<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 25, 1998
REGISTRATION NOS.: 33-46049
811-6572
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 7 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 [X]
AMENDMENT NO. 8 [X]
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TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
(A MASSACHUSETTS BUSINESS TRUST)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 392-1600
BARRY FINK, ESQ.
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(NAME AND ADDRESS OF AGENT FOR SERVICE)
Copy to:
DAVID M. BUTOWSKY, ESQ.
GORDON ALTMAN BUTOWSKY WEITZEN SHALOV & WEIN
114 WEST 47TH STREET
NEW YORK, NEW YORK 10036
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
this effective date of the registration statement.
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IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a) of rule 485.
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AMENDING THE PROSPECTUS AND UPDATING FINANCIAL STATEMENTS
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<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
CROSS-REFERENCE SHEET
FORM N-1A
PART A
ITEM CAPTION PROSPECTUS
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1. .......... Cover Page
2. .......... Summary of Fund Expenses; Prospectus Summary
3. .......... Performance Information
4. .......... Investment Objective and Policies; The Fund and its
Management; Cover Page; Investment Restrictions;
Prospectus Summary
5. .......... The Fund and its Management; Back Cover;
Investment Objective and Policies
6. .......... Dividends, Distributions and Taxes; Additional
Information
7. .......... Purchase of Fund Shares; Shareholder Services;
Repurchases and Redemptions
8. .......... Repurchases and Redemptions; Shareholder
Services
9. .......... Litigation
PART B
ITEM STATEMENT OF ADDITIONAL INFORMATION
---- -----------------------------------
10. .......... Cover Page
11. .......... Table of Contents
12. .......... The Fund and its Management
13. .......... Investment Practices and Policies; Investment
Restrictions; Portfolio Transactions and Brokerage
14. .......... The Fund and its Management; Trustees and
Officers
15. .......... Trustees and Officers
16. .......... The Fund and its Management; Custodian and
Transfer Agent; Independent Accountants
17. .......... Portfolio Transactions and Brokerage
18. .......... Description of Shares
19. .......... Repurchases and Redemptions; Shareholder Services
20. .......... Dividends, Distributions and Taxes
21. .......... The Distributor
22. .......... Performance Information
23. .......... Experts; Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in
Part C of this Registration Statement.
<PAGE>
PROSPECTUS
NOVEMBER 25, 1998
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 November 25, 1998, which has been filed with the
Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone numbers listed on this page.
The Statement of Additional Information is incorporated herein by reference.
TCW/DW NORTH AMERICAN
GOVERNMENT INCOME TRUST
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
TABLE OF CONTENTS
Prospectus Summary/ 2
Summary of Fund Expenses/ 4
Financial Highlights/ 5
The Fund and its Management/ 6
Investment Objective and Policies/ 7
Risk Considerations/ 13
Investment Restrictions/ 20
Purchase of Fund Shares/ 21
Shareholder Services/ 23
Repurchases and Redemptions/ 26
Dividends, Distributions and Taxes/ 27
Performance Information/ 28
Additional Information/ 29
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and the shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Morgan Stanley Dean Witter
Distributors Inc.
Distributor
<PAGE>
<TABLE>
PROSPECTUS SUMMARY
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<S> <C>
THE The Fund is organized as a Massachusetts business trust, and
FUND is an open-end, non-diversified management investment
company investing primarily in investment grade fixed-income
securities issued or guaranteed by the U.S., Canadian or
Mexican governments or their subdivisions, or the agencies
or instrumentalities of any of the foregoing.
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SHARES Shares of beneficial interest with $0.01 par value (see
OFFERED page 29).
- --------------------------------------------------------------------------------
OFFERING The price of the shares offered by this Prospectus is
PRICE determined once daily as of 4:00 p.m., New York time, on
each day that the New York Stock Exchange is open, and is
equal to the net asset value per share (see page 21).
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MINIMUM The minimum initial investment is $1,000 ($100 if the
PURCHASE account is opened through EasyInvest(service mark)); minimum
subsequent investment is $100 (see page 21).
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INVESTMENT The investment objective of the Fund is to earn a high level
OBJECTIVE of current income while maintaining relatively low
volatility of principal.
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MANAGER Morgan Stanley Dean Witter Services Company Inc. (the
"Manager"), a wholly-owned subsidiary of Morgan Stanley Dean
Witter Advisors Inc. ("MSDW Advisors"), is the Fund's
manager. The Manager also serves as Manager to ten other
investment companies which are advised by TCW Funds
Management, Inc. (the "TCW/DW Funds"). The Manager and MSDW
Advisors serve in various investment management, advisory,
management and administrative capacities to a total of 100
investment companies and other portfolios with assets of
approximately $117.3 billion at October 31, 1998.
- --------------------------------------------------------------------------------
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 ten other TCW/DW Funds. As
of October 31, 1998, the Adviser and its affiliates had
approximately $50 billion under management or committed to
management in various fiduciary or advisory capacities,
primarily from institutional investors.
- --------------------------------------------------------------------------------
MANAGEMENT The Manager receives a monthly fee at the annual rate of
AND ADVISORY 0.39% of daily net assets, scaled down on assets over $3
FEES billion. The Adviser receives a monthly fee at an annual
rate of 0.26% of daily net assets, scaled down on assets
over $3 billion (see page 6).
- --------------------------------------------------------------------------------
DIVIDENDS AND Dividends are declared and paid monthly. Capital gains
CAPITAL GAINS distributions, if any, are paid at least once a year or are
DISTRIBUTIONS retained for reinvestment by the Fund. Dividends and any
capital gains distributions are automatically invested in
additional shares at net asset value unless the shareholder
elects to receive cash (see page 27).
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</TABLE>
2
<PAGE>
<TABLE>
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<S> <C>
DISTRIBUTOR AND The Fund is authorized to reimburse Morgan Stanley Dean
PLAN OF Witter Distributors Inc., the Fund's Distributor, for
DISTRIBUTION specific expenses incurred in promoting the distribution of
the Fund's shares, including personal services to
shareholders and maintenance of shareholder accounts, in
accordance with a Plan of Distribution pursuant to Rule
12b-1 under the Investment Company Act of 1940.
Reimbursement may in no event exceed an amount equal to
payments at an annual rate of 0.75% of the average daily net
assets of the Fund (see page 22).
- --------------------------------------------------------------------------------
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 26).
- --------------------------------------------------------------------------------
SPECIAL The net asset value of the Fund's shares will fluctuate with
RISK changes in the market value of its portfolio securities. A
CONSIDERATIONS decline in prevailing interest rates will generally increase
the value of fixed-income securities, while an increase in
rates usually reduces the value of those securities. The
Fund's yield also will vary based on the yield of the Fund's
portfolio securities. The Fund may invest in mortgage-backed
securities issued in the United States and Canada; these
securities have different characteristics than traditional
debt securities, primarily in that interest and principal
payments are made more frequently, usually monthly, and that
principal may be prepaid at any time. Certain derivative
mortgage-backed securities in which the Fund invests are
extremely sensitive to changes in interest rates and in
prepayment rates on the underlying mortgage assets, and as a
result may be highly volatile (see pages 13-14). 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 pages 14-15). The Fund is a non-diversified investment
company and, as such, is not subject to the diversification
requirements of the Investment Company Act of 1940. As a
result, a relatively high percentage of the Fund's assets
may be invested in a limited number of issuers. However, the
Fund intends to continue to qualify as a regulated
investment company under the federal income tax laws and, as
such, is subject to the diversification requirements of the
Internal Revenue Code (see page 15). In addition, the Fund
may utilize certain investment techniques, including forward
foreign currency exchange contracts, options and futures,
and the speculative technique known as leverage through the
use of reverse repurchase agreements and dollar rolls, which
entail additional risks (see pages 13-20).
- --------------------------------------------------------------------------------
</TABLE>
The above is qualified in its entirety by the detailed information appearing
elsewhere in this Prospectus and in the Statement of Additional Information.
3
<PAGE>
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
The following table illustrates all expenses and fees that a shareholder
of the Fund will incur. The expenses and fees set forth in the table are for
the fiscal year ended October 31, 1998.
Shareholder Transaction Expenses
- --------------------------------
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases .................... None
Maximum Sales Charge Imposed on Reinvested Dividends ......... None
Deferred Sales Charge ........................................ None
Redemption Fees .............................................. None
Exchange Fee ................................................. None
</TABLE>
Annual Fund Operating Expenses (as a Percentage of Average Net Assets)
- ----------------------------------------------------------------------
<TABLE>
<S> <C>
Management and Advisory Fees .......... 0.65%
12b-1 Fees* ........................... 0.73%
Other Expenses ........................ 0.31%
Total Fund Operating Expenses ......... 1.69%
</TABLE>
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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 Inc. ("NASD") guidelines (see "Purchase of
Fund Shares").
<TABLE>
<CAPTION>
Example 1 year 3 years 5 years 10 years
------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period: $17 $53 $92 $200
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF THE FUND MAY BE MORE OR LESS
THAN THOSE SHOWN.
The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"The Fund and its Management" and "Purchase of Fund Shares--Plan of
Distribution" in this Prospectus.
Long-term shareholders of the Fund may pay more in distribution fees than
the economic equivalent of the maximum front-end sales charges permitted by the
NASD.
4
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by PricewaterhouseCoopers
LLP, independent accountants. The financial highlights should be read in
conjunction with the financial statements, notes thereto and the unqualified
report of independent accountants, which are contained in the Statement of
Additional Information. Further information about the performance of the Fund
is contained in the Fund's Annual Report to Shareholders, which may be obtained
without charge upon request to the Fund.
<TABLE>
<CAPTION>
For the period
For the year ended October 31 July 31, 1992*
----------------------------------------------------------------- through
1998 1997 1996 1995 1994 1993 October 31, 1992
---- ---- ---- ---- ---- ---- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ....... $ 8.59 $ 8.39 $ 8.33 $ 8.89 $ 10.11 $ 9.96 $ 10.00
------ ------ ------ ------ ------- ------- --------
Net investment income ...................... 0.49 0.44 0.47 0.69 0.68 0.77 0.18
Net realized and unrealized gain (loss)..... (0.05) 0.19 0.04 (0.59) (1.18) 0.14 (0.05)
------ ------ ------ ------ ------- ------- --------
Total from investment operations ........... 0.44 0.63 0.51 0.10 (0.50) 0.91 0.13
------ ------ ------ ------ ------- ------- --------
Less dividends and distributions from :
Net investment income ..................... (0.43) (0.43) (0.45) -- (0.47) (0.76) (0.17)
Net realized gain ......................... -- -- -- -- (0.02) -- --
Paid-in-capital ........................... -- -- -- (0.66) (0.23) -- --
------ ------ ------ ------ ------- ------- --------
Total dividends and distributions .......... (0.43) (0.43) (0.45) (0.66) (0.72) (0.76) (0.17)
------ ------ ------ ------ ------- ------- --------
Net asset value, end of period ............. $ 8.60 $ 8.59 $ 8.39 $ 8.33 $ 8.89 $ 10.11 $ 9.96
====== ====== ====== ====== ======= ======= ========
TOTAL INVESTMENT RETURN+ ................... 5.13% 7.80% 6.38% 1.61% (5.06)% 9.35% 1.28%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ................................... 1.69%(3) 1.65% 1.64% 1.59% 1.52% 1.54% 1.80%(2)
Net investment income ...................... 5.52% 5.18% 5.71% 8.28% 6.85% 7.78% 8.36%(2)
SUPPLEMENTAL DATA :
Net assets, end of period, in millions ..... $ 150 $ 212 $ 351 $ 658 $ 1,360 $ 2,986 $ 762
Portfolio turnover rate .................... 8% -- 13% 44% 27% 77% 2%(1)
</TABLE>
- ----------
* Commencement of operations.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.01%.
5
<PAGE>
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.
Morgan Stanley 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 Morgan Stanley Dean Witter
Advisors Inc. ("MSDW Advisors"). MSDW Advisors is a wholly-owned subsidiary of
Morgan Stanley Dean Witter & Co., a preeminent global financial services firm
that maintains leading market positions in each of its three primary
businesses--securities, asset management and credit services.
The Manager acts as manager to ten other TCW/DW Funds. The Manager and
MSDW Advisors act in various investment management, advisory, management and
administrative capacities to a total of 100 investment companies, twenty-eight
of which are listed on the New York Stock Exchange, with combined assets of
approximately $112.9 billion as of October 31, 1998. MSDW Advisors also manages
and advises portfolios of pension plans, other institutions and individuals
which aggregated approximately $4.4 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 ten other TCW/DW Funds in addition to the Fund.
As of October 31, 1998, the Adviser and its affiliated companies had
approximately $50 billion under man-agement or committed to management,
primarily from institutional investors.
The Fund has retained the Adviser to invest the Fund's assets.
The Fund's Trustees review the various services provided by the Manager
and the Adviser to ensure that the Fund's general investment policies and
programs are being properly carried out and that administrative services are
being provided to the Fund in a satisfactory manner.
As full compensation for the services and facilities furnished to the
Fund and for expenses of the Fund assumed by the Manager, the Fund pays the
Manager monthly compensation calculated daily by applying the annual rate of
0.39% to the Fund's net assets up to $3 billion, scaled down to 0.36% on assets
over $3 billion. As compensation for its investment advisory services, the Fund
pays the Adviser monthly compensation calculated daily by applying an annual
rate of 0.26% to the Fund's net assets up to $3 billion, scaled down to 0.24%
on assets over $3 billion. For the fiscal year ended October 31, 1998, 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 1.69% of the Fund's average daily
net assets.
6
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The investment objective of the Fund is to earn a high level of current
income while maintaining relatively low volatility of principal. This objective
is fundamental and may not be changed without shareholder approval. There is no
assurance that the objective will be achieved.
The Fund seeks to achieve its investment objective by investing under
normal circumstances at least 65% of its total assets in investment grade
fixed-income securities issued or guaranteed by the U.S., Canadian or Mexican
governments or their subdivisions, or the agencies or instrumentalities of any
of the foregoing ("Government Securities"). In the case of the United States
and Canada, a substantial portion of such investments will be fixed rate and
adjustable rate mortgage-backed securities, including collateralized mortgage
obligations ("Mortgage-Backed Securities"). The term investment grade consists
of fixed-income securities rated Baa or higher by Moody's Investors Service,
Inc. ("Moody's") or BBB or higher by Standard & Poor's Corporation ("S&P") or,
if not rated, determined to be of comparable quality by the Adviser.
Investments in securities rated either Baa by Moody's or BBB by S&P may have
speculative characteristics and, therefore, changes in economic conditions or
other circumstances are more likely to weaken their capacity to make principal
and interest payments than would be the case with investments in securities
with higher credit ratings. If a fixed-income security held by the Fund is
rated BBB or Baa and is subsequently downgraded by a rating agency, the Fund
will retain such security in its portfolio until the Adviser determines that it
is practicable to sell the security without undue market or tax consequences to
the Fund. In the event that such downgraded securities constitute 5% or more of
the Fund's total assets, the Adviser will seek to sell immediately sufficient
securities to reduce the total to below 5%. A description of fixed-income
security ratings is contained in the Appendix to the Statement of Additional
Information.
The Fund may invest up to 35% of its total assets in securities which
are not Government Securities, including corporate debt securities and
securities backed by other assets, such as automobile or credit card
receivables and home equity loans ("Asset-Backed Securities"), and money market
instruments, which are short-term (maturities of up to thirteen months)
fixed-income securities, issued by private institutions. Such securities
(except for Eurodollar certificates of deposit) must be issued by U.S.,
Canadian or Mexican issuers and (except for money market instruments) must be
rated at least Aa by Moody's or AA by S&P or, if not rated, determined to be of
comparable quality by the Adviser.
The Fund expects that under normal circumstances the market value dollar
weighted average life (or period until the next reset date) of the Fund's
portfolio securities will be no greater than three years. In addition, the Fund
will purchase only Mexican Government Securities with remaining maturities of
one year or less. The Fund seeks to achieve relatively low volatility by
investing in a portfolio of securities which the Adviser believes will, in the
aggregate, be resistant to significant fluctuations in market value. Although
the values of fixed-income securities generally increase during periods of
declining interest rates and decrease during periods of increasing interest
rates, the extent of these fluctuations has historically generally been smaller
for short term securities than for securities with longer maturities.
Conversely, the yield available on shorter term securities has also
historically been lower on average than that available from longer term
securities.
Under normal circumstances the Fund will invest at least 50% of its
total assets in U.S. Government Securities. The Fund will invest no more than
25% of its total assets in Canadian Government Securities and no more than 25%
of its total assets in Mexican Government Securities. Subject to the foregoing
guidelines, the Adviser will invest the Fund's assets, and allocate its
investments from time to time among U.S., Canadian and Mexican Government
Securities, based on its analysis of market conditions and changes in general
economic conditions in the United States, Canada and Mexico. In such analysis,
the Adviser will consider various factors, including its expectations
7
<PAGE>
regarding interest rate changes and changes in currency exchange rates among
the U.S. dollar, the Canadian dollar and the Mexican peso, as well as general
market, economic and political factors, to attempt to take advantage of
favorable investment opportunities in each country.
Money market instruments in which the Fund may invest are securities
issued or guaranteed by the U.S. Government (Treasury bills, notes and bonds,
including zero coupon securities); obligations of banks subject to regulation
by the U.S. Government and having total assets of $1 billion or more;
Eurodollar certificates of deposit; obligations of savings banks and savings
and loan associations having total assets of $1 billion or more; fully insured
certificates of deposit; and commercial paper rated within the two highest
grades by Moody's or S&P or, if not rated, issued by a company having an
outstanding debt issue rated AAA by S&P or Aaa by Moody's.
In an effort to increase investment return or to hedge the Fund's
portfolio, the Fund may engage in various investment techniques, including
reverse repurchase agreements, dollar rolls, purchasing and selling call and
put options, entering into futures contracts and related options, purchasing
securities on a when-issued, delayed delivery or forward commitment basis and
lending portfolio securities (see "Other Investment Policies" below).
There may be periods during which, in the opinion of the Adviser, market
conditions warrant reduction of some or all of the Fund's securities holdings.
During such periods, the Fund may adopt a temporary "defensive" posture in
which greater than 35% of its total assets are invested in U.S. money market
instruments or cash.
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.
8
<PAGE>
The Fund intends to limit its use of zero coupon securities (other than
Treasury bills with one year or less to maturity) to 10% of its total assets.
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
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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; and (iv) 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 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
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"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
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.
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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.
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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 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
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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 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
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<PAGE>
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
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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.
Year 2000. The management services provided to the Fund by the Manager,
the investment advisory services provided to the Fund by the Adviser and the
services provided to shareholders by the Distributor and the Transfer Agent
depend on the smooth functioning of their computer systems. Many computer
software systems in use today cannot recognize the year 2000, but revert to
1900 or some other date, due to the manner in which dates were encoded and
calculated. That failure could have a negative impact on the handling of
securities trades, pricing and account services. The Manager, the Adviser, the
Distributor and the Transfer Agent have been actively working on necessary
changes to their own computer systems to prepare for the year 2000 and expect
that their systems will be adapted before that date, but there can be no
assurance that they will be successful, or that interaction with other
non-complying computer systems will not impair their services at that time.
In addition, it is possible that the markets for securities in which the
Fund invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues. In
addition, corporate and governmental data processing errors may result in
production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial and may be reported inconsistently in U.S. and
foreign financial statements. Accordingly, the Fund's investments may be
adversely affected.
The risks of other investment techniques which may be utilized by the
Fund, including options and futures transactions, are described under "Other
Investment Policies," below.
OTHER INVESTMENT POLICIES
Asset-Backed Securities. The Fund may invest in Asset-Backed Securities.
Asset-Backed Securities represent the securitization techniques used to develop
Mortgage-Backed Securities applied to a broad range of other assets. Through
the use of trusts and special purpose corporations, various types of assets,
primarily automobile and credit card receivables and home equity loans, are
being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a pay-through structure similar
to the CMO structure.
Asset-Backed Securities involve certain risks that are not posed by
Mortgage-Backed Securities, resulting mainly from the fact that Asset-Backed
Securities do not usually contain the complete benefit of a 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.
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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
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or may purchase or sell securities on a forward commitment basis. The
securities so purchased or sold are subject to market fluctuation and no
interest or dividends accrue to the purchaser prior to the settlement date.
When such transactions are negotiated, the price is fixed at the time of the
commitment, but delivery and payment can take place a month or more after the
date of the commitment. At the time of delivery of the securities, the value
may be more or less than the purchase or sale price. An increase in the
percentage of the Fund's assets committed to the purchase of securities on a
when issued, delayed delivery or forward commitment basis may increase the
volatility of the Fund's net asset value. The Fund will establish a segregated
account with its custodian bank in which it will maintain cash, U.S. Government
securities or other liquid portfolio securities equal in value to its
obligations in respect of when-issued or delayed delivery securities and
forward commitments. The Fund's ability to enter into such transactions is not
otherwise limited, but the Fund expects that under normal circumstances no more
than 15% of the Fund's total assets will be so invested.
When, As and If Issued Securities. The Fund may purchase securities on a
"when, as and if issued" basis under which the issuance of the security depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization, leveraged buyout or debt restructuring. If the
anticipated event does not occur and the securities are not issued, the Fund
will have lost an investment opportunity. An increase in the percentage of the
Fund's assets committed to the purchase of securities on a "when, as and if
issued" basis may increase the volatility of its net asset value. The Fund may
also sell securities on a "when, as and if issued" basis provided that the
issuance of the security will result automatically from the exchange or
conversion of a security owned by the Fund at the time of sale.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may engage in transactions in forward foreign currency exchange
contracts. A forward foreign currency exchange contract ("forward contract")
involves an obligation to purchase or sell a currency at a future date, which
may be any fixed number of days from the date of the contract agreed upon by
the parties, at a price set at the time of the contract.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also limit the opportunity
for gain if the value of the hedged currency should rise. Moreover, it may not
be possible for the Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation level it anticipates.
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
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currency-denominated securities and will not do so unless deemed appropriate by
the Adviser. Currently, only a limited market exists for certain hedging
transactions in future foreign exchange rates. This may limit the Fund's
ability to effectively hedge its investments in Mexico.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may engage in transactions involving options on securities and
currencies and futures contracts on securities, currencies and indexes, each as
described below.
Options. The Fund may purchase and sell (write) call and put options on
U.S. Treasury notes, bonds and bills and on the Canadian dollar or Mexican peso
which are or may in the future be listed on several U.S. and foreign securities
exchanges or are written in over-the-counter transactions ("OTC options").
Listed options are issued or guaranteed by the exchange on which they trade or
by a clearing corporation such as the Options Clearing Corporation. OTC options
are purchased from or sold (written) to dealers or financial institutions which
have entered into direct agreements with the Fund. The Fund is permitted to
write covered call options on portfolio securities and the U.S. dollar, the
Canadian dollar and the Mexican peso, without limit, in order to aid it in
achieving its investment objective. The Fund may also write covered put
options; however, the aggregate value of the obligations underlying the puts
determined as of the date the options are sold will not exceed 50% of the
Fund's net assets.
The Fund may purchase listed and OTC call and put options in amounts
equalling up to 5% of its total assets. The Fund may purchase call options to
close out a covered call position or to protect against an increase in the
price of a security it anticipates purchasing or, in the case of call options
on a foreign currency, to hedge against an adverse exchange rate change of the
currency in which the security it anticipates purchasing is denominated
vis-a-vis the currency in which the exercise price is denominated. The Fund may
purchase put options on securities which it holds in its portfolio only to
protect itself against a decline in the value of the security. The Fund may
also purchase put options to close out written put positions. There are no
other limits on the Fund's ability to purchase call and put options.
Futures Contracts. The Fund may purchase and sell futures contracts that
are currently traded, or may in the future be traded, on U.S. and foreign
commodity exchanges on such underlying fixed-income securities as U.S. Treasury
bonds, notes, and bills and/or any Canadian or Mexican government fixed-income
security ("interest rate" futures), on the Canadian or Mexican currencies
("currency" futures) and on such indexes of U.S. or foreign fixed-income
securities as may exist or come into being, such as the Moody's Investment
Grade Corporate Bond Index ("index" 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
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<PAGE>
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, Goldberg and
Horton have each been portfolio managers with affiliates of TCW for over five
years.
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., Morgan Stanley & Co. Incorporated and other broker-
dealers that are affiliates 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, including Dean Witter Reynolds Inc., Morgan
Stanley & Co. Incorporated and other brokers and dealers that are affiliates of
the Manager or Adviser. In addition, the Fund may incur brokerage commissions
on transactions conducted through such affiliates. 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.
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2. Invest more than 5% of the value of its total assets in
securities of issuers having a record, together with predecessors, of
less than three years of continuous operation. This restriction shall
not apply to Mortgage-Backed Securities or Asset-Backed Securities or to
any obligation of the United States Government, its agencies or
instrumentalities.
3. Purchase or sell commodities or commodities contracts except that
the Fund may purchase and sell financial futures contracts and related
options thereon.
In addition, as a non-fundamental policy, the Fund may not, as to 75% of
its total assets, purchase more than 10% of the voting securities of any
issuer.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of total or net assets will not be considered a
violation of any of the foregoing restrictions.
PURCHASE OF FUND SHARES
- --------------------------------------------------------------------------------
The Fund offers its shares for sale to the public on a continuous basis.
Pursuant to a Distribution Agreement between the Fund and Morgan Stanley Dean
Witter Distributors Inc. ("MSDW Distributors" or the "Distributor"), an
affiliate of the Manager, shares of the Fund are distributed by the Distributor
and offered by Dean Witter Reynolds Inc. ("DWR"), a selected dealer and
subsidiary of Morgan Stanley Dean Witter & Co., 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"). It
is anticipated that DWR will undergo a change of corporate name which is
expected to incorporate the brand name of "Morgan Stanley Dean Witter," pending
approval of various regulatory authorities. 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 Morgan Stanley Dean Witter Trust FSB (the
"Transfer Agent" or "MSDW Trust") at P.O. Box 1040, Jersey City, NJ 07303, or
by contacting a Morgan Stanley Dean Witter Financial Advisor or other Selected
Broker-Dealer representative. 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. The minimum initial purchase in the case of an "Education
IRA" is $500, if the Distributor has reason to believe that additional
investments will increase the investment in the account to $1,000 within three
years. In the case of investments pursuant to (i) Systematic Payroll Deduction
Plans (including Individual Retirement Plans), (ii) the MSDW Advisors mutual
fund asset allocation program and (iii) fee-based programs approved by the
Distributor, pursuant to which participants pay an asset based fee for services
in the nature of investment advisory, administrative and/or brokerage services,
the Fund, in its discretion, may accept investments without regard to any
minimum amounts which would otherwise be required, provided, in the case of
Systematic Payroll Deduction Plans, that the Distributor has reason to believe
that additional investments will increase the investment in all accounts under
such Plans to at least $1,000. Certificates for shares purchased will not be
issued unless a request is made by the shareholder in writing to the Transfer
Agent.
Shares of the Fund are sold through the Distributor on a normal three
business day settlement basis; that is, payment 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
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<PAGE>
date, they may benefit from the temporary use of the funds where payment is
made prior thereto. As noted above, orders placed directly with the Transfer
Agent must be accompanied by payment. Investors will be entitled to receive
dividends and capital gains distributions if their order is received by the
close of business on the day prior to the record date for such distributions.
Sales personnel of a Selected Broker-Dealer are compensated for shares
of the Fund sold by them by the Distributor or any of its affiliates and/or the
Selected Broker-Dealer. In addition, some sales personnel of the Selected
Broker-Dealer will receive various types of non-cash compensation as special
sales incentives, including trips, educational and/or business seminars and
merchandise. The Fund and the Distributor reserve the right to reject any
purchase order.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is determined once daily at
4:00 p.m., New York time (or, on days when the New York Stock Exchange closes
prior to 4:00 p.m., at such earlier time), on each day that the New York Stock
Exchange is open by taking the value of all assets of the Fund, subtracting all
its liabilities, dividing by the number of shares outstanding and adjusting to
the nearest cent. The net asset value per share will not be determined on Good
Friday and on such other federal and non-federal holidays as are observed by
the New York Stock Exchange.
In the calculation of the Fund's net asset value: (1) an equity
portfolio security listed or traded on the New York or American Stock Exchange
or other stock exchange is valued at its latest sale price on that exchange; if
there were no sales that day, the security is valued at the latest bid price
(in cases where a security is traded on more than one exchange, the security is
valued on the exchange designated as the primary market pursuant to procedures
adopted by the Trustees); and (2) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest bid price prior to the time of valuation. When market quotations are not
readily available, including circumstances under which it is determined by the
Adviser that sale or bid prices are not reflective of a security's market
value, portfolio securities are valued at their fair value as determined in
good faith under procedures established by and under the general supervision of
the Fund's Trustees (valuation of securities for which market quotations are
not readily available may also be based upon current market prices of
securities which are comparable in coupon, rating and maturity or an
appropriate matrix utilizing similar factors). For valuation purposes,
quotations of foreign portfolio securities, other assets and liabilities and
forward contracts stated in foreign currency are translated into U.S. dollar
equivalents at the prevailing market rates prior to the close of the New York
Stock Exchange.
Certain of the Fund's portfolio securities may be valued by an outside
pricing service approved by the Fund's Trustees. The pricing service may
utilize a matrix system incorporating security quality, maturity and coupon as
the evaluation model parameters, and/or research evaluations by its staff,
including review of broker-dealer market price quotations, in determining what
the pricing service believes is the fair valuation of such portfolio
securities.
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, Morgan Stanley Dean Witter Financial
Advisors and others, including overhead and telephone expenses; (2) sales
incentives
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<PAGE>
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 $1,299,994 to the Distributor pursuant
to the Plan for the fiscal year ended October 31, 1998. 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 or following
redemption of shares of a Morgan Stanley Dean Witter money market fund, 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 whose shares of TCW/DW Funds
have an aggregate value of $10,000 or more. Shares of any Fund from which
redemptions will be made pursuant to the Plan must have a value of $1,000 or
more (referred to as a "SWP Fund"). The required share values are determined on
the date the shareholder establishes the Withdrawal Plan. The Withdrawal Plan
provides for monthly, quarterly, semi-annual or annual payments in any amount
not less than $25, or in any whole percentage of the value of the SWP Funds'
shares, on an annualized basis. Any applicable CDSC will be imposed on shares
redeemed under the Withdrawal Plan (see "Purchase of Fund Shares"), except that
the CDSC, if any, will be waived on redemptions under the Withdrawal Plan of up
to 12% annually of the value of each SWP Fund account, based on the share
values next determined after the shareholder establishes the Withdrawal Plan.
