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Filed Pursuant to Rule 497(e)
Registration File No.: 333-01995
MORGAN STANLEY DEAN WITTER
INCOME BUILDER FUND
PROSPECTUS -- NOVEMBER 25, 1998
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MORGAN STANLEY DEAN WITTER INCOME BUILDER FUND (THE "FUND") IS AN OPEN-END,
DIVERSIFIED MANAGEMENT INVESTMENT COMPANY WHOSE PRIMARY INVESTMENT OBJECTIVE IS
TO SEEK REASONABLE INCOME. GROWTH OF CAPITAL IS THE SECONDARY OBJECTIVE. THE
FUND SEEKS TO ACHIEVE ITS OBJECTIVES BY INVESTING, UNDER NORMAL MARKET
CONDITIONS, AT LEAST 65% OF ITS TOTAL ASSETS IN A DIVERSIFIED PORTFOLIO OF
INCOME-PRODUCING EQUITY SECURITIES, INCLUDING COMMON STOCK, PREFERRED STOCK AND
CONVERTIBLE SECURITIES. UP TO 35% OF THE FUND'S ASSETS MAY BE INVESTED IN
FIXED-INCOME SECURITIES OR COMMON STOCKS THAT DO NOT PAY A REGULAR DIVIDEND BUT
ARE EXPECTED TO CONTRIBUTE TO THE FUND'S ABILITY TO MEET ITS INVESTMENT
OBJECTIVES.
The Fund offers four classes of shares (each, a "Class"), each with a different
combination of sales charges, ongoing fees and other features. The different
distribution arrangements permit an investor to choose the method of purchasing
shares that the investor believes is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances. (See "Purchase of Fund Shares--Alternative Purchase
Arrangements.")
This Prospectus sets forth concisely the information you should know before
investing in the Fund. It should be read and retained for future reference.
Additional information about the Fund is contained in the Statement of
Additional Information, dated November 25, 1998, which has been filed with the
Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone numbers listed on this page.
The Statement of Additional Information is incorporated herein by reference.
TABLE OF CONTENTS
Prospectus Summary............................................ 2
Summary of Fund Expenses...................................... 4
Financial Highlights.......................................... 5
The Fund and its Management................................... 8
Investment Objectives and Policies............................ 8
Risk Considerations........................................... 11
Investment Restrictions....................................... 15
Purchase of Fund Shares....................................... 15
Shareholder Services.......................................... 24
Redemptions and Repurchases................................... 26
Dividends, Distributions and Taxes............................ 27
Performance Information....................................... 28
Additional Information........................................ 29
Appendix...................................................... 30
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
MORGAN STANLEY DEAN WITTER
INCOME BUILDER FUND
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 392-2550 OR
(800) 869-NEWS (TOLL-FREE)
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Morgan Stanley Dean Witter Distributors Inc., Distributor
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<TABLE>
<CAPTION>
PROSPECTUS SUMMARY
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<S> <C>
THE The Fund is organized as a Trust, commonly known as a Massachusetts business trust, and is an
FUND open-end, diversified management investment company. Under normal market conditions, the Fund
will invest at least 65% of its total assets in income-producing equity securities, including common
stock, preferred stock and convertible securities. Up to 35% of the Fund's assets may be invested in
fixed-income securities or common stocks that do not pay a regular dividend but are expected to
contribute to the Fund's ability to meet its investment objectives.
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SHARES OFFERED Shares of beneficial interest with $0.01 par value (see page 29). The Fund offers four Classes of shares,
each with a different combination of sales charges, ongoing fees and other features (see pages 15-23).
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MINIMUM The minimum initial investment for each Class is $1,000 ($100 if the account is opened through
PURCHASE EasyInvest(SM)). Class D shares are only available to persons investing $5 million ($25 million for
certain qualified plans) or more and to certain other limited categories of investors. For the purpose
of meeting the minimum $5 million (or $25 million) investment for Class D shares, and subject to the
$1,000 minimum initial investment for each Class of the Fund, an investor's existing holdings of Class
A and Class D shares and shares of funds for which Morgan Stanley Dean Witter Advisors Inc. serves
as investment manager ("Morgan Stanley Dean Witter Funds") that are sold with a front-end sales
charge, and concurrent investments in Class D shares of the Fund and other Morgan Stanley Dean
Witter Funds that are multiple class funds, will be aggregated. The minimum subsequent investment
is $100 (see page 15).
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INVESTMENT The primary investment objective of the Fund is to seek reasonable income. Growth of capital is the
OBJECTIVE secondary objective.
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INVESTMENT Morgan Stanley Dean Witter Advisors Inc., the Investment Manager of the Fund, and its wholly-owned
MANAGER subsidiary, Morgan Stanley Dean Witter Services Company Inc., serve in various investment
management, advisory, management and administrative capacities to 100 investment companies and
other portfolios with net assets under management of approximately $117.3 billion at October 31, 1998.
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MANAGEMENT The Investment Manager receives a monthly fee at the annual rate of 0.75% of the portion of daily net
FEE assets not exceeding $500 million; and 0.725% of the portion of daily net assets exceeding $500 million
(see page 8).
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DISTRIBUTOR AND Morgan Stanley Dean Witter Distributors Inc. is the Distributor of the Fund's shares. The Fund has
DISTRIBUTION adopted a distribution plan pursuant to Rule 12b-1 under the Investment Company Act (the "12b-1
FEE Plan") with respect to the distribution fees paid by the Class A, Class B and Class C shares of the Fund
to the Distributor. The entire 12b-1 fee payable by Class A and a portion of the 12b-1 fee payable by
each of Class B and Class C equal to 0.25% of the average daily net assets of the Class are currently
each characterized as a service fee within the meaning of the National Association of Securities
Dealers, Inc. guidelines. The remaining portion of the 12b-1 fee, if any, is characterized as an
asset-based sales charge (see pages 15 and 22).
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ALTERNATIVE Four classes of shares are offered:
PURCHASE
ARRANGEMENTS o Class A shares are offered with a front-end sales charge, starting at 5.25% and reduced for larger
purchases. Investments of $1 million or more (and investments by certain other limited categories of
investors) are not subject to any sales charge at the time of purchase but a contingent deferred sales
charge ("CDSC") of 1.0% may be imposed on redemptions within one year of purchase. The Fund is
authorized to reimburse the Distributor for specific expenses incurred in promoting the distribution
of the Fund's Class A shares and servicing shareholder accounts pursuant to the Fund's 12b-1 Plan.
Reimbursement may in no event exceed an amount equal to payments at an annual rate of 0.25% of
average daily net assets of the Class (see pages 15, 18 and 22).
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</TABLE>
2
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<TABLE>
<CAPTION>
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<S> <C>
o Class B shares are offered without a front-end sales charge, but will in most cases be subject to a
CDSC (scaled down from 5.0% to 1.0%) if redeemed within six years after purchase. The CDSC will
be imposed on any redemption of shares if after such redemption the aggregate current value of a
Class B account with the Fund falls below the aggregate amount of the investor's purchase payments
made during the six years preceding the redemption. A different CDSC schedule applies to
investments by certain qualified plans. Class B shares are also subject to a 12b-1 fee assessed at the
annual rate of 1.0% of the lesser of: (a) the average daily net sales of the Fund's Class B shares or (b)
the average daily net assets of Class B. All shares of the Fund held prior to July 28, 1997 have been
designated Class B shares. Shares held before May 1, 1997 that have been designated Class B shares
will convert to Class A shares in May, 2007. In all other instances, Class B shares convert to Class A
shares approximately ten years after the date of the original purchase (see pages 15, 20 and 22).
o Class C shares are offered without a front-end sales charge, but will in most cases be subject to a
CDSC of 1.0% if redeemed within one year after purchase. The Fund is authorized to reimburse the
Distributor for specific expenses incurred in promoting the distribution of the Fund's Class C shares
and servicing shareholder accounts pursuant to the Fund's 12b-1 Plan. Reimbursement may in no
event exceed an amount equal to payments at an annual rate of 1.0% of average daily net assets of the
Class (see pages 15, 21 and 22).
o Class D shares are offered only to investors meeting an initial investment minimum of $5 million
($25 million for certain qualified plans) and to certain other limited categories of investors. Class D
shares are offered without a front-end sales charge or CDSC and are not subject to any 12b-1 fees (see
pages 15 and 22).
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DIVIDENDS AND The Fund pays quarterly income dividends and distributes substantially all of any net short-term and
CAPITAL GAINS net long-term capital gains at least once each year. The Fund may, however, determine to retain all or
DISTRIBUTIONS part of any net long-term capital gains in any year for reinvestment. Dividends and capital gains
distributions paid on shares of a Class are automatically reinvested in additional shares of the same
Class at net asset value unless the shareholder elects to receive cash. Shares acquired by dividend and
distribution reinvestment will not be subject to any sales charge or CDSC (see pages 24 and 27).
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REDEMPTION Shares are redeemable by the shareholder at net asset value less any applicable CDSC on Class A,
Class B or Class C shares. An account may be involuntarily redeemed if the total value of the account
is less than $100 or, if the account was opened through EasyInvest(SM), if after twelve months the
shareholder has invested less than $1,000 in the account (see page 26).
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RISK The net asset value of the Fund's shares will fluctuate with changes in market value of portfolio
CONSIDERATIONS securities. Dividends payable by the Fund will vary in relation to the amounts of dividends earned on
common stock and interest earned on fixed-income securities. The value of the Fund's convertible and
fixed-income portfolio securities and, therefore, the Fund's net asset value per share, may increase or
decrease due to various factors, including changes in prevailing interest rates. Generally, a rise in
interest rates will result in a decrease in the Fund's net asset value per share, while a drop in interest
rates will result in an increase in the Fund's net asset value per share. The high yield, high risk
fixed-income securities in which the Fund may invest are subject to greater risk of loss of income and
principal than higher rated, lower yielding fixed-income securities. The prices of high yield, high risk
securities have been found to be less sensitive to changes in prevailing interest rates than higher rated
investments, but are likely to be more sensitive to adverse economic changes or individual corporate
developments. The Fund may enter into repurchase agreements, may purchase foreign securities;
securities on a when-issued and delayed delivery basis and may utilize certain investement
techniques, all of which involve certain special risks (see pages 11-14).
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SHAREHOLDER Automatic Investment of Dividends and Distributions; Investment of Distributions Received in Cash;
SERVICES Systematic Withdrawal Plan; Exchange Privilege; EasyInvest(SM); Tax-Sheltered Retirement Plans (see
page 24).
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</TABLE>
The above is qualified in its entirety by the detailed information appearing
elsewhere in this Prospectus and in the Statement of Additional Information.
3
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SUMMARY OF FUND EXPENSES
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The following table illustrates all expenses and fees that a shareholder of the
Fund will incur. The expenses and fees set forth in the table are based on the
expenses and fees for the fiscal year ended September 30, 1998.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price) ............................................ 5.25%(1) None None None
Sales Charge Imposed on Dividend Reinvestments .............. None None None None
Maximum Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds) ............ None(2) 5.00%(3) 1.00%(4) None
Redemption Fees ............................................. None None None None
Exchange Fee ................................................ None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE
NET ASSETS)
Management Fees ............................................. 0.75% 0.75% 0.75% 0.75%
12b-1 Fees (5) (6) .......................................... 0.25% 0.88% 1.00% None
Other Expenses .............................................. 0.17% 0.17% 0.17% 0.17%
Total Fund Operating Expenses ............................... 1.17% 1.80% 1.92% 0.92%
</TABLE>
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(1) Reduced for purchases of $25,000 and over (see "Purchase of Fund
Shares--Initial Sales Charge Alternative--Class A Shares").
(2) Investments that are not subject to any sales charge at the time of
purchase are subject to a CDSC of 1.00% that will be imposed on
redemptions made within one year after purchase, except for certain
specific circumstances (see "Purchase of Fund Shares--Initial Sales
Charge Alternative--Class A Shares").
(3) The CDSC is scaled down to 1.00% during the sixth year, reaching zero
thereafter.
(4) Only applicable to redemptions made within one year after purchase (see
"Purchase of Fund Shares--Level Load Alternative--Class C Shares").
(5) The 12b-1 fee is accrued daily and payable monthly. The entire 12b-1 fee
payable by Class A and a portion of the 12b-1 fee payable by each of
Class B and Class C equal to 0.25% of the average daily net assets of the
Class are currently each characterized as a service fee within the
meaning of National Association of Securities Dealers, Inc. ("NASD")
guidelines and are payments made for personal service and/or maintenance
of shareholder accounts. The remainder of the 12b-1 fee, if any, is an
asset-based sales charge, and is a distribution fee paid to the
Distributor to compensate it for the services provided and the expenses
borne by the Distributor and others in the distribution of the Fund's
shares (see "Purchase of Fund Shares--Plan of Distribution").
(6) Upon conversion of Class B shares to Class A shares, such shares will be
subject to the lower 12b-1 fee applicable to Class A shares. No sales
charge is imposed at the time of conversion of Class B shares to Class A
shares. Class C shares do not have a conversion feature and, therefore,
are subject to an ongoing 1.00% distribution fee (see "Purchase of Fund
Shares--Alternative Purchase Arrangements").
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
EXAMPLES -------- --------- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) a 5% annual return and (2) redemption at the end of each time period:
Class A ............................................................... $64 $88 $113 $187
Class B ............................................................... $68 $87 $117 $212
Class C ............................................................... $29 $60 $104 $224
Class D ............................................................... $ 9 $29 $ 51 $113
You would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of the period:
Class A ............................................................... $64 $88 $113 $187
Class B ............................................................... $18 $57 $ 97 $212
Class C ............................................................... $19 $60 $104 $224
Class D ............................................................... $ 9 $29 $ 51 $113
</TABLE>
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF EACH CLASS MAY BE GREATER OR LESS
THAN THOSE SHOWN.
The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"The Fund and its Management" "Purchase of Fund Shares--Plan of Distribution"
and "Redemptions and Repurchases."
Long-term shareholders of Class B and Class C may pay more in sales charges,
including distribution fees, than the economic equivalent of the maximum
front-end sales charge permitted by the NASD.
4
<PAGE>
FINANCIAL HIGHLIGHTS
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The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by PricewaterhouseCoopers
LLP, independent accountants. The financial highlights should be read in
conjunction with the financial statements, the notes thereto and the
unqualified report of independent accountants, which are contained in the
Statement of Additional Information. Further information about the performance
of the Fund is contained in the Fund's Annual Report to Shareholders, which may
be obtained without charge upon request to the Fund.
