<PAGE>
As Filed With the Securities and Exchange Commission on July 16, 1999
File No. 333-03013
811-7607
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
POST-EFFECTIVE AMENDMENT NO. 10 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 11 [X]
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
1221 Avenue of the Americas
New York, New York 10020
------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 548-7786
--------------
Harold J. Schaaff, Jr., Esq.
Morgan Stanley Dean Witter Investment Management Inc.
1221 Avenue of the Americas, New York, New York 10020
-----------------------------------------------------
(Name and Address of Agent for Service)
Copy to:
Michael F. Klein, Esq. Richard W. Grant, Esq.
Morgan Stanley Dean Witter Investment Management Inc. Morgan, Lewis & Bockius
1221 Avenue of the Americas LLP
New York, NY 10020 1701 Market Street
Philadelphia, PA 19103
- --------------------------------------------------------------------------------
It is proposed that this filing will become effective (check appropriate box)
-- immediately upon filing pursuant to paragraph (b) of Rule 485.
-- on [date] pursuant to paragraph (b) of Rule 485.
-- 60 days after filing pursuant to paragraph (a)(1) of Rule 485.
X 75 days after filing pursuant to paragraph (a)(2) of Rule 485.
-- on [date] pursuant to paragraph (a) of Rule 485.
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS October 1, 1999
A Portfolio of
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
[MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS LOGO APPEARS HERE]
TECHNOLOGY PORTFOLIO
Long-term capital appreciation by investing primarily in equity securities of
companies that the investment adviser expects to benefit from their
involvement in technology and technology-related industries.
Investment Adviser
Morgan Stanley Dean Witter Investment Management Inc.
Distributor
Morgan Stanley & Co. Incorporated
Morgan Stanley Dean Witter Universal Funds, Inc. (the "Fund") is a mutual
fund that provides investment vehicles for variable annuity contracts and
variable life insurance policies and for certain tax-qualified investors. The
Technology Portfolio (the "Portfolio") is one portfolio of the Fund managed
by Morgan Stanley Dean Witter Investment Management Inc. ("MSDW Investment
Management" or the "Adviser").
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation
to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT SUMMARY
Technology Portfolio 1
Additional Risk Factors and Information 2
INVESTMENT ADVISER 4
MANAGEMENT FEE 4
PORTFOLIO MANAGERS 5
SHAREHOLDER INFORMATION 6
</TABLE>
<PAGE>
INVESTMENT SUMMARY
TECHNOLOGY PORTFOLIO
The Technology Portfolio seeks long-term capital appreciation by investing
primarily in equity securities of companies that the investment adviser
expects to benefit from their involvement in technology and technology-related
industries.
Approach
The Adviser seeks to maximize long-term capital appreciation by identifying
significant long-term technology trends and by investing primarily in
companies the Adviser believes are positioned to benefit materially from these
trends.
Process
The Adviser extensively researches technology trends in order to identify
industry sectors and issuers with strong prospects and leading market share.
The Portfolio invests in a broad range of technology-related industries,
including: computers; software and peripheral products; electronics;
communications equipment and services; entertainment; multimedia; and
information services. The Portfolio seeks to overweight investment in the
best-positioned sectors, while underweighting the sectors exposed to the
greatest risk in comparison to potential return. The Adviser looks to invest
in issuers with strong management teams, reasonable valuation relative to
growth prospects and whose competitors face sustainable barriers to market
entry. The Portfolio may participate in the global technology market by
investing up to 35% of its total assets in the equity or fixed income
securities of foreign issuers, including those located in emerging markets.
Risk
Investing in the Technology Portfolio may be appropriate for you if you are
willing to accept the risks and uncertainties of investing in equity
securities of companies in the technology sector in the hope of earning
superior returns and diversifying your investment portfolio. Because the
Portfolio invests primarily in technology-related issuers, there is an
additional risk that economic events may affect a substantial portion of the
Portfolio's investments. Historically, the price of securities in this sector
have tended to be volatile. In general, prices
of equity securities are more volatile than those of fixed income securities.
The prices of equity securities will rise and fall in response to a number of
different factors. In particular, prices of equity securities will respond to
events which affect entire financial markets or industries (changes in
inflation or consumer demand, for example) and to events that affect a
particular issuer (news about the success or failure of a new product, for
example). As a result of this price volatility, there is a risk that you may
lose money by investing in a Portfolio. In addition, at times the Portfolio's
market sector, equity securities of technology-related issuers, may
underperform relative to other sectors.
The Portfolio may invest in the equity securities of both large and small
companies. While the Adviser believes that smaller companies may provide
greater growth potential than larger, more established firms, investing in the
securities of smaller companies also involves greater risk and price
volatility.
The risks of investing in the Portfolio may be intensified because the
Portfolio is non-diversified, which means that it may invest in securities of
a limited number of issuers. As a result, the performance of a particular
investment or a smaller group of investments may affect the Portfolio's
performance more than if the Portfolio were diversified. In addition, the
Portfolio may sell short. In a short sale transaction, the Portfolio sells a
borrowed security in anticipation of a decline in the market value of that
security, hoping to profit from the difference between the amount received
from the sale and the cost of replacing the borrowed security. If the Adviser
incorrectly predicts that the price of the borrowed security will decline, the
Portfolio may lose money because the amount necessary to replace the borrowed
security will be greater than the amount received from the sale.
There is no performance information for the Technology Portfolio since it has
not commenced operations as of the date of this Prospectus.
1
<PAGE>
INVESTMENT SUMMARY
ADDITIONAL RISK FACTORS AND INFORMATION
This section discusses additional risk factors and information relating to the
Portfolio. The Portfolio's investment practices and limitations are described
in more detail in the Statement of Additional Information ("SAI") which is
legally part of this Prospectus. For details on how to obtain a copy of the
SAI and other reports and information, see the back cover of this Prospectus.
Price volatility
The value of your investment in the Portfolio is based on the market prices of
the securities the Portfolio holds. These prices change daily due to economic
and other events that affect markets generally, as well as those that affect
particular regions, countries, industries, and companies. These price
movements, sometimes called volatility, may be greater or lesser depending on
the types of securities the Portfolio owns and the markets in which the
securities trade. Over time, equity securities have generally shown superior
gains, although they have tended to be more volatile than fixed income
securities in the short term.
Foreign investing
Investing in foreign countries entails the risk that the news and events
unique to a country or region will affect those markets and their issuers.
These same events will not necessarily have an effect on the U.S. economy or
similar issuers located in the United States. In addition, the Portfolio's
investments in foreign countries generally will be denominated in foreign
currencies. As a result, changes in the value of a country's currency compared
to the U.S. dollar may affect the value of the Portfolio's investments. These
changes may occur separately from and in response to events that do not
otherwise affect the value of the security in the issuer's home country. These
risks may be intensified for investments in emerging markets countries. The
Adviser may invest in certain instruments, such as derivatives, and may use
certain techniques, such as hedging, to manage these risks. However, the
Adviser cannot guarantee that it will be practical to hedge these risks in
certain markets or under particular conditions or that it will succeed in
doing so. The Adviser may use derivatives for other purposes such as gaining
exposure to foreign markets.
Emerging market risks
Emerging market countries are foreign countries that major international
financial institutions, such as the World Bank, generally consider to be less
economically mature than developed nations, such as the United States or most
nations in Western Europe. Emerging market countries can include every nation
in the world except the United States, Canada, Japan, Australia, New Zealand,
Singapore, and most nations located in Western Europe. Emerging market
countries may be more likely to experience political turmoil or rapid changes
in economic conditions than more developed countries, and the financial
condition of issuers in emerging market countries may be more precarious than
in other countries. These characteristics result in greater risk of price
volatility in emerging market countries, which may be heightened by currency
fluctuations relative to the U.S. dollar.