(For shareholders who established the Withdrawal Plan prior to October 1, 1998,
the value of each SWP Fund account for the purpose of the 12% CDSC waiver will
be determined at 4:00 p.m., New York time, on October 2, 1998.) Redemptions for
which this CDSC waiver policy applies may be in amounts up to 1% per month, 3%
per quarter, 6% semi-annually or 12% annually. Under this CDSC waiver policy,
amounts withdrawn each period will be paid by first redeeming shares not
subject to a CDSC because the shares were purchased by the reinvestment of
dividends or capital gains distributions, the CDSC period has elapsed or some
other waiver of the CDSC applies. If shares subject to a CDSC must be redeemed,
shares held for the longest period of time will be redeemed first and
continuing with shares held the next longest period of
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<PAGE>
time until shares held the shortest period of time are redeemed. Any
shareholder participating in the Withdrawal Plan will have sufficient shares
redeemed from his or her account so that the proceeds (net of any applicable
CDSC) to the shareholder will be the designated monthly, quarterly, semi-annual
or annual amount.
A shareholder may suspend or terminate participation in the Withdrawal
Plan at any time. A shareholder who has suspended participation may resume
payments under the Withdrawal Plan, without requiring a new determination of
the account value for the 12% CDSC waiver. The Withdrawal Plan may be
terminated or revised at any time by the Fund.
Prior to adding an additional SWP Fund to an existing Withdrawal Plan,
the required $10,000/$1,000 shares values must be met, to be calculated on
the date the shareholder adds the additional SWP Fund. However, the addition of
a new SWP Fund will not change the account value for the 12% CDSC waiver for
the SWP Funds already participating in the Withdrawal Plan.
Withdrawal Plan payments should not be considered dividends, yields or
income. If periodic Withdrawal Plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted. Each withdrawal constitutes a
redemption of shares and any gain or loss realized must be recognized for
federal income tax purposes.
Shareholders should contact their Morgan Stanley Dean Witter Financial
Advisor or other Selected Broker-Dealer representative 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 advisor.
For further information regarding plan administration, custodial fees
and other details, investors should contact their Morgan Stanley Dean Witter
Financial Advisor or other Selected Broker-Dealer representative or the
Transfer Agent.
EXCHANGE PRIVILEGE
An "Exchange Privilege," that is, the privilege of exchanging shares of
certain Funds for shares of the Fund, exists whereby shares of TCW/DW Funds
that are multiple class funds ("TCW/DW Multi-Class Funds") may be exchanged for
shares of the Fund and for shares of five money market funds for which MSDW
Advisors serves as investment manager: Morgan Stanley Dean Witter Liquid Asset
Fund Inc., Morgan Stanley Dean Witter U.S. Government Money Market Trust,
Morgan Stanley Dean Witter Tax-Free Daily Income Trust, Morgan Stanley Dean
Witter California Tax Free Daily Income Trust and Morgan Stanley Dean Witter
New York Municipal Money Market Trust (the foregoing six funds, including the
Fund, are hereinafter collectively referred to as "Exchange Funds"). Shares of
the Exchange Funds received in an exchange for shares of a TCW/DW Multi-Class
Fund may be redeemed and exchanged only for shares of the corresponding Class
of a TCW/DW Multi-Class Fund or for shares of one of the other Exchange Funds.
An exchange to the Fund is on the basis of the next calculated net asset
value per share of the Fund after the exchange order is received. When
exchanging into a money market fund shares of the TCW/DW Multi-Class 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. Ultimately, any applicable contingent deferred sales charge
("CDSC") will have to be paid upon redemption of shares originally purchased
from a Class of a TCW/DW Multi-Class Fund that imposes a CDSC. During the
period of time the shares originally purchased from a Class of a TCW/DW
Multi-Class Fund that imposes a CDSC remain in the Exchange Fund, the holding
period (for the purpose of determining the rate of CDSC) is frozen. If those
shares are subsequently re-exchanged for shares of a TCW/DW Multi-Class Fund,
the holding period previously frozen when the first ex-
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change was made resumes on the last day of the month in which shares of a
TCW/DW Multi-Class Fund are reacquired. Thus, the CDSC is based upon the time
(calculated as described above) the shareholder was invested in shares of a
TCW/DW Multi-Class Fund. 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 the respective Exchange
Fund prospectus for a description of Exchange Fund 12b-1 distribution fees).
Exchanges may be made after the shares of the fund acquired by purchase (not by
exchange or dividend reinvestment) have been held for thirty days. There is no
waiting period for exchanges of shares acquired by exchange or dividend
reinvestment.
Additional Information Regarding Exchanges. 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 Morgan Stanley Dean Witter Financial Advisor or other
Selected Broker-Dealer representative 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 of each Class of shares and any other conditions imposed by each
fund. In the case of any shareholder holding a share ceritificate or
certificates, no exchanges may be made until all applicable share certificates
have been received by the Transfer Agent and deposited in the shareholder's
account. An exchange will be treated for federal income tax purposes the same
as a repurchase or redemption of shares, on which the shareholder may realize a
capital gain or loss. However, the ability to deduct capital losses on an
exchange may be limited in situations where there is an exchange of shares
within ninety days after the shares are purchased. The Exchange Privilege is
only available in states where an exchange may legally be made.
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 Morgan Stanley
Dean Witter Financial Advisor or other Selected Broker-Dealer representative
(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 reason-
25
<PAGE>
able 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 Morgan Stanley
Dean Witter Financial Advisor or other Selected Broker-Dealer representative,
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 Morgan Stanley Dean Witter Financial
Advisor or other Selected Broker-Dealer representative or the Transfer Agent
for further information about the Exchange Privilege.
REPURCHASES AND REDEMPTIONS
- --------------------------------------------------------------------------------
Repurchases. DWR and other Selected Broker-Dealers are authorized to
repurchase, as agent for the Fund, shares represented by a share certificate
which is delivered to any of their offices. Shares held in a shareholder's
account without a share certificate may also be repurchased by DWR and other
Selected Broker-Dealers upon the telephonic request of the shareholder. The
repurchase price is the net asset value next determined (see "Purchase of Fund
Shares--Determination of Net Asset Value") after such repurchase order is
received by DWR or the other Selected Broker-Dealer. The offers by DWR and
other Selected Broker-Dealers to repurchase shares from shareholders may be
suspended by them at any time. In that 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
26
<PAGE>
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 Morgan Stanley Dean Witter
Financial Advisor or other Selected Broker-Dealer representative 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 capital gains, if any, at least once each year.
The Fund may, however, determine either to distribute or to retain all or part
of any long-term capital gains in any year for reinvestment.
The Fund may, at times, make payments from sources other than net
investment income, net realized short-term capital gains and net realized long-
term capital gains. Payments from such sources would, in effect, represent a
return of a portion of each shareholder's investment. All, or a portion, of
such payments would not be taxable to shareholders.
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.
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.")
27
<PAGE>
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.
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 advisor.
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
28
<PAGE>
types of total return figures. The Fund may also advertise the growth of
hypothetical investments of $10,000, $50,000 and $100,000 in shares of the
Fund. The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent
organizations(such as mutual fund performance rankings of Lipper Analytical
Services, Inc.).
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Voting Rights. All shares of beneficial interest of the Fund are of
$0.01 par value and are equal as to earnings, assets and voting privileges.
The Fund is not required to hold Annual Meetings of Shareholders and, in
ordinary circumstances, the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances, the Trustees may be removed by action of the Trustees or by the
shareholders.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the
obligations of the Fund. However, the Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Fund,
requires that Fund obligations include such disclaimer, and provides
indemnification and reimbursement of expenses out of the Fund's property for
any shareholder held personally liable for the obligations of the Fund. Thus,
the risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund itself would be unable
to meet its obligations. Given the above limitations on shareholder personal
liability, and the nature of the Fund's assets and operations, the possibility
of the Fund being unable to meet its obligations is remote and thus, in the
opinion of Massachusetts counsel to the Fund, the risk to Fund shareholders of
personal liability is remote.
Code of Ethics. The Adviser is subject to a Code of Ethics with respect
to investment transactions in which the Adviser's officers, directors and
certain other persons have a beneficial interest to avoid any actual or
potential conflict or abuse of their fiduciary position. The Code of Ethics, as
it pertains to the 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
29
<PAGE>
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 as excessive certain fees paid by the Fund. 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 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 which was
denied by the Court on November 20, 1997. 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.
30
<PAGE>
TCW/DW
North American
Government Income Trust
Two World Trade Center
New York, New York 10048
TRUSTEES
John C. Argue
Richard M. DeMartini
Charles A. Fiumefreddo
John R. Haire
Dr. Manuel H. Johnson
Thomas E. Larkin, Jr.
Michael E. Nugent
John L. Schroeder
Marc I. Stern
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Thomas E. Larkin, Jr.
President
Barry Fink
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
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
MANAGER
Morgan Stanley Dean Witter Services Company Inc.
ADVISER
TCW Funds Management, Inc.
TCW/DW
NORTH AMERICAN
GOVERNMENT
INCOME TRUST
PROSPECTUS
NOVEMBER 25, 1998
<PAGE>
TCW/DW
NORTH AMERICAN
GOVERNMENT INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
November 25, 1998
- --------------------------------------------------------------------------------
TCW/DW North American Government Income Trust (the "Fund") is an open-end,
non-diversified management investment company, whose investment objective is to
earn a high level of current income while maintaining relatively low volatility
of principal. The Fund seeks to achieve its investment objective by investing
primarily in investment grade securities issued or guaranteed by the U.S.
Government, Canada or Mexico, or their subdivisions, or the agencies or
instrumentalities of any of the foregoing. See "Investment Practices and
Policies."
A Prospectus for the Fund dated November 25, 1998, which provides the
basic information you should know before investing in the Fund, may be obtained
without charge from the Fund at the address or telephone numbers listed below
or from the Fund's Distributor, Morgan Stanley Dean Witter Distributors Inc.,
or from Dean Witter Reynolds Inc., at any of its branch offices. This Statement
of Additional Information is not a Prospectus. It contains information in
addition to and more detailed than that set forth in the Prospectus. It is
intended to provide additional information regarding the activities and
operations of the Fund, and should be read in conjunction with the Prospectus.
TCW/DW North American Government Income Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
The Fund and its Management ............................................... 3
Trustees and Officers ..................................................... 6
Investment Practices and Policies ......................................... 12
Investment Restrictions ................................................... 26
Portfolio Transactions and Brokerage ...................................... 27
The Distributor ........................................................... 28
Shareholder Services ...................................................... 31
Repurchases and Redemptions ............................................... 36
Dividends, Distributions and Taxes ........................................ 36
Performance Information ................................................... 38
Description of Shares ..................................................... 39
Custodian and Transfer Agent .............................................. 40
Independent Accountants ................................................... 40
Reports to Shareholders ................................................... 40
Legal Counsel ............................................................. 40
Experts ................................................................... 40
Registration Statement .................................................... 40
Financial Statements--October 31, 1998 .................................... 41
Report of Independent Accountants ......................................... 52
Appendix .................................................................. 53
</TABLE>
2
<PAGE>
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
THE FUND
The Fund is a trust of the type commonly known as a "Massachusetts
business trust" and was organized under the laws of the Commonwealth of
Massachusetts on February 19, 1992. The Fund is one of the TCW/DW Funds, which
currently consist, in addition to the Fund, of TCW/DW Latin American Growth
Fund, TCW/DW Income and Growth Fund, TCW/DW Small Cap Growth Fund, TCW/DW
Mid-Cap Equity Trust, TCW/DW Global Telecom Trust, TCW/DW Term Trust 2002,
TCW/DW Term Trust 2003, TCW/DW Term Trust 2000, TCW/DW Emerging Markets
Opportunities Trust and TCW/DW Total Return Trust.
THE MANAGER
Morgan Stanley Dean Witter Services Company Inc. (the "Manager"), a
Delaware corporation, whose address is Two World Trade Center, New York, New
York 10048, is the Fund's Manager. The Manager is a wholly-owned subsidiary of
Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors"), a Delaware
corporation. MSDW Advisors is a wholly-owned subsidiary of Morgan Stanley Dean
Witter & Co. ("MSDW"), a Delaware corporation. The daily management of the Fund
is conducted by or under the direction of officers of the Fund and of the
Manager and Adviser (see below), subject to review by the Fund's Board of
Trustees. Information as to these Trustees and Officers is contained under the
caption "Trustees and Officers."
Pursuant to a management agreement (the "Management Agreement") with the
Manager, the Fund has retained the Manager to manage the Fund's business
affairs, supervise the overall day-to-day operations of the Fund (other than
rendering investment advice) and provide all administrative services to the
Fund. Under the terms of the Management Agreement, the Manager also maintains
certain of the Fund's books and records and furnishes, at its own expense, such
office space, facilities, equipment, supplies, clerical help and bookkeeping
and legal services as the Fund may reasonably require in the conduct of its
business, including the preparation of prospectuses, statements of additional
information, proxy statements and reports required to be filed with federal and
state securities commissions (except insofar as the participation or assistance
of independent accountants and attorneys is, in the opinion of the Manager,
necessary or desirable). In addition, the Manager pays the salaries of all
personnel, including officers of the Fund, who are employees of the Manager.
The Manager also bears the cost of the Fund's telephone service, heat, light,
power and other utilities.
As full compensation for the services and facilities furnished to the Fund
and expenses of the Fund assumed by the Manager, the Fund pays the Manager
monthly compensation calculated daily by applying the following annual rates to
the Fund's daily net assets determined as of the close of each business day:
0.39% of the portion of daily net assets not exceeding $3 billion; and 0.36% of
the portion of daily net assets exceeding $3 billion. While the fee payable
under the Management Agreement may be higher than that paid by other investment
companies for similar services, the Board of Trustees determined that the total
fees payable under the Management Agreement and the Advisory Agreement (as
defined below) are reasonable in relation to the scope and quality of services
to be provided thereunder. In this regard, in evaluating the Management
Agreement, the Board of Trustees recognized that the Manager and the Adviser
had, pursuant to an agreement described under the section entitled "The
Adviser," agreed to a division as between themselves of the total fees
necessary for the management of the business affairs of and the furnishing of
investment advice to the Fund. Accordingly, in reviewing the Management
Agreement and Advisory Agreement, the Board viewed as most significant the
question as to whether the total fees payable under the Management and Advisory
Agreements were in the aggregate reasonable in relation to the services to be
provided thereunder. For the fiscal years ended October 31, 1996, 1997 and
1998, the Fund accrued to the Manager, total compensation of $1,912,210,
$1,052,959 and $697,150 respectively.
The Management Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Manager is not liable to the Fund or any of its
investors for any act or omission by the Manager or for any losses sustained by
the Fund or its investors. The Management Agreement in no way restricts the
Manager from acting as manager to others.
The Management Agreement was initially approved by the Trustees on June 4,
1994 and became effective on April 17, 1995. The Management Agreement replaced
a prior management agreement in effect between the Fund and the Manager, which
in turn had replaced a management agreement between the Fund and MSDW Advisors,
3
<PAGE>
the parent company of the Manager. (That management agreement in turn had
replaced, on June 30, 1993 upon the spin-off by Sears, Roebuck and Co. of its
remaining shares of Morgan Stanley Dean Witter & Co. (formerly Dean Witter
Discover & Co.), an earlier substantially identical management agreement
(originally with DWR, and assumed by MSDW Advisors effective January, 1993)
which was approved by the Trustees on October 30, 1992.) The nature and scope
of services provided to the Fund, and the formula to determine fees paid by the
Fund under the Management Agreement, are identical to those of the Fund's
previous management agreements. The Management Agreement may be terminated at
any time, without penalty, on thirty days' notice by the Trustees of the Fund.
Under its terms, the Management Agreement had an initial term ending April
30, 1995, and will continue in effect from year to year thereafter, provided
continuance of the Agreement is approved at least annually by the Trustees of
the Fund, including the vote of a majority of the Independent Trustees who are
not parties to the Management or Advisory Agreement or "interested persons" (as
defined in the Investment Company Act of 1940, as amended (the "Act")) of any
such party (the "Independent Trustees"). Continuation of the Management
Agreement until April 30, 1999 was approved by the Trustees, including a
majority of the Independent Trustees, at a meeting held on April 30, 1998.
THE ADVISER
TCW Funds Management, Inc. (the "Adviser"), a California corporation, is a
wholly-owned subsidiary of The TCW Group, Inc. ("TCW"), whose direct and
indirect subsidiaries, including Trust Company of the West and TCW Asset
Management Company, provide a variety of trust, investment management and
investment advisory services. As of October 31, 1998, the Adviser and its
affiliates had approximately $50 billion under management or committed to
management. Trust Company of the West and its affiliates have managed
securities portfolios for institutional investors since 1971. The Adviser is
headquartered at 865 South Figueroa Street, Suite 1800, Los Angeles, California
90017 and is registered as an investment adviser under the Investment Advisers
Act of 1940. In addition to the Fund, the Adviser currently serves as
investment adviser to ten other TCW/DW Funds: TCW/DW Latin American Growth
Fund, TCW/DW Term Trust 2002, TCW/DW Income and Growth Fund, TCW/DW Term Trust
2003, TCW/DW Small Cap Growth Fund, TCW/DW Term Trust 2000, TCW/DW Emerging
Markets Opportunities Trust, TCW/DW Mid-Cap Equity Trust, TCW/DW Global Telecom
Trust and TCW/DW Total Return Trust. The Adviser also serves as investment
adviser to TCW Convertible Securities Fund, Inc., a closed-end investment
company listed on the New York Stock Exchange, and to The TCW Galileo Funds,
Inc., an open-end investment company, and acts as adviser or sub-adviser to
other investment companies.
Robert A. Day, who is Chairman of the Board of Directors of TCW, may be
deemed to be a control person of the Adviser by virtue of the aggregate
ownership of Mr. Day and his family of more than 25% of the outstanding voting
stock of TCW.
Pursuant to an investment advisory agreement (the "Advisory Agreement")
with the Adviser, the Fund has retained the Adviser to invest the Fund's
assets, including the placing of orders for the purchase and sale of portfolio
securities. The Adviser obtains and evaluates such information and advice
relating to the economy, securities markets, and specific securities as it
considers necessary or useful to continuously manage the assets of the Fund in
a manner consistent with its investment objective. In addition, the Adviser
pays the salaries of all personnel, including officers of the Fund, who are
employees of the Adviser.
As full compensation for the services and facilities furnished to the Fund
and expenses of the Fund assumed by the Adviser, the Fund pays the Adviser
monthly compensation calculated daily by applying the following annual rates to
the Fund's daily net assets determined as of the close of each business day:
0.26% of the portion of daily net assets not exceeding $3 billion; and 0.24% of
the portion of daily net assets exceeding $3 billion. For the fiscal years
ended October 31, 1996, 1997 and 1998, the Fund accrued to the Adviser total
compensation under the Advisory Agreement of $1,274,806, $701,973 and $464,767,
respectively.
The Advisory Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Adviser is not liable to the Fund or any of its
investors for any act or omission by the Adviser or for any losses sustained by
the Fund or its investors. The Advisory Agreement in no way restricts the
Adviser from acting as investment adviser to others.
4
<PAGE>
The Advisory Agreement was initially approved by the Trustees on May 1,
1992 and by DWR, as then sole shareholder, on May 11, 1992. The Advisory
Agreement may be terminated at any time, without penalty, on thirty days'
notice by the Trustees of the Fund, by the holders of a majority, as defined in
the Act, of the outstanding shares of the Fund, or by the Adviser. The
Agreement will automatically terminate in the event of its assignment (as
defined in the Act).
Under its terms, the Advisory Agreement had an initial term ending April
30, 1994, and provides that it will continue from year to year thereafter,
provided continuance of the Agreement is approved at least annually by the vote
of the holders of a majority, as defined in the Act, of the outstanding shares
of the Fund, or by the Trustees of the Fund; provided that in either event such
continuance is approved annually by the vote of a majority of the Independent
Trustees of the Fund, which vote must be cast in person at a meeting called for
the purpose of voting on such approval. Continuation of the Advisory Agreement
until April 30, 1999 was approved by the Trustees, including a majority of the
Independent Trustees, at a meeting called for that purpose on April 30, 1998.
Expenses not expressly assumed by the Manager under the Management
Agreement, by the Adviser under the Advisory Agreement or by the Distributor of
the Fund's shares, Morgan Stanley Dean Witter Distributors Inc. ("MSDW
Distributors" or the "Distributor") (see "The Distributor"), will be paid by
the Fund. Such expenses include, but are not limited to: expenses of the Plan
of Distribution pursuant to Rule 12b-1 (see "The Distributor"); charges and
expenses of any registrar; custodian, stock transfer and dividend disbursing
agent; brokerage commissions and securities transaction costs; taxes; engraving
and printing of share certificates; registration costs of the Fund and its
shares under federal and state securities laws; the cost and expense of
printing, including typesetting, and distributing Prospectuses and Statements
of Additional Information of the Fund and supplements thereto to the Fund's
shareholders; all expenses of shareholders' and trustees' meetings and of
preparing, printing and mailing of proxy statements and reports to
shareholders; fees and travel expenses of trustees or members of any advisory
board or committee who are not employees of the Manager or Adviser or any
corporate affiliate of either; all expenses incident to any dividend,
withdrawal or redemption options; charges and expenses of any outside service
used for pricing of the Fund's shares; fees and expenses of legal counsel,
including counsel to the Trustees who are not interested persons of the Fund or
of the Manager or the Adviser (not including compensation or expenses of
attorneys who are employees of the Manager or the Adviser) and independent
accountants; membership dues of industry associations; interest on Fund
borrowings; postage; insurance premiums on property or personnel (including
officers and trustees) of the Fund which inure to its benefit; extraordinary
expenses (including, but not limited to, legal claims and liabilities and
litigation costs and any indemnification relating thereto); and all other costs
of the Fund's operation.
The Fund has acknowledged that each of DWR and TCW owns its own name,
initials and logo. The Fund has agreed to change its name at the request of
either the Manager or the Adviser, if the Management Agreement between the
Manager and the Fund or the Advisory Agreement between the Adviser and the Fund
is terminated.
5
<PAGE>
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The Trustees and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with the
Manager or the Adviser, and the affiliated companies of either, and with the 11
TCW/DW Funds and with the 85 investment companies of which MSDW Advisors serves
as investment manager or as investment adviser (the "Morgan Stanley Dean Witter
Funds"), are shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- --------------------------------------------------- ------------------------------------------------------------
<S> <C>
John C. Argue (66) Of Counsel, Argue Pearson Harbison & Myers (law firm);
Trustee Director, Avery Dennison Corporation (manufacturer of
c/o Argue Pearson Harbison & Myers self-adhesive products and office supplies) and CalMat
801 South Flower Street Company (producer of aggregates, asphalt and ready mixed
Los Angeles, California concrete); Chairman, The Rio Hondo Memorial
Foundation (charitable foundation); director or trustee of
various business and not-for-profit corporations; Director,
TCW Galileo Funds, Inc.; Director, TCW Convertible
Securities Fund, Inc.; Director, Apex Mortgage Capital,
Inc. and Nationwide Health Properties, Inc. (real estate
investment trusts); Trustee of the TCW/DW Funds.
Richard M. DeMartini* (46) President and Chief Operating Officer of Morgan Stanley
Trustee Dean Witter Individual Asset Management Group, a
Two World Trade Center business unit of MSDW; President and Chief Operating
New York, New York Officer of Dean Witter Reynolds Inc. ("DWR"); Trustee of
the TCW/DW Funds and the Van Kampen Funds; Director
and/or officer of various MSDW subsidiaries; formerly
Vice Chairman of the Board of the National Association of
Securities Dealers, Inc.; formerly Chairman of the Board of
Directors of the Nasdaq Market, Inc.
Charles A. Fiumefreddo* (65) Chairman, Chief Executive Officer and Trustee of the
Chairman of the Board, Chief TCW/DW Funds; Chairman, Director or Trustee,
Executive Officer and Trustee President and Chief Executive Officer of the Morgan
Two World Trade Center Stanley Dean Witter Funds; formerly Chairman, Chief
New York, New York Executive Officer and Director of MSDW Advisors,
MSDW Distributors and MSDW Services, Executive Vice
President and Director of DWR, Chairman and Director
of Morgan Stanley Dean Witter Trust FSB ("MSDW
Trust"), and Director and/or officer of various MSDW
subsidiaries (until June, 1998).
John R. Haire (73) Chairman of the Audit Committee and Trustee of the
Trustee TCW/DW Funds; Chairman of the Audit Committee and
Two World Trade Center Director or Trustee of the Morgan Stanley Dean Witter
New York, New York Funds; formerly Chairman of the Committee of the
Independent Directors or Trustees of the Morgan Stanley
Dean Witter Funds and the TCW/DW Funds (until June,
1998); formerly President, Council for Aid to Education
(1978-1989) and Chairman and Chief Executive Officer of
Anchor Corporation, an Investment Adviser (1964-1978).
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- --------------------------------------------------- -------------------------------------------------------------
<S> <C>
Dr. Manuel H. Johnson (49) Senior Partner, Johnson Smick International, Inc., a
Trustee consulting firm; Co-Chairman and a founder of the Group
c/o Johnson Smick International, Inc. of Seven Council (G7C), an international economic
1133 Connecticut Avenue, N.W. commission; Director of NASDAQ (since June, 1995);
Washington, D.C. Chairman and Trustee of the Financial Accounting
Foundation (oversight organization for the Financial
Accounting Standards Board); Director of Greenwich
Capital Markets, Inc. (broker-dealer) and NVR, Inc. (home
construction); formerly Vice Chairman of the Board of
Governors of the Federal Reserve System (1986-1990) and
Assistant Secretary of the U.S. Treasury (1982-1986);
Trustee of the TCW/DW Funds; Director or Trustee of
the Morgan Stanley Dean Witter Funds.
Thomas E. Larkin, Jr.* (59) Executive Vice President and Director, The TCW Group,
President and Trustee Inc.; President and Director of Trust Company of the West;
865 South Figueroa Street Vice Chairman and Director of TCW Asset Management
Los Angeles, California Company; Chairman of the Adviser; President and Director
of TCW Galileo Funds, Inc.; Senior Vice President of
TCW Convertible Securities Fund, Inc.; Member of the
Board of Trustees of the University of Notre Dame;
Director of Orthopaedic Hospital of Los Angeles; President
and Trustee of the TCW/DW Funds.
Michael E. Nugent (62) General Partner, Triumph Capital, L.P., a private investment
Trustee partnership; formerly Vice President, Bankers Trust
c/o Triumph Capital, L.P. Company and BT Capital Corporation (1984-1988);
237 Park Avenue Director of various business organizations; Trustee of the
New York, New York TCW/DW Funds; Director or Trustee of the Morgan
Stanley Dean Witter Funds; Director of various business
organizations.
John L. Schroeder (68) Retired; Trustee of the TCW/DW Funds; Director or
Trustee Trustee of the Morgan Stanley Dean Witter Funds; Director
c/o Gordon Altman Butowsky Weitzen of Citizens Utilities Company; formerly Executive Vice
Shalov & Wein President and Chief Investment Officer of the Home
Counsel to the Independent Trustees Insurance Company (August, 1991-September, 1995).
114 West 47th Street
New York, New York
Marc I. Stern* (54) President and Director, The TCW Group, Inc.; President
Trustee and Director of the Adviser; Vice Chairman and Director of
865 South Figueroa Street TCW Asset Management Company; Executive Vice
Los Angeles, California President and Director of Trust Company of the West;
Chairman and Director of the TCW Galileo Funds, Inc.;
Trustee of the TCW/DW Funds; Chairman of TCW
Americas Development, Inc.; formerly President of
SunAmerica, Inc. (financial services company); Director of
Qualcomm, Incorporated (wireless communications);
Director or Trustee of various not-for-profit organizations.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- --------------------------------------------------- ------------------------------------------------------------
<S> <C>
Barry Fink (43) Senior Vice President (since March, 1997), Secretary and
Vice President, Secretary General Counsel (since February, 1997) and Director (since
and General Counsel July, 1998) of MSDW Advisors and MSDW Services;
Two World Trade Center Senior Vice President (since March, 1997) and Assistant
New York, New York Secretary and Assistant General Counsel (since February,
1997) of MSDW Distributors; Assistant Secretary of DWR
(since August, 1996); Vice President, Secretary and General
Counsel of the Morgan Stanley Dean Witter Funds and the
TCW/DW Funds (since February, 1997); previously First
Vice President (June, 1993-February, 1997), Vice President
(until June, 1993) and Assistant Secretary and Assistant
General Counsel of MSDW Advisors and the Manager and
Assistant Secretary of the Morgan Stanley Dean Witter
Funds and the TCW/DW Funds.
Philip A. Barach (46) Group Managing Director of the Adviser, Trust Company
Vice President of the West and TCW Asset Management Company; Vice
865 South Figueroa Street President of various TCW/DW Funds.
Los Angeles, California
James M. Goldberg (53) Managing Director of the Adviser; Managing Director and
Vice President Chairman of the Fixed Income Policy Committee of Trust
865 South Figueroa Street Company of the West and TCW Asset Management
Los Angeles, California Company; Vice President of various TCW/DW Funds.
Jeffrey E. Gundlach (39) Group Managing Director of the Adviser, Trust Company
Vice President of the West and TCW Asset Management Company; Vice
865 South Figueroa Street President of various TCW/DW Funds.
Los Angeles, California
Frederick H. Horton (40) Managing Director of the Adviser, Trust Company of the
Vice President West and TCW Asset Management Company (since
865 South Figueroa Street October, 1993); previously Senior Portfolio Manager for
Los Angeles, California Dewey Square Investors (June, 1991--September, 1993).
Thomas F. Caloia (52) First Vice President and Assistant Treasurer of the Manager
Treasurer and MSDW Advisors and Treasurer of the TCW/DW
Two World Trade Center Funds and the Morgan Stanley Dean Witter Funds.
New York, New York
</TABLE>
- ----------
* Denotes Trustees who are "interested persons" of the Fund, as defined in the
Act.
