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Filed Pursuant to Rule 497(c)
Registration File No.: 333-02419
PROSPECTUS
JULY 31, 1998
TCW/DW Global Telecom Trust (the "Fund") is an open-end, diversified management
investment company, whose investment objective is long-term capital
appreciation. The Fund seeks to achieve its investment objective by investing
primarily in a portfolio consisting of securities of domestic and foreign
companies operating in all aspects of the telecommunications and information
industries. Such issuers are information transporters (such as local/regional
telephone companies, long-distance carriers and cable television), content
providers (such as movie studios, transaction services, publishers and
advertisers) and providers of enabling technologies (such as manufacturers of
information-processing servers, software and communications products). See
"Investment Objective and Policies."
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 July 31, 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 / 5
Financial Highlights/ 7
The Fund and its Management/ 10
Investment Objective and Policies/ 11
Risk Considerations and Investment Practices/ 13
Investment Restrictions/ 20
Purchase of Fund Shares/ 20
Shareholder Services/ 31
Repurchases and Redemptions/ 34
Dividends, Distributions and Taxes/ 35
Performance Information/ 36
Additional Information/ 36
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and the shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
TCW/DW GLOBAL TELECOM TRUST
Two World Trade Center
New York, New York 10048
(212) 392-2550 or (800) 869-NEWS (toll-free)
Morgan Stanley Dean Witter Distributors Inc.,
Distributor
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PROSPECTUS SUMMARY
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THE The Fund is organized as a Trust, commonly known as a Massachusetts business trust, and is
FUND an open-end, diversified management investment company investing primarily in a portfolio
consisting of securities of domestic and foreign companies operating in all aspects of the
telecommunications and information industries.
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SHARES Shares of beneficial interest with $0.01 par value (see page 36). The Fund offers four Classes
OFFERED of shares, each with a different combination of sales charges, ongoing fees and other features
(see pages 20-29).
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MINIMUM The minimum initial investment for each Class is $1,000 ($100 if the account is opened
PURCHASE through EasyInvestSM). 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 shares and concurrent investments in Class D shares of
the Fund and other multiple class funds for which Morgan Stanley Dean Witter Services
Company Inc. serves as manager and TCW Funds Management, Inc. serves as investment
adviser will be aggregated. The minimum subsequent investment is $100 (see page 20).
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INVESTMENT The investment objective of the Fund is long-term capital appreciation.
OBJECTIVE
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MANAGER Morgan Stanley Dean Witter Services Company Inc. (the "Manager"), a wholly-owned
subsidiary of Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors"), is the Fund's
manager. The Manager also serves as manager to ten other investment companies advised by
TCW Funds Management, Inc. (the "TCW/DW Funds"). The Manager and MSDW
Advisors serve in various investment management, advisory, management and administrative
capacities to a total of 103 investment companies and other portfolios with assets of
approximately $115.2 billion at June 30, 1998 (see page 10).
ADVISER TCW Funds Management, Inc. (the "Adviser") is the Fund's investment adviser. In addition
to the Fund, the Adviser serves as investment adviser to 10 other TCW/DW Funds. As of June
30, 1998, the Adviser and its affiliates had approximately $50 billion under management or
committed to management in various fiduciary or advisory capacities, primarily to institutional
investors (see page 10).
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MANAGEMENT The Manager receives a monthly fee at the annual rate of 0.60% of daily net assets. The
AND ADVISORY Adviser receives a monthly fee at an annual rate of 0.40% of daily net assets (see page 10).
FEES
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DISTRIBUTOR Morgan Stanley Dean Witter Distributors Inc. (the "Distributor"). The Fund has adopted a
AND distribution plan pursuant to Rule 12b-1 under the Investment Company Act (the "12b-1
DISTRIBUTION Plan") with respect to the distribution fees paid by the Class A, Class B and Class C shares of
FEE 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 20 and 29).
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2
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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 20, 24 and 29).
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 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 20, 26 and 29).
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 20, 28 and 29).
o Class D shares are offered only to investors meeting an initial investment minimum of $5
million 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 fee (see pages 20, 28 and
29).
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DIVIDENDS Dividends from net investment income and distributions from net capital gains, if any, are paid
AND at least once each year. The Fund may, however, determine to retain all or part of any net
CAPITAL long-term capital gains in any year for reinvestment. Dividends and capital gains distributions
GAINS paid on shares of a Class are automatically reinvested in additional shares of the same Class at
DISTRIBUTIONS 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 31 and
35).
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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 EasyInvestSM, if after
twelve months the shareholder has invested less than $1,000 in the account (see page 34).
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3
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RISK The net asset value of the Fund's shares will fluctuate with changes in the market value of the
CONSIDERATIONS Fund's 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 affecting companies and/or
industries in which the Fund invests. In addition, the value of the Fund's fixed-income and
convertible securities generally increases or decreases due to economic and market factors, as
well as changes in prevailing interest rates. Generally, a rise in interest rates will result in a
decrease in value while a drop in interest rates will result in an increase in value. The Fund may
invest in lower rated or unrated convertible securities. There are also certain risks associated
with the Fund's investments in the telecommunications and information industries. The Fund
will invest in the securities of foreign issuers which entails certain additional risks. The Fund
may also invest in options and futures transactions which may be considered speculative in
nature and may involve greater risks than those customarily assumed by other investment
companies which do not invest in such instruments. In addition, the Fund may enter into
forward foreign currency exchange contracts in connection with its foreign securities
investments and may purchase securities on a when-issued, delayed delivery or "when, as and
if issued" basis, which involve certain special risks. An investment in shares of the Fund should
not be considered a complete investment program and is not appropriate for all investors.
Investors should carefully consider their ability to assume these risks and the risks outlined
under the heading "Risk Considerations and Investment Practices" before making an
investment in the Fund (see pages 13 - 19).
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The above is qualified in its entirety by the detailed information appearing
elsewhere in this Prospectus and in the Statement of Additional Information.
4
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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 annualized fees and expenses set forth in the table
are based on the expenses and fees for the fiscal year ended May 31, 1998.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
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<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
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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)
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Management and Advisory Fees (5) ......................... 1.00% 1.00% 1.00% 1.00%
12b-1 Fees (6) (7) ....................................... 0.24% 0.80% 1.00% None
Other Expenses (5) ....................................... 0.32% 0.32% 0.32% 0.32%
Total Fund Operating Expenses (8) ........................ 1.56% 2.12% 2.32% 1.32%
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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) Management fees and other expenses are based on the Fund's actual
aggregate expenses
(6) 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").
(7) 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").
(8) There were no outstanding shares of Class A, Class C or Class D prior to
July 28, 1997.
5
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Examples 1 year 3 years 5 years 10 years
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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 .......................................................... $68 $99 $133 $228
Class B .......................................................... $72 $96 $134 $245
Class C .......................................................... $34 $72 $124 $266
Class D .......................................................... $13 $42 $ 72 $159
You would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of the period:
Class A .......................................................... $68 $99 $133 $228
Class B .......................................................... $22 $66 $114 $245
Class C .......................................................... $24 $72 $124 $266
Class D .......................................................... $13 $42 $ 72 $159
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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 "Repurchases and Redemptions".
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 charges permitted by the NASD.
6
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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, 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.
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<CAPTION>
For the Period
For the Year August 28, 1996*
Ended through
May 31, 1998**++ May 31, 1997
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CLASS B SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $ 11.43 $ 10.00
----------- ----------------
Net investment loss ............................... (0.17) (0.09)
Net realized and unrealized gain .................. 3.20 1.52
----------- ----------------
Total from investment operations .................. 3.03 1.43
Less distributions from net realized gain ......... (0.49) --
----------- ----------------
Net asset value, end of period .................... $ 13.97 $ 11.43
=========== ================
TOTAL INVESTMENT RETURN+ .......................... 27.30% 14.30%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 2.12% 2.38%(2)
Net investment loss ............................... (1.30)% (1.27)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $165,284 $ 122,240
Portfolio turnover rate ........................... 116% 80%(1)
Average commission rate paid ...................... $ 0.0049 $ 0.0283
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* Commencement of operations.
** Prior to July 28, 1997, the Fund issued one class of shares. All shares
of the Fund 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.
7
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FINANCIAL HIGHLIGHTS (continued)
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For the Period
July 28, 1997*
through
May 31, 1998++
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CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $ 12.99
---------
Net investment loss ............................... (0.09)
Net realized and unrealized gain .................. 1.63
----------
Total from investment operations .................. 1.54
Less distributions from net realized gain ......... (0.49)
----------
Net asset value, end of period .................... $ 14.04
==========
TOTAL INVESTMENT RETURN+ .......................... 12.64%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 1.52%(2)
Net investment loss ............................... (0.76)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $ 966
Portfolio turnover rate ........................... 116%
Average commission rate paid ...................... $ 0.0049
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $ 12.99
--------------
Net investment loss ............................... (0.17)
Net realized and unrealized gain .................. 1.62
--------------
Total from investment operations .................. 1.45
Less distributions from net realized gain ......... ( 0.49)
--------------
Net asset value, end of period .................... $ 13.95
==============
TOTAL INVESTMENT RETURN+ .......................... 11.86%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 2.30%(2)
Net investment loss ............................... (1.52)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $ 559
Portfolio turnover rate ........................... 116%
Average commission rate paid ...................... $ 0.0049
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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.
8
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FINANCIAL HIGHLIGHTS (continued)
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For the Period
July 28, 1997*
through
May 31, 1998++
------------------
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CLASS D SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $ 12.99
-------
Net investment loss ............................... (0.05)
Net realized and unrealized gain .................. 1.62
---------
Total from investment operations .................. 1.57
Less distributions from net realized gain ......... (0.49)
---------
Net asset value, end of period .................... $ 14.07
=========
TOTAL INVESTMENT RETURN+ .......................... 12.80%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 1.33%(2)
Net investment loss ............................... (0.46)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $ 11
Portfolio turnover rate ........................... 116%
Average commission rate paid ...................... $ 0.0049
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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.
9
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THE FUND AND ITS MANAGEMENT
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TCW/DW Global Telecom Trust (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
Massachusetts on March 28, 1996.
Morgan Stanley Dean Witter Services Company Inc. ("MSDW Services" or the
"Manager"), whose address is Two World Trade Center, New York, New York 10048,
is the Fund's Manager. The Manager is a wholly-owned subsidiary of Morgan
Stanley Dean Witter Advisors Inc. ("MSDW Advisors"). MSDW Advisors is a
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co., a preeminent
global financial services firm that maintains leading market positions in each
of its three primary businesses--securities, asset management and credit
services.
The Manager acts as manager to ten other TCW/DW Funds. The Manager and
MSDW Advisors serve in various investment management, advisory, management and
administrative capacities to a total of 103 investment companies, 28 of which
are listed on the New York Stock Exchange, with combined assets of
approximately $110.8 billion as of June 30, 1998. MSDW Advisors also manages
and advises portfolios of pension plans, other institutions and individuals
which aggregated approximately $4.4 billion at such date.
The Fund has retained the Manager to manage its business affairs,
supervise its overall day-to-day operations (other than providing investment
advice) and provide all administrative services.
TCW Funds Management, Inc. (the "Adviser"), whose address is 865 South
Figueroa Street, Suite 1800, Los Angeles, California 90017, is the Fund's
investment adviser. The Adviser was organized in 1987 as a wholly-owned
subsidiary of The TCW Group, Inc. ("TCW"), whose subsidiaries, including Trust
Company of the West and TCW Asset Management Company, provide a variety of
trust, investment management and investment advisory services. Robert A. Day,
who is Chairman of the Board of Directors of TCW, may be deemed to be a control
person of the Adviser by virtue of the aggregate ownership by Mr. Day and his
family of more than 25% of the outstanding voting stock of TCW. The Adviser
serves as investment adviser to ten other TCW/DW Funds in addition to the Fund.
As of June 30, 1998, the Adviser and its affiliated companies had approximately
$50 billion under management or committed to management, primarily from
institutional investors.
The Fund has retained the Adviser to invest the Fund's assets.
The Fund's Trustees review the various services provided by the Manager
and the Adviser to ensure that the Fund's general investment policies and
programs are being properly carried out and that administrative services are
being provided to the Fund in a satisfactory manner.
As full compensation for the services and facilities furnished to the
Fund and for expenses of the Fund assumed by the Manager, the Fund pays the
Manager monthly compensation calculated daily by applying the annual rate of
0.60% to the Fund's net assets. As compensation for its investment advisory
services, the Fund pays the Adviser monthly compensation calculated daily by
applying an annual rate of 0.40% to the Fund's net assets. The total fees paid
by the Fund to the Manager and the Adviser are higher than the fees paid by
most other investment companies for similar services.
For the fiscal year ended May 31, 1998, the Fund accrued total
compensation to the Manager and the Adviser amounting to 0.60% and 0.40%,
respectively, of the Fund's average daily net assets. During that period, the
total expenses of Class B amounted to 2.12% of the Fund's average daily net
assets. Shares of Class A, Class C and Class D were first issued on July 28,
1997. The expenses of the Fund include: the fee of the Manager and the Adviser,
the fee pursuant to the Plan of Distribution (see "Purchase of Fund Shares");
taxes; transfer agent, custodian and auditing
10
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fees; certain legal fees; and printing and other expenses relating to the
Fund's operations which are not expressly assumed by the Manager and the
Adviser, under their respective Agreements with the Fund.
INVESTMENT OBJECTIVE AND POLICIES
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The investment objective of the Fund is long-term capital appreciation. This
objective is fundamental and may not be changed without shareholder approval.
There is no assurance that the objective will be achieved.
The Fund seeks to achieve its investment objective by investing under
normal circumstances at least 65% of its total assets in common stocks and
securities convertible into common stocks of domestic and foreign companies
operating in all aspects of the telecommunications and information industries
(the "Target Industries"). The Fund will not have more than 25% of its total
assets invested in convertible securities. All or some of the convertible
securities in which the Fund may invest may be below investment grade. See the
Appendix to the Statement of Additional Information for a discussion of ratings
of fixed-income securities.
The Target Industries are information transporters, content providers
and providers of enabling technologies. Information transporters are companies
involved in developing and manufacturing any portion of the so-called
information superhighway, such as local/regional telephone companies,
long-distance carriers, cable television, personal communications systems,
wireless, cellular, paging, direct broadcast satellite and the Internet.
Content providers are companies providing some of the information content that
is transmitted via the information superhighway such as movie studios,
providers of transaction services, manufacturers of games and educational
programming, publishers and advertisers. Finally, providers of enabling
technologies are manufacturers of products such as information-processing
servers, consumer electronics, data and video compression, software, storage
and semiconductor products.
Companies considered to be in the Target Industries will be those which
derive at least 35% of their revenues or earnings from the Target Industries,
or devote at least 35% of their assets to activities in the Target Industries.
Investments in securities of issuers in any one country, other than the United
States, will represent no more than 25% of the Fund's total assets. The Fund
will have at least 65% of its total assets invested in securities of issuers
located in at least three different countries.
Under normal market conditions, the Fund will maintain at least 25% of
its portfolio in securities issued by issuers located in the United States. As
such, the Fund will have a greater exposure than other "global" mutual funds to
economic and political events occurring in the U.S. Changes in prevailing U.S.
interest rates, federal tax rate increases, or adverse changes in federal or
state regulations or exchange rules may all have a disproportionate impact upon
the Fund as a result of its concentration policy. Moreover, the Fund's
concentration in securities of U.S. issuers will mean that the Fund's
investments are more likely to be responsive, both positively and negatively,
to declines or advances in the U.S. dollar with respect to foreign currencies.
The communication and use of information using existing and developing
technologies is becoming increasingly important to the global economy. There
are opportunities for continued growth in demand for components, products,
media and systems to collect, store, retrieve, transmit, process, distribute,
record, reproduce and put information to use. The telecommunications,
broadcasting, cable television, media, entertainment and computer industries
are involved in creating new ways of exchanging information and distributing
content as consumers and businesses seek to buy packages of services including
combinations of local and long distance telephone, wireless, cable television
and Internet services. While governmental regulation may impact the Target
Industries both positively and negatively (see "Risk Considerations
11
<PAGE>
and Investment Practices" below), the Adviser believes that the enactment by
the U.S. Congress of the Telecommunications Reform Act of 1996 may add to these
growth opportunities through increasing competition, mergers and other
transactions that could fundamentally change the way consumers and businesses
obtain communication services. All such factors are part of the Adviser's
overall investment selection process.
Up to 75% of the Fund's total assets may be invested in equity
securities of foreign issuers. Such foreign investments may be in the form of
direct investments in securities of foreign issuers or in the form of American
Depository Receipts (ADRs), European Depository Receipts (EDRs), Global
Depository Receipts (GDRs) 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. GDRs are
issued by a foreign bank or trust company and evidence ownership of the
underlying foreign securities. Generally, GDRs are in bearer form and are
designed for use in European and other foreign securities markets. When
purchasing foreign securities, the Fund will generally enter into foreign
currency exchange transactions or forward foreign exchange contracts to
facilitate settlement. The Fund will 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. 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.
Up to 35% of the Fund's total assets may be invested in investment grade
fixed-income securities consisting of securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, corporate debt securities
and money market instruments. With respect to corporate debt securities, the
term "investment grade" means securities which are rated Baa or higher by
Moody's Investors Services, Inc. ("Moody's") or BBB or higher by Standard &
Poor's Corporation ("S&P") or, if not rated, are deemed by the Adviser to be of
comparable quality. See the Appendix to the Statement of Additional Information
for a discussion of ratings of fixed-income securities.
Investments in fixed-income securities rated either BBB by S&P or Baa by
Moody's (the lowest credit ratings designated "investment grade") have
speculative characteristics and, therefore, changes in economic conditions or
other circumstances are more likely to weaken their capacity to make principal
and interest payments than would be the case with investments in securities
with higher credit ratings. If a non-convertible fixed-income security held by
the Fund is rated BBB or Baa and is subsequently downgraded by a rating agency,
or otherwise falls below investment grade the Fund will sell such securities as
soon as is practicable without undue market or tax consequences to the Fund.
Money market instruments in which the Fund may invest are securities
issued or guaranteed by the U.S. Government or its agencies (Treasury Bills,
Notes and Bonds); obligations of banks subject to regulation by the U.S.
Government and having total assets of $1 billion or more; Eurodollar
certificates of deposit; obligations of savings banks and savings and loan
associations having total assets of $1 billion or more; fully insured
certificates of deposit; and commercial paper rated within the two highest
grades by Moody's or S&P or, if not rated, issued by a company having an
outstanding debt issue rated AAA by S&P or Aaa by Moody's.
There may be periods during which, in the opinion of the Adviser, market
conditions warrant reduction of some or all of the Fund's securities holdings.
During such periods, the Fund may adopt a temporary "defensive" posture in
which up to 100% of its total assets may be invested in money market
instruments or cash.
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RISK CONSIDERATIONS AND
INVESTMENT PRACTICES
Given the investment risks described below, an investment in shares of
the Fund should not be considered a complete investment program and is not
appropriate for all investors. Investors should carefully consider their
ability to assume these risks before making an investment in the Fund.
The net asset value of the Fund's shares will fluctuate with changes in
the market value of the Fund's portfolio securities. The market value of the
Fund's portfolio securities will increase or decrease due to a variety of
economic, market or political factors which cannot be predicted. Additionally,
the net asset value of the Fund's shares may increase or decrease due to
changes in prevailing interest rates. Generally, a rise in interest rates will
result in a decrease in the value of the Fund's fixed-income securities, while
a drop in interest rates will result in an increase in the value of those
securities.
Telecommunications and Information Industries. The Fund concentrates its
investments in the telecommunications and information industries. Certain
economic factors or specific events may exert a disproportionate impact upon
the prices of equity securities of companies within a particular industry
relative to their impact on the prices of securities of companies engaged in
other industries. Because of this concentration, the value of the Fund's shares
may be more volatile than that of investment companies that do not similarly
concentrate their investments. The communications and information industries
may be subject to greater changes in governmental policies and governmental
regulation than many other industries in the United States and worldwide.
Regulatory approval requirements, ownership restrictions and restrictions on
rates of return and types of services that may be offered may materially affect
the products and services of these and related industries. Additionally, the
products and services of companies in these industries may be subject to faster
obsolescence as a result of greater competition, advancing technological
developments, and changing market and consumer preferences. As a result, the
stocks of companies in these industries may exhibit greater price volatility
than those of companies in other industries.
Lower Rated or Unrated Convertible Securities. The Fund may acquire,
through purchase or a distribution by the issuer of a security held in its
portfolio, a fixed-income security which is convertible into common stock of
the issuer. 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).
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 privilege.) At such times the price of the
convertible security will tend to fluctuate directly with the price of the
underlying equity security.
A portion of the convertible securities in which the Fund may invest
will generally be 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
Baa by Moody's or BBB by S&P have speculative characteristics greater than
those of more highly rated securities, while fixed-income securities rated Ba
or BB or lower by Moody's and S&P, respectively, are considered to be
speculative investments. The Fund will only
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invest in convertible and other fixed-income securities that are rated at least
B by either S&P or Moody's or, if not rated, determined to be of comparable
quality by the Adviser. 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 S&P are a generally accepted barometer of credit
risk. However, as the creditworthiness of issuers of lower-rated fixed-income
securities is more problematic than that of issuers of higher-rated fixed-income
securities, the achievement of the Fund's investment objective will be more
dependent upon the Adviser's own credit analysis than would be the case with a
mutual fund investing primarily in higher quality bonds. The Adviser 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. See the Appendix to the Statement of Additional Information for
a discussion of ratings of fixed-income securities.
Because of the special nature of the Fund's permitted investments in
lower rated or unrated convertible securities, the Adviser must take account of
certain special considerations in assessing the risks associated with such
investments. The prices of lower rated or unrated 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
or unrated securities and a corresponding volatility in the net asset value of
a share of the Fund.
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 the currencies of
different nations 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.
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. The foreign currency transactions
of the Fund will be conducted on a spot basis or through forward foreign
currency exchange contracts (described below). The Fund will incur certain
costs in connection with these currency transactions.
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
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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.
Warrants and Stock Rights. The Fund may invest up to 5% of the value of
its net assets in warrants, including not more than 2% in warrants not listed
on either the New York or American Stock Exchange. The Fund may also invest in
stock rights. Warrants are, in effect, an option to purchase equity securities
at a specific price, generally valid for a specific period of time, and have no
voting rights, pay no dividends and have no rights with respect to the
corporations issuing them. The Fund may acquire warrants and stock rights
attached to other securities without reference to the foregoing limitations.
Repurchase Agreements. The Fund may enter into repurchase agreements,
which may be viewed as a type of secured lending by the Fund, and which
typically involve the acquisition by the Fund of debt securities from a selling
financial institution such as a bank, savings and loan association or
broker-dealer. The agreement provides that the Fund will sell back to the
institution, and that the institution will repurchase, the underlying security
at a specified price and at a fixed time in the future, usually not more than
seven days from the date of purchase. While repurchase agreements involve
certain risks not associated with direct investments in debt securities, the
Fund follows procedures designed to minimize those risks. See the Statement of
Additional Information for a further discussion of such investments.
Private Placements. The Fund may invest up to 10% of its net assets in
securities which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), or which are otherwise restricted. (Securities eligible for resale
pursuant to Rule 144A under the Securities Act, and determined to be liquid
pursuant to the procedures discussed in the following paragraph, are not
subject to the foregoing restriction.) These securities are generally referred
to as private placements or restricted securities. Limitations on the resale of
such securities may have an adverse effect on their marketability, and may
prevent the Fund from disposing of them promptly at reasonable prices. The Fund
may have to bear the expense of registering such securities for resale and the
risk of substantial delays in effecting such registration.
The Securities and Exchange Commission has adopted Rule 144A under the
Securities Act, which permits the Fund to sell restricted securities to
qualified institutional buyers without limitation. The Adviser, pursuant to
procedures adopted by the Trustees of the Fund, will make a determination as to
the liquidity of each such restricted security purchased by the Fund. If such
Rule 144A 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
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the extent the Fund, at a particular point in time, may be unable to find
qualified institutional buyers interested in purchasing such securities.
When-Issued and Delayed Delivery Securities and Forward
Commitments. From time to time, in the ordinary course of business, the Fund
may purchase securities on a when-issued or delayed delivery basis or may
purchase or sell securities on a forward commitment basis. 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 a further discussion of such
investments.
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 a further discussion of such
investments.
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 Adviser
to be creditworthy and when the income which can be earned from such loans
justifies the attendant risks. The Fund will not under any circumstances lend
more than 25% of the value of its total assets.
Options and Futures Transactions. The Fund may purchase and sell (write)
call and put options on (i) portfolio securities which are denominated in
either U.S. dollars or foreign currencies; (ii) stock indexes; and (iii) the
U.S. dollar and foreign currencies. Such options are or may in the future be
listed on several U.S. and foreign securities exchanges or may be traded in
over-the-counter transactions ("OTC options"). OTC options are purchased from
or sold (written) to dealers or financial institutions which have entered into
direct agreements with the Fund.
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The Fund is permitted to write covered call options on portfolio
securities and the U.S. dollar and foreign currencies, without limit, in order
to hedge against the decline in the value of a security or currency in which
such security is denominated (although such hedge is limited to the value of
the premium received) and to close out long call option positions. The Fund may
write covered put options, under which the Fund incurs an obligation to buy the
security (or currency) underlying the option from the purchaser of the put at
the option's exercise price at any time during the option period, at the
purchaser's election.
The Fund may purchase listed and OTC call and put options and options on
stock indexes in amounts equalling up to 10% of its total assets, with a
maximum of 5% of its total assets invested in the purchase of stock index
options. The Fund may purchase call options to close out a covered call
position or to protect against an increase in the price of a security it
anticipates purchasing or, in the case of call options on a foreign currency,
to hedge against an adverse exchange rate change of the currency in which the
security it anticipates purchasing is denominated vis-a-vis the currency in
which the exercise price is denominated. The Fund may purchase put options on
securities which it holds in its portfolio to protect itself against a decline
in the value of the security and to close out written put positions in a manner
similar to call option closing purchase transactions. There are no other limits
on the Fund's ability to purchase call and put options other than compliance
with the foregoing policies.
The Fund may purchase and sell futures contracts that are currently
traded, or may in the future be traded, on U.S. and foreign commodity exchanges
on underlying portfolio securities, on any currency ("currency" futures), on
U.S. and foreign fixed-income securities ("interest rate" futures) and on such
indexes of U.S. or foreign equity or fixed-income securities as may exist or
come into being ("index" futures). The Fund may purchase or sell interest rate
futures contracts for the purpose of hedging some or all of the value of its
portfolio securities (or anticipated portfolio securities) against changes in
prevailing interest rates. The Fund may purchase or sell index futures
contracts for the purpose of hedging some or all of its portfolio (or
anticipated portfolio) securities against changes in their prices. The Fund may
purchase or sell currency futures contracts to hedge against an anticipated
rise or decline in the value of the currency in which a portfolio security is
denominated vis-a-vis another currency. As a futures contract purchaser, the
Fund incurs an obligation to take delivery of a specified amount of the
obligation underlying the contract at a specified time in the future for a
specified price. As a seller of a futures contract, the Fund incurs an
obligation to deliver the specified amount of the underlying obligation at a
specified time in return for an agreed upon price.
The Fund also may purchase and write call and put options on futures
contracts which are traded on an exchange and enter into closing transactions
with respect to such options to terminate an existing position.
New futures contracts, options and other financial products and various
combinations thereof continue to be developed. The Fund may invest in any such
futures, options or products as may be developed, to the extent consistent with
its investment objective and applicable regulatory requirements.
Risks of Options and Futures Transactions. The Fund may close out its
position as writer of an option, or as a buyer or seller of a futures contract,
only if a liquid secondary market exists for options or futures contracts of
that series. There is no assurance that such a market will exist, particularly
in the case of OTC options, as such options may generally only be closed out by
entering into a closing purchase transaction with the purchasing dealer. Also,
exchanges may limit the amount by which the price of many futures contracts may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased.
Futures contracts and options transactions may be considered speculative
in nature and may involve greater risks than those customarily assumed by other
investment companies which do not invest in such
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<PAGE>
instruments. One such risk is that the Adviser could be incorrect in its
expectations as to the direction or extent of various interest rate or price
movements or the time span within which the movements take place. For example,
if the Fund sold futures contracts for the sale of securities in anticipation
of an increase in interest rates, and then interest rates went down instead,
causing bond prices to rise, the Fund would lose money on the sale. Another
risk which will arise in employing futures contracts to protect against the
price volatility of portfolio securities is that the prices of securities,
currencies and indexes subject to futures contracts (and thereby the futures
contract prices) may correlate imperfectly with the behavior of the U.S. dollar
cash prices of the Fund's portfolio securities and their denominated
currencies. See the Statement of Additional Information for a further
discussion of risks.
