABLE>
See Notes to Financial Statements
43
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995
---------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income ......................................... $ 27,987,343 $ 67,259,196
Net realized loss ............................................. (14,716,492) (256,423,219)
Net change in unrealized depreciation ......................... 13,910,483 162,024,285
---------------- ----------------
Net increase (decrease) ...................................... 27,181,334 (27,139,738)
---------------- ----------------
Dividends and distributions from:
Net investment income ......................................... (26,893,174) --
Paid-in-capital ............................................... -- (64,021,457)
---------------- ----------------
Total ........................................................ (26,893,174) (64,021,457)
Net decrease from transactions in shares of beneficial interest (308,065,887) (610,142,782)
---------------- ----------------
Net decrease ................................................. (307,777,727) (701,303,977)
NET ASSETS:
Beginning of period ............................................ 658,307,338 1,359,611,315
---------------- ----------------
END OF PERIOD (including undistributed net investment income
of $236,650 and distributions in excess of net investment
income of $391,745, respectively) ............................. $ 350,529,611 $ 658,307,338
================ ================
</TABLE>
See Notes to Financial Statements
44
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1996
- -------------------------------------------------------------------------------
1. ORGANIZATION AND ACCOUNTING POLICIES -- TCW/DW North American Government
Income Trust (the "Fund") is registered under the Investment Company Act of
1940, as amended (the "Act"), as a non-diversified, open-end management
investment company. The Fund's investment objective is to earn a high level of
income while maintaining relatively low volatility of principal. The Fund was
organized as a Massachusetts business trust on February 19, 1992 and commenced
operations on July 31, 1992.
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) portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest available bid price prior to the time of valuation; (2) when market
quotations are not readily available, including circumstances under which it
is determined by the Adviser 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 (valuation of debt securities for which
market quotations are not readily available may be based upon current market
prices of securities which are comparable in coupon, rating and maturity or
an appropriate matrix utilizing similar factors); and (3) short-term debt
securities having a maturity date of more than sixty days at time of
purchase are valued on a mark-to-market basis until sixty days prior to
maturity and thereafter at amortized cost based on their value on the 61st
day. Short-term debt securities having a maturity date of sixty days or less
at the time of purchase are valued at amortized cost.
B. Accounting for Investments -- Security transactions are accounted for on
the trade date (date the order to buy or sell is executed). Realized gains
and losses on security transactions are determined by the identified cost
method. The Fund amortizes premiums and accretes discounts based on the
respective life of the securities. Interest income is accrued daily.
C. 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 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.
D. 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.
E. Dollar Rolls -- The Fund may enter into dollar rolls in which the Fund
sells securities for delivery and simultaneously contracts to repurchase
substantially similar securities at the current sales price on
45
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1996 (continued)
- -------------------------------------------------------------------------------
a specified future date. The difference between the current sales price and
the lower forward price for the future purchase (often referred to as the
"drop") is amortized over the life of the dollar roll.
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.
G. Dividends and Distributions to Shareholders -- The Fund records dividends
and distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized
capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such
amounts are reclassified within the capital accounts based on their federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions which exceed net investment income and net
realized capital gains for financial reporting purposes but not for tax
purposes are reported as dividends in excess of net investment income or
distributions in excess of net realized capital gains. To the extent they
exceed net investment income and net realized capital gains for tax
purposes, they are reported as distributions of paid-in-capital.
H. Organizational Expenses -- Dean Witter InterCapital Inc., an affiliate of
Dean Witter Services Company Inc. (the "Manager"), paid the organizational
expenses which have been reimbursed by the Fund in the amount of $200,000.
Such expenses have been deferred and are being amortized on the
straight-line method over a period not to exceed five years from the
commencement of operations.
2. MANAGEMENT AGREEMENT -- Pursuant to a Management Agreement, the Fund pays
the Manager a management fee, accrued daily and payable monthly, by applying
the following annual rates to the net assets of the Fund determined as of the
close of each business day: 0.39% to the portion of average daily net assets
not exceeding $3 billion and 0.36% to the portion of average daily net assets
exceeding $3 billion.
Under the terms of the Agreement, the 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 Manager. The Manager also bears the cost of telephone
services, heat, light, power and other utilities provided to the Fund.