<TABLE>
<CAPTION>
For the period
For the year For the year June 26, 1996*
Ended Ended through
September 30, 1998++ September 30, 1997**++ September 30, 1996
---------------------- ------------------------ -------------------
<S> <C> <C> <C>
CLASS B SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............ $ 12.81 $ 10.23 $ 10.00
-------- -------- -------
Net investment income ........................... 0.50 0.46 0.08
Net realized and unrealized gain (loss) ......... (1.11) 2.54 0.23
-------- -------- -------
Total from investment operations ................ (0.61) 3.00 0.31
-------- -------- -------
Less dividends and distributions from:
Net investment income .......................... (0.43) (0.41) (0.08)
Net realized gain .............................. (0.59) (0.01) --
-------- -------- -------
Total dividends and distributions ............... (1.02) (0.42) (0.08)
-------- -------- -------
Net asset value, end of period .................. $ 11.18 $ 12.81 $ 10.23
======== ======== =======
TOTAL INVESTMENT RETURN+ ......................... (5.29)% 29.83% 3.10%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................ 1.80 %(3) 1.85% 2.25%(2)
Net investment income ........................... 3.98 %(3) 4.16% 3.60%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ......... $416,909 $358,973 $148,142
Portfolio turnover rate ......................... 58 % 74% 7%(1)
</TABLE>
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* Commencement of operations.
** Prior to July 28, 1997 the Fund issued one class of shares. All shares
held prior to that date have been designated Class B shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
5
<PAGE>
FINANCIAL HIGHLIGHTS--Continued
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<TABLE>
<CAPTION>
For the period
For the year July 28, 1997*
Ended through
September 30, 1998++ September 30, 1997++
---------------------- ---------------------
<S> <C> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............ $ 12.81 $12.20
------- ------
Net investment income ........................... 0.59 0.12
Net realized and unrealized gain (loss) ......... (1.12) 0.61
------- ------
Total from investment operations ................ (0.53) 0.73
------- ------
Less dividends and distributions from:
Net investment income ......................... (0.51) (0.12)
Net realized gain ............................. (0.59) --
------- ------
Total dividends and distributions ............... (1.10) (0.12)
------- ------
Net asset value, end of period .................. $ 11.18 $12.81
======= ======
TOTAL INVESTMENT RETURN+ ......................... (4.67)% 5.95 %(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................ 1.17 %(3) 1.28 %(2)
Net investment income ........................... 4.61 %(3) 5.77 %(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.......... $10,073 $1,047
Portfolio turnover rate ......................... 58 % 74 %
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............ $ 12.80 $12.20
--------- -------
Net investment income ........................... 0.50 0.10
Net realized and unrealized gain (loss).......... (1.12) 0.61
--------- -------
Total from investment operations ................ (0.62) 0.71
--------- -------
Less dividends and distributions from:
Net investment income ......................... (0.43) (0.11)
Net realized gain ............................. (0.59) --
--------- -------
Total dividends and distributions ............... (1.02) (0.11)
--------- -------
Net asset value, end of period .................. $ 11.16 $12.80
========= =======
TOTAL INVESTMENT RETURN+ ......................... (5.38)% 5.79 %(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................ 1.92 %(3) 1.98 %(2)
Net investment income ........................... 3.86 %(3) 4.61 %(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.......... $5,630 $987
Portfolio turnover rate ......................... 58 % 74 %
</TABLE>
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* The date shares were first issued.
++The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
6
<PAGE>
FINANCIAL HIGHLIGHTS--Continued
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<TABLE>
<CAPTION>
For the period
For the year July 28, 1997*
Ended through
September 30, 1998++ September 30, 1997++
---------------------- ---------------------
<S> <C> <C>
CLASS D SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............ $12.82 $12.20
------ ------
Net investment income ........................... 0.64 0.12
Net realized and unrealized gain (loss) ......... (1.15) 0.62
------ ------
Total from investment operations ................ (0.51) 0.74
------ ------
Less dividends and distributions from:
Net investment income ......................... (0.54) (0.12)
Net realized gain ............................. (0.59) --
------ ------
Total dividends and distributions ............... (1.13) (0.12)
------ ------
Net asset value, end of period .................. $11.18 $12.82
====== ======
TOTAL INVESTMENT RETURN+ ......................... (4.46)% 5.98 %(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................ 0.92 %(3) 0.96 %(2)
Net investment income ........................... 4.86 %(3) 5.41 %(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ......... $618 $21
Portfolio turnover rate ......................... 58 % 74 %
</TABLE>
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* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
7
<PAGE>
THE FUND AND ITS MANAGEMENT
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Morgan Stanley Dean Witter Income Builder Fund (formerly named Dean Witter
Income Builder Fund) (the "Fund") is an open-end, diversified management
investment company. The Fund is a trust of the type commonly known as a
"Massachusetts business trust" and was organized under the laws of The
Commonwealth of Massachusetts on March 21, 1996.
Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors" or the
"Investment Manager"), whose address is Two World Trade Center, New York, New
York 10048, is the Fund's Investment Manager. The Investment Manager is a
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co., a preeminent
global financial services firm that maintains leading market positions in each
of its three primary businesses--securities, asset management and credit
services. The Investment Manager, which was incorporated in July, 1992 under
the name Dean Witter InterCapital Inc., changed its name to Morgan Stanley Dean
Witter Advisors Inc. on June 22, 1998.
MSDW Advisors and its wholly-owned subsidiary, Morgan Stanley Dean Witter
Services Company Inc. ("MSDW Services"), serve in various investment
management, advisory, management and administrative capacities to 100
investment companies, 28 of which are listed on the New York Stock Exchange,
with combined assets of approximately $112.8 billion at October 31, 1998. The
Investment Manager also manages portfolios of pension plans, other institutions
and individuals which aggregated approximately $4.4 billion at such date.
The Fund has retained the Investment Manager to provide administrative
services, manage its business affairs and manage the investment of the Fund's
assets, including the placing of orders for the purchase and sale of portfolio
securities. MSDW Advisors has retained MSDW Services to perform the
aforementioned administrative services for the Fund.
The Fund's Trustees review the various services provided by or under the
direction of the Investment Manager to ensure that the Fund's general
investment policies and programs are being properly carried out and that
administrative services are being provided to the Fund in a satisfactory
manner.
As full compensation for the services and facilities furnished to the
Fund and for expenses of the Fund assumed by the Investment Manager, the Fund
pays the Investment Manager monthly compensation calculated daily by applying
the annual rate of 0.75% to the Fund's net assets. Effective May 1, 1998, the
Investment Manager's compensation was scaled down to 0.725% on assets over $500
million. For the fiscal year ended September 30, 1998, the Fund accrued total
compensation to the Investment Manager amounting to 0.75% of the Fund's average
daily net assets and the total expenses of each Class amounted to 1.17%, 1.80%,
1.92% and 0.92% of the average daily net assets of Class A, Class B, Class C
and Class D, respectively.
INVESTMENT OBJECTIVES AND POLICIES
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The primary investment objective of the Fund is to seek reasonable income.
Growth of capital is the secondary objective. The objectives are fundamental
policies of the Fund and may not be changed without a vote of a majority of the
outstanding voting securities of the Fund. There is no assurance that the
objectives will be achieved.
The Fund seeks to achieve its objectives by investing, under normal
market conditions, at least 65% of its total assets in income-producing equity
securities, including common stock, preferred stock and convertible securities.
Up to 35% of the Fund's assets may be invested in fixed-income securities or
common stocks that do not pay a regular dividend but are expected to contribute
to the Fund's ability to meet its investment objectives.
COMMON STOCKS, PREFERRED STOCKS AND SECURITIES CONVERTIBLE INTO COMMON
STOCKS. The Fund will invest, under normal market conditions, primarily in
common stocks of large-cap companies which have a record of paying dividends
and, in the opinion of the Investment Manager, have the potential for
maintaining dividends, in preferred stock and in securities convertible into
common stocks of small and mid-cap companies. The Investment Manager intends to
use a value-oriented investment style in the selection of securities for the
Fund's portfolio. A convertible security is a bond, debenture, note, preferred
stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or based on a specified formula.
Convertible securities rank senior to common stocks in a corporation's capital
structure and, therefore, entail less risk than the corporation's common stock.
The value of a convertible security is a function of its "investment value"
(its value as if it did not have a conversion privilege), and its "conversion
value" (the security's worth if it were to be exchanged for the underlying
security, at market value, pursuant to its conversion privilege).
8
<PAGE>
LOWER RATED FIXED-INCOME SECURITIES. The Fund also may invest up to 20% in
fixed-income securities rated below investment grade. Securities below
investment grade are the equivalent of high yield, high risk bonds (commonly
known as "junk bonds"). Investment grade is generally considered to be debt
securities rated BBB or higher by Standard & Poor's Corporation ("S&P") or Baa
or higher by Moody's Investors Service, Inc. ("Moody's"). (Fixed-income
securities rated BBB by S&P or Baa by Moody's which generally are regarded as
having an adequate capacity to pay interest and repay principal, have
speculative characteristics.) However, the Fund will not invest in fixed-income
securities that are rated lower than B by S&P or Moody's or, if not rated,
determined to be of comparable quality by the Investment Manager. The Fund will
not invest in fixed-income securities that are in default in payment of
principal or interest. The 20% limitation on securities rated below investment
grade in which the Fund may invest does not include securities convertible into
common stock. A description of fixed-income securities ratings is contained in
the appendix to the Prospectus.
FOREIGN SECURITIES. The Fund may invest in equity securities of foreign
issuers. However, the Fund will not invest more than 25% of the value of its
total assets, at the time of purchase, in securities of foreign issuers (other
than securities of Canadian issuers registered under the Securities Exchange
Act of 1934 or American Depository Receipts, on which there is no such limit).
The Fund may invest in American Depository Receipts (ADRs), European Depository
Receipts (EDRs) or other similar securities convertible into securities of
foreign issuers. These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are
receipts typically issued by a United States bank or trust company evidencing
ownership of the underlying securities. EDRs are European receipts evidencing a
similar arrangement. Generally, ADRs, in registered form, are designed for use
in the United States securities markets and EDRs, in bearer form, are designed
for use in European securities markets. The Fund's investments in unlisted
foreign securities are subject to the Fund's overall policy limiting its
investment in illiquid securities to 15% or less of its net assets.
CORPORATE NOTES AND BONDS AND U.S. GOVERNMENT SECURITIES. A portion of the
Fund's assets may be invested in investment grade fixed income (fixed-rate and
adjustable rate) securities such as corporate notes and bonds and obligations
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities.
The non-governmental debt securities in which the Fund will invest will
include: (a) corporate debt securities, including bonds, notes and commercial
paper, rated in the four highest categories by a nationally recognized
statistical rating organization ("NRSRO") including Moody's Investors Service,
Inc., Standard & Poor's Corporation, Duff and Phelps, Inc. and Fitch Investors
Service, Inc.; and (b) bank obligations, including CDs, banker's acceptances
and time deposits, issued by banks with a long-term CD rating in one of the
four highest categories by a NRSRO. Investments in securities rated within the
four highest rating categories by a NRSRO are considered "investment grade."
However, such securities rated within the fourth highest rating category by a
NRSRO have speculative characteristics and, therefore, changes in economic
conditions or other circumstances are more likely to weaken their capacity to
make principal and interest payments than would be the case with investments in
securities with higher credit ratings. Where a fixed-income security is not
rated by a NRSRO (as may be the case with a foreign security) the Investment
Manager will make a determination of its creditworthiness and may deem it to be
investment grade. A description of fixed-income security ratings is contained
in the appendix to the Prospectus.
The U.S. Government Securities in which the Fund may invest include
securities which are direct obligations of the United States Government, such
as United States treasury bills, notes and bonds, and which are backed by the
full faith and credit of the United States; securities which are backed by the
full faith and credit of the United States but which are obligations of a
United States agency or instrumentality (e.g., obligations of the Government
National Mortgage Association); securities issued by a United States agency or
instrumentality which has the right to borrow, to meet its obligations, from an
existing line of credit with the United States Treasury (e.g., obligations of
the Federal National Mortgage Association); securities issued by a United
States agency or instrumentality which is backed by the credit of the issuing
agency or instrumentality (e.g., obligations of the Federal Farm Credit
System).
Money market instruments in which the Fund may invest include securities
issued or guaranteed by the U.S. Government, its agencies and instrumentalities
(Treasury bills, notes and bonds, including zero coupon securities); bank
obligations; Eurodollar certificates of deposit; obligations of savings
institutions; fully insured certificates of deposit; and commercial paper rated
within the four highest grades by Moody's or Standard & Poor's or, if not
rated, issued by a company having an outstanding debt issue rated at least AA
by Standard & Poor's or Aa by Moody's. Such securities may be used to invest
uncommitted cash balances.
There may be periods during which, in the opinion of the Investment
Manager, market conditions warrant
9
<PAGE>
reduction of some or all of the Fund's securities holdings. During such
periods, the Fund may adopt a temporary "defensive" posture in which up to 100%
of its total assets is invested in money market instruments or cash.
In addition to the securities noted above, the Fund may invest in the
following:
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From time
to time, in the ordinary course of business, the Fund may purchase securities
on a when-issued or delayed delivery basis or may purchase or sell securities
on a forward commitment basis. When such transactions are negotiated, the price
is fixed at the time of the commitment, but delivery and payment can take place
a month or more after the date of the commitment. An increase in the percentage
of the Fund's assets committed to the purchase of securities on a when-issued,
delayed delivery or forward commitment basis may increase the volatility of the
Fund's net asset value. (See the Statement of Additional Information for added
risk disclosure.)
WHEN, AS AND IF ISSUED SECURITIES. The Fund may purchase securities on a "when,
as and if issued" basis under which the issuance of the security depends upon
the occurrence of a subsequent event, such as approval of a merger, corporate
reorganization, leveraged buyout or debt restructuring. If the anticipated
event does not occur and the securities are not issued, the Fund will have lost
an investment opportunity. An increase in the percentage of the Fund's assets
committed to the purchase of securities on a "when, as and if issued" basis may
increase the volatility of its net asset value. See the Statement of Additional
Information for additional risk disclosure.
INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in real estate
investment trusts, which pool investors' funds for investments primarily in
commercial real estate properties. Investment in real estate investment trusts
may be the most practical available means for the Fund to invest in the real
estate industry (the Fund is prohibited from investing in real estate
directly). As a shareholder in a real estate investment trust, the Fund would
bear its ratable share of the real estate investment trust's expenses,
including its advisory and administration fees. At the same time the Fund would
continue to pay its own investment management fees and other expenses, as a
result of which the Fund and its shareholders in effect will be absorbing
duplicate levels of fees with respect to investments in real estate investment
trusts.
ZERO COUPON SECURITIES. A portion of the fixed-income securities purchased by
the Fund may be zero coupon securities. Such securities are purchased at a
discount from their face amount, giving the purchaser the right to receive
their full value at maturity. The interest earned on such securities is,
implicitly, automatically compounded and paid out at maturity. While such
compounding at a constant rate eliminates the risk of receiving lower yields
upon reinvestment of interest if prevailing interest rates decline, the owner
of a zero coupon security will be unable to participate in higher yields upon
reinvestment of interest received on interest-paying securities if prevailing
interest rates rise.
A zero coupon security pays no interest to its holder during its life.
