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STATEMENT OF ADDITIONAL INFORMATION
MORGAN STANLEY DEAN WITTER
JUNE 28, 1999 NORTH AMERICAN
GOVERNMENT
INCOME TRUST
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This Statement of Additional Information is not a Prospectus. The
Prospectus dated June 28, 1999 for Morgan Stanley Dean Witter North American
Government Income Trust may be obtained without charge from the Fund at its
address or telephone number listed below or from Dean Witter Reynolds at any of
its branch offices.
Morgan Stanley Dean Witter North American Government Income Trust
Two World Trade Center
New York, New York 10048
(800) 869-NEWS
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TABLE OF CONTENTS
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I. Fund History .................................................................... 4
II. Description of the Fund and Its Investments and Risks ........................... 4
A. Classification ............................................................... 4
B. Investment Strategies and Risks .............................................. 4
C. Fund Policies/Investment Restrictions ........................................ 11
III. Management of the Fund .......................................................... 13
A. Board of Trustees ............................................................ 13
B. Management Information ....................................................... 13
C. Compensation ................................................................. 18
IV. Control Persons and Principal Holders of Securities ............................. 20
V. Management, Investment Advice and Other Services ................................ 20
A. The Investment Manager and Sub-Advisor ....................................... 20
B. Principal Underwriter ........................................................ 21
C. Services Provided by the Investment Manager, the Sub-Advisor and Fund Expenses
Paid by Third Parties ........................................................ 21
D. Rule 12b-1 Plan .............................................................. 22
E. Other Service Providers ...................................................... 24
VI. Brokerage Allocation and Other Practices ........................................ 24
A. Brokerage Transactions ....................................................... 24
B. Commissions .................................................................. 24
C. Brokerage Selection .......................................................... 25
D. Directed Brokerage ........................................................... 25
E. Regular Broker-Dealers ....................................................... 25
VII. Capital Stock and Other Securities .............................................. 26
VIII. Purchase, Redemption and Pricing of Shares ...................................... 26
A. Purchase/Redemption of Shares ................................................ 26
B. Offering Price ............................................................... 27
IX. Taxation of the Fund and Shareholders ........................................... 27
X. Underwriters .................................................................... 29
XI. Calculation of Performance Data ................................................. 29
XII Financial Statements ....................... ................................... 30
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GLOSSARY OF SELECTED DEFINED TERMS
The terms defined in this glossary are frequently used in this Statement
of Additional Information (other terms used occasionally are defined in the
text of the document).
"Custodian" -- The Bank of New York.
"Dean Witter Reynolds" -- Dean Witter Reynolds Inc., a wholly-owned
broker-dealer subsidiary of MSDW.
"Distributor" -- Morgan Stanley Dean Witter Distributors Inc., a
wholly-owned broker-dealer subsidiary of MSDW.
"Financial Advisors" -- Morgan Stanley Dean Witter authorized financial
services representatives.
"Fund" -- Morgan Stanley Dean Witter North American Government Income
Trust, a registered open-end investment company.
"Investment Manager" -- Morgan Stanley Dean Witter Advisors Inc., a
wholly-owned investment advisor subsidiary of MSDW.
"Independent Trustees" -- Trustees who are not "interested persons" (as
defined by the Investment Company Act) of the Fund.
"Morgan Stanley & Co." -- Morgan Stanley & Co. Incorporated, a
wholly-owned broker-dealer subsidiary of MSDW.
"Morgan Stanley Dean Witter Funds" -- Registered investment companies (i)
for which the Investment Manager serves as the investment advisor; and (ii)
that hold themselves out to investors as related companies for investment and
investor services.
"MSDW" -- Morgan Stanley Dean Witter & Co., a preeminent global financial
services firm.
"MSDW Services Company" -- Morgan Stanley Dean Witter Services Company
Inc., a wholly-owned fund services subsidiary of the Investment Manager.
"Sub-Advisor" -- TCW Funds Management, Inc., a wholly-owned subsidiary of
TCW.
"TCW" -- The TCW Group, Inc., a preeminent investment management and
investment advisory services firm.
"Transfer Agent" -- Morgan Stanley Dean Witter Trust FSB, a wholly-owned
transfer agent subsidiary of MSDW.
"Trustees" -- The Board of Trustees of the Fund.
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I. FUND HISTORY
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The Fund was organized under the laws of the Commonwealth of Massachusetts
on February 19, 1992 as a Massachusetts business trust under the name "TCW/DW
North American Government Income Trust." On February 25, 1999 the Fund's
Trustees adopted an Amendment to the Fund's Declaration of Trust changing the
name of the Fund to Morgan Stanley Dean Witter North American Government Income
Trust, effective June 28, 1999.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
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A. CLASSIFICATION
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.
B. INVESTMENT STRATEGIES AND RISKS
The following discussion of the Fund's investment strategies and risks
should be read with the sections of the Fund's Prospectus titled "Principal
Investment Strategies," "Principal Risks," "Additional Investment Strategy
Information" and "Additional Risk Information."
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may enter into
forward foreign currency exchange contracts ("forward contracts") to facilitate
settlement or in an attempt to limit the effect of changes in the relationship
between the U.S. dollar and the foreign currency during the period between the
date on which the security is purchased or sold and the date on which payment
is made or received. The Fund may 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. Forward
contracts will only be entered into with United States banks and their foreign
branches, insurance companies or other dealers 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 not enter into forward currency contracts or maintain a net
exposure to these contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. It will, however, do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers 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 may be limited in its ability to enter into hedging transactions
involving forward contracts by the Internal Revenue Code requirements relating
to qualification as a regulated investment company.
Forward contracts may limit gains on portfolio securities that could
otherwise be realized had they not been utilized and could result in losses.
The contracts also may increase the Fund's volatility and may involve a
significant amount of risk relative to the investment of cash.
OPTION AND FUTURES TRANSACTIONS. The Fund may engage in transactions in
listed and OTC options on eligible portfolio securities and stock indexes.
Listed options are issued or guaranteed by the exchange on which they are
traded 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
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the U.S.) or other clearing corporation or exchange, the underlying security
covered by the option at the stated exercise price (the price per unit of the
underlying security) 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 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 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 put would
have the obligation to purchase the underlying security from the OCC (in the
U.S.) or other clearing corporation or exchange, at the exercise price.
Covered Call Writing. The Fund is permitted to write covered call options
on portfolio securities, without limit.
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 alone. Moreover, the premium
received will offset a portion of the potential loss incurred by the Fund if
the securities underlying the option decline in value.
The Fund may be required, at any time during the option period, to deliver
the underlying security against payment of the exercise price on any calls it
has written. 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.
A call option is "covered" if the Fund owns the underlying security
subject to the option or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional consideration
(in cash, Treasury bills or other liquid portfolio securities) held in a
segregated account on the Fund's books) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the Fund
holds a call on the same security as the call written where the exercise price
of the call held is (i) equal to or less than the exercise price of the call
written or (ii) greater than the exercise price of the call written if the
difference is maintained by the Fund in cash, Treasury bills or other liquid
portfolio securities in a segregated account on the Fund's books.
Options written by the Fund 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.
Covered Put Writing. The Fund may engage in 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. Through the writing of a put option, the Fund would receive income
from the premium paid by purchasers. The potential gain on a covered put option
is limited to the premium received on the option (less the commissions paid on
the transaction). At any time during the option period, the Fund may be
required to make payment of the exercise price against delivery of the
underlying security. A put option is "covered" if the Fund maintains cash,
Treasury bills or other liquid portfolio securities with a value equal to the
exercise price in a segregated account on the Fund's books, or holds a put on
the same security as the put written where the exercise price of the put held
is equal to or greater than the exercise price of the put written. The
aggregate value of the obligations underlying puts may not exceed 50% of the
Fund's net assets.
Purchasing Call and Put Options. The Fund may purchase listed and OTC call
and put options in amounts equaling up to 5% of its total assets. The purchase
of a call option would enable the Fund, in return for the premium paid, to lock
in a purchase price for a security during the term of the option. The purchase
of a put option would enable the Fund, in return for a premium paid, to lock in
a price at which it may sell a security during the term of the option.
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OTC Options. 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. The Fund may
engage in OTC option transactions only with member banks of the Federal Reserve
Bank System or primary dealers in U.S. Government securities or with affiliates
of such banks or dealers.
Risks of Options Transactions. The successful use of options depends on
the ability of the Investment Manager or the Sub-Advisor, to forecast correctly
interest rates and/or market movements. If the market value of the portfolio
securities 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. 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 increase, but
has retained the risk of loss should the price of the underlying security
decline. The covered put writer also retains the risk of loss should the market
value of the underlying security decline below the exercise price of the option
less the premium received on the sale of the option. In both cases, the writer
has no control over the time when it may be required to fulfill its obligation
as a writer of the option. Prior to exercise or expiration, an option position
can only be terminated by entering into a closing purchase or sale transaction.