3. INVESTMENT ADVISORY AGREEMENT -- Pursuant to an Investment Advisory
Agreement with TCW Funds Management, Inc. (the "Adviser"), the Fund pays an
advisory fee, calculated daily and payable monthly, by applying the following
annual rates to the net assets of the Fund determined as of the close of each
business day: 0.26% to the portion of average daily net assets not exceeding $3
billion and 0.24% to the portion of average daily net assets exceeding $3
billion.
Under the terms of the Agreement, the Fund has retained the Adviser to
invest the Fund's assets, including placing orders for the purchase and sale of
portfolio securities. The Adviser 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. In addition, the Adviser
pays the salaries of all personnel, including officers of the Fund, who are
employees of the Adviser.
46
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1996 (continued)
- -------------------------------------------------------------------------------
4. PLAN OF DISTRIBUTION -- Dean Witter Distributors Inc. (the "Distributor"),
an affiliate of the Manager, is the distributor of the Fund's shares and, in
accordance with a Plan of Distribution (the "Plan") pursuant to Rule 12b-1
under the Act, finances certain expenses in connection with the distribution of
shares of the Fund.
Under the Plan, the Distributor bears the expense of all promotional and
distribution related activities on behalf of the Fund, except for expenses that
the Trustees determine to reimburse, as described below. The following
activities and services may be provided by the Distributor under the Plan: (1)
compensation to, and expenses of, account executives of Dean Witter Reynolds
Inc., an affiliate of the Manager and Distributor, and other employees or
selected broker-dealers; (2) sales incentives and bonuses to sales
representatives and to marketing personnel in connection with promoting sales
of the Fund's shares; (3) expenses incurred in connection with promoting sales
of the Fund's shares; (4) preparing and distributing sales literature; and (5)
providing advertising and promotional activities, including direct mail
solicitation and television, radio, newspaper, magazine and other media
advertisements.
The Fund is authorized to reimburse the Distributor for specific expenses
the Distributor incurs or plans to incur in promoting the distribution of the
Fund's shares. The amount of each monthly reimbursement payment may in no event
exceed an amount equal to a payment at the annual rate of 0.75% of the Fund's
average daily net assets during the month. Expenses incurred pursuant to the
Plan in any fiscal year in excess of 0.75% of the Fund's average daily net
assets will not be reimbursed by the Fund through payments accrued in any
subsequent fiscal year. For the year ended October 31, 1996, the distribution
fee was accrued at the annual rate of 0.73%.
5. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES -- The cost of
purchases and proceeds from sales/prepayments of portfolio securities,
excluding short-term investments, for the year ended October 31, 1996 were as
follws:
<TABLE>
<CAPTION>
Sales/
Purchases Prepayments
--------- -----------
<S> <C> <C>
U.S. Government Agencies $65,366,471 $236,358,150
Private Issue CMOs ....... -- 2,123,899
</TABLE>
Dean Witter Trust Company, an affiliate of the Manager and Distributor, is
the Fund's transfer agent. At October 31, 1996, the Fund had transfer agent
fees and expenses payable of approximately $54,000.
6. SHARES OF BENEFICIAL INTEREST -- Transactions in shares of beneficial
interest were as follows:
<TABLE>
<CAPTION>
For the year ended For the year ended
October 31, 1996 October 31, 1995
------------------------------ -------------------------------
Shares Amount Shares Amount
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Sold ......................... 4,379,571 $ 36,607,829 11,625,629 $ 96,045,510
Reinvestment of dividends and
distributions ............... 2,403,699 19,895,478 5,930,740 48,356,244
-------------- -------------- -------------- ---------------
6,783,270 56,503,307 17,556,369 144,401,754
Repurchased .................. (44,094,721) (364,569,194) (91,392,898) (754,544,536)
-------------- -------------- -------------- ---------------
Net decrease ................. (37,311,451) $(308,065,887) (73,836,529) $(610,142,782)
============== ============== ============== ===============
</TABLE>
47
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1996 (continued)
- -------------------------------------------------------------------------------
7. FEDERAL INCOME TAX STATUS -- At October 31, 1996, the Fund had a net capital
loss carryover of approximately $228,362,000 of which $53,086,000 will be
available through October 31, 2002, $160,560,000 will be available through
October 31, 2003 and $14,716,000 will be available through October 31, 2004 to
offset future capital gains to the extent provided by regulations.