Therefore, to the extent the Fund invests in zero coupon securities, it will
not receive current cash available for distribution to shareholders. In
addition, zero coupon securities are subject to substantially greater price
fluctuations during periods of changing prevailing interest rates than are
comparable securities which pay interest on a current basis. Current federal
tax law requires that a holder (such as the Fund) of a zero coupon security
accrue a portion of the discount at which the security was purchased as income
each year even though the Fund receives no interest payments in cash on the
security during the year.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to brokers, dealers
and other financial institutions, provided that such loans are callable at any
time by the Fund (subject to certain notice provisions described in the
Statement of Additional Information), and are at all times secured by cash or
money market instruments, which are maintained in a segregated account pursuant
to applicable regulations and that are equal to at least the market value,
determined daily, of the loaned securities. 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,
loans of portfolio securities will only be made to firms deemed by the
Investment Manager to be creditworthy and when the income which can be earned
from such loans justifies the attendant risks.
RULE 144A SECURITIES. The Fund may invest up to 5% of its total assets in
securities which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), or which are otherwise not readily marketable. (Securities eligible for
resale pursuant to Rule 144A under the Securities Act, and determined to be
liquid pursuant to the procedures discussed in the following paragraph, are not
subject to the foregoing restriction.) These securities are generally referred
to as private placements or restricted securities. Limitations on the resale of
such securities may have an adverse effect on
10
<PAGE>
their marketability, and may prevent the Fund from disposing of them promptly
at reasonable prices. The Fund may have to bear the expense of registering such
securities for resale and the risk of substantial delays in effecting such
registration.
The Securities and Exchange Commission has adopted Rule 144A under the
Securities Act, which permits the Fund to buy securities restricted as to
resale to qualified institutional buyers without limitation. The Investment
Manager, pursuant to procedures adopted by the Trustees of the Fund, will make
a determination as to the liquidity of each restricted security purchased by
the Fund. If a restricted security is determined to be "liquid," such security
will not be included within the category "illiquid securities," which under
current policy may not exceed 15% of the Fund's 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.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements, which may
be viewed as a type of secured lending by the Fund, and which typically involve
the acquisition by the Fund of debt securities from a selling financial
institution such as a bank, savings and loan association or broker-dealer. The
agreement provides that the Fund will sell back to the institution, and that
the institution will repurchase, the underlying security at a specified price
and at a fixed time in the future, usually not more than seven days from the
date of purchase. While repurchase agreements involve certain risks not
associated with direct investments in debt securities, including the risks of
default or bankruptcy of the selling financial institution, the Fund follows
procedures designed to minimize those risks. These procedures include effecting
repurchase transactions only with large, well-capitalized and well established
financial institutions and maintaining adequate collateralization.
RISK CONSIDERATIONS
The net asset value of the Fund's shares will fluctuate with changes in the
market value of its portfolio securities. The market value of the Fund's
portfolio securities will increase or decrease due to a variety of economic,
market or political factors which cannot be predicted. The Fund's yield will
also vary based on the yield of the Fund's portfolio securities.
COMMON STOCKS, PREFERRED STOCKS AND SECURITIES CONVERTIBLE INTO COMMON
STOCKS. The net asset value of the Fund's shares will fluctuate with changes in
market values of portfolio securities. Convertible securities rank senior to
common stocks in a corporation's capital structure and, therefore, entail less
risk than the corporation's common stock. The value of a convertible security
is a function of its "investment value" (its value as if it did not have a
conversion privilege), and its "conversion value" (the security's worth if it
were to be exchanged for the underlying security, at market value, pursuant to
its conversion privilege).
The Investment Manager intends to follow a "bottom-up" approach in the
selection of convertible securities. Beginning with a universe of about 500
companies, the Investment Manager will narrow the focus to small and mid-cap
companies and review the issues to determine if the convertible is trading with
the underlying equity security. The yield of the underlying equity security
will be evaluated and company fundamentals will be studied to evaluate cash
flow, risk/reward balance, valuation and the prospects for growth. The
Investment Manager intends to select convertible securities that, in its
judgment, are issued by companies with sound management practices and that
represent good value.
To the extent that a convertible security's investment value is greater
than its conversion value, its price will be primarily a reflection of such
investment value and its price will be likely to increase when interest rates
fall and decrease when interest rates rise, as with a fixed-income security
(the credit standing of the issuer and other factors may also have an effect on
the convertible security's value). If the conversion value exceeds the
investment value, the price of the convertible security will rise above its
investment value and, in addition, may sell at some premium over its conversion
value. (This premium represents the price investors are willing to pay for the
privilege of purchasing a fixed-income security with a possibility of capital
appreciation due to the conversion privilige.) At such times the price of the
convertible security will tend to fluctuate directly with the price of the
underlying equity security.
The Fund may invest up to 25% of its total assets in "enhanced"
convertible securities. Enhanced convertible securities offer holders the
opportunity to obtain higher current income than would be available from a
traditional equity security issued by the same company, in return for reduced
participation or a cap on appreciation in the underlying common stock of the
issuer which the holder can realize. In addition, in many cases, enhanced
convertible securities are convertible into the underlying common stock of the
issuer automatically at maturity, unlike traditional convertible securities
which are convertible only at the option of the security holder. Enhanced
convertible securities may be more volatile than traditional convertible
securities due to the mandatory conversion feature.
11
<PAGE>
The Fund also may invest up to 10% in "synthetic" convertible securities.
Unlike traditional convertible securities whose conversion values are based on
the common stock of the issuer of the convertible security, "synthetic"
convertible securities are preferred stocks or debt obligations of an issuer
which are combined with an equity component whose conversion value is based on
the value of the common stock of a different issuer or a particular benchmark
(which may include a foreign issuer or basket of foreign stocks, or a company
whose stock is not yet publicly traded). In many cases, "synthetic" convertible
securities are not convertible prior to maturity, at which time the value of
the security is paid in cash by the issuer.
"Synthetic" convertible securities may be less liquid than traditional
convertible securities and their price changes may be more volatile. Reduced
liquidity may have an adverse impact on the Fund's ability to sell particular
synthetic securities promptly at favorable prices and may also make it more
difficult for the Fund to obtain market quotations based on actual trades, for
purposes of valuing the Fund's portfolio securities.
The Fund may invest without limitation in "exchangeable" convertible
bonds and convertible preferred stock which are issued by one company, but
convertible into the common stock of a different publicly traded company. These
securities generally have liquidity trading and risk characteristics similar to
traditional convertible securities noted above.
FOREIGN SECURITIES. Foreign securities investments may be affected by changes
in currency rates or exchange control regulations, changes in governmental
administration or economic or monetary policy (in the United States and abroad)
or changed circumstances in dealings between nations. Fluctuations in the
relative rates of exchange between different currencies will affect the value
of the Fund's investments denominated in foreign currency. Changes in foreign
currency exchange rates relative to the U.S. dollar will affect the U.S. dollar
value of the Fund's assets denominated in that currency and thereby impact upon
the Fund's total return on such assets. When purchasing foreign securities, the
Fund may enter into foreign currency exchange transactions or forward foreign
exchange contracts to facilitate settlement. The Fund may utilize forward
foreign exchange contracts in these instances as 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 trade date and settlement date for the
transaction.
Foreign currency exchange rates are determined by forces of supply and
demand on the foreign exchange markets. These forces are themselves affected by
the international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. Moreover,
foreign currency exchange rates may be affected by the regulatory control of
the exchanges on which the currencies trade.
Investments in foreign securities will also occasion risks relating to
political and economic developments abroad, including the possibility of
expropriations or confiscatory taxation, limitations on the use or transfer of
Fund assets and any effects of foreign social, economic or political
instability. Foreign companies are not subject to the regulatory requirements
of U.S. companies and, as such, there may be less publicly available
information about such companies. Moreover, foreign companies are not subject
to uniform accounting, auditing and financial reporting standards and
requirements comparable to those applicable to U.S. companies.
Securities of foreign issuers may be less liquid than comparable
securities of U.S. issuers and, as such, their price changes may be more
volatile. Furthermore, foreign exchanges and broker-dealers are generally
subject to less government and exchange scrutiny and regulation than their
American counterparts. Brokerage commissions, dealer concessions and other
transaction costs may be higher on foreign markets than in the U.S. In
addition, differences in clearance and settlement procedures on foreign markets
may occasion delays in settlements of the Fund's trades effected in such
markets. As such, the inability to dispose of portfolio securities due to
settlement delays could result in losses to the Fund due to subsequent declines
in value of such securities and the inability of the Fund to make intended
security purchases due to settlement problems could result in a failure of the
Fund to make potentially advantageous investments. To the extent the Fund
purchases Eurodollar certificates of deposit issued by foreign branches of
domestic United States banks, consideration will be given to their domestic
marketability, the lower reserve requirements normally mandated for overseas
banking operations, the possible impact of interruptions in the flow of
international currency transactions and future international political and
economic developments which might adversely affect the payment of principal or
interest.
Many European countries are about to adopt a single European currency,
the euro (the "Euro Conversion"). The consequences of the Euro Conversion for
foreign exchange rates, interest rates and the value of European securities
eligible for purchase by the Fund are presently unclear. Such consequences may
adversely affect the value and/or increase the volatility of securities held by
the Fund.
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<PAGE>
LOWER RATED CONVERTIBLE AND FIXED-INCOME SECURITIES. A portion of the
fixed-income and convertible securities in which the Fund may invest will
generally be below investment grade. Securities below investment grade are the
equivalent of high yield, high risk bonds, commonly known as "junk bonds."
Investment grade is generally considered to be debt securities rated BBB or
higher by Standard & Poor's Corporation ("S&P") or Baa or higher by Moody's
Investors Service, Inc. ("Moody's"). Fixed-income securities rated Baa by
Moody's or BBB by Standard & Poor's have speculative characteristics greater
than those of more highly rated bonds, while fixed-income securities rated Ba
or BB or lower by Moody's and Standard & Poor's, respectively, are considered
to be speculative investments. The Fund will not invest in convertibles and
fixed-income securities that are rated lower than B by S&P or Moody's or, if
not rated, determined to be of comparable quality by the Investment Manager.
The Fund will not invest in debt securities that are in default in payment of
principal or interest. The ratings of fixed-income securities by Moody's and
Standard & Poor's are a generally accepted barometer of credit risk. However,
as the creditworthiness of issuers of lower-rated fixed-income securities is
more problematical than that of issuers of higher-rated fixed-income
securities, the achievement of the Fund's investment objective will be more
dependent upon the Investment Manager's own credit analysis than would be the
case with a mutual fund investing primarily in higher quality bonds. The
Investment Manager will utilize a security's credit rating as simply one
indication of an issuer's creditworthiness and will principally rely upon its
own analysis of any security currently held by the Fund or potentially
purchasable by the Fund for its portfolio.
During the fiscal year ended September 30, 1998, the monthly dollar
weighted average ratings of the debt obligations held by the Fund, expressed as
a percentage of the Fund's total investments, were as follows:
<TABLE>
<CAPTION>
Percentage of
Ratings Total Investments
---------------------- -----------------
<S> <C>
AAA/Aaa ............... 0.7%
AA/Aa ................. 0.0%
A/A ................... 2.2%
BBB/Baa ............... 7.1%
BB/Ba ................. 6.4%
B/B ................... 13.9%
CCC/Caa ............... 0.0%
CC/Ca ................. 0.0%
C/C ................... 0.0%
Unrated ............... 4.9%
</TABLE>
Because of the special nature of the Fund's permitted investments in
lower rated debt securities, the Investment Manager must take account of
certain special considerations in assessing the risks associated with such
investments. Historically, the prices of lower rated securities have been found
to be less sensitive to changes in prevailing interest rates than higher rated
investments, but are likely to be more sensitive to adverse economic changes or
individual corporate developments. During an economic downturn or substantial
period of rising interest rates, highly leveraged issuers may experience
financial stress which would adversely affect their ability to service their
principal and interest payment obligations, to meet their projected business
goals or to obtain additional financing. If the issuer of a fixed-income
security owned by the Fund defaults, the Fund may incur additional expenses to
seek recovery. In addition, periods of economic uncertainty and change can be
expected to result in an increased volatility of market prices of lower rated
securities and a corresponding volatility in the net asset value of a share of
the Fund.
CORPORATE NOTES AND BONDS AND U.S. GOVERNMENT SECURITIES. Payments of interest
and principal of U.S. Government securities are guaranteed by the U.S.
Government, however, neither the value nor the yield of corporate notes and
bonds and U.S. Government securities which may be invested in by the Fund are
guaranteed by the U.S. Government. Values and yield of corporate and government
bonds will fluctuate with changes in prevailing interest rates and other
factors. Generally, as prevailing interest rates rise, the value of corporate
notes and bonds and government bonds held by the Fund will fall. Securities
with longer maturities generally tend to produce higher yields and are subject
to greater market fluctuation as a result of changes in interest rates than
debt securities with shorter maturities. The Fund is not limited as to the
maturities of the U.S. Government securities in which it may invest.
REAL ESTATE INVESTMENT TRUSTS. Real estate investment trusts are not
diversified and are subject to the risk of financing projects. They are also
subject to heavy cash flow dependency, defaults by borrowers or tenants, self-
liquidation, and the possibility of failing to qualify for tax-free status
under the Internal Revenue Code and failing to maintain exemption from the Act.
The Fund currently intends to invest up to 10%, but may invest up to 20% of its
assets in real estate investment trusts.
REPURCHASE AGREEMENTS. While repurchase agreements involve certain risks not
associated with direct investments in debt securities, including the risks of
default or bankruptcy of the selling financial institution, 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 sub-
13
<PAGE>
ject to procedures established by the Board of Trustees of the Fund. 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.
YEAR 2000. The investment management services provided to the Fund by the
Investment Manager and the services provided to shareholders by the Distributor
and the Transfer Agent depend on the smooth functioning of their computer
systems. Many computer software systems in use today cannot recognize the year
2000, but revert to 1900 or some other date, due to the manner in which dates
were encoded and calculated. That failure could have a negative impact on the
handling of securities trades, pricing and account services. The Investment
Manager, the Distributor and the Transfer Agent have been actively working on
necessary changes to their own computer systems to prepare for the year 2000
and expect that their systems will be adapted before that date, but there can
be no assurance that they will be successful, or that interaction with other
non-complying computer systems will not impair their services at that time.
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.
For additional risk disclosure, please refer to the "Investment
Objectives and Policies" section of the Prospectus and to the "Investment
Practices and Policies" section of the Statement of Additional Information.
PORTFOLIO MANAGEMENT
The Fund's portfolio is actively managed by its Investment Manager with a view
to achieving the Fund's investment objective. In determining which securities
to purchase for the Fund or hold in the Fund's portfolio, the Investment
Manager will rely on information from various sources, including research,
analysis and appraisals of brokers and dealers, including Dean Witter Reynolds
Inc., Morgan Stanley & Co. Incorporated and other broker-dealers that are
affiliates of the Investment Manager, and the Investment Manager's own analysis
of factors it deems relevant. The Investment Manager also may use quantitative
screens in the process of selecting portfolio securities.
The Fund's portfolio is managed within MSDW Advisors' Growth and Income
Group, which manages 20 equity funds and fund portfolios with approximately
$32.9 billion in assets as of October 31, 1998. Paul D. Vance and Peter M.