Forward Foreign Currency Exchange Contracts. The Fund may enter into
forward foreign currency exchange contracts ("forward contracts") in connection
with its foreign securities investments.
A forward contract involves an obligation to purchase or sell a currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the
contract. The Fund may enter into forward contracts as a hedge against
fluctuations in future foreign exchange rates.
The Fund will enter into forward contracts under various circumstances.
When the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may, for example, desire to "lock in" the
price of the security in U.S. dollars or some other foreign currency which the
Fund is temporarily holding in its portfolio. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars or other
currency, of the amount of foreign currency involved in the underlying security
transactions, the Fund will be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar or
other currency which is being used for the security purchase (by the Fund or
the counterparty) and the foreign currency in which the security is denominated
during the period between the date on which the security is purchased or sold
and the date on which payment is made or received.
At other times, when, for example, the Fund's Adviser believes that the
currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar or some other foreign currency, the Fund may enter into
a forward contract to sell, for a fixed amount of dollars or other currency,
the amount of foreign currency approximating the value of some or all of the
Fund's securities holdings (or securities which the Fund has purchased for its
portfolio) denominated in such foreign currency. Under identical circumstances,
the Fund may enter into a forward contract to sell, for a fixed amount of U.S.
dollars or other currency, an amount of foreign currency other than the
currency in which the securities to be hedged are denominated approximating the
value of some or all of the portfolio securities to be hedged. This method of
hedging, called "cross-hedging," will be selected by the Adviser when it is
determined that the foreign currency in which the portfolio securities are
denominated has insufficient liquidity or is trading at a discount as compared
with some other foreign currency with which it tends to move in tandem.
In addition, when the Fund's Adviser anticipates purchasing securities
at some time in the future, and wishes to lock in the current exchange rate of
the currency in which those securities are denominated against the U.S. dollar
or some other foreign currency, the Fund may enter into a forward contract to
purchase an amount of currency equal to some or all of the value of the
anticipated purchase, for a fixed amount of U.S. dollars or other currency. The
Fund may, however, close out the forward contract without purchasing the
security which was the subject of the "anticipatory" hedge.
In all of the above circumstances, if the currency in which the Fund's
securities holdings (or anticipated portfolio securities) are denominated rises
in value with respect to the currency which is being purchased
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(or sold), then the Fund will have realized fewer gains than had the Fund not
entered into the forward contracts. Moreover, the precise matching of the
forward contract amounts and the value of the securities involved will not
generally be possible, since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The Fund is not required to enter into such transactions with
regard to its foreign currency-denominated securities and will not do so unless
deemed appropriate by the Adviser. The Fund generally will not enter into a
forward contract with a term of greater than one year, although it may enter
into forward contracts for periods of up to five years. The Fund may be limited
in its ability to enter into hedging transactions involving forward contracts
by the Internal Revenue Code requirements relating to qualification as a
regulated investment company (see "Dividends, Distributions and Taxes").
Year 2000. The management services provided to the Fund by the Manager,
the investment advisory services provided to the Fund by the Adviser and the
services provided to shareholders by the Distributor and the Transfer Agent
depend on the smooth functioning of their computer systems. Many computer
software systems in use today cannot recognize the year 2000, but revert to
1900 or some other date, due to the manner in which dates were encoded and
calculated. That failure could have a negative impact on the handling of
securities trades, pricing and account services. The Manager, the Adviser, the
Distributor and the Transfer Agent have been actively working on necessary
changes to their own computer systems to prepare for the year 2000 and expect
that their systems will be adapted before that date, but there can be no
assurance that they will be successful, or that interaction with other
non-complying computer systems will not impair their services at that time.
In addition, it is possible that the markets for securities in which the
Fund invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues. In
addition, corporate and governmental data processing errors may result in
production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial and may be reported inconsistently in U.S. and
foreign financial statements. Accordingly, the Fund's investments may be
adversely affected.
PORTFOLIO MANAGEMENT
The Fund's portfolio is actively managed by the Adviser with a view to
achieving the Fund's investment objective. Robert M. Hanisee and John A.
Healey, each a Managing Director of the Adviser, are the primary portfolio
managers of the Fund. Messrs. Hanisee and Healey have been primary portfolio
managers with affiliates of The TCW Group, Inc. since 1990 and 1995,
respectively. Prior to 1995, Mr. Healey served as an independent consultant
with Healey Partners.
In determining which securities to purchase for the Fund or hold in the
Fund's portfolio, the Adviser will rely on information from various sources,
including research, analysis and appraisals of brokers and dealers, including
Dean Witter Reynolds Inc., Morgan Stanley & Co. Incorporated and other brokers
and dealers that are affiliates of the Manager, and others regarding economic
developments and interest rate trends, and the Adviser's own analysis of
factors it deems relevant.
Orders for transactions in portfolio securities and commodities are
placed for the Fund with a number of brokers and dealers, including Dean Witter
Reynolds Inc., Morgan Stanley & Co. Incorporated and other brokers and dealers
that are affiliates of the Manager. 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 the Manager.
The Fund intends to buy and hold securities for capital appreciation. Although
the Fund does not intend to
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<PAGE>
engage in substantial short-term trading as a means of achieving its investment
objective, the Fund may sell portfolio securities without regard to the length
of time that they have been held, in order to take advantage of new investment
opportunities or yield differentials, or because the Fund desires to preserve
gains or limit losses due to changing economic conditions, interest rate
trends, or the financial condition of the issuer. It is not anticipated that
the Fund's portfolio turnover rate will exceed 150% in any one year. The Fund
will incur underwriting discount costs (on underwritten securities) and
brokerage costs commensurate with its portfolio turnover rate, and thus a
higher level (over 100%) of portfolio transactions will increase the Fund's
overall brokerage expenses. Short term gains and losses may result from such
portfolio transactions. See "Dividends, Distributions and Taxes" for a
discussion of the tax implications of the Fund's transactions.
The expenses of the Fund relating to its portfolio management are likely
to be greater than those incurred by other investment companies investing only
in securities issued by domestic issuers, as custodial costs, brokerage
commissions and other transaction charges related to investing on foreign
markets are generally higher than in the United States.
Except as specifically noted, all investment policies and practices
discussed above are not fundamental policies of the Fund and thus may be
changed without shareholder approval.
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. As to 75% of its assets, 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. As to 75% of its assets, purchase more than 10% of all
outstanding voting securities or more than 10% of 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 except that the Fund will invest at least
25% of its total assets in the telecommunications and information
industry. This restriction does not apply to obligations issued or
guaranteed by the United States Government, its agencies or
instrumentalities.
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 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-
20
<PAGE>
Stanley Dean Witter & Co., and other dealers (which may include TCW Brokerage
Services, an affiliate of the Adviser) who have entered into selected broker-
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 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 shares and concurrent investments in Class D shares of the
Fund and other TCW/DW Funds which are multiple class funds ("TCW/DW Multi-Class
Funds") will be aggregated. Subsequent purchases of $100 or more may be made by
sending a check, payable to TCW/DW Global Telecom Trust, directly to Morgan
Stanley Dean Witter Trust FSB (the "Transfer Agent" or "MSDW Trust") at P.O.
Box 1040, Jersey City, NJ 07303 or by contacting a Morgan Stanley Dean Witter
Financial Advisor or other Selected Broker-Dealer representative. 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
investment 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
21
<PAGE>
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" below).
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
"Repurchases and Redemptions."
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.
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
22
<PAGE>
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 shares in all TCW/DW
Multi-Class Funds, and holdings of shares of "Exchange Funds" (see "Shareholder
Services--Exchange Privilege") for which Class A 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 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.
23
<PAGE>
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 enumer-
24
<PAGE>
ated 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.
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 TCW/DW Multi-Class Funds. The sales charge payable on the
purchase of the Class A shares of the Fund and the Class A shares of the other
TCW/DW Multi-Class 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 TCW/DW Multi-Class Funds previously
purchased at a price including a front-end sales charge (including shares of
the Fund, other TCW/DW Multi-Class Funds or "Exchange Funds" (see "Shareholder
Services--Exchange Privilege") 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 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 Class A shares of other TCW/DW Multi-Class 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 other TCW/DW Multi-Class Funds
or shares of "Exchange Funds" (see "Shareholder Services--Exchange Privilege")
acquired in exchange for Class A 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 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
25
<PAGE>
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.
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 record-
26
<PAGE>
keeper 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. 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 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; and
(3) all redemptions of shares held for the benefit of a participant in a
Qualified Retirement Plan which offers investment companies managed by the
Manager or its parent, Morgan Stanley Dean Witter Advisors Inc., 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.
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
27
<PAGE>
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
TCW/DW 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 TCW/DW
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 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
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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, administrative and/or brokerage 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) certain
Unit Investment Trusts sponsored by DWR; (iv) certain other open-end investment
companies whose shares are distributed by the Distributor; and (v) 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 TCW/DW 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 shares in all TCW/DW Multi-Class Funds,
and holdings of shares of "Exchange Funds" (see "Shareholder Services--Exchange
Privilege") for which Class A 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 shareholder 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 May 31, 1998, Class B shares of the Fund
accrued payments under the Plan
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amounting to $1,206,683, which amount is equal to 0.80% of the average daily
net assets of Class B for the fiscal year. The payments accrued under the Plan
were calculated pursuant to clause (a) of the compensation formula under the
Plan. All shares held prior to July 28, 1997 have been designated Class B
shares. For the fiscal period July 28, 1997 through May 31, 1998, Class A and
Class C shares of the Fund accrued payments under the Plan amounting to $736
and $2,932, respectively, which amounts on an annualized basis are equal to
0.24% and 1.00% of the average daily net assets of Class A and Class C,
respectively, for such period.
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 $7,673,197 at May 31, 1998, which was equal to 4.64% 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
Advisors and other Selected Broker-Dealer representatives 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 $2,395 in the case
of Class C at December 31, 1997, which was equal to 0.71% 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 (or, on days when the New York Stock Exchange closes prior to 4:00
p.m., at such earlier time), on each day that the New York Stock Exchange is
open by taking the 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 (if there were no sales that day, the security is valued at
the latest bid price); and (2) all other portfolio securities for which
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over-the-counter market quotations are readily available are valued at the
latest bid price. When market quotations are not readily available, including
circumstances under which it is determined by the Adviser that sale or bid
prices are not reflective of a security's market value, portfolio securities
are valued at their fair value as determined in good faith under procedures
established by and under the general supervision of the Board of Trustees. For
valuation purposes, quotations of foreign portfolio securities, other assets
and liabilities and forward contracts stated in foreign currency are translated
into U.S. dollar equivalents at the prevailing market rates prior to the close
of the New York Stock Exchange as of the morning of valuation. Dividends
receivable are accrued as of the ex-dividend date or as of the time that the
relevant ex-dividend date and amounts become known.
Short-term debt securities with remaining maturities of 60 days or less
at the time of purchase are valued at amortized cost, unless the Trustees
determine such does not reflect the securities' market value, in which case
these securities will be valued at their fair value as determined by the
Trustees. Other short-term debt securities will be valued on a mark-to-market
basis until such time as they reach a remaining maturity of 60 days, whereupon
they will be valued at amortized cost using their value on the 61st day unless
the Trustees determine such does not reflect the securities' market value, in
which case these securities will be valued at their fair value as determined by
the Trustees. All other securities and other assets are valued at their fair
value as determined in good faith under procedures established by and under the
supervision of the Trustees.
Certain of the Fund's portfolio securities may be valued by an outside
pricing service approved by the Fund's Trustees. The pricing service may
utilize a matrix system incorporating security quality, maturity and coupon as
the evaluation model parameters, and/or research evaluations by its staff,
including review of broker-dealer market price quotations, in determining what
the pricing service believes is the fair valuation of such portfolio
securities.
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 TCW/DW 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 "Repurchases and Redemptions").
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 per share next determined after receipt
by the Transfer Agent, by returning the check or the proceeds to the Transfer
Agent within 30 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 "Repurchases and Redemptions").
EasyInvestSM. 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 Fund's Transfer Agent for
investment in shares of the Fund (see "Purchase of Fund Shares" and
"Repurchases and Redemptions--Involuntary Redemption").
Systematic Withdrawal Plan. A systematic withdrawal plan (the
"Withdrawal Plan") is available for shareholders who own or purchase shares of
the Fund having a minimum value of $10,000 based upon the then current net
asset value. The Withdrawal Plan provides for monthly or quarterly (March,
June, September and December) checks in any dollar amount, not less than $25,
or in any whole percentage of the account balance, on an annualized basis. Any
applicable CDSC will be imposed on shares redeemed
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under the Withdrawal Plan (See "Purchase of Fund Shares"). Therefore, 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 or quarterly amount.
Withdrawal plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted. Each withdrawal constitutes a
redemption of shares and any gain or loss realized must be recognized for
federal income tax purposes.
Shareholders should contact their Morgan Stanley Dean Witter Financial
Advisor or other Selected Broker-Dealer representative or the Transfer Agent
for information about any of the above services.
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 adviser.
For further information regarding plan administration, custodial fees
and other details, investors should contact their account executive or the
Transfer Agent.
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class of
any other TCW/DW Multi-Class Fund without the imposition of any exchange fee.
Shares may also be exchanged for shares of TCW/DW North American Government
Income Trust and for shares of five money market funds for which MSDW Advisors
serves as investment manager: Morgan Stanley Dean Witter Liquid Asset Fund
Inc., Morgan Stanley Dean Witter U.S. Government Money Market Trust, Morgan
Stanley Dean Witter Tax-Free Daily Income Trust, Morgan Stanley Dean Witter
California Tax-Free Daily Income Trust and Morgan Stanley Dean Witter New York
Municipal Money Market Trust (the foregoing six funds are hereinafter
collectively referred to as "Exchange 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 TCW/DW Multi-Class 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 or any other TCW/DW 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
TCW/DW Multi-Class 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 TCW/DW 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 TCW/DW Multi-Class
Fund are reacquired. Thus, the CDSC is based upon the time (calculated as
described above) the shareholder was invested in shares of a TCW/DW Multi-Class
Fund (see "Purchase of Fund Shares"). However, in the case of shares exchanged
into an Exchange Fund, upon a redemption of shares which results in a CDSC
being imposed, a credit (not to exceed the amount of the CDSC) will be given in
an amount equal to the Exchange Fund 12b-1 distribution fees which are
attributable to those shares. (Exchange Fund 12b-1 distribution fees are
described in the prospectuses for those funds.)
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Additional Information Regarding Exchanges. Purchases and exchanges
should be made for investment purposes only. A pattern of frequent exchanges
may be deemed by the Manager to be abusive and contrary to the best interests
of the Fund's other shareholders and, at the Manager's discretion, may be
limited by the Fund's refusal to accept additional purchases and/or exchanges
from the investor. Although the Fund does not have any specific definition of
what constitutes a pattern of frequent exchanges, and will consider all
relevant factors in determining whether a particular situation is abusive and
contrary to the best interests of the Fund and its other shareholders,
investors should be aware that the Fund, each of the other TCW/DW Funds and
each of the money market funds may in its discretion limit or otherwise
restrict the number of times this Exchange Privilege may be exercised by any
investor. Any such restriction will be made by the Fund on a prospective basis
only, upon notice to the shareholder not later than ten days following such
shareholder's most recent exchange. Also, the Exchange Privilege may be
terminated or revised at any time by the Fund and/or any of such other TCW/DW
Funds or money market 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 examine it
carefully before investing. Exchanges are subject to the minimum investment
requirement of each Class of Shares and any other conditions imposed by each
fund. In the case of 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 may realize a
capital gain or loss. However, the ability to deduct capital losses on an
exchange may be limited in situations where there is an exchange of shares
within ninety days after the shares are purchased. The Exchange Privilege is
only available in states where an exchange may legally be made.
If DWR or another Selected Broker-Dealer is the current dealer of record
and its account numbers are part of the account information, shareholders may
initiate an exchange of shares of the Fund for shares of any of the funds for
which the Exchange Privilege is available 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 shareholders who are clients of DWR
or another Selected Broker-Dealer but who wish to make exchanges directly by
writing or telephoning the Transfer Agent) must complete and forward to the
Transfer Agent an Exchange Privilege Authorization Form, copies of which may be
obtained from the Transfer Agent, to initiate an exchange. If the Authorization
Form is used, exchanges may be made in writing or by contacting the Transfer
Agent at (800) 869-NEWS (toll-free). The Fund will employ reasonable procedures
to confirm that exchange instructions communicated over the telephone are
genuine. Such procedures 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 will 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
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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
in the past with other funds managed by the Manager.
Shareholders should contact their Morgan Stanley Dean Witter Financial
Advisor or other Selected Broker-Dealer representative or the Transfer Agent
for further information about the Exchange Privilege.
REPURCHASES AND REDEMPTIONS
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Repurchases. DWR and other Selected Dealers are authorized to repurchase
shares represented by a share certificate which is delivered to any of their
offices. Shares held in a shareholder's account without a share certificate may
also be repurchased by DWR and other Selected Broker-Dealers upon the
telephonic or telegraphic request of the shareholder. The repurchase price is
the net asset value per share next computed (see "Purchase of Fund Shares")
after such repurchase order is received by DWR or other Selected Broker-Dealer,
reduced by any applicable CDSC.
The CDSC, if any, will be the only fee imposed by the Fund or the
Distributor. The offers 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 below under "Redemptions."
Redemptions. 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 information required by the Transfer Agent.
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 redemptionproceeds 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
repurchased or redeemed and has not previously exercised this reinstatement
privilege may, within 35 days after the date of the repurchase or redemption,
reinstate any portion or all of the proceeds of such repurchase or redemption
in shares of the Fund in the same Class from which such shares were redeemed or
repurchased, at net asset value next determined after a reinstatement request,
together with the proceeds, is received by the Transfer Agent and receive a
prorata credit for any CDSC paid in connection with such repurchase or
redemption.
Involuntary Redemption. The Fund reserves the right, on 60 days' notice,
to redeem, at their 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 due to redemptions
by the shareholder have a value of less than $100 or such lesser amount as may
be fixed by the 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
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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 him or her 60 days to make an additional investment in an
amount which will increase the value of his or her 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
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Dividends and Distributions. The Fund declares dividends separately for
each Class of shares and intends to pay dividends and to distribute
substantially all of its net investment income and net short-term and net
long-term capital gains, if any, at least once each year. The Fund may,
however, determine 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 and/or distributions 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 capital gains to shareholders and otherwise qualify 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 income taxes, on the dividends and
distributions they receive from the Fund. Such dividends and distributions, to
the extent that they are derived from net investment income or net short-term
capital gains, are taxable to the shareholder as ordinary income regardless of
whether the shareholder receives such payments in additional shares or in cash.
Any dividends declared with a record date 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.
Dividend payments will generally not be eligible for the federal dividends
reduced deduction.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder
has held the Fund's shares and regardless of whether the distribution is
received in additional shares or in cash. The Fund is subject to foreign
withholding taxes and the pass through of such taxes may not be available to
shareholders.
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 will 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 to the applicability of
the foregoing to their current situation.
35
<PAGE>
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
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 one, five
and ten years or the life of the Fund, if less than any of the foregoing.
Average annual total return reflects all income earned by the Fund, any
appreciation or depreciation of the Fund's assets, all expenses incurred by the
applicable Class and all sales charges which would be incurred by shareholders,
for the period.
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,
and year-by-year or other types of total return figures. Such calculations may
or may not reflect the deduction of any sales charge which, if reflected, would
reduce the performance quoted. 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. The Fund from time to time may also advertise its
performance relative to certain performance rankings and indexes compiled by
independent organizations (such as mutual fund performance rankings of Lipper
Analytical Services, Inc.).
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Voting Rights. All shares of beneficial interest of the Fund are of
$0.01 par value and are equal as to earnings, assets and voting privileges
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 circumstances, be held personally liable as partners for obligations of
the Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that Fund
obligations include such disclaimer, and provides for indemnification and
reimbursement of expenses out of the Fund's property for any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Given the above limitation on shareholder personal liability, and
the nature of the Fund's assets and operations, the possibility of the Fund
being unable to meet its obligations is remote and thus, in the opinion of
Massachusetts counsel to the Fund, the risk to Fund shareholders of personal
liability is remote.
Code of Ethics. The Adviser is subject to a Code of Ethics with respect
to investment transactions in
36
<PAGE>
which the Adviser's officers, directors and certain other persons have a
beneficial interest to avoid any actual or potential conflict or abuse of their
fiduciary position. The Code of Ethics, as it pertains to the TCW/DW Funds,
contains several restrictions and procedures designed to eliminate conflicts of
interest including: (a) pre-clearance of personal investment transactions to
ensure that personal transactions by employees are not being conducted at the
same time as the Adviser's clients; (b) quarterly reporting of personal
securities transactions; (c) a prohibition against personally acquiring
securities in an initial public offering, entering into uncovered short sales
and writing uncovered options; (d) a seven day "blackout period" prior or
subsequent to a TCW/DW Fund transaction during which portfolio managers are
prohibited from making certain transactions in securities which are being
purchased or sold by a TCW/DW Fund; (e) a prohibition, with respect to certain
investment personnel, from profiting in the purchase and sale, or sale and
purchase, of the same (or equivalent) securities within 60 calendar days; and
(f) a prohibition against acquiring any security which is subject to firm wide
or, if applicable, a department restriction of the Adviser. The Code of Ethics
provides that exemptive relief may be given from certain of its requirements,
upon application. The Adviser's Code of Ethics complies with regulatory
requirements and, insofar as it relates to persons associated with registered
investment companies, the 1994 Report of the Advisory Group on Personal
Investing of the Investment Company Institute.
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.
37
<PAGE>
TCW/DW GLOBAL TELECOM TRUST
Two World Trade Center
New York, New York 10048
T C W / D W
TRUSTEES
John C. Argue
Richard M. DeMartini
Charles A. Fiumefreddo
John R. Haire G L O B A L
Dr. Manuel H. Johnson
Thomas E. Larkin, Jr. T E L E C O M T R U S T
Michael E. Nugent
John L. Schroeder
Marc I. Stern
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Thomas E. Larkin, Jr.
President
Barry Fink
Vice President, Secretary and
General Counsel
Robert M. Hanisee
Vice President
John A. Healey
Vice President
Thomas F. Caloia
Treasurer
CUSTODIAN
The Chase Manhattan Bank
One Chase Plaza
New York, NY 10005
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
P R O S P E C T U S
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas J U L Y 3 1 , 1 9 9 8
New York, New York 10036
MANAGER
Morgan Stanley Dean Witter Services Company Inc.
ADVISER
TCW Funds Management, Inc.
<PAGE>
TCW/DW GLOBAL TELECOM
TRUST
STATEMENT OF ADDITIONAL INFORMATION
July 31, 1998
- --------------------------------------------------------------------------------
TCW/DW Global Telecom Trust (the "Fund") is an open-end, diversified
management investment company, whose investment objective is long-term capital
appreciation. The Fund seeks to achieve its investment objective by investing
primarily in a portfolio consisting of securities of domestic and foreign
companies operating in all aspects of the telecommunications and information
industries (the "Target Industries"). See "Investment Objective and Policies"
in the Prospectus.
A Prospectus for the Fund dated July 31, 1998, which provides basic
information you should know before investing in the Fund, may be obtained
without charge from the Fund at the address or telephone numbers listed below
or from the Fund's Distributor, Morgan Stanley Dean Witter Distributors Inc.,
or from Dean Witter Reynolds Inc. at any of its branch offices. This Statement
of Additional Information is not a Prospectus. It contains information in
addition to and more detailed than that set forth in the Prospectus. It is
intended to provide additional information regarding the activities and
operations of the Fund, and should be read in conjunction with the Prospectus.
TCW/DW Global Telecom Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The Fund and its Management ............................................. 3
Trustees and Officers ................................................... 6
Investment Practices and Policies ....................................... 12
Investment Restrictions ................................................. 25
Portfolio Transactions and Brokerage .................................... 26
The Distributor ......................................................... 27
Purchase of Fund Shares ................................................. 32
Shareholder Services .................................................... 34
Repurchases and Redemptions ............................................. 38
Dividends, Distributions and Taxes ...................................... 39
Performance Information ................................................. 40
Description of Shares ................................................... 41
Custodian and Transfer Agent ............................................ 42
Independent Accountants ................................................. 42
Reports to Shareholders ................................................. 42
Legal Counsel ........................................................... 42
Experts ................................................................. 42
Registration Statement .................................................. 42
Financial Statements -- May 31, 1998 .................................... 43
Report of Independent Accountants ....................................... 59
Appendix ................................................................ 60
</TABLE>
2
<PAGE>
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
THE FUND
The Fund is a trust of the type commonly known as a "Massachusetts
business trust" and was organized under the laws of the Commonwealth of
Massachusetts on March 28, 1996. The Fund is one of the TCW/DW Funds, which
currently consist, in addition to the Fund, of TCW/DW Small Cap Growth Fund,
TCW/DW North American Government Income Trust, TCW/DW Latin American Growth
Fund, TCW/DW Term Trust 2002, TCW/DW Income and Growth Fund, TCW/DW Term Trust
2003, TCW/DW Term Trust 2000, TCW/DW Emerging Markets Opportunities Trust,
TCW/DW Total Return Trust and TCW/DW Mid-Cap Equity Trust.
THE MANAGER
Morgan Stanley Dean Witter Services Company Inc. (the "Manager"), a
Delaware corporation, whose address is Two World Trade Center, New York, New
York 10048, is the Fund's Manager. The Manager is a wholly-owned subsidiary of
Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors"), a Delaware
corporation. MSDW Advisors is a wholly-owned subsidiary of Morgan Stanley Dean
Witter & Co. ("MSDW"), a Delaware corporation. The daily management of the Fund
is conducted by or under the direction of officers of the Fund and of the
Manager and Adviser (see below), subject to review by the Fund's Board of
Trustees. Information as to these Trustees and officers is contained under the
caption "Trustees and Officers."
Pursuant to a management agreement (the "Management Agreement") with the
Manager, the Fund has retained the Manager to manage the Fund's business
affairs, supervise the overall day-to-day operations of the Fund (other than
rendering investment advice) and provide all administrative services to the
Fund. Under the terms of the Management Agreement, the Manager also maintains
certain of the Fund's books and records and furnishes, at its own expense, such
office space, facilities, equipment, supplies, clerical help and bookkeeping
and certain legal services as the Fund may reasonably require in the conduct of
its business, including the preparation of prospectuses, statements of
additional information, proxy statements and reports required to be filed with
federal and state securities commissions (except insofar as the participation
or assistance of independent accountants and attorneys is, in the opinion of
the Manager, necessary or desirable). In addition, the Manager pays the
salaries of all personnel, including officers of the Fund, who are employees of
the Manager. The Manager also bears the cost of the Fund's telephone service,
heat, light, power and other utilities.
As full compensation for the services and facilities furnished to the Fund
and expenses of the Fund assumed by the Manager, the Fund pays the Manager
monthly compensation calculated daily by applying the annual rate of 0.60% to
the daily net assets of the Fund determined as of the close of each business
day. The management fee is allocated among the classes pro rata based on the
net assets of the Fund attributable to each Class. While the total fees payable
under the Management Agreement and the Advisory Agreement (described below) are
higher than that paid by most other investment companies for similar services,
the Board of Trustees determined that the total fees payable under the
Management Agreement and the Advisory Agreement (described below) are
reasonable in relation to the scope and quality of services to be provided
thereunder. In this regard, in evaluating the Management Agreement and the
Advisory Agreement, the Board of Trustees recognized that the Manager and the
Adviser had, pursuant to an agreement described under the section entitled "The
Adviser," agreed to a division as between themselves of the total fees
necessary for the management of the business affairs of and the furnishing of
investment advice to the Fund. Accordingly, in reviewing the Management
Agreement and Advisory Agreement, the Board viewed as most significant the
question as to whether the total fees payable under the Management and Advisory
Agreements were in the aggregate reasonable in relation to the services to be
provided thereunder.
For the period August 28, 1996 (commencement of operations) through May
31, 1997 and for the fiscal year ended May 31, 1998, the Fund accrued to the
Manager total compensation under the Management Agreement in the amount of
$474,078 and 910,689, respectively.