Derivatives
The Portfolio may use various instruments that derive their values from those
of specified securities, indices, currencies or other points of reference for
both hedging and non-hedging purposes. Derivatives include futures, options,
forward contracts, swaps, and structured notes. These derivatives, including
those used to manage risk, are themselves subject to risks of the different
markets in which they trade and, therefore, may not serve their intended
purposes.
The primary risks of derivatives are: (i) changes in the market value of
securities held by the Portfolio, and of derivatives relating to those
securities, may not be proportionate, (ii) there may not be a liquid market
for the Portfolio to sell a derivative, which could result in difficulty
closing a position and (iii) certain derivatives can magnify the extent of
losses incurred due to changes in the market value of the securities to which
they relate. In addition, some derivatives are subject to counterparty risk.
To minimize this risk, the Portfolio may enter into derivatives transactions
with counterparties that meet certain requirements for credit quality and
collateral. Also, the Portfolio may invest in certain derivatives that require
the Portfolio to segregate some or all of its cash or liquid securities to
cover its obligations under those instruments. At certain levels, this can
cause the Portfolio to lose flexibility in managing its investments properly,
responding to shareholder redemption requests, or meeting other obligations.
If the Portfolio is in that position, it could be forced to sell other
securities that it wanted to retain.
2
<PAGE>
The Portfolio will limit its use of derivatives, for non-hedging purposes, to
33 1/3% of its total assets measured by the aggregate notional amount of
outstanding derivatives. While the use of derivatives may be advantageous to
the Portfolio, if the Adviser is not successful in employing them, the
Portfolio's performance may be worse than if it did not make such investments.
See the SAI for more about the risks of different types of derivatives.
Year 2000 risks
The management and distribution services provided to the Fund by the Adviser
and Morgan Stanley & Co. Incorporated ("Morgan Stanley") 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 Adviser and Morgan Stanley have been actively working on
necessary changes to their own computer systems to deal with the year 2000
problem and expect that their systems will be adapted before that date. There
can be no assurance, however, that they will be successful. In addition, other
unaffiliated service providers may be faced with similar problems. The Adviser
and Morgan Stanley are monitoring their remedial efforts, but, there can be no
assurance that they and the services they provide will not be adversely
affected.
In addition, it is possible that the markets for securities in which the
Portfolio 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 Portfolio's
investments may be adversely affected.
Temporary defensive investments
When the Adviser believes that changes in economic, financial or political
conditions warrant, the Portfolio may invest without limit in certain short-
and medium-term fixed income securities for temporary, defensive purposes. If
the Adviser incorrectly predicts the effects of these changes, such defensive
investments may adversely affect the Portfolio's performance and the Portfolio
may not achieve its investment objective.
Portfolio turnover
Consistent with its investment policies, the Portfolio will purchase and sell
securities without regard to the effect on portfolio turnover. Higher
portfolio turnover (e.g., over 100% per year) will cause the Portfolio to
incur additional transaction costs.
3
<PAGE>
INVESTMENT ADVISER
MSDW Investment Management, with principal offices at 1221 Avenue of the
Americas, New York, New York 10020, conducts a worldwide portfolio management
business and provides a broad range of portfolio management services to
customers in the United States and abroad. Morgan Stanley Dean Witter & Co.
("MSDW") is the direct parent of MSDW Investment Management and Morgan
Stanley. MSDW is a preeminent global financial services firm that maintains
leading market positions in each of its three primary businesses --
securities, asset management and credit services. As of August 31, 1999, MSDW
Investment Management and its institutional investment advisory affiliates had
approximately $ billion in assets under management or fiduciary advice.
MANAGEMENT FEE
The Adviser is entitled to receive a management fee at an annual percentage of
the Portfolio's average daily net assets as follows:
<TABLE>
<CAPTION>
ASSETS FEE
- --------------------------------------
<S> <C>
First $500 million %
- --------------------------------------
From $500 million to $1 billion %
- --------------------------------------
More than $1 billion %
</TABLE>
However, the Adviser has voluntarily agreed to reduce its management fee
and/or reimburse the Portfolio, so that total annual operating expenses of the
Portfolio will not exceed % of its average daily assets. For purposes of
determining the amount of the voluntary management fee waiver and/or
reimbursement, if any, the annual operating expenses of the Portfolio exclude
certain investment related expenses such as foreign country tax expense and
interest expense on amounts borrowed. As a result, the expense ratio,
including these expenses, after fee waivers and/or reimbursements may be
higher than %. Fee waivers and/or expense reimbursements are voluntary and
the Adviser reserves the right to terminate any waiver and/or reimbursement at
any time without notice.
4
<PAGE>
PORTFOLIO MANAGERS
The following individuals have primary day-to-day portfolio management
responsibility for the Portfolio:
TECHNOLOGY PORTFOLIO
Alexander L. Umansky and Stephen C. Sexauer
Alexander L. Umansky is a Vice President of MSDW Investment Management and
Morgan Stanley and a Portfolio Manager in the Institutional Equity Group. He
joined MSDW Investment Management in 1994 as a Compliance Analyst and in 1996,
he became a research analyst in the Institutional Equity Group focusing
primarily on technology. Prior to joining MSDW Investment Management, Mr.
Umansky was a financial analyst in Morgan Stanley's Global Risk Management
department. He graduated from New York University's Stern School of Business
with a B.S. in Computer Science and Finance. Stephen C. Sexauer is a Principal
of MSDW Investment Management and Morgan Stanley and is a Portfolio Manager in
the Institutional Equity Group of MSDW Investment Management. In addition to
portfolio management, his equity research responsibilities include
telecommunications, technology, finance and utilities. Mr. Sexauer joined MSDW
Investment Management in 1989 after three years as Vice President at Salomon
Brothers. Previously, he was with Merrill Lynch Economics and Wharton
Econometrics. Mr. Sexauer received a B.S. in Economics from the University of
Illinois and an M.B.A. in Economics and Statistics from the University of
Chicago. Messrs. Umansky and Sexauer have had primary responsibility for
managing the Portfolio since its inception.
5
<PAGE>
SHAREHOLDER INFORMATION
Purchasing and selling Fund shares
Shares are offered on each day that the New York Stock Exchange (the "NYSE")
is open for business.
The Portfolio offers its shares only to insurance companies for separate
accounts they establish to fund variable life insurance and variable annuity
contracts and by other entities under qualified pension and retirement plans.
An insurance company purchases or redeems shares of the Portfolio based on,
among other things, the amount of net contract premiums or purchase payments
allocated to a separate account investment division, transfers to or from a
separate account investment division, contract loans and repayments, contract
withdrawals and surrenders, and benefit payments. The contract prospectus
describes how contract owners may allocate, transfer and withdraw amounts to,
and from, separate accounts.
The price per share will be the net asset value per share (NAV) next
determined after the Fund receives the insurance company's purchase order. In
some cases, an insurance company's order for Portfolio shares may be executed
at the NAV next computed after the order is actually transmitted to a
Portfolio. NAV for one share is the value of that share's portion of all of
the assets in the Portfolio. The Fund determines the net asset value for the
Portfolio as of the close of business of the NYSE (normally 4:00 p.m. Eastern
Time) on each day that the NYSE is open for business.
About net asset value
The net asset value ("NAV") per share of the Portfolio is determined by
dividing the total market value of the Portfolio's investments, less any
liabilities, by the total number of outstanding shares of the Portfolio. In
making this calculation, the Portfolio generally values securities at market
price. If market prices are unavailable or may be unreliable because of events
occurring after the close of trading, fair value prices may be determined in
good faith using methods approved by the Board of Directors. The Portfolio may
hold portfolio securities that are listed on foreign exchanges. These
securities may trade on weekends or other days when the Portfolio does not
calculate NAV. As a result, the value of these investments may change on days
when you cannot purchase or sell shares.