To reflect reclassifications arising from permanent book/tax differences for
the year ended October 31, 1996, accumulated undistributed net investment
income was charged $465,774 and paid-in-capital was credited $465,774.
8. REVERSE REPURCHASE AND DOLLAR ROLL AGREEMENTS -- Reverse repurchase and
dollar roll agreements involve the risk that the market value of the securities
the Fund is obligated to repurchase under the agreement may decline below the
repurchase price. In the event the buyer of securities under a reverse
repurchase or dollar roll agreement files for bankruptcy or becomes insolvent,
the Fund's use of proceeds of the agreement may be restricted pending a
determination by the other party, its trustee or receiver, whether to enforce
the Fund's obligation to repurchase the securities.
Reverse repurchase agreements are collateralized by Fund securities with a
market value in excess of the Fund's obligation under the contract.
9. PURPOSES 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 foreign currency exposure associated with foreign currency
denominated securities.
Forward contracts involve elements of market risk in excess of the amounts
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.
10. LITIGATION -- Several purported class action lawsuits, which have been
consolidated for pretrial purposes, were instituted in 1995 in the United
States District Court, in New York, against the Fund, some of its Trustees and
officers, its underwriter and distributor, the Adviser, the Manager, and other
defendants, by certain shareholders of the Fund. The consolidated amended
complaint asserts claims under the Securities Act of 1933 and generally alleges
that the defendants made inadequate and misleading disclosures in the
prospectuses for the Fund, in particular as such disclosures relate to the
nature and risks of the Fund's investments in mortgage-backed securities and
Mexican securities. The plaintiffs also challenge certain fees paid by the Fund
as excessive. Damages are sought in an unspecified amount. All defendants moved
to dismiss the consolidated amended complaint, and on May 8, 1996 the motions
to dismiss were denied. The defendants moved for reargument and on August 28,
1996 the Court issued a second opinion which granted the motion to dismiss in
part. The Court has also certified a plaintiff class pursuant to the Federal
Rules of Civil Procedure. On December 4, 1996, the defendants filed a renewed
motion to dismiss.
The ultimate outcome of these matters is not presently determinable, and no
provision has been made in the Fund's financial statements for the effect, if
any, of such matters.
48
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT 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, JULY 31, 1992*
--------------------------------------- THROUGH
1996 1995 1994 1993 OCTOBER 31, 1992
-------- -------- --------- -------- ----------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .. $ 8.33 $ 8.89 $10.11 $ 9.96 $10.00
-------- -------- --------- -------- ----------------
Net investment income .................. 0.47 0.69 0.68 0.77 0.18
Net realized and unrealized gain (loss) 0.04 (0.59) (1.18) 0.14 (0.05)
-------- -------- --------- -------- ----------------
Total from investment operations ...... 0.51 0.10 (0.50) 0.91 0.13
-------- -------- --------- -------- ----------------
Less dividends and distributions from:
Net investment income ................. (0.45) -- (0.47) (0.76) (0.17)
Net capital gain ...................... -- -- (0.02) -- --
Paid-in-capital ....................... -- (0.66) (0.23) -- --
-------- -------- --------- -------- ----------------
Total dividends and distributions ..... (0.45) (0.66) (0.72) (0.76) (0.17)
-------- -------- --------- -------- ----------------
Net asset value, end of period ......... $ 8.39 $ 8.33 $ 8.89 $10.11 $ 9.96
======== ======== ========= ======== ================
TOTAL INVESTMENT RETURN+ .............. 6.38% 1.61% (5.06)% 9.35% 1.28%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................... 1.64% 1.59% 1.52% 1.54% 1.80%(2)
Net investment income .................. 5.71% 8.28% 6.85% 7.78% 8.36%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in millions $351 $658 $1,360 $2,986 $762
Portfolio turnover rate ................ 13% 44% 27% 77% 2%(1)
</TABLE>
- --------------
* Commencement of operations.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
See Notes to Financial Statements
49
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Shareholders and Trustees of TCW/DW North American Government 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 TCW/DW North American Government
Income Trust (the "Fund") at October 31, 1996, 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
four years in the period then ended and for the period July 31, 1992
(commencement of operations) through October 31, 1992, 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, 1996 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
Our report on the October 31, 1995 financial statements referred to certain
pending litigation, the status of which is described in Note 10 to these
financial statements. Because of changes to professional auditing standards
recently adopted by the American Institute of Certified Public Accountants, our
report on the October 31, 1996 financial statements is no longer required to
refer to uncertainties such as this litigation.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
December 17, 1996
50
<PAGE>
APPENDIX
- -------------------------------------------------------------------------------
RATINGS
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")
FIXED-INCOME SECURITY RATINGS
Aaa Fixed-income securities 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 Fixed Income securities 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 fixed-income securities. They
are rated lower than the best fixed-income securities 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 Fixed-income securities 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 Fixed-income securities 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 fixed-income securities lack outstanding
investment characteristics and in fact have speculative
characteristics as well.