In addition, Mitchell M. Merin, President, Chief Executive Officer and
Director of MSDW Advisors and MSDW Services, Chairman and Director of MSDW
Distributors and MSDW Trust, Executive Vice President and Director of DWR, and
Director of various MSDW subsidiaries, Robert M. Scanlan, President, Chief
Operating Officer and Director of MSDW Advisors and MSDW Services, Executive
Vice President of MSDW Distributors and MSDW Trust and Director of MSDW Trust,
Ronald E. Robison, Executive Vice President and Chief Administrative Officer of
MSDW Advisors and MSDW Services, Robert S. Giambrone, Senior Vice President of
MSDW Advisors, MSDW Services, MSDW Distributors and MSDW Trust and Director of
MSDW Trust, and Joseph J. McAlinden, Executive Vice President and Chief
Investment Officer of MSDW Advisors and Director of MSDW Trust, are Vice
Presidents of the Fund, and Marilyn K. Cranney and Carsten Otto, First Vice
Presidents and Assistant General Counsels of MSDW Advisors and MSDW Services,
Frank Bruttomesso,
8
<PAGE>
LouAnne D. McInnis and Ruth Rossi, Vice Presidents and Assistant General
Counsels of MSDW Advisors and MSDW Services, and Todd Lebo, a staff attorney
with MSDW Advisors, are Assistant Secretaries of the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees consists of nine (9) trustees. These same
individuals also serve as trustees for all of the TCW/DW Funds. As of the date
of this Statement of Additional Information, there are a total of 11 TCW/DW
Funds. As of October 31, 1998, the TCW/DW Funds had total net assets of
approximately $2.9 billion and approximately a quarter of a million
shareholders.
Five Trustees (56% of the total number) have no affiliation or business
connection with TCW Funds Management, Inc. or MSDW Services or any of their
affiliated persons and do not own any stock or other securities issued by MSDW
or TCW, the parent companies of MSDW Services and TCW Funds Management, Inc.,
respectively. These are the "disinterested" or "independent" Trustees. Four of
the five independent Trustees are also Independent Trustees of the Morgan
Stanley Dean Witter Funds.
Law and regulation establish both general guidelines and specific duties
for the Independent Trustees. The TCW/DW Funds seek as Independent Trustees
individuals of distinction and experience in business and finance, government
service or academia; these are people whose advice and counsel are in demand by
others and for whom there is often competition. To accept a position on the
Funds' Boards, such individuals may reject other attractive assignments because
the Funds make substantial demands on their time. Indeed, by serving on the
Funds' Boards, certain Trustees who would otherwise be qualified and in demand
to serve on bank boards would be prohibited by law from doing so.
All of the Independent Trustees serve as members of the Audit Committee.
Three of them also serve as members of the Derivatives Committee. In addition,
two of the Trustees, including one Independent Trustee, serve as members of the
Insurance Committee. During the calendar year ended December 31, 1997, the
Audit Committee, the Derivatives Committee and the Independent Trustees held a
combined total of sixteen meetings.
The Independent Trustees are charged with recommending to the full Board
approval of management, advisory and administration contracts, Rule 12b-1 plans
and distribution and underwriting agreements; continually reviewing Fund
performance; checking on the pricing of portfolio securities, brokerage
commissions, transfer agent costs and performance, and trading among Funds in
the same complex; and approving fidelity bond and related insurance coverage
and allocations, as well as other matters that arise from time to time. The
Independent Trustees are required to select and nominate individuals to fill
any Independent Trustee vacancy on the Board of any Fund that has a Rule 12b-1
plan of distribution. Each of the open-end TCW/DW Funds has such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of such services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; and reviewing the adequacy of the Fund's system of internal
controls.
The Board of each Fund has formed a Derivatives Committee to approve
parameters for and monitor the activities of the Fund with respect to
derivative investments, if any, made by the Fund.
Finally, the Board of each Fund has formed an Insurance Committee to
review and monitor the insurance coverage maintained by the Fund.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL TCW/DW
FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the TCW/DW Funds avoids the duplication
of effort that would arise from having different groups of individuals serving
as Independent Trustees for each of the Funds or even of sub-groups of Funds.
They believe that having the same individuals serve as Independent Trustees of
all the Funds tends to increase their knowledge and expertise regarding matters
which affect the Fund complex generally and enhances their ability to negotiate
9
<PAGE>
on behalf of each Fund with the Fund's service providers. This arrangement also
precludes the possibility of separate groups of Independent Trustees arriving
at conflicting decisions regarding operations and management of the Funds and
avoids the cost and confusion that would likely ensue. Finally, having the same
Independent Trustees serve on all Fund Boards enhances the ability of each Fund
to obtain, at modest cost to each separate Fund, the services of Independent
Trustees of the caliber, experience and business acumen of the individuals who
serve as Independent Trustees of the TCW/DW Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Fund pays each Independent Trustee an annual fee of $2,225 plus a per
meeting fee of $200 for meetings of the Board of Trustees, the Independent
Trustees or Committees of the Board of Trustees attended by the Trustee (the
Fund pays the Chairman of the Audit Committee an additional annual fee of $750).
If a Board meeting and a meeting of the Independent Trustees or a Committee
meeting, or a meeting of the Independent Trustees and/or more than one
Committee meeting, take place on a single day, the Trustees are paid a single
meeting fee by the Fund. The Fund also reimburses such Trustees for travel and
other out-of-pocket expenses incurred by them in connection with attending such
meetings. Trustees and officers of the Fund who are or have been employed by
the Manager or the Adviser or an affiliated company of either receive no
compensation or expense reimbursement from the Fund for their services as
Trustee. Mr. Haire currently serves as Chairman of the Audit Committee. Prior
to June 1, 1998, Mr. Haire also served as Chairman of the Independent Trustees,
for which services the Fund paid him an additional annual fee of $1,200. The
Trustees of the TCW/DW Funds do not have retirement or deferred compensation
plans.
The following table illustrates the compensation paid to the Fund's
Independent Trustees by the Fund for the fiscal year ended October 31, 1998.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- --------------------------- -------------
<S> <C>
John C. Argue ................. $5,456
John R. Haire ................. 6,706
Dr. Manuel H. Johnson ......... 5,256
Michael E. Nugent ............. 5,256
John L. Schroeder ............. 5,456
</TABLE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1997 for services
to the 14 TCW/DW Funds and, in the case of Messrs. Haire, Johnson, Nugent and
Schroeder, the 84 Morgan Stanley Dean Witter Funds that were in operation at
December 31, 1997, and, in the case of Mr. Argue, TCW Galileo Funds, Inc. and
TCW Convertible Securities Fund, Inc. Mr. Haire serves as Chairman of the Audit
Committee of each TCW/DW Fund and each Morgan Stanley Dean Witter Fund and,
prior to June 1, 1998, also served as Chairman of the Independent Directors or
Trustees of those Funds. With respect to Messrs. Haire, Johnson, Nugent and
Schroeder, the Morgan Stanley Dean Witter Funds are included solely because of
a limited exchange privilege between various TCW/DW Funds and five Morgan
Stanley Dean Witter Money Market Funds. With respect to Mr. Argue, TCW Galileo
Funds, Inc. and TCW Convertible Securities Fund, Inc. are included solely
because the Fund's Adviser, TCW Funds Management, Inc., also serves as Adviser
to those investment companies.
10
<PAGE>
CASH COMPENSATION FROM FUND GROUPS
<TABLE>
<CAPTION>
FOR SERVICE
AS DIRECTOR OR
FOR SERVICE AS TRUSTEE AND
TRUSTEE AND COMMITTEE FOR SERVICE AS
COMMITTEE MEMBER DIRECTOR OF
MEMBER OF 84 TCW GALILEO
OF 14 MORGAN STANLEY FUNDS, INC. AND
TCW/DW DEAN WITTER TCW CONVERTIBLE
NAME OF INDEPENDENT TRUSTEE FUNDS FUNDS SECURITIES FUND, INC.
- --------------------------- ----- ----- ---------------------
<S> <C> <C> <C>
John C. Argue ............... $71,125 -- $43,250
John R. Haire ............... 73,725 $149,702 --
Dr. Manuel H. Johnson........ 71,125 145,702 --
Michael E. Nugent ........... 73,725 149,702 --
John L. Schroeder ........... 73,725 149,702 --
<CAPTION>
FOR SERVICE AS
CHAIRMAN OF TOTAL
FOR SERVICES AS INDEPENDENT CASH COMPENSATION
CHAIRMAN OF DIRECTORS/ FOR SERVICES TO
INDEPENDENT TRUSTEES 84 MORGAN STANLEY
TRUSTEES AND AUDIT DEAN WITTER
AND AUDIT COMMITTEES FUNDS, 14
COMMITTEES OF 84 TCW/DW FUNDS,
OF 14 MORGAN STANLEY TCW GALILEO FUNDS, INC.
TCW/DW DEAN WITTER AND TCW CONVERTIBLE
NAME OF INDEPENDENT TRUSTEE FUNDS FUNDS SECURITIES FUND, INC.
- --------------------------- ----- ----- ---------------------
<S> <C> <C> <C>
John C. Argue ............... -- -- $114,375
John R. Haire ............... $25,350 $157,463 406,240
Dr. Manuel H. Johnson........ -- -- 216,827
Michael E. Nugent ........... -- -- 223,427
John L. Schroeder ........... -- -- 223,427
</TABLE>
As of the date of this Statement of Additional Information, 57 of the
Morgan Stanley Dean Witter Funds have adopted a retirement program under which
an Independent Trustee who retires after serving for at least five years (or
such lesser period as may be determined by the Board) as an Independent
Director or Trustee of any Morgan Stanley Dean Witter Fund that has adopted the
retirement program (each such Fund referred to as an "Adopting Fund" and each
such Trustee referred to as an "Eligible Trustee") is entitled to retirement
payments upon reaching the eligible retirement age (normally, after attaining
age 72). Annual payments are based upon length of service. Currently, upon
retirement, each Eligible Trustee is entitled to receive from the Adopting
Fund, commencing as of his or her retirement date and continuing for the
remainder of his or her life, an annual retirement benefit (the "Regular
Benefit") equal to 29.41% of his or her Eligible Compensation plus 0.4901667%
of such Eligible Compensation for each full month of service as an Independent
Director or Trustee of any Adopting Fund in excess of five years up to a
maximumof 58.82% after ten years of service. The foregoing percentages may be
changed by the Board.(1) "Eligible Compensation" is one-fifth of the total
compensation earned by such Eligible Trustee for service to the Adopting Fund
in the five year period prior to the date of the Eligible Trustee's retirement.
Benefits under the retirement program are not secured or funded by the Adopting
Funds.
The following table illustrates the retirement benefits accrued to Messrs.
Haire, Johnson, Nugent and Schroeder by the 57 Morgan Stanley Dean Witter Funds
for the year ended December 31, 1997, and the estimated retirement benefits for
Messrs. Haire, Johnson, Nugent and Schroeder, to commence upon their
retirement, from the 57 Morgan Stanley Dean Witter Funds as of December 31,
1997.
- ----------
(1) An Eligible Trustee may elect alternate payments of his or her retirement
benefits based upon the combined life expectancy of such Eligible Trustee
and his or her spouse on the date of such Eligible Trustee's retirement.
The amount estimated to be payable under this method, through the
remainder of the later of the lives of such Eligible Trustee and spouse,
will be the actuarial equivalent of the Regular Benefit. In addition, the
Eligible Trustee may elect that the surviving spouse's periodic payment
of benefits will be equal to either 50% or 100% of the previous periodic
amount, an election that, respectively, increases or decreases the
previous periodic amount so that the resulting payments will be the
actuarial equivalent of the Regular Benefit.
11
<PAGE>
RETIREMENT BENEFITS FROM ALL MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
CREDITED YEARS ESTIMATED RETIREMENT BENEFITS ANNUAL BENEFITS
OF SERVICE AT PERCENTAGE OF ACCRUED AS EXPENSES UPON RETIREMENT
RETIREMENT ELIGIBLE BY ALL ADOPTING FROM ALL ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUNDS FUNDS(2)
- --------------------------- ------------ ------------ ----- --------
<S> <C> <C> <C> <C>
John R. Haire .................. 10 58.82% $ (19,823)(3) $132,002
Dr. Manuel H. Johnson .......... 10 58.82 12,832 55,026
Michael E. Nugent .............. 10 58.82 22,546 55,026
John L. Schroeder .............. 8 49.02 39,350 46,123
</TABLE>
- ----------
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1)
above.
(3) This number reflects the effect of the extension of Mr. Haire's term as
Director or Trustee until May 1, 1999.
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's
officers and Trustees as a group was less than 1 percent of the Fund's shares
of beneficial interest outstanding.
INVESTMENT PRACTICES AND POLICIES
- --------------------------------------------------------------------------------
Mexican Sovereign Debt. Sovereign Debt differs from debt obligations
issued by private entities in that usually remedies from defaults must be
pursued in the courts of the defaulting party. Legal recourse is therefore
somewhat diminished. Political conditions, in terms of a country or agency's
willingness to meet the terms of its debt obligations, is of considerable
significance. Also, there can be no assurance that the holders of commercial
bank debt may not contest payments to the holders of Sovereign Debt in the
event of default under commercial bank loan agreements.
Sovereign Debt generally offers high yields, reflecting not only perceived
credit risk, but also the need to compete with other local investments in
domestic financial markets. Mexico is among the largest debtors to commercial
banks and foreign governments. A foreign debtor's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the foreign
debtor's policy towards the International Monetary Fund and the political
constraints to which a sovereign debtor may be subject. Mexico may also be
dependent on expected disbursements from foreign governments, multilateral
agencies and others abroad to reduce principal and interest arrearages on their
debt. The commitment on the part of these governments agencies and others to
make such disbursements may be conditioned on its implementation of economic
reforms and/or economic performance and the timely service of its obligations.
Failure to implement such reforms, achieve such levels of economic performance
or repay principal or interest when due, may result in the cancellation of such
third parties' commitments to lend funds to Mexico, which may further impair
its ability or willingness to service its debts.
The ability of the Mexican government to make timely payments on its
Sovereign Debt is likely to be influenced strongly by its balance of trade and
its access to trade and other international credits. In addition, the
occurrence of political, social or diplomatic changes could adversely affect
the Fund's investments. Mexico is faced with social and political issues and
has experienced high rates of inflation in recent years. Among other effects,
high inflation and internal debt service requirements may adversely affect the
cost and availability of future domestic sovereign borrowing to finance
governmental programs, and may have other adverse social, political and
economic consequences. Political changes or a deterioration of Mexico's
domestic economy or balance of trade may affect its willingness to service its
Sovereign Debt. While the Adviser intends to invest the Fund's portfolio in a
manner that will minimize the exposure to the risks of Sovereign Debt
(specifically by limiting the Fund's investments to investment grade securities
with maturities of one year or less), there can be no assurance that adverse
political changes will not cause the Fund to suffer a loss of all or a portion
of interest and/or principal on any of its holdings.
12
<PAGE>
MONEY MARKET SECURITIES
As stated in the Prospectus, the money market instruments which the Fund
may purchase include U.S. Government securities, bank obligations, Eurodollar
certificates of deposit, obligations of savings institutions, fully insured
certificates of deposit and commercial paper. Such securities include:
U.S. Government Securities. Obligations issued or guaranteed as to
principal and interest by the United States or its agencies (such as the
Export-Import Bank of the United States, Federal Housing Administration and
Government National Mortgage Association) or its instrumentalities (such as the
Federal Home Loan Bank), including Treasury bills, notes and bonds;
Bank Obligations. Obligations (including certificates of deposit, bankers'
acceptances, commercial paper (see below) and other debt obligations) of banks
subject to regulation by the U.S. Government and having total assets of $1
billion or more, and instruments secured by such obligations, not including
obligations of foreign branches of domestic banks except as permitted below;
Eurodollar Certificates of Deposit. Eurodollar certificates of deposit
issued by foreign branches of domestic banks having total assets of $1 billion
or more (investments in Eurodollar certificates may be affected by changes in
currency rates or exchange control regulations, or changes in governmental
administration or economic or monetary policy in the United States and abroad);
Obligations of Savings Institutions. Certificates of deposit of savings
banks and savings and loan associations, having total assets of $1 billion or
more (investments in savings institutions above $100,000 in principal amount
are not protected by federal deposit insurance);
Fully Insured Certificates of Deposit. Certificates of deposit of banks
and savings institutions, having total assets of less than $1 billion, if the
principal amount of the obligation is insured by the Bank Insurance Fund or the
Savings Association Insurance Fund (each of which is administered by the
Federal Deposit Insurance Corporation), limited to $100,000 principal amount
per certificate and to 15% or less of the Fund's total assets in all such
obligations and in all illiquid assets, in the aggregate;
Commercial Paper. Commercial paper rated within the two highest grades by
Standard & Poor's Corporation or Moody's Investors Service, Inc. or, if not
rated, issued by a company having an outstanding debt issue rated at least AAA
by Standard & Poor's or Aaa by Moody's.
MORTGAGE-BACKED SECURITIES
As stated in the Prospectus, the Fund may invest a portion of its assets
in securities that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans secured by real property
("Mortgage-Backed Securities"). The Fund will invest in mortgage pass-through
securities representing participation interests in pools of residential
mortgage loans originated by United States governmental or private lenders and
guaranteed, to the extent provided in such securities, by the United States
Government or one of its agencies or instrumentalities. Such securities, which
are ownership interests in the underlying mortgage loans, differ from
conventional debt securities, which provide for periodic payment of interest in
fixed amounts (usually semi-annually) and principal payments at maturity or on
specified call dates. Mortgage pass-through securities provide for monthly
payments that are a "pass-through" of the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans, net of any fees paid to the guarantor of such securities
and the servicer of the underlying mortgage loans.
Certificates for Mortgage-Backed Securities evidence an interest in a
specific pool of mortgages. These certificates are, in most cases, "modified
pass-through" instruments, wherein the issuing agency guarantees the payment of
principal and interest on mortgages underlying the certificates, whether or not
such amounts are collected by the issuer on the underlying mortgages.
Private Mortgage Pass-Through Securities. Private mortgage pass-through
securities are issued by originators of and investors in mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. These
securities usually are backed by a pool of conventional fixed rate or
adjustable rate mortgage loans. Since private mortgage pass-through securities
typically are not guaranteed by a governmental entity, such securities
generally are structured with one or more types of credit enhancement.
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Adjustable Rate Mortgage Securities. As stated in the Prospectus, the Fund
may also invest in adjustable rate mortgage securities ("ARMs"), which are
pass-through mortgage securities collateralized by mortgages with adjustable
rather than fixed rates. ARMs eligible for inclusion in a mortgage pool
generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve or thirteen, twenty-four, thirty-six or longer
scheduled monthly payments. Thereafter, the interest rates are subject to
periodic adjustment based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest
rate may not vary over the lifetime of the security. In addition, certain ARMs
provide for additional limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. Alternatively,
certain ARMs contain limitations on changes in the required monthly payment. In
the event that a monthly payment is not sufficient to pay the interest accruing
on an ARM, any such excess interest is added to the principal balance of the
mortgage loan, which is repaid through future monthly payments. If the monthly
payment for such an instrument exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment required at such
point to amortize the outstanding principal balance over the remaining term of
the loan, the excess is utilized to reduce the then outstanding principal
balance of the ARM.
Types of Credit Enhancement. Mortgage-Backed Securities are often backed
by a pool of assets representing the obligations of a number of different
parties. To lessen the effect of failures by obligors on underlying assets to
make payments, those securities may contain elements of credit support, which
fall into two categories: (i) liquidity protection and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from default ensures ultimate payment of the obligations on at least
a portion of the assets in the pool. This protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. The degree of credit
support provided for each issue is generally based on historical information
regarding the level of credit risk associated with the underlying assets.
Delinquencies or losses in excess of those anticipated could adversely affect
the return on an investment in a security. In addition, any circumstance
adversely affecting the ability of third parties, such as insurance companies,
to satisfy any of their obligations with respect to any Mortgage-Backed
Securities, such as a diminishment of their creditworthiness, could affect the
rating, and thus the value, of the securities. The Fund will not pay any fees
for credit support, although the existence of credit support may increase the
price of a security.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
As discussed in the Prospectus, the Fund may enter into forward foreign
currency exchange contracts ("forward contracts") as a hedge against
fluctuations in future foreign exchange rates. The Fund will conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. A
forward contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial and investment banks) and
their customers. Such forward contracts will only be entered into with United
States banks and their foreign branches or foreign banks whose assets total $1
billion or more. A forward contract generally has no deposit requirement, and
no commissions are charged at any stage for trades.
The Fund will enter into forward contracts under various circumstances.
When the Fund enters into a contract for the purchase or sale of a security
denominated in either the Canadian dollar or Mexican peso ("foreign currency"),
it may, for example, desire to "lock in" the price of the security in U.S.
dollars, Canadian dollars or Mexican pesos. By entering into a forward contract
for the purchase or sale, for a fixed amount of dollars or other currency, of
the amount of foreign currency involved in the underlying security
transactions, the Fund will be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar or
other currency which is being used for the security purchase and the foreign
currency in which the security is denominated during the period between the
date on which the security is purchased or sold and the date on which payment
is made or received.
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At other times, when, for example, the Adviser believes that the Canadian
dollar or Mexican peso may suffer a substantial decline against the U.S. dollar
or some other foreign currency, the Fund may enter into a forward contract to
sell, for a fixed amount of U.S. dollars, the amount of that currency
approximating the value of some or all of the Fund's portfolio securities (or
securities which the Fund has purchased for its portfolio) denominated in such
foreign currency.
In addition, when the Adviser anticipates purchasing securities at some
time in the future, and wishes to lock in the current exchange rate of the
currency in which those securities are denominated against the U.S. dollar, the
Fund may enter into a forward contract to purchase an amount of currency equal
to some or all of the value of the anticipated purchase, for a fixed amount of
U.S. dollars.
Finally, the Fund is permitted to enter into forward contracts with
respect to currencies in which certain of its portfolio securities are
denominated and on which options have been written (see "Options and Futures
Transactions," below).
The Fund will not enter into such forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of Canadian dollars or Mexican pesos in
excess of the value of the Fund's portfolio securities or other assets
denominated in that currency. The Fund's custodian bank will place cash, U.S.
Government securities or other appropriate liquid portfolio securities in a
segregated account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of forward contracts entered into
under the circumstances set forth above. If the value of the securities placed
in the segregated account declines, additional cash or securities will be
placed in the account on a daily basis so that the value of the account will
equal the amount of the Fund's commitments with respect to such contracts.
Where, for example, the Fund is hedging a portfolio position consisting of
foreign fixed-income securities denominated in the Canadian dollar or Mexican
peso against adverse exchange rate moves vis-a-vis the U.S. dollar, at the
maturity of the forward contract for delivery by the Fund of the Canadian
dollar or Mexican peso, the Fund may either sell the portfolio security and
make delivery of the foreign currency, or it may retain the security and
terminate its contractual obligation to deliver the Canadian dollar or Mexican
peso by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
Canadian dollar or Mexican peso. It is impossible to forecast the market value
of portfolio securities at the expiration of the contract. Accordingly, it may
be necessary for the Fund to purchase additional Canadian dollars or Mexican
pesos on the spot market (and bear the expense of such purchase) if the market
value of the security is less than the amount of foreign currency the Fund is
obligated to deliver and if a decision is made to sell the security and make
delivery of the Canadian dollars or Mexican pesos. Conversely, it may be
necessary to sell on the spot market some of the Canadian dollars or Mexican
pesos received upon the sale of the portfolio securities if its market value
exceeds the amount of Canadian dollars or Mexican pesos the Fund is obligated
to deliver.
If the Fund retains the portfolio securities and engages in an offsetting
transaction, the Fund will incur a gain or loss to the extent that there has
been movement in spot or forward contract prices. If the Fund engages in an
offsetting transaction, it may subsequently enter into a new forward contract
to sell the foreign currency. Should forward prices decline during the period
between the Fund's entering into a forward contract for the sale of Canadian
dollars or Mexican pesos and the date it enters into an offsetting contract for
the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
If the Fund purchases a fixed-income security which is denominated in U.S.
dollars but which will pay out its principal based upon a formula tied to the
exchange rate between the U.S. dollar and the Canadian dollar or Mexican peso,
it may hedge against a decline in the principal value of the security by
entering into a forward contract to sell or purchase an amount of the relevant
foreign currency equal to some or all of the principal value of the security.
At times when the Fund has written a call or put option on a fixed-income
security or the currency in which it is denominated, it may wish to enter into
a forward contract to purchase or sell the foreign currency in which the
security is denominated. A forward contract would, for example, hedge the risk
of the security on which a call
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currency option has been written declining in value to a greater extent than
the value of the premium received for the option. The Fund will maintain with
its Custodian at all times, cash, U.S. Government securities or other
appropriate liquid portfolio securities in a segregated account equal in value
to all forward contract obligations and option contract obligations entered
into in hedge situations such as this.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of Canadian dollars and Mexican pesos
into U.S. dollars on a daily basis. It will, however, do so from time to time,
and investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the spread between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Fund at one rate, while offering a lesser rate of exchange should the
Fund desire to resell that currency to the dealer.
The Fund generally will not enter into a forward contract with a term of
greater than one year, although it may enter into forward contracts for periods
of up to five years. The Fund may be limited in its ability to enter into
hedging transactions involving forward contracts by the Internal Revenue Code
requirements relating to qualifications as a regulated investment company (see
"Dividends, Distributions and Taxes").
OPTIONS AND FUTURES TRANSACTIONS
As discussed in the Prospectus, the Fund may write covered call options
against securities held in its portfolio and covered put options on eligible
portfolio securities and purchase options of the same series to effect closing
transactions, and may hedge against potential changes in the market value of
its investments (or anticipated investments) by purchasing put and call options
on portfolio (or eligible portfolio) securities (and the currencies in which
they are denominated) and engaging in transactions involving futures contracts
and options on such contracts.
Call and put options on U.S. Treasury notes, bonds and bills and on
various foreign currencies are listed on several U.S. and foreign securities
exchanges and are written in over-the-counter transactions ("OTC Options").
Listed options are issued or guaranteed by the exchange on which they trade or
by a clearing corporation such as the Options Clearing Corporation ("OCC").
Ownership of a listed call option gives the Fund the right to buy from the OCC
(in the U.S.) or other clearing corporation or exchange, the underlying
security or currency covered by the option at the stated exercise price (the
price per unit of the underlying security or currency) by filing an exercise
notice prior to the expiration date of the option. The writer (seller) of the
option would then have the obligation to sell, to the OCC (in the U.S.) or
other clearing corporation or exchange, the underlying security or currency at
that exercise price prior to the expiration date of the option, regardless of
its then current market price. Ownership of a listed put option would give the
Fund the right to sell the underlying security or currency to the OCC (in the
U.S.) or other clearing corporation or exchange at the stated exercise price.
Upon notice of exercise of the put option, the writer of the option would have
the obligation to purchase the underlying security or currency from the OCC (in
the U.S.) or other clearing corporation or exchange at the exercise price.
Options on Treasury Bonds and Notes. Because trading interest in options
written on Treasury bonds and notes tends to center on the most recently
auctioned issues, the exchanges on which such securities trade will not
continue indefinitely to introduce options with new expirations to replace
expiring options on particular issues. Instead, the expirations introduced at
the commencement of options trading on a particular issue will be allowed to
run their course, with the possible addition of a limited number of new
expirations as the original ones expire. Options trading on each issue of bonds
or notes will thus be phased out as new options are listed on more recent
issues, and options representing a full range of expirations will not
ordinarily be available for every issue on which options are traded.
Options on Treasury Bills. Because a deliverable Treasury bill changes
from week to week, writers of Treasury bill calls cannot provide in advance for
their potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of
the option, the position may be hedged from a risk standpoint by the writing of
a call option. For so long as the call option is outstanding, the Fund will
hold the Treasury bills in a segregated account with its Custodian, so that
they will be treated as being covered.
Options on GNMA Certificates. Currently, options on GNMA Certificates are
only traded over-the-counter. Since the remaining principal balance of GNMA
Certificates declines each month as a result of mortgage
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payments, the Fund, as a writer of a GNMA call holding GNMA Certificates as
"cover" to satisfy its delivery obligation in the event of exercise, may find
that the GNMA Certificates it holds no longer have a sufficient remaining
principal balance for this purpose. Should this occur, the Fund will purchase
additional GNMA Certificates from the same pool (if obtainable) or replacement
GNMA Certificates in the cash market in order to maintain its cover. A GNMA
Certificate held by the Fund to cover an option position in any but the nearest
expiration month may cease to represent cover for the option in the event of a
decline in the GNMA coupon rate at which new pools are originated under the
FHA/VA loan ceiling in effect at any given time, as such decline may increase
the prepayments made on other mortgage pools. If this should occur, the Fund
will no longer be covered, and the Fund will either enter into a closing
purchase transaction or replace such Certificate with a Certificate which
represents cover. When the Fund closes out its position or replaces such
Certificate, it may realize an unanticipated loss and incur transaction costs.
Options on Foreign Currencies. The Fund may purchase and write options on
foreign currencies for purposes similar to those involved with investing in
forward foreign currency exchange contracts. For example, in order to protect
against declines in the dollar value of portfolio securities which are
denominated in a foreign currency, the Fund may purchase put options on an
amount of such foreign currency equivalent to the current value of the
portfolio securities involved. As a result, the Fund would be enabled to sell
the foreign currency for a fixed amount of U.S. dollars, thereby "locking in"
the dollar value of the portfolio securities (less the amount of the premiums
paid for the options). Conversely, the Fund may purchase call options on
foreign currencies in which securities it anticipates purchasing are
denominated to secure a set U.S. dollar price for such securities and protect
against a decline in the value of the U.S. dollar against such foreign
currency. The Fund may also purchase call and put options to close out written
option positions.
The Fund may also write call options on foreign currency to protect
against potential declines in its portfolio securities which are denominated in
foreign currencies. If the U.S. dollar value of the portfolio securities falls
as a result of a decline in the exchange rate between the foreign currency in
which it is denominated and the U.S. dollar, then a loss to the Fund occasioned
by such value decline would be ameliorated by receipt of the premium on the
option sold. At the same time, however, the Fund gives up the benefit of any
rise in value of the relevant portfolio securities above the exercise price of
the option and, in fact, only receives a benefit from the writing of the option
to the extent that the value of the portfolio securities falls below the price
of the premium received. The Fund may also write options to close out long call
option positions. A put option on a foreign currency would be written by the
Fund for the same reason it would purchase a call option, namely, to hedge
against an increase in the U.S. dollar value of a foreign security which the
Fund anticipates purchasing. Here, the receipt of the premium would offset, to
the extent of the size of the premium, any increased cost to the Fund resulting
from an increase in the U.S. dollar value of the foreign security. However, the
Fund could not benefit from any decline in the cost of the foreign security
which is greater than the price of the premium received. The Fund may also
write options to close out long put and call option positions.