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.
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.
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. In the case of OTC
options, if the transacting dealer fails to make or take delivery of the
securities underlying an option it has written, in accordance with the terms of
that option, due to insolvency or otherwise, the Fund would lose the premium
paid for the option as well as any anticipated benefit of the transaction.
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security which may be
written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). An exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be
reflected in the option markets.
Futures Contracts. The Fund may purchase and sell interest rate and index
futures contracts that are traded on U.S. commodity exchanges on such
underlying securities as U.S. Treasury bonds, notes, bills, GNMA Certificates
and on any foreign government fixed-income security, and on such indexes of
U.S. securities (and, if applicable, foreign securities) as may exist or come
into existence.
A futures contract purchaser incurs an obligation to take delivery of a
specified amount of the obligation underlying the contract at a specified time
in the future for a specified price. A seller of a futures contract incurs an
obligation to deliver the specified amount of the underlying obligation at a
specified time in return for an agreed upon price. The purchase of a futures
contract enables the Fund, during the
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term of the contract, to lock in a price at which it may purchase a security
and protect against a rise in prices pending purchase of portfolio securities.
The sale of a futures contract enables the Fund to lock in a price at which it
may sell a security and protect against declines in the value of portfolio
securities.
Although most 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. Index futures contracts provide for
the delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value at the open or close of the last trading day
of the contract and the futures contract price. A futures contract sale is
closed out by effecting a futures contract purchase for the same aggregate
amount of the specific type of security 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
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.
Margin. If the Fund enters into a futures contract, it is initially
required to deposit an "initial margin" of cash or U.S. Government securities
or other liquid portfolio securities ranging from approximately 2% to 5% of the
contract amount. Initial margin requirements are established by the exchanges
on which futures contracts trade and may, from time to time, change. In
addition, brokers may establish margin deposit requirements in excess of those
required by the exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing
of funds by a broker's 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," which are reflective of price
fluctuations in the futures contract.
Options on Futures Contracts. The Fund may purchase and write call and put
options on futures contracts 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), and
the writer the obligation, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put)
at a specified exercise price at any time during the term of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option is accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents
the amount by which the market price of the futures contract at the time of
exercise exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract.
The 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.
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 into which it has entered; 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 net assets which may be subject to a hedge position.
Risks of Transactions in Futures Contracts and Related Options. The prices
of securities and indexes subject to futures contracts (and thereby the futures
contract prices) may correlate imperfectly
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with the behavior of the cash prices of the Fund's securities. Also, prices of
futures contracts may not move in tandem with the changes in prevailing
interest rates, market movements and/or currency exchange rates against which
the Fund seeks a hedge. A correlation may also be distorted (a) temporarily, by
short-term traders seeking to profit from the difference between a contract or
security price objective and their cost of borrowed funds; (b) by investors in
futures contracts electing to close out their contracts through offsetting
transactions rather than meet margin deposit requirements; (c) by investors in
futures contracts opting to make or take delivery of underlying securities
rather than engage in closing transactions, thereby reducing liquidity of the
futures market; and (d) temporarily, by speculators who view the deposit
requirements in the futures markets as less onerous than margin requirements in
the cash market. Due to the possibility of price distortion in the futures
market and because of the possible imperfect correlation between movements in
the prices of securities and movements in the prices of futures contracts, a
correct forecast of interest rate and/or market movement trends by the
Investment Manager and/or the Sub-Advisor may still not result in a successful
hedging transaction.
There is no assurance that a liquid secondary market will exist for
futures contracts and related options in which the Fund may invest. In the
event a liquid market does not exist, it may not be possible to close out a
futures position and, in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin. The
absence of a liquid market in futures contracts might cause the Fund to make or
take delivery of the underlying securities at a time when it may be
disadvantageous to do so.
Exchanges also 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 these situations, if the Fund has
insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do
so. In addition, the Fund may be required to take or make delivery of the
instruments underlying interest rate futures contracts it holds at a time when
it is disadvantageous to do so. The inability to close out options and futures
positions could also have an adverse impact on the Fund's ability to
effectively hedge its portfolio.
Futures contracts and options thereon which are purchased or sold on
foreign commodities exchanges may have greater price volatility than their U.S.
counterparts. Furthermore, foreign commodities exchanges may be less regulated
and under less governmental scrutiny than U.S. exchanges. Brokerage
commissions, clearing costs and other transaction costs may be higher on
foreign exchanges. Greater margin requirements may limit the Fund's ability to
enter into certain commodity transactions on foreign exchanges. Moreover,
differences in clearance and delivery requirements on foreign exchanges may
occasion delays in the settlement of the Fund's transactions effected on
foreign exchanges.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the
broker and/or incur a loss of all or part of its margin deposits with the
broker.
MONEY MARKET SECURITIES. The Fund may invest in various money market
securities for cash management purposes or when assuming a temporary defensive
position, which among others may include commercial paper, bank acceptances,
bank obligations, corporate debt securities, certificates of deposit, U.S.
Government securities and obligations of savings institutions and repurchase
agreements. Such securities are limited to:
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;
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Bank Obligations. Obligations (including certificates of deposit and
bankers' acceptances) 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 to the extent below;
Eurodollar Certificates of Deposit. Eurodollar certificates of deposit
issued by foreign branches of domestic banks having total assets of $1 billion
or more;
Obligations of Savings Institutions. Certificates of deposit of savings
banks and savings and loan associations, having total assets of $1 billion or
more;
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 federally insured by the Bank Insurance
Fund or the Savings Association Insurance Fund (each of which is administered
by the FDIC), limited to $100,000 principal amount per certificate and to 10%
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 ("S&P") or the two highest grade by Moody's
Investor's Service, Inc. ("Moody's") or, if not rated, issued by a company
having an outstanding debt issue rated at least AAA by S&P or Aaa by Moody's;
and
Repurchase Agreements. The Fund may invest in repurchase agreements. When
cash may be available for only a few days, it may be invested by the Fund in
repurchase agreements until such time as it may otherwise be invested or used
for payments of obligations of the Fund. These agreements, which may be viewed
as a type of secured lending by the Fund, 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 serving as collateral at a specified price
and at a fixed time in the future, usually not more than seven days from the
date of purchase. The collateral will be marked-to-market daily to determine
that the value of the collateral, as specified in the agreement, does not
decrease below the purchase price plus accrued interest. If such decrease
occurs, additional collateral will be requested and, when received, added to
the account to maintain full collateralization. The Fund will accrue interest
from the institution until the time when the repurchase is to occur. Although
this date is deemed by the Fund to be the maturity date of a repurchase
agreement, the maturities of securities subject to repurchase agreements are
not subject to any limits.
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 Investment
Manager and/or Sub-Advisor subject to procedures established by the Trustees.
In addition, as described above, 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 use reverse
repurchase agreements as part of its investment strategy and may also use
dollar rolls as part of its investment strategy.
Reverse repurchase agreements involve sales by the Fund of assets
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. Reverse repurchase agreements involve the risk
that the market value of the securities the Fund is obligated to
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purchase under the agreement may decline below the repurchase price. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the
agreement may be restricted pending a determination by the other party, or its
trustee or receiver, whether to enforce the Fund's obligation to repurchase the
securities.
Dollar rolls involve the Fund selling securities for delivery in the
current month and simultaneously contracting to repurchase substantially
similar (same type and coupon) securities on a specified future date. During
the roll period, the Fund will forgo 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.
Reverse repurchase agreements and dollar rolls are speculative techniques
involving leverage and are considered borrowings by the Fund.
LENDING PORTFOLIO SECURITIES. The Fund may lend its portfolio securities
to brokers, dealers and other financial institutions, provided that the loans
are callable at any time by the Fund, and are at all times secured by cash or
cash equivalents, which are maintained in a segregated account pursuant to
applicable regulations and that are equal to at least 100% of the market value,
determined daily, of the loaned securities. The advantage of these 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 more
than 25% of the value of its total assets.
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.
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 the
rights if the matters involved would have a material effect on the Fund's
investment in the 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. The
Fund may purchase securities on a when-issued or delayed delivery basis or may
purchase or sell securities on a forward commitment basis. When these
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
commitment. 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. 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.
At the time the Fund makes the commitment to purchase or sell securities
on a when-issued, delayed delivery or forward commitment basis, it 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, their 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 its net
asset value. The Fund will also establish a segregated account on the Fund's
books in which it will continually maintain cash or cash equivalents or other
liquid portfolio securities equal in value to commitments to purchase
securities on a when-issued, delayed delivery or forward commitment basis.