Fixed-income securities rated Aaa, Aa, A and Baa are considered
investment grade.
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 fixed-income security 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")
FIXED-INCOME SECURITY RATINGS
A Standard & Poor's fixed-income security 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.
51
<PAGE>
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. The
ratings are based, in varying degrees, on the following considerations: (1)
likelihood of default-capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with any rating
and may, on occasion, rely on unaudited financial information. The ratings may
be changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or for other reasons.
AAA Fixed-income securities rated AAA have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA Fixed-income securities rated AA have a very strong capacity to pay
interest and repay principal and differs from the highest-rated issues
only in small degree.
A Fixed-income securities rated A have 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 fixed-income securities in higher-rated categories.
BBB Fixed-income securities rated BBB are 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 fixed-income
securities in this category than for fixed-income securities in
higher-rated categories.
Fixed-income securities rated AAA, AA, A and BBB are considered
investment grade.
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.
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. The
categories are as follows:
Issues assigned A ratings are regarded as having the greatest capacity for
timely payment. Issues in this category are further refined with the
designation 1, 2 and 3 to indicate the relative degree of safety.
A-1 indicates that the degree of safety regarding timely payment is very
strong.
A-2 indicates capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1".
A-3 indicates a satisfactory capacity for timely payment. Obligations
carrying this designation are, however, somewhat more vulnerable to
the adverse effects of changes in circumstances than obligations
carrying the higher designations.
52
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT 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 July 31, 1992
through October 31, 1992 and for the years ended
October 31, 1993, 1994, 1995 and 1996 .................... 4
(2) Financial statements included in the Statement of
Additional Information (Part B):
Portfolio of Investments at October 31, 1996 ................ 40
Statement of Assets and Liabilities at October 31, 1996 ..... 42
Statement of operations for the fiscal year ended
October 31, 1996 ......................................... 42
Statement of changes in net assets for the years ended
October 31, 1995 and October 31, 1996 .................... 43
Notes to Financial Statements............................. 45
Financial Highlights for the period July 31, 1992 through
October 31, 1992 and for the years ended October 31, 1993,
1994, 1995 and 1996 ...................................... 49
(3) Financial statements included in Part C:
None.
Exhibit
Number Description
- ------ -----------
2. -- Amended and Restated By-Laws of the Registrant dated as
of October 25, 1996
8. -- Form of Amendment to the Custodian Agreement between Registrant
and The Bank of New York
11. -- Consent of Independent Accountants
16. -- Schedule for Computation of Performance Quotations
27. -- Financial Data Schedule
-------------------
All other exhibits previously filed and incorporated
1
<PAGE>
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, 1996
-------------- ------------------------
Shares of Beneficial Interest 28,248
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
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 Management and Advisory Agreements, none of the
Manager, the Adviser or 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
2
<PAGE>
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 Manager, Registrant's Trustees,
and other registered investment management companies managed by the 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.