The markets in foreign currency options are relatively new and the Fund's
ability to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. Although the Fund will not purchase
or write such options unless and until, in the opinion of the Adviser, the
market for them has developed sufficiently to ensure that the risks in
connection with such options are not greater than the risks in connection with
the underlying currency, there can be no assurance that a liquid secondary
market will exist for a particular option at any specific time. In addition,
options on foreign currencies are affected by all of those factors which
influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and have no relationship to the investment merits of a foreign security,
including foreign securities held in a "hedged" investment portfolio. Because
foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in
an odd lot market (generally consisting of transactions of less than $1
million) for the underlying foreign currencies at prices that are less
favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
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information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the
extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may
take place in the underlying markets that are not reflected in the options
market.
OTC Options. Exchange-listed options are issued by the OCC (in the U.S.)
or other clearing corporation or exchange which assures that all transactions
in such options are properly executed. OTC options are purchased from or sold
(written) to dealers or financial institutions which have entered into direct
agreements with the Fund. With OTC options, such variables as expiration date,
exercise price and premium will be agreed upon between the Fund and the
transacting dealer, without the intermediation of a third party such as the
OCC. If the transacting dealer fails to make or take delivery of the securities
or amount of foreign currency underlying an option it has written, in
accordance with the terms of that option, the Fund would lose the premium paid
for the option as well as any anticipated benefit of the transaction. The Fund
will engage in OTC option transactions only with member banks of the Federal
Reserve System or primary dealers in U.S. Government securities or with
affiliates of such banks or dealers which have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least $50
million.
Covered Call Writing. As stated in the Prospectus, the Fund is permitted
to write covered call options on portfolio securities and on the U.S. Dollar
and foreign currencies in which they are denominated, without limit, in order
to aid in achieving its investment objectives. Generally, a call option is
"covered" if the Fund owns, or has the right to acquire, without additional
cash consideration (or for additional cash consideration held for the Fund by
its Custodian in a segregated account) the underlying security (currency)
subject to the option except that in the case of call options on U.S. Treasury
Bills, the Fund might own U.S. Treasury Bills of a different series from those
underlying the call option, but with a principal amount and value corresponding
to the exercise price and a maturity date no later than that of the security
(currency) deliverable under the call option. A call option is also covered if
the Fund holds a call on the same security as the underlying security
(currency) of the written option, where the exercise price of the call used for
coverage is equal to or less than the exercise price of the call written or
greater than the exercise price of the call written if the mark to market
difference is maintained by the Fund in cash, U.S. Government securities or
other liquid portfolio securities which the Fund holds in a segregated account
maintained with its Custodian.
The Fund will receive from the purchaser, in return for a call it has
written, a "premium"; i.e., the price of the option. Receipt of these premiums
may better enable the Fund to earn a higher level of current income than it
would earn from holding the underlying securities (currencies) alone. Moreover,
the premium received will offset a portion of the potential loss incurred by
the Fund if the securities (currencies) underlying the option are ultimately
sold (exchanged) by the Fund at a loss. Furthermore, a premium received on a
call written on a foreign currency will ameliorate any potential loss of value
on the portfolio security due to a decline in the value of the currency.
However, during the option period, the covered call writer has, in return for
the premium on the option, given up the opportunity for capital appreciation
above the exercise price should the market price of the underlying security (or
the exchange rate of the currency in which it is denominated) increase, but has
retained the risk of loss should the price of the underlying security (or the
exchange rate of the currency in which it is denominated) decline. The premium
received will fluctuate with varying economic market conditions. If the market
value of the portfolio securities (or the currencies in which they are
denominated) upon which call options have been written increases, the Fund may
receive a lower total return from the portion of its portfolio upon which calls
have been written than it would have had such calls not been written.
As regards listed options and certain OTC options, during the option
period, the Fund may be required, at any time, to deliver the underlying
security (currency) against payment of the exercise price on any calls it has
written (exercise of certain listed and OTC options may be limited to specific
expiration dates). This obligation is terminated upon the expiration of the
option period or at such earlier time when the writer effects a closing
purchase transaction. A closing purchase transaction is accomplished by
purchasing an option of the same series as the option previously written.
However, once the Fund has been assigned an exercise notice, the Fund will be
unable to effect a closing purchase transaction.
Closing purchase transactions are ordinarily effected to realize a profit
on an outstanding call option, to prevent an underlying security (currency)
from being called, to permit the sale of an underlying security (or the
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exchange of the underlying currency) or to enable the Fund to write another
call option on the underlying security (currency) with either a different
exercise price or expiration date or both. The Fund may realize a net gain or
loss from a closing purchase transaction depending upon whether the amount of
the premium received on the call option is more or less than the cost of
effecting the closing purchase transaction. Any loss incurred in a closing
purchase transaction may be wholly or partially offset by unrealized
appreciation in the market value of the underlying security (currency).
Conversely, a gain resulting from a closing purchase transaction could be
offset in whole or in part or exceeded by a decline in the market value of the
underlying security (currency).
If a call option expires unexercised, the Fund realizes a gain in the
amount of the premium on the option less the commission paid. Such a gain,
however, may be offset by depreciation in the market value of the underlying
security (currency) during the option period. If a call option is exercised,
the Fund realizes a gain or loss from the sale of the underlying security
(currency) equal to the difference between the purchase price of the underlying
security (currency) and the proceeds of the sale of the security (currency)
plus the premium received on the option less the commission paid.
Options written by the Fund will normally have expiration dates of up to
eighteen months from the date written. The exercise price of a call option may
be below, equal to or above the current market value of the underlying security
at the time the option is written. See "Risks of Transactions in Futures
Contracts and Related Options," below.
Covered Put Writing. As a writer of a covered put option, the Fund incurs
an obligation to buy the security underlying the option from the purchaser of
the put, at the option's exercise price at any time during the option period,
at the purchaser's election (certain listed and OTC put options written by the
Fund will be exercisable by the purchaser only on a specific date). A put is
"covered" if, at all times, the Fund maintains, in a segregated account
maintained on its behalf at the Fund's Custodian, cash, U.S. Government
Securities or other liquid portfolio securities in an amount equal to at least
the exercise price of the option, at all times during the option period.
Similarly, a short put position could be covered by the Fund by its purchase of
a put option on the same security (currency) as the underlying security of the
written option, where the exercise price of the purchased option is equal to or
more than the exercise price of the put written or less than the exercise price
of the put written if the marked to market difference is maintained by the Fund
in cash, U.S. Government Securities or other liquid portfolio securities which
the Fund holds in a segregated account maintained at its Custodian. In writing
puts, the Fund assumes the risk of loss should the market value of the
underlying security (currency) decline below the exercise price of the option
(any loss being decreased by the receipt of the premium on the option written).
In the case of listed options, during the option period, the Fund may be
required, at any time, to make payment of the exercise price against delivery
of the underlying security (currency). The operation of and limitations on
covered put options in other respects are substantially identical to those of
call options.
The Fund will write put options for three purposes: (1) to receive the
income derived from the premiums paid by purchasers; (2) when the Adviser
wishes to purchase the security (or a security denominated in the currency
underlying the option) underlying the option at a price lower than its current
market price, in which case it will write the covered put at an exercise price
reflecting the lower purchase price sought; and (3) to close out a long put
option position. The potential gain on a covered put option is limited to the
premium received on the option (less the commissions paid on the transaction)
while the potential loss equals the differences between the exercise price of
the option and the current market price of the underlying securities
(currencies) when the put is exercised, offset by the premium received (less
the commissions paid on the transaction).
Purchasing Call and Put Options. As stated in the Prospectus, the Fund may
purchase listed and OTC call and put options in amounts equalling up to 5% of
its total assets. The Fund may purchase a call option in order to close out a
covered call position (see "Covered Call Writing" above), to protect against an
increase in price of a security it anticipates purchasing or, in the case of a
call option on foreign currency, to hedge against an adverse exchange rate move
of the currency in which the security it anticipates purchasing is denominated
vis-a-vis the currency in which the exercise price is denominated. The purchase
of the call option to effect a closing transaction on a call written
over-the-counter may be a listed or an OTC option. In either case, the call
purchased is likely to be on the same securities (currencies) and have the same
terms as the written option. If purchased over-the-counter, the option would
generally be acquired from the dealer or financial institution which purchased
the call written by the Fund.
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The Fund may purchase put options on securities (currencies) which it
holds in its portfolio to protect itself against a decline in the value of the
security and to close out written put option positions. If the value of the
underlying security (currency) were to fall below the exercise price of the put
purchased in an amount greater than the premium paid for the option, the Fund
would incur no additional loss. In addition, the Fund may sell a put option
which it has previously purchased prior to the sale of the securities
(currencies) underlying such option. Such a sale would result in a net gain or
loss depending on whether the amount received on the sale is more or less than
the premium and other transaction costs paid on the put option which is sold.
And such gain or loss could be offset in whole or in part by a change in the
market value of the underlying security (currency). If a put option purchased
by the Fund expired without being sold or exercised, the premium would be lost.
Risks of Options Transactions. During the option period, the covered call
writer has, in return for the premium on the option, given up the opportunity
for capital appreciation above the exercise price should the market price of
the underlying security (or the value of its denominated currency) increase,
but has retained the risk of loss should the price of the underlying security
(or the value of its denominated currency) decline. The writer has no control
over the time when it may be required to fulfill its obligation as a writer of
the option. Once an option writer has received an exercise notice, it cannot
effect a closing purchase transaction in order to terminate its obligation
under the option and must deliver or receive the underlying securities at the
exercise price.
Prior to exercise or expiration, an option position can only be terminated
by entering into a closing purchase or sale transaction. If a covered call
option writer is unable to effect a closing purchase transaction or to purchase
an offsetting OTC option, it cannot sell the underlying security until the
option expires or the option is exercised. Accordingly, a covered call option
writer may not be able to sell an underlying security at a time when it might
otherwise be advantageous to do so. A secured put option writer who is unable
to effect a closing purchase transaction or to purchase an offsetting OTC
option would continue to bear the risk of decline in the market price of the
underlying security until the option expires or is exercised. In addition, a
secured put writer would be unable to utilize the amount held in cash or U.S.
Government or other liquid portfolio securities as security for the put option
for other investment purposes until the exercise or expiration of the option.
The Fund's ability to close out its position as a writer of an option is
dependent upon the existence of a liquid secondary market on Option Exchanges.
There is no assurance that such a market will exist, particularly in the case
of OTC options, as such options will generally only be closed out by entering
into a closing purchase transaction with the purchasing dealer. However, the
Fund may be able to purchase an offsetting option which does not close out its
position as a writer but constitutes an asset of equal value to the obligation
under the option written. If the Fund is not able to either enter into a
closing purchase transaction or purchase an offsetting position, it will be
required to maintain the securities subject to the call, or the collateral
underlying the put, even though it might not be advantageous to do so, until a
closing transaction can be entered into (or the option is exercised or
expires).
Among the possible reasons for the absence of a liquid secondary market on
an Exchange are: (i) insufficient trading interest in certain options; (ii)
restrictions on transactions imposed by an Exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (iv) interruption of the normal
operations on an Exchange; (v) inadequacy of the facilities of an Exchange or
the OCC to handle current trading volume; or (vi) a decision by one or more
Exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the OCC as a result of trades
on that Exchange would generally continue to be exercisable in accordance with
their terms.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in options, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by the Fund,
the Fund could experience a loss of all or part of the value of the option.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the Fund's management.
Each of the Exchanges has established limitations governing the maximum
number of options on the same underlying security or futures contract (whether
or not covered) which may be written by a single investor, whether acting alone
or in concert with others (regardless of whether such options are written on
the same or
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different Exchanges or are held or written on one or more accounts or through
one or more brokers). An Exchange may order the liquidation of positions found
to be in violation of these limits and it may impose other sanctions or
restrictions. These position limits may restrict the number of listed options
which the Fund may write.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be
reflected in the option markets.
The extent to which the Fund may enter into transactions involving options
may be limited by the Internal Revenue Code's requirements for qualification as
a regulated investment company and the Fund's intention to qualify as such (see
"Dividends, Distributions and Taxes").
Futures Contracts. As stated in the Prospectus, the Fund may purchase and
sell interest rate, currency, and index futures contracts ("futures
contracts"), that are traded on U.S. and foreign commodity exchanges, on such
underlying securities as U.S. Treasury bonds, notes and bills and/or any
foreign government fixed-income security ("interest rate" futures), on various
currencies ("currency futures") and on such indexes of U.S. and foreign
securities as may exist or come into being ("index" futures).
The Fund will purchase or sell interest rate futures contracts for the
purpose of hedging some or all of the value of its portfolio securities (or
anticipated portfolio securities) against changes in prevailing interest rates.
If the Adviser anticipates that interest rates may rise and, concomitantly, the
price of certain of its portfolio securities fall, the Fund may sell an
interest rate futures contract. If declining interest rates are anticipated,
the Fund may purchase an interest rate futures contract to protect against a
potential increase in the price of securities the Fund intends to purchase.
Subsequently, appropriate securities may be purchased by the Fund in an orderly
fashion; as securities are purchased, corresponding futures positions would be
terminated by offsetting sales of contracts.
The Fund will purchase or sell index futures contracts for the purpose of
hedging some or all of its portfolio (or anticipated portfolio) securities
against changes in their prices. If the Adviser anticipates that the prices of
securities held by the Fund may fall, the Fund may sell an index futures
contract. Conversely, if the Fund wishes to hedge against anticipated price
rises in those securities which the Fund intends to purchase, the Fund may
purchase an index futures contract.
The Fund will purchase or sell currency futures on currencies in which its
portfolio securities (or anticipated portfolio securities) are denominated for
the purposes of hedging against anticipated changes in currency exchange rates.
The Fund will enter into currency futures contracts for the same reasons as set
forth above for entering into forward foreign currency contracts; namely, to
"lock-in" the value of a security purchased or sold in a given currency
vis-a-vis a different currency or to hedge against an adverse currency exchange
rate movement of a portfolio security's (or anticipated portfolio security's)
denominated currency vis-a-vis a different currency.
In addition to the above, interest rate, index and currency futures will
be bought or sold in order to close out a short or long position maintained by
the Fund in a corresponding futures contract.
Although most interest rate futures contracts call for actual delivery or
acceptance of securities, the contracts usually are closed out before the
settlement date without the making or taking of delivery. A futures contract
sale is closed out by effecting a futures contract purchase for the same
aggregate amount of the specific type of security (currency) and the same
delivery date. If the sale price exceeds the offsetting purchase price, the
seller would be paid the difference and would realize a gain. If the offsetting
purchase price exceeds the sale price, the seller would pay the difference and
would realize a loss. Similarly, a futures contract purchase is closed out by
effecting a futures contract sale for the same aggregate amount of the specific
type of security (currency) and the same delivery date. If the offsetting sale
price exceeds the purchase price, the purchaser would realize a gain, whereas
if the purchase price exceeds the offsetting sale price, the purchaser would
realize a loss. There is no assurance that the Fund will be able to enter into
a closing transaction.
Interest Rate Futures Contracts. When the Fund enters into an interest
rate futures contract, it is initially required to deposit with the Fund's
Custodian, in a segregated account in the name of the broker performing the
transaction, an "initial margin" of cash or U.S. Government securities or other
liquid portfolio securities equal to approximately 2% of the contract amount.
Initial margin requirements are established by the Exchanges on which futures
contracts trade and may, from time to time, change. In addition, brokers may
establish margin deposit requirements in excess of those required by the
Exchanges.
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Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing
of funds by a brokers' client but is, rather, a good faith deposit on the
futures contract which will be returned to the Fund upon the proper termination
of the futures contract. The margin deposits made are marked-to-market daily
and the Fund may be required to make subsequent deposits of cash or U.S.
Government Securities called "variation margin," with the Fund's futures
contract clearing broker, which are reflective of price fluctuations in the
futures contract. Currently, interest rate futures contracts can be purchased
on debt securities such as U.S. Treasury Bills and Bonds, U.S. Treasury Notes
with maturities between 6 1/2 and 10 years, GNMA Certificates and Bank
Certificates of Deposit.
Currency Futures. Generally, foreign currency futures provide for the
delivery of a specified amount of a given currency, on the exercise date, for a
set exercise price denominated in U.S. dollars or other currency. Foreign
currency futures contracts would be entered into for the same reason and under
the same circumstances as forward foreign currency exchange contracts. The
Adviser will assess such factors as cost spreads, liquidity and transaction
costs in determining whether to utilize futures contracts or forward contracts
in its foreign currency transactions and hedging strategy. Currently, currency
futures exist for, among other foreign currencies, Canadian dollars.
Purchasers and sellers of foreign currency futures contracts are subject
to the same risks that apply to the buying and selling of futures generally. In
addition, there are risks associated with foreign currency futures contracts
and their use as a hedging device similar to those associated with options on
foreign currencies described above. Further, settlement of a foreign currency
futures contract must occur within the country issuing the underlying currency.
Thus, the Fund must accept or make delivery of the underlying foreign currency
in accordance with any U.S. or foreign restrictions or regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and may be
required to pay any fees, taxes or charges associated with such delivery which
are assessed in the issuing country.
Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures contracts is
relatively new. The ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary market. To reduce
this risk, the Fund will not purchase or write options on foreign currency
futures contracts unless and until, in the Adviser's opinion, the market for
such options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with transactions in the
underlying foreign currency futures contracts.
Index Futures Contracts. As discussed in the Prospectus, the Fund may
invest in index futures contracts. An index futures contract sale creates an
obligation by the Fund, as seller, to deliver cash at a specified future time.
An index futures contract purchase would create an obligation by the Fund, as
purchaser, to take delivery of cash at a specified future time. Futures
contracts on indexes do not require the physical delivery of securities, but
provide for a final cash settlement on the expiration date which reflects
accumulated profits and losses credited or debited to each party's account.
The Fund is required to maintain margin deposits with brokerage firms
through which it effects index futures contracts in a manner similar to that
described above for interest rate futures contracts. In addition, due to
current industry practice, daily variations in gains and losses on open
contracts are required to be reflected in cash in the form of variation margin
payments. The Fund may be required to make additional margin payments during
the term of the contract.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will operate
to terminate the Fund's position in the futures contract. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund and the Fund realizes a loss or gain.
Options on Futures Contracts. The Fund may purchase and write call and put
options on futures contracts which are traded on an exchange and enter into
closing transactions with respect to such options to terminate an existing
position. An option on a futures contract gives the purchaser the right (in
return for the premium paid) to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put)
at a specified exercise price at any time during the term of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option is accompanied by delivery
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of the accumulated balance in the writer's futures margin account, which
represents the amount by which the market price of the futures contract at the
time of exercise exceeds, in the case of a call, or is less than, in the case
of a put, the exercise price of the option on the futures contract.
The Fund will purchase and write options on futures contracts for
identical purposes to those set forth above for the purchase of a futures
contract (purchase of a call option or sale of a put option) and the sale of a
futures contract (purchase of a put option or sale of a call option), or to
close out a long or short position in futures contracts. If, for example, the
Adviser wished to protect against an increase in interest rates and the
resulting negative impact on the value of a portion of its fixed-income
portfolio, it might write a call option on an interest rate futures contract,
the underlying security of which correlates with the portion of the portfolio
the Adviser seeks to hedge. Any premiums received in the writing of options on
futures contracts may, of course, provide a further hedge against losses
resulting from price declines in portions of the Fund's portfolio.
Limitations on Futures Contracts and Options on Futures. The Fund may not
enter into futures contracts or purchase related options thereon if,
immediately thereafter, the amount committed to margin plus the amount paid for
premiums for unexpired options on futures contracts exceeds 5% of the value of
the Fund's total assets, after taking into account unrealized gains and
unrealized losses on such contracts it has entered into, provided, however,
that in the case of an option that is in-the-money (the exercise price of the
call (put) option is less (more) than the market price of the underlying
security) at the time of purchase, the in-the-money amount may be excluded in
calculating the 5%. However, there is no overall limitation on the percentage
of the Fund's assets which may be subject to a hedge position. Except as
described above, there are no other limitations on the use of futures and
options thereon by the Fund.
The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an
option on a futures contract are included in initial margin deposits.
Risks of Transactions in Futures Contracts and Related Options. As stated
in the Prospectus, the Fund may sell a futures contract to protect against the
decline in the value of securities (or the currency in which they are
denominated) held by the Fund. However, it is possible that the futures market
may advance and the value of securities (or the currency in which they are
denominated) held in the portfolio of the Fund may decline. If this occurred,
the Fund would lose money on the futures contract and also experience a decline
in value of its portfolio securities. However, while this could occur for a
very brief period or to a very small degree, over time the value of a
diversified portfolio will tend to move in the same direction as the futures
contracts.
If the Fund purchases a futures contract to hedge against the increase in
value of securities it intends to buy (or the currency in which they are
denominated), and the value of such securities (currencies) decreases, then the
Fund may determine not to invest in the securities as planned and will realize
a loss on the futures contract that is not offset by a reduction in the price
of the securities.
If the Fund has sold a call option on a futures contract, it will cover
this position by holding, in a segregated account maintained at its Custodian,
cash, U.S. Government Securities or other liquid portfolio securities equal in
value (when added to any initial or variation margin on deposit) to the market
value of the securities (currencies) underlying the futures contract or the
exercise price of the option. Such a position may also be covered by owning the
securities (currencies) underlying the futures contract, or by holding a call
option permitting the Fund to purchase the same contract at a price no higher
than the price at which the short position was established.
In addition, if the Fund holds a long position in a futures contract it
will hold cash, U.S. Government Securities or other liquid portfolio securities
equal to the purchase price of the contract (less the amount of initial or
variation margin on deposit) in a segregated account maintained for the Fund by
its Custodian. Alternatively, the Fund could cover its long position by
purchasing a put option on the same futures contract with an exercise price as
high or higher than the price of the contract held by the Fund.
Exchanges limit the amount by which the price of a futures contract may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased. In the event of adverse price movements, the Fund
would continue to be required to make daily cash payments of variation margin
on open futures positions. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily variation margin
requirements at a time when it may be
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disadvantageous to do so. In addition, the Fund may be required to take or make
delivery of the instruments underlying interest rate futures contracts it holds
at a time when it is disadvantageous to do so. The inability to close out
options and futures positions could also have an adverse impact on the Fund's
ability to effectively hedge its portfolio.
Futures contracts and options thereon which are purchased or sold on
foreign commodities exchanges may have greater price volatility than their U.S.
counterparts. Furthermore, foreign commodities exchanges may be less regulated
and under less governmental scrutiny than U.S. exchanges. Brokerage
commissions, clearing costs and other transaction costs may be higher on
foreign exchanges. Greater margin requirements may limit the Fund's ability to
enter into certain commodity transactions on foreign exchanges. Moreover,
differences in clearance and delivery requirements on foreign exchanges may
occasion delays in the settlement of the Fund's transactions effected on
foreign exchanges.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the
broker and/or incur a loss of all or part of its margin deposits with the
broker. Similarly, in the event of the bankruptcy of the writer of an OTC
option purchased by the Fund, the Fund could experience a loss of all or part
of the value of the option. Transactions are entered into by the Fund only with
brokers or financial institutions deemed creditworthy by the Adviser.
While the futures contracts and options transactions to be engaged in by
the Fund for the purpose of hedging the Fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such instruments.
One such risk which may arise in employing futures contracts to protect against
the price volatility of portfolio securities (and the currencies in which they
are denominated) is that the prices of securities and indexes subject to
futures contracts (and thereby the futures contract prices) may correlate
imperfectly with the behavior of the cash prices of the Fund's portfolio
securities (and the currencies in which they are denominated). Another such
risk is that prices of interest rate futures contracts may not move in tandem
with the changes in prevailing interest rates against which the Fund seeks a
hedge. A correlation may also be distorted by the fact that the futures market
is dominated by short-term traders seeking to profit from the difference
between a contract or security price objective and their cost of borrowed
funds. Such distortions are generally minor and would diminish as the contract
approached maturity.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Fund and the movements in the prices of the
securities (currencies) which are the subject of the hedge. If participants in
the futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationship between the debt securities or currency markets and futures
markets could result. Price distortions could also result if investors in
futures contracts opt to make or take delivery of underlying securities rather
than engage in closing transactions due to the resultant reduction in the
liquidity of the futures market. In addition, due to the fact that, from the
point of view of speculators, the deposit requirements in the futures markets
are less onerous than margin requirements in the cash market, increased
participation by speculators in the futures market could cause temporary price
distortions. Due to the possibility of price distortions in the futures market
and because of the imperfect correlation between movements in the prices of
securities and movements in the prices of futures contracts, a correct forecast
of interest rate trends may still not result in a successful hedging
transaction.
As stated in the Prospectus, there is no assurance that a liquid secondary
market will exist for futures contracts and related options in which the Fund
may invest. In the event a liquid market does not exist, it may not be possible
to close out a futures position, and in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In addition, limitations imposed by an exchange or board of trade on
which futures contracts are traded may compel or prevent the Fund from closing
out a contract which may result in reduced gain or increased loss to the Fund.
The absence of a liquid market in futures contracts might cause the Fund to
make or take delivery of the underlying securities (currencies) at a time when
it may be disadvantageous to do so.
The extent to which the Fund may enter into transactions involving futures
contracts and options thereon may be limited by the Internal Revenue Code's
requirements for qualification as a regulated investment company and the Fund's
intention to qualify as such (see "Dividends, Distributions and Taxes").
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Compared to the purchase or sale of futures contracts, the purchase of
call or put options on futures contracts involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances when the purchase
of a call or put option on a futures contract would result in a loss to the
Fund notwithstanding that the purchase or sale of a futures contract would not
result in a loss, as in the instance where there is no movement in the prices
of the futures contract or underlying securities (currencies).
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
As stated in the Prospectus, the Fund may also use reverse repurchase
agreements and dollar rolls as part of its investment strategy. Reverse
repurchase agreements involve sales by the Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. Generally, the effect of such a transaction is
that the Fund can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are only advantageous if the interest cost to the
Fund of the reverse repurchase transaction is less than the cost of obtaining
the cash otherwise.
The Fund may enter into dollar rolls in which the Fund sells securities
for delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Fund foregoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the lower forward price for the future purchase (often referred
to as the "drop") as well as by the interest earned on the cash proceeds of the
initial sale.
The Fund will establish a segregated account with its custodian bank in
which it will maintain cash, U.S. Government securities or other liquid
portfolio securities equal in value to its obligations in respect of reverse
repurchase agreements and dollar rolls.
LENDING OF PORTFOLIO SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions,
provided that such loans are callable at any time by the Fund (subject to
notice provisions described below), and are at all times secured by cash or
money market instruments, which are maintained in a segregated account pursuant
to applicable regulations and that are equal to at least the market value,
determined daily, of the loaned securities. The advantage of such loans is that
the Fund continues to receive the income on the loaned securities while at the
same time earning interest on the cash amounts deposited as collateral, which
will be invested in short-term obligations. The Fund will not lend its
portfolio securities if such loans are not permitted by the laws or regulations
of any state in which its shares are qualified for sale and will not lend more
than 25% of the value of its total assets. A loan may be terminated by the
borrower on one business day's notice, or by the Fund on two business days'
notice. If the borrower fails to deliver the loaned securities within two days
after receipt of notice, the Fund could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will only be made to firms deemed by the Fund's management to be
creditworthy and when the income which can be earned from such loans justifies
the attendant risks. Upon termination of the loan, the borrower is required to
return the securities to the Fund. Any gain or loss in the market price during
the loan period would inure to the Fund. The creditworthiness of firms to which
the Fund lends its portfolio securities will be monitored on an ongoing basis
by the Adviser pursuant to procedures adopted and reviewed, on an ongoing
basis, by the Board of Trustees of the Fund.
When voting or consent rights which accompany loaned securities pass to
the borrower, the Fund will follow the policy of calling the loaned securities,
to be delivered within one day after notice, to permit the exercise of such
rights if the matters involved would have a material effect on the Fund's
investment in such loaned securities. The Fund will pay reasonable finder's,
administrative and custodial fees in connection with a loan of its securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS
From time to time, in the ordinary course of business, the Fund may
purchase securities on a when-issued or delayed delivery basis and may purchase
or sell securities on a forward commitment basis. When such transactions
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are negotiated, the price is fixed at the time of the commitment, but delivery
and payment can take place a month or more after the date of the commitment.
The securities so purchased or sold are subject to market fluctuation and no
interest or dividends accrue to the purchaser prior to the settlement date.
While the Fund will only purchase securities on a when-issued, delayed delivery
or forward commitment basis with the intention of acquiring the securities, the
Fund may sell the securities before the settlement date, if it is deemed
advisable. At the time the Fund makes the commitment to purchase or sell
securities on a when-issued, delayed delivery or forward commitment basis, the
Fund will record the transaction and thereafter reflect the value, each day, of
such security purchased or, if a sale, the proceeds to be received, in
determining its net asset value. At the time of delivery of the securities, the
value may be more or less than the purchase or sale price. The Fund will also
establish a segregated account with the Fund's custodian bank in which it will
continuously maintain cash or U.S. Government Securities or other liquid
portfolio securities equal in value to commitments to purchase securities on a
when-issued, delayed delivery or forward commitment basis; subject to this
requirement, the Fund may purchase securities on such basis without limit. An
increase in the percentage of the Fund's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of the Fund's net asset value.