The Management Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Manager is not liable to the Fund or any of its
investors for any act or omission by the Manager or for any losses sustained by
the Fund or its investors. The Management Agreement in no way restricts the
Manager from acting as manager to others.
3
<PAGE>
MSDW Advisors paid the organizational expenses of the Fund (approximately
$158,225) incurred prior to the offering of the Fund's shares. The Fund has
agreed to reimburse MSDW Advisors such expenses. These expenses will be
deferred by the Fund and amortized on the straight line method over a period
not to exceed five years from the date of commencement of the Fund's
operations.
The Management Agreement was approved by the Trustees on April 17, 1996
and became effective on that date. It was approved by MSDW Advisors as the then
sole shareholder on April 18, 1996. The Management Agreement may be terminated
at any time, without penalty, on thirty days' notice by the Trustees of the
Fund, or by the Manager.
Under its terms, the Management Agreement had an initial term ending April
30, 1997, and provides that it will continue in effect from year to year
thereafter, provided continuance of the Agreement is approved at least annually
by the vote of the Trustees of the Fund, including the vote of a majority of
the Trustees of the Fund who are not parties to the Management or Advisory
Agreement or "interested persons" (as defined in the Investment Company Act of
1940, as amended (the "Act")) of any such party (the "Independent Trustees").
At a meeting held on April 30, 1998, the Board of Trustees, including a
majority of the Independent Trustees, approved continuation of the Management
Agreement until April 30, 1999.
THE ADVISER
TCW Funds Management, Inc. (the "Adviser") is a wholly-owned subsidiary of
The TCW Group, Inc. ("TCW"), whose direct and indirect subsidiaries, including
Trust Company of the West and TCW Asset Management Company, provide a variety
of trust, investment management and investment advisory services. As of June
30, 1998, the Adviser and its affiliates had $50 billion under management or
committed to management. Trust Company of the West and its affiliates have
managed equity securities portfolios for institutional investors since 1971.
The Adviser is headquartered at 865 South Figueroa Street, Suite 1800, Los
Angeles, California 90017 and is registered as an investment adviser under the
Investment Advisers Act of 1940. In addition to the Fund, the Adviser serves as
investment adviser or co-adviser to ten other TCW/DW Funds: TCW/DW Small Cap
Growth Fund, TCW/DW North American Government Income Trust, TCW/DW Latin
American Growth Fund, TCW/DW Term Trust 2002, TCW/DW Income and Growth Fund,
TCW/DW Term Trust 2003, TCW/DW Term Trust 2000, TCW/DW Emerging Markets
Opportunities Trust, TCW/DW Total Return Trust and TCW/DW Mid-Cap Equity Trust.
The Adviser also serves as investment adviser to TCW Convertible Securities
Fund, Inc., a closed-end investment company listed on the New York Stock
Exchange, and to TCW Galileo Funds, Inc., an open-end management investment
company, and acts as adviser or sub-adviser to other investment companies.
Robert A. Day, who is Chairman of the Board of Directors of TCW, may be
deemed to be a control person of the Adviser by virtue of the aggregate
ownership of Mr. Day and his family of more than 25% of the outstanding voting
stock of TCW.
Pursuant to an investment advisory agreement (the "Advisory Agreement")
with the Adviser, the Fund has retained the Adviser to invest the Fund's
assets, including the placing of orders for the purchase and sale of portfolio
securities. The Adviser obtains and evaluates such information and advice
relating to the economy, securities markets, and specific securities as it
considers necessary or useful to continuously manage the assets of the Fund in
a manner consistent with its investment objective. In addition, the Adviser
pays the salaries of all personnel, including officers of the Fund, who are
employees of the Adviser.
As full compensation for the services and facilities furnished to the Fund
and expenses of the Fund assumed by the Adviser, the Fund pays the Adviser
monthly compensation calculated daily by applying the annual rate of 0.40% to
the daily net assets of the Fund determined as of the close of each business
day. Total compensation accrued to the Adviser for the period August 28, 1996
through May 31, 1997 and for the fiscal year ended May 31, 1998 amounted to
$316,052 and 607,126, respectively.
The Advisory Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Adviser is not liable to the Fund or any of its
investors for any act or omission by the Adviser or for any losses sustained by
the Fund or its investors. The Advisory Agreement in no way restricts the
Adviser from acting as investment adviser to others.
4
<PAGE>
The Advisory Agreement was approved by the Trustees on April 17, 1996 and
by InterCapital as the then sole shareholder on April 18, 1996. The Advisory
Agreement may be terminated at any time, without penalty, on thirty days'
notice by the Trustees of the Fund, by the holders of a majority, as defined in
the Act, of the outstanding shares of the Fund, or by the Adviser. The
Agreement will automatically terminate in the event of its assignment (as
defined in the Act).
Under its terms, the Advisory Agreement had an initial term ending April
30, 1997, and will continue from year to year thereafter, provided continuance
of the Agreement is approved at least annually by the vote of the holders of a
majority, as defined in the Act, of the outstanding shares of the Fund, or by
the Trustees of the Fund; provided that in either event such continuance is
approved annually by the vote of a majority of the Independent Trustees of the
Fund, which vote must be cast in person at a meeting called for the purpose of
voting on such approval.
Expenses not expressly assumed by the Manager under the Management
Agreement, by the Adviser under the Advisory Agreement or by the Distributor of
the Fund's shares, Morgan Stanley Dean Witter Distributors Inc. ("MSDW
Distributors" or the "Distributor") (see "The Distributor"), will be paid by
the Fund. These expenses will be allocated among the four classes of shares of
the Fund (each, a "Class") pro rata based on the net assets of the Fund
attributable to each Class, except as described below. Such expenses include,
but are not limited to: expenses of the Plan of Distribution pursuant to Rule
12b-1 (the "12b-1 fee") (see "The Distributor"); charges and expenses of any
registrar; custodian, stock transfer and dividend disbursing agent; brokerage
commissions and securities transaction costs; taxes; engraving and printing of
share certificates; registration costs of the Fund and its shares under federal
and state securities laws; the cost and expense of printing, including
typesetting, and distributing Prospectuses and Statements of Additional
Information of the Fund and supplements thereto to the Fund's shareholders; all
expenses of shareholders' and trustees' meetings and of preparing, printing and
mailing of proxy statements and reports to shareholders; fees and travel
expenses of trustees or members of any advisory board or committee who are not
employees of the Manager or Adviser or any corporate affiliate of either; all
expenses incident to any dividend, withdrawal or redemption options; charges
and expenses of any outside service used for pricing of the Fund's shares; fees
and expenses of legal counsel, including counsel to the Trustees who are not
interested persons of the Fund or of the Manager or the Adviser (not including
compensation or expenses of attorneys who are employees of the Manager or the
Adviser) and independent accountants; membership dues of industry associations;
interest on Fund borrowings; postage; insurance premiums on property or
personnel (including officers and trustees) of the Fund which inure to its
benefit; extraordinary expenses (including, but not limited to, legal claims
and liabilities and litigation costs and any indemnification relating thereto);
and all other costs of the Fund's operation. The 12b-1 fees relating to a
particular Class will be allocated directly to that Class. In addition, other
expenses associated with a particular Class (except advisory or custodial fees)
may be allocated directly to that Class, provided that such expenses are
reasonably identified as specifically attributable to that Class and the direct
allocation to that Class is approved by the Trustees.
The following owned 5% or more of the outstanding shares of Class A on
June 30, 1998: James P. Rogers, 4628 IDS Center, 80 South Eighth Street,
Minneapolis, MN 55402, K-Gam Limited Partnership, 6061 E. Broadway, Suite 130,
Tucson, AZ 85711. The following owned 5% or more of the outstanding shares of
Class C on June 30, 1998: Michael J. Griffin & Joyce A. Bertoldo JTTEJ, 28
Spring Hill Road, Cold Spring Harbor, NY 11724, Dorain Grusman & Ben Grusman &
Anna Grusman JTTEN, 7919 Oceanus Drive, Los Angeles, CA 90046, Dean Witter
Reynolds Cust for William T. Drobick, IRA Standard dated 4/28/97, 3233 Sutton
Court, Fremont, CA 94536. The following owned 5% or more of the outstanding
shares of Class D on June 30, 1998: Morgan Stanley Dean Witter Advisors, Inc.,
Attn: Maurice Bendrihem, 2 World Trade Center, 73rd Floor, New York, NY 10048.
The following owned 25% or more of the outstanding shares of Class A on June
30, 1998: James P. Rogers, 4628 IDS Center, 80 South Eighth Street,
Minneapolis, MN 55402. The following owned 25% or more of the outstanding
shares of Class D on June 30, 1998: Morgan Stanley Dean Witter Advisors, Inc.,
Attn: Maurice Bendrihem, 2 World Trade Center, 73rd Floor, New York, NY 10048.
The Fund has acknowledged that each of DWR and TCW owns its own name,
initials and logo. 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
Fund has agreed to change its name at the request of either the Manager or the
Adviser, if the Management Agreement between the Manager and the Fund or the
Advisory Agreement between the Adviser and the Fund is terminated.
5
<PAGE>
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The Trustees and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with the
Manager or the Adviser, and the affiliated companies of either, and the 11
TCW/DW Funds and with the 86 investment companies of which MSDW Advisors serves
as investment manager or investment adviser (the "Morgan Stanley Dean Witter
Funds"), are shown below.
<TABLE>
<CAPTION>
Name, Age, Position with Fund and Address Principal Occupation During Last Five Years
- ------------------------------------------- ------------------------------------------------------------
<S> <C>
John C. Argue (66) Of Counsel, Argue Pearson Harbison & Myers (law firm);
Trustee Director, Avery Dennison Corporation (manufacturer of
c/o Argue Pearson Harbison & Myers self-adhesive products and office supplies), CalMat
801 South Flower Street Company (producer of aggregates, asphalt and ready
Los Angeles, California mixed concrete); Chairman, Director, Apex Mortgage
Capital, Inc. and Nationwide Health Properties, Inc. (each
real estate investment trusts); advisory director, LAACO
Ltd. (owner and operator of private clubs and real estate);
director or trustee of various business and not-for-profit
corporations; Director, TCW Galileo Funds, Inc.; Trustee
of the TCW/DW Funds.
Richard M. DeMartini* (45) President and Chief Operating Officer of Morgan
Trustee Stanley Dean Witter Individual Asset Management
Two World Trade Center Group, a division of DWR; Director of DWR, the
New York, New York Manager, MSDW Advisors, Morgan Stanley Dean
Witter Distributors and Morgan Stanley Dean Witter
Trust FSB ("MSDW Trust"); Executive Vice President
of Morgan Stanley Dean Witter & Co. ("MSDW");
Trustee of the TCW/DW Funds and the Van Kampen
American Capital Funds; Director and/or officer of
various MSDW subsidiaries; formerly Vice Chairman
of the Board of the National Association of Securities
Dealers, Inc.; and Chairman of the Board of Directors
of the Nasdaq Market, Inc.
Charles A. Fiumefreddo* (65) Chairman, Chief Executive Officer and Trustee of the
Chairman of the Board, Chief TCW/DW Funds; Chairman, Director or Trustee,
Executive Officer and Trustee President and Chief Executive Officer of the Morgan
Two World Trade Center Stanley Dean Witter Funds; formerly Chairman, Chief
New York, New York Executive Officer and Director of MSDW Advisors,
MSDW Distributors and MSDW Services, Executive
Vice President and Director of Dean Witter Reynolds
Inc. ("DWR"), Chairman and Director of Morgan
Stanley Dean Witter Trust FSB ("MSDW Trust"), and
Director and/or officer of various MSDW subsidiaries
(until June, 1998).
John R. Haire (73) Chairman of the Audit Committee and Director or
Trustee Trustee of the TCW/DW Funds; Chairman of the
Two World Trade Center Audit Committee and Director or Trustee of the
New York, New York Morgan Stanley Dean Witter Funds; formerly Chairman
of the Committee of the Independent Directors or
Trustees of the Morgan Stanley Dean Witter Funds and
the TCW/DW Funds (until June, 1998); formerly
President, Council for Aid to Education (1978-1989)
and Chairman and Chief Executive Officer of Anchor
Corporation, an Investment Adviser (1964-1978).
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Name, Age, Position with Fund and Address Principal Occupation During Last Five Years
- ------------------------------------------- -------------------------------------------------------
<S> <C>
Dr. Manuel H. Johnson (49) Senior Partner, Johnson Smick International, Inc., a
Trustee consulting firm; Co-Chairman and a founder of the
c/o Johnson Smick International, Inc. Group of Seven Council (G7C), an international
1133 Connecticut Avenue, N.W. economic commission; Director or Trustee of the
Washington D.C. Morgan Stanley Dean Witter Funds; Trustee of
the TCW/DW Funds; Chairman and Trustee of
the Financial Accounting Foundation (oversight
organization for the Financial Accounting Standards
Board); Director of NASDAQ Market, Inc. (since June,
1995); Director of Greenwich Capital Markets, Inc.
(broker-dealer) and NVR Inc. (home construction);
Chairman and Trustee of the Financial Accounting
Foundation (oversight organization for the Financial
Accounting Standards Board); formerly Vice Chairman
of the Board of Governors of the Federal Reserve
System (1986-1990) and Assistant Secretary of the U.S.
Treasury (1982-1986).
Thomas E. Larkin, Jr.* (58) Executive Vice President and Director, The TCW
President and Trustee Group, Inc.; President and Director of Trust Company
865 South Figueroa Street of the West; Vice Chairman and Director of TCW
Los Angeles, California Asset Management Company; Chairman of the Adviser;
President and Director of TCW Galileo Funds, Inc.;
Senior Vice President of TCW Convertible Securities
Fund, Inc.; President and Trustee of the TCW/DW
Funds; Member of the Board of Trustees of the
University of Notre Dame; Director of Orthopaedic
Hospital of Los Angeles.
Michael E. Nugent (62) General Partner, Triumph Capital, L.P., a private
Trustee investment partnership; Trustee of the TCW/DW
c/o Triumph Capital, L.P. Funds; Director or Trustee of the Morgan Stanley
237 Park Avenue Dean Witter Funds; formerly Vice President, Bankers
New York, New York Trust Company and BT Capital Corporation (1984-
1988); Director of various business organizations.
John L. Schroeder (67) Retired; Director or Trustee of the Morgan Stanley
Trustee Dean Witter Funds; Trustee of the TCW/DW Funds;
c/o Gordon Altman Butowsky Director of Citizens Utilities Company; formerly
Weitzen Shalov & Wein Executive Vice President and Chief Investment Officer
Counsel to the Independent Trustees of the Home Insurance Company (August, 1991-
114 West 47th Street September, 1995).
New York, New York
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Name, Age, Position with Fund and Address Principal Occupation During Last Five Years
- ------------------------------------------- -----------------------------------------------------------
<S> <C>
Marc I. Stern* (54) President and Director, The TCW Group, Inc.;
Trustee President and Director of the Adviser; Vice Chairman
865 South Figueroa Street and Director of TCW Asset Management Company;
Los Angeles, California Executive Vice President and Director of Trust
Company of the West; Chairman and Director of
TCW Galileo Funds, Inc.; Trustee of the TCW/DW
Funds; Chairman of TCW Americas Development,
Inc.; Chairman of TCW Asia, Limited; Chairman of
TCW London International, Limited; Chairman, Apex
Mortgage Capital Inc. (a real estate investment trust);
formerly President of SunAmerica, Inc. (financial
services company); Director of Qualcomm, Incorporated
(wireless communications); director or trustee of various
not-for-profit organizations.
Barry Fink (43) Senior Vice President (since March, 1997); Secretary
Vice President, Secretary and General Counsel (since February, 1997) and
and General Counsel Director (since July, 1998) of the Manager and MSDW
Two World Trade Center Advisors; Senior Vice President (since March, 1997)
New York, New York and Assistant Secretary and Assistant General Counsel
(since February, 1997) of MSDW Distributors; Assistant
Secretary of DWR (since August, 1996); Vice President,
Secretary and General Counsel of the Morgan Stanley
Dean Witter Funds and the TCW/DW Funds (since
February, 1997); previously First Vice President (June,
1993-February, 1997), Vice President (until June, 1993)
and Assistant Secretary and Assistant General Counsel
of the Manager and MSDW Advisors Assistant Secretary
of the Morgan Stanley Dean Witter Funds and the
TCW/DW Funds.
Robert M. Hanisee (60) Managing Director of the Adviser; Managing Director,
Vice President Director of Research and Chairman of the Equity
865 South Figueroa Street Policy Committee of Trust Company of the West and
Los Angeles, California TCW Asset Management Company; Vice President of
TCW/DW Income and Growth Fund and TCW/DW
Core Equity Trust.
John A. Healey (62) Managing Director of the Adviser (since April, 1996);
Vice President previously, Senior Advisor with the Adviser (since 1995);
865 South Figueroa Street formerly, independent consultant with Healey Partners
Los Angeles, California (financial services firm until 1995); formerly director of
Emerging Markets Country Investment Trust Plc.
Thomas F. Caloia (52) First Vice President and Assistant Treasurer of the
Treasurer Manager and MSDW Advisors; Treasurer of the
Two World Trade Center TCW/DW Funds and the Morgan Stanley Dean Witter
New York, New York Funds.
</TABLE>
- ----------
* Denotes Trustees who are "interested persons" of the Fund, as defined in
the Act.
8
<PAGE>
In addition, Mitchell M. Merin, President, Chief Executive Officer and
Director of MSDW Advisors and MSDW Services, Chairman and Director of MSDW
Distributors and MSDW Trust, Executive Vice President and Director of DWR, and
Director of SPS Transaction Services, Inc. and various other MSDW subsidiaries,
Robert M. Scanlan, President, Chief Operating Officer and Director of the
Manager and MSDW Advisors, Executive Vice President of MSDW Distributors and
MSDW Trust and Director of MSDW Trust, Robert S. Giambrone, Senior Vice
President of MSDW Advisors, MSDW Services, MSDW Distributors and MSDW Trust and
Director of MSDW Trust, are Vice Presidents of the Fund, and Marilyn K. Cranney
and Carsten Otto, First Vice Presidents and Assistant General Counsels of the
Manager and MSDW Advisors, Frank Bruttomesso, LouAnne D. McInnis and Ruth
Rossi, Vice Presidents and Assistant General Counsels of the Manager and MSDW
Advisors, and Todd Lebo, a Staff Attorney with MSDW Advisors, are Assistant
Secretaries of the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees consists of nine (9) trustees. These same
individuals also serve as trustees for all of the TCW/DW Funds. As of the date
of this Statement of Additional Information, there are a total of 11 TCW/DW
Funds. As of May 31, 1998, the TCW/DW Funds had total net assets of
approximately $50 billion and approximately a quarter of a million
shareholders.
Five Trustees (56% of the total number) have no affiliation or business
connection with TCW Funds Management, Inc. or MSDW Services or any of their
affiliated persons and do not own any stock or other securities issued by MSDW
or TCW, the parent companies of MSDW Services and TCW Funds Management, Inc.,
respectively. These are the "disinterested" or "independent" Trustees. Four of
the five independent Trustees are also Independent Trustees of the Morgan
Stanley Dean Witter Funds.
Law and regulation establish both general guidelines and specific duties
for the Independent Trustees. The TCW/DW Funds seek as Independent Trustees
individuals of distinction and experience in business and finance, government
service or academia; these are people whose advice and counsel are in demand by
others and for whom there is often competition. To accept a position on the
Funds' Boards, such individuals may reject other attractive assignments because
the Funds make substantial demands on their time. Indeed, by serving on the
Funds' Boards, certain Trustees who would otherwise be qualified and in demand
to serve on bank boards would be prohibited by law from doing so.
All of the Independent Trustees serve as members of the Audit Committee.
Three of them also serve as members of the Derivatives Committee. During the
calendar year ended December 31, 1997, the Audit Committee, the Derivatives
Committee and the Independent Trustees held a combined total of sixteen
meetings.
The Independent Trustees are charged with recommending to the full Board
approval of management, advisory and administration contracts, Rule 12b-1 plans
and distribution and underwriting agreements; continually reviewing Fund
performance; checking on the pricing of portfolio securities, brokerage
commissions, transfer agent costs and performance, and trading among Funds in
the same complex; and approving fidelity bond and related insurance coverage
and allocations, as well as other matters that arise from time to time. The
Independent Trustees are required to select and nominate individuals to fill
any Independent Trustee vacancy on the Board of any Fund that has a Rule 12b-1
plan of distribution. Each of the open-end TCW/DW Funds has such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of such services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; and reviewing the adequacy of the Fund's system of internal
controls.
Finally, the Board of each Fund has formed a Derivatives Committee to
approve parameters for and monitor the activities of the Fund with respect to
derivative investments, if any, made by the Fund.
9
<PAGE>
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL
TCW/DW FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the TCW/DW Funds avoids the duplication
of effort that would arise from having different groups of individuals serving
as Independent Trustees for each of the Funds or even of sub-groups of Funds.
They believe that having the same individuals serve as Independent Trustees of
all the Funds tends to increase their knowledge and expertise regarding matters
which affect the Fund complex generally and enhances their ability to negotiate
on behalf of each Fund with the Fund's service providers. This arrangement also
precludes the possibility of separate groups of Independent Trustees arriving
at conflicting decisions regarding operations and management of the Funds and
avoids the cost and confusion that would likely ensue. Finally, having the same
Independent Trustees serve on all Fund Boards enhances the ability of each Fund
to obtain, at modest cost to each separate Fund, the services of Independent
Trustees of the caliber, experience and business acumen of the individuals who
serve as Independent Trustees of the TCW/DW Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Fund pays each Independent Trustee an annual fee of $2,225 plus a per
meeting fee of $200 for meetings of the Board of Trustees, the Independent
Trustees or Committees of the Board of Trustees attended by the Trustee (the
Fund pays the Chairman of the Audit Committee an additional annual fee of $750
). If a Board meeting and a meeting of the Independent Trustees or a Committee
meeting, or a meeting of the Independent Trustees and/or more than one
Committee meeting, take place on a single day, the Trustees are paid a single
meeting fee by the Fund. The Fund also reimburses such Trustees for travel and
other out-of-pocket expenses incurred by them in connection with attending such
meetings. Trustees and officers of the Fund who are or have been employed by
the Manager or the Adviser or an affiliated company of either receive no
compensation or expense reimbursement from the Fund for their services as
Trustee. Mr. Haire currently serves as Chairman of the Audit Committee. Prior
to June 1, 1998, Mr. Haire also served as Chairman of the Independent Trustees,
for which services the Fund paid him an additional annual fee of $1,200. The
Trustees of the TCW/DW Funds do not have retirement or deferred compensation
plans.
The following table illustrates the compensation paid to the Fund's
Independent Trustees by the Fund for the fiscal year ended May 31, 1998.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- --------------------------- -------------
<S> <C>
John C. Argue ................. $5,569
John R. Haire ................. 7,419
Dr. Manuel H. Johnson ......... 5,369
Michael E. Nugent ............. 5,369
John L. Schroeder ............. 5,569
</TABLE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1997 for services
to the 14 TCW/DW Funds and, in the case of Messrs. Haire, Johnson, Nugent and
Schroeder, the 84 Morgan Stanley Dean Witter Funds that were in operation at
December 31, 1997, and, in the case of Mr. Argue, TCW Galileo Funds, Inc. and
TCW Convertible Securities Fund, Inc. Mr. Haire serves as Chairman of the Audit
Committee of each TCW/DW Fund and each Morgan Stanley Dean Witter Fund and,
prior to June 1, 1998, also served as Chairman of the Independent Directors or
Trustees of those Funds. With respect to Messrs. Haire, Johnson, Nugent and
Schroeder, the Morgan Stanley Dean Witter Funds are included solely because of
a limited exchange privilege between various TCW/DW Funds and five Morgan
Stanley Dean Witter Money Market Funds. With respect to Mr. Argue, TCW Galileo
Funds, Inc. and TCW Convertible Securities Fund, Inc. are included solely
because the Fund's Adviser, TCW Funds Management, Inc., also serves as Adviser
to those investment companies.
10
<PAGE>
CASH COMPENSATION FROM FUND GROUPS
<TABLE>
<CAPTION>
FOR SERVICE
AS DIRECTOR OR
FOR SERVICE AS TRUSTEE AND
TRUSTEE AND COMMITTEE FOR SERVICE AS
COMMITTEE MEMBER DIRECTOR OF
MEMBER OF 84 TCW GALILEO
OF 14 MORGAN STANLEY FUNDS, INC. AND
TCW/DW DEAN WITTER TCW CONVERTIBLE
NAME OF INDEPENDENT TRUSTEE FUNDS FUNDS SECURITIES FUND, INC.
- --------------------------- ----- ----- ---------------------
<S> <C> <C> <C>
John C. Argue ............... $71,125 -- $43,250
John R. Haire ............... 73,725 $149,702 --
Dr. Manuel H. Johnson........ 71,125 145,702 --
Michael E. Nugent ........... 73,725 149,702 --
John L. Schroeder ........... 73,725 149,702 --
<CAPTION>
FOR SERVICE AS
CHAIRMAN OF TOTAL
FOR SERVICES AS INDEPENDENT CASH COMPENSATION
CHAIRMAN OF DIRECTORS/ FOR SERVICES TO
INDEPENDENT TRUSTEES 84 MORGAN STANLEY
TRUSTEES AND AUDIT DEAN WITTER
AND AUDIT COMMITTEES FUNDS, 14
COMMITTEES OF 84 TCW/DW FUNDS,
OF 14 MORGAN STANLEY TCW GALILEO FUNDS, INC.
TCW/DW DEAN WITTER AND TCW CONVERTIBLE
NAME OF INDEPENDENT TRUSTEE FUNDS FUNDS SECURITIES FUND, INC.
- --------------------------- ----- ----- ---------------------
<S> <C> <C> <C>
John C. Argue ............... -- -- $114,375
John R. Haire ............... $25,350 $157,463 406,240
Dr. Manuel H. Johnson........ -- -- 216,827
Michael E. Nugent ........... -- -- 223,427
John L. Schroeder ........... -- -- 223,427
</TABLE>
As of the date of this Statement of Additional Information, 57 of the
Morgan Stanley Dean Witter Funds have adopted a retirement program under which
an Independent Trustee who retires after serving for at least five years (or
such lesser period as may be determined by the Board) as an Independent
Director or Trustee of any Morgan Stanley Dean Witter Fund that has adopted the
retirement program (each such Fund referred to as an "Adopting Fund" and each
such Trustee referred to as an "Eligible Trustee") is entitled to retirement
payments upon reaching the eligible retirement age (normally, after attaining
age 72). Annual payments are based upon length of service. Currently, upon
retirement, each Eligible Trustee is entitled to receive from the Adopting
Fund, commencing as of his or her retirement date and continuing for the
remainder of his or her life, an annual retirement benefit (the "Regular
Benefit") equal to 29.41% of his or her Eligible Compensation plus 0.4901667%
of such Eligible Compensation for each full month of service as an Independent
Director or Trustee of any Adopting Fund in excess of five years up to a
maximumof 58.82% after ten years of service. The foregoing percentages may be
changed by the Board.(1) "Eligible Compensation" is one-fifth of the total
compensation earned by such Eligible Trustee for service to the Adopting Fund
in the five year period prior to the date of the Eligible Trustee's retirement.
Benefits under the retirement program are not secured or funded by the Adopting
Funds.
The following table illustrates the retirement benefits accrued to Messrs.
Haire, Johnson, Nugent and Schroeder by the 57 Morgan Stanley Dean Witter Funds
for the year ended December 31, 1997, and the estimated retirement benefits for
Messrs. Haire, Johnson, Nugent and Schroeder, to commence upon their
retirement, from the 57 Morgan Stanley Dean Witter Funds as of December 31,
1997.
RETIREMENT BENEFITS FROM ALL MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
ESTIMATED
CREDITED YEARS ESTIMATED RETIREMENT BENEFITS ESTIMATED ANNUAL BENEFITS
OF SERVICE AT PERCENTAGE OF ACCRUED AS EXPENSES UPON RETIREMENT
RETIREMENT ELIGIBLE BY ALL ADOPTING FROM ALL ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUNDS FUNDS(2)
- --------------------------- ------------ ------------ ----- --------
<S> <C> <C> <C> <C>
John R. Haire .................. 10 58.82% $ (19,823)(3) $132,002
Dr. Manuel H. Johnson .......... 10 58.82 12,832 55,026
Michael E. Nugent .............. 10 58.82 22,546 55,026
John L. Schroeder .............. 8 49.02 39,350 46,123
</TABLE>
- ----------
(1) An Eligible Trustee may elect alternate payments of his or her retirement
benefits based upon the combined life expectancy of such Eligible Trustee
and his or her spouse on the date of such Eligible Trustee's retirement.