Avelar, Senior Vice Presidents of MSDW Advisors and members of MSDW Advisors'
Growth and Income Group, have been the primary portfolio co-managers of the
Fund since its inception and January 1998, respectively, and have been
portfolio managers with MSDW Advisors for over five years.
Although the Fund does not intend to engage in short-term trading of
portfolio securities as a means of achieving its investment objective, it may
sell portfolio securities without regard to the length of time they have been
held whenever such sale will in the Investment Manager's opinion strengthen the
Fund's position and contribute to its investment objective. The portfolio
turnover rate is not expected to exceed 90%. Brokerage commissions are not
normally charged on the purchase or sale of U.S. Government obligations, but
such transactions may involve costs in the form of spreads between bid and
asked prices. Pursuant to an order of the Securities and Exchange Commission,
the Fund may effect principal transactions in certain money market instruments
with Dean Witter Reynolds Inc. In addition, the Fund may incur brokerage
commissions on transactions conducted through Dean Witter Reynolds Inc., Morgan
Stanley & Co. Incorporated and other brokers and dealers that are affiliates of
MSDW Advisors.
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<PAGE>
INVESTMENT RESTRICTIONS
- -------------------------------------------------------------------------------
The investment restrictions listed below are among the restrictions which have
been adopted by the Fund as fundamental policies. Under the Investment Company
Act of 1940, as amended (the "Act"), a fundamental policy may not be changed
without the vote of a majority of the outstanding voting securities of the
Fund, as defined in the Act. For purposes of the following limitations: (i) all
percentage limitations apply immediately after a purchase or initial
investment; and (ii) any subsequent change in any applicable percentage
resulting from market fluctuations or other changes in total or net assets does
not require elimination of any security from the portfolio.
The Fund may not:
1. Invest more than 5% of the value of its total assets in the securities
of any one issuer (other than obligations issued, or guaranteed by, the United
States Government, its agencies or instrumentalities).
2. Purchase more than 10% of all outstanding voting securities or any
class of securities of any one issuer.
3. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry. This restriction does not apply to obligations
issued or guaranteed by the United States Government or its agencies or
instrumentalities.
4. 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 any obligation of
the United States Government, its agencies or instrumentalities. (See the
Statement of Additional Information for additional investment restrictions.)
Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objectives by investing all or substantially all
of its assets in another investment company having substantially the same
investment objectives and policies as the Fund.
PURCHASE OF FUND SHARES
- -------------------------------------------------------------------------------
GENERAL
The Fund offers each Class of its shares for sale to the public on a continuous
basis. Pursuant to a Distribution Agreement between the Fund and Morgan Stanley
Dean Witter Distributors Inc. ("MSDW Distributors" or the "Distributor"), an
affiliate of the Investment Manager, shares of the Fund are distributed by the
Distributor and offered by Dean Witter Reynolds Inc. ("DWR"), a selected dealer
and subsidiary of Morgan Stanley Dean Witter & Co., and other dealers which
have entered into selected dealer agreements with the Distributor ("Selected
Broker-Dealers"). It is anticipated that DWR will undergo a change of corporate
name which is expected to incorporate the brand name of "Morgan Stanley Dean
Witter," pending approval of various regulatory authorities. The principal
executive office of the Distributor is located at Two World Trade Center, New
York, New York 10048.
The Fund offers four classes of shares (each, a "Class"). Class A shares
are sold to investors with an initial sales charge that declines to zero for
larger purchases; however, Class A shares sold without an initial sales charge
are subject to a contingent deferred sales charge ("CDSC") of 1.0% if redeemed
within one year of purchase, except for certain specific circumstances. Class B
shares are sold without an initial sales charge but are subject to a CDSC
(scaled down from 5.0% to 1.0%) payable upon most redemptions within six years
after purchase. (Class B shares purchased by certain qualified plans are
subject to a CDSC scaled down from 2.0% to 1.0% if redeemed within three years
after purchase.) Class C shares are sold without an initial sales charge but
are subject to a CDSC of 1.0% on most redemptions made within one year after
purchase. Class D shares are sold without an initial sales charge or CDSC and
are available only to investors meeting an initial investment minimum of $5
million ($25 million for certain qualified plans), and to certain other limited
categories of investors. At the discretion of the Board of Trustees of the
Fund, Class A shares may be sold to categories of investors in addition to
those set forth in this prospectus at net asset value without a front-end sales
charge, and Class D shares may be sold to certain other categories of
investors, in each case as may be described in the then current prospectus of
the Fund. See "Alternative Purchase Arrangements--Selecting a Particular Class"
for a discussion of factors to consider in selecting which Class of shares to
purchase.
The minimum initial purchase is $1,000 for each Class of shares, although
Class D shares are only available to persons investing $5 million ($25 million
for
15
<PAGE>
certain qualified plans) or more and to certain other limited categories of
investors. For the purpose of meeting the minimum $5 million (or $25 million)
initial investment for Class D shares, and subject to the $1,000 minimum
initial investment for each Class of the Fund, an investor's existing holdings
of Class A and Class D shares of the Fund and other Morgan Stanley Dean Witter
Funds that are multiple class funds ("Morgan Stanley Dean Witter Multi-Class
Funds") and shares of Morgan Stanley Dean Witter Funds sold with a front-end
sales charge ("FSC Funds") and concurrent investments in Class D shares of the
Fund and other Morgan Stanley Dean Witter Multi-Class Funds will be aggregated.
Subsequent purchases of $100 or more may be made by sending a check, payable to
Morgan Stanley Dean Witter Income Builder Fund, directly to Morgan Stanley Dean
Witter Trust FSB (the "Transfer Agent" or "MSDW Trust") at P.O. Box 1040,
Jersey City, NJ 07303 or by contacting a Morgan Stanley Dean Witter Financial
Advisor or other Selected Broker-Dealer representative of DWR or other Selected
Broker-Dealer. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A, Class B, Class C or Class D shares. If no
Class is specified, the Transfer Agent will not process the transaction until
the proper Class is identified. The minimum initial purchase in the case of
investments through EasyInvestSM, an automatic purchase plan (see "Shareholder
Services"), is $100, provided that the schedule of automatic investments will
result in investments totalling at least $1,000 within the first twelve months.
The minimum initial purchase in the case of an "Education IRA" is $500, if the
Distributor has reason to believe that additional investments will increase the
investment in the account to $1,000 within three years. In the case of
investments pursuant to (i) Systematic Payroll Deduction Plans (including
Individual Retirement Plans), (ii) the MSDW Advisors mutual fund asset
allocation program and (iii) fee-based programs approved by the Distributor,
pursuant to which participants pay an asset based fee for services in the
nature of investment advisory, administrative and/or brokerage services, the
Fund, in its discretion, may accept investments without regard to any minimum
amounts which would otherwise be required, provided, in the case of Systematic
Payroll Deduction Plans, that the Distributor has reason to believe that
additional investments will increase the investment in all accounts under such
Plans to at least $1,000. Certificates for shares purchased will not be issued
unless a request is made by the shareholder in writing to the Transfer Agent.
Shares of the Fund are sold through the Distributor on a normal three
business day settlement basis; that is, payment is due on the third business
day (settlement date) after the order is placed with the Distributor. Since DWR
and other Selected Broker-Dealers forward investors' funds on settlement date,
they will benefit from the temporary use of the funds if payment is made prior
thereto. As noted above, orders placed directly with the Transfer Agent must be
accompanied by payment. Investors will be entitled to receive income dividends
and capital gains distributions if their order is received by the close of
business on the day prior to the record date for such dividends and
distributions. Sales personnel of a Selected Broker-Dealer are compensated for
selling shares of the Fund by the Distributor or any of its affiliates and/or
the Selected Broker-Dealer. In addition, some sales personnel of the Selected
Broker-Dealer will receive various types of non-cash compensation as special
sales incentives, including trips, educational and/or business seminars and
merchandise. The Fund and the Distributor reserve the right to reject any
purchase orders.
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund offers several Classes of shares to investors designed to provide them
with the flexibility of selecting an investment best suited to their needs. The
general public is offered three Classes of shares: Class A shares, Class B
shares and Class C shares, which differ principally in terms of sales charges
and rate of expenses to which they are subject. A fourth Class of shares, Class
D shares, is offered only to limited categories of investors. See "No Load
Alternative--Class D Shares."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund except that Class A,
Class B and Class C shares bear the expenses of the ongoing shareholder service
fees, Class B and Class C shares bear the expenses of the ongoing distribution
fees and Class A, Class B and Class C shares which are redeemed subject to a
CDSC bear the expense of the additional incremental distribution costs
resulting from the CDSC applicable to shares of those Classes. The ongoing
distribution fees that are imposed on Class A, Class B and Class C shares will
be imposed directly against those Classes and not against all assets of the
Fund and, accordingly, such charges against one Class will not affect the net
asset value of any other Class or have any impact on investors choosing another
sales charge option. See "Plan of Distribution" and "Redemptions and
Repurchases."
Set forth below is a summary of the differences between the Classes and
the factors an investor should consider when selecting a particular Class. This
summary is qualified in its entirety by detailed discussion of each Class that
follows this summary.
16
<PAGE>
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.25%. The initial sales charge is reduced for certain
purchases. Investments of $1 million or more (and investments by certain other
limited categories of investors) are not subject to any sales charges at the
time of purchase but are subject to a CDSC of 1.0% on redemptions made within
one year after purchase, except for certain specific circumstances. Class A
shares are also subject to a 12b-1 fee of up to 0.25% of the average daily net
assets of the Class. See "Initial Sales Charge Alternative--Class A Shares."
CLASS B SHARES. Class B shares are offered at net asset value with no initial
sales charge but are subject to a CDSC (scaled down from 5.0% to 1.0%) if
redeemed within six years of purchase. (Class B shares purchased by certain
qualified plans are subject to a CDSC scaled down from 2.0% to 1.0% if redeemed
within three years after purchase.) This CDSC may be waived for certain
redemptions. Class B shares are also subject to an annual 12b-1 fee of 1.0% of
the lesser of: (a) the average daily aggregate gross sales of the Fund's Class
B shares since the inception of the Fund (not including reinvestments of
dividends or capital gains distributions), less the average daily aggregate net
asset value of the Fund's Class B shares redeemed since the Fund's inception
upon which a CDSC has been imposed or waived, or (b) the average daily net
assets of Class B. The Class B shares' distribution fee will cause that Class
to have higher expenses and pay lower dividends than Class A or Class D shares.
After approximately ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund, based on the relative net asset
values of the shares of the two Classes on the conversion date. In addition, a
certain portion of Class B shares that have been acquired through the
reinvestment of dividends and distributions will be converted at that time. See
"Contingent Deferred Sales Charge Alternative--Class B Shares."
CLASS C SHARES. Class C shares are sold at net asset value with no initial
sales charge but are subject to a CDSC of 1.0% on redemptions made within one
year after purchase. This CDSC may be waived for certain redemptions. They are
subject to an annual 12b-1 fee of up to 1.0% of the average daily net assets of
the Class C shares. The Class C shares' distribution fee may cause that Class
to have higher expenses and pay lower dividends than Class A or Class D shares.
See "Level Load Alternative--Class C Shares."
CLASS D SHARES. Class D shares are available only to limited categories of
investors (see "No Load Alternative--Class D Shares" below). Class D shares are
sold at net asset value with no initial sales charge or CDSC. They are not
subject to any 12b-1 fees. See "No Load Alternative--Class D Shares."
SELECTING A PARTICULAR CLASS. In deciding which Class of Fund shares to
purchase, investors should consider the following factors, as well as any other
relevant facts and circumstances:
The decision as to which Class of shares is more beneficial to an
investor depends on the amount and intended length of his or her investment.
Investors who prefer an initial sales charge alternative may elect to purchase
Class A shares. Investors qualifying for significantly reduced or, in the case
of purchases of $1 million or more, no initial sales charges may find Class A
shares particularly attractive because similar sales charge reductions are not
available with respect to Class B or Class C shares. Moreover, Class A shares
are subject to lower ongoing expenses than are Class B or Class C shares over
the term of the investment. As an alternative, Class B and Class C shares are
sold without any initial sales charge so the entire purchase price is
immediately invested in the Fund. Any investment return on these additional
investment amounts may partially or wholly offset the higher annual expenses of
these Classes. Because the Fund's future return cannot be predicted, however,
there can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, although Class C shares are subject to a significantly
lower CDSC upon redemptions, they do not, unlike Class B shares, convert into
Class A shares after approximately ten years, and, therefore, are subject to an
ongoing 12b-1 fee of 1.0% (rather than the 0.25% fee applicable to Class A
shares) for an indefinite period of time. Thus, Class B shares may be more
attractive than Class C shares to investors with longer term investment
outlooks. Other investors, however, may elect to purchase Class C shares if,
for example, they determine that they do not wish to be subject to a front-end
sales charge and they are uncertain as to the length of time they intend to
hold their shares.
For the purpose of meeting the $5 million (or $25 million) minimum
investment amount for Class D shares, holdings of Class A and Class D shares in
all Morgan Stanley Dean Witter Multi-Class Funds, shares of FSC Funds and
shares of Morgan Stanley Dean Witter Funds for which such shares have been
exchanged will be included together with the current investment amount.
Sales personnel may receive different compensation for selling each Class
of shares. Investors should understand that the purpose of a CDSC is the same
as that of
17
<PAGE>
the initial sales charge in that the sales charges applicable to each Class
provide for the financing of the distribution of shares of that Class.
Set forth below is a chart comparing the sales charge, 12b-1 fees and
conversion options applicable to each Class of shares:
<TABLE>
<CAPTION>
Conversion
Class Sales Charge 12b-1 Fee Feature
- ------- ------------------------ ----------- -----------------
<S> <C> <C> <C>
A Maximum 5.25% 0.25% No
initial sales charge
reduced for
purchases of
$25,000 and over;
shares sold without
an initial sales
charge generally
subject to a 1.0%
CDSC during first
year.
- --------------------------------------------------------------------
B Maximum 5.0% 1.0% B shares convert
CDSC during the first to A shares
year decreasing automatically
to 0 after six years after
approximately
ten years
- --------------------------------------------------------------------
C 1.0% CDSC during 1.0% No
first year
- --------------------------------------------------------------------
D None None No
- --------------------------------------------------------------------
</TABLE>
See "Purchase of Fund Shares" and "The Fund and its Management" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Determination of Net Asset Value," "Dividends,
Distributions and Taxes" and "Shareholder Services--Exchange Privilege" for
other differences between the Classes of shares.
INITIAL SALES CHARGE ALTERNATIVE--
CLASS A SHARES
Class A shares are sold at net asset value plus an initial sales charge. In
some cases, reduced sales charges may be available, as described below.