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
10
<PAGE>
event, such as approval of a merger, corporate reorganization or debt
restructuring. The commitment for the purchase of any such security will not be
recognized in the portfolio of the Fund until the Investment Manager and/or
Sub-Advisor determines that issuance of the security is probable. At that time,
the Fund will record the transaction and, in determining its net asset value,
will reflect the value of the security daily. At that time, the Fund will also
establish a segregated account on the Fund's books in which it will maintain
cash or cash equivalents or other liquid portfolio securities equal in value to
recognized commitments for such securities.
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.
PRIVATE PLACEMENTS AND RESTRICTED SECURITIES. The Fund may invest up to
15% of its net assets in securities which are subject to restrictions on resale
because they have not been registered under the Securities Act of 1933 (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 these 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 the
securities for resale and the risk of substantial delays in effecting the
registration.
Rule 144A permits the Fund to sell restricted securities to qualified
institutional buyers without limitation. The Investment Manager and/or
Sub-Advisor, pursuant to procedures adopted by the Trustees, 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," the security will
not be included within the category "illiquid securities," which may not exceed
15% of the Fund's net assets. However, investing in Rule 144A securities could
have the effect of increasing the level of Fund illiquidity to the extent the
Fund, at a particular point in time, may be unable to find qualified
institutional buyers interested in purchasing such securities.
YEAR 2000. The investment management services provided to the Fund by the
Investment Manager and the Sub-Advisor and the services provided to
shareholders by the Distributor and the Transfer Agent depend on the smooth
functioning of their computer systems. Many computer software systems in use
today cannot recognize the year 2000, but revert to 1900 or some other date,
due to the manner in which dates were encoded and calculated. That failure
could have a negative impact on the handling of securities trades, pricing and
account services. The Investment Manager, the Sub-Advisor, 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.
C. FUND POLICIES/INVESTMENT RESTRICTIONS
The investment objective, policies and restrictions listed below have been
adopted by the Fund as fundamental policies. Under the Investment Company Act
of 1940 (the "Investment Company Act"), a fundamental policy may not be changed
without the vote of a majority of the outstanding voting securities of the
Fund. The Investment Company Act defines a majority as the lesser of (a) 67% or
more of the
11
<PAGE>
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. For purposes of the following
restrictions: (i) all percentage limitations apply immediately after a purchase
or initial investment; and (ii) any subsequent change in any applicable
percentage resulting from market fluctuations or other changes in total or net
assets does not require elimination of any security from the portfolio.
The Fund will:
1. Seek to earn a high level of current income while maintaining
relatively low volatility of principal.
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, its agencies or
instrumentalities.
2. Invest more than 5% of the value of its total assets in securities of
issuers having a record, together with predecessors, of less than three
years of continuous operation. This restriction shall not apply to
mortgage-backed securities or asset-backed securities or to any
obligation of the United States Government, its agencies or
instrumentalities.
3. Purchase or sell commodities or commodities contracts except that the
Fund may purchase and sell financial futures contracts and related
options thereon.
4. 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.
5. 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.
6. 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.
7. Pledge its assets or assign or otherwise encumber them except to secure
permitted borrowings. For the purpose of this restriction, collateral
arrangements with respect to initial or variation margin for futures are
not deemed to be pledges of assets.
8. 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; or
(e) lending portfolio securities.
9. Make loans of money or securities, except: (a) by the purchase of
portfolio securities; (b) by investment in repurchase agreements; or (c)
by lending its portfolio securities.
10. Make short sales of securities.
11. 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.
12. Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act in disposing of a
portfolio security.
13. Invest for the purpose of exercising control or management of any
other issuer.
12
<PAGE>
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.
III. MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
A. BOARD OF TRUSTEES
The Board of Trustees of the Fund oversees the management of the Fund but
does not itself manage the Fund. The Trustees review various services provided
by or under the direction of the Investment Manager to ensure that the Fund's
general investment policies and programs are properly carried out. The Trustees
also conduct their review to ensure that administrative services are provided
to the Fund in a satisfactory manner.
Under state law, the duties of the Trustees are generally characterized as
a duty of loyalty and a duty of care. The duty of loyalty requires a Trustee to
exercise his or her powers in the interest of the Fund and not the Trustee's
own interest or the interest of another person or organization. A Trustee
satisfies his or her duty of care by acting in good faith with the care of an
ordinarily prudent person and in a manner the Trustee reasonably believes to be
in the best interest of the Fund and its shareholders.
B. MANAGEMENT INFORMATION
TRUSTEES AND OFFICERS. The Board of the Fund consists of eight (8)
Trustees. These same individuals also serve as trustees for all of the Morgan
Stanley Dean Witter Funds. Six Trustees (75% of the total number) have no
affiliation or business connection with the Investment Manager or any of its
affiliated persons and do not own any stock or other securities issued by the
Investment Manager's parent company, MSDW or the Sub-Advisor's parent company,
TCW. These are the "disinterested" or "independent" Trustees. The other two
Trustees (the "Management Trustees") are affiliated with the Investment
Manager. All of the Trustees also serve as Trustees of "Discover Brokerage
Index Series," a mutual fund for which the Investment Manager is the investment
advisor.
The Trustees and executive officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with the
Investment Manager or the Sub-Advisor, and with the 90 Morgan Stanley Dean
Witter Funds and Discover Brokerage Index Series are shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------- ---------------------------------------------------
<S> <C>
Michael Bozic (58) ........................ Vice Chairman of Kmart Corporation (since
Trustee December, 1998); Director or Trustee of the Morgan
c/o Kmart Corporation Stanley Dean Witter Funds and Discover Brokerage
3100 West Big Beaver Road Index Series; formerly Chairman and Chief
Troy, Michigan Executive Officer of Levitz Furniture Corporation
(November, 1995-November, 1998) and President
and Chief Executive Officer of Hills Department
Stores (May, 1991-July, 1995); formerly variously
Chairman, Chief Executive Officer, President and
Chief Operating Officer (1987-1991) of the Sears
Merchandise Group of Sears, Roebuck and Co.;
Director of Eaglemark Financial Services, Inc. and
Weirton Steel Corporation.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------- ----------------------------------------------------
<S> <C>
Charles A. Fiumefreddo* (66) .............. Chairman, Director or Trustee and Chief Executive
Chairman of the Board, Officer of the Morgan Stanley Dean Witter Funds
Chief Executive Officer and Trustee and Discover Brokerage Index Series; formerly
Two World Trade Center Chairman, Chief Executive Officer and Director of
New York, New York the Investment Manager, the Distributor and MSDW
Services Company; Executive Vice President and
Director of Dean Witter Reynolds; Chairman and
Director of the Transfer Agent; formerly Director
and/or officer of various MSDW subsidiaries (until
June, 1998).
Edwin J. Garn (66) ........................ Director or Trustee of the Morgan Stanley Dean
Trustee Witter Funds and Discover Brokerage Index Series;
c/o Huntsman Corporation formerly United States Senator (R-Utah)
500 Huntsman Way (1974-1992) and Chairman, Senate Banking
Salt Lake City, Utah Committee (1980-1986); formerly Mayor of Salt
Lake City, Utah (1971-1974); formerly Astronaut,
Space Shuttle Discovery (April 12-19, 1985); Vice
Chairman, Huntsman Corporation (chemical
company); Director of Franklin Covey (time
management systems), BMW Bank of North
America, Inc. (industrial loan corporation), United
Space Alliance (joint venture between Lockheed
Martin and the Boeing Company) and Nuskin Asia
Pacific (multilevel marketing); member of the board
of various civic and charitable organizations.
Wayne E. Hedien (65) ...................... Retired; Director or Trustee of the Morgan Stanley
Trustee Dean Witter Funds and Discover Brokerage Index
c/o Gordon Altman Butowsky Series; Director of The PMI Group, Inc. (private
Weitzen Shalov & Wein mortgage insurance); Trustee and Vice Chairman
Counsel to the Independent Trustees of The Field Museum of Natural History; formerly
114 West 47th Street associated with the Allstate Companies
New York, New York (1966-1994), most recently as Chairman of The
Allstate Corporation (March, 1993-December,
1994) and Chairman and Chief Executive Officer of
its wholly-owned subsidiary, Allstate Insurance
Company (July, 1989-December, 1994); director
of various other business and charitable
organizations.
Dr. Manuel H. Johnson (50) ................ Senior Partner, Johnson Smick International, Inc.,
Trustee a consulting firm; Co-Chairman and a founder of
c/o Johnson Smick International, Inc. the Group of Seven Council (G7C), an international
1133 Connecticut Avenue, N.W. economic commission; Chairman of the Audit
Washington, D.C. Committee and Director or Trustee of the Morgan
Stanely Dean Witter Funds and Discover Brokerage
Index Series; Director of Greenwich Capital
Markets, Inc. (broker-dealer) and NVR, Inc. (home
construction); Chairman and Trustee of the
Financial Accounting Foundation (oversight
organization of the Financial Accounting Standards
Board); formerly Vice Chairman of the Board of
Governors of the Federal Reserve System
(1986-1990) and Assistant Secretary of the U.S.