The amount estimated to be payable under this method, through the
remainder of the later of the lives of such Eligible Trustee and spouse,
will be the actuarial equivalent of the Regular Benefit. In addition, the
Eligible Trustee may elect that the surviving spouse's periodic payment
of benefits will be equal to either 50% or 100% of the previous periodic
amount, an election that, respectively, increases or decreases the
previous periodic amount so that the resulting payments will be the
actuarial equivalent of the Regular Benefit.
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1)
above.
(3) This number reflects the effect of the extension of Mr. Haire's term as
Director or Trustee until May 1, 1999.
11
<PAGE>
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's
officers and Trustees as a group was less than 1 percent of the Fund's shares
of beneficial interest outstanding.
INVESTMENT PRACTICES AND POLICIES
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES
As discussed in the Prospectus, the Fund may invest in, among other
securities, securities issued by the U.S. Government, its agencies or
instrumentalities. Such securities include:
(1) U.S. Treasury bills (maturities of one year or less), U.S.
Treasury notes (maturities of one to ten years) and U.S. Treasury bonds
(generally maturities of greater than ten years), all of which are direct
obligations of the U.S. Government and, as such, are backed by the "full
faith and credit" of the United States.
(2) Securities issued by agencies and instrumentalities of the U.S.
Government which are backed by the full faith and credit of the United
States. Among the agencies and instrumentalities issuing such obligations
are the Federal Housing Administration, the Government National Mortgage
Association ("GNMA"), the Department of Housing and Urban Development, the
Export-Import Bank, the Farmers Home Administration, the General Services
Administration, the Maritime Administration and the Small Business
Administration. The maturities of such obligations range from three months
to 30 years.
(3) Securities issued by agencies and instrumentalities which are not
backed by the full faith and credit of the United States, but whose
issuing agency or instrumentality has the right to borrow, to meet its
obligations, from an existing line of credit with the U.S. Treasury. Among
the agencies and instrumentalities issuing such obligations are the
Tennessee Valley Authority, the Federal National Mortgage Association
("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and the
U.S. Postal Service. The U.S. Treasury has no legal obligation to provide
such line of credit and may choose not to do so.
(4) Securities issued by agencies and instrumentalities which are not
backed by the full faith and credit of the United States, but which are
backed by the credit of the issuing agency or instrumentality. Among the
agencies and instrumentalities issuing such obligations are the Federal
Farm Credit System and the Federal Home Loan Banks.
Neither the value nor the yield of the U.S. Government securities which
may be invested in by the Fund are guaranteed by the U.S. Government. Such
values and yield will fluctuate with changes in prevailing interest rates and
other factors. Generally, as prevailing interest rates rise, the value of any
U.S. Government securities held by the Fund will fall. Such 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.
MONEY MARKET SECURITIES
As stated in the Prospectus, the money market instruments which the Fund
may purchase include U.S. Government securities, bank obligations, Eurodollar
certificates of deposit, obligations of savings institutions, fully insured
certificates of deposit and commercial paper. Such securities are limited to:
U.S. Government Securities. Obligations issued or guaranteed as to
principal and interest by the United States or its agencies (such as the
Export-Import Bank of the United States, Federal Housing Administration and
Government National Mortgage Association) or its instrumentalities (such as the
Federal Home Loan Bank), including Treasury bills, notes and bonds;
Bank Obligations. Obligations (including certificates of deposit, bankers'
acceptances, commercial paper (see below) and other debt obligations) of banks
subject to regulation by the U.S. Government and having total assets of $1
billion or more, and instruments secured by such obligations, not including
obligations of foreign branches of domestic banks except as permitted below;
12
<PAGE>
Eurodollar Certificates of Deposit. Eurodollar certificates of deposit
issued by foreign branches of domestic banks having total assets of $1 billion
or more (investments in Eurodollar certificates may be affected by changes in
currency rates or exchange control regulations, or changes in governmental
administration or economic or monetary policy in the United States and abroad);
Obligations of Savings Institutions. Certificates of deposit of savings
banks and savings and loan associations, having total assets of $1 billion or
more (investments in savings institutions above $100,000 in principal amount
are not protected by Federal deposit insurance);
Fully Insured Certificates of Deposit. Certificates of deposit of banks
and savings institutions, having total assets of less than $1 billion, if the
principal amount of the obligation is insured by the Bank Insurance Fund or the
Savings Association Insurance Fund (each of which is administered by the
Federal Deposit Insurance Corporation), limited to $100,000 principal amount
per certificate and to 15% or less of the Fund's total assets in all such
obligations and in all illiquid assets, in the aggregate; and
Convertible Securities. The Fund will only invest in convertible and other
fixed income securities that are rated at least B by either S&P or Moody's or,
if not rated, determined to be of comparable quality by the Adviser.
LENDING OF PORTFOLIO SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions,
provided that such loans are callable at any time by the Fund (subject to
notice provisions described below), and are at all times secured by cash or
money market instruments, which are maintained in a segregated account pursuant
to applicable regulations and that are equal to at least the market value,
determined daily, of the loaned securities. The advantage of such loans is that
the Fund continues to receive the income on the loaned securities while at the
same time earning interest on the cash amounts deposited as collateral, which
will be invested in short-term obligations. The Fund will not lend its
portfolio securities if such loans are not permitted by the laws or regulations
of any state in which its shares are qualified for sale and will not lend more
than 25% of the value of its total assets. A loan may be terminated by the
borrower on one business day's notice, or by the Fund on two business days'
notice. If the borrower fails to deliver the loaned securities within two days
after receipt of notice, the Fund could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will only be made to firms deemed by the Adviser to be creditworthy
and when the income which can be earned from such loans justifies the attendant
risks. Upon termination of the loan, the borrower is required to return the
securities to the Fund. Any gain or loss in the market price during the loan
period would inure to the Fund. The creditworthiness of firms to which the Fund
lends its portfolio securities will be monitored on an ongoing basis by the
Adviser pursuant to procedures adopted and reviewed, on an ongoing basis, by
the Board of Trustees of the Fund.
When voting or consent rights which accompany loaned securities pass to
the borrower, the Fund will follow the policy of calling the loaned securities,
to be delivered within one day after notice, to permit the exercise of such
rights if the matters involved would have a material effect on the Fund's
investment in such loaned securities. The Fund will pay reasonable finder's,
administrative and custodial fees in connection with a loan of its securities.
REPURCHASE AGREEMENTS
When cash may be available for only a few days, it may be invested by the
Fund in repurchase agreements until such time as it may otherwise be invested
or used for payments of obligations of the Fund. These agreements, which may be
viewed as a type of secured lending by the Fund, typically involve the
acquisition by the Fund of debt securities from a selling financial institution
such as a bank, savings and loan association or broker-dealer. The agreement
provides that the Fund will sell back to the institution, and that the
institution will repurchase, the underlying security ("collateral") at a
specified price and at a fixed time in the future, usually not more than seven
days from the date of purchase. The collateral will be maintained in a
segregated account and will be marked to market daily to determine that the
value of the collateral, as specified in the agreement, does not decrease below
the purchase price plus accrued interest. If such decrease occurs, additional
collateral will be requested and, when received, added to the account to
maintain full collateralization. The Fund will accrue interest from the
institution
13
<PAGE>
until the time when the repurchase is to occur. Although such date is deemed by
the Fund to be the maturity date of a repurchase agreement, the maturities of
securities subject to repurchase agreements are not subject to any limits.
While repurchase agreements involve certain risks not associated with
direct investments in debt securities, the Fund follows procedures designed to
minimize such risks. These procedures include effecting repurchase transactions
only with large, well-capitalized and well-established financial institutions
whose financial condition will be continually monitored by the Adviser subject
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.
WARRANTS
The Fund may invest up to 5% of the value of its net assets in warrants,
including not more than 2% in warrants not listed on either the New York or
American Stock Exchange. Warrants are, in effect, an option to purchase equity
securities at a specific price, generally valid for a specific period of time,
and have no voting rights, pay no dividends and have no rights with respect to
the corporations issuing them. The Fund may acquire warrants attached to other
securities without reference to the foregoing limitations.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS
From time to time, in the ordinary course of business, the Fund may
purchase securities on a when-issued or delayed delivery basis and may purchase
or sell securities on a forward commitment basis. When such transactions are
negotiated, the price is fixed at the time of the commitment, but delivery and
payment can take place a month or more after the date of the commitment. The
securities so purchased or sold are subject to market fluctuation and no
interest or dividends accrue to the purchaser prior to the settlement date.
While the Fund will only purchase securities on a when-issued, delayed delivery
or forward commitment basis with the intention of acquiring the securities, the
Fund may sell the securities before the settlement date, if it is deemed
advisable. At the time the Fund makes the commitment to purchase or sell
securities on a when-issued, delayed delivery or forward commitment basis, the
Fund will record the transaction and thereafter reflect the value, each day, of
such security purchased or, if a sale, the proceeds to be received, in
determining its net asset value. At the time of delivery of the securities, the
value may be more or less than the purchase or sale price. The Fund will also
establish a segregated account with the Fund's custodian bank in which it will
continuously maintain cash or U.S. Government securities or other liquid
portfolio securities equal in value to commitments to purchase securities on a
when-issued, delayed delivery or forward commitment basis; subject to this
requirement, the Fund may purchase securities on such basis without limit. An
increase in the percentage of the Fund's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of the Fund's net asset value.
WHEN, AS AND IF ISSUED SECURITIES
The Fund may purchase securities on a "when, as and if issued" basis under
which the issuance of the security depends upon the occurrence of a subsequent
event, such as approval of a merger, corporate reorganization, leveraged buyout
or debt restructuring. The commitment for the purchase of any such security
will not be recognized in the portfolio of the Fund until the Adviser
determines that issuance of the security is probable. At such time, the Fund
will record the transaction and, in determining its net asset value, will
reflect the value of the security daily. At such time, the Fund will also
establish a segregated account with its custodian bank in which it will
continuously maintain cash or U.S. Government securities or other liquid
portfolio securities equal in value to recognized commitments for such
securities. Settlement of the trade will occur within five business days of the
occurrence of the subsequent event. Once a segregated account has been
established, if the anticipated event does not occur and the securities are not
issued the Fund will have lost an investment opportunity. The Fund may
14
<PAGE>
purchase securities on such basis without limit. An increase in the percentage
of the Fund's assets committed to the purchase of securities on a "when, as and
if issued" basis may increase the volatility of its net asset value. The Fund
may also sell securities on a "when, as and if issued" basis provided that the
issuance of the security will result automatically from the exchange or
conversion of a security owned by the Fund at the time of the sale.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may write covered call options against securities held in its
portfolio and covered put options on eligible portfolio securities and stock
indexes and purchase options of the same series to effect closing transactions,
and may hedge against potential changes in the market value of investments (or
anticipated investments) and facilitate the reallocation of the Fund's assets
into and out of equities and fixed-income securities by purchasing put and call
options on portfolio (or eligible portfolio) securities and engaging in
transactions involving futures contracts and options on such contracts. The
Fund may also hedge against potential changes in the market value of the
currencies in which its investments (or anticipated investments) are
denominated by purchasing put and call options on currencies and engage in
transactions involving currency futures contracts and options on such
contracts.
Call and put options on U.S. Treasury notes, bonds and bills and equity
securities are listed on Exchanges and are written in over-the-counter
transactions ("OTC options"). Listed options are issued by the Options Clearing
Corporation ("OCC") and other clearing utilities including foreign exchanges.
Ownership of a listed call option gives the Fund the right to buy from the OCC
the underlying security covered by the option at the stated exercise price (the
price per unit of the underlying security) by filing an exercise notice prior
to the expiration date of the option. The writer (seller) of the option would
then have the obligation to sell to the OCC the underlying security at that
exercise price prior to the expiration date of the option, regardless of its
then current market price. Ownership of a listed put option would give the Fund
the right to sell the underlying security to the OCC at the stated exercise
price. Upon notice of exercise of the put option, the writer of the put would
have the obligation to purchase the underlying security from the OCC at the
exercise price.
Options on Treasury Bonds and Notes. Because trading in options written on
Treasury bonds and notes tends to center on the most recently auctioned issues,
the exchanges on which such securities trade will not continue indefinitely to
introduce options with new expirations to replace expiring options on
particular issues. Instead, the expirations introduced at the commencement of
options trading on a particular issue will be allowed to run their course, with
the possible addition of a limited number of new expirations as the original
ones expire. Options trading on each issue of bonds or notes will thus be
phased out as new options are listed on more recent issues, and options
representing a full range of expirations will not ordinarily be available for
every issue on which options are traded.
Options on Treasury Bills. Because a deliverable Treasury bill changes
from week to week, writers of Treasury bill calls cannot provide in advance for
their potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of
the option, the position may be hedged from a risk standpoint by the writing of
a call option. For so long as the call option is outstanding, the Fund will
hold the Treasury bills in a segregated account with its Custodian, so that
they will be treated as being covered.
Options on Foreign Currencies. The Fund may purchase and write options on
foreign currencies for purposes similar to those involved with investing in
forward foreign currency exchange contracts. For example, in order to protect
against declines in the dollar value of portfolio securities which are
denominated in a foreign currency, the Fund may purchase put options on an
amount of such foreign currency equivalent to the current value of the
portfolio securities involved. As a result, the Fund would be enabled to sell
the foreign currency for a fixed amount of U.S. dollars, thereby "locking in"
the dollar value of the portfolio securities (less the amount of the premiums
paid for the options). Conversely, the Fund may purchase call options on
foreign currencies in which securities it anticipates purchasing are
denominated to secure a set U.S. dollar price for such securities and protect
against a decline in the value of the U.S. dollar against such foreign
currency. The Fund may also purchase call and put options to close out written
option positions.
The Fund may also write call options on foreign currency to protect
against potential declines in its portfolio securities which are denominated in
foreign currencies. If the U.S. dollar value of the portfolio securities falls
as a result of a decline in the exchange rate between the foreign currency in
which a security is denominated and the U.S. dollar, then a loss to the Fund
occasioned by such value decline would be ameliorated by receipt of the
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premium on the option sold. At the same time, however, the Fund gives up the
benefit of any rise in value of the relevant portfolio securities above the
exercise price of the option and, in fact, only receives a benefit from the
writing of the option to the extent that the value of the portfolio securities
falls below the price of the premium received. The Fund may also write options
to close out long call option positions.
The markets in foreign currency options are relatively new and the Fund's
ability to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. Although the Fund will not purchase
or write such options unless and until, in the opinion of the management of the
Fund, the market for them has developed sufficiently to ensure that the risks
in connection with such options are not greater than the risks in connection
with the underlying currency, there can be no assurance that a liquid secondary
market will exist for a particular option at any specific time. In addition,
options on foreign currencies are affected by all of those factors which
influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and have no relationship to the investment merits of a foreign security,
including foreign securities held in a "hedged" investment portfolio. Because
foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in
an odd lot market (generally consisting of transactions of less than $1
million) for the underlying foreign currencies at prices that are less
favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the
extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may
take place in the underlying markets that are not reflected in the options
market.
OTC Options. Exchange-listed options are issued by the OCC which assures
that all transactions in such options are properly executed. OTC options are
purchased from or sold (written) to dealers or financial institutions which
have entered into direct agreements with the Fund. With OTC options, such
variables as expiration date, exercise price and premium will be agreed upon
between the Fund and the transacting dealer, without the intermediation of a
third party such as the OCC. If the transacting dealer fails to make or take
delivery of the securities underlying an option it has written, in accordance
with the terms of that option, the Fund would lose the premium paid for the
option as well as any anticipated benefit of the transaction. The Fund will
engage in OTC option transactions only with primary U.S. Government securities
dealers recognized by the Federal Reserve Bank of New York.
Covered Call Writing. The Fund is permitted to write covered call options
on portfolio securities and the U.S. dollar and foreign currencies, without
limit, in order to aid in achieving its investment objective. Generally, a call
option is "covered" if the Fund owns, or has the right to acquire, without
additional cash consideration (or for additional cash consideration held for
the Fund by its Custodian in a segregated account) the underlying security
subject to the option except that in the case of call options on U.S. Treasury
Bills, the Fund might own U.S. Treasury Bills of a different series from those
underlying the call option, but with a principal amount and value corresponding
to the exercise price and a maturity date not later than that of the securities
deliverable under the call option. A call option is also covered if the Fund
holds a call on the same security as the underlying security of the written
option, where the exercise price of the call used for coverage is equal to or
less than the exercise price of the call written or greater than the exercise
price of the call written if the mark to market difference is maintained by the
Fund in cash, U.S. Government securities or other liquid portfolio securities
which the Fund holds in a segregated account maintained with its Custodian.
The Fund will receive from the purchaser, in return for a call it has
written, a "premium"; i.e., the price of the option. Receipt of these premiums
may better enable the Fund to achieve a greater total return than would be
realized from holding the underlying securities alone. Moreover, the premium
received will offset a portion of the potential loss incurred by the Fund if
the securities underlying the option are ultimately sold by the Fund at a loss.
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The premium received will fluctuate with varying economic market conditions. If
the market value of the portfolio securities upon which call options have been
written increases, the Fund may receive less total return from the portion of
its portfolio upon which calls have been written than it would have had such
call not been written.
As regards listed options and certain OTC options, during the option
period, the Fund may be required, at any time, to deliver the underlying
security against payment of the exercise price on any calls it has written
(exercise of certain listed options may be limited to specific expiration
dates). This obligation is terminated upon the expiration of the option period
or at such earlier time when the writer effects a closing purchase transaction.
A closing purchase transaction is accomplished by purchasing an option of the
same series as the option previously written. However, once the Fund has been
assigned an exercise notice, the Fund will be unable to effect a closing
purchase transaction.
Closing purchase transactions are ordinarily effected to realize a profit
on an outstanding call option to prevent an underlying security from being
called, to permit the sale of an underlying security or to enable the Fund to
write another call option on the underlying security with either a different
exercise price or expiration date or both. Also, effecting a closing purchase
transaction will permit the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other investments by the Fund.
The Fund may realize a net gain or loss from a closing purchase transaction
depending upon whether the amount of the premium received on the call option is
more or less than the cost of effecting the closing purchase transaction. Any
loss incurred in a closing purchase transaction may be wholly or partially
offset by unrealized appreciation in the market value of the underlying
security. Conversely, a gain resulting from a closing purchase transaction
could be offset in whole or in part or exceeded by a decline in the market
value of the underlying security.
If a call option expires unexercised, the Fund realizes a gain in the
amount of the premium on the option less the commission paid. Such a gain,
however, may be offset by depreciation in the market value of the underlying
security during the option period. If a call option is exercised, the Fund
realizes a gain or loss from the sale of the underlying security equal to the
difference between the purchase price of the underlying security and the
proceeds of the sale of the security plus the premium received on the option
less the commission paid.
Options written by the Fund normally have expiration dates of from up to
nine months (equity securities) to eighteen months (fixed-income securities)
from the date written. The exercise price of a call option may be below, equal
to or above the current market value of the underlying security at the time the
option is written. See "Risks of Options and Futures Transactions," below.
Covered Put Writing. As a writer of a covered put option, the Fund incurs
an obligation to buy the security underlying the option from the purchaser of
the put, at the option's exercise price at any time during the option period,
at the purchaser's election (certain listed put options written by the Fund
will be exercisable by the purchaser only on a specific date). A put is
"covered" if, at all times, the Fund maintains, in a segregated account
maintained on its behalf at the Fund's Custodian, cash, U.S. Government
securities or other liquid portfolio securities in an amount equal to at least
the exercise price of the option, at all times, during the option period.
Similary, a short put position could be covered by the Fund by its purchase of
a put option on the same security as the underlying security of the written
option, where the exercise price of the purchased option is equal to or more
than the exercise price of the put written or less than the exercise price of
the put written if the mark to market difference is maintained by the Fund in
cash, U.S. Government securities or other liquid portfolio securities which the
Fund holds in a segregated account maintained at its Custodian. In writing
puts, the Fund assumes the risk of loss should the market value of the
underlying security decline below the exercise price of the option (any loss
being decreased by the receipt of the premium on the option written). During
the option period, the Fund may be required, at any time, to make payment of
the exercise price against delivery of the underlying security. The operation
of and limitations on covered put options in other respects are substantially
identical to those of call options.
The Fund will write put options for two purposes: (1) to receive the
income derived from the premiums paid by purchasers; and (2) when the Adviser
wishes to purchase the security underlying the option at a price lower than its
current market price, in which case it will write the covered put at an
exercise price reflecting the lower purchase price sought. The potential gain
on a covered put option is limited to the premium received on the option (less
the commissions paid on the transaction) while the potential loss equals the
difference between the exercise price of the option and the current market
price of the underlying securities when the put is exercised, offset by the
premium received (less the commissions paid on the transaction).
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The Fund may also purchase put options to close out written put positions
in a manner similar to call options closing purchase transactions. In addition,
the Fund may sell a put option which it has previously purchased prior to the
sale of the securities (currency) underlying such option. Such a sale would
result in a net gain or loss depending on whether the amount received on the
sale is more or less than the premium and other transaction costs paid on the
put option sold. Any such gain or loss could be offset in whole or in part by a
change in the market value of the underlying security (currency). If a put
option purchased by the Fund expired without being sold or exercised the
premium would be lost.
Purchasing Call and Put Options. As stated in the Prospectus, the Fund may
purchase listed and OTC call and put options on securities and stock indexes in
amounts equalling up to 10% of its total assets, with a maximum of 5% of the
Fund's assets invested in stock index options. The Fund may purchase call
options only in order to close out a covered call position (see "Covered Call
Writing" above) to protect against an increase in price of a security it
anticipates purchasing or, in the case of a call option on foreign currency to
hedge against an adverse exchange rate move of the currency in which the
security it anticipates purchasing is denominated vis-a-vis the currency in
which the exercise price is denominated. The purchase of a call option to
effect a closing transaction on a call written over-the-counter may be a listed
or OTC option. In either case, the call purchased is likely to be on the same
securities and have the same terms as the written option. If purchased
over-the-counter, the option would generally be acquired from the dealer or
financial institution which purchased the call written by the Fund.
The Fund may purchase put options on securities which it holds (or has the
right to acquire) in its portfolio only to protect itself against a decline in
the value of the security. If the value of the underlying security were to fall
below the exercise price of the put purchased in an amount greater than the
premium paid for the option, the Fund would incur no additional loss. The Fund
may also purchase put options to close out written put positions in a manner
similar to call options closing purchase transactions. In addition, the Fund
may sell a put option which it has previously purchased prior to the sale of
the securities underlying such option. Such a sale would result in a net gain
or loss depending on whether the amount received on the sale is more or less
than the premium and other transaction costs paid on the put option which is
sold. And such gain or loss could be offset in whole or in part by a change in
the market value of the underlying security. If a put option purchased by the
Fund expired without being sold or exercised, the premium would be lost.
Risks of Options Transactions. The successful use of options depends on
the ability of the Adviser to forecast correctly interest rates and market
movements. If the market value of the portfolio securities (or the currencies
in which they are denominated) upon which call options have been written
increases, the Fund may receive a lower total return from the portion of its
portfolio upon which calls have been written than it would have had such calls
not been written. During the option period, the covered call writer has, in
return for the premium on the option, given up the opportunity for capital
appreciation above the exercise price should the market price of the underlying
security increase, but has retained the risk of loss should the price of the
underlying security decline. The secured put writer also retains the risk of
loss should the market value of the underlying security decline below the
exercise price of the option less the premium received on the sale of the
option. In both cases, the writer has no control over the time when it may be
required to fulfill its obligation as a writer of the option. Once an option
writer has received an exercise notice, it cannot effect a closing purchase
transaction in order to terminate its obligation under the option and must
deliver or receive the underlying securities at the exercise price.
Prior to exercise or expiration, an option position can only be terminated
by entering into a closing purchase or sale transaction. If a covered call
option writer is unable to effect a closing purchase transaction, it cannot
sell the underlying security until the option expires or the option is
exercised. Accordingly, a covered call option writer may not be able to sell an
underlying security at a time when it might otherwise be advantageous to do so.
A secured put option writer who is unable to effect a closing purchase
transaction would continue to bear the risk of decline in the market price of
the underlying security until the option expires or is exercised. In addition,
a secured put writer would be unable to utilize the amount held in cash or U.S.
government or other liquid portfolio securities as security for the put option
for other investment purposes until the exercise or expiration of the option.
The Fund's ability to close out its position as a writer of an option is
dependent upon the existence of a liquid secondary market on Option Exchanges.
There is no assurance that such a market will exist, particularly in the case
of OTC options. However, the Fund may be able to purchase an offsetting option
which does not close out its position as a writer but constitutes an asset of
equal value to the obligation under the option written. If the Fund
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is not able to either enter into a closing purchase transaction or purchase an
offsetting position, it will be required to maintain the securities subject to
the call, or the collateral underlying the put, even though it might not be
advantageous to do so, until a closing transaction can be entered into (or the
option is exercised or expires).
Among the possible reasons for the absence of a liquid secondary market on
an Exchange are: (i) insufficient trading interest in certain options; (ii)
restrictions on transactions imposed by an Exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (iv) interruption of the normal
operations on an Exchange; (v) inadequacy of the facilities of an Exchange or
the OCC to handle current trading volume; or (vi) a decision by one or more
Exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the OCC as a result of trades
on that Exchange would generally continue to be exercisable in accordance with
their terms.
Exchanges limit the amount by which the price of a futures contract may
move on any day. If the price moves equal to the daily limit on successive
days, then it may prove impossible to liquidate a futures position until the
daily limit moves have ceased. In the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin on open futures positions. In such situations, if the Fund has
insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do
so. In addition, the Fund may be required to take or make delivery of the
instruments underlying interest rate futures contracts it holds at a time when
it is disadvantageous to do so. The inability to close out options and futures
positions could also have an adverse impact on the Fund's ability to
effectively hedge its portfolio.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in options, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by the Fund,
the Fund could experience a loss of all or part of the value of the option.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the Adviser.
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different Exchanges or are held or written
on one or more accounts or through one or more brokers). An Exchange may order
the liquidation of positions found to be in violation of these limits and it
may impose other sanctions or restrictions. These position limits may restrict
the number of listed options which the Fund may write.
While the futures contracts and options transactions to be engaged in by
the Fund for the purpose of hedging the Fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such instruments.
One such risk which may arise in employing futures contracts to protect against
the price volatility of portfolio securities is that the prices of securities
and indexes subject to futures contracts (and thereby the futures contract
prices) may correlate imperfectly with the behavior of the cash prices of the
Fund's portfolio securities. Another such risk is that prices of interest rate
futures contracts may not move in tandem with the changes in prevailing
interest rates against which the Fund seeks a hedge. A correlation may also be
distorted by the fact that the futures market is dominated by short-term
traders seeking to profit from the difference between a contract or security
price objective and their cost of borrowed funds. Such distortions are
generally minor and would diminish as the contract approached maturity.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be
reflected in the option markets.
Stock Index Options. Options on stock indexes are similar to options on
stock except that, rather than the right to take or make delivery of stock at a
specified price, an option on a stock index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the stock index upon which the option is based is greater than, in the case of
a call, or less than, in the case of a put, the exercise price of the option.
This amount
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of cash is equal to such difference between the closing price of the index and
the exercise price of the option expressed in dollars times a specified
multiple (the "multiplier"). The multiplier for an index option performs a
function similar to the unit of trading for a stock option. It determines the
total dollar value per contract of each point in the difference between the
exercise price of an option and the current level of the underlying index. A
multiplier of 100 means that a one-point difference will yield $100. Options on
different indexes may have different multipliers. The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
Unlike stock options, all settlements are in cash and a gain or loss depends on
price movements in the stock market generally (or in a particular segment of
the market) rather than the price movements in individual stocks. Currently,
options are traded on the S&P 100 Index and the S&P 500 Index on the Chicago
Board Options Exchange, the Major Market Index and the Computer Technology
Index, Oil Index and Institutional Index on the American Stock Exchange and the
NYSE Index and NYSE Beta Index on the New York Stock Exchange, The Financial
News Composite Index on the Pacific Stock Exchange and the Value Line Index,
National O-T-C Index and Utilities Index on the Philadelphia Stock Exchange,
each of which and any similar index on which options are traded in the future
which include stocks that are not limited to any particular industry or segment
of the market is referred to as a "broadly based stock market index." The Fund
will invest only in broadly based indexes. Options on broad-based stock indexes
provide the Fund with a means of protecting the Fund against the risk of market
wide price movements. If the Investment Manager anticipates a market decline,
the Fund could purchase a stock index put option. If the expected market
decline materialized, the resulting decrease in the value of the Fund's
portfolio would be offset to the extent of the increase in the value of the put
option. If the Investment Manager anticipates a market rise, the Fund may
purchase a stock index call option to enable the Fund to participate in such
rise until completion of anticipated common stock purchases by the Fund.