Dividends and distributions
The Portfolio distributes its investment income annually as dividends and
makes distributions of capital gains, if any, at least annually.
Taxes
Please consult your tax advisor regarding your specific questions about
federal, state and local income taxes. Below is summarized some important tax
issues that affect the Portfolio and its shareholders. The summary is based on
current tax laws, which may change.
The Portfolio expects that it will not have to pay income taxes if it
distributes all of its income and gains. Net income and realized capital gains
that the Portfolio distributes are not currently taxable when left to
accumulate within a variable annuity or variable life insurance contract or
under a qualified pension or retirement plan.
For information on federal income taxation of a life insurance company with
respect to its receipt of distributions from the Portfolio and federal income
taxation of owners of variable annuity or variable life insurance contracts,
refer to the contract prospectus.
6
<PAGE>
WHERE TO FIND ADDITIONAL INFORMATION
Statement of Additional Information
In addition to this Prospectus, the Fund has an SAI, dated May 1, 1999, which
contains additional, more detailed information about the Fund and the
Portfolio. The SAI is incorporated by reference into this Prospectus and,
therefore, legally forms a part of this Prospectus.
Shareholder Reports
The Fund publishes annual and semi-annual reports containing financial
statements. These reports contain additional information about the Portfolio's
investments. In the Fund's shareholder reports, you will find a discussion of
the market conditions and the investment strategies that significantly
affected the Portfolio's performance during that period.
For additional Fund information, including information regarding investments
comprising the Portfolio, please call 1-800-281-2715 or contact your insurance
company.
You may obtain the SAI and shareholder reports without charge by contacting
the Fund at the toll-free number above or your insurance company.
Information about the Fund, including the SAI, and the annual and semi-annual
reports, may be obtained from the Securities and Exchange Commission in any of
the following ways: (1) In person: you may review and copy documents in the
Commission's Public Reference Room in Washington, D.C. (for information call
1- 800-SEC-0330); (2) On-line: you may retrieve information from the
Commission's web site at "http://www.sec.gov"; or (3) By mail; you may request
documents, upon payment of a duplicating fee, by writing to Securities
Exchange Commission, Public Reference Section, Washington, D.C. 20549-6009. To
aid you in obtaining this information, the Fund's Investment Company Act
registration number is 811-7607
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
[MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC. LOGO APPEARS HERE]
P.O. Box 2798
Boston, Massachusetts 02208-2798
For information call 1-800-281-2715
<PAGE>
Morgan Stanley Dean Witter Universal Funds, Inc.
P.O. Box 2798, Boston, MA 02208-2798
STATEMENT OF ADDITIONAL INFORMATION
Morgan Stanley Dean Witter Universal Funds, Inc. (the "Fund") is a no-load,
open-end management investment company with diversified and non-diversified
series ("Portfolios"). The Fund currently consists of 20 Portfolios offering a
broad range of investment choices. Shares of each Portfolio are offered with no
sales charge or exchange or redemption fee. This Statement of Additional
Information relates to one investment portfolio of the Fund, the Technology
Portfolio (the "Portfolio").
Shares of each Portfolio may be purchased only by insurance companies for the
purpose of funding variable annuity contracts and variable life insurance
policies and by certain tax-qualified investors. The variable annuity contract
and variable life insurance policy holders incur fees and expenses separate
from the fees and expenses charged by the Portfolios.
The Fund was incorporated under the laws of the State of Maryland on March 26,
1996. The Fund filed a registration statement with the Securities and Exchange
Commission (the "SEC") registering itself as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and its shares under the Securities Act of 1933, as amended (the "1933 Act").
The Portfolios are managed by either Morgan Stanley Dean Witter Investment
Management Inc. ("MSDW Investment Management" or an "Adviser") or Miller
Anderson & Sherrerd, LLP ("MAS" or an "Adviser") thereby making available in a
single product the combined strength of these leading investment management
firms. The Portfolio is one investment portfolio of the Fund managed by Morgan
Stanley Dean Witter Investment Management Inc. ("MSDW Investment Management")
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the prospectus for the Fund's Portfolio(s) (the
"Prospectus"). This Statement of Additional Information is incorporated by
reference into the Prospectus in its entirety. To obtain the Prospectus, please
contact the Fund or your insurance company.
<TABLE>
<S> <C>
Table of Contents Page
Investment Policies 2
Investments and Strategies 2
Taxes 14
Purchase of Shares 16
Redemption of Shares 16
Investment Limitations 16
Management of the Fund 18
Portfolio Transactions 26
Performance Information 29
General Performance Information 29
General Information 30
Description of Ratings 31
</TABLE>
Statement of Additional Information dated May 1, 1999, relating to the
Technology Portfolio's Prospectus dated October , 1999.
<PAGE>
Investment Policies
Under normal circumstances, at least 65% of the total assets of the Portfolio
will be invested in Equity Securities of companies in the technology and
technology-related industries.
Investments and Strategies
This Statement of Additional Information provides additional information about
the investment policies and operations of the Portfolio (the "Portfolio").
Investment Strategies
Emerging Markets Investing: The Adviser's approach to emerging markets
investing is based on the Adviser's evaluation of both short-term and long-term
international economic trends and the relative attractiveness of emerging
markets and individual emerging market securities.
Emerging markets describes any country which is generally considered to be an
emerging or developing country by the international financial community such as
the International Bank for Reconstruction and Development (more commonly known
as the World Bank) and the International Finance Corporation. Emerging markets
can include every nation in the world except the United States, Canada, Japan,
Australia, New Zealand and most nations located in Western Europe.
Currently, investing in many emerging markets is either not feasible or very
costly, or may involve unacceptable political risks. Other special risks
include the possible increased likelihood of expropriation or the return to
power of a communist regime which would institute policies to expropriate,
nationalize or otherwise confiscate investments. The Portfolio will focus its
investments on those emerging market countries in which the Adviser believes
the potential for market appreciation outweighs these risks and the cost of
investment. Investing in emerging markets also involves an extra degree of
custodial and/or market risk, especially where the securities purchased are not
traded on an official exchange or where ownership records regarding the
securities are maintained by an unregulated entity (or even the issuer itself).
Foreign Investing: Investors should recognize that investing in Foreign bonds
and foreign equities involves certain special considerations which are not
typically associated with investing in domestic securities.
As non-U.S. companies are not generally subject to uniform accounting, auditing
and financial reporting standards and practices comparable to those applicable
to U.S. companies, there may be less publicly available information about
certain foreign securities than about U.S. securities. Foreign bonds and
foreign equities may be less liquid and more volatile than securities of
comparable U.S. companies. There is generally less government supervision and
regulation of stock exchanges, brokers and listed companies than in the U.S.
With respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect U.S. investments in those countries.
Additionally, there may be difficulty in obtaining and enforcing judgments
against foreign issuers.
Since foreign bonds and foreign equities may be denominated in foreign
currencies, and since the Portfolio may temporarily hold uninvested reserves in
bank deposits of foreign currencies prior to reinvestment or conversion to U.S.
dollars, the Portfolio may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations, and may incur costs in
connection with conversions between various currencies.
Equity Securities
Equity Securities generally represent an ownership interest in an issuer, or
may be convertible into or represent a right to acquire an ownership interest
in an issuer. While there are many types of Equity Securities, prices of all
equity securities will fluctuate. Economic, political and other events may
affect the prices of broad equity markets. For example, changes in inflation or
consumer demand may affect the prices of all Equity Securities in the United
States. Similar events also may affect the prices of particular equity
securities. For example, news about the success or failure of a new product may
affect the price of a particular issuer's Equity Securities.