Treasury.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------- ------------------------------------------------------
<S> <C>
Michael E. Nugent (62) .................... General Partner, Triumph Capital, L.P., a private
Trustee investment partnership; Chairman of the Insurance
c/o Triumph Capital, L.P. Committee and Director or Trustee of the Morgan
237 Park Avenue Stanley Dean Witter Funds and Discover Brokerage
New York, New York Index Series; formerly Vice President, Bankers
Trust Company and BT Capital Corporation
(1984-1988); director of various business
organizations.
Philip J. Purcell* (55) ................... Chairman of the Board of Directors and Chief
Trustee Executive Officer of MSDW, Dean Witter Reynolds
1585 Broadway and Novus Credit Services Inc.; Director of the
New York, New York Distributor; Director or Trustee of the Morgan
Stanley Dean Witter Funds and Discover Brokerage
Index Series; Director and/or officer of various
MSDW subsidiaries.
John L. Schroeder (68) .................... Retired; Chairman of the Deriatives Committee
Trustee and Director or Trustee of the Morgan Stanley
c/o Gordon Altman Butowsky Dean Witter Funds and Discover Brokerage Index
Weitzen Shalov & Wein Series; Director of Citizens Utilities Company
Counsel to the Independent Trustees (telecommunications, gas, electric and water
114 West 47th Street utilities company); formerly Executive Vice
New York, New York President and Chief Investment Officer of Home
Insurance Company (August, 1991-September,
1995).
Mitchell M. Merin (45) .................... President and Chief Operating Officer of Asset
President Management of MSDW (since December, 1998);
Two World Trade Center President and Director (since April, 1997) and
New York, New York Chief Executive Officer (since June, 1998) of the
Investment Manager and MSDW Services
Company; Chairman, Chief Executive Officer and
Director of the Distributor (since June, 1998);
Chairman and Chief Executive Officer (since June,
1998) and Director (since January, 1998) of the
Transfer Agent; Director of various MSDW
subsidiaries; President of the Morgan Stanley Dean
Witter Funds and Discover Brokerage Index Series
(since May, 1999); previously Chief Strategic Officer
of the Investment Manager and MSDW Services
Company and Executive Vice President of the
Distributor (April, 1997-June, 1998), Vice President
of the Morgan Stanley Dean Witter Funds and
Discover Brokerage Index Series (May, 1997-April,
1999), and Executive Vice President of Dean
Witter, Discover & Co.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------- ----------------------------------------------------
<S> <C>
Barry Fink (44) ........................... Senior Vice President (since March, 1997) and
Vice President, Secretary and General Counsel (since February,
Secretary and General Counsel 1997) and Director (since July, 1998) of the
Two World Trade Center Investment Manager and MSDW Services
New York, New York Company; Senior Vice President (since March,
1997) and Assistant Secretary and Assistant
General Counsel (since February, 1997) of the
Distributor; Assistant Secretary of Dean Witter
Reynolds (since August, 1996); Vice President,
Secretary and General Counsel of the Morgan
Stanley Dean Witter Funds (since February, 1997);
Vice President, Secretary and General Counsel of
Discover Brokerage Index Series; previously First
Vice President (June, 1993-February, 1997), Vice
President and Assistant Secretary and Assistant
General Counsel of the Investment Manager and
MSDW Services Company and Assistant Secretary
of the Morgan Stanley Dean Witter Funds.
Philip A. Barach (46) ..................... Group Managing Director and Chief Investment
Vice President Officer--Investment Grade Fixed Income of the
865 South Figueroa Street Sub-Advisor, Trust Company of the West and TCW
Los Angeles, California Asset Management Company.
James M. Goldberg (53) .................... Managing Director of the Sub-Advisor, Managing
Vice President Director and Chairman of the Fixed Income Policy
865 South Figueroa Street Committee of Trust Company of the West and
Los Angeles, California TCW Asset Management Company.
Jeffrey E. Gundlach (39) .................. Group Managing Director and Chairman,
Vice President Multi-Strategy Fixed Income Committee of the
865 South Figueroa Street Sub-Advisor, Trust Company of the West and TCW
Los Angeles, California Asset Management Company.
Frederick H. Horton (40) .................. Managing Director of the Sub-Advisor, Trust
Vice President Company of the West and TCW Asset Management
865 South Figueroa Street Company (since October, 1993); previously Senior
Los Angeles, California Portfolio Manager for Dewey Square Investors
(June, 1991-September, 1993).
Thomas F. Caloia (53) ..................... First Vice President and Assistant Treasurer of the
Treasurer Investment Manager, the Distributor and MSDW
Two World Trade Center Services Company; Treasurer of the Morgan
New York, New York Stanley Dean Witter Funds and Discover Brokerage
Index Series.
</TABLE>
- ----------
* Denotes Trustees who are "interested persons" of the Fund as defined by the
Investment Company Act.
In addition, Ronald E. Robison, Executive Vice President, Chief
Administrative Officer and Director of the Investment Manager and MSDW Services
Company, Robert S. Giambrone, Senior Vice President of the Investment Manager,
MSDW Services Company, the Distributor and the Transfer Agent and Director of
the Transfer Agent, and Joseph J. McAlinden, Executive Vice President and Chief
Investment Officer of the Investment Manager and Director of the Transfer
Agent, are Vice Presidents of the Fund.
In addition, Frank Bruttomesso, Marilyn K. Cranney, Lou Anne D. McInnis,
Carsten Otto and Ruth Rossi, First Vice Presidents and Assistant General
Counsels of the Investment Manager and MSDW Services Company, and Todd Lebo,
Vice President and Assistant General Counsel of the Investment Manager and MSDW
Services Company, are Assistant Secretaries of the Fund.
16
<PAGE>
INDEPENDENT TRUSTEES AND THE COMMITTEES. Law and regulation establish both
general guidelines and specific duties for the Independent Trustees. The Morgan
Stanley Dean Witter Funds seek as Independent Trustees individuals of
distinction and experience in business and finance, government service or
academia; these are people whose advice and counsel are in demand by others and
for whom there is often competition. To accept a position on the Funds' Boards,
such individuals may reject other attractive assignments because the Funds make
substantial demands on their time. Indeed, by serving on the Funds' Boards,
certain Trustees who would otherwise be qualified and in demand to serve on
bank boards would be prohibited by law from doing so. All of the Independent
Trustees serve as members of the Audit Committee. In addition, three of the
Trustees, including two Independent Trustees, serve as members of the
Derivatives Committee and the Insurance Committee.
The Independent Trustees are charged with recommending to the full Board
approval of management, advisory and administration contracts, plans and
distribution and underwriting agreements; continually reviewing Fund
performance; checking on the pricing of portfolio securities, brokerage
commissions, transfer agent costs and performance, and trading among Funds in
the same complex; and approving fidelity bond and related insurance coverage
and allocations, as well as other matters that arise from time to time. The
Independent Trustees are required to select and nominate individuals to fill
any Independent Trustee vacancy on the Board of any Fund that has a Rule 12b-1
plan of distribution. Most of the Morgan Stanley Dean Witter Funds have a Rule
12b-1 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 the services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; reviewing the adequacy of the Fund's system of internal
controls; and preparing and submitting Committee meeting minutes to the full
Board.
The Board of each Fund has 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
MORGAN STANLEY DEAN WITTER FUNDS. The Independent Trustees and the Funds'
management believe that having the same Independent Trustees for each of the
Morgan Stanley Dean Witter Funds avoids the duplication of effort that would
arise from having different groups of individuals serving as Independent
Trustees for each of the Funds or even of sub-groups of Funds. They believe
that having the same individuals serve as Independent Trustees of all the Funds
tends to increase their knowledge and expertise regarding matters which affect
the Fund complex generally and enhances their ability to negotiate on behalf of
each Fund with the Fund's service providers. This arrangement also precludes
the possibility of separate groups of Independent Trustees arriving at
conflicting decisions regarding operations and management of the Funds and
avoids the cost and confusion that would likely ensue. Finally, having the same
Independent Trustees serve on all Fund Boards enhances the ability of each Fund
to obtain, at modest cost to each separate Fund, the services of Independent
Trustees, of the caliber, experience and business acumen of the individuals who
serve as Independent Trustees of the Morgan Stanley Dean Witter Funds.
TRUSTEE AND OFFICER INDEMNIFICATION. The Fund's 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/her or its own bad faith, willful
misfeasance, gross negligence or reckless disregard of his/her or its duties.
It also provides that all third persons shall look solely to the Fund property
for satisfaction of claims arising in connection with the affairs of the Fund.
With the exceptions stated, the Declaration of Trust provides that a Trustee,
officer, employee or agent is entitled to be indemnified against all liability
in connection with the affairs of the Fund.