The TCW Funds Management, Inc. (the "Adviser") is a 100% owned
subsidiary of The TCW Group, Inc., a Nevada corporation. The Adviser presently
serves as investment adviser to: (1) TCW Funds, Inc., a diversified open-end
management investment company, (2) TCW Convertible Securities Fund, Inc., a
diversified closed-end management investment company; (3) TCW/DW Core Equity
Trust, an open-end, non-diversified management company, (4) TCW/DW North
American Government Income Trust, an open-end, non-diversified management
company, (5) TCW/DW Income and Growth Fund, an open-end, non-diversified
management company, (6) TCW/DW Latin American Growth Fund, an open-end
non-diversified management company, (7) TCW/DW Small Cap Growth Fund, an
open-end non-diversified management company, (8) TCW/DW Term Trust 2000, a
closed-end, diversified management company, (9) TCW/DW Term Trust 2002, a
closed-end diversified management company, (10) TCW/DW Term Trust 2003, a
closed-end diversified management company, (11) TCW/DW Balanced Fund, an
open-end, diversified management company, (12) TCW/DW Emerging Markets
Opportunities Trust, a closed-end, non-diversified management company, (13)
TCW/DW Total Return Trust, an open-end non-diversified management investment
company, (14) TCW/DW Mid-Cap Equity Trust, an open-end, diversified management
investment company, (15) TCW/DW Global Telecom Trust, an open-end diversified
management investment company and (16) TCW/DW Strategic Income Trust, an
open-end diversified management investment company. The Adviser also serves as
investment adviser or sub-adviser to other investment companies, including
foreign investment companies. The list required by this Item 28 of the officers
and directors of the Adviser together with information as to any other
business, profession, vocation or employment of a substantive nature engaged in
by the Adviser and such officers and directors during the past two years, is
incorporated by
3
<PAGE>
reference to Form ADV (File No. 801-29075) filed by the Adviser pursuant to
the Investment Advisers Act.
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 Natural Resource Development Securities Inc.
(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 Global Utilities Fund
(15) Dean Witter Federal Securities Trust
(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 World Wide Income Trust
(23) Dean Witter Utilities Fund
(24) Dean Witter Strategist Fund
(25) Dean Witter New York Municipal Money Market Trust
(26) Dean Witter Intermediate Income Securities
(27) Prime Income Trust
(28) Dean Witter European Growth Fund Inc.
(29) Dean Witter Developing Growth Securities Trust
(30) Dean Witter Precious Metals and Minerals Trust
(31) Dean Witter Pacific Growth Fund Inc.
(32) Dean Witter Multi-State Municipal Series Trust
(33) Dean Witter Premier Income Trust
(34) Dean Witter Short-Term U.S. Treasury Trust
(35) Dean Witter Diversified Income Trust
(36) Dean Witter Health Sciences Trust
(37) Dean Witter Global Dividend Growth Securities
(38) Dean Witter American Value Fund
(39) Dean Witter U.S. Government Money Market Trust
(40) Dean Witter Global Short-Term Income Fund Inc.
(41) Dean Witter Variable Investment Series
(42) Dean Witter Value-Added Market Series
4
<PAGE>
(43) Dean Witter Short-Term Bond Fund
(44) Dean Witter National Municipal Trust
(45) Dean Witter High Income Securities
(46) Dean Witter International SmallCap Fund
(47) Dean Witter Hawaii Municipal Trust
(48) Dean Witter Balanced Growth Fund
(49) Dean Witter Balanced Income Fund
(50) Dean Witter Intermediate Term U.S. Treasury Trust
(51) Dean Witter Global Asset Allocation Fund
(52) Dean Witter Mid-Cap Growth Fund
(53) Dean Witter Capital Appreciation Fund
(54) Dean Witter Intermediate Term U.S. Treasury Trust
(55) Dean Witter Information Fund
(56) Dean Witter Japan Fund
(57) Dean Witter Income Builder Fund
(58) Dean Witter Special Value Fund
(59) Dean Witter Financial Services Trust
(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
(b) The following information is given regarding directors and officers
of Dean Witter Distributors Inc. ("Distributors"). The principal address of
Distributors is Two World Trade Center, New York, New York 10048.
Positions and
Office with Distributors
Name and the Registrant
- ---- ------------------
Charles A. Fiumefreddo Chairman, Chief Executive
Officer and Director of
Distributors and Chairman,
Chief Executive Officer
and Trustee of the
Registrant.
Philip J. Purcell Director of Distributors.