Common Stocks. Common Stocks represent an ownership interest in a corporation,
entitling the stockholder to voting rights and receipt of dividends paid based
on proportionate ownership.
Depositary Receipts. Depositary Receipts represent an ownership interest in
securities of foreign companies (an "underlying issuer") that are deposited
with a depositary. Depositary Receipts are not necessarily denominated in the
same currency as the underlying securities. Depositary Receipts include
American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and
other types of Depositary Receipts (which, together with ADRs and GDRs, are
hereinafter collectively referred to as "Depositary Receipts"). ADRs are
dollar-denominated Depositary Receipts typically issued by a U.S. financial
institution which evidence an ownership interest in a security or pool of
securities issued by a foreign issuer. ADRs are listed and traded in the United
States. GDRs and other types of Depositary Receipts are typically issued by
foreign banks or trust companies, although they also may be issued by U.S.
financial institutions, and evidence ownership interests in a
2
<PAGE>
security or pool of securities issued by either a foreign or a U.S.
corporation. Generally, Depositary Receipts in registered form are designed for
use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States.
Depositary Receipts may be "sponsored" or "unsponsored." Sponsored Depositary
Receipts are established jointly by a depositary and the underlying issuer,
whereas unsponsored Depositary Receipts may be established by a depositary
without participation by the underlying issuer. Holders of unsponsored
Depositary Receipts generally bear all the costs associated with establishing
unsponsored Depositary Receipts. In addition, the issuers of the securities
underlying unsponsored Depository Receipts are not obligated to disclose
material information in the United States and, therefore, there may be less
information available regarding such issuers and there may not be a correlation
between such information and the market value of the Depositary Receipts. For
purposes of the Portfolio's investment policies, the Portfolio's investments in
Depositary Receipts will be deemed to be an investment in the underlying
securities, except that ADRs may be deemed to be issued by a U.S. issuer.
Investment Company Securities. Investment Company Securities are securities of
other open-end or closed-end investment companies. The Investment Company Act
of 1940, as amended (the "1940 Act"), generally prohibits an Underlying Fund
from acquiring more than 3% of the outstanding voting shares of an investment
company and limits such investments to no more than 5% of the Portfolio's total
assets in any one investment company and no more than 10% in any combination of
investment companies. To the extent the Portfolio invests a portion of its
assets in Investment Company Securities, those assets will be subject to the
risks of the purchased investment company's portfolio securities. The Portfolio
also will bear its proportionate share of the expenses of the purchased
investment company in addition to its own expenses.
Limited Partnerships. A limited partnership interest entitles the Portfolio to
participate in the investment return of the partnership's assets as defined by
the agreement among the partners. As a limited partner, the Portfolio generally
is not permitted to participate in the management of the partnership. However,
unlike a general partner whose liability is not limited, a limited partner's
liability generally is limited to the amount of its commitment to the
partnership.
REITs. Real Estate Investment Trusts ("REITs") pool investors' funds for
investment primarily in income producing real estate or real estate related
loans or interests. A REIT is not taxed on income distributed to its
shareholders or unitholders if it complies with regulatory requirements
relating to its organization, ownership, assets and income, and with a
regulatory requirement that it distribute to its shareholders or unitholders at
least 95% of its taxable income for each taxable year. Generally, REITs can be
classified as Equity REITs, Mortgage REITs or Hybrid REITs. Equity REITs invest
the majority of their assets directly in real property and derive their income
primarily from rents and capital gains from appreciation realized through
property sales. Equity REITs are further categorized according to the types of
real estate securities they own, e.g., apartment properties, retail shopping
centers, office and industrial properties, hotels, health-care facilities,
manufactured housing and mixed-property types. Mortgage REITs invest the
majority of their assets in real estate mortgages and derive their income
primarily from interest payments. Hybrid REITs combine the characteristics of
both Equity and Mortgage REITs.
A shareholder in the Portfolio, by investing in REITs indirectly through the
Portfolio, will bear not only his proportionate share of the expenses of the
Portfolio, but also, indirectly, the management expenses of underlying REITs.
REITs may be affected by changes in the value of their underlying properties
and by defaults by borrowers or tenants. Mortgage REITs may be affected by the
quality of the credit extended. Furthermore, REITs are dependent on specialized
management skills. Some REITs may have limited diversification and may be
subject to risks inherent in investments in a limited number of properties, in
a narrow geographic area, or in a single property type. REITs depend generally
on their ability to generate cash flow to make distributions to shareholders or
unitholders, and may be subject to defaults by borrowers and to self-
liquidations. In addition, the performance of a REIT may be affected by its
failure to qualify for tax-free pass-through of income, or its failure to
maintain exemption from registration under the 1940 Act.
Rights. Rights represent the right, but not the obligation, for a fixed period
of time to purchase additional shares of an issuer's Common Stock at the time
of a new issuance, usually at a price below the initial offering price of the
Common Stock and before the Common Stock is offered to the general public.
Rights are usually freely transferrable. The risk of investing in a Right is
that the Right may expire prior to the market value of the Common Stock
exceeding the price fixed by the Right.
Warrants. Warrants give holders the right, but not the obligation, to buy
Common Stock of an issuer at a given price, usually higher than the market
price at the time of issuance, during a specified period. Warrants are usually
freely transferrable. The risk of investing in a Warrant is that the Warrant
may expire prior to the market value of the Common Stock exceeding the price
fixed by the Warrant.
Fixed Income Securities
Fixed Income Securities generally represent an issuer's obligation to repay
money that it has borrowed together with interest on the amount borrowed. Fixed
Income Securities come in many varieties and may differ in the way that
interest is calculated, the amount and frequency of payments,
3
<PAGE>
the type of collateral, if any, and some Fixed Income Securities may have other
novel features such as conversion rights. Prices of Fixed Income Securities
fluctuate and, in particular, are subject to credit risk and market risk.
Credit risk is the possibility that an issuer may be unable to meet scheduled
interest and principal payments. Market risk is the possibility that a change
in interest rates or the market's perception of the issuer's prospects may
adversely affect the value of a fixed income security. Economic, political and
other events also may affect the prices of broad fixed income markets.
Generally, the values of Fixed Income Securities vary inversely with changes in
interest rates. During periods of falling interest rates, the values of
outstanding Fixed Income Securities generally rise and during periods of rising
interest rates, the values of such securities generally decline. Prepayments
also will affect the maturity and value of Fixed Income Securities. Prepayments
generally rise in response to a decline in interest rates as debtors take
advantage of the opportunity to refinance their obligations. When this happens,
the Portfolio may be forced to reinvest in lower yielding Fixed Income
Securities.
The length of time to the final payment, or maturity, of a Fixed Income
Security also affects its price volatility. While securities with longer
maturities tend to produce higher yields, the prices of longer maturity
securities are subject to greater market fluctuation, especially as a result of
changes in interest rates. Traditionally, term to maturity has been used as a
barometer of a Fixed Income Security's sensitivity to interest rate changes.
However, this measure considers only the time until final payment and takes no
account of the pattern of payments prior to maturity. Duration is a more
precise measure of the expected life of a Fixed Income Security that combines
consideration of yield, coupon, interest payments, final maturity and call
features and measures the expected life of a Fixed Income Security on a present
value basis. The duration of a Fixed Income Security ordinarily is shorter than
its maturity.
Agencies. Agencies are Fixed Income Securities which are not guaranteed by, or
backed by the full faith and credit of the U.S. Government, but which are
issued, sponsored or guaranteed by a federal agency or federally sponsored
agency such as the Student Loan Marketing Association, or any of several other
agencies.