WHEN, AS AND IF ISSUED SECURITIES
The Fund may purchase securities on a "when, as and if issued" basis under
which the issuance of the security depends upon the occurrence of a subsequent
event, such as approval of a merger, corporate reorganization, leveraged buyout
or debt restructuring. The commitment for the purchase of any such security
will not be recognized in the portfolio of the Fund until the Adviser
determines that issuance of the security is probable. At such time, the Fund
will record the transaction and, in determining its net asset value, will
reflect the value of the security daily. At such time, the Fund will also
establish a segregated account with its custodian bank in which it will
continuously maintain cash or U.S. Government securities or other liquid
portfolio securities equal in value to recognized commitments for such
securities. Settlement of the trade will occur within five business days of the
occurrence of the subsequent event. Once a segregated account has been
established, if the anticipated event does not occur and the securities are not
issued the Fund will have lost an investment opportunity. The Fund may purchase
securities on such basis without limit. An increase in the percentage of the
Fund's assets committed to the purchase of securities on a "when, as and if
issued" basis may increase the volatility of its net asset value. The Fund may
also sell securities on a "when, as and if issued" basis provided that the
issuance of the security will result automatically from the exchange or
conversion of a security owned by the Fund at the time of the sale.
PORTFOLIO TURNOVER
It is anticipated that the Fund's portfolio turnover rate generally will
not exceed 100%. A 100% turnover rate would occur, for example, if 100% of the
securities held in the Fund's portfolio (excluding all securities whose
maturities at acquisition were one year or less) were sold and replaced within
one year.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
In addition to the investment restrictions enumerated in the Prospectus,
the investment restrictions listed below have been adopted by the Fund as
fundamental policies, except as otherwise indicated. Under the Act, a
fundamental policy may not be changed without the vote of a majority of the
outstanding voting securities of the Fund, as defined in the Act. Such a
majority is defined as the lesser of (a) 67% or more of the shares present at a
meeting of shareholders, if the holders of 50% of the outstanding shares of the
Fund are present or represented by proxy or (b) more than 50% of the
outstanding shares of the Fund.
The Fund may not:
1. Purchase or sell real estate or interests therein (including
limited partnership interests), although the Fund may purchase securities
of issuers which engage in real estate operations and securities secured
by real estate or interests therein.
2. Purchase oil, gas or other mineral leases, rights or royalty
contracts or exploration or development programs, except that the Fund may
invest in the securities of companies which operate, invest in, or sponsor
such programs.
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3. Borrow money, except that the Fund (i) may borrow from a bank for
temporary or emergency purposes in amounts not exceeding 5% (taken at the
lower of cost or current value) of its total assets (not including the
amount borrowed), and (ii) may engage in reverse repurchase agreements and
dollar rolls.
4. Pledge its assets or assign or otherwise encumber them except to
secure borrowings effected within the limitations set forth in restriction
(3). For the purpose of this restriction, collateral arrangements with
respect to initial or variation margin for futures are not deemed to be
pledges of assets.
5. Issue senior securities as defined in the Act except insofar as
the Fund may be deemed to have issued a senior security by reason of (a)
entering into any repurchase agreement; (b) purchasing any securities on a
when-issued or delayed delivery basis; (c) purchasing or selling any
financial futures contracts or options thereon; (d) borrowing money in
accordance with restrictions described above; or (e) lending portfolio
securities.
6. Make loans of money or securities, except: (a) by the purchase of
portfolio securities in which the Fund may invest consistent with its
investment objective and policies; (b) by investment in repurchase
agreements; or (c) by lending its portfolio securities.
7. Make short sales of securities.
8. Purchase securities on margin, except for such short-term loans as
are necessary for the clearance of portfolio securities. The deposit or
payment by the Fund of initial or variation margin in connection with
futures contracts is not considered the purchase of a security on margin.
9. Engage in the underwriting of securities, except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security.
10. Invest for the purpose of exercising control or management of any
other issuer.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of total or net assets will not be considered a
violation of any of the foregoing restrictions.
PORTFOLIO TRANSACTIONS AND BROKERAGE
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Subject to the general supervision of the Trustees, the Adviser is
responsible for decisions to buy and sell securities for the Fund, the
selection of brokers and dealers to effect the transactions, and the
negotiation of brokerage commissions, if any. Purchases and sales of securities
on a stock exchange are effected through brokers who charge a commission for
their services. In the over-the-counter market, securities are generally traded
on a "net" basis with dealers acting as principal for their own accounts
without a stated commission, although the price of the security usually
includes a profit to the dealer. In addition, securities may be purchased at
times in underwritten offerings where the price includes a fixed amount of
compensation, generally referred to as the underwriter's concession or
discount. Futures transactions will usually be effected through a broker and a
commission will be charged. On occasion, the Fund may also purchase certain
money market instruments directly from an issuer, in which case no commissions
or discounts are paid. During the fiscal years ended October 31, 1996, 1997 and
1998, the Fund paid no brokerage commissions.
The Adviser currently serves as investment adviser to a number of clients,
including other investment companies, and may in the future act as investment
adviser to others. It is the practice of the Adviser to cause purchase and sale
transactions to be allocated among the Fund and others whose assets it manages
in such manner as it deems equitable. In making such allocations among the Fund
and other client accounts, the main factors considered are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the Fund and other client accounts.
The policy of the Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible
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commissions are paid in all circumstances. The Fund believes that a requirement
always to seek the lowest possible commission cost could impede effective
portfolio management and preclude the Fund and the Adviser from obtaining a
high quality of brokerage and research services. In seeking to determine the
reasonableness of brokerage commissions paid in any transaction, the Adviser
relies upon its experience and knowledge regarding commissions generally
charged by various brokers and on its judgment in evaluating the brokerage and
research services received from the broker effecting the transaction. Such
determinations are necessarily subjective and imprecise, as in most cases an
exact dollar value for those services is not ascertainable.
In seeking to implement the Fund's policies, the Adviser effects
transactions with those brokers and dealers who the Adviser believes provide
the most favorable prices and are capable of providing efficient executions. If
the Adviser believes such prices and executions are obtainable from more than
one broker or dealer, it may give consideration to placing portfolio
transactions with those brokers and dealers who also furnish research and other
services to the Fund or the Adviser. Such services may include, but are not
limited to, any one or more of the following: reports on industries and
companies, economic analyses and review of business conditions, portfolio
strategy, analytic computer software, account performance services, computer
terminals and various trading and/or quotation equipment. They also include
advice from broker-dealers as to the value of securities, availability of
securities, availability of buyers, and availability of sellers. In addition,
they include recommendations as to purchase and sale of individual securities
and timing of such transactions. The Fund will not purchase at a higher price
or sell at a lower price in connection with transactions effected with a
dealer, acting as principal, who furnishes research services to the Fund than
would be the case if no weight were given by the Fund to the dealer's
furnishing of such services.
The information and services received by the Adviser from brokers and
dealers may be of benefit to the Adviser in the management of accounts of some
of its other clients and may not in all cases benefit the Fund directly. While
the receipt of such information and services is useful in varying degrees and
would generally reduce the amount of research or services otherwise performed
by the Adviser and thereby reduce its expenses, it is of indeterminable value
and the advisory fee paid to the Adviser is not reduced by any amount that may
be attributable to the value of such services.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may
be effected through DWR, Morgan Stanley & Co. Incorporated ("MS & Co.") and
other affiliated brokers and dealers. In order for an affiliated broker or
dealer to effect any portfolio transactions for the Fund, the commissions, fees
or other remuneration received by the affiliated broker or dealer must be
reasonable and fair compared to the commissions, fees or other remuneration
paid to other brokers in connection with comparable transactions involving
similar securities being purchased or sold on an exchange during a comparable
period of time. This standard would allow the affiliated broker or dealer to
receive no more than the remuneration which would be expected to be received by
an unaffiliated broker in a commensurate arm's-length transaction. Furthermore,
the Board of Trustees of the Fund, including a majority of the Trustees who are
not "interested" persons of the Fund, as defined in the Act, have adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to an affiliated broker or dealer are consistent
with the foregoing standard. During the fiscal years ended October 31, 1996,
1997 and 1998, the Fund paid no brokerage commissions to DWR. During the period
June 1, 1997 through October 31, 1997 and the fiscal year ended October 31,
1998, the Fund did not pay any brokerage commissions to MS & Co. which became
an affiliate of the Fund on June 1, 1997.
THE DISTRIBUTOR
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As discussed in the Prospectus, shares of the Fund are distributed by
Morgan Stanley Dean Witter Distributors Inc. (the "Distributor"). The
Distributor has entered into a selected dealer agreement with DWR, which
through its own sales organization sells shares of the Fund. In addition, the
Distributor may enter into selected dealer agreements with other selected
broker-dealers (including TCW Brokerage Services, an affiliate of the Adviser).
The Distributor, a Delaware corporation, is a wholly-owned subsidiary of MSDW.
The current Distribution Agreement appointing the Distributor exclusive
distributor of the Fund's shares and providing for the Distributor to bear
distribution expenses not borne by the Fund was approved by the Board of
Trustees, including all of the Independent Trustees, on April 24, 1997. The
current Distribution Agreement is substantively identical to the Fund's
previous distribution agreements. The current Distribution Agreement took
effect on May 31, 1997
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upon the consummation of the merger of Dean Witter, Discover & Co. with Morgan
Stanley Group Inc. and is substantially identical to the Fund's prior
distribution agreements except for its dates of effectiveness and termination.
By its terms, the Distribution Agreement had an initial term ending April 30,
1998, and provides that it will remain in effect from year to year thereafter
if approved by the Trustees. At their meeting held on April 30, 1998, the
Trustees of the Fund, including a majority of the Independent Trustees,
approved continuation of the Distribution Agreement until April 30, 1999.
The Distributor bears all expenses it or any selected dealer may incur in
providing services under the Distribution Agreement. Such expenses include the
payment of commissions for sales of the Fund's shares and incentive
compensation to Morgan Stanley Dean Witter Financial Advisors and other
selected broker-dealer representatives. The Distributor also pays certain
expenses in connection with the distribution of the Fund's shares, including
the costs of preparing, printing and distributing advertising or promotional
materials, and the costs of printing and distributing prospectuses and
supplements thereto used in connection with the offering and sale of the Fund's
shares. The Fund bears the costs of initial typesetting, printing and
distribution of prospectuses and supplements thereto to shareholders. The Fund
also bears the costs of registering the Fund and its shares under federal and
state securities laws. The Fund and the Distributor have agreed to indemnify
each other against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. Under the Distribution Agreement, the
Distributor uses its best efforts in rendering services to the Fund, but in the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations, the Distributor is not liable to the Fund or any
of its shareholders for any error of judgment or mistake of law or for any act
or omission or for any losses sustained by the Fund or its shareholders.
PLAN OF DISTRIBUTION
As discussed in the Prospectus, the Fund has entered into a Plan of
Distribution pursuant to Rule 12b-1 under the Act with the Distributor whereby
the expenses of certain activities in connection with the distribution of
shares of the Fund are reimbursed. The Plan was initially approved by the
Trustees of the Fund on May 1, 1992 and by DWR, the then sole shareholder of
the Fund, on May 11, 1992. The vote of the Trustees included a majority of the
Trustees who are not and were not at the time of their votes interested persons
of the Fund and who have and had at the time of their votes no direct or
indirect financial interest in the operation of the Plan (the "Independent
12b-1 Trustees"), cast in person at a meeting called for the purpose of voting
on such Plan. In determining to approve the Plan, the Trustees, including the
Independent 12b-1 Trustees, concluded that, in their judgment, there is a
reasonable likelihood that the Plan will benefit the Fund and its shareholders.
The Plan provides that the Distributor will bear the expense of all
promotional and distribution related activities on behalf of the Fund, except
for expenses that the Trustees determine to reimburse, as described below. The
following activities and services may be provided by the Distributor and DWR or
any other selected broker-dealer under the Plan: (1) compensation to and
expenses of account executives and other employees of DWR and other selected
dealers, including overhead and telephone expenses; (2) sales incentives and
bonuses to sales representatives and to marketing personnel in connection with
promoting sales of the Fund's shares; (3) expenses incurred in connection with
promoting sales of the Fund's shares; (4) preparing and distributing sales
literature; and (5) providing advertising and promotional activities, including
direct mail solicitation and television, radio, newspaper, magazine and other
media advertisements.
The Fund is authorized to reimburse specific expenses incurred or to be
incurred in promoting the distribution of the Fund's shares and in servicing
shareholder accounts. Reimbursement is made through payments at the end of each
month. The amount of each monthly payment may in no event exceed an amount
equal to a payment at the annual rate of 0.75 of 1% of the Fund's average daily
net assets during the month. No interest or other financing charges, if any,
incurred on any distribution expenses will be reimbursable under the Plan. In
the case of all expenses other than expenses representing a residual to Morgan
Stanley Dean Witter Financial Advisors and other selected broker-dealer
representatives, such amounts shall be determined at the beginning of each
calendar quarter by the Trustees, including a majority of the Independent 12b-1
Trustees. Expenses representing a residual to Morgan Stanley Dean Witter
Financial Advisors and other selected broker-dealer representatives may be
reimbursed without prior determination. In the event that the Distributor
proposes that monies shall be reimbursed for other than such expenses, then in
making quarterly determinations of the amounts that may be expended by the
Fund, the Distributor will provide and the Trustees will review a quarterly
budget of projected
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distribution expenses to be incurred on behalf of the Fund, together with a
report explaining the purposes and anticipated benefits of incurring such
expenses. The Trustees will determine which particular expenses, and the
portions thereof, that may be borne by the Fund, and in making such a
determination shall consider the scope of the Distributor's commitment to
promoting the distribution of the Fund's shares.
The Distributor has informed the Fund that a portion of the fees payable
by the Fund each year pursuant to the Plan equal to 0.25% of the Fund's average
daily net assets is characterized as a "service fee" under the Rules of the
Association of the National Association of Securities Dealers (of which the
Distributor is a member). Such portion of the fee is a payment made for
personal service and/or the maintenance of shareholder accounts. The remaining
portion of the Plan fees payable by the Fund is characterized as an
"asset-based sales charge" as defined in the aforementioned Rules of the
Association.
DWR's Financial Advisors are credited with an annual residual commission,
currently a gross residual of up to 0.75% of the current value of the
respective accounts for which they are the account executives or dealers of
record. The residual is a charge which reflects residual commissions paid by
DWR to its Financial Advisors and expenses of DWR and its affiliates associated
with the servicing of shareholders' accounts, including the expenses of
operating branch offices in connection with the servicing of shareholders'
accounts, which expenses include lease costs, the salaries and employee
benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies and other
expenses relating to branch office servicing of shareholder accounts. The
portion of the annual residual commission allocated to servicing of shareholder
accounts does not exceed 0.25% of the average annual net asset value of shares
of accounts for which he or she is account executive of record.
Under the Plan, the Distributor uses its best efforts in rendering
services to the Fund, but in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations, the Distributor is
not liable to the Fund or any of its shareholders for any error of judgment or
mistake of law or for any act or omission or for any losses sustained by the
Fund or its shareholders.
The Fund accrued $1,299,994 to the Distributor, pursuant to the Plan, for
the fiscal year ended October 31, 1998. This amount represents an annual rate
of 0.73 of 1% of the Fund's average daily net assets for the fiscal year. Based
upon the total amounts spent by the Distributor during the period, it is
estimated that the amount paid by the Fund to the Distributor for distribution
was spent in approximately the following ways: (i) advertising--$-0-; (ii)
printing and mailing prospectuses to other than current shareholders--$-0-;
(iii) compensation to underwriters--$-0-; (iv) compensation to dealers--$-0-;
(v) compensation to sales personnel--$-0-; and (vi) other, which includes
payments to DWR for expenses substantially all of which relate to compensation
of sales personnel (including compensation for servicing shareholder accounts
and associated overhead expenses)--$1,299,994.
The Plan remained in effect until April 30, 1993, and under its terms will
continue from year to year thereafter, provided such continuance is approved
annually by a vote of the Trustees, including a majority of the Independent
12b-1 Trustees. At their meeting held April 30, 1998, the Trustees, including a
majority of the Independent 12b-1 Trustees, approved the continuance of the
Plan until April 30, 1999. Any amendment to increase materially the maximum
amount authorized to be spent under the Plan must be approved by the
shareholders of the Fund, and all material amendments to the Plan must be
approved by the Trustees in the manner described above. At their meeting held
on July 23, 1997, the Trustees of the Fund, including all of the Independent
12b-1 Trustees, approved amendments to the Plan to change the provisions
regarding quarterly budgets. The Plan may be terminated at any time, without
payment of any penalty, by vote of a majority of the Independent Trustees or by
a vote of the holders of a majority of the outstanding voting securities of the
Fund (as defined in the Act) on not more than thirty days' written notice to
any other party to the Plan. So long as the Plan is in effect, the selection or
nomination of the Independent Trustees is committed to the discretion of the
Independent 12b-1 Trustees.
Under the Plan, the Distributor provides the Fund, for review by the
Trustees, and the Trustees review, promptly after the end of each calendar
quarter, a written report regarding the distribution expenses incurred on
behalf of the Fund during such calendar quarter, which report includes (1) an
itemization of the types of expenses and the purposes therefor; (2) the amounts
of such expenses; and (3) a description of the benefits derived by the Fund. In
the Trustees' quarterly review of the Plan they consider its continued
appropriateness and the level of compensation provided therein.
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No interested person of the Fund nor any Trustee of the Fund who is not an
interested person of the Fund, as defined in the Act, has any direct or
indirect financial interest in the operation of the Plan except to the extent
that DWR, the Distributor, the Manager or MSDW Advisors or certain of its
employees may be deemed to have such an interest as a result of benefits
derived from the successful operation of the Plan or as a result of receiving a
portion of the amounts expended thereunder by the Fund.
DETERMINATION OF NET ASSET VALUE
As stated in the Prospectus, short-term debt securities with remaining
maturities of sixty days or less at the time of purchase are valued at
amortized cost, unless the Trustees determine such does not reflect the
securities' market value, in which case these securities will be valued at
their fair value as determined by the Trustees. Other short-term debt
securities will be valued on a mark-to-market basis until such time as they
reach a remaining maturity of sixty days, whereupon they will be valued at
amortized cost using their value on the 61st day unless the Trustees determine
such does not reflect the securities' market value, in which case these
securities will be valued at their fair value as determined by the Trustees.
Listed options are valued at the latest sale price on the exchange on which
they are listed unless no sales of such options have taken place that day, in
which case they will be valued at the mean between their latest bid and asked
prices. Unlisted options are valued at the mean between their latest bid and
asked prices. Futures are valued at the latest sale price on the commodities
exchange on which they trade unless the Trustees determine that such price does
not reflect their market value, in which case they will be valued at their fair
value as determined by the Trustees. All other securities and other assets are
valued at their fair value as determined in good faith under procedures
established by and under the supervision of the Trustees.
Generally, trading in foreign securities, as well as corporate bonds,
United States government securities and money market instruments, is
substantially completed each day at various times prior to the close of the New
York Stock Exchange. The values of such securities used in computing the net
asset value of the Fund's shares are determined as of such times. Foreign
currency exchange rates are also generally determined prior to the close of the
New York Stock Exchange. Occasionally, events which may affect the values of
such securities and such exchange rates may occur between the times at which
they are determined and the close of the New York Stock Exchange and will
therefore not be reflected in the computation of the Fund's net asset value. If
events that may affect the value of such securities occur during such period,
then these securities may be valued at their fair value as determined in good
faith under procedures established by and under the supervision of the
Trustees.
As discussed in the Prospectus, the net asset value per share of the Fund
is determined at 4:00 p.m., New York time (or, on days when the New York Stock
Exchange closes prior to 4:00 p.m., at such earlier time), on each day the New
York Stock Exchange is open, by taking the value of all the assets of the Fund,
subtracting all liabilities, dividing by the number of shares outstanding and
adjusting the result to the nearest cent. The New York Stock Exchange currently
observes the following holidays: New Year's Day; Reverend Dr. Martin Luther
King, Jr. Day; Presidents' Day; Good Friday; Memorial Day; Independence Day;
Labor Day; Thanksgiving Day and Christmas Day.
SHAREHOLDER SERVICES
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Shareholder Investment Account. Upon purchase of shares of the Fund, a
Shareholder Investment Account is opened for the investor on the books of the
Fund, maintained by Morgan Stanley Dean Witter Trust FSB (the "Transfer
Agent"), in full and fractional shares of the Fund (rounded to the nearest
1/100 of a share). This is an open account in which shares owned by the
investor are credited by the Transfer Agent in lieu of issuance of a share
certificate. If a share certificate is desired, it must be requested in writing
for each transaction. Certificates are issued only for full shares and may be
redeposited in the account at any time. There is no charge to the investor for
issuance of a certificate. No certificates will be issued for fractional shares
or to shareholders who have elected the Systematic Withdrawal Plan for
withdrawing cash from their accounts. Whenever a shareholder instituted
transaction takes place in the Shareholder Investment Account, the shareholder
will be mailed a confirmation of the transaction from the Fund or from DWR or
another selected broker-dealer.
Automatic Investment of Dividends and Distributions. All dividends and
capital gains distributions are automatically paid in full and fractional
shares of the Fund, unless the shareholder requests that they be paid in cash.
Each purchase of shares of the Fund is made upon the condition that the
Transfer Agent is thereby automatically appointed as agent of the investor to
receive all dividends and capital gains distributions on shares
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owned by the investor. Such dividends and distributions will be paid in shares
of the Fund (or in cash if the shareholder so requests) at the net asset value
per share as of the close of business on the record date. At any time an
investor may request the Transfer Agent in writing to have subsequent dividends
and/or capital gains distributions paid in cash rather than shares. To assure
sufficient time to process the change, such request should be received by the
Transfer Agent at least five (5) business days prior to the record date for
which it commences to take effect. In case of recently purchased shares for
which registration instructions have not been received on the record date, cash
payments will be made to DWR or other selected broker-dealer, and will be
forwarded to the shareholder, upon the receipt of proper instructions. It has
been and remains the Fund's policy and practice that, if checks for dividends
or distributions paid in cash remain uncashed, no interest will accrue on
amounts represented by such uncashed checks.
EasyInvest(service mark). Shareholders may subscribe to EasyInvest, an
automatic purchase plan which provides for any amount from $100 to $5,000 to be
transferred automatically from a checking or savings account or following
redemption of shares of a Morgan Stanley Dean Witter money market fund, on a
semi-monthly, monthly or quarterly basis, to the Transfer Agent for investment
in shares of the Fund. Shares purchased through EasyInvest will be added to the
shareholder's existing account at the net asset value calculated the same
business day the transfer of funds is effected. Shares of Morgan Stanley Dean
Witter money market funds redeemed in connection with EasyInvest are redeemed
on the business day preceding the transfer of funds. For further information or
to subscribe to EasyInvest, shareholders should contact their Morgan Stanley
Dean Witter Financial Advisor or other selected broker-dealer representative or
the Transfer Agent.
Investment of Distributions Received in Cash. As discussed in the
Prospectus, any shareholder who receives a cash payment representing a dividend
or capital gains distribution may invest such dividend or distribution at net
asset value (without sales charge) by returning the check or the proceeds to
the Transfer Agent within 30 days after the payment date. If the shareholder
returns the proceeds of a dividend or distribution, such funds must be
accompanied by a signed statement indicating that the proceeds constitute a
dividend or distribution to be invested. Such investment will be made at the
net asset value per share next determined after receipt of the check or the
proceeds by the Transfer Agent.
Direct Investments through Transfer Agent. As discussed in the Prospectus,
a shareholder may make additional investments in Fund shares at any time by
sending a check in any amount, not less than $100, payable to TCW/DW North
American Government Income Trust, directly to the Transfer Agent. Such amounts
will be applied to the purchase of Fund shares at the net asset value per share
next computed after receipt of the check or purchase payment by the Transfer
Agent. The shares so purchased will be credited to the investor's account.
Targeted Dividends(service mark). In states where it is legally
permissible to do so, shareholders may also have all income dividends and
capital gains distributions automatically invested in shares of an open-end
TCW/DW Fund other than TCW/DW North American Government Income Trust. Such
investment will be made as described above for automatic investment in shares
of the Fund, at the net asset value per share of the selected TCW/DW Fund as of
the close of business on the payment date of the dividend or distribution, and
will begin to earn dividends, if any, in the selected TCW/DW Fund the next
business day. To participate in the Targeted Dividends program, shareholders
should contact their Morgan Stanley Dean Witter Financial Advisor or other
selected broker-dealer representative or the Transfer Agent. Shareholders of
the Fund must be shareholders of the TCW/DW Fund targeted to receive
investments from dividends at the time they enter the Targeted Dividends
program. Investors should review the prospectus of the targeted TCW/DW Fund
before entering the program.
Systematic Withdrawal Plan. As discussed in the Prospectus, a systematic
withdrawal plan (the "Withdrawal Plan") is available for shareholders whose
shares of TCW/DW Funds have an aggregate value of $10,000 or more. Shares of
any Fund from which redemptions will be made pursuant to the Plan must have a
value of $1,000 or more (referred to as a "SWP Fund"). The required share
values are determined on the date the shareholder establishes the Withdrawal
Plan. The Withdrawal Plan provides for monthly, quarterly, semi-annual or
annual payments in any amount not less than $25, or in any whole percentage of
the value of the SWP Funds' shares, on an annualized basis. Any applicable
Contingent Deferred Sales Charge ("CDSC") will be imposed on shares redeemed
under the Withdrawal Plan (see "Purchase of Fund Shares"), except that the
CDSC, if any, will be waived on redemptions under the Withdrawal Plan of up to
12% annually of the value of each SWP Fund account, based on the share values
next determined after the shareholder establishes the Withdrawal Plan.
Redemptions for which this CDSC
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waiver policy applies may be in amounts up to 1% per month, 3% per quarter, 6%
semi-annually or 12% annually. Under this CDSC waiver policy, amounts withdrawn
each period will be paid by first redeeming shares not subject to a CDSC
because the shares were purchased by the reinvestment of dividends or capital
gains distributions, the CDSC period has elapsed or some other waiver of the
CDSC applies. If shares subject to a CDSC must be redeemed, shares held for the
longest period of time will be redeemed first and continuing with shares held
the next longest period of time until shares held the shortest period of time
are redeemed. Any shareholder participating in the Withdrawal Plan will have
sufficient shares redeemed from his or her account so that the proceeds (net of
any applicable CDSC) to the shareholder will be the designated monthly,
quarterly, semi-annual or annual amount.
A shareholder may suspend or terminate participation in the Withdrawal
Plan at any time. A shareholder who has suspended participation may resume
payments under the Withdrawal Plan, without requiring a new determination of
the account value for the 12% CDSC waiver. The Withdrawal Plan may be
terminated or revised at any time by the Fund.
Prior to adding an additional SWP Fund to an existing Withdrawal Plan, the
required $10,000/$1,000 share values must be met, to be calculated on the date
the shareholder adds the additional SWP Fund. However, the addition of a new
SWP Fund will not change the account value for the 12% CDSC waiver for the SWP
Funds already participating in the Withdrawal Plan.
The Transfer Agent acts as agent for the shareholder in tendering to the
Fund for redemption sufficient full and fractional shares to provide the amount
of the periodic withdrawal payment designated in the application. The shares
will be redeemed at their net asset value determined, at the shareholder's
option, on the tenth or twenty-fifth day (or next following business day) of
the relevant month, quarter, or semi-annual or annual period and normally a
check for the proceeds will be mailed by the Transfer Agent, or amounts
credited to a shareholder's Dean Witter Reynolds Inc. or other selected
broker-dealer brokerage account, or amounts deposited electronically into the
shareholder's bank account via the Automated Clearing House, within five
business days after the date of redemption.
Withdrawal Plan payments should not be considered dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted. Each withdrawal constitutes a
redemption of shares and any gain or loss realized must be recognized for
federal income tax purposes. Although a shareholder may make additional
investments while participating in the Withdrawal Plan, withdrawals made
concurrently with purchases of additional shares are inadvisable because of
sales charges applicable to purchases or redemptions of shares (see "Purchase
of Fund Shares" in the Prospectus).
Any shareholder who wishes to have payments under the Withdrawal Plan made
to a third party or sent to an address other than the one listed on the account
must send complete written instructions to the Transfer Agent to enroll in the
Withdrawal Plan. The shareholder's signature on such instructions must be
guaranteed by an eligible guarantor acceptable to the Transfer Agent
(shareholders should contact the Transfer Agent for a determination as to
whether a particular institution is such an eligible guarantor). A shareholder
may, at any time, change the amount and interval of withdrawal payments through
his or her Morgan Stanley Dean Witter Financial Advisor or other selected
broker-dealer representative or by written notification to the Transfer Agent.
In addition, the party and/or the address to which checks are mailed may be
changed by written notification to the Transfer Agent, with signature
guarantees required in the manner described above. The shareholder may also
terminate the Withdrawal Plan at any time by written notice to the Transfer
Agent. In the event of such termination, the account will be continued as a
regular Shareholder Investment Account. The shareholder may also redeem all or
part of the shares held in the Withdrawal Plan account (see "Redemptions and
Repurchases" in the Prospectus) at any time.
EXCHANGE PRIVILEGE
As discussed in the Prospectus under the caption "Exchange Privilege," an
Exchange Privilege exists whereby investors who have purchased shares of any of
the TCW/DW Funds that are multiple class funds ("TCW/DW Multi-Class Funds")
will be permitted, after the shares of the fund acquired by purchase (not by
exchange or dividend reinvestment) have been held for thirty days, to redeem
all or part of their shares in that fund, have the
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proceeds invested in shares of the Fund and in shares of five money market
funds for which MSDW Advisors serves as investment manager: Morgan Stanley Dean
Witter Liquid Asset Fund Inc., Morgan Stanley Dean Witter Tax-Free Daily Income
Trust, Morgan Stanley Dean Witter California Tax-Free Daily Income Trust,
Morgan Stanley Dean Witter New York Municipal Money Market Trust, or Morgan
Stanley Dean Witter U.S. Government Money Market Trust (these six funds,
including the Fund, are hereinafter collectively referred to as "Exchange
Funds"). There is no waiting period for exchanges of shares acquired by
exchange or dividend reinvestment. Shares of the Exchange Funds received in an
exchange for shares of a TCW/DW Multi-Class Fund may be redeemed or exchanged
only for shares of the corresponding Class of a TCW/DW Multi-Class Fund or for
shares of one of the other Exchange Funds. Ultimately, any applicable
contingent deferred sales charge ("CDSC") will have to be paid upon redemption
of shares originally purchased from a Class of a TCW/DW Multi-Class Fund that
imposes a CDSC. An exchange will be treated for federal income tax purposes the
same as a repurchase or redemption of shares, on which the shareholder may
realize a capital gain or loss.