Richard M. DeMartini Director of Distributors and
Director of the Registrant.
James F. Higgins Director of Distributors.
Thomas C. Schneider Executive Vice President, Chief
Financial Officer and Director
of Distributors.
5
<PAGE>
Positions and
Office with Distributors
Name and the Registrant
- ---- ------------------
Christine A. Edwards Executive Vice President,
Secretary, Chief Legal Officer
and Director of Distributors.
Robert Scanlan Executive Vice President of
Distributors and Vice President
of the Registrant.
Robert S. Giambrone Senior Vice President of
Distributors and Vice President
of the Registrant.
Sheldon Curtis Senior Vice President,
Assistant General Counsel and
Assistant Secretary of
Distributors and Vice President,
Secretary and General Counsel of
the Registrant.
Frederick K. Kubler Senior Vice President,
Assistant Secretary and Chief
Compliance Officer of
Distributors.
Michael T. Gregg Vice President and Assistant
Secretary of Distributors.
Edward C. Oelsner III Vice President of Distributors.
Samuel Wolcott III Vice President of Distributors.
Thomas F. Caloia Assistant Treasurer of
Distributors and Treasurer of
the Registrant.
Michael Interrante Assistant Treasurer of
Distributors.
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 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.
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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.
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<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 day 31st of January , 1997.
TCW/DW North American Government Income Trust
By /s/ Sheldon Curtis
----------------------------
Sheldon Curtis
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 5 has been signed below by the following persons in
the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
(1) Principal Executive Officer
By /s/ Charles A. Fiumefreddo President, Chief
--------------------------- Executive Officer,
Charles A. Fiumefreddo Trustee and Chairman 01/31/97
(2) Principal Financial Officer
By /s/ Thomas F. Caloia Treasurer and Principal
--------------------------- Accounting Officer
Thomas F. Caloia 01/31/97
(3) Majority of the Trustees
Charles A. Fiumefreddo (Chairman)
Richard M. DeMartini
Thomas E. Larkin, Jr.
Marc I. Stern
By /s/ Sheldon Curtis
---------------------------
Sheldon Curtis
Attorney-in-Fact 01/31/97
John C. Argue
Manuel H. Johnson
John R. Haire
Michael E. Nugent
John L. Schroeder
By /s/ David M. Butowsky
---------------------------
David M. Butowsky 01/31/97
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
---------------------------------------------
EXHIBIT INDEX
-------------
2. -- AMENDED AND RESTATED BY-LAWS OF THE REGISTRANT DATED AS OF
October 25, 1996
8. -- Form of Amendment to the Custodian Agreement between the
Registrant and the Bank of New York
11. -- Consent of Independent Accountants
16. -- Schedule for Computation of Performance Quotations
27. -- Financial Data Schedule
<PAGE>
BY-LAWS
OF
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
AMENDED AND RESTATED AS OF OCTOBER 25, 1996
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 TCW/DW North
American Government Income Trust dated February 19, 1992.
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, otherwise
required by Section 16(c) of the 1940 Act and to the extent required by the
corporate or, 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.
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
<PAGE>
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 power
to adjourn the meeting from time to time. Any adjourned meeting may be held
as adjourned without further notice. At any adjourned meeting at which a
quorum shall be present, any business may be transacted as if the meeting had
been held 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.
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
2
<PAGE>
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 Chairman
and shall be called by the Chairman 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.
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
3
<PAGE>
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
(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.
4
<PAGE>
(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 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.
5
<PAGE>
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 Chairman 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 Chairman to the
extent provided by the Trustees with respect to officers appointed by the
Chairman.
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.
SECTION 6.6. The Chairman. (a) The Chairman shall be the chief executive
officer of the Trust; he shall preside at all meetings of the Shareholders
and of the Trustees; 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 the President or to one or more Vice Presidents
such of his powers and duties at such times and in such manner as he may deem
advisable; he 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.
6
<PAGE>
(b) In the absence of the Chairman, the Board shall determine who shall
preside at all meetings of the shareholders and the Board of Trustees.
SECTION 6.7. The President. The President shall perform such duties as the
Board of Trustees and the Chairman 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 Chairman, 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
Chairman 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 Chairman.