Purchases and sales of stock index options also enable the Investment Manager
to more speedily achieve changes in the Fund's equity positions.
The Fund will be able to write put options on stock indexes only if such
positions are covered by cash, U.S. government securities or other liquid
portfolio securities equal to the aggregate exercise price of the puts, or by a
put option on the same stock index with a strike price no lower than the strike
price of the put option sold by the Fund, which cover is held for the Fund in a
segregated account maintained for it by the Fund's Custodian. All call options
on stock indexes written by the Fund will be covered either by a portfolio of
stocks substantially replicating the movement of the index underlying the call
option or by holding a separate call option on the same stock index with a
strike price no higher than the strike price of the call option sold by the
Fund.
Risks of Options on Indexes. Because exercises of stock index options are
settled in cash, call writers such as the Fund cannot provide in advance for
their potential settlement obligations by acquiring and holding the underlying
securities. A call writer can offset some of the risk of its writing position
by holding a diversified portfolio of stocks similar to those on which the
underlying index is based. However, most investors cannot, as a practical
matter, acquire and hold a portfolio containing exactly the same stocks as the
underlying index, and, as a result, bear a risk that the value of the
securities held will vary from the value of the index. Even if an index call
writer could assemble a stock portfolio that exactly reproduced the composition
of the underlying index, the writer still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the writer will not learn that it had been assigned
until the next business day, at the earliest. The time lag between exercise and
notice of assignment poses no risk for the writer of a covered call on a
specific underlying security, such as a common stock, because there the
writer's obligation is to deliver the underlying security, not to pay its value
as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds stocks that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those stocks against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value on the
exercise date; and by the time it learns that it has been assigned, the index
may have declined, with a corresponding decrease in the value of its stock
portfolio. This "timing risk" is an inherent limitation on the ability of index
call writers to cover their risk exposure by holding stock positions.
A holder of an index option who exercises it before the closing index
value for that day is available runs the risk that the level of the underlying
index may subsequently change. If such a change causes the exercised option to
fall out-of-the-money, the exercising holder will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
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If dissemination of the current level of an underlying index is
interrupted, or if trading is interrupted in stocks accounting for a
substantial portion of the value of an index, the trading of options on that
index will ordinarily be halted. If the trading of options on an underlying
index is halted, an exchange may impose restrictions prohibiting the exercise
of such options.
Futures Contracts. As stated in the Prospectus, the Fund may purchase and
sell interest rate and stock index futures contracts ("futures contracts") that
are traded on U.S. and foreign commodity exchanges on such underlying
securities as U.S. Treasury bonds, notes, bills and GNMA Certificates
("interest rate" futures) and such indexes as the S&P 500 Index, the Moody's
Investment-Grade Corporate Bond Index and the New York Stock Exchange Composite
Index ("index" futures).
As a futures contract purchaser, the Fund incurs an obligation to take
delivery of a specified amount of the obligation underlying the contract at a
specified time in the future for a specified price. As a seller of a futures
contract, the Fund incurs an obligation to deliver the specified amount of the
underlying obligation at a specified time in return for an agreed upon price.
The Fund will purchase or sell interest rate futures contracts and bond
index futures contracts for the purpose of hedging its fixed-income portfolio
(or anticipated portfolio) securities against changes in prevailing interest
rates. If the Investment Manager anticipates that interest rates may rise and,
concomitantly, the price of fixed-income securities falls, the Fund may sell an
interest rate futures contract or a bond index futures contract. If declining
interest rates are anticipated, the Fund may purchase an interest rate futures
contract to protect against a potential increase in the price of U.S.
Government securities the Fund intends to purchase. Subsequently, appropriate
fixed-income securities may be purchased by the Fund in an orderly fashion; as
securities are purchased, corresponding futures positions would be terminated
by offsetting sales of contracts.
The Fund will purchase or sell futures contracts on the U.S. dollar and on
foreign currencies to hedge against an anticipated rise or decline in the value
of the U.S. dollar or foreign currency in which a portfolio security of the
Fund is denominated vis-a-vis another currency.
The Fund will purchase or sell stock index futures contracts for the
purpose of hedging its equity portfolio (or anticipated portfolio) securities
against changes in their prices. If the Investment Manager anticipates that the
prices of stock held by the Fund may fall, the Fund may sell a stock index
futures contract. Conversely, if the Investment Manager wishes to hedge against
anticipated price rises in those stocks which the Fund intends to purchase, the
Fund may purchase stock index and currency futures contracts. In addition,
interest rate and stock index futures contracts will be bought or sold in order
to close out a short or long position in a corresponding futures contract.
Although most interest rate futures contracts call for actual delivery or
acceptance of securities, the contracts usually are closed out before the
settlement date without the making or taking of delivery. Stock index futures
contracts provide for the delivery of an amount of cash equal to a specified
dollar amount times the difference between the stock index value at the open or
close of the last trading day of the contract and the futures contract price. A
futures contract sale is closed out by effecting a futures contract purchase
for the same aggregate amount of the specific type of equity security and the
same delivery date. If the sales price exceeds the offsetting purchase price,
the seller would be paid the difference and would realize a gain. If the
offsetting purchase price exceeds the sale price, the seller would pay the
difference and would realize a loss. Similarly, a futures contract purchase is
closed out by effecting a futures contract sale for the same aggregate amount
of the specific type of security and the same delivery date. If the offsetting
sale price exceeds the purchase price, the purchaser would realize a gain,
whereas if the purchase price exceeds the offsetting sale price, the purchaser
would realize a loss. There is no assurance that the Fund will be able to enter
into a closing transaction.
Interest Rate Futures Contracts. When the Fund enters into an interest
rate futures contract, it is initially required to deposit with the Fund's
Custodian, in a segregated account in the name of the broker performing the
transaction, an "initial margin" of cash or U.S. Government securities or other
liquid portfolio securities equal to approximately 2% of the contract amount.
Initial margin requirements are established by the Exchanges on which futures
contracts trade and may, from time to time, change. In addition, brokers may
establish margin deposit requirements in excess of those required by the
Exchanges.
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Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing
of funds by a broker's client but is, rather, a good faith deposit on the
futures contract which will be returned to the Fund upon the proper termination
of the futures contract. The margin deposits made are marked-to-market daily
and the Fund may be required to make subsequent deposits of cash or U.S.
Government securities called "variation margin", with the Fund's futures
contract clearing broker, which are reflective of price fluctuations in the
futures contract. Currently, interest rate futures contracts can be purchased
on debt securities such as U.S. Treasury Bills and Bonds, U.S. Treasury Notes
with Maturities between 6 1/2 and 10 years, GNMA Certificates and Bank
Certificates of Deposit.
Currency Futures. Generally, foreign currency futures provide for the
delivery of a specified amount of a given currency, on the exercise date, for a
set exercise price denominated in U.S. dollars or other currency. Foreign
currency futures contracts would be entered into for the same reason and under
the same circumstances as forward foreign currency exchange contracts. The
Adviser will assess such factors as cost spreads, liquidity and transaction
costs in determining whether to utilize futures contracts or forward contracts
in its foreign currency transactions and hedging strategy. Currently, currency
futures exist for, among other foreign currencies, the Japanese yen, German
mark, Canadian dollar, British pound, Swiss franc and European currency unit.
Purchasers and sellers of foreign currency futures contracts are subject
to the same risks that apply to the buying and selling of futures generally. In
addition, there are risks associated with foreign currency futures contracts
and their use as a hedging device similar to those associated with options on
foreign currencies described above. Further, settlement of a foreign currency
futures contract must occur within the country issuing the underlying currency.
Thus, the Fund must accept or make delivery of the underlying currency in
accordance with any U.S. or foreign restrictions or regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and may be
required to pay any fees, taxes or charges associated with such delivery which
are assessed in the issuing country.
Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures contracts is
relatively new. The ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary market. To reduce
this risk, the Fund will not purchase or write options on foreign currency
futures contracts unless and until, in the Adviser's opinion, the market for
such options has developed sufficiently that the risks on connection with such
options are not greater than the risks in connection with transactions in the
underlying foreign currency.
Index Futures Contracts. As discussed in the Prospectus, the Fund may
invest in index futures contracts. An index futures contract sale creates an
obligation by the Fund, as seller, to deliver cash at a specified future time.
An index futures contract purchase would create an obligation by the Fund, as
purchaser, to take delivery of cash at a specified future time. Futures
contracts on indexes do not require the physical delivery of securities, but
provide for a final cash settlement on the expiration date which reflects
accumulated profits and losses credited or debited to each party's account.
The Fund is required to maintain margin deposits with brokerage firms
through which it effects index futures contracts in a manner similar to that
described above for interest rate futures contracts. Currently, the initial
margin requirements range from 3% to 10% of the contract amount for index
futures. In addition, due to current industry practice, daily variations in
gains and losses on open contracts are required to be reflected in cash in the
form of variation margin payments. The Fund may be required to make additional
margin payments during the term of the contract.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will operate
to terminate the Fund's position in the futures contract. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund and the Fund realizes a loss or a gain.
Currently, index futures contracts can be purchased or sold with respect
to, among others, the Standard & Poor's 500 Stock Price Index and the Standard
& Poor's 100 Stock Price Index on the Chicago Mercantile Exchange, the New York
Stock Exchange Composite Index on the New York Futures Exchange, the Major
Market Index on the American Stock Exchange, the Value Line Stock Index on the
Kansas City Board of Trade and the Moody's Investment-Grade Corporate Bond
Index on the Chicago Board of Trade.
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<PAGE>
Options on Futures Contracts. The Fund may purchase and write call and put
options on futures contracts and enter into closing transactions with respect
to such options to terminate an existing position. An option on a futures
contract gives the purchaser the right (in return for the premium paid), and
the writer the obligation, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put)
at a specified exercise price at any time during the term of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option is accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents
the amount by which the market price of the futures contract at the time of
exercise exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract.
The Fund will purchase and write options on futures contracts for
identical purposes to those set forth above for the purchase of a futures
contract (purchase of a call option or sale of a put option) and the sale of a
futures contract (purchase of a put option or sale of a call option), or to
close out a long or short position in futures contracts. If, for example, the
Investment Manager wished to protect against an increase in interest rates and
the resulting negative impact on the value of a portion of its fixed-income
portfolio, it might write a call option on an interest rate futures contract,
the underlying security of which correlates with the portion of the portfolio
the Investment Manager seeks to hedge. Any premiums received in the writing of
options on futures contracts may, of course, augment the total return of the
Fund and thereby provide a further hedge against losses resulting from price
declines in portions of the Fund's portfolio.
The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an
option on a futures contract are included in initial margin deposits.
Limitations on Futures Contracts and Options on Futures. The Fund may not
enter into futures contracts or purchase related options thereon if,
immediately thereafter, the amount committed to margin plus the amount paid for
premiums for unexpired options on futures contracts exceeds 5% of the value of
the Fund's total assets, after taking into account unrealized gains and
unrealized losses on such contracts it has entered into, provided, however,
that in the case of an option that is in-the-money (the exercise price of the
call (put) option is less (more) than the market price of the underlying
security) at the time of purchase, the in-the-money amount may be excluded in
calculating the 5%. However, there is no overall limitation on the percentage
of the Fund's assets which may be subject to a hedge position. In addition, in
accordance with the regulations of the Commodity Futures Trading Commission
("CFTC") under which the Fund is exempted from registration as a commodity pool
operator, the Fund may only enter into futures contracts and options on futures
contracts transactions in accordance with the limitation described above. If
the CFTC changes its regulations so that the Fund would be permitted more
latitude to write options on futures contracts for purposes other than hedging
the Fund's investments without CFTC registration, the Fund may engage in such
transactions for those purposes. Except as described above, there are no other
limitations on the use of futures and options thereon by the Fund.
Risks of Transactions in Futures Contracts and Related Options. The
successful use of futures and related options depends on the ability of the
Adviser to accurately predict market, interest rate and currency movements. As
stated in the Prospectus, the Fund may sell a futures contract to protect
against the decline in the value of securities (or the currency in which they
are denominated) held by the Fund. However, it is possible that the futures
market may advance and the value of securities (or the currency in which they
are denominated) held in the portfolio of the Fund may decline. If this
occurred, the Fund would lose money on the futures contract and also experience
a decline in value of its portfolio securities. However, while this could occur
for a very brief period or to a very small degree, over time the value of a
diversified portfolio will tend to move in the same direction as the futures
contracts.
If the Fund purchases a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the Adviser may determine not to invest in the securities as
planned and the Fund will realize a loss on the futures contract that is not
offset by a reduction in the price of the securities.
In addition, if the Fund holds a long position in a futures contract or
has sold a put option on a futures contract, it will hold cash, U.S. Government
securities or other liquid portfolio securities equal to the purchase price of
the contract or the exercise price of the put option (less the amount of
initial or variation margin on deposit) in a segregated account maintained for
the Fund by its Custodian. Alternatively, the Fund could cover its long
position by purchasing a put option on the same futures contract with an
exercise price as high or higher than the price of the contract held by the
Fund.
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<PAGE>
If the Fund maintains a short position in a futures contract or has sold a
call option in a futures contract, it will cover this position by holding, in a
segregated account maintained at its Custodian, cash, U.S. Government
securities or other liquid portfolio securities equal in value (when added to
any initial or variation margin on deposit) to the market value of the
securities underlying the futures contract or the exercise price of the option.
Such a position may also be covered by owning the securities underlying the
futures contract (in the case of a stock index futures contract a portfolio of
securities substantially replicating the relevant index), or by holding a call
option permitting the Fund to purchase the same contract at a price no higher
than the price at which the short position was established.
Exchanges limit the amount by which the price of a futures contract may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased. In the event of adverse price movements, the Fund
would continue to be required to make daily cash payments of variation margin
on open futures positions. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In addition,
the Fund may be required to take or make delivery of the instruments underlying
interest rate futures contracts it holds at a time when it is disadvantageous
to do so. The inability to close out options and futures positions could also
have an adverse impact on the Fund's ability to effectively hedge its
portfolio.
Futures contracts and options thereon which are purchased or sold on
foreign commodities exchanges may have greater price volatility than their U.S.
counterparts. Furthermore, foreign commodities exchanges may be less regulated
and under less governmental scrutiny than U.S. exchanges. Brokerage
commissions, clearing costs and other transaction costs may be higher on
foreign exchanges. Greater margin requirements may limit the Fund's ability to
enter into certain commodity transactions on foreign exchanges. Moreover,
differences in clearance and delivery requirements on foreign exchanges may
occasion delays in the settlement of the Fund's transactions affected on
foreign exchanges.
The extent to which the Fund may enter into transactions involving options
and futures contracts may be limited by the Internal Revenue Code's
requirements for qualification as a regulated investment company and the Fund's
intention to qualify as such. See "Dividends, Distributions and Taxes" in the
Prospectus and this Statement of Additional Information.
While the futures contracts and options transactions to be engaged in by
the Fund for the purpose of hedging the Fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such instruments.
One such risk which may arise in employing futures contracts to protect against
the price volitility of portfolio securities (and the currencies in which they
are denominated) is that the prices of securities and indexes subject to
futures contracts (and thereby the futures contract prices) may correlate
imperfectly with the behavior of the cash prices of the Fund's portfolio
securities (and the currencies in which they are denominated). Another such
risk is that prices of interest rate futures contracts may not move in tandem
with the changes in prevailing interest rates against which the Fund seeks a
hedge. A correlation may also be distorted (a) temporarily, by short-term
traders seeking to profit from the difference between a contract or security
price objective and their cost of borrowed funds; (b) by investors in futures
contracts electing to close out their contracts through offsetting transactions
rather than meet margin deposit requirements; (c) by investors in futures
contracts opting to make or take delivery of underlying securities rather than
engage in closing transactions, thereby reducing liquidity of the futures
market; and (d) temporarily, by speculators who view the deposit requirements
in the futures markets as less onerous than margin requirements in the cash
market. Due to the possibility of price distortion in the futures market and
because of the imperfect correlation between movements in the prices of
securities and movements in the prices of futures contracts, a correct forecast
of interest rate trends may still not result in a successful hedging
transaction.
As stated in the Prospectus, there is no assurance that a liquid secondary
market will exist for futures contracts and related options in which the Fund
may invest. In the event a liquid market does not exist, it may not be possible
to close out a futures position and, in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In addition, limitations imposed by an exchange or board of trade on
which futures contracts are traded may compel or prevent the Fund from closing
out a contract which may result in reduced gain or increased loss to the Fund.
The absence of a liquid market in futures contracts might cause the Fund to
make or take delivery of the underlying securities at a time when it may be
disadvantageous to do so.
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<PAGE>
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on futures contracts involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances when the purchase
of a call or put option on a futures contract would result in a loss to the
Fund notwithstanding that the purchase or sale of a futures contract would not
result in a loss, as in the instance where there is no movement in the prices
of the futures contract or underlying securities.
The Adviser has substantial experience in the use of the investment
techniques described above under the heading "Options and Futures
Transactions," which techniques require skills different from those needed to
select the portfolio securities underlying various options and futures
contracts.
New Instruments. New futures contracts, options and other financial
products and various combinations thereof continue to be developed. The Fund
may invest in any such futures, options or products as may be developed, to the
extent consistent with its investment objective and applicable regulatory
requirements.
PORTFOLIO TURNOVER
It is anticipated that the Fund's portfolio turnover rate generally will
not exceed 150%. A 100% turnover rate would occur, for example, if 100% of the
securities held in the Fund's portfolio (excluding all securities whose
maturities at acquisition were one year or less) were sold and replaced within
one year.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
In addition to the investment restrictions enumerated in the Prospectus,
the investment restrictions listed below have been adopted by the Fund as
fundamental policies, except as otherwise indicated. Under the Act, a
fundamental policy may not be changed without the vote of a majority of the
outstanding voting securities of the Fund, as defined in the Act. Such a
majority is defined as the lesser of (a) 67% or more of the shares present at a
meeting of shareholders, if the holders of 50% of the outstanding shares of the
Fund are present or represented by proxy or (b) more than 50% of the
outstanding shares of the Fund.
The Fund may not:
1. Purchase or sell real estate or interests therein (including
limited partnership interests), although the Fund may purchase securities
of issuers which engage in real estate operations and securities secured
by real estate or interests therein.
2. Purchase oil, gas or other mineral leases, rights or royalty
contracts or exploration or development programs, except that the Fund may
invest in the securities of companies which operate, invest in, or sponsor
such programs.
3. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
4. Borrow money, except that the Fund may borrow from a bank for
temporary or emergency purposes in amounts not exceeding 5% (taken at the
lower of cost or current value) of its total assets (not including the
amount borrowed).
5. Pledge its assets or assign or otherwise encumber them except to
secure borrowings effected within the limitations set forth in restriction
(4). For the purpose of this restriction, collateral arrangements with
respect to initial or variation margin for futures are not deemed to be
pledges of assets.
6. Issue senior securities as defined in the Act except insofar as
the Fund may be deemed to have issued a senior security by reason of (a)
entering into any repurchase agreement; (b) purchasing any securities on a
when-issued or delayed delivery basis; (c) purchasing or selling any
financial futures contracts; (d) borrowing money in accordance with
restrictions described above; or (e) lending portfolio securities.
7. Make loans of money or securities, except: (a) by the purchase of
portfolio securities in which the Fund may invest consistent with its
investment objective and policies; (b) by investment in repurchase
agreements; or (c) by lending its portfolio securities.
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<PAGE>
8. Purchase or sell commodities or commodities contracts except that
the Fund may purchase or sell financial or stock index futures contracts
or options thereon.
9. Make short sales of securities.
10. Purchase securities on margin, except for such short-term loans
as are necessary for the clearance of portfolio securities. The deposit or
payment by the Fund of initial or variation margin in connection with
futures contracts is not considered the purchase of a security on margin.
11. Engage in the underwriting of securities, except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security.
12. Invest for the purpose of exercising control or management of any
other issuer.
13. Purchase warrants if as a result the Fund would then have either
more than 5% of its net assets invested in warrants or more than 2% of its
net assets invested in warrants not listed on the New York or American
Stock Exchange.
In addition, as a nonfundamental policy, the Fund may not invest more than
5% of the value of its total assets in securities of issuers (other than
obligations issued or guaranteed by the United States Government, its agencies
or instrumentalities having a record, together with predecessors, of less than
three years of continuous operation.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of total or net assets will not be considered a
violation of any of the foregoing restrictions.
PORTFOLIO TRANSACTIONS AND BROKERAGE
- --------------------------------------------------------------------------------
Subject to the general supervision of the Trustees, the Adviser is
responsible for decisions to buy and sell securities for the Fund, the
selection of brokers and dealers to effect the transactions, and the
negotiation of brokerage commissions, if any. Purchases and sales of securities
on a stock exchange are effected through brokers who charge a commission for
their services. In the over-the-counter market, securities are generally traded
on a "net" basis with dealers acting as principal for their own accounts
without a stated commission, although the price of the security usually
includes a profit to the dealer. In addition, securities may be purchased at
times in underwritten offerings where the price includes a fixed amount of
compensation, generally referred to as the underwriter's concession or
discount. Futures transactions will usually be effected through a broker and a
commission will be charged. On occasion, the Fund may also purchase certain
money market instruments directly from an issuer, in which case no commissions
or discounts are paid. During the period August 28, 1996 (commencement of
operations) through May 31, 1997, and for the fiscal year ended May 31, 1998,
the Fund paid a total of $359,466 and $398,984, respectively, in brokerage
commissions.
The Adviser currently serves as investment adviser to a number of clients,
including other investment companies, and may in the future act as investment
adviser to others. It is the practice of the Adviser to cause purchase and sale
transactions to be allocated among the Fund and others whose assets it manages
in such manner as it deems equitable. In making such allocations among the Fund
and other client accounts, the main factors considered are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investments generally held and the opinions of the persons responsible for
managing the portfolios of the Fund and other client accounts.
The policy of the Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid
in all circumstances. The Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Adviser from obtaining a high quality of brokerage
and research services. In seeking to determine the reasonableness of brokerage
commissions paid in any transaction, the Adviser relies upon its experience and
knowledge regarding
26
<PAGE>
commissions generally charged by various brokers and on its judgment in
evaluating the brokerage and research services received from the broker
effecting the transaction. Such determinations are necessarily subjective and
imprecise, as in most cases an exact dollar value for those services is not
ascertainable.
In seeking to implement the Fund's policies, the Adviser effects
transactions with those brokers and dealers who the Adviser believes provide
the most favorable prices and are capable of providing efficient executions. If
the Adviser believes such prices and executions are obtainable from more than
one broker or dealer, it may give consideration to placing portfolio
transactions with those brokers and dealers who also furnish research and other
services to the Fund or the Adviser. Such services may include, but are not
limited to, any one or more of the following: reports on industries and
companies, economic analyses and review of business conditions, portfolio
strategy, analytic computer software, account performance services, computer
terminals and various trading and/or quotation equipment. They also include
advice from broker-dealers as to the value of securities, availability of
securities, availability of buyers, and availability of sellers. In addition,
they include recommendations as to purchase and sale of individual securities
and timing of such transactions. The Fund will not purchase at a higher price
or sell at a lower price in connection with transactions effected with a
dealer, acting as principal, who furnishes research services to the Fund than
would be the case if no weight were given by the Fund to the dealer's
furnishing of such services. During the fiscal year ended May 31, 1998, the
Fund directed the payment of $335,918 in brokerage commissions in connection
with transactions in the aggregate amount of $135,328,384 to brokers because of
research services provided.
The information and services received by the Adviser from brokers and
dealers may be of benefit to the Adviser in the management of accounts of some
of its other clients and may not in all cases benefit the Fund directly. While
the receipt of such information and services is useful in varying degrees and
would generally reduce the amount of research or services otherwise performed
by the Adviser and thereby reduce its expenses, it is of indeterminable value
and the advisory fee paid to the Adviser is not reduced by any amount that may
be attributable to the value of such services.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may
be effected through DWR, Morgan Stanley & Co. Incorporated ("MS & Co."), and
other affiliated brokers and dealers. In order for an affiliated broker-dealer
to effect any portfolio transactions for the Fund, the commissions, fees or
other remuneration received by the affiliated broker or dealer must be
reasonable and fair compared to the commissions, fees or other remuneration
paid to other brokers in connection with comparable transactions involving
similar securities being purchased or sold on an exchange during a comparable
period of time. This standard would allow the affiliated broker or dealer to
receive no more than the remuneration which would be expected to be received by
an unaffiliated broker in a commensurate arm's-length transaction. Furthermore,
the Board of Trustees of the Fund, including a majority of the Trustees who are
not "interested" persons of the Fund, as defined in the Act, have adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to an affiliated broker-dealer are consistent with
the foregoing standard. During the period August 28, 1996 (commencement of
operations) through May 31, 1997, and the fiscal year ended May 31, 1998, the
Fund did not pay any brokerage commissions to DWR. During the period June 1,
1997 through May 31, 1998, the Fund paid a total of $3,460 in brokerage
commissions to MS & Co., which broker-dealer became an affiliate of the
Distributor on May 31, 1997 upon consummation of the merger of Dean Witter,
Discover & Co. with Morgan Stanley Group Inc. The brokerage commissions paid to
MS & Co. represented approximately 0.87% of the total brokerage commissions
paid by the Fund during the period and were paid on account of transactions
having an aggregate dollar value equal to approximately 1.60% of the aggregate
dollar value of all portfolio transactions of the Fund during the period for
which commissions were paid. The Fund paid no brokerage commission to DWR
during the fiscal year ended May 31, 1998.
THE DISTRIBUTOR
- --------------------------------------------------------------------------------
As discussed in the Prospectus, shares of the Fund are distributed by
Morgan Stanley Dean Witter Distributors Inc. (the "Distributor"). The
Distributor has entered into a selected dealer agreement with DWR, which
through its own sales organization sells shares of the Fund. In addition, the
Distributor may enter into selected dealer agreements with other selected
broker-dealers. The Distributor, a Delaware corporation, is a
27
<PAGE>
wholly-owned subsidiary of MSDW. The Trustees of the Fund, including a majority
of the Independent Trustees, approved, at their meeting held on June 30, 1997,
the current Distribution Agreement appointing the Distributor as exclusive
distributor of the Fund's shares and providing for the Distributor to bear
distribution expenses not borne by the Fund. By its terms, the Distribution
Agreement has an initial term ending April 30, 1998, and will remain in effect
from year to year thereafter if approved by the Board. At their meeting held on
April 30, 1998, the Trustees of the Fund, including a majority of the
Independent Trustees, approved the continuation of the Distribution Agreement
until April 30, 1999.
The Distributor bears all expenses it may incur in providing services
under the Distribution Agreement. Such expenses include the payment of
commissions for sales of the Fund's shares and incentive compensation to Morgan
Stanley Dean Witter Financial Advisors and other selected broker-dealer
representatives. The Distributor also pays certain expenses in connection with
the distribution of the Fund's shares, including the costs of preparing,
printing and distributing advertising or promotional materials, and the costs
of printing and distributing prospectuses and supplements thereto used in
connection with the offering and sale of the Fund's shares. The Fund bears the
costs of initial typesetting, printing and distribution of prospectuses and
supplements thereto to shareholders. The Fund also bears the costs of
registering the Fund and its shares under federal securities laws and pays
filing fees in accordance with state securities laws. The Fund and the
Distributor have agreed to indemnify each other against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. Under the
Distribution Agreement, the Distributor uses its best efforts in rendering
services to the Fund, but in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations, the Distributor is
not liable to the Fund or any of its shareholders for any error of judgment or
mistake of law or for any act or omission or for any losses sustained by the
Fund or its shareholders.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under
the Act (the "Plan") pursuant to which each Class, other than Class D, pays the
Distributor compensation accrued daily and payable monthly at the following
annual rates: 0.25% and 1.0% of the average daily net assets of Class A and
Class C, respectively, and, with respect to Class B, 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
contingent deferred sales charge has been imposed or upon which such charge has
been waived; or (b) the average daily net assets of Class B. The Distributor
also receives the proceeds of front-end sales charges and of contingent
deferred sales charges imposed on certain redemptions of shares, which are
separate and apart from payments made pursuant to the Plan (see "Purchase of
Fund Shares" in the Prospectus). The Distributor has informed the Fund that it
and/or DWR received (a) $253,094 and $430,611 in contingent deferred sales
charges from Class B for the fiscal period August 28, 1996 (commencement of
operations) through May 31, 1997 and for the fiscal year ended May 31, 1998,
respectively, (b) $2 and $393 in contingent deferred sales charges from Class A
and Class C, respectively, for the fiscal year ended May 31, 1998, and (c)
$11,497 in front-end sales charges from Class A for the fiscal year ended May
31, 1998, none of which was retained by the Distributor.