Any new account established through the Exchange Privilege will have the
same registration and cash dividend or dividend reinvestment plan as the
present account, unless the Transfer Agent receives written notification to the
contrary. For telephone exchanges, the exact registration of the existing
account and the account number must be provided.
Any shares held in certificate form cannot be exchanged but must be
forwarded to the Transfer Agent and deposited into the shareholder's account
before being eligible for exchange. (Certificates mailed in for deposit should
not be endorsed.)
When shares of a TCW/DW Multi-Class Fund are exchanged for shares of an
Exchange Fund, the exchange is executed at no charge to the shareholder,
without the imposition of the CDSC at the time of the exchange. During the
period of time the shareholder remains in the Exchange Fund, (calculated from
the last day of the month in which the Exchange Fund shares were acquired), the
holding period or "year since purchase payment made" is frozen. When shares are
redeemed out of the Exchange Fund, they will be subject to a CDSC which would
be based upon the period of time the shareholder held shares in a TCW/DW
Multi-Class Fund. However, in the case of shares exchanged into an Exchange
Fund, upon redemption of shares which results in a CDSC being imposed, a credit
(not to exceed the amount of the CDSC) will be given in an amount equal to the
Exchange Fund 12b-1 distribution fees which are attributable to those shares.
Shareholders acquiring shares of an Exchange Fund pursuant to this exchange
privilege may exchange those shares back into a TCW/DW Multi-Class Fund from
the Exchange Fund, with no CDSC being imposed on such exchange. The holding
period previously frozen when shares were first exchanged for shares of the
Exchange Fund resumes on the last day of the month in which shares of a TCW/DW
Multi-Class Fund are reacquired. Thus, a CDSC is imposed only upon an ultimate
redemption, based upon the time (calculated as described above) the shareholder
was invested in a TCW/DW Multi-Class Fund.
When shares initially purchased in a TCW/DW Multi-Class Fund are exchanged
for shares of a TCW/DW Multi-Class Fund or shares of an Exchange Fund, the date
of purchase of the shares of the fund exchanged into, for purposes of the CDSC
upon redemption, will be the last day of the month in which the shares being
exchanged were originally purchased. In allocating the purchase payments
between funds for purposes of the CDSC, the amount which represents the current
net asset value of shares at the time of the exchange which were (i) purchased
more than one, three or six years (depending on the CDSC applicable to the
shares) prior to the exchange and (ii) originally acquired through reinvestment
of dividends or distributions (all such shares called "Free Shares"), will be
exchanged first. After an exchange, all dividends earned on shares in the
Exchange Fund will be considered Free Shares. If the exchanged amount exceeds
the value of such Free Shares, an exchange is made, on a block-by-block basis,
of non-Free Shares held for the longest period of time. Shares equal to any
appreciation in the value of non-Free Shares exchanged will be treated as Free
Shares, and the amount of the purchase payments for the non-Free Shares of the
fund exchanged into will be equal to the lesser of (a) the purchase payments
for, or (b) the current net asset value of, the exchanged non-Free Shares. If
an exchange between funds would result in exchange of only part of a particular
block of non-Free Shares, then shares equal to any appreciation in the value of
the block (up to the amount of the exchange) will be treated as Free Shares and
exchanged first, and the purchase payment for that block will be allocated on a
pro rata basis between the non-Free Shares of that block to be retained and the
non-Free Shares to be exchanged. The prorated amount of such purchase payment
attributable to the retained non-Free Shares will remain as the purchase
payment for such shares, and the amount of purchase payment for
34
<PAGE>
the exchanged non-Free Shares will be equal to the lesser of (a) the prorated
amount of the purchase payment for, or (b) the current net asset value of those
exchanged non-Free Shares. Based upon the procedures described in the TCW/DW
Multi-Class Fund Prospectus under the caption "Purchase of Fund Shares," any
applicable CDSC will be imposed upon the ultimate redemption of shares of any
fund, regardless of the number of exchanges since those shares were originally
purchased.
With respect to the redemption or repurchase of shares of the Fund, the
application of proceeds to the purchase of new shares in the Fund or any other
of the funds and the general administration of the Exchange Privilege, the
Transfer Agent acts as agent for the Distributor and for the shareholder's
selected broker-dealer, if any, in the performance of such functions. With
respect to exchanges, redemptions or repurchases, the Transfer Agent shall be
liable for its own negligence and not for the default or negligence of its
correspondents or for losses in transit. The Fund shall not be liable for any
default or negligence of the Transfer Agent, the Distributor or any selected
broker-dealer.
The Distributor and any selected broker-dealer have authorized and
appointed the Transfer Agent to act as their agent in connection with the
application of proceeds of any redemption of Fund shares to the purchase of the
shares of any other fund and the general administration of the Exchange
Privilege. No commission or discounts will be paid to the Distributor or any
selected broker-dealer for any transactions pursuant to this Exchange
Privilege.
Shares of the Fund acquired pursuant to the Exchange Privilege will be
held by the Fund's Transfer Agent in an Exchange Privilege account distinct
from any account of the same shareholder who may have acquired shares of the
Fund directly. A shareholder of the Fund will not be permitted to make
additional investments in such Exchange Privilege account, except through the
exchange of additional shares of the fund in which the shareholder had
initially invested, and the proceeds of any shares redeemed from such Exchange
Privilege account may not thereafter be placed back into that Exchange
Privilege account, except by utilizing the Reinstatement Privilege (see
"Repurchases and Redemptions--Reinstatement Privilege"). If such a shareholder
desires to make any additional investments in the Fund, a separate account will
be maintained for receipt of such investments. The Fund will have additional
costs for account maintenance if a shareholder has more than one account with
the Fund.
Exchanges are subject to the minimum investment requirement and any other
conditions imposed by each fund. (The minimum initial investment for the
Exchange Privilege account of each Class is $5,000 for Morgan Stanley Dean
Witter Liquid Asset Fund Inc., Morgan Stanley Dean Witter Tax-Free Daily Income
Trust, Morgan Stanley Dean Witter California Tax-Free Daily Income Trust and
Morgan Stanley Dean Witter New York Municipal Money Market Trust, although
those funds may, at their discretion, accept initial investments of as low as
$1,000. The minimum initial investment for the Exchange Privilege account of
each Class for Morgan Stanley Dean Witter U.S. Government Money Market Trust
and all TCW/DW Funds is $1,000.) Upon exchange into a money market fund, the
shares of that fund will be held in a special Exchange Privilege Account
separately from accounts of those shareholders who have acquired their shares
directly from that fund. As a result, certain services normally available to
shareholders of money market funds, including the check writing feature, will
not be available for funds held in that account.
The Fund, each of the other TCW/DW Funds and each of the money market
funds may limit the number of times this Exchange Privilege may be exercised by
any investor within a specified period of time. Also, the Exchange Privilege
may be terminated or revised at any time by any of the TCW/DW Funds or the
money market funds, upon such notice as may be required by applicable
regulatory agencies (presently sixty days' prior written notice for termination
or material revision), provided that six months' prior written notice of
termination will be given to the shareholders who hold shares of the Exchange
Funds pursuant to this Exchange Privilege, and provided further that the
Exchange Privilege may be terminated or materially revised at times (a) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (b) when trading on that Exchange is restricted, (c) when an
emergency exists as a result of which disposal by the Fund of securities owned
by it is not reasonably practicable or it is not reasonably practicable for the
Fund fairly to determine the value of its net assets, (d) during any other
period when the Securities and Exchange Commission by order so permits
(provided that applicable rules and regulations of the Securities and Exchange
Commission shall govern as to whether the conditions prescribed in (b) or (c)
exist), or (e), if the Fund would be unable to invest amounts effectively in
accordance with its investment objective(s), policies and restrictions.
For further information regarding the Fund's Exchange Privilege,
shareholders should contact their Morgan Stanley Dean Witter Financial Advisor
or other selected broker-dealer representative or the Transfer Agent.
35
<PAGE>
REPURCHASES AND REDEMPTIONS
- --------------------------------------------------------------------------------
Payment for Shares Repurchased or Redeemed. As discussed in the
Prospectus, payment for shares presented for repurchase or redemption will be
ordinarily made by check within seven days after receipt by the Transfer Agent
of the certificate and/or written request in good order. The term "good order"
means that the share certificates, 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. Such payment may be postponed or the right of redemption suspended at
times (a) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (b) when trading on that Exchange is restricted,
(c) when an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets, or
(d) during any other period when the Securities and Exchange Commission by
order so permits; provided that applicable rules and regulations of the
Securities and Exchange Commission shall govern as to whether the conditions
prescribed in (b) or (c) exist. If the shares to be redeemed have recently been
purchased by check and the check has not yet cleared, payment of redemption
proceeds may be delayed until the check has cleared. It has been and remains
the Fund's policy and practice that, if checks for dividends or distributions
paid in cash remain uncashed, no interest will accrue on amounts represented by
such uncashed checks.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The Fund intends to continue to qualify and elect to be treated as a
regulated investment company for each taxable year under the Internal Revenue
Code of 1986, as amended (the "Code"). To so qualify, the Fund must meet
certain requirements as to the nature of its income and the nature of its
assets.
As a regulated investment company, the Fund will not be subject to United
States federal income tax on its income that it distributes to its
shareholders, provided that an amount equal to at least 90% of its investment
company taxable income (i.e., 90% of its taxable income minus the excess, if
any, of its net realized long-term capital gains over its net realized
short-term capital losses including any capital loss carryovers), plus or minus
certain other adjustments as specified in section 852 of the Code) for the
taxable year is distributed, but will be subject to tax at regular corporate
rates on any income or gains that it does not distribute. Furthermore, the Fund
will be subject to a United States corporate income tax with respect to such
distributed amounts in any year that it fails to qualify as a regulated
investment company or fails to meet this distribution requirement.
Gains or losses on the Fund's transactions in certain listed options on
securities and on futures and options on futures traded on U.S. exchanges
generally are treated as 60% long-term gain or loss and 40% short-term gain or
loss. When the Fund engages in options and futures transactions, various tax
regulations applicable to the Fund may have the effect of causing the Fund to
recognize a gain or loss for tax purposes before that gain or loss is realized,
or to defer recognition of a realized loss for tax purposes. Recognition, for
tax purposes, of an unrealized loss may result in a lesser amount of the Fund's
realized net gains being available for distribution.
As discussed in the Prospectus, the Fund will determine either to
distribute or to retain all or part of any net long-term capital gains in any
year for reinvestment. If any such gains are retained, the Fund expects to
designate such retained amounts as undistributed capital gains in a notice to
its shareholders who (a) will be required to include in income for United
States federal income tax purposes, as long-term capital gains, their
proportionate shares of the undistributed amount, (b) will be entitled to
credit their proportionate shares of the 35% tax paid by the Fund on the
undistributed amount against their United States federal income tax
liabilities, if any, and to claim refunds to the extent their credits exceed
their liabilities, if any, and (c) will be entitled to increase their tax
basis, for United States federal income tax purposes, in their shares by an
amount equal to 65% of the amount of undistributed capital gains included in
the shareholder's income.
The Code imposes a 4% nondeductible excise tax on the Fund to the extent
the Fund does not distribute by the end of any calendar year at least 98% of
its net investment income for that year and 98% of the net amount of its
capital gains (both long- and short-term) for the one-year period ending, as a
general rule, on October 31 of that year. For this purpose, however, any income
or gain retained by the Fund that is subject to corporate income tax will be
considered to have been distributed by year-end. The Fund anticipates that it
will pay such dividends and will make such distributions as are necessary in
order to avoid the application of this tax.
The Fund may invest in securities having original issue discount which may
generate income in excess of the cash received by the Fund. Consequently, the
Fund may be required to borrow or to liquidate securities in order to make
distributions.
36
<PAGE>
Any dividend or capital gains distribution received by a shareholder from
any investment company will have the effect of reducing the net asset value of
the shareholder's stock in that company by the exact amount of the dividend or
capital gains distribution. Furthermore, capital gains distributions and
dividends are subject to federal income taxes. If the net asset value of the
shares should be reduced below a shareholder's cost as a result of the payment
of dividends or the distribution of realized net long-term capital gains, such
payment or distribution would be in part a return of the shareholder's
investment to the extent of such reduction below the shareholder's cost, but
nonetheless would be fully taxable. Therefore, an investor should consider the
tax implications of purchasing Fund shares immediately prior to a distribution
record date.
Any loss realized by shareholders upon a redemption of shares within six
months of the date of their purchase will be treated as a long-term capital
loss to the extent of any distributions of net long-term capital gains during
the six-month period.
Dividends, interest and capital gains received by the Fund may give rise
to withholding and other taxes imposed by foreign countries. Tax treaties
between certain countries and the United States may reduce or eliminate such
taxes. Investors may be entitled to claim United States foreign tax credits or
deductions with respect to such taxes, subject to certain provisions and
limitations contained in the Code. If more than 50% of the Fund's total assets
at the close of its fiscal year consist of securities of foreign corporations,
the Fund would be eligible and would determine whether or not to file an
election with the Internal Revenue Service pursuant to which shareholders of
the Fund will be required to include their respective pro rata portions of such
withholding taxes in their United States income tax returns as gross income,
treat such respective pro rata portions as taxes paid by them, and deduct such
respective pro rata portions in computing their taxable income or,
alternatively, use them as foreign tax credits against their United States
income taxes. The Fund will report annually to its shareholders the amount per
share of such withholding. The Taxpayer Relief Act of 1997 mandates a holding
period requirement for claiming a foreign tax credit with respect to dividends.
The foreign tax credit normally available with respect to a dividend from a
corporation (or a Fund that has made an election under Section 853), is
disallowed if the shareholder has not held the stock for, in general, 16 days
in the case of common stock (46 days in the case of preferred stock) during the
30-day (90-day) period beginning 15 days (46 days) before the ex-date of the
dividend with respect to which the foreign tax is paid. The holding period
requirement applies to shareholders of the Fund as well as the Fund itself.
Special Rules for Certain Foreign Currency Transactions. In general, gains
from foreign currencies and from foreign currency options, foreign currency
futures and forward foreign exchange contracts relating to investments in
stock, securities or foreign currencies are currently considered to be
qualifying income for purposes of determining whether the Fund qualifies as a
regulated investment company. It is currently unclear, however, who will be
treated as the issuer of certain foreign currency instruments or how foreign
currency options, futures, or forward foreign currency contracts will be valued
for purposes of the regulated investment company diversification requirements
applicable to the Fund. The Fund may request a private letter ruling from the
Internal Revenue Service on some or all of these issues.
Under Code Section 988, special rules are provided for certain
transactions in a foreign currency other than the taxpayer's functional
currency (i.e., unless certain special rules apply, currencies other than the
U.S. dollar). In general, foreign currency gains or losses from forward
contracts, from futures contracts that are not "regulated futures contracts",
and from unlisted options will be treated as ordinary income or loss under Code
Section 988. Also, certain foreign exchange gains or losses derived with
respect to foreign fixed-income securities are also subject to Section 988
treatment. In general, therefore, Code Section 988 gains or losses will
increase or decrease the amount of the Fund's investment company taxable income
available to be distributed to shareholders as ordinary income, rather than
increasing or decreasing the amount of the Fund's net capital gain.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund may not be able to make any
ordinary dividend distributions and distributions paid during the year may be
characterized for tax purposes as a return of capital.
Exchange control regulations may restrict repatriations of investment
income and capital or the proceeds of securities sales by foreign investors
such as the Fund and may limit the Fund's ability to pay sufficient dividends
and to make sufficient distributions to satisfy the 90% and excise tax
distribution requirements.
37
<PAGE>
The Fund's transactions, if any, in foreign currencies, forward contracts,
options and futures contracts (including options and futures contracts on
foreign currencies) may be subject to special provisions of the Code that,
among other things, may affect the character of gains and losses realized by
the Fund (i.e., may affect whether gains or losses are ordinary or capital),
accelerate recognition of income to the Fund and defer Fund losses. These rules
could therefore affect the character, amount and timing of distributions to
shareholders. These rules also (a) could require the Fund to mark-to-market
certain types of the positions in its portfolio (i.e., treat them as they were
closed out) and (b) may cause the Fund to recognize income without receiving
cash with which to pay dividends or make distributions in amounts necessary to
satisfy the distribution requirements for avoiding income and excise taxes.
If the Fund invests in an entity which is classified as a "passive foreign
investment company" ("PFIC") for U.S. tax purposes, the application of certain
technical tax provisions applying to such companies could result in the
imposition of federal income tax with respect to such investments at the Fund
level which could not be eliminated by distributions to shareholders. The
Taxpayer Relief Act of 1997 establishes a mark-to-market regime which allows
taxpayers investing in PFICs to avoid most, if not all of the difficulties
posed by the PFIC rules. In any event, it is not anticipated that any taxes on
the Fund with respect to investments in PFIC's would be significant.
Distributions in excess of the Fund's current and accumulated earnings and
profits will, as to each shareholder, be treated as a tax-free return of
capital, to the extent of a shareholder's basis in his shares of the Fund, and
as a capital gain thereafter (if the shareholder held his or her shares of the
Fund as capital assets).
Shareholders receiving dividends or distributions in the form of
additional Fund shares should be treated for United States federal income tax
purposes as receiving a distribution in an amount equal to the amount of money
that the shareholders receiving cash dividends or distributions will receive,
and should have a cost basis in the shares received equal to such amount.
Any loss realized on the redemption by a shareholder of his shares will be
disallowed to the extent the shares disposed of are replaced, including
replacement through the reinvesting of dividends and capital gains
distributions in the Fund, within a period (of 61 days) beginning 30 days
before and ending 30 days after the disposition of the shares. In such a case,
the basis of the shares acquired will be increased to reflect the disallowed
loss. Any loss realized by a shareholder on the sale of a Fund share held by
the shareholder for six months or less will be treated for United States income
tax purposes as a long-term capital loss to the extent of any distributions or
deemed distributions of long-term capital gains received by the shareholder
with respect to such share.
Distributions may also be subject to state, local and foreign taxes
depending on each shareholder's particular situation.
The foregoing discussion is a general summary of certain of the current
Federal income tax laws regarding the Fund and investors. The discussion does
not purport to deal with all of the Federal income tax consequences applicable
to the Fund, or to all categories of investors, some of which may be subject to
special rules. Investors should consult their own tax advisors regarding the
tax consequences to them of investments in shares.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
As discussed in the Prospectus, from time to time the Fund may quote its
"yield" and/or its "total return" in advertisements and sales literature. Yield
is calculated for any 30-day period as follows: the amount of interest and/or
dividend income for each security in the Fund's portfolio is determined in
accordance with regulatory requirements; the total for the entire portfolio
constitutes the Fund's gross income for the period. Expenses accrued during the
period are subtracted to arrive at "net investment income." The resulting
amount is divided by the product of the net asset value per share on the last
day of the period multiplied by the average number of Fund shares outstanding
during the period that were entitled to dividends. This amount is added to 1
and raised to the sixth power. 1 is then subtracted from the result and the
difference is multiplied by 2 to arrive at the annualized yield. The Fund's
yield for the 30-day period ended October 31, 1998 was 8.95%.
The Fund's "average annual total return" represents an annualization of
the Fund's total return over a particular period and is computed by finding the
annual percentage rate which will result in the ending redeemable value of a
hypothetical $1,000 investment made at the beginning of a one, five or ten year
period, or for the period from the date of commencement of the Fund's
operations, if shorter than any of the foregoing. For the purpose
38
<PAGE>
of this calculation, it is assumed that all dividends and distributions are
reinvested. The formula for computing the average annual total return involves
a percentage obtained by dividing the ending redeemable value by the amount of
the initial investment, taking a root of the quotient (where the root is
equivalent to the number of years in the period) and subtracting 1 from the
result. The average annual total returns for the Fund for the 1 and 5 year
periods ended October 31, 1998 and for the period from July 31, 1992
(commencement of operations) through October 31, 1998, were 5.13%, 3.07% and
4.13%, respectively.
In addition to the foregoing, the Fund may advertise its total return over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. The Fund may compute its aggregate total return
for specified periods by determining the aggregate percentage rate which will
result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is assumed
that all dividends and distributions are reinvested. The formula for computing
aggregate total return involves a percentage obtained by dividing the ending
value by the initial $1,000 investment and subtracting 1 from the result. The
Fund's total returns for the 1 and 5 year periods ended October 31, 1998 and
for the period from July 31, 1992 through October 31, 1998, were 5.13%, 16.31%
and 28.81%, respectively.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in shares of the Fund by adding 1 to the Fund's
aggregate total return and multiplying by $10,000, $50,000 or $100,000, as the
case may be. Investments of $10,000, $50,000 and $100,000 in the Fund at
inception would have grown to $12,881, $64,405 and $128,810, respectively, at
October 31, 1998.
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent organizations.
DESCRIPTION OF SHARES
- --------------------------------------------------------------------------------
The shareholders of the Fund are entitled to a full vote for each full
share held. The Trustees have been elected by DWR as the then sole shareholder
of the Fund on May 11, 1992, or, in the case of Messrs. Schroeder and Stern, by
the other Trustees of the Fund on April 20, 1995. The Trustees themselves have
the power to alter the number and the terms of office of the Trustees, and they
may at any time lengthen their own terms or make their terms of unlimited
duration and appoint their own successors, provided that always at least a
majority of the Trustees has been elected by the shareholders of the Fund.
Under certain circumstances the Trustees may be removed by action of the
Trustees. The shareholders also have the right to remove the Trustees following
a meeting called for that purpose requested in writing by the record holders of
not less than ten percent of the Fund's outstanding shares. The voting rights
of shareholders are not cumulative, so that holders of more than 50 percent of
the shares voting can, if they choose, elect all Trustees being selected, while
the holders of the remaining shares would be unable to elect any Trustees.
The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios) and additional classes of shares
within any series (which would be used to distinguish among the rights of
different categories of shareholders, as might be required by future
regulations or other unforeseen circumstances). The Trustees have not presently
authorized any such additional series or classes of shares.
The Declaration of Trust provides that no Trustee, officer, employee or
agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his own
bad faith, willful misfeasance, gross negligence, or reckless disregard of his
duties. It also provides that all third persons shall look solely to the Fund's
property for satisfaction of claims arising in connection with the affairs of
the Fund. With the exceptions stated, the Declaration of Trust provides that a
Trustee, officer, employee or agent is entitled to be indemnified against all
liabilities in connection with the affairs of the Fund.
The Fund is authorized to issue an unlimited number of shares of
beneficial interest. The Fund shall be of unlimited duration subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders.
39
<PAGE>
CUSTODIAN AND TRANSFER AGENT
- --------------------------------------------------------------------------------
The Bank of New York, 90 Washington Street, New York, New York 10286 is
the Custodian of the Fund's assets. Any of the Fund's cash balances with the
Custodian in excess of $100,000 are unprotected by federal deposit insurance.
Such balances may, at times, be substantial.
Morgan Stanley Dean Witter Trust FSB ("MSDW Trust"), Harborside Financial
Center, Plaza Two, Jersey City, New Jersey 07311 is the Transfer Agent of the
Fund's shares and Dividend Disbursing Agent for payment of dividends and
distributions on Fund shares and Agent for shareholders under various
investment plans described herein. MSDW Trust is an affiliate of Morgan Stanley
Dean Witter Services Company Inc., the Fund's Manager, and Morgan Stanley Dean
Witter Distributors Inc., the Fund's Distributor. As Transfer Agent and
Dividend Disbursing Agent, MSDW Trust's responsibilities include maintaining
shareholder accounts, disbursing cash dividends and reinvesting dividends,
processing account registration changes, handling purchase and redemption
transactions, mailing prospectuses and reports, mailing and tabulating proxies,
processing share certificate transactions, and maintaining shareholder records
and lists. For these services MSDW Trust receives a per shareholder account
fee.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP serves as the independent accountants of the
Fund. The independent accountants are responsible for auditing the annual
financial statements of the Fund.
REPORTS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports
showing the Fund's portfolio and other information. An annual report containing
financial statements audited by independent accountants will be sent to
shareholders each year.
The Fund's fiscal year ends on October 31. The financial statements of the
Fund must be audited at least once a year by independent accountants whose
selection is made annually by the Fund's Board of Trustees.
LEGAL COUNSEL
- --------------------------------------------------------------------------------
Barry Fink, Esq., who is an officer and the General Counsel of the
Manager, is an officer and the General Counsel of the Fund.
EXPERTS
- --------------------------------------------------------------------------------
The financial statements of the Fund included in this Statement of
Additional Information and incorporated by reference in the Prospectus have
been so included and incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
40
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (40.7%)
$ 4,702 Federal Home Loan Mortgage Corp. ARM ............................ 7.643% 08/01/23 $ 4,775,792
3,577 Federal Home Loan Mortgage Corp. ARM ............................ 7.659 03/01/25 3,629,879
2,434 Federal Home Loan Mortgage Corp. PC GOLD ........................ 6.00 12/01/00 2,451,186
935 Federal National Mortgage Assoc. ................................ 9.50 06/01/20 987,985
19,289 Government National Mortgage Assoc. II ARM ...................... 6.875 06/20/22-
06/20/25 19,532,347
29,594 Government National Mortgage Assoc. II ARM ...................... 7.00 08/20/22-
12/20/24 29,892,536
------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(Identified Cost $60,918,681)............................................................ 61,269,725
------------
COLLATERALIZED MORTGAGE OBLIGATIONS (44.4%)
U.S. GOVERNMENT AGENCIES (29.1%)
14 Federal Home Loan Mortgage Corp. 1370 K (PAC I/O) ............... 1,089.16 09/15/22 274,331
2,070 Federal Home Loan Mortgage Corp. 1504 A (PAC) ................... 7.00 07/15/22 2,077,457
1,835 Federal Home Loan Mortgage Corp. 1560 A (PAC) ................... 6.50 02/15/23 1,830,790
17,168 Federal Home Loan Mortgage Corp. G 21 P ......................... 6.50 10/25/23 16,460,661
2,325 Federal National Mortgage Assoc. 1993-163 A ..................... 7.00 03/25/23 2,331,848
9,017 Federal National Mortgage Assoc. 1993-165 SE .................... 8.593+ 09/25/23 8,887,382
6,567 Federal National Mortgage Assoc. 1993-167 M (PAC) ............... 6.00 09/25/23 6,562,106
5,000 Federal National Mortgage Assoc. G96-1 PJ (PAC) ................. 7.50 11/17/25 5,282,750
------------
TOTAL U.S. GOVERNMENT AGENCIES (Identified Cost $44,293,261)............................. 43,707,325
------------
PRIVATE ISSUES (15.3%)
433 Citicorp Mortgage Securities, Inc. 1991-1 A ..................... 8.50 03/25/06 434,022
12,232 CountryWide Funding Corp. 1993-7 AS3 (TAC) ...................... 10.423+ 11/25/23 11,681,772
1,859 General Electric Capital Mortgage Services, Inc. 1992-11M ....... 8.00 09/25/22 1,884,443
7,000 Residential Funding Mortgage Security I, 1997-S12 A10 (PAC) ..... 6.70 08/25/27 7,053,625
1,954 Resolution Trust Corp. 1991- 6 C1 ............................... 9.00 09/25/28 1,979,422
------------
TOTAL PRIVATE ISSUES (Identified Cost $24,031,806)....................................... 23,033,284
------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Identified Cost $68,325,067).................. 66,740,609
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
41
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
PORTFOLIO OF INVESTMENTS October 31, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS (11.9%)
MEXICAN GOVERNMENT SECURITIES (a) (7.7%)
MXN 12,495 Cetes (Amortized Cost $13,560,599).............................. 17.01-% 11/19/98-
33.06 03/11/99 $ 11,598,391
------------
U.S. GOVERNMENT AGENCY (a) (1.7%)
$ 2,500 Federal Home Loan Mortgage Corp. (Amortized Cost $2,495,992).... 4.81 11/13/98 2,495,992
------------
REPURCHASE AGREEMENT (2.5%)
The Bank of New York (dated 10/30/98; proceeds $3,841,829) (b)
(Identified Cost $3,840,189).................................... 5.125 11/02/98 3,840,189
------------
TOTAL SHORT-TERM INVESTMENTS (Identified Cost $19,896,780)............................... 17,934,572
------------
TOTAL INVESTMENTS (Identified Cost $149,140,528) (c)....................... 97.0% 145,944,906
OTHER ASSETS IN EXCESS OF LIABILITIES ..................................... 3.0 4,496,052
------------
NET ASSETS ................................................................ 100.0% $150,440,958
============
</TABLE>
- --------------
ARM Adjustable Rate Mortgage.
I/O Interest-only securities.
PAC Planned Amortization Class.
PC Participation Certificate.
TAC Targeted Amortization Class.
+ Inverse floater: interest rate moves inversely to a designated index,
such as LIBOR (London Inter-Bank Offered Rate) or COFI (Cost of Funds
Index), typically at a multiple of the changes of the relevant index
rate.
(a) Securities were purchased on a discount basis. The interest rates
shown have been adjusted to reflect a money market equivalent
yield. The yield for Mexican Cetes does not reflect the effect of
exchange rates. The weighted average yield
to maturity at date of purchase for Mexican Cetes is 22.17%.
(b) Collateralized by $3,867,973 U.S. Treasury Inflation Note 3.625%
due 04/15/28 valued at $3,916,993.
(c) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$1,246,042 and the aggregate gross unrealized depreciation is
$4,441,664, resulting in net unrealized depreciation of
$3,195,622.
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT OCTOBER 31, 1998:
<TABLE>
<CAPTION>
CONTRACTS TO IN DELIVERY UNREALIZED
DELIVER EXCHANGE FOR DATE DEPRECIATION
- -----------------------------------------------------------------
<S> <C> <C> <C>
MXN 37,902,000 $ 3,749,000 11/04/98 $ (26,079)
</TABLE>
Currency Abbreviation:
- ----------------------
MXN Mexican Peso.