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
Chairman, 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 Chairman, 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
Chairman 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 Chairman, 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 Chairman, 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 Chairman, 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 Chairman, 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.
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.
7
<PAGE>
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 Chairman, 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:
(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.
8
<PAGE>
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 Shareholders entitled to notice
of, or to vote at, any meeting of Shareholders, or Shareholders entitled to
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. Such
date, in any case, shall be not more than ninety (90) days, and in case of a
meeting of Shareholders not less than ten (10) days, prior to the date on
which particular action requiring such determination of Shareholders is to be
taken. 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 such meeting.
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.
9
<PAGE>
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 TCW/DW North American Government
Income Trust, dated February 19, 1992, a copy of which is on file in the
office of the Secretary of the Commonwealth of Massachusetts, provides that
the name TCW/DW North American Government 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 TCW/DW
North American Government 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 TCW/DW North American Government Income Trust, but the Trust
Estate only shall be liable.
10
<PAGE>
AMENDMENT TO CUSTODY AGREEMENT
Amendment made as of this 17th day of April, 1996 by and between TCW\DW
North American Government Income Trust (the "Fund") and The Bank of New York
(the "Custodian") to the Custody Agreement between the Fund and the Custodian
dated June 2, 1992 (the "Custody Agreement"). The Custody Agreement is hereby
amended as follows:
Article XV Section 8 of the Custody Agreement shall be deleted and be
replaced by Sections 8.(a), 8.(b) and 8.(c) as set forth below:
"8. (a) The Custodian will use reasonable care with respect to its
obligations under this Agreement and the safekeeping of Securities and moneys
owned by the Fund. The Custodian shall indemnify the Fund against and save the
Fund harmless from all liability, claims, losses and demands whatsoever,
including attorneys' fees, howsoever arising or incurred as the result of the
failure of a subcustodian which is a banking institution located in a foreign
country and identified on Schedule A attached hereto (each, a "Subcustodian")
to exercise reasonable care with respect to the safekeeping of such Securities
and moneys to the same extent that the Custodian would be liable to the Fund if
the Custodian were holding such securities and moneys in New York. In the event
of any loss to the Fund by reason of the failure of the Custodian or a
Subcustodian to utilize reasonable care, the Custodian shall be liable to the
Fund only to the extent of the Fund's direct damages, to be determined based on
the market value of the Securities and moneys which are the subject of the loss
at the date of discovery of such loss and without reference to any special
conditions or circumstances.
8. (b) The Custodian shall not be liable for any loss which results
from (i) the general risk of investing, or (ii) investing or holding Securities
and moneys in a particular country including, but not limited to, losses
resulting from nationalization, banking or securities industry; currency
restrictions, devaluations or fluctuations; or market conditions which prevent
the orderly execution of securities transactions or affect the value of
Securities or moneys.
8. (c) Neither party shall be liable to the other for any loss due to
forces beyond its control including, but not limited to, strikes or work
stoppages, acts of war or terrorism, insurrection, revolution, nuclear fusion,
fission or radiation, or acts of God."
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective Officers, thereunto duly authorized and their
respective seals to be hereunto affixed, as of the day and year first above
written.
TCW\DW NORTH AMERICAN GOVERNMENT INCOME TRUST
[SEAL] By:
---------------------------
Attest:
- ---------------------------
THE BANK OF NEW YORK
[SEAL] By:
---------------------------
Attest:
- ---------------------------
<PAGE>
SCHEDULE A
COUNTRY/MARKET SUBCUSTODIAN
- -------------- ------------
Argentina The Bank of Boston
Australia ANZ Banking Group Limited
Austria Girocredit Bank AG
Bangladesh* Standard Chartered Bank
Belgium Banque Bruxelles Lambert
Botswana* Stanbic Bank Botswana Ltd.
Brazil The Bank of Boston
Canada Royal Trust/Royal Bank of Canada
Chile The Bank of Boston/Banco de Chile
China Standard Chartered Bank
Colombia Citibank, N.A.
Denmark Den Danske Bank
Euromarket CEDEL
Euroclear
First Chicago Clearing Centre
Finland Union Bank of Finland
France Banque Paribas/Credit Commercial de France
Germany Dresdner Bank A.G.
Ghana* Merchant Bank Ghana Ltd.