Asset-Backed Securities. Asset-Backed Securities ("Asset-Backeds") are
securities collateralized by shorter-term loans such as automobile loans, home
equity loans, equipment or computer leases or credit card receivables. The
payments from the collateral are passed through to the security holder. The
collateral underlying Asset-Backeds tends to have prepayment rates that usually
do not vary with interest rates. In addition, the short-term nature of the
loans reduces the impact of any change in prepayment level. However, it is
possible that prepayments (on automobile loans and other collateral) will alter
the cash flow on Asset-Backeds and it is not possible to determine in advance
the actual final maturity date or average life. Faster prepayment will shorten
the average life and slower prepayment will lengthen it. However, it is
possible to determine what the range of that movement could be and to calculate
the effect that it will have on the price of the security. The maturity of
Asset-Backeds will be based on the expected average life of the instrument. In
selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.
Cash Equivalents: Cash equivalents are short-term Fixed Income Securities
comprising:
(1) Time deposits, certificates of deposit (including marketable variable rate
certificates of deposit) and bankers' acceptances issued by a commercial bank
or savings and loan association. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. Certificates of deposit are negotiable short-term obligations
issued by commercial banks or savings and loan associations against funds
deposited in the issuing institution. Variable rate certificates of deposit are
certificates of deposit on which the interest rate is periodically adjusted
prior to their stated maturity based upon a specified market rate. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods).
The Portfolio may invest in obligations of U.S. banks, of foreign branches of
U.S. banks (Eurodollars) and of U.S. branches of foreign banks (Yankee
dollars). Euro and Yankee dollar investments will involve some of the same
risks of investing in international securities that are discussed in the
foreign investing section of the Prospectus.
The Portfolio will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion, or the equivalent
in other currencies, or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation ("FDIC"), (ii) in
the case of U.S. banks, it is a member of the FDIC, and (iii) in the case of
foreign branches of U.S. banks, the security is deemed by the Adviser to be of
an investment quality comparable with other fixed income securities which the
Portfolio may purchase.
(2) Commercial paper rated at time of purchase by one or more Nationally
Recognized Statistical Rating Organizations ("NRSRO") in one of their two
highest categories, (e.g., A-l or A-2 by Standard & Poor's or Prime 1 or Prime
2 by Moody's), or, if not rated, issued by a corporation having an outstanding
unsecured debt issue rated high-grade by a NRSRO (e.g., A or better by Moody's,
Standard & Poor's or Fitch).
4
<PAGE>
(3) Short-term corporate obligations rated high-grade at the time of purchase
by a NRSRO (e.g., A or better by Moody's, Standard & Poor's or Fitch);
(4) U.S. Government obligations including bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct obligations of the
U.S. Government and differ mainly in interest rates, maturities and dates of
issue;
(5) Government Agency securities issued or guaranteed by U.S. Government
sponsored instrumentalities and Federal agencies. These include securities
issued by the Federal Home Loan Banks, Federal Land Bank, Farmers Home
Administration, Farm Credit Banks, Federal Intermediate Credit Bank, Fannie
Mae, Federal Financing Bank, the Tennessee Valley Authority, and others;
(6) Repurchase agreements collateralized by securities listed above; and
Commercial paper refers to short-term fixed income securities with maturities
ranging from 2 to 270 days. They are primarily issued by corporations needing
to finance large amounts of receivables, but may be issued by banks and other
borrowers. Commercial paper is issued either directly or through broker-
dealers, and may be discounted or interest-bearing. Commercial paper is
unsecured, but is almost always backed by bank lines of credit. Virtually all
commercial paper is rated by Moody's or Standard & Poor's.
Corporates. Corporates are Fixed Income Securities issued by private
businesses. Holders, as creditors, have a prior legal claim over holders of
Equity Securities of the issuer as to both income and assets for the principal
and interest due the holder.
High Yield Securities. High Yield Securities are generally considered to
include Fixed Income Securities rated below the four highest rating categories
at the time of purchase (e.g., Ba through C by Moody's or BB through D by S&P)
and unrated securities considered to be of equivalent quality. High Yield
Securities are not considered investment grade and are commonly referred to as
junk bonds or high yield, high risk securities.
While High Yield Securities offer higher yields, they carry a high degree of
credit risk and are considered speculative by the major credit rating agencies.
High Yield Securities are often issued by smaller, less credit worthy issuers,
or by highly leveraged (indebted) issuers that are generally less able than
more established or less leveraged issuers to make scheduled payments of
interest and principal. In comparison to Investment Grade Securities, the price
movement of these securities is influenced less by changes in interest rates
and more by the financial and business position of the issuer. The values of
High Yield Securities are more volatile and may react with greater sensitivity
to market changes.
Investment Grade Securities. Investment Grade Securities are Fixed Income
Securities rated by one or more of the rating agencies in one of the four
highest rating categories at the time of purchase (e.g., AAA, AA, A or BBB by
Standard & Poor's Ratings Group ("S&P") or Fitch Investors Service, Inc.
("Fitch"), or Aaa, Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's"))
or determined to be of equivalent quality by the Adviser. Securities rated BBB
or Baa represent the lowest of four levels of Investment Grade Securities and
are regarded as borderline between definitely sound obligations and those in
which the speculative element begins to predominate. Ratings assigned to Fixed
Income Securities represent only the opinion of the rating agency assigning the
rating and are not dispositive of the credit risk associated with the purchase
of a particular Fixed Income Security. Moreover, market risk also will affect
the prices of even the highest rated Fixed Income Securities so that their
prices may rise or fall even if the issuer's capacity to repay its obligations
remains unchanged.
Loan Participations and Assignments. Loan Participations are interests in loans
or other direct debt instruments ("Loans") relating to amounts owed by a
corporate, governmental or other borrower to another party. Loans may represent
amounts owed to lenders or lending syndicates, to suppliers of goods or
services (trade claims or other receivables), or to other parties ("Lenders")
and may be fixed rate or floating rate. Loans also may be arranged through
private negotiations between an issuer of sovereign debt obligations and
Lenders.
The Portfolio's investments in Loans are expected in most instances to be in
the form of a participation in Loans ("Participations") and assignments of all
or a portion of Loans ("Assignments") from third parties. In the case of a
Participation, the Portfolio will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In the event of an insolvency of the Lender selling a
Participation, the Portfolio may be treated as a general creditor of the Lender
and may not benefit from any set-off between the Lender and the borrower.
Certain Participations may be structured in a manner designed to avoid
purchasers of Participations being subject to the credit risk of the Lender
with respect to the Participation. Even under such a structure, in the event of
a Lender's insolvency, the Lender's servicing of the Participation may be
delayed and the assignability of the Participation may be impaired. The
Portfolio will acquire Participations only if the Lender interpositioned
between a Portfolio and the borrower is determined by the Adviser to be
creditworthy.
When the Portfolio purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan. However, because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by the Portfolio
5
<PAGE>
as the purchaser of an Assignment may differ from, and be more limited than,
those held by the assigning Lender. Because there is no liquid market for such
securities, it is likely that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market may
have an adverse impact on the value of such securities and the Portfolio's
ability to dispose of particular Assignments or Participations when necessary
to meet the Portfolio's liquidity needs or in response to a specific economic
event, such as a deterioration in the creditworthiness of the borrower. The
lack of a liquid secondary market for Assignments and Participations also may
make it more difficult for the Portfolio to assign a value to these securities
for purposes of valuing the Portfolio's securities and calculating its NAV.