17
<PAGE>
C. COMPENSATION
The Fund pays each Independent Trustee an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Trustees, 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,
and the Chairman of the Derivatives and Insurance Committees additional annual
fees of $500). 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 Investment Manager or an affiliated company receive no
compensation or expense reimbursement from the Fund for their services as
Trustee. Dr. Johnson serves as Chairman of the Audit Committee.
At their June 8, 1999 meeting, shareholders elected or re-elected, as
appropriate, the following eight individuals to the Fund's Board of Trustees to
serve for indefinite terms: Michael Bozic, Charles A. Fiumefreddo, Edwin Jacob
(Jake) Garn, Wayne E. Hedien, Dr. Manuel H. Johnson, Michael E. Nugent, Philip
J. Purcell and John L. Schroeder. Messrs. Fiumefreddo, Johnson, Nugent and
Schroeder previously served as Trustees of the Fund and were previously elected
by shareholders. Messrs. Bozic, Garn, Hedien and Purcell previously held
directorships or trusteeships with the other Morgan Stanley Dean Witter Funds
and were elected to replace Messrs. Argue, DeMartini, Larkin and Stern who
resigned as Trustees. Messrs. Bozic, Garn, Hedien and Purcell commenced service
at the time the new Investment Management Agreement took effect on June 28,
1999. Prior to the effectiveness of the election of Messrs. Bozic, Garn, Hedien
and Purcell and the resignation of Messrs. Argue, DeMartini, Larkin and Stern,
the Fund paid each Independent Trustee an annual fee of $2,225 plus a per
meeting fee of $200 for meetings of the Board of Trustees or committees of the
Board attended by the Trustee. The fee paid by the Fund to the Chairman of the
Audit Committee and the Chairman of the Independent Trustees remained
unchanged.
The following table illustrates the compensation that the Fund paid to
those of its Independent Trustees who were Trustees of the Fund on October 31,
1998, for the fiscal year ended on that date.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- ------------------------------- --------------
<S> <C>
Dr. Manuel H. Johnson ......... $5,256
Michael E. Nugent ............. 5,256
John L. Schroeder ............. 5,456
</TABLE>
At such time as the Fund has paid fees to the Independent Trustees for a
full fiscal year at the lower current compensation rates set forth above, and
assuming that during such fiscal year the Fund holds the same number of
meetings of the Board, the Independent Trustees and the Committees as were held
by the other Morgan Stanley Dean Witter Funds during the calendar year ended
December 31, 1998, it is estimated that the compensation paid to each
Independent Trustee during such fiscal year will be $1,650 and an additional
$750 to Dr. Johnson who serves as Chairman of the Audit Committee.
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1998 for services
to the 90 Morgan Stanley Dean Witter Funds that were in operation at December
31, 1998. No compensation was paid to the Fund's Independent Trustees by
Discover Brokerage Index Series for the calendar year ended December 31, 1998.
18
<PAGE>
CASH COMPENSATION FROM MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
TOTAL CASH
COMPENSATION
FOR SERVICES TO
90 MORGAN
NAME OF STANLEY DEAN
INDEPENDENT TRUSTEE WITTER FUNDS
- ------------------------------- ----------------
<S> <C>
Michael Bozic ................. $120,150
Edwin J. Garn ................. 132,450
Wayne E. Hedien ............... 132,350
Dr. Manuel H. Johnson ......... 155,681
Michael E. Nugent ............. 159,731
John L. Schroeder ............. 160,731
</TABLE>
As of the date of this Statement of Additional Information, 55 of the
Morgan Stanley Dean Witter Funds, not including the Fund, have adopted a
retirement program under which an Independent Trustee who retires after serving
for at least five years (or such lesser period as may be determined by the
Board) as an Independent Director or Trustee of any 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 30.22% of his or her Eligible Compensation plus
0.5036667% of such Eligible Compensation for each full month of service as an
Independent Director or Trustee of any Adopting Fund in excess of five years up
to a maximum of 60.44% 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 accrued as expenses on the books of
the Adopting Funds. Such benefits are not secured or funded by the Adopting
Funds.
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the 55 Morgan Stanley Dean Witter Funds (not
including the Fund) for the year ended December 31, 1998, and the estimated
retirement benefits for the Independent Trustees, to commence upon their
retirement, from the 55 Morgan Stanley Dean Witter Funds as of December 31,
1998.
RETIREMENT BENEFITS FROM ALL MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS
---------------------------------
ESTIMATED
CREDITED
YEARS ESTIMATED RETIREMENT BENEFITS ESTIMATED ANNUAL
OF SERVICE AT PERCENTAGE OF ACCRUED AS EXPENSES BENEFITS UPON RETIREMENT
NAME OF RETIREMENT ELIGIBLE BY ALL FROM ALL
INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION ADOPTING FUNDS ADOPTING FUNDS(2)
- --------------------------- --------------- --------------- --------------------- -------------------------
<S> <C> <C> <C> <C>
Michael Bozic ............. 10 60.44% $22,377 $52,250
Edwin J. Garn ............. 10 60.44 35,225 52,250
Wayne E. Hedien ........... 9 51.37 41,979 44,413
Dr. Manuel H. Johnson 10 60.44 14,047 52,250
Michael E. Nugent ......... 10 60.44 25,336 52,250
John L. Schroeder ......... 8 50.37 45,117 44,343
</TABLE>
- ----------
(1) An Eligible Trustee may elect alternative payments of his or her
retirement benefits based upon the combined life expectancy of the
Eligible Trustee and his or her spouse on the date of such Eligible
Trustee's retirement. In addition, the Eligible Trustee may elect that
the surviving spouse's periodic payment of benefits will be equal to a
lower percentage of the periodic amount when both spouses were alive. The
amount estimated to be payable under this method, through the remainder
of the later of the lives of the Eligible Trustee and spouse, will be the
actuarial equivalent of the Regular Benefit.
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1)
above.
19
<PAGE>
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
- --------------------------------------------------------------------------------
No persons owned 5% or more of the Shares of the Fund as of May 31, 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% of the Fund's shares of
beneficial interest outstanding.
V. INVESTMENT MANAGEMENT AND OTHER SERVICES
- --------------------------------------------------------------------------------
A. INVESTMENT MANAGER AND SUB-ADVISOR
The Investment Manager to the Fund is Morgan Stanley Dean Witter Advisors
Inc., a Delaware corporation, whose address is Two World Trade Center, New
York, New York 10048. The Investment Manager is a wholly-owned subsidiary of
MSDW, a Delaware corporation. MSDW is 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 Sub-Advisor is TCW Funds Management, Inc., a wholly-owned subsidiary
of TCW, whose direct and indirect subsidiaries provide a variety of trust,
investment management and investment advisory services. The Sub-Advisor is
headquartered at 865 South Figueroa Street, Suite 1800, Los Angeles, California
90017. Robert A. Day, who is Chairman of the Board of Directors of TCW, may be
deemed to be a control person of the Sub-Advisor by virtue of the aggregate
ownership by Mr. Day and his family of more than 25% of the outstanding voting
stock of TCW. The Sub-Advisor was retained to provide sub-advisory services to
the Fund effective June 28, 1999.
Pursuant to an Investment Management Agreement (the "Management Agreement")
with the Investment Manager, the Fund has retained the Investment Manager to
provide administrative services, manage its business affairs and supervise the
investment of the Fund's assets. The Fund pays the Investment Manager monthly
compensation calculated daily by applying the following annual rates to the net
assets of the Fund determined as of the close of each business day: 0.65% to the
portion of daily net assets not exceeding $500 million; and 0.60% to the portion
of daily net assets exceeding $500 million. The Investment Manager has retained
its wholly-owned subsidiary, MSDW Services Company, to perform administrative
services for the Fund.
Under a Sub-Advisory Agreement (the "Sub-Advisory Agreement ") between the
Sub-Advisor and the Investment Manager, the Sub-Advisor provides the Fund with
investment advice and portfolio management relating to the Fund's investments
in securities, subject to the overall supervision of the Investment Manager.
The Investment Manager pays the Sub-Advisor monthly compensation equal to 40%
of the Investment Manager's fee.
Prior to June 28, 1999, the Fund was managed by MSDW Services Company,
pursuant to a management agreement between the Fund and MSDW Services Company
and was advised by TCW Funds Management, Inc. pursuant to an advisory agreement
between the Fund and TCW Funds Management, Inc. As part of an overall
consolidation of the TCW/DW Family of Funds and the Morgan Stanley Dean Witter
Family of Funds, the Fund's Board of Trustees recommended on February 25, 1999
and shareholders of the Fund approved on June 8, 1999 the Investment Management
Agreement between the Fund and the Investment Manager. The Board also
recommended and shareholders also approved the Sub-Advisory Agreement between
the Investment Manager and TCW Funds Management, Inc. The fee rate under the
Management Agreement with the Investment Manager is identical to the total
aggregate fee rate in effect under the previous management and advisory
agreements. For the fiscal years ended October 31, 1996, 1997 and 1998 MSDW
Services Company accrued total compensation under the old management agreement
in the amounts of $1,912,210, $1,052,959 and $697,150, respectively. For the
same periods, TCW Funds Management, Inc. accrued total compensation in its
capacity of adviser to the Fund in the amounts of $1,274,806, $701,973 and
$464,767, respectively.