Investments of $1 million or more (and investments by certain other limited
categories of investors) are not subject to any sales charges at the time of
purchase but are subject to a CDSC of 1.0% on redemptions made within one year
after purchase (calculated from the last day of the month in which the shares
were purchased), except for certain specific circumstances. The CDSC will be
assessed on an amount equal to the lesser of the current market value or the
cost of the shares being redeemed. The CDSC will not be imposed (i) in the
circumstances set forth below in the section "Contingent Deferred Sales Charge
Alternative--Class B Shares--CDSC Waivers," except that the references to six
years in the first paragraph of that section shall mean one year in the case of
Class A shares, and (ii) in the circumstances identified in the section
"Additional Net Asset Value Purchase Options" below. Class A shares are also
subject to an annual 12b-1 fee of up to 0.25% of the average daily net assets
of the Class.
The offering price of Class A shares will be the net asset value per
share next determined following receipt of an order (see "Determination of Net
Asset Value" below), plus a sales charge (expressed as a percentage of the
offering price) on a single transaction as shown in the following table:
<TABLE>
<CAPTION>
Sales Charge
------------------------------------
Percentage of Approximate
Amount of Single Public Offering Percentage of
Transaction Price Amount Invested
- ----------------------------- ----------------- ----------------
<S> <C> <C>
Less than $25,000 ........... 5.25% 5.54%
$25,000 but less
than $50,000 ............. 4.75% 4.99%
$50,000 but less
than $100,000 ............ 4.00% 4.17%
$100,000 but less
than $250,000 ............ 3.00% 3.09%
$250,000 but less
than $1 million .......... 2.00% 2.04%
$1 million and over ......... 0 0
</TABLE>
Upon notice to all Selected Broker-Dealers, the Distributor may reallow
up to the full applicable sales charge as shown in the above schedule during
periods specified in such notice. During periods when 90% or more of the sales
charge is reallowed, such Selected Broker-Dealers may be deemed to be
underwriters as that term is defined in the Securities Act of 1933.
The above schedule of sales charges is applicable to purchases in a
single transaction by, among others: (a) an individual; (b) an individual, his
or her spouse and their children under the age of 21 purchasing shares for his,
her or their own accounts; (c) a trustee or other fiduciary purchasing shares
for a single trust estate or a single fiduciary account; (d) a pension,
profit-sharing or other employee benefit plan qualified or non-qualified under
Section 401 of the Internal Revenue Code; (e) tax-exempt organizations
enumerated in Section 501(c)(3) or (13) of the Internal Revenue Code; (f)
employee benefit plans qualified under Section 401 of the Internal Revenue Code
of a single employer or of employers who are "affiliated persons" of each other
within the meaning of Section 2(a)(3)(c) of the Act; and for investments in
Individual Retirement Accounts of employees of a single employer through
Systematic Payroll Deduction plans; or (g) any other organized group of
persons, whether incorporated or not, provided the organization has been in
existence for at least six months and has some purpose other than the purchase
of redeemable securities of a registered investment company at a discount.
18
<PAGE>
COMBINED PURCHASE PRIVILEGE. Investors may have the benefit of reduced sales
charges in accordance with the above schedule by combining purchases of Class A
shares of the Fund in single transactions with the purchase of Class A shares
of other Morgan Stanley Dean Witter Multi-Class Funds and shares of FSC Funds.
The sales charge payable on the purchase of the Class A shares of the Fund, the
Class A shares of the other Morgan Stanley Dean Witter Multi-Class Funds and
the shares of the FSC Funds will be at their respective rates applicable to the
total amount of the combined concurrent purchases of such shares.
RIGHT OF ACCUMULATION. The above persons and entities may benefit from a
reduction of the sales charges in accordance with the above schedule if the
cumulative net asset value of Class A shares purchased in a single transaction,
together with shares of the Fund and other Morgan Stanley Dean Witter Funds
previously purchased at a price including a front-end sales charge (including
shares of the Fund and other Morgan Stanley Dean Witter Funds acquired in
exchange for those shares, and including in each case shares acquired through
reinvestment of dividends and distributions), which are held at the time of
such transaction, amounts to $25,000 or more. If such investor has a cumulative
net asset value of shares of FSC Funds and Class A and Class D shares that,
together with the current investment amount, is equal to at least $5 million
($25 million for certain qualified plans), such investor is eligible to
purchase Class D shares subject to the $1,000 minimum initial investment
requirement of that Class of the Fund. See "No Load Alternative--Class D
Shares" below.
The Distributor must be notified by DWR or a Selected Broker-Dealer or
the shareholder at the time a purchase order is placed that the purchase
qualifies for the reduced charge under the Right of Accumulation. Similar
notification must be made in writing by the dealer or shareholder when such an
order is placed by mail. The reduced sales charge will not be granted if: (a)
such notification is not furnished at the time of the order; or (b) a review of
the records of the Selected Broker-Dealer or the Transfer Agent fails to
confirm the investor's represented holdings.
LETTER OF INTENT. The foregoing schedule of reduced sales charges will also be
available to investors who enter into a written Letter of Intent providing for
the purchase, within a thirteen-month period, of Class A shares of the Fund
from DWR or other Selected Broker-Dealers. The cost of Class A shares of the
Fund or shares of other Morgan Stanley Dean Witter Funds which were previously
purchased at a price including a front-end sales charge during the 90-day
period prior to the date of receipt by the Distributor of the Letter of Intent,
or of Class A shares of the Fund or shares of other Morgan Stanley Dean Witter
Funds acquired in exchange for shares of such funds purchased during such
period at a price including a front-end sales charge, which are still owned by
the shareholder, may also be included in determining the applicable reduction.
ADDITIONAL NET ASSET VALUE PURCHASE OPTIONS. In addition to investments of $1
million or more, Class A shares also may be purchased at net asset value by the
following:
(1) trusts for which MSDW Trust (which is an affiliate of the Investment
Manager) provides discretionary trustee services;
(2) persons participating in a fee-based program approved by the
Distributor, pursuant to which such persons pay an asset based fee for services
in the nature of investment advisory, administrative and/or brokerage services
(such investments are subject to all of the terms and conditions of such
programs, which may include termination fees, mandatory redemption upon
termination and such other circumstances as specified in the programs'
agreements, and restrictions on transferability of Fund shares);
(3) employer-sponsored 401(k) and other plans qualified under Section
401(a) of the Internal Revenue Code ("Qualified Retirement Plans") with at
least 200 eligible employees and for which MSDW Trust serves as Trustee or
DWR's Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement;
(4) Qualified Retirement Plans for which MSDW Trust serves as Trustee or
DWR's Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement whose Class B shares have converted to Class A
shares, regardless of the plan's asset size or number of eligible employees;
(5) investors who are clients of a Morgan Stanley Dean Witter Financial
Advisor who joined Morgan Stanley Dean Witter from another investment firm
within six months prior to the date of purchase of Fund shares by such
investors, if the shares are being purchased with the proceeds from a
redemption of shares of an open-end proprietary mutual fund of the Financial
Advisor's previous firm which imposed either a front-end or deferred sales
charge, provided such purchase was made within sixty days after the redemption
and the proceeds of the redemption had been maintained in the interim in cash
or a money market fund; and
(6) other categories of investors, at the discretion of the Board, as
disclosed in the then current prospectus of the Fund.
19
<PAGE>
No CDSC will be imposed on redemptions of shares purchased pursuant to
paragraphs (1), (2) or (5), above.
For further information concerning purchases of the Fund's shares,
contact DWR or another Selected Broker-Dealer or consult the Statement of
Additional Information.
CONTINGENT DEFERRED SALES CHARGE
ALTERNATIVE--CLASS B SHARES
Class B shares are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, will be imposed on most
Class B shares redeemed within six years after purchase. The CDSC will be
imposed on any redemption of shares if after such redemption the aggregate
current value of a Class B account with the Fund falls below the aggregate
amount of the investor's purchase payments for Class B shares made during the
six years (or, in the case of shares held by certain Qualified Retirement
Plans, three years) preceding the redemption. In addition, Class B shares are
subject to an annual 12b-1 fee of 1.0% of the lesser of: (a) the average daily
aggregate gross sales of the Fund's Class B shares since the inception of the
Fund (not including reinvestments of dividends or capital gains distributions),
less the average daily aggregate net asset value of the Fund's Class B shares
redeemed since the Fund's inception upon which a CDSC has been imposed or
waived, or (b) the average daily net assets of Class B.
Except as noted below, Class B shares of the Fund which are held for six
years or more after purchase (calculated from the last day of the month in
which the shares were purchased) will not be subject to any CDSC upon
redemption. Shares redeemed earlier than six years after purchase may, however,
be subject to a CDSC which will be a percentage of the dollar amount of shares
redeemed and will be assessed on an amount equal to the lesser of the current
market value or the cost of the shares being redeemed. The size of this
percentage will depend upon how long the shares have been held, as set forth in
the following table:
<TABLE>
<CAPTION>
Year Since
Purchase CDSC as a Percentage
Payment Made of Amount Redeemed
- -------------------------------- ---------------------
<S> <C>
First .......................... 5.0%
Second ......................... 4.0%
Third .......................... 3.0%
Fourth ......................... 2.0%
Fifth .......................... 2.0%
Sixth .......................... 1.0%
Seventh and thereafter ......... None
</TABLE>
In the case of Class B shares of the Fund purchased on or after July 28,
1997 by Qualified Retirement Plans for which MSDW Trust serves as Trustee or
DWR's Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement, shares held for three years or more after
purchase (calculated as described in the paragraph above) will not be subject
to any CDSC upon redemption. However, shares redeemed earlier than three years
after purchase may be subject to a CDSC (calculated as described in the
paragraph above), the percentage of which will depend on how long the shares
have been held, as set forth in the following table:
<TABLE>
<CAPTION>
Year Since
Purchase CDSC as a Percentage
Payment Made of Amount Redeemed
- ------------------------------- ---------------------
<S> <C>
First ......................... 2.0%
Second ........................ 2.0%
Third ......................... 1.0%
Fourth and thereafter ......... None
</TABLE>
CDSC WAIVERS. A CDSC will not be imposed on: (i) any amount which represents an
increase in value of shares purchased within the six years (or, in the case of
shares held by certain Qualified Retirement Plans, three years) preceding the
redemption; (ii) the current net asset value of shares purchased more than six
years (or, in the case of shares held by certain Qualified Retirement Plans,
three years) prior to the redemption; and (iii) the current net asset value of
shares purchased through reinvestment of dividends or distributions and/or
shares acquired in exchange for shares of FSC Funds or of other Morgan Stanley
Dean Witter Funds acquired in exchange for such shares. Moreover, in
determining whether a CDSC is applicable it will be assumed that amounts
described in (i), (ii) and (iii) above (in that order) are redeemed first.
In addition, the CDSC, if otherwise applicable, will be waived in the
case of:
(1) redemptions of shares held at the time a shareholder dies or becomes
disabled, only if the shares are: (a) registered either in the name of an
individual shareholder (not a trust), or in the names of such shareholder and
his or her spouse as joint tenants with right of survivorship; or (b) held in
a qualified corporate or self-employed retirement plan, Individual Retirement
Account ("IRA") or Custodial Account under Section 403(b)(7) of the Internal
Revenue Code ("403(b) Custodial Account"), provided in either case that the
redemption is requested within one year of the death or initial determination
of disability;
(2) redemptions in connection with the following retirement plan
distributions: (a) lump-sum or other distributions from a qualified corporate
or self-employed
20
<PAGE>
retirement plan following retirement (or, in the case of a "key employee" of a
"top heavy" plan, following attainment of age 59 1/2); (b) distributions from
an IRA or 403(b) Custodial Account following attainment of age 59 1/2; or (c)
a tax-free return of an excess contribution to an IRA;
(3) all redemptions of shares held for the benefit of a participant in a
Qualified Retirement Plan which offers investment companies managed by the
Investment Manager or its subsidiary, MSDW Services, as self-directed
investment alternatives and for which MSDW Trust serves as Trustee or DWR's
Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement ("Eligible Plan"), provided that either: (a)
the plan continues to be an Eligible Plan after the redemption; or (b) the
redemption is in connection with the complete termination of the plan involving
the distribution of all plan assets to participants; and
(4) certain redemptions pursuant to the Fund's Systematic Withdrawal Plan
(see "Shareholder Services --Systematic Withdrawal Plan.")
With reference to (1) above, for the purpose of determining disability,
the Distributor utilizes the definition of disability contained in Section
72(m)(7) of the Internal Revenue Code, which relates to the inability to engage
in gainful employment. With reference to (2) above, the term "distribution"
does not encompass a direct transfer of IRA, 403(b) Custodial Account or
retirement plan assets to a successor custodian or trustee. All waivers will be
granted only following receipt by the Distributor of confirmation of the
shareholder's entitlement.
CONVERSION TO CLASS A SHARES. All shares of the Fund held prior to July 28,
1997 have been designated Class B shares. Shares held before May 1, 1997 will
convert to Class A shares in May, 2007. In all other instances Class B shares
will convert automatically to Class A shares, based on the relative net asset
values of the shares of the two Classes on the conversion date, which will be
approximately ten (10) years after the date of the original purchase. The ten
year period is calculated from the last day of the month in which the shares
were purchased or, in the case of Class B shares acquired through an exchange
or a series of exchanges, from the last day of the month in which the original
Class B shares were purchased, provided that shares originally purchased before
May 1, 1997 will convert to Class A shares in May, 2007. The conversion of
shares purchased on or after May 1, 1997 will take place in the month following
the tenth anniversary of the purchase. There will also be converted at that
time such proportion of Class B shares acquired through automatic reinvestment
of dividends and distributions owned by the shareholder as the total number of
his or her Class B shares converting at the time bears to the total number of
outstanding Class B shares purchased and owned by the shareholder. In the case
of Class B shares held by a Qualified Retirement Plan for which MSDW Trust
serves as Trustee or DWR's Retirement Plan Services serves as recordkeeper
pursuant to a written Recordkeeping Services Agreement, the plan is treated as
a single investor and all Class B shares will convert to Class A shares on the
conversion date of the first shares of a Morgan Stanley Dean Witter Multi-Class
Fund purchased by that plan. In the case of Class B shares previously exchanged
for shares of an "Exchange Fund" (see "Shareholder Services--Exchange
Privilege"), the period of time the shares were held in the Exchange Fund
(calculated from the last day of the month in which the Exchange Fund shares
were acquired) is excluded from the holding period for conversion. If those
shares are subsequently re-exchanged for Class B shares of a Morgan Stanley
Dean Witter Multi-Class Fund, the holding period resumes on the last day of the
month in which Class B shares are reacquired.
If a shareholder has received share certificates for Class B shares, such
certificates must be delivered to the Transfer Agent at least one week prior to
the date for conversion. Class B shares evidenced by share certificates that
are not received by the Transfer Agent at least one week prior to any
conversion date will be converted into Class A shares on the next scheduled
conversion date after such certificates are received.
Effectiveness of the conversion feature is subject to the continuing
availability of a ruling of the Internal Revenue Service or an opinion of
counsel that (i) the conversion of shares does not constitute a taxable event
under the Internal Revenue Code, (ii) Class A shares received on conversion
will have a basis equal to the shareholder's basis in the converted Class B
shares immediately prior to the conversion, and (iii) Class A shares received
on conversion will have a holding period that includes the holding period of
the converted Class B shares. The conversion feature may be suspended if the
ruling or opinion is no longer available. In such event, Class B shares would
continue to be subject to Class B 12b-1 fees.
