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Filed Pursuant to Rule 497(e)
Registration File No.: 33-46049
TCW/DW NORTH AMERICAN
GOVERNMENT INCOME TRUST
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.
TABLE OF CONTENTS
Prospectus Summary 2
Summary of Fund Expenses 3
Financial Highlights 3
The Fund and its Management 4
Investment Objective and Policies 4
Risk Considerations 8
Investment Restrictions 13
Purchase of Fund Shares 14
Shareholder Services 15
Repurchases and Redemptions 17
Dividends, Distributions and Taxes 17
Performance Information 18
Additional Information 19
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.
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)
Dean Witter Distributors Inc.
Distributor
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.
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PROSPECTUS SUMMARY
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The The Fund is organized as a Massachusetts business trust, and is an
Fund 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.
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Shares Shares of beneficial interest with $0.01 par value (see page 19).
Offered
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Offering The price of the shares offered by this Prospectus is determined once daily
Price 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
14).
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Minimum The minimum initial investment is $1,000 ($100 if the account is opened
Purchase through EasyInvest(Service Mark)); minimum subsequent investment is $100
(see page 14).
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Investment The investment objective of the Fund is to earn a high level of current
Objective income while maintaining relatively low volatility of principal.
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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.
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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.
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Management The Manager receives a monthly fee at the annual rate of 0.39% of daily net
and Advisory assets, scaled down on assets over $3 billion. The Adviser receives a
Fees monthly fee at an annual rate of 0.26% of daily net assets, scaled down on
assets over $3 billion (see page 4).
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Dividends and Dividends are declared and paid monthly. Capital gains distributions, if
Capital Gains any, are paid at least once a year or are retained for reinvestment by the
Distributions 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 17).
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Distributor and The Fund is authorized to reimburse Dean Witter Distributors Inc., the
Plan of Fund's Distributor, for specific expenses incurred in promoting the
Distribution 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 15).
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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 17).
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Special The net asset value of the Fund's shares will fluctuate with changes in the
Risk market value of its portfolio securities. A decline in prevailing interest
Considerations 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 8). 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 9). 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 10). 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 8-13).
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The above is qualified in its entirety by the detailed information appearing
elsewhere in this Prospectus and in the Statement of Additional Information.
2
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SUMMARY OF FUND EXPENSES
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The following table illustrates all expenses and fees that a shareholder
of the Fund will incur. The expenses and fees set forth in the table are for
the fiscal year ended October 31, 1996.
SHAREHOLDER TRANSACTION EXPENSES
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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
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ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
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Management and Advisory Fees.. 0.65%
12b-1 Fees* .................. 0.73%
Other Expenses ............... 0.26%
Total Fund Operating Expenses 1.64%
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* 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").
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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.
FINANCIAL HIGHLIGHTS
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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 YEAR ENDED OCTOBER 31,
---------------------------------------
FOR THE PERIOD
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>
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* Commencement of operations.
+ Calculated based on the net asset value as of the last business day of
the period.
(1) Not annualized.
(2) Annualized.
3
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THE FUND AND ITS MANAGEMENT
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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 management 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.
INVESTMENT OBJECTIVE AND POLICIES
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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
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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 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.
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. For this reason, zero coupon securities are subject to
substantially greater price fluctuations during periods of changing
prevailing interest rates than are comparable securities which pay interest
on a current basis.
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.
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
5
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zero coupon securities (other than Treasury bills with one year or less to
maturity) to 10% of its total assets.
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 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 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
6
<PAGE>
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.
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
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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 proportions of the interest and principal
distribution on a pool of Mortgage Assets. A common type of Stripped
Mortgage-Backed Securities will have one class receiving some of the interest
and most of the principal from the Mortgage Assets, while the other class
will receive most of the interest and the remainder of the principal. In the
most extreme case, one class will receive all of the interest (the
interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). PO classes generate income
through the accretion of the deep discount at which such securities are
purchased, and, while PO classes do not receive periodic payments of
interest, they receive monthly payments associated with scheduled
amortization and principal prepayment from the Mortgage Assets underlying the
PO class. The yield to maturity on an IO class is extremely sensitive to the
rate of principal payments (including prepayments) on the related underlying
Mortgage Assets, and a rapid rate of principal payments may have a material
adverse effect on the Fund's yield to maturity. If the underlying Mortgage
Assets experience greater than anticipated prepayments of principal, the Fund
may fail to fully recoup its initial investment in these securities even if
the securities are rated Aaa by Moody's or AAA by S&P.
The Fund may purchase Stripped Mortgage-Backed Securities for income, or
for hedging purposes to protect the Fund's portfolio against interest rate
fluctuations. For example, since an IO class will tend to increase in value
as interest rates rise, it may be utilized to hedge against a decrease in
value of other fixed-income securities in a rising interest rate environment.
The Fund's management understands that the staff of the Securities and
Exchange Commission considers privately issued Stripped Mortgage-Backed
Securities representing interest only or principal only components of U.S.
Government or other debt securities to be illiquid securities. The Fund will
treat such securities as illiquid so long as the staff maintains such
position. Stripped Mortgage-Backed Securities issued by the U.S. Government
or its agencies, and which are backed by fixed-rate mortgages, will be
treated as liquid provided they are so determined by, or under procedures
approved by, the Board of Trustees. The Fund may not invest more than 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 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
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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.
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
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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 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
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contain the complete benefit of a security interest in the related
collateral. For example, credit card receivables generally are unsecured and
the debtors are entitled to the protection of a number of state and federal
consumer credit laws, 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 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
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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.
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 securi-
12
<PAGE>
ties as may exist or come into being, such as the Moody's Investment Grade
Corporate Bond Index ("index" futures). The Fund will purchase or sell
interest rate futures contracts for the purpose of hedging some or all of the
value of its portfolio securities (or anticipated portfolio securities)
against changes in prevailing interest rates. The Fund will purchase or sell
index futures contracts for the purpose of hedging some or all of its
portfolio (or anticipated portfolio) securities against changes in their
prices.
The Fund 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 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-
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<PAGE>
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
- -----------------------------------------------------------------------------
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 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.
<PAGE>
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.
14
<PAGE>
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 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.
For further information regarding plan administration, custodial fees and
other details, investors should contact their account executive or the
Transfer Agent.
<PAGE>
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
15
<PAGE>
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 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.
16
<PAGE>
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 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 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.
17
<PAGE>
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.
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.).
18
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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 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.
19
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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.