Loan Participations and Assignments involve a risk of loss in case of default
or insolvency of the borrower. In addition, they may offer less legal
protection to the Portfolio in the event of fraud or misrepresentation and may
involve a risk of insolvency of the Lender. Certain Loan Participations and
Assignments may also include standby financing commitments that obligate the
investing Portfolio to supply additional cash to the borrower on demand.
Participations involving emerging market country issuers may relate to Loans as
to which there has been or currently exists an event of default or other
failure to make payment when due, and may represent amounts owed to Lenders
that are themselves subject to political and economic risks, including the risk
of currency devaluation, expropriation, or failure. Such Loan Participations
and Assignments present additional risk of default or loss.
Money Market Instruments. Money Market Instruments are high quality short-term
Fixed Income Securities. Money Market Instruments may include obligations of
governments, government agencies, banks, corporations and special purpose
entities and Repurchase Agreements relating to these obligations. Certain Money
Market Instruments may be denominated in a foreign currency.
Repurchase Agreements. Repurchase Agreements are transactions in which the
Portfolio purchases a security or basket of securities and simultaneously
commits to resell that security or basket to the seller (a bank, broker or
dealer) at a mutually agreed upon date and price. The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated
to the coupon rate or date of maturity of the purchased security. Repurchase
Agreements may be viewed as a fully collateralized loan of money by the
Portfolio to the seller at a mutually agreed upon rate and price. The term of
these agreements is usually from overnight to one week, and never exceeds one
year. Repurchase Agreements with a term of over seven days are considered
illiquid.
In these transactions, the Portfolio receives as collateral securities that
have a market value at least equal to the purchase price (including accrued
interest) of the Repurchase Agreement, and this value is maintained during the
term of the agreement. These securities are held by the Portfolio's Custodian
or an approved third party for the benefit of the Portfolio until repurchased.
Repurchase Agreements permit the Portfolio to remain fully invested while
retaining overnight flexibility to pursue investments of a longer-term nature.
If the seller defaults and the collateral value declines, the Portfolio might
incur a loss. If bankruptcy proceedings are commenced with respect to the
seller, the Portfolio's realization upon the collateral may be delayed or
limited.
Pursuant to an order issued by the Securities and Exchange Commission (the
"SEC"), the Portfolio may pool its daily uninvested cash balances in order to
invest in Repurchase Agreements on a joint basis with other investment
companies advised by the Portfolio's Adviser. By entering into Repurchase
Agreements on a joint basis, the Portfolio expects to incur lower transaction
costs and potentially obtain higher rates of interest on such Repurchase
Agreements. The Portfolio's participation in the income from jointly purchased
Repurchase Agreements will be based on the Portfolio's percentage share in the
total Repurchase Agreement.
Temporary Investments. When the Adviser believes that changes in economic,
financial or political conditions make it advisable, the Portfolio may invest
up to 100% of its assets in cash and certain short- and medium-term Fixed
Income Securities for temporary defensive purposes. These Temporary Investments
may consist of obligations of the U.S. or foreign governments, their agencies
or instrumentalities; Money Market Instruments; and instruments issued by
international development agencies.
U.S. Government Securities. U.S. Government Securities are Fixed Income
Securities that are backed by the full faith and credit of the U.S. Government
as to the payment of both principal and interest. U.S. Government Securities
may include securities issued by the U.S. Treasury and securities issued by
federal agencies and U.S. Government sponsored instrumentalities.
Yankee Dollar Obligations. Yankee dollar bank obligations are dollar-
denominated obligations issued in the U.S. capital markets by foreign banks.
Yankee dollar obligations are subject to the same risks as domestic issues,
notably credit risk, market risk and liquidity risk. To a limited extent, they
are also subject to certain sovereign risks. One such risk is the possibility
that a sovereign country might prevent capital, in the form of dollars, from
flowing across its borders. Other risks include adverse political and economic
developments; the extent and quality of government regulations of financial
markets and institutions; the imposition of foreign withholding taxes; and the
expropriation or nationalization of foreign issuers. The Portfolio may consider
Yankee dollar obligations to be domestic securities for purposes of its
investment policies.
6
<PAGE>
Zero Coupons. Zero Coupons are fixed income securities that do not make regular
interest payments. Instead, Zero Coupons are sold at a discount from their face
value. The difference between a Zero Coupon's issue or purchase price and its
face value represents the imputed interest an investor will earn if the
obligation is held until maturity. Zero Coupons may offer investors the
opportunity to earn a higher yield than that available on ordinary interest-
paying obligations of similar credit quality and maturity.
Foreign Investment
Investing in foreign securities involves certain special considerations which
are not typically associated with investing in the Equity Securities or Fixed
Income Securities of U.S. issuers. Foreign issuers are not generally subject to
uniform accounting, auditing and financial reporting standards and may have
policies that are not comparable to those of domestic issuers. As a result,
there may be less information available about foreign issuers than about
domestic issuers. Securities of some foreign issuers are generally less liquid
and more volatile than securities of comparable domestic issuers. There is
generally less government supervision and regulation of stock exchanges,
brokers and listed issuers than in the United States. In addition, with respect
to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, political and social instability, or diplomatic
developments which could affect U.S. investments in those countries. The costs
of investing in foreign countries frequently is higher than the costs of
investing in the United States. Although the Advisers endeavor to achieve the
most favorable execution costs in portfolio transactions, fixed commissions on
many foreign stock exchanges are generally higher than negotiated commissions
on U.S. exchanges.
Investments in securities of foreign issuers generally are denominated in
foreign currencies. Accordingly, the value of the Portfolio's assets, as
measured in U.S. dollars may be affected favorably or unfavorably by changes in
currency exchange rates and in exchange control regulations. The Portfolio may
incur costs in connection with conversions between various currencies.
Certain foreign governments levy withholding or other taxes on dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from investments in such countries. The Portfolios may be
able to claim a credit for U.S. tax purposes with respect to any such foreign
taxes.
Brady Bonds. Brady Bonds are Fixed Income Securities that are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
Nicholas F. Brady when he was the U.S. Secretary of the Treasury. They may be
collateralized or uncollateralized and issued in various currencies (although
most are U.S. dollar-denominated) and they are actively traded in the over-the-
counter secondary market. The Portfolio will invest in Brady Bonds only if they
are consistent with the Portfolio's quality specifications. However, Brady
Bonds should be viewed as speculative in light of the history of defaults with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds.
Emerging Market Country Securities. An emerging market country security is one
issued by a foreign government or private issuer that has one or more of the
following characteristics: (i) its principal securities trading market is in an
emerging market country, (ii) alone or on a consolidated basis it derives 50%
or more of its annual revenue from either goods produced, sales made or
services performed in emerging markets, or (iii) it is organized under the laws
of, and has a principal office in, an emerging market country.
Emerging market describes any country which is generally considered to be an
emerging or developing country by major organizations in the international
financial community, such as the International Bank for Reconstruction and
Development (more commonly known as the World Bank) and the International
Finance Corporation. Emerging markets can include every nation in the world
except the United States, Canada, Japan, Australia, New Zealand and most
nations located in Western Europe.
The economies of individual emerging market countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures. These economies also
have been, and may continue to be, adversely affected by economic conditions in
the countries with which they trade.
Prior governmental approval for foreign investments may be required under
certain circumstances in some emerging market countries, and the extent of
foreign investment in certain fixed income securities and domestic companies
may be subject to limitation in other emerging market countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies in emerging market countries to prevent, among other concerns,
violation of foreign investment limitations. Repatriation of investment income,
capital and the proceeds of sales by foreign investors may require governmental
registration and/or approval in some emerging countries. The Portfolio could be
adversely affected by delays in, or a refusal to grant, any required
governmental registration of approval for such repatriation.