LEVEL LOAD ALTERNATIVE--CLASS C SHARES
Class C shares are sold at net asset value next determined without an initial
sales charge but are subject to a CDSC of 1.0% on most redemptions made within
one year after purchase (calculated from the last day of the month in which the
shares were purchased). The CDSC will be assessed on an amount equal to the
lesser of the
21
<PAGE>
current market value or the cost of the shares being redeemed. The CDSC will
not be imposed in the circumstances set forth above in the section "Contingent
Deferred Sales Charge Alternative--Class B Shares--CDSC Waivers," except that
the references to six years in the first paragraph of that section shall mean
one year in the case of Class C shares. Class C shares are subject to an annual
12b-1 fee of up to 1.0% of the average daily net assets of the Class. Unlike
Class B shares, Class C shares have no conversion feature and, accordingly, an
investor that purchases Class C shares will be subject to 12b-1 fees applicable
to Class C shares for an indefinite period subject to annual approval by the
Fund's Board of Trustees and regulatory limitations.
NO LOAD ALTERNATIVE--CLASS D SHARES
Class D shares are offered without any sales charge on purchase or redemption
and without any 12b-1 fee. Class D shares are offered only to investors meeting
an initial investment minimum of $5 million ($25 million for Qualified
Retirement Plans for which MSDW Trust serves as Trustee or DWR's Retirement
Plan Services serves as recordkeeper pursuant to a written Recordkeeping
Services Agreement) and the following categories of investors: (i) investors
participating in the MSDW Advisors mutual fund asset allocation program
pursuant to which such persons pay an asset based fee; (ii) persons
participating in a fee-based program approved by the Distributor, pursuant to
which such persons pay an asset based fee for services in the nature of
investment advisory or administrative services (subject to all of the terms and
conditions of such programs, referred to in (i) and (ii) above, which may
include termination fees, mandatory redemption upon termination and such other
circumstances as specified in the programs' agreements, and restrictions on
transferability of Fund shares); (iii) employee benefit plans maintained by
Morgan Stanley Dean Witter & Co. or any of its subsidiaries for the benefit of
certain employees of Morgan Stanley Dean Witter & Co. and its subsidiaries;
(iv) certain Unit Investment Trusts sponsored by DWR; (v) certain other
open-end investment companies whose shares are distributed by the Distributor;
(vi) investors who were shareholders of Dean Witter Retirement Series on
September 11, 1998 (with respect to additional purchases for their former Dean
Witter Retirement Series accounts); and (vii) other categories of investors, at
the discretion of the Board, as disclosed in the then current prospectus of the
Fund. Investors who require a $5 million (or $25 million) minimum initial
investment to qualify to purchase Class D shares may satisfy that requirement
by investing that amount in a single transaction in Class D shares of the Fund
and other Morgan Stanley Dean Witter Multi-Class Funds, subject to the $1,000
minimum initial investment required for that Class of the Fund. In addition,
for the purpose of meeting the $5 million (or $25 million) minimum investment
amount, holdings of Class A and Class D shares in all Morgan Stanley Dean
Witter Multi-Class Funds, shares of FSC Funds and shares of Morgan Stanley Dean
Witter Funds for which such shares have been exchanged will be included
together with the current investment amount. If a shareholder redeems Class A
shares and purchases Class D shares, such redemption may be a taxable event.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Act with respect to the distribution of Class A, Class B and Class C shares of
the Fund. In the case of Class A and Class C shares, the Plan provides that the
Fund will reimburse the Distributor and others for the expenses of certain
activities and services incurred by them specifically on behalf of those
shares. Reimbursements for these expenses will be made in monthly payments by
the Fund to the Distributor, which will in no event exceed amounts equal to
payments at the annual rates of 0.25% and 1.0% of the average daily net assets
of Class A and Class C, respectively. In the case of Class B shares, the Plan
provides that the Fund will pay the Distributor a fee, which is accrued daily
and paid monthly, at the annual rate of 1.0% of the lesser of: (a) the average
daily aggregate gross sales of the Fund's Class B shares since the inception of
the Fund (not including reinvestments of dividends or capital gains
distributions), less the average daily aggregate net asset value of the Fund's
Class B shares redeemed since the Fund's inception upon which a CDSC has been
imposed or waived, or (b) the average daily net assets of Class B. The fee is
treated by the Fund as an expense in the year it is accrued. In the case of
Class A shares, the entire amount of the fee currently represents a service fee
within the meaning of the NASD guidelines. In the case of Class B and Class C
shares, a portion of the fee payable pursuant to the Plan, equal to 0.25% of
the average daily net assets of each of these Classes, is currently
characterized as a service fee. A service fee is a payment made for personal
service and/or the maintenance of shareholder accounts.
Additional amounts paid under the Plan in the case of Class B and Class C
shares are paid to the Distributor for services provided and the expenses borne
by the Distributor and others in the distribution of the shares of those
Classes, including the payment of commissions for sales of the shares of those
Classes and incentive compensation to and expenses of Morgan Stanley Dean
Witter Financial Advisors and others who engage in or support distribution of
shares or who service share-
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<PAGE>
holder accounts, including overhead and telephone expenses; printing and
distribution of prospectuses and reports used in connection with the offering
of the Fund's shares to other than current shareholders; and preparation,
printing and distribution of sales literature and advertising materials. In
addition, the Distributor may utilize fees paid pursuant to the Plan in the
case of Class B shares to compensate DWR and other Selected Broker-Dealers for
their opportunity costs in advancing such amounts, which compensation would be
in the form of a carrying charge on any unreimbursed expenses.
For the fiscal year ended September 30, 1998, Class B shares of the Fund
accrued payments under the Plan amounting to $3,886,869, which amount is equal
to 0.88% of the average daily net assets of Class B for the fiscal year. These
payments were calculated pursuant to clause (a) of the compensation formula
under the Plan. For the fiscal year ended September 30, 1998, Class A and Class
C shares of the Fund accrued payments under the Plan amounting to $18,844 and
$41,480, respectively, which amounts are equal to 0.25% and 1.00% of the
average daily net assets of Class A and Class C, respectively, for the fiscal
year.
In the case of Class B shares, at any given time, the expenses in
distributing Class B shares of the Fund may be in excess of the total of (i)
the payments made by the Fund pursuant to the Plan, and (ii) the proceeds of
CDSCs paid by investors upon the redemption of Class B shares. For example, if
$1 million in expenses in distributing Class B shares of the Fund had been
incurred and $750,000 had been received as described in (i) and (ii) above, the
excess expense would amount to $250,000. The Distributor has advised the Fund
that such excess amounts, including the carrying charge described above,
totalled $18,378,964 at September 30, 1998, which was equal to 4.41% of the net
assets of Class B on such date. Because there is no requirement under the Plan
that the Distributor be reimbursed for all distribution expenses or any
requirement that the Plan be continued from year to year, such excess amount
does not constitute a liability of the Fund. Although there is no legal
obligation for the Fund to pay expenses incurred in excess of payments made to
the Distributor under the Plan, and the proceeds of CDSCs paid by investors
upon redemption of shares, if for any reason the Plan is terminated the
Trustees will consider at that time the manner in which to treat such expenses.
Any cumulative expenses incurred, but not yet recovered through distribution
fees or CDSCs, may or may not be recovered through future distribution fees or
CDSCs.
In the case of Class A and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales commission credited to Morgan Stanley Dean Witter Financial
Advisor or other Selected Broker-Dealer representative at the time of sale may
be reimbursed in the subsequent calendar year. The Distributor has advised the
Fund that unreimbursed expenses representing a gross sales commission credited
to Morgan Stanley Dean Witter Financial Advisors and other Selected
Broker-Dealer representatives at the time of sale totalled $16,788 in the case
of Class C at December 31, 1997, which was equal to 0.72% of the net assets of
Class C on such date, and that there were no such expenses which may be
reimbursed in the subsequent year in the case of Class A on such date. No
interest or other financing charges will be incurred on any Class A or Class C
distribution expenses incurred by the Distributor under the Plan or on any
unreimbursed expenses due to the Distributor pursuant to the Plan.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined once daily at 4:00 p.m., New York
time, on each day that the New York Stock Exchange is open (or, on days when
the New York Stock Exchange closes prior to 4:00 p.m., at such earlier time),
by taking the net assets of the Fund, dividing by the number of shares
outstanding and adjusting to the nearest cent. The assets belonging to the
Class A, Class B, Class C and Class D shares will be invested together in a
single portfolio. The net asset value of each Class, however, will be
determined separately by subtracting each Class's accrued expenses and
liabilities. The net asset value per share will not be determined on Good
Friday and on such other federal and non-federal holidays as are observed by
the New York Stock Exchange.
In the calculation of the Fund's net asset value: (1) an equity portfolio
security listed or traded on the New York or American Stock Exchange or other
domestic or foreign stock exchange is valued at its latest sale price on that
exchange prior to the time assets are valued; if there were no sales that day,
the security is valued at the latest bid price (in cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market pursuant to procedures adopted by the
Trustees); (2) all other portfolio securities for which over-the-counter market
quotations are readily available are valued at the latest bid price; (3) when
market quotations are not readily available, including circumstances under
which it is determined by the Investment Manager that sale or bid prices are
not reflective of a security's market value, portfolio securities are valued at
their fair value as determined in good faith under procedures established by
and under
23
<PAGE>
the general supervision of the Fund's 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); (4) the value of
short-term debt securities which mature at a date less than sixty days
subsequent to valuation date will be determined on an amortized cost or
amortized value basis; and (5) the value of other assets will be determined in
good faith at fair value under procedures established by and under the general
supervision of the Fund's Trustees. Dividends receivable are accrued as of the
ex-dividend date. Interest income is accrued daily. Certain securities in the
Fund's portfolio may be valued by an outside pricing service approved by the
Fund's Trustees.
SHAREHOLDER SERVICES
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AUTOMATIC INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. All income dividends and
capital gains distributions are automatically paid in full and fractional
shares of the applicable Class of the Fund (or, if specified by the
shareholder, in shares of any other open-end Morgan Stanley Dean Witter Fund),
unless the shareholder requests that they be paid in cash. Shares so acquired
are acquired at net asset value and are not subject to the imposition of a
front-end sales charge or a CDSC (see "Redemptions and Repurchases").
INVESTMENT OF DIVIDENDS OR DISTRIBUTIONS RECEIVED IN CASH. Any shareholder who
receives a cash payment representing a dividend or capital gains distribution
may invest such dividend or distribution in shares of the applicable Class at
the net asset value next determined after receipt by the Transfer Agent, by
returning the check or the proceeds to the Transfer Agent within thirty days
after the payment date. Shares so acquired are acquired at net asset value and
are not subject to the imposition of a front-end sales charge or a CDSC (see
"Redemptions and Repurchases").
EASYINVEST(SM). Shareholders may subscribe to EasyInvest, an automatic purchase
plan which provides for any amount from $100 to $5,000 to be transferred
automatically from a checking or savings account or following redemption of
shares of a Morgan Stanley Dean Witter money market fund, on a semi-monthly,
monthly or quarterly basis, to the Transfer Agent for investment in shares of
the Fund (see "Purchase of Fund Shares" and "Redemptions and
Repurchases--Involuntary Redemption").
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan (the "Withdrawal
Plan") is available for shareholders whose shares of Morgan Stanley Dean Witter
Funds have an aggregate value of $10,000 or more. Shares of any Fund from which
redemptions will be made pursuant to the Plan must have a value of $1,000 or
more (referred to as a "SWP Fund"). The required share values are determined on
the date the shareholder establishes the Withdrawal Plan. The Withdrawal Plan
provides for monthly, quarterly, semi-annual or annual payments in any amount
not less than $25, or in any whole percentage of the value of the SWP Funds'
shares, on an annualized basis. Any applicable CDSC will be imposed on shares
redeemed under the Withdrawal Plan (see "Purchase of Fund shares"), except that
the CDSC, if any, will be waived on redemptions under the Withdrawal Plan of up
to 12% annually of the value of each SWP Fund account, based on the share
values next determined after the shareholder establishes the Withdrawal Plan.
Redemptions for which this CDSC waiver policy applies may be in amounts up to
1% per month, 3% per quarter, 6% semi-annually or 12% annually. Under this CDSC
waiver policy, amounts withdrawn each period will be paid by first redeeming
shares not subject to a CDSC because the shares were purchased by the
reinvestment of dividends or capital gains distributions, the CDSC period has
elapsed or some other waiver of the CDSC applies. If shares subject to a CDSC
must be redeemed, shares held for the longest period of time will be redeemed
first and continuing with shares held the next longest period of time until
shares held the shortest period of time are redeemed. Any shareholder
participating in the Withdrawal Plan will have sufficient shares redeemed from
his or her account so that the proceeds (net of any applicable CDSC) to the
shareholder will be the designated monthly, quarterly, semi-annually or annual
amount.
A shareholder may suspend or terminate participation in the Withdrawal
Plan at any time. A shareholder who has suspended participation may resume
payments under the Withdrawal Plan, without requiring a new determination of
the account value for the 12% CDSC waiver. The Withdrawal Plan may be
terminated or revised at any time by the Fund.
Prior to adding an additional SWP Fund to an existing Withdrawal Plan,
the required $10,000/$1,000 share values must be met, to be calculated on the
date the shareholder adds the additional SWP Fund. However, the addition of a
new SWP Fund will not change the account value for the 12% CDSC waiver for the
SWP Funds already participating in the Withdrawal Plan.
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<PAGE>
Withdrawal Plan payments should not be considered dividends, yields or
income. If periodic Withdrawal Plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted. Each withdrawal constitutes a
redemption of shares and any gain or loss realized must be recognized for
federal income tax purposes.
TAX-SHELTERED RETIREMENT PLANS. Retirement plans are available for use by
corporations, the self-employed, Individual Retirement Accounts and Custodial
Accounts under Section 403(b)(7) of the Internal Revenue Code. Adoption of such
plans should be on advice of legal counsel or tax advisor.
Shareholders should contact their Morgan Stanley Dean Witter Financial
Advisor or other Selected Broker-Dealer representative or the Transfer Agent
for further information about any of the above services.
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class of any other
Morgan Stanley Dean Witter Multi-Class Fund without the imposition of any
exchange fee. Shares may also be exchanged for shares of the following funds:
Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust, Morgan Stanley Dean
Witter Limited Term Municipal Trust, Morgan Stanley Dean Witter Short-Term Bond
Fund and five Morgan Stanley Dean Witter Funds which are money market funds
(the "Exchange Funds"). Class A shares may also be exchanged for shares of
Morgan Stanley Dean Witter Multi-State Municipal Series Trust and Morgan
Stanley Dean Witter Hawaii Municipal Trust, which are Morgan Stanley Dean
Witter Funds sold with a front-end sales charge ("FSC Funds"). Exchanges may be
made after the shares of the Fund acquired by purchase (not by exchange or
dividend reinvestment) have been held for thirty days. There is no waiting
period for exchanges of shares acquired by exchange or dividend reinvestment.