20
<PAGE>
B. PRINCIPAL UNDERWRITER
The Fund's principal underwriter is the Distributor (which has the same
address as the Investment Manager). In this capacity, the Fund's shares are
distributed by the Distributor. The Distributor has entered into a Selected
Dealer Agreement with Dean Witter Reynolds, which through its own sales
organization sells shares of the Fund. In addition, the Distributor may enter
into similar agreements with other selected broker-dealers. The Distributor, a
Delaware corporation, is a wholly-owned subsidiary of MSDW.
The Distributor bears all expenses it may incur in providing services
under the Distribution Agreement. These expenses include the payment of
commissions for sales of the Fund's shares and incentive compensation to
Financial Advisors. 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 and
pays filing fees in accordance with state securities laws.
The Fund and the Distributor have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act. 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.
C. SERVICES PROVIDED BY THE INVESTMENT MANAGER, THE SUB-ADVISOR AND FUND
EXPENSES PAID BY THIRD PARTIES
The Investment Manager supervises the investment of the Fund's assets. The
Investment Manager obtains and evaluates the information and advice relating to
the economy, securities markets, and specific securities as it considers
necessary or useful to continuously oversee the management of the assets of the
Fund in a manner consistent with its investment objective.
Under the terms of the Management Agreement, the Investment Manager also
maintains certain of the Fund's books and records and furnishes, at its own
expense, the office space, facilities, equipment, clerical help, bookkeeping
and certain legal services as the Fund may reasonably require in the conduct of
its business, including the preparation of prospectuses, proxy statements and
reports required to be filed with federal and state securities commissions
(except insofar as the participation or assistance of independent accountants
and attorneys is, in the opinion of the Investment Manager, necessary or
desirable). In addition, the Investment Manager pays the salaries of all
personnel, including officers of the Fund, who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone service, heat,
light, power and other utilities provided to the Fund.
Pursuant to the Sub-Advisory Agreement, the Sub-Advisor has been retained,
subject to the overall supervision of the Investment Manager, to continuously
furnish investment advice concerning individual security selections, asset
allocations and overall economic trends.
Expenses not expressly assumed by the Investment Manager or the
Sub-Advisor under the Management Agreement and the Sub-Advisory Agreement or by
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;
charges and expenses of any registrar, custodian, stock transfer and dividend
disbursing agent; brokerage commissions; taxes; engraving and printing share
certificates; registration costs of the Fund and its shares under federal and
state securities laws; the cost and expense of printing, including typesetting,
and distributing prospectuses 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
21
<PAGE>
members of any advisory board or committee who are not employees of the
Investment Manager or the Sub-Advisor or any corporate affiliate of the
Investment Manager or the Sub-Advisor; all expenses incident to any dividend,
withdrawal or redemption options; charges and expenses of any outside service
used for pricing of the Fund's shares; fees and expenses of legal counsel,
including counsel to the Trustees who are not interested persons of the Fund or
of the Investment Manager (not including compensation or expenses of attorneys
who are employees of the Investment Manager); fees and expenses of the Fund's
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 Management Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Investment Manager is not liable to the Fund or any
of its investors for any act or omission by the Investment Manager or for any
losses sustained by the Fund or its investors.
The Management Agreement will remain in effect from year to year, provided
continuance of the Management Agreement is approved at least annually by the
vote of the holders of a majority, as defined in the Investment Company Act, of
the outstanding shares of the Fund, or by the Trustees; provided that in either
event such continuance is approved annually by the vote of a majority of the
Trustees who are not parties to the Management Agreement or the Sub-Advisory
Agreement or are "independent Trustees," which votes must be cast in person at
a meeting called for the purpose of voting on such approval.
D. RULE 12B-1 PLAN
In accordance with a Plan of Distribution pursuant to Rule 12b-1 under the
Investment Company Act between the Fund and the Distributor, the Distributor
provides certain services in connection with the promotion of sales of Fund
shares (the "Plan").
The Plan provides that the Distributor bears the expense of all
promotional and distribution related activities on behalf of the Fund, except
for expenses that the Trustees determine to reimburse, as described below. The
following activities and services may be provided by the Distributor under the
Plan: (1) compensation to and expenses of Dean Witter Reynolds' Financial
Advisors and other Selected Broker-Dealers' account executives and other
employees, 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. 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 will be incurred for which reimbursement
payments under the Plan will be made. In addition, no interest 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
Financial Advisors and other authorized financial 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 Financial Advisors and other authorized financial 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 Investment Manager provides and the Trustees review a
quarterly budget of projected incremental 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
22
<PAGE>
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 Fund accrued a total of $1,299,994 pursuant to the Plan of
Distribution for the fiscal year ended October 31, 1998. It is estimated that
the amounts paid by the Fund for distribution were for expenses which relate to
compensation of sales personnel and associated overhead expenses.
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.
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 incremental 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
therefore; (2) the amounts of such expenses; and (3) a description of the
benefits derived by the Fund. In the Trustees' quarterly review of the Plan
they consider its continued appropriateness and the level of compensation
provided therein.
No interested person of the Fund nor any Independent Trustee has any
direct financial interest in the operation of the Plan except to the extent
that the Distributor, the Investment Manager, Dean Witter Reynolds, MSDW
Services Company or certain of their employees may be deemed to have such an
interest as a result of benefits derived from the successful operation of the
Plan or as a result of receiving a portion of the amounts expended thereunder
by the Fund.
On an annual basis, the Trustees, including a majority of the Independent
Trustees, consider whether the Plan should be continued. Prior to approving the
last continuation of the Plan, the Trustees requested and received from the
Distributor and reviewed all the information which they deemed necessary to
arrive at an informed determination. In making their determination to continue
the Plan, the Trustees considered: (1) the Fund's experience under the Plan and
whether such experience indicates that the Plan is operating as anticipated;
(2) the benefits the Fund had obtained, was obtaining and would be likely to
obtain under the Plan, including that: the Plan is essential in order to enable
the Fund to continue to grow and avoid a pattern of net redemptions which, in
turn, is essential for effective investment management; and without the
compensation to individual brokers and the reimbursement of distribution and
account maintenance expenses of Dean Witter Reynolds's branch offices made
possible by the 12b-1 fees, Dean Witter Reynolds could not establish and
maintain an effective system for distribution, servicing of Fund shareholders
and maintenance of shareholder accounts; and (3) what services had been
provided and were continuing to be provided under the Plan to the Fund and its
shareholders. Based upon their review, the Trustees, including each of the
Independent Trustees, determined that continuation of the Plan would be in the
best interest of the Fund and would have a reasonable likelihood of continuing
to benefit the Fund and its shareholders. In the Trustees' quarterly review of
the Plan, they will consider its continued appropriateness and the level of
compensation provided therein.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of the
Fund, and all material amendments to the Plan must also be approved by the
Trustees. 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 a
majority of the outstanding voting securities of the Fund (as defined in the
Investment Company 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 election and
nomination of Independent Trustees shall be committed to the discretion of the
Independent Trustees.
23
<PAGE>
E. OTHER SERVICE PROVIDERS
(1) TRANSFER AGENT/DIVIDEND-PAYING AGENT
Morgan Stanley Dean Witter Trust FSB is the Transfer Agent for the Fund's
shares and the Dividend Disbursing Agent for payment of dividends and
distributions on Fund shares and Agent for shareholders under various
investment plans. The principal business address of the Transfer Agent is
Harborside Financial Center, Plaza Two, Jersey City, New Jersey 07311.
(2) CUSTODIAN AND INDEPENDENT ACCOUNTANTS
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.
These balances may, at times, be substantial.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New
York 10036, serves as the independent accountants of the Fund. The independent
accountants are responsible for auditing the annual financial statements of the
Fund.
(3) AFFILIATED PERSONS
The Transfer Agent is an affiliate of the Investment Manager, and of the
Distributor. As Transfer Agent and Dividend Disbursing Agent, the Transfer
Agent'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, the Transfer Agent receives a per shareholder account fee from the
Fund and is reimbursed for its out-of-pocket expenses in connection with such
services.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
- --------------------------------------------------------------------------------
A. BROKERAGE TRANSACTIONS
Subject to the general supervision of the Trustees, the Investment Manager
and/or Sub-Advisor are 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. The Fund expects that the
primary market for the securities in which it invests will generally be the
over-the-counter market. In the over-the-counter market, securities are
generally traded on a "net" basis with dealers acting as principal for their
own accounts without a stated commission, although the price of the security
usually includes a profit to the dealer. The Fund also expects that securities
will be purchased at times in underwritten offerings where the price includes a
fixed amount of compensation, generally referred to as the underwriter's
concession or discount. 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.