7
<PAGE>
Any investment subject to such repatriation controls will be considered
illiquid if it appears reasonably likely that this process will take more than
seven days.
Investing in emerging market countries may entail purchasing securities issued
by or on behalf of entities that are insolvent, bankrupt, in default or
otherwise engaged in an attempt to reorganize or reschedule their obligations,
and in entities that have little or no proven credit rating or credit history.
In any such case, the issuer's poor or deteriorating financial condition may
increase the likelihood that the investing Portfolio will experience losses or
diminution in available gains due to bankruptcy, insolvency or fraud. Emerging
market countries also pose the risk of nationalization, expropriation or
confiscatory taxation, political changes, government regulation, social
instability or diplomatic developments (including war) that could affect
adversely the economies of such countries or the value of the Portfolio's
investments in those countries. In addition, it may be difficult to obtain and
enforce a judgment in a court outside the United States.
If the Portfolio invests in emerging markets, it may also be exposed to an
extra degree of custodial and/or market risk, especially where the securities
purchased are not traded on an official exchange or where ownership records
regarding the securities are maintained by an unregulated entity (or even the
issuer itself).
Eurodollar Obligations. Eurodollar bank obligations are dollar-denominated
certificates of deposit and time deposits issued outside the U.S. capital
markets by foreign branches of U.S. banks and by foreign banks. Eurodollar
obligations are subject to the same risks as domestic issues and are also
subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of dollars, from flowing
across its borders. Other risks include adverse political and economic
developments; the extent and quality of government regulations of financial
markets and institutions; the imposition of foreign withholding taxes; and the
expropriation or nationalization of foreign issuers.
Foreign Bonds. Foreign Bonds are Fixed Income Securities issued by a foreign
government or a private issuer in a foreign country.
Foreign Currency Transactions. The U.S. dollar value of the assets of the
Portfolio, to the extent it invests in securities denominated in foreign
currencies, may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations, and the Portfolio may
incur costs in connection with conversions between various currencies. The
Portfolio may conduct its foreign currency exchange transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or may enter into forward contracts to purchase or sell
foreign currencies. The Portfolio also may manage its foreign currency
transactions using the instruments and techniques described under "Derivatives"
below and may purchase and sell foreign currency forward contracts in
combination with other derivatives in order to gain exposure to an investment
in lieu of actually purchasing such investment.
A foreign currency forward contract involves an obligation to purchase or sell
a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks)
and their customers. A forward contract generally has no deposit requirement,
and no commissions are charged at any stage for such trades. The Portfolio may
enter into foreign currency forward contracts in many circumstances. For
example, when the Portfolio enters into a contract for the purchase or sale of
a security denominated in a foreign currency, or when the Portfolio anticipates
the receipt in a foreign currency of dividends or interest payments on a
security which it holds, the Portfolio may desire to "lock-in" the U.S. dollar
price of the security or the U.S. dollar equivalent of such dividend or
interest payment, as the case may be. By entering into a forward contract for a
fixed amount of dollars, for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, the Portfolio will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during
the period between the date on which the security is purchased or sold, or on
which the dividend or interest payment is declared, and the date on which such
payments are made or received. Additionally, when the Portfolio anticipates
that the currency of a particular foreign country may suffer a decline against
the U.S. dollar, it may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of such Portfolio's securities denominated in such foreign currency.
However, it may not be practicable to hedge currency risk in all markets,
particularly emerging markets.
The term hedging, generally, means that the Portfolio is using a derivative
product as a way to reduce or limit risk. For example, the Portfolio may hedge
in order to limit the effects of a change in the value of a particular foreign
currency versus the U.S. dollar. The Portfolio also may use certain complex
hedging techniques. For example, the Portfolio may use a type of hedge known as
a cross hedge or a proxy hedge, where the Portfolio hedges the risk associated
with one underlying by purchasing or selling a derivative product with an
underlying that is different. There is no limit on the use of foreign currency
forward contracts or other derivative products for hedging purposes.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be
8
<PAGE>
possible since the future value of securities in foreign currencies will change
as a consequence of market movements in the value of these securities between
the date on which the forward contract is entered into and the date it matures.
The projection of short-term currency market movement is extremely difficult,
and the successful execution of a short-term hedging strategy is highly
uncertain.
Under normal circumstances, consideration of the prospect for changes in the
values of currency will be incorporated into the long-term investment decisions
made with regard to overall diversification strategies. However, the management
of the Fund believes that it is important to have the flexibility to enter into
such forward contracts when it determines that it is in the best interests of
the Portfolio. Except under circumstances where a segregated account is not
required under the 1940 Act or the rules adopted thereunder, the Portfolio will
earmark cash or liquid securities or place them into a segregated account in an
amount necessary to cover the Portfolio's obligations under such foreign
currency forward contracts.
The Portfolio generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Portfolio may
either sell the portfolio security and make delivery of the foreign currency,
or it may retain the security and terminate its contractual obligation to
deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly,
it may be necessary for the Portfolio to purchase additional foreign currency
on the spot market (and bear the expense of such purchase) if the market value
of the security is less than the amount of foreign currency that such Portfolio
is obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If the Portfolio retains the portfolio security and engages in an offsetting
transaction, such Portfolio will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. Should
forward prices decline during the period between the Portfolio entering into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, such Portfolio
will realize a gain to the extent that the price of the currency it has agreed
to sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, such Portfolio would suffer a loss to the extent that
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The Portfolio is not required to enter into such transactions with regard to
its foreign currency-denominated securities. It also should be realized that
this method of protecting the value of portfolio securities against a decline
in the value of a currency does not eliminate fluctuations in the underlying
prices of the securities. It simply establishes a rate of exchange which one
can achieve at some future point in time. Additionally, although such contracts
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result should the value of such currency increase.
Foreign Equity Securities. Foreign Equity Securities are Equity Securities of
an issuer in a foreign country.
Investment Funds. Some emerging market countries have laws and regulations that
currently preclude direct investment or make it undesirable to invest directly
in the securities of their companies. However, indirect investment in the
securities of companies listed and traded on the stock exchanges in these
countries is permitted by certain emerging market countries through Investment
Funds that have been specifically authorized. A Portfolio may invest in these
Investment Funds subject to the provisions of the 1940 Act, as applicable, and
other applicable laws.
Other Securities and Investment Techniques
Borrowing for Investment Purposes. Borrowing for investment purposes creates
leverage which is a speculative characteristic. The Portfolio will borrow only
when the Adviser believes that borrowing will benefit the Portfolio after
taking into account considerations such as the costs of borrowing and the
likely investment returns on securities purchased with borrowed funds.
Borrowing by the Portfolio will create the opportunity for increased net income
but, at the same time, will involve special risk considerations. Leverage that
results from borrowing will magnify declines as well as increases in the
Portfolio's net asset value per share and net yield. When the Portfolio is
engaged in borrowing, it expects that all of its borrowing will be made on a
secured bases. The Portfolio will either segregate the assets securing the
borrowing for the benefit of the lenders or arrangements will be made with a
suitable sub-custodian. If assets used to secure the borrowing decrease in
value, the Portfolio may be required to pledge additional collateral to the
lender in the form of cash or securities to avoid liquidation of those assets.
Convertible Securities. Convertible Securities are securities that may be
exchanged under certain circumstances for a fixed number of shares of Common
Stock or other Equity Securities. Convertible Securities generally represent a
feature of some other type of security, such as a Fixed Income Security or
Preferred Stock, so that, for example, a Convertible Fixed Income Security
would be a Fixed Income Security that is convertible into Common Stock.