SEE NOTES TO FINANCIAL STATEMENTS
42
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $149,140,528)................ $145,944,906
Receivable for:
Investments sold ........................... 3,749,021
Interest ................................... 718,420
Principal paydowns ......................... 412,578
Shares of beneficial interest sold ......... 12,284
Prepaid expenses ................................ 33,159
------------
TOTAL ASSETS ............................... 150,870,368
------------
LIABILITIES:
Payable for:
Plan of distribution fee ................... 98,188
Shares of beneficial interest
repurchased ............................. 93,946
Dividends to shareholders .................. 58,882
Management fee ............................. 51,057
Investment advisory fee .................... 34,038
Accrued expenses ................................ 93,299
Contingencies (Note 10) ......................... --
------------
TOTAL LIABILITIES .......................... 429,410
------------
NET ASSETS ................................. $150,440,958
============
COMPOSITION OF NET ASSETS:
Paid-in-capital ................................. 383,541,250
Net unrealized depreciation ..................... (3,195,622)
Accumulated undistributed net investment
income ....................................... 622,302
Accumulated net realized loss ................... (230,526,972)
------------
NET ASSETS ................................. $150,440,958
============
NET ASSET VALUE PER SHARE,
17,502,018 shares outstanding (unlimited
shares authorized of $.01 par value).......... $8.60
=====
</TABLE>
STATEMENT OF OPERATIONS
For the year ended October 31, 1998
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ................................. $ 12,869,087
------------
EXPENSES
Plan of distribution fee ........................ 1,299,994
Management fee .................................. 697,150
Investment advisory fee ......................... 464,767
Transfer agent fees and expenses ................ 289,215
Professional fees ............................... 112,315
Shareholder reports and notices ................. 45,626
Registration fees ............................... 33,233
Trustees' fees and expenses ..................... 32,181
Custodian fees .................................. 22,162
Other ........................................... 29,533
------------
TOTAL EXPENSES ............................. 3,026,176
Less: expense offset ............................ (21,320)
------------
NET EXPENSES ............................... 3,004,856
------------
NET INVESTMENT INCOME ...................... 9,864,231
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss ............................... (790,110)
Net change in unrealized depreciation ........... (70,301)
------------
NET LOSS ................................... (860,411)
------------
NET INCREASE .................................... $ 9,003,820
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
43
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997
---------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................ $ 9,864,231 $ 13,981,737
Net realized loss .................................... (790,110) (2,132,540)
Net change in unrealized depreciation ................ (70,301) 6,751,649
------------- --------------
NET INCREASE ...................................... 9,003,820 18,600,846
Dividends from net investment income ................. (8,875,486) (13,827,194)
Net decrease from transactions in shares of beneficial
interest ........................................... (61,727,111) (143,263,528)
------------- --------------
NET DECREASE ...................................... (61,598,777) (138,489,876)
NET ASSETS:
Beginning of period .................................. 212,039,735 350,529,611
------------- --------------
END OF PERIOD
(Including undistributed net investment income of
$622,302 and $391,193, respectively) .............. $ 150,440,958 $ 212,039,735
============= ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
44
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
TCW/DW North American Government Income Trust (the "Fund") is registered under
the Investment Company Act of 1940, as amended (the "Act"), as a
non-diversified, open-end management investment company. The Fund's investment
objective is to earn a high level of income while maintaining relatively low
volatility of principal. The Fund was organized as a Massachusetts business
trust on February 19, 1992 and commenced operations on July 31, 1992.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest available bid price prior to the time of valuation; (2) when market
quotations are not readily available, including circumstances under which it is
determined by TCW Funds Management, Inc. (the "Adviser") that sale or bid
prices are not reflective of a security's market value, portfolio securities
are valued at their fair value as determined in good faith under procedures
established by and under the general supervision of the Trustees (valuation of
debt securities for which market quotations are not readily available may be
based upon current market prices of securities which are comparable in coupon,
rating and maturity or an appropriate matrix utilizing similar factors); and
(3) short-term debt securities having a maturity date of more than sixty days
at time of purchase are valued on a mark-to-market basis until sixty days prior
to maturity and thereafter at amortized cost based on their value on the 61st
day. Short-term debt securities having a maturity date of sixty days or less at
the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
The Fund amortizes premiums and accretes discounts based on the respective life
of the securities. Interest income is accrued daily.
C. FOREIGN CURRENCY TRANSLATION -- The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, other assets and liabilities and forward foreign
currency contracts are translated at the exchange rates prevailing at the end
of the period; and (2) purchases, sales, income and expenses are translated at
the exchange rates prevailing on the respective dates of such transactions. The
resultant exchange gains and losses are included in the
45
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued
Statement of Operations as realized and unrealized gain/loss on foreign
exchange transactions. Pursuant to U.S. Federal income tax regulations, certain
foreign exchange gains/losses included in realized and unrealized gain/loss are
included in or are a reduction of ordinary income for federal income tax
purposes. The Fund does not isolate that portion of the results of operations
arising as a result of changes in the foreign exchange rates from the changes
in the market prices of the securities.
D. FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may enter into forward
foreign currency contracts which are valued daily at the appropriate exchange
rates. The resultant unrealized exchange gains and losses are included in the
Statement of Operations as unrealized foreign currency gain or loss. The Fund
records realized gains or losses on delivery of the currency or at the time the
forward contract is extinguished (compensated) by entering into a closing
transaction prior to delivery.
E. DOLLAR ROLLS -- The Fund may enter into dollar rolls in which the Fund sells
securities for delivery and simultaneously contracts to repurchase
substantially similar securities at the current sales price on a specified
future date. The difference between the current sales price and the lower
forward price for the future purchase (often referred to as the "drop") is
amortized over the life of the dollar roll.
F. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which
may differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
46
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued
2. MANAGEMENT AGREEMENT
Pursuant to a Management Agreement with Morgan Stanley Dean Witter Services
Company Inc. (the "Manager"), the Fund pays the Manager a management fee,
accrued daily and payable monthly, by applying the following annual rates to
the net assets of the Fund determined as of the close of each business day:
0.39% to the portion of daily net assets not exceeding $3 billion and 0.36% to
the portion of daily net assets exceeding $3 billion.
Under the terms of the Agreement, the Manager maintains certain of the Fund's
books and records and furnishes, at its own expense, office space, facilities,
equipment, clerical, bookkeeping and certain legal services and pays the
salaries of all personnel, including officers of the Fund who are employees of
the Manager. The Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
3. INVESTMENT ADVISORY AGREEMENT
Pursuant to an Investment Advisory Agreement with the Adviser, the Fund pays an
advisory fee, calculated daily and payable monthly, by applying the following
annual rates to the net assets of the Fund determined as of the close of each
business day: 0.26% to the portion of average daily net assets not exceeding
$3 billion and 0.24% to the portion of average daily net assets exceeding
$3 billion.
Under the terms of the Agreement, the Fund has retained the Adviser to invest
the Fund's assets, including placing orders for the purchase and sale of
portfolio securities. The Adviser obtains and evaluates such information and
advice relating to the economy, securities markets, and specific securities as
it considers necessary or useful to continuously manage the assets of the Fund
in a manner consistent with its investment objective. In addition, the Adviser
pays the salaries of all personnel, including officers of the Fund, who are
employees of the Adviser.
4. PLAN OF DISTRIBUTION
Morgan Stanley Dean Witter Distributors Inc. (the "Distributor"), an affiliate
of the Manager, is the distributor of the Fund's shares and, in accordance with
a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act,
finances certain expenses in connection with the distribution of shares of the
Fund.
Under the Plan, the Distributor bears the expense of all promotional and
distribution related activities on behalf of the Fund, except for expenses that
the Trustees determine to reimburse, as described below. The following
activities and services may be provided by the Distributor, Dean Witter
Reynolds Inc. ("DWR"),
47
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued
an affiliate of the Manager and Distributor, its affiliates or other selected
broker-dealers under the Plan:
(1) compensation to, and expenses of Morgan Stanley Dean Witter Financial
Advisors 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.
The Fund is authorized to reimburse the Distributor for specific expenses the
Distributor incurs or plans to incur in promoting the distribution of the
Fund's shares. The amount of each monthly reimbursement payment may in no event
exceed an amount equal to a payment at the annual rate of 0.75% of the Fund's
average daily net assets during the month. Expenses incurred pursuant to the
Plan in any fiscal year in excess of 0.75% of the Fund's average daily net
assets will not be reimbursed by the Fund through payments accrued in any
subsequent fiscal year. For the year ended October 31, 1998, the distribution
fee was accrued at the annual rate of 0.73%.
5. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The proceeds from sales/prepayments of portfolio securities, excluding
short-term investments, for the year ended October 31, 1998 were as follows:
<TABLE>
<CAPTION>
SALES/
PURCHASES PREPAYMENTS
--------- -----------
<S> <C> <C>
U.S. Government Agencies ......... $5,187,500 $85,407,329
Private Issue CMOs ............... 7,024,063 2,239,110
</TABLE>
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Manager and
Distributor, is the Fund's transfer agent. At October 31, 1998, the Fund had
transfer agent fees and expenses payable of approximately $5,600.
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997
------------------------------------ ------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Sold .............................. 8,261,398 $ 71,093,361 2,792,480 $ 23,503,988
Reinvestment of dividends ......... 760,095 6,519,534 1,223,673 10,240,883
Repurchased ....................... (16,198,924) (139,340,006) (21,098,837) (177,008,399)
----------- -------------- ----------- --------------
Net decrease ...................... (7,177,431) $ (61,727,111) (17,082,684) $ (143,263,528)
=========== ============== =========== ==============
</TABLE>
48
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued
7. FEDERAL INCOME TAX STATUS
At October 31, 1998, the Fund had a net capital loss carryover of approximately
$230,527,000 which may be used to offset future capital gains to the extent
provided by regulations, which is available through October 31 of the following
years:
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS
-------------------------------------------------
2002 2003 2004 2005 2006
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$53,086 $160,560 $14,716 $2,013 $152
======= ======== ======= ====== ====
</TABLE>
As of October 31, 1998, the Fund had permanent book/tax differences
attributable to foreign currency losses. To reflect reclassifications arising
from these differences, accumulated undistributed net investment income was
charged and accumulated net realized loss was credited $757,636.
8. REVERSE REPURCHASE AND DOLLAR ROLL AGREEMENTS
Reverse repurchase and dollar roll agreements involve the risk that the market
value of the securities the Fund is obligated to repurchase under the agreement
may decline below the repurchase price. In the event the buyer of securities
under a reverse repurchase or dollar roll agreement files for bankruptcy or
becomes insolvent, the Fund's use of proceeds of the agreement may be
restricted pending a determination by the other party, its trustee or receiver,
whether to enforce the Fund's obligation to repurchase the securities.
Reverse repurchase agreements are collateralized by Fund securities with a
market value in excess of the Fund's obligation under the contract.
9. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward foreign currency contracts ("forward
contracts") to facilitate settlement of foreign currency denominated portfolio
transactions or to manage foreign currency exposure associated with foreign
currency denominated securities.
Forward contracts involve elements of market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The Fund bears the risk
of an unfavorable change in the foreign exchange rates underlying the forward
contracts. Risks may also arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
At October 31, 1998, there were outstanding forward contracts.
49
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS October 31, 1998, continued
10. LITIGATION
Several class action lawsuits, which have been consolidated for pretrial
purposes, were instituted in 1995 in the United States District Court, in New
York, against the Fund, some of its Trustees and officers, its underwriter and
distributor, the Adviser, the Manager, and other defendants, by certain
shareholders of the Fund. The consolidated amended complaint asserts claims
under the Securities Act of 1933 and generally alleges that the defendants made
inadequate and misleading disclosures in the prospectuses for the Fund, in
particular as such disclosures relate to the nature and risks of the Fund's
investments in mortgage-backed securities and Mexican securities. The
plaintiffs also challenge as excessive certain fees paid by the Fund. Damages
are sought in an unspecified amount. All defendants have moved to dismiss the
consolidated amended complaint, and on May 8, 1996 the motions to dismiss were
denied. The defendants then 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 which was denied by the Court on November 20, 1997. The ultimate
outcome of these matters is not presently determinable, and no provision has
been made in the Fund's financial statements for the effect, if any, of such
matters.
50
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 31 JULY 31, 1992*
------------------------------------------------------------------- THROUGH
1998 1997 1996 1995 1994 1993 OCTOBER 31, 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ......... $ 8.59 $ 8.39 $ 8.33 $ 8.89 $ 10.11 $ 9.96 $ 10.00
------ ------ ------ ------ ------- ------- -------
Net investment income ........................ 0.49 0.44 0.47 0.69 0.68 0.77 0.18
Net realized and unrealized gain (loss) ...... (0.05) 0.19 0.04 (0.59) (1.18) 0.14 (0.05)
------ ------ ------ ------ ------- ------- -------
Total from investment operations ............. 0.44 0.63 0.51 0.10 (0.50) 0.91 0.13
------ ------ ------ ------ ------- ------- -------
Less dividends and distributions from:
Net investment income ....................... (0.43) (0.43) (0.45) -- (0.47) (0.76) (0.17)
Net realized gain ........................... -- -- -- -- (0.02) -- --
Paid-in-capital ............................. -- -- -- (0.66) (0.23) -- --
------ ------ ------ ------ ------- ------- -------
Total dividends and distributions ............ (0.43) (0.43) (0.45) (0.66) (0.72) (0.76) (0.17)
------ ------ ------ ------ ------- ------- -------
Net asset value, end of period ............... $ 8.60 $ 8.59 $ 8.39 $ 8.33 $ 8.89 $ 10.11 $ 9.96
====== ====== ====== ====== ======= ======= =======
TOTAL INVESTMENT RETURN+ ..................... 5.13% 7.80% 6.38% 1.61% (5.06)% 9.35% 1.28%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ..................................... 1.69%(3) 1.65% 1.64% 1.59% 1.52% 1.54% 1.80%(2)
Net investment income ........................ 5.52% 5.18% 5.71% 8.28% 6.85% 7.78% 8.36%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in millions ....... $ 150 $ 212 $ 351 $ 658 $1,360 $ 2,986 $ 762
Portfolio turnover rate ...................... 8% -- 13% 44% 27% 77% 2%(1)
</TABLE>
- -------------
* Commencement of operations.
+ Calculated based on the net asset value as of the last business day of
the period.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
51
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of TCW/DW North American Government
Income Trust (the "Fund") at October 31, 1998, the results of its operations
for the year then ended, the changes in its net assets for each of the two
years in the period then ended and the financial highlights for each of the six
years in the period then ended and for the period July 31, 1992 (commencement
of operations) through October 31, 1992, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1998 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
November 20, 1998
52
<PAGE>
APPENDIX
- --------------------------------------------------------------------------------
RATINGS
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")
FIXED-INCOME SECURITY RATINGS
Aaa Fixed-income securities which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Fixed Income securities which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they comprise what
are generally known as high grade fixed-income securities. They are rated
lower than the best fixed-income securities because margins of protection
may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A Fixed-income securities which are rated A possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Fixed-income securities which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
fixed-income securities lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Fixed-income securities rated Aaa, Aa, A and Baa are considered investment
grade.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2, and 3 in
each generic rating classification from Aa through B in its corporate and
municipal fixed-income security rating system. The modifier 1 indicates that
the security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and a modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1, Prime-2, Prime-3.
Issuers rated Prime-1 have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 have a strong capacity for
repayment of short-term promissory obligations; and Issuers rated Prime-3 have
an acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S")
FIXED-INCOME SECURITY RATINGS
A Standard & Poor's fixed-income security rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
53
<PAGE>
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. The
ratings are based, in varying degrees, on the following considerations: (1)
likelihood of default-capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with any rating
and may, on occasion, rely on unaudited financial information. The ratings may
be changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or for other reasons.
AAA Fixed-income securities rated AAA have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA Fixed-income securities rated AA have a very strong capacity to pay
interest and repay principal and differs from the highest-rated issues
only in small degree.
A Fixed-income securities rated A have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
fixed-income securities in higher-rated categories.
BBB Fixed-income securities rated BBB are regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for fixed-income securities in this category
than for fixed-income securities in higher-rated categories.
Fixed-income securities rated AAA, AA, A and BBB are considered investment
grade.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not
rate a particular type of obligation as a matter of policy.
COMMERCIAL PAPER RATINGS
Standard and Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. The commercial paper rating is not a recommendation to purchase
or sell a security. The ratings are based upon current information furnished by
the issuer or obtained by S&P from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information. Ratings are graded into group categories,
ranging from "A" for the highest quality obligations to "D" for the lowest. The
categories are as follows:
Issues assigned A ratings are regarded as having the greatest capacity for
timely payment. Issues in this category are further refined with the
designation 1, 2 and 3 to indicate the relative degree of safety.
A-1 indicates that the degree of safety regarding timely payment is very
strong.
A-2 indicates capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming as
for issues designated "A-1".
A-3 indicates a satisfactory capacity for timely payment. Obligations carrying
this designation are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
54
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
PART C OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
(1) Financial statements and schedules, included in Prospectus
(Part A):
Page in
Prospectus
----------
Financial Highlights for the period July 31, 1992
(commencement of operations) through October 31, 1992
and the fiscal years ended October 31, 1993, 1994, 1995,
1996, 1997 and 1998......................................... 5
(2) Financial statements included in the Statement of
Additional Information (Part B):
Page in
SAI
---
Portfolio of Investments at October 31, 1998................ 41
Statement of Assets and Liabilities at October 31, 1998..... 43
Statement of Operations for the year ended
October 31, 1998............................................ 43
Statement of Changes in Net Assets for the fiscal years
ended October 31, 1997 and 1998............................. 44
Notes to Financial Statements at October 31, 1998........... 45
Financial Highlights for the period July 31, 1992
(commencement of operations) through October 31, 1992
and the fiscal years ended October 31, 1993, 1994, 1995,
1996, 1997 and 1998......................................... 51
(3) Financial statements included in Part C:
None.
Exhibits
8. -- Form of Amended and Restated Transfer Agency and Services Agreement
between the Registrant and Morgan Stanley Dean Witter Trust FSB
11. -- Consent of Independent Accountants
16. -- Schedule for Computation of Performance Quotations
27. -- Financial Data Schedule
- -------------------------------------------------------------------------------
All other exhibits were previously filed via EDGAR and are hereby incorporated
by reference
1
<PAGE>
Item 25. Persons Controlled by or Under Common Control With Registrant.
None
Item 26. Number of Holders of Securities.
(1) (2)
Number of Record Holders
Title of Class at October 31, 1998
-------------- -------------------
Shares of Beneficial Interest 15,479
Item 27. Indemnification.
Pursuant to Section 5.3 of the Registrant's Declaration of Trust and
under Section 4.8 of the Registrant's By-Laws, the indemnification of the
Registrant's trustees, officers, employees and agents is permitted if it is
determined that they acted under the belief that their actions were in or not
opposed to the best interest of the Registrant, and, with respect to any
criminal proceeding, they had reasonable cause to believe their conduct was not
unlawful. In addition, indemnification is permitted only if it is determined
that the actions in question did not render them liable by reason of willful
misfeasance, bad faith or gross negligence in the performance of their duties
or by reason of reckless disregard of their obligations and duties to the
Registrant. Trustees, officers, employees and agents will be indemnified for
the expense of litigation if it is determined that they are entitled to
indemnification against any liability established in such litigation. The
Registrant may also advance money for these expenses provided that they give
their undertakings to repay the Registrant unless their conduct is later
determined to permit indemnification.
Pursuant to Section 5.2 of the Registrant's Declaration of Trust and
paragraph 8 of the Registrant's Management and Advisory Agreements, none of the
Manager, the Adviser or any trustee, officer, employee or agent of the
Registrant shall be liable for any action or failure to act, except in the case
of bad faith, willful misfeasance, gross negligence or reckless disregard of
duties to the Registrant.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer,
or controlling person of the Registrant in connection with the successful
defense of any action, suit or proceeding) is asserted against the Registrant
by such trustee, officer or controlling person in connection with the shares
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act, and will be governed by the
final adjudication of such issue.
The Registrant hereby undertakes that it will apply the
indemnification provision of its by-laws in a manner consistent with Release
11330 of the Securities and Exchange Commission under the Investment Company
Act of 1940, so long as the interpretation of Sections 17(h) and 17(i) of such
Act remains in effect.
2
<PAGE>
Registrant, in conjunction with the Manager, Registrant's Trustees,
and other registered investment management companies managed by the Manager,
maintains insurance on behalf of any person who is or was a Trustee, officer,
employee, or agent of Registrant, or who is or was serving at the request of
Registrant as a trustee, director, officer, employee or agent of another trust
or corporation, against any liability asserted against him and incurred by him
or arising out of his position. However, in no event will Registrant maintain
insurance to indemnify any such person for any act for which Registrant itself
is not permitted to indemnify him.
Item 28. Business and Other Connections of Investment Adviser.
The TCW Funds Management, Inc. ("TCW") is a 100% owned subsidiary of
The TCW Group, Inc., a Nevada corporation. TCW presently serves as investment
adviser to: (1) TCW/DW North American Government Income Trust, an open-end,
non-diversified management company; (2) TCW/DW Income and Growth Fund, an
open-end, non-diversified management company; (3) TCW/DW Latin American Growth
Fund, an open-end, non-diversified management company; (4) TCW/DW Small Cap
Growth Fund, an open-end non-diversified management company; (5) TCW/DW Term
Trust 2000, a closed-end, diversified management company; (6) TCW/DW Term Trust
2002, a closed-end diversified management company; (7) TCW/DW Term Trust 2003,
a closed-end diversified management company; (8) TCW/DW Emerging Markets
Opportunities Trust, an open-end, non-diversified management company; (9)
TCW/DW Total Return Trust, an open-end non-diversified management investment
company; (10) TCW/DW Mid-Cap Equity Trust, an open-end, diversified management
investment company; and (11) TCW/DW Global Telecom Trust, an open-end
diversified management investment company. TCW also serves as investment
adviser or sub-adviser to other investment companies, including foreign
investment companies. The list required by this Item 28 of the officers and
directors of TCW together with information as to any other business,
profession, vocation or employment of a substantive nature engaged in by TCW
and such officers and directors during the past two years, is incorporated by
reference to Form ADV (File No. 801-29075) filed by TCW pursuant to the
Investment Advisers Act.
Item 29. Principal Underwriters.
(a) Morgan Stanley Dean Witter Distributors Inc. ("MSDW Distributors"), a
Delaware corporation,is the principal underwriter of the Registrant. MSDW
Distributors is also the principal underwriter of the following investment
companies:
(1) Active Assets California Tax-Free Trust
(2) Active Assets Government Securities Trust
(3) Active Assets Money Trust
(4) Active Assets Tax-Free Trust
(5) Morgan Stanley Dean Witter American Value Fund
(6) Morgan Stanley Dean Witter Balanced Growth Fund
(7) Morgan Stanley Dean Witter Balanced Income Fund
(8) Morgan Stanley Dean Witter California Tax-Free Daily Income Trust
(9) Morgan Stanley Dean Witter California Tax-Free Income Fund
(10) Morgan Stanley Dean Witter Capital Appreciation Fund
(11) Morgan Stanley Dean Witter Capital Growth Securities
(12) Morgan Stanley Dean Witter Competitive Edge Fund, "Best Ideas Portfolio"
(13) Morgan Stanley Dean Witter Convertible Securities Trust
(14) Morgan Stanley Dean Witter Developing Growth Securities Trust
(15) Morgan Stanley Dean Witter Diversified Income Trust
(16) Morgan Stanley Dean Witter Dividend Growth Securities Inc.
(17) Morgan Stanley Dean Witter Equity Fund
(18) Morgan Stanley Dean Witter European Growth Fund Inc.
3
<PAGE>
(19) Morgan Stanley Dean Witter Federal Securities Trust
(20) Morgan Stanley Dean Witter Financial Services Trust
(21) Morgan Stanley Dean Witter Fund of Funds
(22) Morgan Stanley Dean Witter Global Dividend Growth Securities
(23) Morgan Stanley Dean Witter Global Short-Term Income Fund Inc.
(24) Morgan Stanley Dean Witter Global Utilities Fund
(25) Morgan Stanley Dean Witter Growth Fund
(26) Morgan Stanley Dean Witter Hawaii Municipal Trust
(27) Morgan Stanley Dean Witter Health Sciences Trust
(28) Morgan Stanley Dean Witter High Yield Securities Inc.
(29) Morgan Stanley Dean Witter Income Builder Fund
(30) Morgan Stanley Dean Witter Information Fund
(31) Morgan Stanley Dean Witter Intermediate Income Securities
(32) Morgan Stanley Dean Witter International SmallCap Fund
(33) Morgan Stanley Dean Witter Japan Fund
(34) Morgan Stanley Dean Witter Limited Term Municipal Trust
(35) Morgan Stanley Dean Witter Liquid Asset Fund Inc.
(36) Morgan Stanley Dean Witter Market Leader Trust
(37) Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities
(38) Morgan Stanley Dean Witter Mid-Cap Growth Fund
(39) Morgan Stanley Dean Witter Multi-State Municipal Series Trust
(40) Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
(41) Morgan Stanley Dean Witter New York Municipal Money Market Trust
(42) Morgan Stanley Dean Witter New York Tax-Free Income Fund
(43) Morgan Stanley Dean Witter Pacific Growth Fund Inc.
(44) Morgan Stanley Dean Witter Precious Metals and Minerals Trust
(45) Morgan Stanley Dean Witter Prime Income Trust
(46) Morgan Stanley Dean Witter S&P 500 Index Fund
(47) Morgan Stanley Dean Witter S&P 500 Select Fund
(48) Morgan Stanley Dean Witter Short-Term Bond Fund
(49) Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
(50) Morgan Stanley Dean Witter Special Value Fund
(51) Morgan Stanley Dean Witter Strategist Fund
(52) Morgan Stanley Dean Witter Tax-Exempt Securities Trust
(53) Morgan Stanley Dean Witter Tax-Free Daily Income Trust
(54) Morgan Stanley Dean Witter U.S. Government Money Market Trust
(55) Morgan Stanley Dean Witter U.S. Government Securities Trust
(56) Morgan Stanley Dean Witter Utilities Fund
(57) Morgan Stanley Dean Witter Value-Added Market Series
(58) Morgan Stanley Dean Witter Value Fund
(59) Morgan Stanley Dean Witter Variable Investment Series
(60) Morgan Stanley Dean Witter World Wide Income Trust
(1) TCW/DW Emerging Markets Opportunities Trust
(2) TCW/DW Global Telecom Trust
(3) TCW/DW Income and Growth
(4) TCW/DW Latin American Growth Fund
(5) TCW/DW Mid-Cap Equity Trust
(6) TCW/DW North American Government Income Trust
(7) TCW/DW Small Cap Growth Fund
(8) TCW/DW Total Return Trust
4
<PAGE>
(b) The following information is given regarding directors and officers of
MSDW Distributors not listed in Item 28 above. The principal address of
MSDW Distributors is Two World Trade Center, New York, New York 10048.
POSITION AND OFFICE WITH DISTRIBUTORS
NAME AND THE REGISTRANT
- ---- -------------------------------------
Philip J. Purcell Director of MSDW Distributors.
James F. Higgins Director of MSDW Distributors.
Christine A. Edwards Executive Vice President, Secretary, Chief
Legal Officer and Director of MSDW Distributors.
Mitchell M. Merin Chairman and Director of MSDW Distributors and
Vice President of the Registrant.
John B. Kemp III President of MSDW Distributors
Robert Scanlan Executive Vice President of MSDW Distributors
and Vice President of the Registrant.
Robert S. Giambrone Senior Vice President of MSDW Distributors and
Vice President of the Registrant.
Barry Fink Senior Vice President, Assistant General
Counsel and Assistant Secretary of
MSDW Distributors and Vice President, Secretary
and General Counsel of the Registrant.
Frederick K. Kubler Senior Vice President, Assistant Secretary and
Chief Compliance Officer of MSDW Distributors.
Michael T. Gregg Vice President and Assistant Secretary of
MSDW Distributors.
Michael Interrante Assistant Treasurer of MSDW Distributors.
Item 30. Location of Accounts and Records
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder
are maintained by the Manager at its offices, except records relating to
holders of shares issued by the Registrant, which are maintained by the
Registrant's Transfer Agent, at its place of business as shown in the
prospectus.
Item 31. Management Services
Registrant is not a party to any such management-related service
contract.
5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York on the 25th day of November, 1998.
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
By /s/Barry Fink
----------------------------------
Barry Fink
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 7 has been signed below by the following persons
in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
(1) Principal Executive Officer President, Chief Executive
Officer, Trustee and Chairman
By /s/ Charles A. Fiumefreddo 11/25/98
----------------------------
Charles A. Fiumefreddo
(2) Principal Financial Officer Treasurer and Principal
Accounting Officer
By /s/ Thomas F. Caloia 11/25/98
----------------------------
Thomas F. Caloia
(3) Majority of the Trustees
Charles A. Fiumefreddo (Chairman) Richard M. DeMartini
Thomas J. Larkin, Jr. Marc I. Stern
By /s/ Barry Fink 11/25/98
----------------------------
Barry Fink
Attorney-in-Fact
John C. Argue
John R. Haire
Manuel H. Johnson
Michael E. Nugent
John L. Schroeder
By /s/ Stuart M. Strauss 11/25/98
----------------------------
Stuart M. Strauss
Attorney-in-Fact
<PAGE>
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
EXHIBIT INDEX
8.- Form of Transfer Agency and Services Agreement between Registrant and
Dean Witter Trust Company
11.- Consent of Independent Accounts
16.- Schedule for Computation of Performance Quotations
27.- Financial Data Schedule
1
<PAGE>
AMENDED AND RESTATED
TRANSFER AGENCY AND SERVICE AGREEMENT
with
MORGAN STANLEY DEAN WITTER TRUST FSB
[open-end funds]
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
Article 1 Terms of Appointment...................................... 1
Article 2 Fees and Expenses......................................... 5
Article 3 Representations and Warranties of MSDW TRUST.............. 6
Article 4 Representations and Warranties of the Fund................ 7
Article 5 Duty of Care and Indemnification.......................... 7
Article 6 Documents and Covenants of the Fund and MSDW TRUST........ 10
Article 7 Duration and Termination of Agreement..................... 13
Article 8 Assignment................................................ 14
Article 9 Affiliations.............................................. 14
Article 10 Amendment................................................. 15
Article 11 Applicable Law............................................ 15
Article 12 Miscellaneous............................................. 15
Article 13 Merger of Agreement....................................... 17
Article 14 Personal Liability........................................ 17
-i-
<PAGE>
AMENDED AND RESTATED TRANSFER AGENCY AND SERVICE AGREEMENT
AMENDED AND RESTATED AGREEMENT made as of the 22nd day of June, 1998
by and between each of the Funds listed on the signature pages hereof, each of
such Funds acting severally on its own behalf and not jointly with any of such
other Funds (each such Fund hereinafter referred to as the "Fund"), each such
Fund having its principal office and place of business at Two World Trade
Center, New York, New York, 10048, and MORGAN STANLEY DEAN WITTER TRUST FSB
("MSDW TRUST"), a federally chartered savings bank, having its principal office
and place of business at Harborside Financial Center, Plaza Two, Jersey City,
New Jersey 07311.