The Distributor has informed the Fund that the entire fee payable by Class
A and a portion of the fees payable by each of Class B and Class C each year
under the Plan equal to 0.25% of such Class's average daily net assets are
currently each characterized as a "service fee" under the Rules of the
Association of the National Association of Securities Dealers (of which the
Distributor is a member). The service fee is a payment made for personal
service and/or the maintenance of shareholder accounts. The remaining portion
of the Plan fees payable by a Class, if any, is characterized as an
"asset-based sales charge" as such is defined by the aforementioned Rules of
the Association.
The Plan was adopted by a majority vote of the Board of Trustees,
including all of the Trustees of the Fund who are not "interested persons" of
the Fund (as defined in the Act) and who have no direct or indirect financial
interest in the operation of the Plan (the "Independent 12b-1 Trustees"), cast
in person at a meeting called for the purpose of voting on the Plan, on April
17, 1996. At their meeting held on June 30, 1997, the Trustees, including a
majority of the Independent 12b-1 Trustees, approved amendments to the Plan to
reflect the multiple-class structure for the Fund, which took effect on July
28, 1997.
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<PAGE>
Under the Plan and as required by Rule 12b-1, the Trustees receive and
review promptly after the end of each fiscal quarter a written report provided
by the Distributor of the amounts expended under the Plan and the purpose for
which such expenditures were made. In the Trustees' quarterly reviews of the
Plan, they will consider its continued appropriateness and the level of
compensation provided therein. Class B shares of the Fund accrued amounts
payable to the Distributor under the Plan, during the fiscal year ended May 31,
1998, of $1,206,683. This amount is equal to the annual rate of 0.80% of the
average daily net assets of Class B for the fiscal year and was calculated
pursuant to clause (b) of the compensation formula under the Plan. This amount
is treated by the Fund as an expense in the year it is accrued. For the fiscal
period July 28, 1997 through May 31, 1998, Class A and Class C shares of the
Fund accrued payments under the Plan amounting to $736 and $2,932,
respectively, which amounts are equal to 0.24% and 1.00% of the average daily
net assets of Class A and Class C, respectively, for such period. This amount
is equal to payments required to be paid monthly by the Fund which were
computed at the annual rate of 1.0% of the average daily aggregate gross sales
of the Fund's 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 shares redeemed since the Fund's
inception upon which a contingent deferred sales charge has been imposed or
waived. This amount is treated by the Fund as an expense in the year it is
accrued. This amount represents amounts paid by Class B only; there were no
Class A or Class C shares outstanding on such date.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method the Fund offers four
Classes of shares, each with a distribution arrangement as set forth in the
Prospectus.
With respect to Class A shares, DWR compensates its Financial Advisors by
paying them, from proceeds of the front-end sales charge, commissions for the
sale of Class A shares, currently a gross sales credit of up to 5.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.25% of the current value
of the respective accounts for which they are the Financial Advisors or dealers
of record in all cases. On orders of $1 million or more (for which no sales
charge was paid) or net asset value purchases by employer-sponsored 401(k) and
other plans qualified under Section 401(a) of the Internal Revenue Code
("Qualified Retirement Plans") for which Morgan Stanley Dean Witter Trust FSB
("MSDW Trust") serves as Trustee or DWR's Retirement Plan Services serves as
recordkeeper pursuant to a written Recordkeeping Services Agreement, MSDW
Advisors compensates DWR's Financial Advisors by paying them, from its own
funds, a gross sales credit of 1.0% of the amount sold.
With respect to Class B shares, DWR compensates its Financial Advisors by
paying them, from its own funds, commissions for the sale of Class B shares,
currently a gross sales credit of up to 5.0% of the amount sold (except as
provided in the following sentence) and an annual residual commission,
currently a residual of up to 0.25% of the current value (not including
reinvested dividends or distributions) of the amount sold in all cases. In the
case of Class B shares 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, DWR compensates its Financial Advisors by paying them, from
its own funds, a gross sales credit of 3.0% of the amount sold.
With respect to Class C shares, DWR compensates its Financial Advisors by
paying them, from its own funds, commissions for the sale of Class C shares,
currently a gross sales credit of up to 1.0% of the amount sold and an annual
residual commission, currently a residual of up to 1.0% of the current value of
the respective accounts for which they are the Financial Advisors of record.
With respect to Class D shares other than shares held by participants in
the MSDW Advisors mutual fund asset allocation program, MSDW Advisors
compensates DWR's Financial Advisors by paying them, from its own funds,
commissions for the sale of Class D shares, currently a gross sales credit of
up to 1.0% of the amount sold. There is a chargeback of 100% of the amount paid
if the Class D shares are redeemed in the first year and a chargeback of 50% of
the amount paid if the Class D shares are redeemed in the second year after
purchase. MSDW Advisors also compensates DWR's Financial Advisors by paying
them, from its own funds, an annual residual commission, currently a residual
of up to 0.10% of the current value of the respective accounts for which they
are the account executives of record (not including accounts of participants in
the MSDW Advisors mutual fund asset allocation program).
The gross sales credit is a charge which reflects commissions paid by DWR
to its Financial Advisors and DWR's Fund-associated distribution-related
expenses, including sales compensation, and overhead and other
29
<PAGE>
branch office distribution-related expenses including (a) the expenses of
operating DWR's branch offices in connection with the sale of Fund shares,
including lease costs, the salaries and employee benefits of operations and
sales support personnel, utility costs, communications costs and the costs of
stationery and supplies, (b) the costs of client sales seminars, (c) travel
expenses of mutual fund sales coordinators to promote the sale of Fund shares
and (d) other expenses relating to branch promotion of Fund sales. The
distribution fee that the Distributor receives from the Fund under the Plan, in
effect, offsets distribution expenses incurred under the Plan on behalf of the
Fund and, in the case of Class B shares, opportunity costs, such as the gross
sales credit and an assumed interest charge thereon ("carrying charge"). In the
Distributor's reporting of the distribution expenses to the Fund, in the case
of Class B shares, such assumed interest (computed at the "broker's call rate")
has been calculated on the gross credit as it is reduced by amounts received by
the Distributor under the Plan and any contingent deferred sales charges
received by the Distributor upon redemption of shares of the Fund. No other
interest charge is included as a distribution expense in the Distributor's
calculation of its distribution costs for this purpose. The broker's call rate
is the interest rate charged to securities brokers on loans secured by
exchange-listed securities.
The Fund is authorized to reimburse expenses incurred or to be incurred in
promoting the distribution of the Fund's Class A and Class C shares and in
servicing shareholder accounts. Reimbursement will be made through payments at
the end of each month. The amount of each monthly payment may in no event
exceed an amount equal to a payment at the annual rate of 0.25%, in the case of
Class A, and 1.0%, in the case of Class C, of the average net assets of the
respective Class during the month. No interest or other financing charges, if
any, incurred on any distribution expenses on behalf of Class A and Class C
will be reimbursable under the Plan. With respect to Class A, in the case of
all expenses other than expenses representing the service fee, and, with
respect to Class C, in the case of all expenses other than expenses
representing a gross sales credit or a residual to account executives, such
amounts shall be determined at the beginning of each calendar quarter by the
Trustees, including a majority of the Independent 12b-1 Trustees. Expenses
representing the service fee (for Class A) or a gross sales credit or a
residual to account executives (for Class C) may be reimbursed without prior
determination. In the event that the Distributor proposes that monies shall be
reimbursed for other than such expenses, then in making quarterly
determinations of the amounts that may be reimbursed by the Fund, the
Distributor will provide and the Trustees will review a quarterly budget of
projected distribution expenses to be incurred on behalf of the Fund, together
with a report explaining the purposes and anticipated benefits of incurring
such expenses. The Trustees will determine which particular expenses, and the
portions thereof, that may be borne by the Fund, and in making such a
determination shall consider the scope of the Distributor's commitment to
promoting the distribution of the Fund's Class A and Class C shares.
Each Class paid 100% of the amounts accrued under the Plan with respect to
that Class for the fiscal year ended May 31, 1998 to the Distributor. The
Distributor and DWR estimate that they have spent, pursuant to the Plan,
$10,318,273 on behalf of Class B, since the inception of the Plan. It is
estimated that this amount was spent in approximately the following ways: (i)
20.68% ($2,133,419)--advertising and promotional expenses; (ii) 2.18%
($225,319)--printing of prospectuses for distribution to other than current
shareholders; and (iii) 77.14% ($7,959,535)--other expenses, including the
gross sales credit and the carrying charge, of which 5.88% ($468,197)
represents carrying charges, 38.16% ($3,036,988) represents commission credits
to DWR branch offices and other selected broker-dealers for payments of
commission to Morgan Stanley Dean Witter Financial Advisors and other selected
broker-dealer representatives and 55.96% ($4,454,350) represents overhead and
other branch office distribution-related expenses. The amounts accrued by Class
A and Class C for distribution during the fiscal period July 28, 1997 through
May 31, 1998 were for expenses which relate to compensation of sales personnel
and associated overhead expenses.
In the case of Class B shares, at any given time the expenses in
distributing shares of the Fund may be more or less than the total of (i) the
payments made by the Fund pursuant to the Plan and (ii) the proceeds of
contingent deferred sales charges paid by investors upon redemption of shares.
The Distributor has advised the Fund that in the case of Class B shares the
excess distribution expenses, including the carrying charge designed to
approximate the opportunity costs incurred by DWR which arise from it having
advanced monies without having received the amount of any sales charges imposed
at the time of sale of the Fund's Class B shares, totalled $7,673,197 as of May
31, 1998. Because there is no requirement under the Plan that the Distributor
be reimbursed for all distribution expenses with respect to Class B shares or
any requirement that the Plan be continued from year to year, this excess
amount does not constitute a liability of the Fund. Although there is no legal
obligation for the Fund to pay distribution expenses in excess of payments made
under the Plan and the proceeds of contingent deferred sales
30
<PAGE>
charges 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 contingent deferred sales charges, may or may not
be recovered through future distribution fees or contingent deferred sales
charges.
No interested person of the Fund, nor any Trustee of the Fund who is not
an interested person of the Fund, as defined in the Act, has any direct or
indirect financial interest in the operation of the Plan except to the extent
that DWR, MSDW Advisors, the Distributor or the Manager or certain of their
employees, may be deemed to have such an interest as a result of benefits
derived from the successful operation of the Plan or as a result of receiving a
portion of the amounts expended thereunder by the Fund.
Under its terms, the Plan had an initial term ending April 30, 1997, and
provides that it will continue from year to year thereafter, provided such
continuance is approved annually by a vote of the Trustees in the manner
described above. The most recent continuance of the Plan for one year, until
April 30, 1999, was approved by the Board of Trustees of the Fund, including a
majority of the Independent 12b-1 Trustees, at a Board meeting held on April
30, 1998. Prior to approving the continuation of the Plan, the Board requested
and received from the Distributor and reviewed all the information which it
deemed necessary to arrive at an informed determination. In making their
determination to continue the Plan, the Trustees considered: (1) the Fund's
experience under the Plan and whether such experience indicates that the Plan
is operating as anticipated; (2) the benefits the Fund had obtained, was
obtaining and would be likely to obtain under the Plan; and (3) what services
had been provided and were continuing to be provided under the Plan by the
Distributor, DWR and other selected broker-dealers to the Fund and its
shareholders. Based upon their review, the Trustees of the Fund, including each
of the Independent 12b-1 Trustees, determined that continuation of the Plan
would be in the best interest of the Fund and would have a reasonable
likelihood of continuing to benefit the Fund and its shareholders. This
determination was based upon the conclusion of the Trustees that the Plan
provides an effective means of stimulating sales of shares of the Fund and of
reducing or avoiding net redemptions and the potentially adverse effects that
may occur therefrom. In the Trustees' quarterly review of the Plan, they will
consider its continued appropriateness and the level of compensation provided
therein.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval of the shareholders of the
affected Class or Classes of the Fund, and all material amendments of the Plan
must also be approved by the Trustees in the manner described above. The Plan
may be terminated at any time, without payment of any penalty, by vote of a
majority of the Independent 12b-1 Trustees or by a vote of a majority of the
outstanding voting securities of the Fund (as defined in the Act) on not more
than thirty days written notice to any other party to the Plan. So long as the
Plan is in effect, the election and nomination of Independent 12b-1 Trustees
shall be committed to the discretion of the Independent 12b-1 Trustees.
DETERMINATION OF NET ASSET VALUE
As stated in the Prospectus, short-term securities with remaining
maturities of sixty days or less at the time of purchase are valued at
amortized cost, unless the Trustees determine such does not reflect the
securities' market value, in which case these securities will be valued at
their fair value as determined by the Trustees. Other short-term debt
securities will be valued on a mark-to-market basis until such time as they
reach a remaining maturity of sixty days, whereupon they will be valued at
amortized cost using their value on the 61st day unless the Trustees determine
such does not reflect the securities' market value, in which case these
securities will be valued at their fair value as determined by the Trustees.
All other securities and other assets are valued at their fair value as
determined in good faith under procedures established by and under the
supervision of the Trustees.
The net asset value per share for each Class of shares of the Fund is
determined once daily at 4:00 p.m., New York time (or, on days when the New
York Stock Exchange closes prior to 4:00 p.m., at such earlier time), on each
day that the New York Stock Exchange is open by taking the value of all assets
of the Fund, subtracting its liabilities, dividing by the number of shares
outstanding and adjusting to the nearest cent. The New York Stock Exchange
currently observes the following holidays: New Year's Day, Reverend Dr. Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
31
<PAGE>
PURCHASE OF FUND SHARES
- --------------------------------------------------------------------------------
As discussed in the Prospectus, the Fund offers four Classes of shares as
follows:
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
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 in the circumstances
discussed in the Prospectus.
Right of Accumulation. As discussed in the Prospectus, investors may
combine the current value of shares purchased in separate transactions for
purposes of benefitting from the reduced sales charges available for purchases
of shares of the Fund totalling at least $25,000 in net asset value. For
example, if any person or entity who qualifies for this privilege holds Class A
shares of the Fund and/or other TCW/DW Funds which are multiple class funds
("TCW/DW Multi-Class Funds") purchased at a price including a front-end sales
charge having a current value of $5,000, and purchases $20,000 of additional
shares of the Fund, the sales charge applicable to the $20,000 purchase would
be 4.75% of the offering price.
The Distributor must be notified by the 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 selected broker-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 Distributor or Morgan Stanley Dean Witter Trust
FSB (the "Transfer Agent") fails to confirm the investor's represented
holdings.
Letter of Intent. As discussed in the Prospectus, reduced sales charges
are 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 the Distributor or from a single Selected Broker-Dealer.
A Letter of Intent permits an investor to establish a total investment
goal to be achieved by any number of purchases over a thirteen-month period.
Each purchase of Class A shares made during the period will receive the reduced
sales commission applicable to the amount represented by the goal, as if it
were a single purchase. A number of shares equal in value to 5% of the dollar
amount of the Letter of Intent will be held in escrow by the Transfer Agent, in
the name of the shareholder. The initial purchase under a Letter of Intent must
be equal to at least 5% of the stated investment goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the investor is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and sales charges actually paid. Such payment may be
made directly to the Distributor or, if not paid, the Distributor is authorized
by the shareholder to liquidate a sufficient number of his or her escrowed
shares to obtain such difference.
If the goal is exceeded and purchases pass the next sales charge level,
the sales charge on the entire amount of the purchase that results in passing
that level and on subsequent purchases will be subject to further reduced sales
charges in the same manner as set forth above under "Right of Accumulation,"
but there will be no retroactive reduction of sales charges on previous
purchases. For the purpose of determining whether the investor is entitled to a
further reduced sales charge applicable to purchases at or above a sales charge
level which exceeds the stated goal of a Letter of Intent, the cumulative
current net asset value of any shares owned by the investor in any other TCW/DW
Multi-Class Funds held by the shareholder which were previously purchased at a
price including a front-end sales charge (including shares of the Fund, other
TCW/DW Multi-Class Funds or "Exchange Funds" (see "Shareholder
Services--Exchange Privilege") acquired in exchange for those shares, and
including in each case shares acquired through reinvestment of dividends and
distributions) will be added to the cost or net asset value of shares of the
Fund owned by the investor. However, shares of "Exchange Funds" and the
purchase of shares of other TCW/DW Funds will not be included in determining
whether the stated goal of a Letter of Intent has been reached.
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<PAGE>
At any time while a Letter of Intent is in effect, a shareholder may, by
written notice to the Distributor, increase the amount of the stated goal. In
that event, only shares purchased during the previous 90-day period and still
owned by the shareholder will be included in the new sales charge reduction.
The 5% escrow and minimum purchase requirements will be applicable to the new
stated goal. Investors electing to purchase shares of the Fund pursuant to a
Letter of Intent should carefully read such Letter of Intent.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Class B shares are sold without an initial sales charge but are subject to
a CDSC payable upon most redemptions within six years after purchase. As stated
in the Prospectus, a CDSC will be imposed on any redemption by an investor if
after such redemption the current value of the investor's Class B shares of the
Fund is less than the dollar amount of all payments by the shareholder for the
purchase of Class B shares during the preceding six years (or, in the case of
shares held by certain Qualified Retirement Plans, three years). However, no
CDSC will be imposed to the extent that the net asset value of the shares
redeemed does not exceed: (a) 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, plus (b) the current
net asset value of shares purchased through reinvestment of dividends or
distributions of the Fund or another TCW/DW Fund (see "Shareholder
Services--Targeted Dividends"), plus (c) increases in the net asset value of
the investor's shares above the total amount of payments for the purchase of
Fund shares made during the preceding six (three) years. The CDSC will be paid
to the Distributor.
In determining the applicability of the CDSC to each redemption, the
amount which represents an increase in the net asset value of the investor's
shares above the amount of the total payments for the purchase of shares within
the last six years (or, in the case of shares held by certain Qualified
Retirement Plans, three years) will be redeemed first. In the event the
redemption amount exceeds such increase in value, the next portion of the
amount redeemed will be the amount which represents the net asset value of the
investor's shares purchased more than six (three) years prior to the redemption
and/or shares purchased through reinvestment of dividends or distributions. A
portion of the amount redeemed which exceeds an amount which represents both
such increase in value and the 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/or shares purchased through reinvestment of
dividends or distributions will be subject to a CDSC.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Class B shares of the Fund until
the time of redemption of such shares. For purposes of determining the number
of years from the time of any payment for the purchase of shares, all payments
made during a month will be aggregated and deemed to have been made on the last
day of the month. The following table sets forth the rates of the CDSC
applicable to most Class B shares of the Fund:
<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>
The following table sets forth the rates of the CDSC applicable to 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:
<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>
33
<PAGE>
In determining the rate of the CDSC, it will be assumed that a redemption
is made of shares held by the investor for the longest period of time within
the applicable six-year or three-year period. This will result in any such CDSC
being imposed at the lowest possible rate. The CDSC will be imposed, in
accordance with the table shown above, on any redemptions within six years (or,
in the case of shares held by certain Qualified Retirement Plans, three years)
of purchase which are in excess of these amounts and which redemptions do not
qualify for waiver of the CDSC, as described in the Prospectus.
LEVEL LOAD ALTERNATIVE--CLASS C SHARES
Class C shares are sold without a sales charge but are subject to a CDSC
of 1.0% on most redemptions made within one year after purchase, except in the
circumstances discussed in the Prospectus.
NO LOAD ALTERNATIVE--CLASS D SHARES
Class D shares are offered without any sales charge on purchase or
redemption. Class D shares are offered only to those persons meeting the
qualifications set forth in the Prospectus.
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
Upon the purchase of shares of the Fund, a Shareholder Investment Account
is opened for the investor on the books of the Fund and maintained by the
Transfer Agent. This is an open account in which shares owned by the investor
are credited by the Transfer Agent in lieu of issuance of a share certificate.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares and may be
redeposited in the account at any time. There is no charge to the investor for
issuance of a certificate. Whenever a shareholder-instituted transaction takes
place in the Shareholder Investment Account, the shareholder will be mailed a
confirmation of the transaction from the Fund or from DWR or other selected
broker-dealer.
Automatic Investment of Dividends and Distributions. As stated in the
Prospectus, all income dividends and capital gains distributions are
automatically paid in full and fractional shares of the applicable Class of the
Fund, unless the shareholder requests that they be paid in cash. Each purchase
of shares of the Fund is made upon the condition that the Transfer Agent is
thereby automatically appointed as agent of the investor to receive all
dividends and capital gains distributions on shares owned by the investor. Such
dividends and distributions will be paid, at the net asset value per share, in
shares of the applicable Class of the Fund (or in cash if the shareholder so
requests) as of the close of business on the record date. At any time an
investor may request the Transfer Agent, in writing, to have subsequent
dividends and/or capital gains distributions paid to him or her in cash rather
than shares. To assure sufficient time to process the change, such request
should be received by the Transfer Agent at least five business days prior to
the record date of the dividend or distribution. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payments will be made to DWR or the other selected
broker-dealer, and which will be forwarded to the shareholder, upon the receipt
of proper instructions. It has been and remains the Fund's policy and practice
that, if checks for dividends or distributions paid in cash remain uncashed, no
interest will accrue on amounts represented by such uncashed checks.
Targeted Dividends(SM). In states where it is legally permissible,
shareholders may also have all income dividends and capital gains distributions
automatically invested in shares of any Class of an open-end TCW/DW Fund other
than TCW/DW Global Telecom Trust or in another Class of TCW/DW Global Telecom
Trust. Such investment will be made as described above for automatic investment
in shares of the applicable Class of the Fund, at the net asset value per share
of the selected TCW/DW Fund as of the close of business on the payment date of
the dividend or distribution and will begin to earn dividends, if any, in the
selected TCW/DW Fund the next business day. To participate in the Targeted
Dividends program, shareholders should contact their Morgan Stanley Dean Witter
Financial Advisor or other selected broker-dealer representative or the
Transfer Agent. Shareholders of the Fund must be shareholders of the selected
Class of the TCW/DW Fund targeted to receive investments from dividends at the
time they enter the Targeted Dividends program. Investors should review the
prospectus of the targeted TCW/DW Fund before entering the program.
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
34
<PAGE>
redemption of shares of a Morgan Stanley Dean Witter money market fund, on a
semi-monthly, monthly or quarterly basis, to the Transfer Agent for investment
in shares of the Fund. Shares purchased through EasyInvest will be added to the
shareholder's existing account at the net asset value calculated the same
business day the transfer of funds is effected (subject to any applicable sales
changes). Shares of the Morgan Stanley Dean Witter money market funds redeemed
in connection with EasyInvest are redeemed on the business day preceding the
transfer of funds. For further information or to subscribe to EasyInvest,
shareholders should contact their Morgan Stanley Dean Witter Financial Advisor
or other selected broker-dealer representative or the Transfer Agent.
Investment of Dividends or Distributions Received in Cash. As discussed in
the Prospectus, any shareholder who receives a cash payment representing a
dividend or distribution may invest such dividend or distribution in shares of
the applicable Class at the net asset value per share, without the imposition
of a CDSC upon redemption, by returning the check or the proceeds to the
Transfer Agent within 30 days after the payment date. If the shareholder
returns the proceeds of a dividend or distribution, such funds must be
accompanied by a signed statement indicating that the proceeds constitute a
dividend or distribution to be invested. Such investment will be made at the
net asset value per share next determined after receipt of the check or
proceeds by the Transfer Agent.
Systematic Withdrawal Plan. As discussed in the Prospectus, a systematic
withdrawal plan (the "Withdrawal Plan") is available for shareholders who own
or purchase shares of the Fund having a minimum value of $10,000 based upon the
then current net asset value. The Withdrawal Plan provides for monthly or
quarterly (March, June, September and December) checks in any dollar amount,
not less than $25, or in any whole percentage of the account balance, on an
annualized basis. Any applicable CDSC will be imposed on shares redeemed under
the Withdrawal Plan (see "Purchase of Fund Shares"). Therefore, 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 or quarterly amount.
The Transfer Agent acts as agent for the shareholder in tendering to the
Fund for redemption sufficient full and fractional shares to provide the amount
of the periodic withdrawal payment designated in the application. The shares
will be redeemed at their net asset value determined, at the shareholder's
option, on the tenth or twenty-fifth day (or next following business day) of
the relevant month or quarter and normally a check for the proceeds will be
mailed by the Transfer Agent, or amounts credited to a shareholder's DWR or
other selected broker-dealer brokerage account, within five business days after
the date of redemption. The Withdrawal Plan may be terminated at any time by
the Fund.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted.
Each withdrawal constitutes a redemption of shares and any gain or loss
realized must be recognized for federal income tax purposes. Although the
shareholder may make additional investments of $2,500 or more under the
Withdrawal Plan, withdrawals made concurrently with purchases of additional
shares may be inadvisable because of sales charges which may be applicable to
purchases or redemptions of shares (see "Purchase of Fund Shares").
Any shareholder who wishes to have payments under the Withdrawal Plan made
to a third party or sent to an address other than the one listed on the account
must send complete written instructions to the Transfer Agent to enroll in the
Withdrawal Plan. The shareholder's signature on such instructions must be
guaranteed by an eligible guarantor acceptable to the Transfer Agent
(shareholders should contact the Transfer Agent for a determination as to
whether a particular institution is such an eligible guarantor). A shareholder
may, at any time, change the amount and interval of withdrawal payments through
his or her Morgan Stanley Dean Witter Financial Advisor or other selected
broker-dealer representative or by written notification to the Transfer Agent.
In addition, the party and/or the address to which checks are mailed may be
changed by written notification to the Transfer Agent, with signature
guarantees required in the manner described above. The shareholder may also
terminate the Withdrawal Plan at any time by written notice to the Transfer
Agent. In the event of such termination, the account will be continued as a
regular shareholder investment account. The shareholder may also redeem all or
part of the shares held in the Withdrawal Plan account (see "Repurchases and
Redemptions" in the Prospectus) at any time. Shareholders wishing to enroll in
the Withdrawal Plan should contact their account executive or the Transfer
Agent.
35
<PAGE>
Direct Investments through Transfer Agent. As discussed in the Prospectus,
shareholders may make additional investments in any Class of shares of the Fund
for which they qualify at any time by sending a check in any amount, not less
than $100, payable to TCW/DW Global Telecom Trust, and indicating the selected
Class, directly to the Fund's Transfer Agent. In the case of Class A shares,
after deduction of any applicable sales charge, the balance will be applied to
the purchase of Fund shares, and, in the case of shares of the other Classes,
the entire amount will be applied to the purchase of Fund shares, at the net
asset value per share next computed after receipt of the check or purchase
payment by the Transfer Agent. The shares so purchased will be credited to the
investor's account.
EXCHANGE PRIVILEGE
As discussed in the Prospectus, the Fund makes available to its
shareholders an Exchange Privilege whereby shareholders of each Class of shares
of the Fund may exchange their shares for shares of the same Class of shares of
any other TCW/DW Multi-Class Fund without the imposition of any exchange fee.
Shares may also be exchanged for TCW/DW North American Government Income Trust
and five money market funds for which MSDW Advisors serves as investment
manager (the foregoing six funds are hereinafter collectively referred to as
the "Exchange 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 will be treated for federal
income tax purposes the same as a repurchase or redemption of shares, on which
the shareholder may realize a capital gain or loss.
Shareholders utilizing the Fund's Exchange Privilege may subsequently
re-exchange such shares back to the Fund. However, no exchange privilege is
available between the Fund and any other fund managed by the Manager or MSDW
Advisors, except for other TCW/DW Funds and the five money market funds listed
in the Prospectus.