Greece Alpha Credit Bank
Hong Kong Hong Kong and Shanghai Banking Corp.
Indonesia Hong Kong and Shanghai Banking Corp.
Ireland Allied Irish Bank
Israel Israel Discount Bank
Italy Banca Commerciale Italiana
Japan Yasuda Trust & Banking Co., Ltd.
Korea Bank of Seoul
Luxembourg Kredietbank S.A.
Malaysia Hong Kong Bank Malaysia Berhad
Mexico Banco Nacional de Mexico (Banamex)
Netherlands Mees Pierson
New Zealand ANZ Banking Group Limited
Norway Den Norske Bank
Pakistan Standard Chartered Bank
Peru Citibank, N.A.
Philippines Hong Kong and Shanghai Banking Corp.
Poland Bank Handlowy w Warsawie
Portugal Banco Comercial Portugues
Singapore United Overseas Bank
South Africa Standard Bank of South Africa Limited
Spain Banco Bilbao Vizcaya
Sri Lanka Standard Chartered Bank
<PAGE>
SCHEDULE A
COUNTRY/MARKET SUBCUSTODIAN
- -------------- ------------
Sweden Skandinaviska Enskilda Banken
Switzerland Union Bank of Switzerland
Taiwan Hong Kong and Shanghai Banking Corp.
Thailand Siam Commercial Bank
Turkey Citibank, N.A.
United Kingdom The Bank of New York
United States The Bank of New York
Uruguay The Bank of Boston
Venezuela Citibank, N.A.
Zimbabwe* Stanbic Bank Zimbabwe Ltd.
* Not yet 17(f)5 compliant
<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. 5 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
December 17, 1996, relating to the financial statements and financial
highlights of TCW/DW North American Government 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 references 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 28, 1997
<PAGE>
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
(A) AVERAGE ANNUAL TOTAL RETURNS (NO LOAD FUND)
(B) TOTAL RETURN (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
(B) (A)
$1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL
INVESTED - P 31-Oct-96 RETURN - TR YEARS - n COMPOUND RETURN - t
- ------------ --------- ----------- --------- -------------------
31-Oct-95 $1,063.80 6.38% 1.00 6.38%
31-Jul-92 $1,136.60 13.66% 4.25 3.06%
(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>
31-Jul-92 13.66 $11,366 $56,830 $113,660
</TABLE>
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
SCHEDULE OF COMPUTATION OF YIELD QUOTATION
10/31/96
6
YIELD = 2 { [ ((a-b) /cd) +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 { [ ((2,104,534.45 - 453,303.45) /42,933,122.044 X 8.39) +1] -1}
= 5.56%
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 358,537,664
<INVESTMENTS-AT-VALUE> 348,660,694
<RECEIVABLES> 3,252,889
<ASSETS-OTHER> 85,763
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 351,999,346
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,469,735
<TOTAL-LIABILITIES> 1,469,735
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 588,066,115
<SHARES-COMMON-STOCK> 41,762,133
<SHARES-COMMON-PRIOR> 79,073,584
<ACCUMULATED-NII-CURRENT> 702,424
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (228,361,958)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (9,876,970)
<NET-ASSETS> 350,529,611
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 36,010,522
<OTHER-INCOME> 0
<EXPENSES-NET> 8,023,179
<NET-INVESTMENT-INCOME> 27,987,343
<REALIZED-GAINS-CURRENT> (14,716,492)
<APPREC-INCREASE-CURRENT> 13,910,483
<NET-CHANGE-FROM-OPS> 27,181,334
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (26,893,174)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,379,571
<NUMBER-OF-SHARES-REDEEMED> (44,094,721)
<SHARES-REINVESTED> 2,403,699
<NET-CHANGE-IN-ASSETS> (307,777,727)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (213,645,466)
<OVERDISTRIB-NII-PRIOR> (391,745)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,274,806
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,023,179
<AVERAGE-NET-ASSETS> 490,310,209
<PER-SHARE-NAV-BEGIN> 8.33
<PER-SHARE-NII> .47
<PER-SHARE-GAIN-APPREC> .04
<PER-SHARE-DIVIDEND> (.45)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.39
<EXPENSE-RATIO> 1.64
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