WHEREAS, the Fund desires to appoint MSDW TRUST as its transfer agent,
dividend disbursing agent and shareholder servicing agent and MSDW TRUST
desires to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of MSDW TRUST
------------------------------------------
1.1 Subject to the terms and conditions set forth in this
Agreement, the Fund hereby employs and appoints MSDW TRUST to act as, and MSDW
TRUST agrees to act as, the transfer agent for each series and class of shares
of the Fund, whether now or hereafter authorized or issued ("Shares"), dividend
disbursing agent and shareholder servicing agent in
-1-
<PAGE>
connection with any accumulation, open-account or similar plans provided to the
holders of such Shares ("Shareholders") and set out in the currently effective
prospectus and statement of additional information ("prospectus") of the Fund,
including without limitation any periodic investment plan or periodic
withdrawal program.
1.2 MSDW TRUST agrees that it will perform the following
services:
(a) In accordance with procedures established from time to
time by agreement between the Fund and MSDW TRUST, MSDW TRUST shall:
(i) Receive for acceptance, orders for the purchase of Shares,
and promptly deliver payment and appropriate documentation therefor to the
custodian of the assets of the Fund (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number
of Shares and issue certificates therefor or hold such Shares in book form in
the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and
redemption directions and deliver the appropriate documentation therefor to the
Custodian;
(iv) At the appropriate time as and when it receives monies
paid to it by the Custodian with respect to any redemption, pay over or cause
to be paid over in the appropriate manner such monies as instructed by the
redeeming Shareholders;
-2-
<PAGE>
(v) Effect transfers of Shares by the registered owners
thereof upon receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and
distributions declared by the Fund;
(vii) Calculate any sales charges payable by a Shareholder on
purchases and/or redemptions of Shares of the Fund as such charges may be
reflected in the prospectus;
(viii) Maintain records of account for and advise the Fund and
its Shareholders as to the foregoing; and
(ix) Record the issuance of Shares of the Fund and maintain
pursuant to Rule 17Ad-10(e) under the Securities Exchange Act of 1934 ("1934
Act") a record of the total number of Shares of the Fund which are authorized,
based upon data provided to it by the Fund, and issued and outstanding. MSDW
TRUST shall also provide to the Fund on a regular basis the total number of
Shares that are authorized, issued and outstanding and shall notify the Fund in
case any proposed issue of Shares by the Fund would result in an overissue. In
case any issue of Shares would result in an overissue, MSDW TRUST shall refuse
to issue such Shares and shall not countersign and issue any certificates
requested for such Shares. When recording the issuance of Shares, MSDW TRUST
shall have no obligation to take cognizance of any Blue Sky laws relating to
the issue of sale of such Shares, which functions shall be the sole
responsibility of the Fund.
(b) In addition to and not in lieu of the services set forth
in the above paragraph (a), MSDW TRUST shall:
-3-
<PAGE>
(i) perform all of the customary services of a transfer agent,
dividend disbursing agent and, as relevant, shareholder servicing agent in
connection with dividend reinvestment, accumulation, open-account or similar
plans (including without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to, maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing proxies, receiving and
tabulating proxies, mailing shareholder reports and prospectuses to current
Shareholders, withholding taxes on U.S. resident and non-resident alien
accounts, preparing and filing appropriate forms required with respect to
dividends and distributions by federal tax authorities for all Shareholders,
preparing and mailing confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares and other confirmable
transactions in Shareholder accounts, preparing and mailing activity statements
for Shareholders and providing Shareholder account information;
(ii) open any and all bank accounts which may be necessary or
appropriate in order to provide the foregoing services; and
(iii) provide a system that will enable the Fund to monitor
the total number of Shares sold in each State or other jurisdiction.
(c) In addition, the Fund shall:
(i) identify to MSDW TRUST in writing those transactions and
assets to be treated as exempt from Blue Sky reporting for each State; and
-4-
<PAGE>
(ii) verify the inclusion on the system prior to activation of
each State in which Fund shares may be sold and thereafter monitor the daily
purchases and sales for shareholders in each State. The responsibility of MSDW
TRUST for the Fund's status under the securities laws of any State or other
jurisdiction is limited to the inclusion on the system of each State as to
which the Fund has informed MSDW TRUST that shares may be sold in compliance
with state securities laws and the reporting of purchases and sales in each
such State to the Fund as provided above and as agreed from time to time by the
Fund and MSDW TRUST.
(d) MSDW TRUST shall provide such additional services and
functions not specifically described herein as may be mutually agreed between
MSDW TRUST and the Fund. Procedures applicable to such services may be
established from time to time by agreement between the Fund and MSDW TRUST.
Article 2 Fees and Expenses
-----------------
2.1 For performance by MSDW TRUST pursuant to this
Agreement, each Fund agrees to pay MSDW TRUST an annual maintenance fee for
each Shareholder account and certain transactional fees, if applicable, as set
out in the respective fee schedule attached hereto as Schedule A. Such fees and
out-of-pocket expenses and advances identified under Section 2.2 below may be
changed from time to time subject to mutual written agreement between the Fund
and MSDW TRUST.
2.2 In addition to the fees paid under Section 2.1 above, the
Fund agrees to reimburse MSDW TRUST for out of pocket expenses in connection
with the services rendered
-5-
<PAGE>
by MSDW TRUST hereunder. In addition, any other expenses incurred by MSDW TRUST
at the request or with the consent of the Fund will be reimbursed by the Fund.
2.3 The Fund agrees to pay all fees and reimbursable expenses
within a reasonable period of time following the mailing of the respective
billing notice. Postage for mailing of dividends, proxies, Fund reports and
other mailings to all Shareholder accounts shall be advanced to MSDW TRUST by
the Fund upon request prior to the mailing date of such materials.
Article 3 Representations and Warranties of MSDW TRUST
--------------------------------------------
MSDW TRUST represents and warrants to the Fund that:
3.1 It is a federally chartered savings bank whose principal
office is in New Jersey.
3.2 It is and will remain registered with the U.S. Securities
and Exchange Commission ("SEC") as a Transfer Agent pursuant to the
requirements of Section 17A of the 1934 Act.
3.3 It is empowered under applicable laws and by its charter
and By-Laws to enter into and perform this Agreement.
3.4 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.5 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
-6-
<PAGE>
Article 4 Representations and Warranties of the Fund
------------------------------------------
The Fund represents and warrants to MSDW TRUST that:
4.1 It is a corporation duly organized and existing and in
good standing under the laws of Delaware or Maryland or a trust duly organized
and existing and in good standing under the laws of Massachusetts, as the case
may be.
4.2 It is empowered under applicable laws and by its Articles
of Incorporation or Declaration of Trust, as the case may be, and under its
By-Laws to enter into and perform this Agreement.
4.3 All corporate proceedings necessary to authorize it to
enter into and perform this Agreement have been taken.
4.4 It is an investment company registered with the SEC under
the Investment Company Act of 1940, as amended (the "1940 Act").
4.5 A registration statement under the Securities Act of 1933
(the "1933 Act") is currently effective and will remain effective, and
appropriate state securities law filings have been made and will continue to be
made, with respect to all Shares of the Fund being offered for sale.
Article 5 Duty of Care and Indemnification
--------------------------------
5.1 MSDW TRUST shall not be responsible for, and the Fund
shall indemnify and hold MSDW TRUST harmless from and against, any and all
losses, damages, costs,
-7-
<PAGE>
charges, counsel fees, payments, expenses and liability arising out of or
attributable to:
(a) All actions of MSDW TRUST or its agents or subcontractors
required to be taken pursuant to this Agreement, provided that such actions are
taken in good faith and without negligence or willful misconduct.
(b) The Fund's refusal or failure to comply with the terms of
this Agreement, or which arise out of the Fund's lack of good faith, negligence
or willful misconduct or which arise out of breach of any representation or
warranty of the Fund hereunder.
(c) The reliance on or use by MSDW TRUST or its agents or
subcontractors of information, records and documents which (i) are received by
MSDW TRUST or its agents or subcontractors and furnished to it by or on behalf
of the Fund, and (ii) have been prepared and/or maintained by the Fund or any
other person or firm on behalf of the Fund.
(d) The reliance on, or the carrying out by MSDW TRUST or its
agents or subcontractors of, any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any
requirement under the federal securities laws or regulations or the securities
or Blue Sky laws of any State or other jurisdiction that notice of offering of
such Shares in such State or other jurisdiction or in violation of any stop
order or other determination or ruling by any federal agency or any State or
other jurisdiction with respect to the offer or sale of such Shares in such
State or other jurisdiction.
-8-
<PAGE>
5.2 MSDW TRUST shall indemnify and hold the Fund harmless from
or against any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to any action or failure
or omission to act by MSDW TRUST as a result of the lack of good faith,
negligence or willful misconduct of MSDW TRUST, its officers, employees or
agents.
5.3 At any time, MSDW TRUST may apply to any officer of the
Fund for instructions, and may consult with legal counsel to the Fund, with
respect to any matter arising in connection with the services to be performed
by MSDW TRUST under this Agreement, and MSDW TRUST and its agents or
subcontractors shall not be liable and shall be indemnified by the Fund for any
action taken or omitted by it in reliance upon such instructions or upon the
opinion of such counsel. MSDW TRUST, its agents and subcontractors shall be
protected and indemnified in acting upon any paper or document furnished by or
on behalf of the Fund, reasonably believed to be genuine and to have been
signed by the proper person or persons, or upon any instruction, information,
data, records or documents provided to MSDW TRUST or its agents or
subcontractors by machine readable input, telex, CRT data entry or other
similar means authorized by the Fund, and shall not be held to have notice of
any change of authority of any person, until receipt of written notice thereof
from the Fund. MSDW TRUST, its agents and subcontractors shall also be
protected and indemnified in recognizing stock certificates which are
reasonably believed to bear the proper manual or facsimile signature of the
officers of the Fund, and the proper countersignature of any former transfer
agent or registrar, or of a co-transfer agent or co-registrar.
-9-
<PAGE>
5.4 In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such party shall not be liable for
damages to the other for any damages resulting from such failure to perform or
otherwise from such causes.
5.5 Neither party to this Agreement shall be liable to the
other party for consequential damages under any provision of this Agreement or
for any act or failure to act hereunder.
5.6 In order that the indemnification provisions contained in
this Article 5 shall apply, upon the assertion of a claim for which either
party may be required to indemnify the other, the party seeking indemnification
shall promptly notify the other party of such assertion, and shall keep the
other party advised with respect to all developments concerning such claim. The
party who may be required to indemnify shall have the option to participate
with the party seeking indemnification in the defense of such claim. The party
seeking indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to indemnify it
except with the other party's prior written consent.
Article 6 Documents and Covenants of the Fund and MSDW TRUST
--------------------------------------------------
6.1 The Fund shall promptly furnish to MSDW TRUST the
following, unless previously furnished to Dean Witter Trust Company, the prior
transfer agent of the Fund:
-10-
<PAGE>
(a) If a corporation:
(i) A certified copy of the resolution of the Board of
Directors of the Fund authorizing the appointment of MSDW TRUST and the
execution and delivery of this Agreement;
(ii) A certified copy of the Articles of Incorporation and
By-Laws of the Fund and all amendments thereto;
(iii) Certified copies of each vote of the Board of Directors
designating persons authorized to give instructions on behalf of the Fund and
signature cards bearing the signature of any officer of the Fund or any other
person authorized to sign written instructions on behalf of the Fund;
(iv) A specimen of the certificate for Shares of the Fund in
the form approved by the Board of Directors, with a certificate of the
Secretary of the Fund as to such approval;
(b) If a business trust:
(i) A certified copy of the resolution of the Board of
Trustees of the Fund authorizing the appointment of MSDW TRUST and the
execution and delivery of this Agreement;
(ii) A certified copy of the Declaration of Trust and By-Laws
of the Fund and all amendments thereto;
-11-
<PAGE>
(iii) Certified copies of each vote of the Board of Trustees
designating persons authorized to give instructions on behalf of the Fund and
signature cards bearing the signature of any officer of the Fund or any other
person authorized to sign written instructions on behalf of the Fund;
(iv) A specimen of the certificate for Shares of the Fund in
the form approved by the Board of Trustees, with a certificate of the Secretary
of the Fund as to such approval;
(c) The current registration statements and any amendments and
supplements thereto filed with the SEC pursuant to the requirements of the 1933
Act or the 1940 Act;
(d) All account application forms or other documents relating
to Shareholder accounts and/or relating to any plan, program or service offered
or to be offered by the Fund; and
(e) Such other certificates, documents or opinions as MSDW
TRUST deems to be appropriate or necessary for the proper performance of its
duties.
6.2 MSDW TRUST hereby agrees to establish and maintain
facilities and procedures reasonably acceptable to the Fund for safekeeping of
Share certificates, check forms and facsimile signature imprinting devices, if
any; and for the preparation or use, and for keeping account of, such
certificates, forms and devices.
-12-
<PAGE>
6.3 MSDW TRUST shall prepare and keep records relating to the
services to be performed hereunder, in the form and manner as it may deem
advisable and as required by applicable laws and regulations. To the extent
required by Section 31 of the 1940 Act, and the rules and regulations
thereunder, MSDW TRUST agrees that all such records prepared or maintained by
MSDW TRUST relating to the services performed by MSDW TRUST hereunder are the
property of the Fund and will be preserved, maintained and made available in
accordance with such Section 31 of the 1940 Act, and the rules and regulations
thereunder, and will be surrendered promptly to the Fund on and in accordance
with its request.
6.4 MSDW TRUST and the Fund agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential and shall not be voluntarily disclosed to
any other person except as may be required by law or with the prior consent of
MSDW TRUST and the Fund.
6.5 In case of any request or demands for the inspection of
the Shareholder records of the Fund, MSDW TRUST will endeavor to notify the
Fund and to secure instructions from an authorized officer of the Fund as to
such inspection. MSDW TRUST reserves the right, however, to exhibit the
Shareholder records to any person whenever it is advised by its counsel that it
may be held liable for the failure to exhibit the Shareholder records to such
person.
Article 7 Duration and Termination of Agreement
-------------------------------------
7.1 This Agreement shall remain in full force and effect until
August 1,
-13-
<PAGE>
2000 and from year-to-year thereafter unless terminated by either party as
provided in Section 7.2 hereof.
7.2 This Agreement may be terminated by the Fund on 60 days
written notice, and by MSDW TRUST on 90 days written notice, to the other party
without payment of any penalty.
7.3 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and other
materials will be borne by the Fund. Additionally, MSDW TRUST reserves the
right to charge for any other reasonable fees and expenses associated with such
termination.
Article 8 Assignment
----------
8.1 Except as provided in Section 8.3 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
8.2 This Agreement shall inure to the benefit of and be
binding upon the parties and their respective permitted successors and assigns.
8.3 MSDW TRUST may, in its sole discretion and without further
consent by the Fund, subcontract, in whole or in part, for the performance of
its obligations and duties hereunder with any person or entity including but
not limited to companies which are affiliated with MSDW TRUST; provided,
however, that such person or entity has and maintains the qualifications, if
any, required to perform such obligations and duties, and that MSDW TRUST
-14-
<PAGE>
shall be as fully responsible to the Fund for the acts and omissions of any
agent or subcontractor as it is for its own acts or omissions under this
Agreement.
Article 9 Affiliations
------------
9.1 MSDW TRUST may now or hereafter, without the consent of or
notice to the Fund, function as transfer agent and/or shareholder servicing
agent for any other investment company registered with the SEC under the 1940
Act and for any other issuer, including without limitation any investment
company whose adviser, administrator, sponsor or principal underwriter is or
may become affiliated with Morgan Stanley Dean Witter & Co. or any of its
direct or indirect subsidiaries or affiliates.
9.2 It is understood and agreed that the Directors or Trustees
(as the case may be), officers, employees, agents and shareholders of the Fund,
and the directors, officers, employees, agents and shareholders of the Fund's
investment adviser and/or distributor, are or may be interested in MSDW TRUST
as directors, officers, employees, agents and shareholders or otherwise, and
that the directors, officers, employees, agents and shareholders of MSDW TRUST
may be interested in the Fund as Directors or Trustees (as the case may be),
officers, employees, agents and shareholders or otherwise, or in the investment
adviser and/or distributor as directors, officers, employees, agents,
shareholders or otherwise.
Article 10 Amendment
---------
10.1 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution
of the Board of Directors or the Board of Trustees (as the case may be) of the
Fund.
-15-
<PAGE>
Article 11 Applicable Law
--------------
11.1 This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of the State of New
York.
Article 12 Miscellaneous
-------------
12.1 In the event that one or more additional investment
companies managed or administered by Morgan Stanley Dean Witter Advisors Inc.
or any of its affiliates ("Additional Funds") desires to retain MSDW TRUST to
act as transfer agent, dividend disbursing agent and/or shareholder servicing
agent, and MSDW TRUST desires to render such services, such services shall be
provided pursuant to a letter agreement, substantially in the form of Exhibit A
hereto, between MSDW TRUST and each Additional Fund.
12.2 In the event of an alleged loss or destruction of any
Share certificate, no new certificate shall be issued in lieu thereof, unless
there shall first be furnished to MSDW TRUST an affidavit of loss or
non-receipt by the holder of Shares with respect to which a certificate has
been lost or destroyed, supported by an appropriate bond satisfactory to MSDW
TRUST and the Fund issued by a surety company satisfactory to MSDW TRUST,
except that MSDW TRUST may accept an affidavit of loss and indemnity agreement
executed by the registered holder (or legal representative) without surety in
such form as MSDW TRUST deems appropriate indemnifying MSDW TRUST and the Fund
for the issuance of a replacement certificate, in cases where the alleged loss
is in the amount of $1,000 or less.
12.3 In the event that any check or other order for payment of
money on the
-16-
<PAGE>
account of any Shareholder or new investor is returned unpaid for any reason,
MSDW TRUST will (a) give prompt notification to the Fund's distributor
("Distributor") (or to the Fund if the Fund acts as its own distributor) of
such non-payment; and (b) take such other action, including imposition of a
reasonable processing or handling fee, as MSDW TRUST may, in its sole
discretion, deem appropriate or as the Fund and, if applicable, the Distributor
may instruct MSDW TRUST.
12.4 Any notice or other instrument authorized or required by
this Agreement to be given in writing to the Fund or to MSDW TRUST shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Fund:
[Name of Fund]
Two World Trade Center
New York, New York 10048
Attention: General Counsel
To MSDW TRUST:
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
Attention: President
Article 13 Merger of Agreement
-------------------
13.1 This Agreement constitutes the entire agreement between
the parties hereto and supersedes any prior agreement with respect to the
subject matter hereof whether oral or written.
-17-
<PAGE>
Article 14 Personal Liability
------------------
14.1 In the case of a Fund organized as a Massachusetts
business trust, a copy of the Declaration of Trust of the Fund is on file with
the Secretary of The Commonwealth of Massachusetts, and notice is hereby given
that this instrument is executed on behalf of the Board of Trustees of the Fund
as Trustees and not individually and that the obligations of this instrument
are not binding upon any of the Trustees or shareholders individually but are
binding only upon the assets and property of the Fund; provided, however, that
the Declaration of Trust of the Fund provides that the assets of a particular
Series of the Fund shall under no circumstances be charged with liabilities
attributable to any other Series of the Fund and that all persons extending
credit to, or contracting with or having any claim against, a particular Series
of the Fund shall look only to the assets of that particular Series for payment
of such credit, contract or claim.
IN WITNESS WHEREOF, the parties hereto have caused this
Amended and Restated Agreement to be executed in their names and on their
behalf by and through their duly authorized officers, as of the day and year
first above written.
MORGAN STANLEY DEAN WITTER FUNDS
MONEY MARKET FUNDS
1. Morgan Stanley Dean Witter Liquid Asset Fund Inc.
2. Active Assets Money Trust
3. Morgan Stanley Dean Witter U.S. Government Money Market Trust
4. Active Assets Government Securities Trust
5. Morgan Stanley Dean Witter Tax-Free Daily Income Trust
6. Active Assets Tax-Free Trust
7. Morgan Stanley Dean Witter California Tax-Free Daily Income Trust
8. Morgan Stanley Dean Witter New York Municipal Money Market Trust
9. Active Assets California Tax-Free Trust
-18-
<PAGE>
EQUITY FUNDS
10. Morgan Stanley Dean Witter American Value Fund
11. Morgan Stanley Dean Witter Mid-Cap Growth Fund
12. Morgan Stanley Dean Witter Dividend Growth Securities Inc.
13. Morgan Stanley Dean Witter Capital Growth Securities
14. Morgan Stanley Dean Witter Global Dividend Growth Securities
15. Morgan Stanley Dean Witter Income Builder Fund
16. Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
17. Morgan Stanley Dean Witter Precious Metals and Minerals Trust
18. Morgan Stanley Dean Witter Developing Growth Securities Trust
19. Morgan Stanley Dean Witter Health Sciences Trust
20. Morgan Stanley Dean Witter Capital Appreciation Fund
21. Morgan Stanley Dean Witter Information Fund
22. Morgan Stanley Dean Witter Value-Added Market Series
23. Morgan Stanley Dean Witter European Growth Fund Inc.
24. Morgan Stanley Dean Witter Pacific Growth Fund Inc.
25. Morgan Stanley Dean Witter International SmallCap Fund
26. Morgan Stanley Dean Witter Japan Fund
27. Morgan Stanley Dean Witter Utilities Fund
28. Morgan Stanley Dean Witter Global Utilities Fund
29. Morgan Stanley Dean Witter Special Value Fund
30. Morgan Stanley Dean Witter Financial Services Trust
31. Morgan Stanley Dean Witter Market Leader Trust
32. Morgan Stanley Dean Witter Fund of Funds
33. Morgan Stanley Dean Witter S&P 500 Index Fund
34. Morgan Stanley Dean Witter Competitive Edge Fund
35. Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities
36. Morgan Stanley Dean Witter Equity Fund
37. Morgan Stanley Dean Witter Growth Fund
38. Morgan Stanley Dean Witter S&P 500 Select Fund
BALANCED FUNDS
39. Morgan Stanley Dean Witter Balanced Growth Fund
40. Morgan Stanley Dean Witter Balanced Income Trust
ASSET ALLOCATION FUNDS
41. Morgan Stanley Dean Witter Strategist Fund
42. Dean Witter Global Asset Allocation Fund
-19-
<PAGE>
FIXED INCOME FUNDS
43. Morgan Stanley Dean Witter High Yield Securities Inc.
44. Morgan Stanley Dean Witter High Income Securities
45. Morgan Stanley Dean Witter Convertible Securities Trust
46. Morgan Stanley Dean Witter Intermediate Income Securities
47. Morgan Stanley Dean Witter Short-Term Bond Fund
48. Morgan Stanley Dean Witter World Wide Income Trust
49. Morgan Stanley Dean Witter Global Short-Term Income Fund Inc.
50. Morgan Stanley Dean Witter Diversified Income Trust
51. Morgan Stanley Dean Witter U.S. Government Securities Trust
52. Morgan Stanley Dean Witter Federal Securities Trust
53. Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
54. Morgan Stanley Dean Witter Intermediate Term U.S. Treasury Trust
55. Morgan Stanley Dean Witter Tax-Exempt Securities Trust
56. Morgan Stanley Dean Witter Limited Term Municipal Trust
57. Morgan Stanley Dean Witter California Tax-Free Income Fund
58. Morgan Stanley Dean Witter New York Tax-Free Income Fund
59. Morgan Stanley Dean Witter Hawaii Municipal Trust
60. Morgan Stanley Dean Witter Multi-State Municipal Series Trust
61. Morgan Stanley Dean Witter Select Municipal Reinvestment Fund
SPECIAL PURPOSE FUNDS
62. Dean Witter Retirement Series
63. Morgan Stanley Dean Witter Variable Investment Series
64. Morgan Stanley Dean Witter Select Dimensions Investment Series
TCW/DW FUNDS
65. TCW/DW North American Government Income Trust
66. TCW/DW Latin American Growth Fund
67. TCW/DW Income and Growth Fund
68. TCW/DW Small Cap Growth Fund
69. TCW/DW Total Return Trust
-20-
<PAGE>
70. TCW/DW Global Telecom Trust
71. TCW/DW Mid-Cap Equity Trust
72. TCW/DW Emerging Markets Opportunities Trust
By:
-----------------------------------
Barry Fink
Vice President and General Counsel
ATTEST:
- ------------------------------
Assistant Secretary
MORGAN STANLEY DEAN WITTER TRUST FSB
By:
-----------------------------------
John Van Heuvelen
President
ATTEST:
- -------------------------------
Executive Vice President
-21-
<PAGE>
Exhibit A
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, NJ 07311
Gentlemen:
The undersigned, (inset name of investment company) a
(Massachusetts business trust/Maryland corporation) (the "Fund"), desires to
employ and appoint Morgan Stanley Dean Witter Trust FSB ("MSDW TRUST") to act
as transfer agent for each series and class of shares of the Fund, whether now
or hereafter authorized or issued ("Shares"), dividend disbursing agent and
shareholder servicing agent, registrar and agent in connection with any
accumulation, open-account or similar plan provided to the holders of Shares,
including without limitation any periodic investment plan or periodic
withdrawal plan.
The Fund hereby agrees that, in consideration for the payment
by the Fund to MSDW TRUST of fees as set out in the fee schedule attached
hereto as Schedule A, MSDW TRUST shall provide such services to the Fund
pursuant to the terms and conditions set forth in the Transfer Agency and
Service Agreement annexed hereto, as if the Fund was a signatory thereto.
-22-
<PAGE>
Please indicate MSDW TRUST's acceptance of employment and
appointment by the Fund in the capacities set forth above by so indicating in
the space provided below.
Very truly yours,
(name of fund)
By:
---------------------------------
Barry Fink
Vice President and General Counsel
ACCEPTED AND AGREED TO:
MORGAN STANLEY DEAN WITTER TRUST FSB
By:
------------------------------------
Its:
-----------------------------------
Date:
----------------------------------
-23-
<PAGE>
SCHEDULE A
Fund: TCW/DW North American Government Income Trust
Fees: (1) Annual maintenance fee of $13.20 per shareholder account,
payable monthly.
(2) A fee equal to 1/12 of the fee set forth in (1) above, for
providing Forms 1099 for accounts closed during the year,
payable following the end of the calendar year.
(3) Out-of-pocket expenses in accordance with Section 2.2 of
the Agreement.
(4) Fees for additional services not set forth in this
Agreement shall be as negotiated between the parties.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 7 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
November 20, 1998, relating to the financial statements and financial highlights
of TCW/DW North American Government Income Trust, which appears in such
Statement of Additional Information, and to the incorporation by reference of
our report into the Prospectus which constitutes part of this Registration
Statement. We also consent to the references to us under the headings
"Independent Accountants" and "Experts" in such Statement of Additional
Information and to the reference to us under the heading "Financial Highlights"
in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
November 20, 1998
<PAGE>
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS
TCW/DW NORTH AMERICAN GOVERNMENT INCOME TRUST
(A) AVERAGE ANNUAL TOTAL RETURNS (NO LOAD FUND)
(B) TOTAL RETURN (NO LOAD FUND)
_ -
| ___________________|
FORMULA: | | |
| /\ n| EV |
t = | \ | ----------- | -1
| \| P |
| | |
|_ _|
EV
TR = -------- -1
P
t=AVERAGE ANNUAL COMPOUND RETURN
n=NUMBER OF YEARS
EV=ENDING VALUE
P=INITIAL INVESTMENT
TR=TOTAL RETURN
(8) (A)
$1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL
INVESTED-P 31-Oct-98 RETURN - TR YEARS - n COMPOUND RETURN - t
- ---------- --------- ----------- ---------- -------------------
31-Oct-97 $1,051.30 5.13% 1.00 5.13%
31-Oct-93 $1,163.10 16.31% 5.00 3.07%
31-Jul-92 $1,288.10 28.81% 6.25 4.13%
(C) GROWTH OF $10,000
(D) GROWTH OF $50,000
(E) GROWTH OF $100,000
FORMULA: G=(TR+1)*P
G=GROWTH OF INITIAL INVESTMENT
P=INITIAL INVESTMENT
TR=TOTAL RETURN SINCE INCEPTION
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
$10,000 TOTAL (C) GROWTH OF (D) GROWTH OF (E) GROWTH OF
INVESTED-P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT - G $100,000 INVESTMENT - G
- ---------- ----------- ---------------------- ---------------------- -----------------------
31-Jul-92 28.81 $12,881 $64,405 $128,810
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 149,140,528
<INVESTMENTS-AT-VALUE> 145,944,906
<RECEIVABLES> 4,892,303
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 33,159
<TOTAL-ASSETS> 150,870,368
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 429,410
<TOTAL-LIABILITIES> 429,410
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 383,541,250
<SHARES-COMMON-STOCK> 17,502,018
<SHARES-COMMON-PRIOR> 24,679,449
<ACCUMULATED-NII-CURRENT> 622,302
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (230,526,972)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,195,622)
<NET-ASSETS> 150,440,958
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,869,087
<OTHER-INCOME> 0
<EXPENSES-NET> 3,004,856
<NET-INVESTMENT-INCOME> 9,864,231
<REALIZED-GAINS-CURRENT> (790,110)
<APPREC-INCREASE-CURRENT> (70,301)
<NET-CHANGE-FROM-OPS> 9,003,820
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,875,486)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,261,398
<NUMBER-OF-SHARES-REDEEMED> (16,198,924)
<SHARES-REINVESTED> 760,095
<NET-CHANGE-IN-ASSETS> (61,598,777)
<ACCUMULATED-NII-PRIOR> 391,193
<ACCUMULATED-GAINS-PRIOR> (230,494,498)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,161,917
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,026,176
<AVERAGE-NET-ASSETS> 178,756,547
<PER-SHARE-NAV-BEGIN> 8.59
<PER-SHARE-NII> 0.49
<PER-SHARE-GAIN-APPREC> (0.05)
<PER-SHARE-DIVIDEND> (0.43)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.60
<EXPENSE-RATIO> 1.69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