Any new account established through the Exchange Privilege will have the
same registration and cash dividend or dividend reinvestment plan as the
present account, unless the Transfer Agent receives written notification to the
contrary. For telephone exchanges, the exact registration of the existing
account and the account number must be provided.
Any shares held in certificate form cannot be exchanged but must be
forwarded to the Transfer Agent and deposited into the shareholder's account
before being eligible for exchange. (Certificates mailed in for deposit should
not be endorsed.)
As described below, and in the Prospectus under the caption "Purchase of
Fund Shares," a CDSC may be imposed upon a redemption, depending on a number of
factors, including the number of years from the time of purchase until the time
of redemption or exchange ("holding period"). When shares of a TCW/DW
Multi-Class Fund are exchanged for shares of an Exchange Fund, the exchange is
executed at no charge to the shareholder, without the imposition of the CDSC at
the time of the exchange. During the period of time the shareholder remains in
the Exchange Fund (calculated from the last day of the month in which the
Exchange Fund shares were acquired), the holding period or "year since purchase
payment made" is frozen. When shares are redeemed out of the Exchange Fund,
they will be subject to a CDSC which would be based upon the period of time the
shareholder held shares in a TCW/DW Multi-Class Fund. However, in the case of
shares exchanged into an Exchange Fund, upon a redemption of shares which
results in a CDSC being imposed, a credit (not to exceed the amount of the
CDSC) will be given in an amount equal to the Exchange Fund 12b-1 distribution
fees which are attributable to those shares. Shareholders acquiring shares of
an Exchange Fund pursuant to this exchange privilege may exchange those shares
back into a TCW/DW Multi-Class Fund from the Exchange Fund, with no charge
being imposed on such exchange. The holding period previously frozen when
shares were first exchanged for shares of an Exchange Fund resumes on the last
day of the month in which shares of a TCW/DW Multi-Class Fund are reacquired. A
CDSC is imposed only upon an ultimate redemption, based upon the time
(calculated as described above) the shareholder was invested in a TCW/DW
Multi-Class Fund.
When shares initially purchased in a TCW/DW Multi-Class Fund are exchanged
for shares of a TCW/DW Multi-Class Fund or shares of an Exchange Fund, the date
of purchase of the shares of the fund exchanged into, for purposes of the CDSC
upon redemption, will be the last day of the month in which the shares being
exchanged were originally purchased. In allocating the purchase payments
between funds for purposes of the CDSC the amount which represents the current
net asset value of shares at the time of the exchange which were (i) purchased
more than one, three or six years (depending on the CDSC schedule applicable to
the shares) prior to the exchange and (ii) originally acquired through
reinvestment of dividends or distributions (all such shares called "Free
Shares") will be exchanged first. After an exchange, all dividends earned on
shares in the Exchange Fund will be considered Free Shares. If the exchanged
amount exceeds the value of such Free Shares, an exchange is made, on a
36
<PAGE>
block-by-block basis, of non-Free Shares held for the longest period of time.
Shares equal to any appreciation in the value of non-Free Shares exchanged will
be treated as Free Shares, and the amount of the purchase payments for the
non-Free Shares of the fund exchanged into will be equal to the lesser of (a)
the purchase payments for, or (b) the current net asset value of, the exchanged
non-Free Shares. If an exchange between funds would result in exchange of only
part of a particular block of non-Free Shares, then shares equal to any
appreciation in the value of the block (up to the amount of the exchange) will
be treated as Free Shares and exchanged first, and the purchase payment for
that block will be allocated on a pro rata basis between the non-Free Shares of
that block to be retained and the non-Free Shares to be exchanged. The prorated
amount of such purchase payment attributable to the retained non-Free Shares
will remain as the purchase payment for such shares, and the amount of purchase
payment for the exchanged non-Free Shares will be equal to the lesser of (a)
the prorated amount of the purchase payment for, or (b) the current net asset
value of, those exchanged non-Free Shares. Based upon the procedures described
in the Prospectus under the caption "Purchase of Shares," any applicable CDSC
will be imposed upon the ultimate redemption of shares of any fund, regardless
of the number of exchanges since those shares were originally purchased.
With respect to the redemption or repurchase of shares of the Fund, the
application of proceeds to the purchase of new shares in the Fund or any other
of the funds and the general administration of the Exchange Privilege, the
Transfer Agent acts as agent for the Distributor and for the shareholder's
selected broker-dealer, if any, in the performance of such functions. With
respect to exchanges, redemptions or repurchases, the Transfer Agent shall be
liable for its own negligence and not for the default or negligence of its
correspondents or for losses in transit. The Fund shall not be liable for any
default or negligence of the Transfer Agent, the Distributor or any selected
broker-dealer.
The Distributor and any selected broker-dealer have authorized and
appointed the Transfer Agent to act as their agent in connection with the
application of proceeds of any redemption of Fund shares to the purchase of
shares of any other fund and the general administration of the Exchange
Privilege. No commission or discounts will be paid to the Distributor or any
selected broker-dealer for any transactions pursuant to this Exchange
Privilege.
Exchanges are subject to the minimum investment requirement and any other
conditions imposed by each fund. (The minimum initial investment for the
Exchange Privilege account of each Class is $5,000 for Morgan Stanley Dean
Witter Liquid Asset Fund Inc., Morgan Stanley Dean Witter Tax-Free Daily Income
Trust, Morgan Stanley Dean Witter New York Municipal Money Market Trust and
Morgan Stanley Dean Witter California Tax-Free Daily Income Trust, although
those funds may, at their discretion, accept initial investments of as low as
$1,000. The minimum initial investment for the Exchange Privilege account of
each Class for Morgan Stanley Dean Witter U.S. Government Money Market Trust
and for all TCW/DW Funds is $1,000.) Upon exchange into an Exchange Fund, the
shares of that fund will be held in a special Exchange Privilege Account
separately from accounts of those shareholders who have acquired their shares
directly from that fund. As a result, certain services normally available to
shareholders of money market funds, including the check writing feature, will
not be available for funds held in that account.
The Fund, each of the other TCW/DW Funds and each of the money market
funds may limit the number of times this Exchange Privilege may be exercised by
any investor within a specified period of time. Also, the Exchange Privilege
may be terminated or revised at any time by the Fund and/or any of the funds
for which shares of the Fund have been exchanged, upon such notice as may be
required by applicable regulatory agencies (presently sixty days for
termination or material revision), provided that six months prior written
notice of termination will be given to the shareholders who hold shares of
Exchange Funds pursuant to this Exchange Privilege, and provided further that
the Exchange Privilege may be terminated or materially revised without notice
at times (a) when the New York Stock Exchange is closed for other than
customary weekends and holidays, (b) when trading on that Exchange is
restricted, (c) when an emergency exists as a result of which disposal by the
Fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets, (d) during any other period when the Securities and Exchange Commission
by order so permits (provided that applicable rules and regulations of the
Securities and Exchange Commission shall govern as to whether the conditions
prescribed in (b) or (c) exist) or (e) if the Fund would be unable to invest
amounts effectively in accordance with its investment objective, policies and
restrictions.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain a copy and examine it carefully
before investing. An exchange will be treated for federal income tax
37
<PAGE>
purposes the same as a repurchase or redemption of shares, on which the
shareholder may realize a capital gain or loss. However, the ability to deduct
capital losses on an exchange may be limited in situations where there is an
exchange of shares within ninety days after the shares are purchased. The
Exchange Privilege is only available in states where an exchange may legally be
made.
For further information regarding the Exchange Privilege, shareholders
should contact their Morgan Stanley Dean Witter Financial Advisor or other
selected broker-dealer representative or the Transfer Agent.
REPURCHASES AND REDEMPTIONS
- --------------------------------------------------------------------------------
Redemption. As stated in the Prospectus, shares of each Class of the Fund
can be redeemed for cash at any time at the net asset value per share next
determined; however, such redemption proceeds will be reduced by the amount of
any applicable CDSC. 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. The share certificate, or
an accompanying stock power, and the request for redemption, must be signed by
the shareholder or shareholders exactly as the shares are registered. Each
request for redemption, whether or not accompanied by a share certificate, must
be sent to the Fund's Transfer Agent, which will redeem the shares at their net
asset value next computed (see "Purchase of Fund Shares") after it receives the
request, and certificate, if any, in good order. Any redemption request
received after such computation will be redeemed at the next determined net
asset value. The term "good order" means that the share certificate, if any,
and request for redemption are properly signed, accompanied by any
documentation required by the Transfer Agent, and bear signature guarantees
when required by the Fund or the Transfer Agent. If redemption is requested by
a corporation, partnership, trust or fiduciary, the Transfer Agent may require
that written evidence of authority acceptable to the Transfer Agent be
submitted before such request is accepted.
Whether certificates are held by the shareholder or shares are held in a
shareholder's account, if the proceeds are to be paid to any person other than
the record owner, or if the proceeds are to be paid to a corporation (other
than the Distributor or a selected broker-dealer for the account of the
shareholder), partnership, trust or fiduciary, or sent to the shareholder at an
address other than the registered address, signatures must be guaranteed by an
eligible guarantor acceptable to the Transfer Agent (shareholders should
contact the Transfer Agent for a determination as to whether a particular
institution is such an eligible guarantor). A stock power may be obtained from
any dealer or commercial bank. The Fund may change the signature guarantee
requirements from time to time upon notice to shareholders, which may be by
means of a revised prospectus.
Repurchase. As stated in the Prospectus, DWR and other selected
broker-dealers are authorized to repurchase shares represented by a share
certificate which is delivered to any of their offices. Shares held in a
shareholder's account without a share certificate may also be repurchased by
DWR and other selected broker-dealers upon the telephonic request of the
shareholder. The repurchase price is the net asset value next computed after
such purchase order is received by DWR or other selected broker-dealer reduced
by any applicable CDSC.
Payment for Shares Repurchased or Redeemed. As discussed in the
Prospectus, payment for shares of any Class 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 at times (a) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (b) when trading on that Exchange is restricted, (c) when an
emergency exists as a result of which disposal by the Fund of securities owned
by it is not reasonably practicable or it is not reasonably practicable for the
Fund fairly to determine the value of its net assets, or (d) during any other
period when the Securities and Exchange Commission by order so permits;
provided that applicable rules and regulations of the Securities and Exchange
Commission shall govern as to whether the conditions prescribed in (b) or (c)
exist. If the shares to be redeemed have recently been purchased by check,
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). It
has been and remains the Fund's policy and practice that, if checks for
redemption proceeds remain uncashed, no interest will accrue on amounts
represented by such uncashed checks. 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.
38
<PAGE>
Transfers of Shares. In the event a shareholder requests a transfer of any
shares to a new registration, such shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the CDSC or free of such charge (and with regard to the
length of time shares subject to the charge have been held), any transfer
involving less than all of the shares in an account will be made on a pro-rata
basis (that is, by transferring shares in the same proportion that the
transferred shares bear to the total shares in the account immediately prior to
the transfer). The transferred shares will continue to be subject to any
applicable CDSC as if they had not been so transferred.
Reinstatement Privilege. As discussed in the Prospectus, 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
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 at the net
asset value next determined after a reinstatement request, together with such
proceeds, is received by the Transfer Agent.
Exercise of the reinstatement privilege will not affect the federal income
tax treatment of any gain or loss realized upon the redemption or repurchase,
except that if the redemption or repurchase resulted in a loss and
reinstatement is made in shares of the Fund, some or all of the loss, depending
on the amount reinstated, will not be allowed as a deduction for federal income
tax purposes, but will be applied to adjust the cost basis of the shares
acquired upon reinstatement.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
As discussed in the Prospectus, the Fund will determine either to
distribute or to retain all or part of any net long-term capital gains in any
year for reinvestment. If any such gains are retained, the Fund will pay
federal income tax thereon, and shareholders will be required to include such
undistributed gains in their taxable income and will be able to claim their
share of the tax paid by the Fund as a credit against their individual federal
income tax. In addition, shareholders are entitled to increase their tax basis
of their investment by their pro rata share of the undistributed gain net of
the tax paid by the Fund on such gain.
Gains or losses on sales of securities by the Fund will be long-term
capital gains or losses if the securities have been held by the Fund for more
than twelve months. Gains or losses on the sale of securities held for twelve
months or less will be short-term gains or losses.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder
has held the Fund's shares and regardless of whether the distribution is
received in additional shares or in cash. The Treasury intends to issue
regulations to permit shareholders to take into account their proportionate
share of the Fund's capital gains distributions that will be subject to a
reduced rate under the Taxpayer Relief Act of 1997. The Taxpayer Relief Act
reduces the maximum tax rate on long-term capital gains from 28% to 20%; it
also lengthens the required holding period to obtain the lower rate from more
than twelve months to more than eighteen months. However, the IRS Restructuring
and Reform Act of 1998 reduces the holding period requirement for the lower
capital gain rate to more than 12 months for transactions occurring after
January 1, 1998. The lower rates do not apply to collectibles and certain other
assets. Additionally, the maximum capital gain rate for assets that are held
more than five years and that are acquired after December 31, 2000 is 18%.
The Fund intends to remain qualified as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986. As such, the Fund will
not be subject to federal income tax on its net investment income and capital
gains, if any, realized during any fiscal year in which it distributes such
income and capital gains to its shareholders. In addition, the Fund intends to
distribute to its sharesholders each calendar year a sufficient amount of
ordinary income and capital gains to avoid the imposition of a 4% excise tax.
Shareholders will normally have to pay federal income taxes, and any state
and/or local income taxes, on the dividends and distributions they receive from
the Fund. Such dividends and distributions, to the extent that they are derived
from net investment income or short-term capital gains, are taxable to the
shareholder as ordinary income regardless of whether the shareholder receives
such payments in additional shares or in cash. 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 received by the shareholder in the prior year.
Any dividend or capital gains distribution received by a shareholder from
any investment company will have the effect of reducing the net asset value of
the shareholder's stock in that company by the exact amount of the dividend or
capital gains distribution. Furthermore, capital gains distributions and
dividends are subject to federal
39
<PAGE>
income taxes. If the net asset value of the shares should be reduced below a
shareholder's cost as a result of the payment of dividends or the distribution
of realized net long-term capital gains, such payment or distribution would be
in part a return of the shareholder's investment to the extent of such
reduction below the shareholder's cost, but nonetheless would be fully taxable
at either ordinary or capital gain rates. Therefore, an investor should
consider the tax implications of purchasing Fund shares immediately prior to a
dividend or distribution record date.
Any loss realized by shareholders upon a redemption of shares within six
months of the date of their purchase will be treated as a long-term capital
loss to the extent of any distributions of net long-term capital gains during
the six-month period.
Dividend payments will be eligible for the federal dividends received
deduction available to the Fund's corporate shareholders only to the extent the
aggregate dividends received by the Fund would be eligible for the deduction if
the Fund were the shareholder claiming the dividends received deduction. The
amount of dividends paid by the Fund which may qualify for the dividends
received deduction is limited to the aggregate amount of qualifying dividends
which the Fund derives from its portfolio investments which the Fund has held
for a minimum period, usually 46 days within a 90-day period beginning 45 days
before the ex-dividend date of each qualifying dividend. Shareholders must meet
a similar holding period requirement with respect to their shares to claim the
dividends received deduction with respect to any distribution of qualifying
dividends. Any long-term capital gain distributions will also not be eligible
for the dividends received deduction. The ability to take the dividends
received deduction will also be limited in the case of a Fund shareholder which
incurs or continues indebtedness which is directly attributable to its
investment in the Fund.
Shareholders are urged to consult their attorneys or tax advisers
regarding specific questions as to federal, state or local taxes.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
As discussed in the Prospectus, 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
Fund's "average annual total return" represents an annualization of the Fund's
total return over a particular period and is computed by finding the annual
percentage rate which will result in the ending redeemable value of a
hypothetical $1,000 investment made at the beginning of a one, five or ten year
period, or for the period from the date of commencement of the Fund's
operations, if shorter than any of the foregoing. For periods of less than one
year, the Fund quotes its total return on a non-annualized basis.
The Fund may compute its aggregate total return for specified periods by
determining the aggregate percentage rate which will result in the ending value
of a hypothetical $1,000 investment made at the beginning of the period. For
the purpose of this calculation, it is assumed that all dividends and
distributions are reinvested. The formula for computing aggregate total return
involves a percentage obtained by dividing the ending value by the initial
$1,000 investment and subtracting 1 from the result. The ending redeemable
value is reduced by any CDSC at the end of the period. Based on the foregoing
calculation, the Fund's total return of Class B for the period August 28, 1996
(commencement of operations) through May 31, 1998 and for the fiscal year ended
May 31, 1998 was 41.51% and 22.30%, respectively.
For periods of less than one year, the Fund quotes its total return on a
non-annualized basis. Accordingly, the Fund may compute its aggregate total
return for each of Class A, Class C and Class D for specified periods by
determining the aggregate percentage rate which will result in the ending value
of a hypothetical $1,000 investment made at the beginning of the period. For
the purpose of this calculation, it is assumed that all dividends and
distributions are reinvested. The formula for computing aggregate total return
involves a percentage obtained by dividing the ending value by the initial
$1,000 investment and subtracting 1 from the result. The ending redeemable
value is reduced by any CDSC at the end of the period. Based on the foregoing
calculations, the total returns for the period July 28, 1997 through May 31,
1998 were 6.73%, 10.86% and 12.80% for Class A, Class C and Class D,
respectively.
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. Such calculations may or
may not reflect the imposition of the maximum front-end sales charge for Class
A or the deduction of the CDSC for each of Class B and Class C which, if
reflected, would reduce the performance quotes. For example, the total
40
<PAGE>
return of the Fund may be calculated in the manner described above, but without
deduction of any applicable contingent deferred sales charge. Based on this
calculation, the aggregate total returns of Class B for the period August 28,
1996 (commencement of operations) through May 31, 1998 and for the fiscal year
ended May 31, 1998 were 45.51% and 27.30%, respectively.
In addition, the Fund may compute its aggregate total return for each
Class for specified periods by determining the aggregate percentage rate which
will result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is assumed
that all dividends and distributions are reinvested. The formula for computing
aggregate total return involves a percentage obtained by dividing the ending
value (without the reduction for any sales charge) by the initial $1,000
investment and subtracting 1 from the result. Based on the foregoing
calculation, the total returns of Class B for the fiscal year ended May 31,
1998 and the period from August 28, 1996 (commencement of operations) through
May 31, 1998 were 27.30% and 45.51%, respectively. Based on the foregoing
calculations, the total returns for Class A, Class C and Class D for the period
July 28, 1997 through May 31, 1998 were 12.64%, 11.86% and 12.80%,
respectively.
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 by adding 1
to the Fund's aggregate total return to date (expressed as a decimal and
without taking into account the effect of any applicable CDSC) and multiplying
by $9,475, $48,000 and $97,000 in the case of Class A (investments of $10,000,
$50,000 or $100,000 adjusted for the initial sales charge) or by $10,000,
$50,000 and $100,000 in the case of each of Class B, Class C and Class D, as
the case may be. Investments of $10,000, $50,000 and $100,000 in each Class at
inception of the Class would have grown to the following amounts at May 31,
1998:
<TABLE>
<CAPTION>
INVESTMENT AT INCEPTION OF:
INCEPTION -----------------------------------
CLASS DATE $10,000 $50,000 $100,000
- ----- ---- ------- ------- --------
<S> <C> <C> <C> <C>
Class A ......... 7/28/97 $10,673 $54,067 $109,261
Class B ......... 8/28/96 14,551 72,755 145,510
Class C ......... 7/28/97 11,186 55,930 111,860
Class D ......... 7/28/97 11,280 56,400 112,800
</TABLE>
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent organizations.
DESCRIPTION OF SHARES
- --------------------------------------------------------------------------------
The shareholders of the Fund are entitled to a full vote for each full
share held. The Trustees were elected by MSDW Advisors as the then sole
shareholder of the Fund prior to the public offering of the Fund's shares. The
Trustees themselves have the power to alter the number and the terms of office
of the Trustees, and they may at any time lengthen their own terms or make
their terms of unlimited duration and appoint their own successors, provided
that always at least a majority of the Trustees has been elected by the
shareholders of the Fund. Under certain circumstances the Trustees may be
removed by action of the Trustees. The shareholders also have the right to
remove the Trustees following a meeting called for that purpose requested in
writing by the record holders of not less than ten percent of the Fund's
outstanding shares. The voting rights of shareholders are not cumulative, so
that holders of more than 50 percent of the shares voting can, if they choose,
elect all Trustees being selected, while the holders of the remaining shares
would be unable to elect any Trustees.
The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios) and additional classes of shares
within any series (which would be used to distinguish among the rights of
different categories of shareholders, as might be required by future
regulations or other unforeseen circumstances). The Trustees have not presently
authorized any such additional series or classes of shares other than as set
forth in the Prospectus.
The Declaration of Trust provides that no Trustee, officer, employee or
agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his own
bad faith, willful misfeasance, gross negligence, or reckless disregard of his
duties. It also provides that all third persons shall look solely to the Fund's
property for satisfaction of claims arising in connection with the affairs of
the Fund. With the exceptions stated, the Declaration of Trust provides that a
Trustee, officer, employee or agent is entitled to be indemnified against all
liabilities in connection with the affairs of the Fund.
41
<PAGE>
The Fund is authorized to issue an unlimited number of shares of
beneficial interest. The Fund shall be of unlimited duration subject to the
provisions of the Declaration of Trust concerning termination by action of the
shareholders.
CUSTODIAN AND TRANSFER AGENT
- --------------------------------------------------------------------------------
The Chase Manhattan Bank, One Chase Plaza, New York, New York 10005 is the
Custodian of the Fund's assets. Any of the Fund's cash balances with the
Custodian in excess of $100,000 are unprotected by federal deposit insurance.
Such balances may, at times, be substantial.
Morgan Stanley Dean Witter Trust FSB ("MSDW Trust"), Harborside Financial
Center, Plaza Two, Jersey City, New Jersey 07311 is the Transfer Agent of the
Fund's shares and Dividend Disbursing Agent for payment of dividends and
distributions on Fund shares and Agent for shareholders under various
investment plans described herein. MSDW Trust is an affiliate of Morgan Stanley
Dean Witter Services Company Inc., the Fund's Manager, and of Morgan Stanley
Dean Witter Distributors Inc., the Fund's Distributor. As Transfer Agent and
Dividend Disbursing Agent, MSDW Trust's responsibilities include maintaining
shareholder accounts, disbursing cash dividends and reinvesting dividends,
processing account registration changes, handling purchase and redemption
transactions, mailing prospectuses and reports, mailing and tabulating proxies,
processing share certificate transactions, and maintaining shareholder records
and lists. For these services MSDW Trust receives a per shareholder account
fee.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP serves as the independent accountants of the
Fund. The independent accountants are responsible for auditing the annual
financial statements of the Fund.
REPORTS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports
showing the Fund's portfolio and other information. An annual report containing
financial statements audited by independent accountants will be sent to
shareholders each year.
The Fund's fiscal year ends on May 31. The financial statements of the
Fund must be audited at least once a year by independent accountants whose
selection is made annually by the Fund's Board of Trustees.
LEGAL COUNSEL
- --------------------------------------------------------------------------------
Barry Fink, Esq., who is an officer and the General Counsel of the
Manager, is an officer and the General Counsel of the Fund.
EXPERTS
- --------------------------------------------------------------------------------
The financial statements of the Fund included in this Statement of
Additional Information and incorporated by reference in the Prospectus have
been so included and incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
42
<PAGE>
TCW/DW GLOBAL TELECOM TRUST
PORTFOLIO OF INVESTMENTS May 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON AND PREFERRED STOCKS
AND RIGHTS (99.1%)
BRAZIL (5.7%)
Telephones
1,600,000 Cia Riograndense Telecomunicacoes
S.A. (Pref.) ........................... $ 1,724,617
42,341 Cia Riograndense Telecomunicacoes
S.A. (Rights)* ......................... --
20,000 Telecomunicacoes Brasileiras
S.A. -- Telebras (ADR) ................. 2,132,500
11,000,000 Telecomunicacoes de Minas
Gerais -- Telemig ...................... 1,109,179
11,000,000 Telecomunicacoes de Minas
Gerais -- Telemig (Pref.)* ............. 564,152
25,000,000 Telecomunicacoes do Rio de
Janeiro S.A. -- Telerj ................. 2,086,231
25,000,000 Telecomunicacoes do Rio de
Janeiro S.A. -- Telerj (Pref.)* ........ 1,825,452
------------
TOTAL BRAZIL ............................. 9,442,131
------------
CANADA (4.7%)
Computer Software
95,300 Cognicase Inc. ........................... 1,453,325
114,100 CrossKeys Systems Corp.* ................. 1,162,394
600,000 Sanga International Inc.* ** ............. 3,000,000
------------
5,615,719
------------
Telecommunications
190,400 Clearnet Communications Inc.
(Class A)* ............................... 2,165,800
------------
TOTAL CANADA ............................. 7,781,519
------------
CHINA (0.8%)
Telephones
40,000 China Telecom (Hong Kong) Ltd.
(ADR)* ................................... 1,425,000
------------
FINLAND (2.4%)
Telecommunications
60,588 Nokia Corp. (ADR) ........................ 3,934,433
------------
HONG KONG (0.9%)
Telecommunications
160,000 APT Satellite Holdings Ltd.
(ADR)* ................................... 1,520,000
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
INDIA (0.9%)
Telecommunications
125,000 Videsh Sanchar Nigam Ltd.
(GDR)* ................................... $ 1,485,000
------------
ISRAEL (2.4%)
Telecommunications
70,000 ECI Telecommunications Limited
Designs ................................ 2,213,750
60,000 Gilat Satellite Networks Ltd. ............ 1,860,000
------------
TOTAL ISRAEL ............................. 4,073,750
------------
ITALY (2.7%)
Communications Equipment
800,000 Pirelli SpA .............................. 2,636,693
------------
Telecommunications
250,000 Telecom Italia SpA ....................... 1,887,310
------------
TOTAL ITALY .............................. 4,524,003
------------
JAPAN (3.8%)
Computers
130,000 Fujitsu Ltd. ............................. 1,488,657
------------
Electronic Components
17,700 Hitachi Ltd. (ADR) ....................... 1,174,838
------------
Telephones
1,300 DDI Corp. ................................ 3,726,323
------------
TOTAL JAPAN .............................. 6,389,818
------------
MEXICO (1.3%)
Telephones
44,400 Telefonos de Mexico S.A. de C.V.
(Series L) (ADR) ......................... 2,106,225
------------
NETHERLANDS (0.9%)
Electronics
15,000 Philips Electronics N.V. ................. 1,426,875
------------
PERU (1.3%)
Telephones
100,000 Telefonica del Peru S.A. (ADR) ........... 2,162,500
------------
RUSSIA (0.6%)
Telephones
20,000 Vimpel -- Communications (ADR)* 968,750
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
43
<PAGE>
TCW/DW GLOBAL TELECOM TRUST
PORTFOLIO OF INVESTMENTS May 31, 1998, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
SINGAPORE (0.6%)
Wire & Cable
151,300 Asia Pacific Wire & Cable Corp.*........ $ 1,096,925
------------
SWEDEN (2.5%)
Telecommunications
151,800 Ericsson (L.M.) Telephone Co.
(Class B) (ADR) ........................ 4,231,425
------------
UNITED KINGDOM (1.7%)
Telecommunications
95,000 Esat Telecom Group PLC (ADR)*........... 2,850,000
------------
UNITED STATES (64.8%)
Broadcast Media
46,600 Cox Communications, Inc.