An exchange to another Morgan Stanley Dean Witter Multi-Class Fund, any
FSC Fund or any Exchange Fund that is not a money market fund is on the basis
of the next calculated net asset value per share of each fund after the
exchange order is received. When exchanging into a money market fund from the
Fund, shares of the Fund are redeemed out of the Fund at their next calculated
net asset value and the proceeds of the redemption are used to purchase shares
of the money market fund at their net asset value determined the following day.
Subsequent exchanges between any of the money market funds and any of the
Morgan Stanley Dean Witter Multi-Class Funds, FSC Funds or any Exchange Fund
that is not a money market fund can be effected on the same basis.
No CDSC is imposed at the time of any exchange of shares, although any
applicable CDSC will be imposed upon ultimate redemption. During the period of
time the shareholder remains in an Exchange Fund (calculated from the last day
of the month in which the Exchange Fund shares were acquired), the holding
period (for the purpose of determining the rate of the CDSC) is frozen. If
those shares are subsequently re-exchanged for shares of a Morgan Stanley Dean
Witter Multi-Class Fund, the holding period previously frozen when the first
exchange was made resumes on the last day of the month in which shares of a
Morgan Stanley Dean Witter Multi-Class Fund are reacquired. Thus, the CDSC is
based upon the time (calculated as described above) the shareholder was
invested in shares of a Morgan Stanley Dean Witter Multi-Class Fund (see
"Purchase of Fund Shares"). In the case of exchanges of Class A shares which
are subject to a CDSC, the holding period also includes the time (calculated as
described above) the shareholder was invested in shares of a FSC Fund. In the
case of shares exchanged into an Exchange Fund on or after April 23, 1990, upon
a redemption of shares which results in a CDSC being imposed, a credit (not to
exceed the amount of the CDSC) will be given in an amount equal to the Exchange
Fund 12b-1 distribution fees incurred on or after that date which are
attributable to those shares. (Exchange Fund 12b-1 distribution fees are
described in the prospectuses for those funds.) Class B shares of the Fund
acquired in exchange for Class B shares of another Morgan Stanley Dean Witter
Multi-Class Fund having a different CDSC schedule than that of this Fund will
be subject to the higher CDSC schedule, even if such shares are subsequently
re-exchanged for shares of the fund with the lower CDSC schedule.
ADDITIONAL INFORMATION REGARDING EXCHANGES. Purchases and exchanges should be
made for investment purposes only. A pattern of frequent exchanges may be
deemed by the Investment Manager to be abusive and contrary to the best
interests of the Fund's other shareholders and, at the Investment Manager's
discretion, may be limited by the Fund's refusal to accept additional purchases
and/or exchanges from the investor. Although the Fund does not have any
specific definition of what constitutes a pattern of frequent exchanges, and
will consider all relevant factors in determining whether a particular
situation is abusive and contrary to the best interests of the Fund and its
other shareholders, investors should be aware that the Fund and each of the
other Morgan Stanley Dean Witter Funds may in their discretion limit or
otherwise restrict the number of times this Exchange
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<PAGE>
Privilege may be exercised by any investor. Any such restriction will be made
by the Fund on a prospective basis only, upon notice to the shareholder not
later than ten days following such shareholder's most recent exchange. Also,
the Exchange Privilege may be terminated or revised at any time by the Fund
and/or any of such Morgan Stanley Dean Witter Funds for which shares of the
Fund have been exchanged, upon such notice as may be required by applicable
regulatory agencies. Shareholders maintaining margin accounts with DWR or
another Selected Broker-Dealer are referred to their Morgan Stanley Dean Witter
Financial Advisor or other Selected Broker-Dealer representative regarding
restrictions on exchange of shares of the Fund pledged in the margin account.
The current prospectus for each fund describes its investment
objective(s) and policies, and shareholders should obtain a copy and read it
carefully before investing. Exchanges are subject to the minimum investment
requirement of each Class of shares and any other conditions imposed by each
fund. In the case of a shareholder holding a share certificate or certificates,
no exchanges may be made until all applicable share certificates have been
received by the Transfer Agent and deposited in the shareholder's account. An
exchange will be treated for federal income tax purposes the same as a
repurchase or redemption of shares on which the shareholder has realized a
capital gain or loss. However, the ability to deduct capital losses on an
exchange may be limited in situations where there is an exchange of shares
within ninety days after the shares are purchased. The Exchange Privilege is
only available in states where an exchange may legally be made.
If DWR or another Selected Broker-Dealer is the current dealer of record
and its account numbers are part of the account information, shareholders may
initiate an exchange of shares of the Fund for shares of any of the Morgan
Stanley Dean Witter Funds (for which the Exchange Privilege is available)
pursuant to this Exchange Privilege by contacting their Morgan Stanley Dean
Witter Financial Advisor or other Selected Broker-Dealer representative (no
Exchange Privilege Authorization Form is required). Other shareholders (and
those who are clients of DWR or other Selected Broker-Dealer but who wish to
make exchanges directly by writing or telephoning the Transfer Agent) must
complete and forward to the Transfer Agent an Exchange Privilege Authorization
Form, copies of which may be obtained from the Fund, to initiate an exchange.
If the Authorization Form is used, exchanges may be made in writing or by
contacting the Transfer Agent at (800) 869-NEWS (toll-free).
The Fund will employ reasonable procedures to confirm that exchange
instructions communicated over the telephone are genuine. Such procedures may
include requiring various forms of personal identification such as name,
mailing address, social security or other tax identification number and DWR or
other Selected Broker-Dealer account number (if any). Telephone instructions
may also be recorded. If such procedures are not employed, the Fund may be
liable for any losses due to unauthorized or fraudulent instructions.
Telephone exchange instructions will be accepted if received by the
Transfer Agent between 9:00 a.m. and 4:00 p.m., New York time, on any day the
New York Stock Exchange is open. Any shareholder wishing to make an exchange
who has previously filed an Exchange Privilege Authorization Form and who is
unable to reach the Fund by telephone should contact his or her Morgan Stanley
Dean Witter Financial Advisor or other Selected Broker-Dealer representative,
if appropriate, or make a written exchange request. Shareholders are advised
that during periods of drastic economic or market changes, it is possible that
the telephone exchange procedures may be difficult to implement, although this
has not been the case with the Morgan Stanley Dean Witter Funds in the past.
Additional information on the above is available from a Morgan Stanley
Dean Witter Financial Advisor or other Selected Broker-Dealer representative or
from the Transfer Agent.
REDEMPTIONS AND REPURCHASES
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REDEMPTION. Shares of each Class of the Fund can be redeemed for cash at any
time at the net asset value per share next determined less the amount of any
applicable CDSC in the case of Class A, Class B or Class C shares (see
"Purchase of Fund Shares"). If shares are held in a shareholder's account
without a share certificate, a written request for redemption to the Fund's
Transfer Agent at P.O. Box 983, Jersey City, NJ 07303 is required. If
certificates are held by the shareholder, the shares may be redeemed by
surrendering the certificates with a written request for redemption, along with
any additional documentation required by the Transfer Agent.
REPURCHASE. DWR and other Selected Broker-Dealers are authorized to repurchase
shares represented by a share certificate which is delivered to any of their
offices.
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<PAGE>
Shares held in a shareholder's account without a share certificate may also be
repurchased by DWR and other Selected Broker-Dealers upon the telephonic or
telegraphic request of the shareholder. The repurchase price is the net asset
value per share next determined (see "Purchase of Fund Shares") after such
purchase order is received by DWR or another Selected Broker-Dealer.
The CDSC, if any, will be the only fee imposed by the Fund or the
Distributor. The offer by DWR and other Selected Broker-Dealers to repurchase
shares may be suspended without notice by them at any time. In that event,
shareholders may redeem their shares through the Fund's Transfer Agent as set
forth above under "Redemption."
PAYMENT FOR SHARES REDEEMED OR REPURCHASED. Payment for shares presented for
repurchase or redemption will be made by check within seven days after receipt
by the Transfer Agent of the certificate and/or written request in good order.
Such payment may be postponed or the right of redemption suspended under
unusual circumstances, e.g., when normal trading is not taking place on the New
York Stock Exchange. If the shares to be redeemed have recently been purchased
by check, payment of the redemption proceeds may be delayed for the minimum
time needed to verify that the check used for investment has been honored (not
more than fifteen days from the time of receipt of the check by the Transfer
Agent). Shareholders maintaining margin accounts with DWR or another Selected
Broker-Dealer are referred to their Morgan Stanley Dean Witter Financial
Advisor or other Selected Broker-Dealer representative regarding restrictions
on redemption of shares of the Fund pledged in the margin account.
REINSTATEMENT PRIVILEGE. A shareholder who has had his or her shares redeemed
or repurchased and has not previously exercised this reinstatement privilege
may, within 35 days after the date of the redemption or repurchase, reinstate
any portion or all of the proceeds of such redemption or repurchase in shares
of the Fund in the same Class from which such shares were redeemed or
repurchased, at the net asset value next determined after a reinstatement
request, together with the proceeds, is received by the Transfer Agent and
receive a pro rata credit for any CDSC paid in connection with such redemption
or repurchase.
INVOLUNTARY REDEMPTION. The Fund reserves the right to redeem, upon sixty days'
notice and at net asset value, the shares of any shareholder (other than shares
held in an Individual Retirement Account or Custodial Account under Section
403(b)(7) of the Internal Revenue Code) whose shares have a value of less than
$100 as a result of redemptions or repurchases, or such lesser amount as may be
fixed by the Board of Trustees or, in the case of an account opened through
EasyInvestSM, if after twelve months the shareholder has invested less than
$1,000 in the account. However, before the Fund redeems such shares and sends
the proceeds to the shareholder, it will notify the shareholder that the value
of the shares is less than the applicable amount and allow the shareholder to
make an additional investment in an amount which will increase the value of the
account to at least the applicable amount before the redemption is processed.
No CDSC will be imposed on any involuntary redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. The Fund declares dividends separately for each
Class of shares and intends to pay quarterly income dividends and to distribute
substantially all of the Fund's net short-term and net long-term capital gains,
if there are any, at least once each year. The Fund may, however, determine
either to distribute or to retain all or part of any net long-term capital
gains in any year for reinvestment.
All dividends and any capital gains distributions will be paid in
additional shares of the same Class and automatically credited to the
shareholder's account without issuance of a share certificate unless the
shareholder requests in writing that all dividends be paid in cash. Shares
acquired by dividend and distribution reinvestments will not be subject to any
front-end sales charge or CDSC. Class B shares acquired through dividend and
distribution reinvestments will become eligible for conversion to Class A
shares on a pro rata basis. Distributions paid on Class A and Class D shares
will be higher than for Class B and Class C shares because distribution fees
paid by Class B and Class C shares are higher (see "Shareholder
Services--Automatic Investment of Dividends and Distributions").
TAXES. Because the Fund intends to distribute all of its net investment income
and net short-term capital gains to shareholders and otherwise remain qualified
as a regulated investment company under Subchapter M of the Internal Revenue
Code, it is not expected that the Fund will be required to pay any federal
income tax. Shareholders who are required to pay taxes on their income will
normally have to pay federal income taxes, and any state and local income
taxes, on the dividends and distribu-
27
<PAGE>
tions 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 dividend income regardless of
whether the shareholder receives such distributions in additional shares or in
cash. Any dividends declared in the last quarter of any calendar year which are
paid in the following year prior to February 1 will be deemed, for tax
purposes, to have been received by the shareholder in the prior year.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder
has held the Fund's shares and regardless of whether the distribution is
received in additional shares or in cash. Capital gains distributions are not
eligible for the dividends received deduction.
The Fund may at times make payments from sources other than income or net
capital gains. Payments from such sources would, in effect, represent a return
of a portion of each shareholder's investment. All, or a portion, of such
payments would not be taxable to shareholders.
After the end of the calendar year, shareholders will be sent full
information on their dividends and capital gains distributions for tax
purposes. Shareholders will also be notified of their proportionate share of
long-term capital gains distributions that are eligible for a reduced rate of
tax under the Taxpayer Relief Act of 1997. To avoid being subject to a 31%
federal backup withholding tax on taxable dividends, capital gains
distributions and the proceeds of redemptions and repurchases, shareholders'
taxpayer identification numbers must be furnished and certified as to their
accuracy.
Shareholders should consult their tax advisors as to the applicability of
the foregoing to their current situation.
PERFORMANCE INFORMATION
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From time to time the Fund may quote its "yield" and/or its "total return" in
advertisements and sales literature. These figures are computed separately for
Class A, Class B, Class C and Class D shares. Both the yield and the total
return of the Fund are based on historical earnings and are not intended to
indicate future performance. The yield of each Class of the Fund is computed by
dividing the Class's net investment income over a 30-day period by an average
value (using the average number of shares entitled to receive dividends and the
net asset value per share at the end of the period), all in accordance with
applicable regulatory requirements. Such amount is compounded for six months
and then annualized for a twelve-month period to derive the yield for each
Class.
From time to time the Fund may quote its "total return" in advertisements
and sales literature. These figures are computed separately for Class A, Class
B, Class C and Class D shares. The total return of the Fund is based on
historical earnings and is not intended to indicate future performance. The
"average annual total return" of the Fund refers to a figure reflecting the
average annualized percentage increase (or decrease) in the value of an initial
investment in a Class of the Fund of $1,000 over periods of one, five and ten
years, or over the life of the Fund, if less than any of the foregoing. Total
return and average annual total return reflect all income earned by the Fund,
any appreciation or depreciation of the Fund's assets, all expenses incurred by
the applicable Class and all sales charges which will be incurred by
shareholders, for the stated periods. It also assumes reinvestment of all
dividends and distributions paid by the Fund.
In addition to the foregoing, the Fund may advertise its total return for
each Class over different periods of time by means of aggregate, average,
year-by-year or other types of total return figures. The Fund may also
advertise the growth of hypothetical investments of $10,000, $50,000 and
$100,000 in each Class of shares of the Fund. Such calculations may or may not
reflect the deduction of any sales charge which, if reflected, would reduce the
performance quoted. The Fund from time to time may also advertise its
performance relative to certain performance rankings and indexes compiled by
independent organizations (such as mutual fund performance rankings of Lipper
Analytical Services, Inc., the S&P 500 Index and the Lehman Brothers
Government/Corporate Bond Index).
28
<PAGE>
ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
VOTING RIGHTS. All shares of beneficial interest of the Fund are of $0.01 par
value and are equal as to earnings, assets and voting privileges except that
each Class will have exclusive voting privileges with respect to matters
relating to distribution expenses borne solely by such Class or any other
matter in which the interests of one Class differ from the interests of any
other Class. In addition, Class B shareholders will have the right to vote on
any proposed material increase in Class A's expenses, if such proposal is
submitted separately to Class A shareholders. Also, as discussed herein, Class
A, Class B and Class C bear the expenses related to the distribution of their
respective shares.