B. COMMISSIONS
Pursuant to an order of the SEC, the Fund may effect principal
transactions in certain money market instruments with Dean Witter Reynolds. The
Fund will limit its transactions with Dean Witter Reynolds to U.S. Government
and government agency securities, bank money instruments (i.e., certificates of
deposit and bankers' acceptances) and commercial paper. The transactions will
be effected with Dean Witter Reynolds only when the price available from Dean
Witter Reynolds is better than that available from other dealers.
During the fiscal years ended October 31, 1996, 1997 and 1998, the Fund
did not effect any principal transactions with Dean Witter Reynolds.
Brokerage transactions in securities listed on exchanges or admitted to
unlisted trading privileges may be effected through Dean Witter Reynolds,
Morgan Stanley & Co. and other affiliated brokers and
24
<PAGE>
dealers. In order for an affiliated broker or dealer to effect any portfolio
transactions on an exchange 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 Trustees,
including the Independent Trustees, have adopted procedures which are
reasonably designed to provide that any commissions, fees or other remuneration
paid to an affiliated broker or dealer are consistent with the foregoing
standard. The Fund does not reduce the management fee it pays to the Investment
Manager by any amount of the brokerage commissions it may pay to an affiliated
broker or dealer.
C. BROKERAGE SELECTION
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.
In seeking to implement the Fund's policies, the Investment Manager and
the Sub-Advisor effect transactions with those brokers and dealers who the
Investment Manager and/or Sub-Advisor believes provide the most favorable
prices and are capable of providing efficient executions. If the Investment
Manager and/or Sub-Advisor believes the prices and executions are obtainable
from more than one broker or dealer, it may give consideration to placing
portfolio transactions with those brokers and dealers who also furnish research
and other services to the Fund or the Investment Manager and the Sub-Advisor.
The services may include, but are not limited to, any one or more of the
following: information as to the availability of securities for purchase or
sale; statistical or factual information or opinions pertaining to investment;
wire services; and appraisals or evaluations of portfolio securities. The
information and services received by the Investment Manager and/or Sub-Advisor
from brokers and dealers may be of benefit to the Investment Manager and/or
Sub-Advisor in the management of accounts of some of their other clients and
may not in all cases benefit the Fund directly.
The Investment Manager and the Sub-Advisor currently serve as investment
advisors to a number of clients, including other investment companies, and may
in the future act as investment manager or advisor to others. It is the
practice of the Investment Manager and the Sub-Advisor to cause purchase and
sale transactions to be allocated among the Fund and others whose assets they
manage in such manner as they deem equitable. In making such allocations among
the Fund and other client accounts, various factors may be considered,
including the respective investment objectives, the relative size of portfolio
holdings of the same or comparable securities, the availability of cash for
investment, the size of investment commitments generally held and the opinions
of the persons responsible for managing the portfolios of the Fund and other
client accounts. In the case of certain initial and secondary public offerings,
the Investment Manager utilizes a pro rata allocation process based on the size
of the funds involved and the number of shares available from the public
offering.
D. DIRECTED BROKERAGE
During the fiscal year ended October 31, 1998, the Fund did not pay any
brokerage commissions to brokers because of research services provided.
E. REGULAR BROKER-DEALERS
During the fiscal year ended October 31, 1998, the Fund did not purchase
securities issued by brokers or dealers that were among the ten brokers or the
ten dealers that executed transactions for or with the Fund in the largest
dollar amounts during the year.
25
<PAGE>
VII. CAPITAL STOCK AND OTHER SECURITIES
- --------------------------------------------------------------------------------
The shareholders of the Fund are entitled to a full vote for each full
share of beneficial interest held. The Fund is authorized to issue an unlimited
number of shares of beneficial interest. 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's Declaration of Trust permits the Trustees to authorize the
creation of additional series of shares (the proceeds of which would be
invested in separate, independently managed portfolios) and additional Classes
of shares within any series. The Trustees have not presently authorized any
such additional series or Classes of shares other than as set forth in the
Prospectus.
The 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 Investment Company Act or the Declaration of
Trust. Under certain circumstances the Trustees may be removed by action of the
Trustees. In addition, under certain circumstances the shareholders may call a
meeting to remove Trustees and the Fund is required to provide assistance in
communicating with shareholders about such a meeting. 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.
Under Massachusetts law, shareholders of a business trust may, under
certain limited 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 notice of such Fund obligations include such disclaimer, and
provides for indemnification 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.
All of the Trustees have been elected by the shareholders of the Fund,
most recently at a Special Meeting of Shareholders held on June 8, 1999. The
Trustees themselves have the power to alter the number and the terms of office
of the Trustees (as provided for in the Declaration of Trust), and they may at
any time lengthen or shorten 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.
VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
- --------------------------------------------------------------------------------
A. PURCHASE/REDEMPTION OF SHARES
Information concerning how Fund shares are offered to the public (and how
they are redeemed and exchanged) is provided in the Fund's Prospectus.
TRANSFER AGENT AS AGENT. With respect to the redemption or repurchase of
Fund shares, the application of proceeds to the purchase of new shares in the
Fund or any other Morgan Stanley Dean Witter Fund and the general
administration of the exchange privilege, the Transfer Agent acts as agent for
the Distributor and for the shareholder's authorized 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 authorized broker-dealer.
The Distributor and any authorized broker-dealer have 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
26
<PAGE>
of shares of any other continuously offered Morgan Stanley Dean Witter Fund and
the general administration of the exchange privilege. No commission or
discounts will be paid to the Distributor or any authorized broker-dealer for
any transaction pursuant to the exchange privilege.
B. OFFERING PRICE
The price of Fund shares, called "net asset value," is based on the value
of the Fund's portfolio securities. Net asset value per Fund share is
calculated by dividing the value of the Fund's securities and other assets,
less the liabilities, by the number of shares outstanding.
In the calculation of the Fund's net asset value all portfolio securities
for which over-the-counter market quotations are readily available are valued
at the latest bid price. When market quotations are not readily available,
including circumstances under which it is determined by the Investment Manager
or the Sub-Advisor that sale or bid prices are not reflective of a security's
market value, portfolio securities are valued at their fair value as determined
in good faith under procedures established by and under the general supervision
of the Fund's Trustees. For valuation purposes, quotations of foreign portfolio
securities, other assets and liabilities and forward contracts stated in
foreign currency are translated into U.S. dollar equivalents at the prevailing
market rates prior to the close of the New York Stock Exchange.
Short-term debt securities with remaining maturities of sixty days or less
at the time of purchase are valued at amortized cost, unless the Trustees
determine such does not reflect the securities' market value, in which case
these securities will be valued at their fair value as determined by the
Trustees.
Certain of the Fund's portfolio securities may be valued by an outside
pricing service approved by the Fund's Trustees. The pricing service may
utilize a matrix system incorporating security quality, maturity and coupon as
the evaluation model parameters, and/or research evaluations by its staff,
including review of broker-dealer market price quotations in determining what
it believes is the fair valuation of the portfolio securities valued by such
pricing service.
Generally, trading in foreign securities, as well as corporate bonds, U.S.
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.
IX. TAXATION OF THE FUND AND SHAREHOLDERS
- --------------------------------------------------------------------------------
The Fund generally will make two basic types of distributions: ordinary
dividends and long-term capital gain distributions. These two types of
distributions are reported differently on a shareholder's income tax return and
they are also subject to different rates of tax. The tax treatment of the
investment activities of the Fund will affect the amount and timing and
character of the distributions made by the Fund. Tax issues relating to the
Fund are not generally a consideration for shareholders such as tax exempt
entities and tax-advantaged retirement vehicles such as an IRA or 401(k) plan.
Shareholders are urged to consult their own tax professionals regarding
specific questions as to federal, state or local taxes.
INVESTMENT COMPANY TAXATION. The Fund intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986. As such, the Fund will not be subject to federal income tax on its net
investment income and capital gains, if any, to the extent that it distributes
such income and capital gains to its shareholders.
The Fund generally intends to distribute sufficient income and gains so
that the Fund will not pay corporate income tax on its earnings. The Fund also
generally intends to distribute to its shareholders in
27
<PAGE>
each calendar year a sufficient amount of ordinary income and capital gains to
avoid the imposition of a 4% excise tax. However, the Fund may instead
determine to retain all or part of any net long-term capital gains in any year
for reinvestment. In such event, the Fund will pay federal income tax (and
possibly excise tax) on such retained gains.
Gains or losses on sales of securities by the Fund will be long-term
capital gains or losses if the securities have a tax holding period of more
than one year. Gains or losses on the sale of securities with a tax holding
period of one year or less will be short-term gains or losses.