(Class A)* ............................. 2,035,837
61,400 Sinclair Broadcast Group, Inc.* ........ 1,561,862
------------
3,597,699
------------
Business Services
44,700 Cognizant Corp. ........................ 2,380,275
109,800 LCC International, Inc. (Class A)*...... 1,756,800
69,000 Omnicom Group, Inc. .................... 3,230,062
------------
7,367,137
------------
Cable Television Equipment
42,000 CIENA Corp.* ........................... 2,173,500
------------
Cable/Cellular
57,200 Houston Industries, Inc. $3.22
(Conv. Pref.) .......................... 3,982,550
------------
Commercial & Consumer Services
100,800 Cendant Corp.* ......................... 2,186,100
------------
Communications -- Equipment &
Software
41,300 Cisco Systems, Inc.* ................... 3,118,150
117,600 Pairgain Technologies, Inc.* ........... 1,837,500
35,100 Tellabs, Inc.* ......................... 2,410,931
------------
7,366,581
------------
Communications -- Equipment/
Manufacturers
51,300 3Com Corp.* ............................ 1,301,737
68,200 Andrew Corp.* .......................... 1,496,137
------------
2,797,874
------------
Communications Equipment
45,000 ADC Telecommunications, Inc.* .......... 1,254,375
134,300 FORE Systems, Inc.* .................... 2,929,419
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
55,800 MRV Communications, Inc.* .............. $ 1,297,350
96,000 Xircom, Inc.* .......................... 1,500,000
------------
6,981,144
------------
Computer Software
158,000 Pervasive Software, Inc.* .............. 1,757,750
64,400 Security Dynamics Technologies,
Inc.* .................................. 1,352,400
------------
3,110,150
------------
Computer Software & Services
95,800 Checkfree Holdings Corp.* .............. 2,167,475
56,500 Sterling Commerce, Inc.* ............... 2,242,344
------------
4,409,819
------------
Consumer Services
64,800 E*TRADE Group, Inc.* ................... 1,401,300
------------
Electrical Equipment
300,000 Jinpan International Ltd.* ............. 1,875,000
------------
Electronics & Electrical
69,700 Cymer, Inc.* ........................... 1,324,300
32,500 Teradyne, Inc.* ........................ 999,375
------------
2,323,675
------------
Electronics -- Semiconductors/
Components
22,600 Intel Corp. ............................ 1,613,075
64,200 Maxim Integrated Products, Inc.*........ 2,142,675
------------
3,755,750
------------
Home Entertainment
55,800 Electronic Arts, Inc.* ................. 2,413,350
134,400 T-HQ, Inc.* ............................ 3,192,000
------------
5,605,350
------------
Internet
87,500 At Home Corp. (Series A)* .............. 3,029,688
62,100 Infoseek Corp.* ........................ 1,432,181
94,700 USWeb Corp.* ........................... 1,994,619
------------
6,456,488
------------
Media
98,100 Tele-Communications Liberty
Media Group (Class A)* ................. 3,225,038
204,400 VDI Media* ............................. 3,066,000
------------
6,291,038
------------
Publishing
50,100 Mecklermedia Corp.* .................... 1,039,575
129,800 Ziff-Davis Inc.* ....................... 2,190,375
------------
3,229,950
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
44
<PAGE>
TCW/DW GLOBAL TELECOM TRUST
PORTFOLIO OF INVESTMENTS May 31, 1998, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------
<S> <C> <C>
Publishing -- Newspaper
31,400 Tribune Co. .......................... $ 2,099,875
------------
Telecommunications
43,100 Advanced Fibre Communications,
Inc.* ................................ 1,594,700
176,200 Boston Communications Group,
Inc.* ................................ 1,497,700
250,000 Euronet Services, Inc. ............... 1,468,750
400,000 General DataComm Industries,
Inc.* ................................ 1,825,000
85,000 Global Telesystems Group, Inc.* ...... 3,251,250
34,500 Iridium World Communications
Ltd. ................................. 1,897,500
39,100 NEXTLINK Communications, Inc.
(Class A)* ........................... 1,216,988
84,100 Premiere Technologies, Inc.* ......... 2,007,888
107,000 Primus Telecommunications
Group, Inc.* ......................... 1,952,750
100,000 RSL Communications, Ltd.
(Class A)* ........................... 2,475,000
103,600 SmarTalk Teleservices, Inc.* ......... 1,897,175
44,700 Teleport Communications Group
Inc. (Class A)* ...................... 2,497,613
160,000 Tricom, S.A. (ADR)* .................. 1,350,000
------------
24,932,314
------------
Telecommunications -- Cellular/
Wireless
40,000 Airtouch Communications, Inc.* ....... 1,905,000
89,600 Nextel Communications, Inc.
(Class A)* ........................... 2,105,600
------------
4,010,600
------------
Utilities -- Telecommunications
29,400 Intermedia Communications, Inc.*...... 2,175,600
------------
TOTAL UNITED STATES .................. 108,129,494
------------
VENEZUELA (1.1%)
Telephones
60,000 Compania Anonima Nacional
Telefonos de Venezuela
(ADR) * .............................. 1,848,750
------------
</TABLE>
<TABLE>
<CAPTION>
VALUE
- -------------------------------------------------------------------
<S> <C> <C>
TOTAL COMMON AND PREFERRED
STOCKS AND RIGHTS
(Identified Cost $144,178,555) (a) 99.1% $165,396,598
CASH AND OTHER ASSETS IN
EXCESS OF LIABILITIES ............ 0.9 1,425,602
------------
NET ASSETS ....................... 100.0% $166,822,200
============
</TABLE>
- --------------------------------
ADR American Depository Receipt.
GDR Global Depository Receipt.
* Non-income producing security.
** Restricted security.
(a) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$34,887,310 and the aggregate gross unrealized depreciation is
$13,669,267, resulting in net unrealized appreciation of
$21,218,043.
SEE NOTES TO FINANCIAL STATEMENTS
45
<PAGE>
TCW/DW GLOBAL TELECOM TRUST
SUMMARY OF INVESTMENTS May 31, 1998
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ----------------------------------------------------------------------------------
<S> <C> <C>
Broadcast Media .................................. $ 3,597,699 2.2%
Business Services ................................ 7,367,137 4.4
Cable Television Equipment ....................... 2,173,500 1.3
Cable/Cellular ................................... 3,982,550 2.4
Commercial & Consumer Services ................... 2,186,100 1.3
Communications - Equipment & Software ............ 7,366,581 4.4
Communications - Equipment/Manufacturers ......... 2,797,874 1.7
Communications Equipment ......................... 9,617,837 5.8
Computer Software ................................ 8,725,869 5.2
Computer Software & Services ..................... 4,409,819 2.6
Computers ........................................ 1,488,657 0.9
Consumer Services ................................ 1,401,300 0.8
Electrical Equipment ............................. 1,875,000 1.1
Electronic Components ............................ 1,174,838 0.7
Electronics ...................................... 1,426,875 0.9
Electronics & Electrical ......................... 2,323,675 1.4
Electronics - Semiconductors/Components .......... 3,755,750 2.2
Home Entertainment ............................... 5,605,350 3.4
Internet ......................................... 6,456,488 3.9
Media ............................................ 6,291,038 3.8
Publishing ....................................... 3,229,950 1.9
Publishing - Newspaper ........................... 2,099,875 1.3
Telecommunications ............................... 47,080,032 28.2
Telecommunications - Cellular/Wireless ........... 4,010,600 2.4
Telephones ....................................... 21,679,679 13.0
Utilities - Telecommunications ................... 2,175,600 1.3
Wire & Cable ..................................... 1,096,925 0.6
------------ ----
$165,396,598 99.1%
============ ====
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
TYPE OF INVESTMENT VALUE NET ASSETS
- ----------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks ........................ $157,299,827 94.3%
Convertible Preferred Stocks ......... 3,982,550 2.4
Preferred Stocks ..................... 4,114,221 2.4
------------ ----
$165,396,598 99.1%
============ ====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
46
<PAGE>
TCW/DW GLOBAL TELECOM TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $144,178,555) ............ $165,396,598
Cash ......................................... 329,239
Receivable for:
Investments sold ........................... 3,621,891
Shares of beneficial interest sold ......... 385,028
Dividends .................................. 84,633
Interest ................................... 30,698
Deferred organizational expenses ............. 111,518
Prepaid expenses and other assets ............ 105,600
------------
TOTAL ASSETS ............................... 170,065,205
------------
LIABILITIES:
Payable for:
Investments purchased ...................... 2,826,110
Shares of beneficial interest
repurchased ............................. 131,900
Plan of distribution fee ................... 110,143
Management fee ............................. 89,196
Investment advisory fee .................... 59,464
Accrued expenses and other payables .......... 26,192
------------
TOTAL LIABILITIES .......................... 3,243,005
------------
NET ASSETS ................................. $166,822,200
============
COMPOSITION OF NET ASSETS:
Paid-in-capital ............................. $124,359,589
Net unrealized appreciation .................. 21,217,915
Net investment loss .......................... (18,845)
Accumulated undistributed net realized gain 21,263,541
------------
NET ASSETS ................................. $166,822,200
============
CLASS A SHARES:
Net Assets ................................... $966,443
Shares Outstanding (unlimited authorized,
$.01 par value) ........................... 68,811
NET ASSET VALUE PER SHARE .................. $14.04
======
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net
asset value) ............................ $14.82
======
CLASS B SHARES:
Net Assets ................................... $165,285,396
Shares Outstanding (unlimited authorized,
$.01 par value) ........................... 11,832,228
NET ASSET VALUE PER SHARE .................. $13.97
======
CLASS C SHARES:
Net Assets ................................... $559,065
Shares Outstanding (unlimited authorized,
$.01 par value) ........................... 40,065
NET ASSET VALUE PER SHARE .................. $13.95
======
CLASS D SHARES:
Net Assets ................................... $11,296
Shares Outstanding (unlimited authorized,
$.01 par value) ........................... 803
NET ASSET VALUE PER SHARE .................. $14.07
======
</TABLE>
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended May 31, 1998*
NET INVESTMENT INCOME:
INCOME
Dividends (net of $73,845 foreign
withholding tax) ............................... $ 1,105,413
Interest .......................................... 144,228
-----------
TOTAL INCOME .................................... 1,249,641
-----------
EXPENSES
Plan of distribution fee (Class A Shares) ......... 736
Plan of distribution fee (Class B Shares) ......... 1,206,683
Plan of distribution fee (Class C Shares) ......... 2,932
Management fee .................................... 910,689
Investment advisory fee ........................... 607,126
Transfer agent fees and expenses .................. 219,574
Registration fees ................................. 51,959
Custodian fees .................................... 43,110
Professional fees ................................. 42,538
Trustees' fees and expenses ....................... 39,619
Organizational expenses ........................... 34,925
Shareholder reports and notices ................... 26,134
Foreign exchange provisional tax .................. 20,095
Other ............................................. 12,757
-----------
TOTAL EXPENSES .................................. 3,218,877
-----------
NET INVESTMENT LOSS ............................. (1,969,236)
-----------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain (loss) on:
Investments .................................. 28,200,756
Foreign exchange transactions ................ (19,991)
-----------
NET GAIN ........................................ 28,180,765
-----------
Net change in unrealized appreciation on:
Investments .................................. 7,811,237
Translation of other assets and
liabilities denominated in foreign
currencies ................................ 547
-----------
NET APPRECIATION ................................ 7,811,784
-----------
NET GAIN ........................................ 35,992,549
-----------
NET INCREASE ...................................... $34,023,313
===========
</TABLE>
- --------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
47
<PAGE>
TCW/DW GLOBAL TELECOM TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR AUGUST 28, 1996*
ENDED THROUGH
MAY 31, 1998** MAY 31, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss .................................. $ (1,969,236) $ (1,003,201)
Net realized gain .................................... 28,180,765 1,507,340
Net change in unrealized appreciation ................ 7,811,784 13,406,131
------------ ------------
NET INCREASE ....................................... 34,023,313 13,910,270
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET
REALIZED GAIN:
Class A shares ....................................... (8,783) --
Class B shares ....................................... (5,580,481) --
Class C shares ....................................... (12,951) --
Class D shares ....................................... (380) --
------------ ------------
TOTAL DISTRIBUTIONS ................................ (5,602,595) --
------------ ------------
Net increase from transactions in shares of beneficial
interest ........................................... 16,161,166 108,230,046
------------ ------------
NET INCREASE ....................................... 44,581,884 122,140,316
NET ASSETS:
Beginning of period .................................. 122,240,316 100,000
------------ ------------
END OF PERIOD
(Including a net investment loss of $18,845
and $0, respectively) ............................. $166,822,200 $122,240,316
============ ============
</TABLE>
- ---------------------
* Commencement of operations.
** Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
48
<PAGE>
TCW/DW GLOBAL TELECOM TRUST
NOTES TO FINANCIAL STATEMENTS May 31, 1998
1. ORGANIZATIONAL AND ACCOUNTING POLICIES
TCW/DW Global Telecom Trust (the "Fund") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a diversified, open-end
management investment company. The Fund's investment objective is long-term
capital appreciation. The Fund seeks to achieve its objective by investing
primarily in securities of domestic and foreign companies operating in all
aspects of the telecommunications and information industries. The Fund was
organized as a Massachusetts business trust on March 28, 1996 and had no other
operations other than those relating to organizational matters and the issuance
of 10,000 shares of beneficial interest for $100,000 to Morgan Stanley Dean
Witter Advisors Inc. ("MSDWA"), an affiliate of Morgan Stanley Dean Witter
Services Company Inc. (the "Manager"), to effect the Fund's initial
capitalization. The Fund commenced operations on August 28, 1996. On July 28,
1997, the Fund commenced offering three additional classes of shares, with the
then current shares designated as Class B shares.
Effective June 22, 1998, the following entities have changed their name:
<TABLE>
<CAPTION>
OLD NAME NEW NAME
- -------- --------
<S> <C>
Dean Witter InterCapital Inc. Morgan Stanley Dean Witter Advisors Inc.
Dean Witter Distributors Inc. Morgan Stanley Dean Witter Distributors Inc.
Dean Witter Services Company Inc. Morgan Stanley Dean Witter Services Company Inc.
</TABLE>
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase, some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year,
six years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price
(in cases where securities are traded on more than one exchange; the securities
are valued on the exchange designated as the primary market pursuant to
procedures adopted by the Trustees); (2) all other
49
<PAGE>
TCW/DW GLOBAL TELECOM TRUST
NOTES TO FINANCIAL STATEMENTS May 31, 1998, continued
portfolio securities for which over-the-counter market quotations are readily
available are valued at the latest available bid price prior to the time of
valuation; (3) when market quotations are not readily available, including
circumstances under which it is determined by TCW Funds Management, Inc. (the
"Adviser") that sale or bid prices are not reflective of a security's market
value, portfolio securities are valued at their fair value as determined in
good faith under procedures established by and under the general supervision of
the Trustees (valuation of debt securities for which market quotations are not
readily available may be based upon current market prices of securities which
are comparable in coupon, rating and maturity or an appropriate matrix
utilizing similar factors); and (4) certain portfolio securities may be valued
by an outside pricing service approved by the Trustees. The pricing service may
utilize a matrix system incorporating security quality, maturity and coupon as
the evaluation model parameters, and/or research and evaluations by its staff,
including review of broker-dealer market price quotations, if available, in
determining what it believes is the fair valuation of the securities valued by
such pricing service; (5) short-term debt securities having a maturity date of
more than sixty days at time of purchase are valued on a mark-to-market basis
until sixty days prior to maturity and thereafter at amortized cost based on
their value on the 61st day. Short-term debt securities having a maturity date
of sixty days or less at the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date
except for certain dividends on foreign securities which are recorded as soon
as the Fund is informed after the ex-dividend date. Discounts are accreted over
the life of the respective securities. Interest income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date
such items are recognized. Distribution fees are charged directly to the
respective class.
D. FOREIGN CURRENCY TRANSLATION -- The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, other assets and liabilities and forward contracts are
translated at the exchange rates prevailing at the end of the period; and (2)
purchases, sales, income and expenses are translated at the exchange rates
prevailing on the respective dates of such transactions. The resultant exchange
gains and losses are included in the Statement of Operations as realized and
unrealized gain/loss on foreign exchange transactions. Pursuant to U.S. Federal
income tax regulations, certain foreign exchange gains/losses included in
realized and unrealized gain/loss
50
<PAGE>
TCW/DW GLOBAL TELECOM TRUST
NOTES TO FINANCIAL STATEMENTS May 31, 1998, continued
are included in or are a reduction of ordinary income for federal income tax
purposes. The Fund does not isolate that portion of the results of operations
arising as a result of changes in the foreign exchange rates from the changes
in the market prices of the securities.
E. FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may enter into forward
foreign currency contracts which are valued daily at the appropriate exchange
rates. The resultant unrealized exchange gains and losses are included in the
Statement of Operations as unrealized foreign currency gain or loss and in the
Statement of Assets and Liabilities as part of the related foreign currency
denominated asset or liability. The Fund records realized gains or losses on
delivery of the currency or at the time the forward contract is extinguished
(compensated) by entering into a closing transaction prior to delivery.
F. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which
may differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
H. ORGANIZATIONAL EXPENSES -- MSDWA paid the organizational expenses in the
amount of approximately $172,000 which has been reimbursed for the full amount
thereof. Such expenses have been deferred and are being amortized on the
straight-line method over a period not to exceed five years from the
commencement of operations.
2. MANAGEMENT AGREEMENT
Pursuant to a Management Agreement, the Fund pays the Manager a management fee,
accrued daily and payable monthly, by applying the annual rate of 0.60% to the
net assets of the Fund determined as of the close of each business day.
51
<PAGE>
TCW/DW GLOBAL TELECOM TRUST
NOTES TO FINANCIAL STATEMENTS May 31, 1998, continued
Under the terms of the Management Agreement, the Manager maintains certain of
the Fund's books and records and furnishes, at its own expense, office space,
facilities, equipment, clerical, bookkeeping and certain legal services and
pays the salaries of all personnel, including officers of the Fund who are
employees of the Manager. The Manager also bears the cost of telephone
services, heat, light, power and other utilities provided to the Fund.
3. INVESTMENT ADVISORY AGREEMENT
Pursuant to an Investment Advisory Agreement, the Fund pays the Adviser an
advisory fee, accrued daily and payable monthly, by applying the annual rate of
0.40% to the net assets of the Fund determined as of the close of each business
day.
Under the terms of the Investment Advisory Agreement, the Fund has retained the
Adviser to invest the Fund's assets, including placing orders for the purchase
and sale of portfolio securities. The Adviser obtains and evaluates such
information and advice relating to the economy, securities markets, and
specific securities as it considers necessary or useful to continuously manage
the assets of the Fund in a manner consistent with its investment objective. In
addition, the Adviser pays the salaries of all personnel, including officers of
the Fund, who are employees of the Adviser.
4. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A -- up
to 0.25% of the average daily net assets of Class A; (ii) Class B -- 1.0% of
the lesser of: (a) the average daily aggregate gross sales of the Class B
shares since the inception of the Fund (not including reinvestment of dividend
or capital gain distributions) less the average daily aggregate net asset value
of the Class B shares redeemed since the Fund's inception upon which a
contingent deferred sales charge has been imposed or waived; or (b) the average
daily net assets of Class B; and (iii) Class C -- up to 1.0% of the average
daily net assets of Class C. In the case of Class A shares, amounts paid under
the Plan are paid to the Distributor for services provided. In the case of
Class B and Class C shares, amounts paid under the Plan are paid to the
Distributor for services provided and the expenses borne by it and others in
the distribution of the shares of these Classes, including the payment of
commissions for sales of these Classes and incentive compensation to, and
expenses of, Morgan Stanley Dean Witter Financial Advisors and others who
engage in or support distribution of the shares or who service shareholder
accounts, including overhead and
52
<PAGE>
TCW/DW GLOBAL TELECOM TRUST
NOTES TO FINANCIAL STATEMENTS May 31, 1998, continued
telephone expenses; printing and distribution of prospectuses and reports used
in connection with the offering of these 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 Dean Witter
Reynolds Inc. ("DWR"), an affiliate of the Manager and Distributor, 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.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund
pursuant to the Plan and contingent deferred sales charges paid by investors
upon redemption of Class B shares. 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 contingent deferred sales charges 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. The Distributor has advised the Fund that such excess amounts,
including carrying charges, totaled $7,673,197 at
May 31, 1998.
In the case of Class A shares 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 credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the period ended May 31, 1998, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.24% and
1.0%, respectively.
The Distributor has informed the Fund that for the period ended May 31, 1998,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $430,611, and $393, respectively,
and received $11,497 in front-end sales charges from sales of the Fund's Class
A shares. The respective shareholders pay such charges which are not an expense
of the Fund.
5. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities,
excluding short-term investments, for the year ended May 31, 1998 aggregated
$179,976,218 and $170,506,083, respectively.
For the year ended May 31, 1998, the Fund incurred brokerage commissions of
$3,460 with Morgan Stanley & Co., Inc., an affiliate of the Manager, for
portfolio transactions executed on behalf of the Fund.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Manager and
Distributor, is the Fund's transfer agent.
53
<PAGE>
TCW/DW GLOBAL TELECOM TRUST
NOTES TO FINANCIAL STATEMENTS May 31, 1998, continued
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR AUGUST 28, 1996*
ENDED THROUGH
MAY 31, 1998 MAY 31, 1997
-------------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
CLASS A SHARES**
Sold .................................. 70,641 $ 1,010,003 -- --
Reinvestment of distributions ......... 687 8,164
Redeemed .............................. (2,517) (35,654) -- --
---------- ------------- ---------- -------------
Net increase -- Class A ............... 68,811 982,513 -- --
---------- ------------- ---------- -------------
CLASS B SHARES
Sold .................................. 2,865,878 38,687,349 11,662,388 $ 118,594,978
Reinvestment of distributions ......... 444,412 5,270,720 -- --
Redeemed .............................. (2,172,212) (29,334,428) (978,238) (10,364,932)
---------- ------------- ---------- -------------
Net increase -- Class B ............... 1,138,078 14,623,641 10,684,150 108,230,046
---------- ------------- ---------- -------------
CLASS C SHARES**
Sold .................................. 43,731 598,390 -- --
Reinvestment of distributions ......... 1,064 12,611 -- --
Redeemed .............................. (4,730) (66,384) -- --
---------- ------------- ---------- -------------
Net increase -- Class C ............... 40,065 544,617 -- --
---------- ------------- ---------- -------------
CLASS D SHARES**
Sold .................................. 771 10,015 -- --
Reinvestment of distributions ......... 32 380 -- --
---------- ------------- ---------- -------------
Net increase -- Class D ............... 803 10,395 -- --
---------- ------------- ---------- -------------
Net increase in Fund .................. 1,247,757 $ 16,161,166 10,684,150 $ 108,230,046
========== ============= ========== =============
</TABLE>
- ---------------
* Commencement of operations.
** For the period July 28, 1997 (issue date) through May 31, 1998.
54
<PAGE>
TCW/DW GLOBAL TELECOM TRUST
NOTES TO FINANCIAL STATEMENTS May 31, 1998, continued
7. FEDERAL INCOME TAX STATUS
Foreign currency losses incurred after October 31 ("post-October losses")
within the taxable year are deemed to arise on the first business day of the
Fund's next taxable year. The Fund incurred and will elect to defer net foreign
currency losses of approximately $19,000 during fiscal 1998.
As of May 31, 1998, the Fund had temporary book/tax differences primarily
attributable to post-October losses and capital loss deferrals on wash sales
and permanent book/tax differences primarily attributable to a net operating
loss. To reflect reclassifications arising from the permanent differences,
paid-in-capital was charged $107,536, accumulated undistributed net realized
gain was charged $1,842,855 and net investment loss was credited $1,950,391.
8. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward foreign currency contracts ("forward
contracts") to facilitate settlement of foreign currency denominated portfolio
transactions or to manage foreign currency exposure associated with foreign
currency denominated securities.
Forward contracts involve elements of market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The Fund bears the risk
of an unfavorable change in foreign exchange rates underlying the forward
contracts. Risks may also arise upon entering into these contracts from the
potential inability of the counter parties to meet the terms of their
contracts.
At May 31, 1998, there were no outstanding forward contracts.
55
<PAGE>
TCW/DW GLOBAL TELECOM TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR AUGUST 28, 1996*
ENDED THROUGH
MAY 31, 1998**++ MAY 31, 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS B SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $11.43 $10.00
------ ------
Net investment loss ............................... (0.17) (0.09)
Net realized and unrealized gain .................. 3.20 1.52
------ ------
Total from investment operations .................. 3.03 1.43
Less distributions from net realized gain......... (0.49) --
------ ------
Net asset value, end of period .................... $13.97 $11.43
====== ======
TOTAL INVESTMENT RETURN+ .......................... 27.30% 14.30%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 2.12% 2.38%(2)
Net investment loss ............................... (1.30)% (1.27)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $165,284 $122,240
Portfolio turnover rate ........................... 116% 80%(1)
Average commission rate paid ...................... $0.0049 $0.0283
</TABLE>
- -------------
* Commencement of operations.
** Prior to July 28, 1997, the Fund issued one class of shares. All shares
of the Fund 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.
SEE NOTES TO FINANCIAL STATEMENTS
56
<PAGE>
TCW/DW GLOBAL TELECOM TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
MAY 31, 1998++
- ----------------------------------------------------------------------------
<S> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $12.99
------
Net investment loss ............................... (0.09)
Net realized and unrealized gain .................. 1.63
------
Total from investment operations .................. 1.54
Less distributions from net realized gain......... (0.49)
------
Net asset value, end of period .................... $14.04
======
TOTAL INVESTMENT RETURN+ .......................... 12.64%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 1.52%(2)
Net investment loss ............................... (0.76)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $966
Portfolio turnover rate ........................... 116%
Average commission rate paid ...................... $0.0049
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $12.99
------
Net investment loss ............................... (0.17)
Net realized and unrealized gain .................. 1.62
------
Total from investment operations .................. 1.45
Less distributions from net realized gain ......... (0.49)
------
Net asset value, end of period .................... $13.95
======
TOTAL INVESTMENT RETURN+ .......................... 11.86%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 2.30%(2)
Net investment loss ............................... (1.52)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $559
Portfolio turnover rate ........................... 116%
Average commission rate paid ...................... $0.0049
</TABLE>
- -------------
* 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.
SEE NOTES TO FINANCIAL STATEMENTS
57
<PAGE>
TCW/DW GLOBAL TELECOM TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
MAY 31, 1998++
- ------------------------------------------------------------------------
<S> <C>
CLASS D SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $12.99
------
Net investment loss ............................... (0.05)
Net realized and unrealized gain .................. 1.62
------
Total from investment operations .................. 1.57
Less distributions from net realized gain ......... (0.49)
------
Net asset value, end of period .................... $14.07
======
TOTAL INVESTMENT RETURN+ .......................... 12.80%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 1.33%(2)
Net investment loss ............................... (0.46)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $11
Portfolio turnover rate ........................... 116%
Average commission rate paid ...................... $0.0049
</TABLE>
- -------------
* 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.
SEE NOTES TO FINANCIAL STATEMENTS
58
<PAGE>
TCW/DW GLOBAL TELECOM TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF TCW/DW GLOBAL TELECOM TRUST
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of TCW/DW Global Telecom Trust (the
"Fund") at May 31, 1998, the results of its operations for the year then ended,
and the changes in its net assets and the financial highlights for each of the
periods presented, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at May 31, 1998 by correspondence with the custodian and brokers and
the application of alternative auditing procedures where confirmations from
brokers were not received, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
July 10, 1998
- -------------------------------------------------------------------------------
1998 FEDERAL TAX NOTICE (unaudited)
For the year ended May 31, 1998, the Fund paid to shareholders $0.05 per share
from long-term capital gains. This $0.05 distribution is taxable as 28% rate
gain.
- -------------------------------------------------------------------------------
59
<PAGE>
APPENDIX
- --------------------------------------------------------------------------------
RATINGS OF CORPORATE DEBT INSTRUMENTS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
BOND RATINGS
Aaa Bonds 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 Bonds 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 bonds. They are rated lower than the best bonds
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 Bonds 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 Bonds 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 bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.
Ba Bonds 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 Bonds 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 Bonds 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 Bonds 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 Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2, and 3 in
each generic rating classification from Aa through B in its municipal bond
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 if
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
60
<PAGE>
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")
BOND RATINGS
A Standard & Poor's bond 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.
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A Debt rated "A" has 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 debt in
higher-rated categories.
BBB Debt rated "BBB" is 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 debt in this category than for debt in
higher-rated categories.
Bonds rated AAA, AA, A and BBB are considered investment grade bonds.
BB Debt rated "BB" has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
could lead to inadequate capacity or willingness to pay interest and
repay principal.
B Debt rated "B" has a greater vulnerability to default but presently has
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.
CCC Debt rated "CCC" has a current identifiable vulnerability to default, and
is 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, it is not
likely to have the capacity to pay interest and repay principal.
CC The rating "CC" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC" rating.
61
<PAGE>
C The rating "C" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC" rating.
Cl The rating "Cl" is reserved for income bonds 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.
Debt 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 debt
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.
COMMERCIAL PAPER RATINGS
Standard and Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. The commercial paper rating is not a recommendation to purchase
or sell a security. The ratings are based upon current information furnished by
the issuer or obtained by S&P from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information. Ratings are graded into group categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
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.
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.
62