The Fund is not required to hold Annual Meetings of Shareholders and, in
ordinary circumstances, the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances, the Trustees may be removed by action of the Trustees or by the
Shareholders.
Under Massachusetts law, shareholders of a business trust may, under
certain 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, in the opinion of Massachusetts
counsel to the Fund, the risk to Fund shareholders of personal liability is
remote.
CODE OF ETHICS. Directors, officers and employees of MSDW Advisors, MSDW
Services and MSDW Distributors are subject to a strict Code of Ethics adopted
by those companies. The Code of Ethics is intended to ensure that the interests
of shareholders and other clients are placed ahead of any personal interest,
that no undue personal benefit is obtained from a person's employment
activities and that actual and potential conflicts of interest are avoided. To
achieve these goals and comply with regulatory requirements, the Code of Ethics
requires, among other things, that personal securities transactions by
employees of the companies be subject to an advance clearance process to
monitor that no Morgan Stanley Dean Witter Fund is engaged at the same time in
a purchase or sale of the same security. The Code of Ethics bans the purchase
of securities in an initial public offering and prohibits engaging in futures
and options transactions and profiting on short-term trading (that is, a
purchase within 60 days of a sale or a sale within 60 days of a purchase) of a
security. In addition, investment personnel may not purchase or sell a security
for their personal account within 30 days before or after any transaction in
any Morgan Stanley Dean Witter Fund managed by them. Any violations of the Code
of Ethics are subject to sanctions, including reprimand, demotion or suspension
or termination of employment. The Code of Ethics comports with regulatory
requirements and the recommendations in the 1994 report by the Investment
Company Institute Advisory Group on Personal Investing.
MASTER/FEEDER CONVERSION. The Fund reserves the right to seek to achieve its
investment objectives by investing all of its investable assets in a
diversified, open-end management investment company having the same investment
objectives and policies and substantially the same investment restrictions as
those applicable to the Fund.
SHAREHOLDER INQUIRIES. All inquiries regarding the Fund should be directed to
the Fund at the telephone numbers or address set forth on the front cover of
this Prospectus.
29
<PAGE>
APPENDIX
- -------------------------------------------------------------------------------
RATINGS OF CORPORATE DEBT INSTRUMENTS INVESTMENTS
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")
FIXED-INCOME SECURITY RATINGS
<TABLE>
<S> <C>
Aaa Fixed-income securities which are rated Aaa are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by
a large or by an exceptionally stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa Fixed-income securities which are rated Aa are judged to be of high quality by all standards. Together with
the Aaa group they comprise what are generally known as high grade fixed-income securities. They are
rated lower than the best fixed-income securities because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in Aaa securities.
A Fixed-income securities which are rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility to impairment sometime
in the future.
Baa Fixed-income securities which are rated Baa are considered as medium grade obligations; i.e., they are
neither highly protected nor poorly secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be characteristically unreliable over any
great length of time. Such fixed-income securities lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Fixed-income securities rated Aaa, Aa, A and Baa are considered investment grade.
Ba Fixed-income securities which are rated Ba are judged to have speculative elements; their future cannot
be considered as well assured. Often the protection of interest and principal payments may be very
moderate, and therefore not well safeguarded during both good and bad times in the future. Uncertainty
of position characterizes bonds in this class.
B Fixed-income securities which are rated B generally lack characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of the contract over any
long period of time may be small.
Caa Fixed-income securities which are rated Caa are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
Ca Fixed-income securities which are rated Ca present obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
C Fixed-income securities which are rated C are the lowest rated class of fixed-income securities, and issues
so rated can be regarded as having extremely poor prospects of ever attaining any real investment
standing.
</TABLE>
30
<PAGE>
Rating Refinements: Moody's may apply numerical modifiers, 1, 2, and 3 in
each generic rating classification from Aa through B in its municipal
fixed-income security rating system. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and a modifier 3 indicates that the issue ranks
in the lower end of its generic rating category.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess of
nine months. The ratings apply to Municipal Commercial Paper as well as taxable
Commercial Paper. Moody's employs the following three designations, all judged
to be investment grade, to indicate the relative repayment capacity of rated
issuers: Prime-1, Prime-2, Prime-3.
Issuers rated Prime-1 have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 have a strong capacity for
repayment of short-term promissory obligations; and issuers rated Prime-3 have
an acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S")
FIXED-INCOME SECURITY RATINGS
A Standard & Poor's fixed-income security rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. The
ratings are based, in varying degrees, on the following considerations: (1)
likelihood of default-capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with any rating
and may, on occasion, rely on unaudited financial information. The ratings may
be changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or for other reasons.
<TABLE>
<S> <C>
AAA Fixed-income securities rated "AAA" have the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
AA Fixed-income securities rated "AA" have a very strong capacity to pay interest and repay principal and
differs from the highest-rate issues only in small degree.
A Fixed-income securities rated "A" have a strong capacity to pay interest and repay principal although they
are somewhat more susceptible to the adverse effects of changes in circumstances and economic
conditions than fixed-income securities in higher-rated categories.
BBB Fixed-income securities rated "BBB" are regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for fixed-income securities in this category than for fixed-income securities in higher-rated
categories.
Fixed-income securities rated AAA, AA, A and BBB are considered investment grade.
BB Fixed-income securities rated "BB" have less near-term vulnerability to default than other speculative
grade fixed-income securities. However, it faces major ongoing uncertainties or exposures to adverse
business, financial or economic conditions which could lead to inadequate capacity or willingness to pay
interest and repay principal.
B Fixed-income securities rated "B" have a greater vulnerability to default but presently have the capacity to
meet interest payments and principal repayments. Adverse business, financial or economic conditions
would likely impair capacity or willingness to pay interest and repay principal.
</TABLE>
31
<PAGE>
<TABLE>
<S> <C>
CCC Fixed-income securities rated "CCC" have a current identifiable vulnerability to default, and are dependent
upon favorable business, financial and economic conditions to meet timely payments of interest and
repayments of principal. In the event of adverse business, financial or economic conditions, they are not
likely to have the capacity to pay interest and repay principal.
CC The rating "CC" is typically applied to fixed-income securities subordinated to senior debt which is
assigned an actual or implied "CCC" rating.
C The rating "C" is typically applied to fixed-income securities subordinated to senior debt which is assigned
an actual or implied "CCC-" rating.
CI The rating "CI" is reserved for fixed-income securities on which no interest is being paid.
NR Indicates that no rating has been requested, that there is insufficient information on which to base a rating
or that Standard & Poor's does not rate a particular type of obligation as a matter of policy.
Fixed-income securities rated "BB," "B," "CCC," "CC" and "C" are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay principal. "BB" indicates the
least degree of speculation and "C" the highest degree of speculation. While such fixed-income securities
will likely have some quality and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
Plus (+) or minus (-): The rating from "AA" to "CCC" may be modified by the addition of a plus or minus
sign to show relative standing within the major ratings categories.
</TABLE>
COMMERCIAL PAPER RATINGS
Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. The commercial paper rating is not a recommendation to purchase
or sell a security. The ratings are based upon current information furnished by
the issuer or obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in or unavailability of such information. Ratings are graded into group
categories, ranging from "A" for the highest quality obligations to "D" for the
lowest. Ratings are applicable to both taxable and tax-exempt commercial paper.
The categories are as follows:
Issues assigned A ratings are regarded as having the greatest capacity for
timely payment. Issues in this category are further refined with the
designation 1, 2, and 3 to indicate the relative degree of safety.
<TABLE>
<S> <C>
A-1 indicates that the degree of safety regarding timely payment is very strong.
A-2 indicates capacity for timely payment on issues with this designation is strong. However, the relative
degree of safety is not as overwhelming as for issues designated "A-1."
A-3 indicates a satisfactory capacity for timely payment. Obligations carrying this designation are, however,
somewhat more vulnerable to the adverse effects of changes in circumstances than obligations carrying
the higher designations.
</TABLE>
BOND RATINGS
FITCH INVESTORS SERVICE, INC. ("FITCH")
The Fitch Bond Ratings provides a guide to investors in determining the
investment risk associated with a particular security. The rating represents
its assessment of the issuer's ability to meet the obligations of a specific
debt issue or class of debt in a timely manner. Fitch bond ratings are not
recommendations to buy, sell or hold securities since they incorporate no
information on market price or yield relative to other debt instruments.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the record of the issuer and
of any guarantor, as well as the political and economic environment that might
affect the future financial strength and credit quality of the issuer.
Bonds which have the same rating are of similar but not necessarily
identical investment quality since the limited number of rating categories
cannot fully reflect small differences in the degree of risk. Moreover, the
character of the risk factor varies from industry to industry and between
corporate, health care and municipal.
32
<PAGE>
In assessing credit risk, Fitch Investors Service relies on current
information furnished by the issuer and/or guarantor and other sources which it
considers reliable. Fitch does not perform an audit of the financial statements
used in assigning a rating.
Ratings may be changed, withdrawn or suspended at any time to reflect
changes in the financial condition of the issuer, the status of the issue
relative to other debt of the issuer, or any other circumstances that Fitch
considers to have a material effect on the credit of the obligor.
<TABLE>
<S> <C>
AAA rated bonds are considered to be investment grade and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA rated bonds are considered to be investment grade and of very high credit quality. The obligor's ability to
pay interest and repay principal, while very strong, is somewhat less than for AAA rated securities or more
subject to possible change over the term of the issue.
A rated bonds are considered to be investment grade and of high credit quality. The obligor's ability to pay
interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher ratings.
BBB rated bonds are considered to be investment grade and of satisfactory credit quality. The obligor's ability
to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to weaken this ability than bonds with higher ratings.
BB rated bonds are considered speculative and of low investment grade. The obligor's ability to pay interest
and repay principal is not strong and is considered likely to be affected over time by adverse economic
changes.
B rated bonds are considered highly speculative. Bonds in this class are lightly protected as to the obligor's
ability to pay interest over the life of the issue and repay principal when due.
CCC rated bonds may have certain identifiable characteristics which, if not remedied, could lead to the
possibility of default in either principal or interest payments.
CC rated bonds are minimally protected. Default in payment of interest and/or principal seems probable.
C rated bonds are in imminent default in payment of interest and/or principal.
</TABLE>
SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes. Although the credit analysis is similar to Fitch's bond
rating analysis, the short-term rating places greater emphasis on the existence
of liquidity necessary to meet the issuer's obligations in a timely manner.
Fitch's short-term ratings are as follows:
<TABLE>
<S> <C>
Fitch-1+ (Exceptionally Strong Credit Quality) Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
Fitch-1 (Very Strong Credit Quality) Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated Fitch-1+.
Fitch-2 (Good Credit Quality) Issues assigned this rating have a satisfactory degree of assurance for timely
payment but the margin of safety is not as great as the two higher categories.
Fitch-3 (Fair Credit Quality) Issues assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate, however, near-term adverse change is likely to cause these
securities to be rated below investment grade.
Fitch-S (Weak Credit Quality) Issues assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near term adverse changes in financial and economic
conditions.
D (Default) Issues assigned this rating are in actual or imminent payment default.
LOC This symbol LOC indicates that the rating is based on a letter of credit issued by a commercial bank.
</TABLE>
33
<PAGE>
LONG-TERM RATINGS
DUFF & PHELPS, INC.
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and
expertise. The projected viability of the obligor at the trough of the cycle is
a critical determination.
Each rating also takes into account the legal form of the security, (e.g.,
first mortgage bonds, subordinated debt, preferred stock, etc.). The extent of
rating dispersion among the various classes of securities is determined by
several factors including relative weightings of the different security classes
in the capital structure, the overall credit strength of the issuer, and the
nature of covenant protection. Review of indenture restrictions is important to
the analysis of a company's operating and financial constraints.
The Credit Rating Committee formally reviews all ratings once per quarter
(more frequently, if necessary).
<TABLE>
<CAPTION>
RATING
SCALE DEFINITION
- -------- ---------------------------------------------------------------------------------------------------------------
<S> <C>
AAA Highest credit quality. The risk factors are negligible, being only slightly more than risk-free U.S. Treasury
debt.
AA+ High credit quality. Protection factors are strong. Risk is modest, but may vary slightly from time to time
AA because of economic conditions.
AA-
A+ Protection factors are average but adequate. However, risk factors are more variable and greater in periods
A of economic stress.
A-
BBB+ Below average protection factors but still considered sufficient for prudent investment. Considerable
BBB variability in risk during economic cycles.
BBB-
BB+ Below investment grade but deemed likely to meet obligations when due. Present or prospective financial
BB protection factors fluctuate according to industry conditions or company fortunes. Overall quality may
BB- move up or down frequently within this category.
B+ Below investment grade and possessing risk that obligations will not be met when due. Financial
B protection factors will fluctuate widely according to economic cycles, industry conditions and/or company
B- fortunes. Potential exists for frequent changes in the quality rating within this category or into a higher
or lower quality rating grade.
CCC Well below investment grade securities. May be in default or considerable uncertainty exists as to timely
payment of principal, interest or preferred dividends. Protection factors are narrow and risk can be
substantial with unfavorable economic/industry conditions, and/or with unfavorable company
developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal and/or interest payments.
DP Preferred stock with dividend arrearages.
</TABLE>
34
<PAGE>
SHORT-TERM RATINGS
Duff & Phelps' short-term ratings are consistent with the rating criteria
utilized by money market participants. The ratings apply to all obligations
with maturities of under one year, including commercial paper, the uninsured
portion of certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit, and current maturities of long-term
debt. Asset-backed commercial paper is also rated according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds, including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
<TABLE>
<CAPTION>
<S> <C>
A. CATEGORY 1: HIGH GRADE
Duff 1+ Highest certainty of timely payment. Short-term liquidity, including internal
operating factors and/or access to alternative sources of funds, is outstanding,
and safety is just below risk-free U.S. Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
Duff- High certainty of timely payment. Liquidity factors are strong and supported by
good fundamental protection factors. Risk factors are very small.
B. CATEGORY 2: GOOD GRADE
Duff 2 Good certainty of timely payment. Liquidity factors and company fundamentals
are sound. Although ongoing funding needs may enlarge total financing
requirements, access to capital markets is good. Risk factors are small.
C. CATEGORY 3: SATISFACTORY GRADE
Duff 3 Satisfactory liquidity and other protection factors qualify issue as to investment
grade. Risk factors are larger and subject to more variation. Nevertheless, timely
payment is expected.
D. CATEGORY 4: NON-INVESTMENT GRADE
Duff 4 Speculative investment characteristics. Liquidity is not sufficient to insure against
disruption in debt service. Operating factors and market access may be subject
to a high degree of variation.
E. CATEGORY 5: DEFAULT
Duff 5 Issuer failed to meet scheduled principal and/or interest payments.
</TABLE>
35
<PAGE>
MORGAN STANLEY DEAN WITTER
INCOME BUILDER FUND
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and
General Counsel
Paul D. Vance
Vice President
Peter M. Avelar
Vice President
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