Under certain tax rules, the Fund may be required to accrue a portion of
any discount at which certain securities are purchased as income each year even
though the Fund receives no payments in cash on the security during the year.
To the extent that the Fund invests in such securities, it would be required to
pay out such accrued discount as an income distribution in each year in order
to avoid taxation at the Fund level. Such distributions will be made from the
available cash of the Fund or by liquidation of portfolio securities if
necessary. If a distribution of cash necessitates the liquidation of portfolio
securities, the Investment Manager and/or Sub-Advisor will select which
securities to sell. The Fund may realize a gain or loss from such sales. In the
event the Fund realizes net capital gains from such transactions, its
shareholders may receive a larger capital gain distribution, if any, than they
would in the absence of such transactions.
TAXATION OF DIVIDENDS AND DISTRIBUTIONS. Shareholders normally will have
to pay federal income taxes, and any state and/or local income taxes, on the
dividends and other distributions they receive from the Fund. Such dividends
and distributions, to the extent that they are derived from net investment
income or short-term capital gains, are taxable to the shareholder as ordinary
income regardless of whether the shareholder receives such payments in
additional shares or in cash.
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. The Taxpayer Relief Act of 1997
reduced the maximum tax on long-term capital gains applicable to individuals
from 28% to 20%.
Shareholders are generally taxed on any ordinary dividend or capital gain
distributions from the Fund in the year they are actually distributed. However,
if any such dividends or distributions are declared in October, November or
December and paid in January then such amounts will be treated for tax purposes
as received by the shareholders on December 31, to shareholders of record of
such month.
Subject to certain exceptions, a corporate shareholder may be eligible for
a 70% dividends received deduction to the extent that the Fund earns and
distributes qualifying dividends from its investments. Distributions of net
capital gains by the Fund will not be eligible for the dividends received
deduction.
Shareholders who are not citizens or residents of the United States and
certain foreign entities may be subject to withholding of United States tax on
distributions made by the Fund of investment income and short term capital
gains.
After the end of each calendar year, shareholders will be sent full
information on their dividends and capital gain distributions for tax purposes,
including the portion taxable as ordinary income, the portion taxable as
long-term capital gains and the amount of any dividends eligible for the
federal dividends received deduction for corporations.
PURCHASES AND REDEMPTIONS AND EXCHANGES OF FUND SHARES. 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, such dividends and capital gains
distributions 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 long-term capital gains,
such payment or distribution would be in part a return of the shareholder's
investment but nonetheless would be taxable to the shareholder. Therefore, an
investor should consider the tax implications of purchasing Fund shares
immediately prior to a distribution record date.
28
<PAGE>
In general, a sale of shares results in capital gain or loss, and for
individual shareholders, is taxable at a federal rate dependent upon the length
of time the shares were held. A redemption of a shareholder's Fund shares is
normally treated as a sale for tax purposes. Fund shares held for a period of
one year or less will, for tax purposes, generally result in short-term gains
or losses and those held for more than one year generally result in long-term
gain or loss. 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
with respect to such shares during the six-month period.
Gain or loss on the sale or redemption of shares in the Fund is measured
by the difference between the amount received and the tax basis of the shares.
Shareholders should keep records of investments made (including shares acquired
through reinvestment of dividends and distributions) so they can compute the
tax basis of their shares. Under certain circumstances a shareholder may
compute and use an average cost basis in determining the gain or loss on the
sale or redemption of shares.
Exchanges of Fund shares for shares of any other continuously offered
Morgan Stanley Dean Witter Fund are also subject to similar tax treatment. Such
an exchange is treated for tax purposes as a sale of the original shares in the
first fund, followed by the purchase of shares in the second fund.
If a shareholder realizes a loss on the redemption or exchange of a fund's
shares and reinvests in that fund's shares within 30 days before or after the
redemption or exchange, the transactions may be subject to the "wash sale"
rules, resulting in a postponement of the recognition of such loss for tax
purposes.
X. UNDERWRITERS
- --------------------------------------------------------------------------------
The Fund's shares are offered to the public on a continuous basis. The
Distributor, as the principal underwriter of the shares, has certain
obligations under the Distribution Agreement concerning the distribution of the
shares. These obligations and the compensation the Distributor receives are
described above in the sections titled "Principal Underwriter" and "Rule 12b-1
Plans".
XI. CALCULATION OF PERFORMANCE DATA
- --------------------------------------------------------------------------------
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 income for each security in the Fund's portfolio is determined as
described below; 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 maximum offering price per share on the last day of the period
(reduced by any undeclared earned income per share that is expected to be
declared shortly after the end 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.
To determine interest income from debt obligations, a yield-to-maturity,
expressed as a percentage, is determined for obligations held at the beginning
of the period, based on the current market value of the security plus accrued
interest, generally as of the end of the month preceding the 30-day period, or,
for obligations purchased during the period, based on the cost of the security
(including accrued interest). The yield-to-maturity is multiplied by the market
value (plus accrued interest) for each security and the result is divided by
360 and multiplied by 30 days or the number of days the security was held
during the period, if less. Modifications are made for determining
yield-to-maturity on certain tax-exempt securities. For the 30-day period ended
October 31, 1998, the Fund's yield, calculated pursuant to the formula
described above 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
29
<PAGE>
redeemable value of a hypothetical $1,000 investment made at the beginning of a
one, five or ten year period, or for the period from the date of commencement
of the Fund's operations, if shorter than any of the foregoing. For the purpose
of this calculation, it is assumed that all dividends and distributions are
reinvested. The formula for computing the average annual total return involves
a percentage obtained by dividing the ending redeemable value by the amount of
the initial investment (which is reduced by the initial sales charge), 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. Based on this calculation, the
average annual total returns of the Fund for the one and five year periods
ended October 31, 1998 and for the period July 31, 1992 (commencement of
operations) through October 31, 1998 were 5.13%, 3.07% and 4.13%, respectively.
In addition, 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 (without
reduction for any sales charge) by the initial $1,000 investment and
subtracting 1 from the result. Based on this calculation, the Fund's total
returns for the one and five year periods ended October 31, 1998 and for the
period 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 to date and multiplying $10,000, $50,000 or $100,000.
Investments of $10,000, $50,000 and $100,000 in the Fund since 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 recognized organizations.
XII. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
EXPERTS. The financial statements of the Fund for the fiscal year ended
Ocrober 31, 1998 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.
* * * * *
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 SEC. The complete Registration Statement may be obtained from
the SEC.
30
<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
32
<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
33
<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
34
<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
35
<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
36
<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.
37
<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"),
38
<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>
39
<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.
40
<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.
41
<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 YEAR ENDED OCTOBER 31
-------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---------------- ---------- ---------- ---------- ------------ ----------
<S> <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
--------- ------ ------ ------ ------- -------
Net investment income ........................ 0.49 0.44 0.47 0.69 0.68 0.77
Net realized and unrealized gain (loss) ...... (0.05) 0.19 0.04 (0.59) (1.18) 0.14
--------- ------ ------ ------- ------- -------
Total from investment operations ............. 0.44 0.63 0.51 0.10 (0.50) 0.91
--------- ------ ------ ------- ------- -------
Less dividends and distributions from:
Net investment income ....................... (0.43) (0.43) (0.45) -- (0.47) (0.76)
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)
--------- ------- ------- ------- ------- -------
Net asset value, end of period ............... $ 8.60 $ 8.59 $ 8.39 $ 8.33 $ 8.89 $10.11
========= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN+ ..................... 5.13% 7.80% 6.38% 1.61% (5.06)% 9.35%
RATIOS TO AVERAGE NET ASSETS:
Expenses ..................................... 1.69%(3) 1.65% 1.64% 1.59% 1.52 % 1.54%
Net investment income ........................ 5.52% 5.18% 5.71% 8.28% 6.85 % 7.78%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions ....... $ 150 $ 212 $ 351 $ 658 $1,360 $2,986
Portfolio turnover rate ...................... 8% -- 13% 44% 27 % 77%
<CAPTION>
FOR THE PERIOD
JULY 31, 1992*
THROUGH
OCTOBER 31, 1992
-----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ......... $ 10.00
---------
Net investment income ........................ 0.18
Net realized and unrealized gain (loss) ...... (0.05)
---------
Total from investment operations ............. 0.13
---------
Less dividends and distributions from:
Net investment income ....................... (0.17)
Net realized gain ........................... --
Paid-in-capital ............................. --
---------
Total dividends and distributions ............ (0.17)
---------
Net asset value, end of period ............... $ 9.96
=========
TOTAL INVESTMENT RETURN+ ..................... 1.28%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ..................................... 1.80%(2)
Net investment income ........................ 8.36%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in millions ....... $ 762
Portfolio turnover rate ...................... 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
42
<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
43