Convertible Securities may be viewed as an investment in the current security
or the security into which the Convertible Securities may be exchanged and,
therefore, are included in both the definition of Equity Security and Fixed
Income Security.
9
<PAGE>
Loans of Portfolio Securities. The Portfolio may lend its investment securities
to qualified institutional investors that need to borrow securities in order to
complete certain transactions, such as covering short sales, avoiding failures
to deliver securities or completing arbitrage operations. By lending its
investment securities, the Portfolio attempts to increase its net investment
income through the receipt of interest of the loan. Any gain or loss in the
market price of the securities loaned that might occur during the term of the
loan would be for the account of the Portfolio. The Portfolio may lend its
investment securities to qualified brokers, dealers, domestic and foreign banks
or other financial institutions, so long as the terms, structure and the
aggregate amount of such loans are not inconsistent with the 1940 Act or the
Rules and Regulations or interpretations of the SEC thereunder, which currently
require that (i) the borrower pledge and maintain with the Portfolio collateral
consisting of liquid, unencumbered assets having a value at all times not less
than 100% of the value of the securities loaned; (ii) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the
borrower "marks to market" on a daily basis); (iii) the loan be made subject to
termination by the Portfolio at any time; and (iv) the Portfolio receive
reasonable interest on the loan (which may include the Portfolio investing any
cash collateral in interest bearing short-term investments), any distributions
on the loaned securities and any increase in their market value. There may be
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. However,
loans will be made only to borrowers deemed by the Adviser to be of good
standing and when, in the judgment of the Adviser, the consideration which can
be earned currently from such securities loans justifies the attendant risk.
All relevant facts and circumstances, including the creditworthiness of the
broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Board of
Directors.
At the present time, the staff of the SEC does not object if an investment
company pays reasonable negotiated fees in connection with loaned securities,
so long as such fees are set forth in a written contract and approved by the
investment company's Board of Directors. In addition, voting rights may pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
Non-Publicly Traded Securities, Private Placements and Restricted
Securities. The Portfolio may invest in securities that are neither listed on a
stock exchange nor traded over-the-counter, including privately placed and
restricted securities. Such unlisted securities may involve a higher degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be
less liquid than publicly traded securities. Although these securities may be
resold in privately negotiated transactions, the prices realized from these
sales could be less than those originally paid by the Portfolio or less than
what may be considered the fair value of such securities. Furthermore,
companies whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements which might be applicable
if their securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
sold, the Portfolio may be required to bear the expenses of registration.
As a general matter, the Portfolio may not invest more than 15% of its net
assets in illiquid securities, such as securities for which there is not a
readily available secondary market or securities that are restricted from sale
to the public without registration. However, certain Restricted Securities can
be offered and sold to qualified institutional buyers under Rule 144A under the
1933 Act ("Rule 144A Securities") and may be deemed to be liquid under
guidelines adopted by the Fund's Board of Directors. The Portfolio may invest
without limit in liquid Rule 144A Securities. Rule 144A Securities may become
illiquid if qualified institutional buyers are not interested in acquiring the
securities.
Preferred Stocks. Preferred Stocks are securities that evidence ownership in a
corporation and pay a fixed or variable stream of dividends. Preferred Stocks
have a preference over Common Stocks in the event of the liquidation of an
issuer and usually do not carry voting rights. Because Preferred Stocks pay a
fixed or variable stream of dividends they have many of the characteristics of
a Fixed Income Security and are, therefore, included in both the definition of
Equity Security and Fixed Income Security.
Reverse Repurchase Agreements. Under a Reverse Repurchase Agreement, the
Portfolio sells a security and promises to repurchase that security at an
agreed upon future date and price. The price paid to repurchase the security
reflects interest accrued during the term of the agreement. The Portfolio will
earmark cash or liquid assets or establish a segregated account holding cash
and other liquid assets in an amount not less than the purchase obligations of
the agreement. Reverse Repurchase Agreements may be viewed as a speculative
form of borrowing called leveraging. The Portfolio may invest in reverse
repurchase agreements if (i) interest earned from leveraging exceeds the
interest expense of the original reverse repurchase transaction and (ii)
proceeds from the transaction are not invested for longer than the term of the
Reverse Repurchase Agreement.
Short Sales. A short sale is a transaction in which the Portfolio sells
securities it owns or has the right to acquire at no added cost (i.e., "against
the box") or does not own (but has borrowed) in anticipation of a decline in
the market price of the securities. To deliver the securities to the buyer, the
Portfolio arranges through a broker to borrow the securities and, in so doing,
the Portfolio becomes obligated to replace the securities borrowed at their
market price at the time of replacement. When selling short, the Portfolio
intends to
10
<PAGE>
replace the securities at a lower price and therefore, profit from the
difference between the cost to replace the securities and the proceeds received
from the sale of the securities. When the Portfolio makes a short sale, the
proceeds it receives from the sale will be held on behalf of a broker until the
Portfolio replaces the borrowed securities. The Portfolio may have to pay a
premium to borrow the securities and must pay any dividends or interest payable
on the securities until they are replaced.
The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash or other liquid securities. In addition, the Portfolio will
earmark cash or liquid assets or place in a segregated account an amount of
cash or other liquid securities equal to the difference, if any, between (i)
the market value of the securities sold at the time they were sold short, and
(ii) any cash or other liquid securities deposited as collateral with the
broker in connection with the short sale. Short sales by the Portfolio involve
certain risk and special considerations. If the Adviser incorrectly predicts
that the price of the borrowed security will decline, the Portfolio will have
to replace the securities with securities with a greater value than the amount
received from the sale. As a result, losses from short sales differ from losses
that could be incurred from a purchase of a security, because losses from short
sales may be unlimited, whereas losses from purchases can equal only the total
amount invested.
Structured Investments. Structured Investments are securities that are
convertible into, or the value of which is based upon the value of, other fixed
income or equity securities or indices upon certain terms and conditions. The
amount the Portfolio receives when it sells a Structured Investment or at
maturity of a Structured Investment is not fixed, but is based on the price of
the underlying security or index. Particular Structured Investments may be
designed so that they move in conjunction with or differently from their
underlying security or index in terms of price and volatility. It is impossible
to predict whether the underlying index or price of the underlying security
will rise or fall, but prices of the underlying indices and securities (and,
therefore, the prices of Structured Investments) will be influenced by the same
types of political and economic events that affect particular issuers of fixed
income and equity securities and capital markets generally. Structured
Investments also may trade differently from their underlying securities.
Structured Investments generally trade on the secondary market, which is fairly
developed and liquid. However, the market for such securities may be shallow
compared to the market for the underlying securities or the underlying index.
Accordingly, periods of high market volatility may affect the liquidity of
Structured Investments, making high volume trades possible only with
discounting.
Structured Investments are a relatively new innovation and may be designed to
have various combinations of equity and fixed income characteristics. The
following sections describe four of the more common types of Structured
Investments. The Portfolio may invest in other Structured Investments,
including those that may be developed in the future, to the extent that the
Structured Investments are otherwise consistent with the Portfolio's investment
objective and policies.
Temporary Borrowing. The Portfolio is permitted to borrow from banks in an
amount up to 10% of its total assets for extraordinary or emergency purposes.
For example, the Portfolio may borrow for temporary defensive purposes or to
meet shareholder redemptions when the Adviser believes that it would not be in
the best interests of the Portfolio to liquidate portfolio holdings. The
Portfolio will not purchase additional securities while temporary borrowings
exceed 5% of its total assets.
When-Issued and Delayed Delivery Securities. When-Issued and Delayed Delivery
Securities are securities purchased with payment and delivery taking place in
the future in order to secure what is considered to be an advantageous yield or
price at the time of the transaction. Delivery of and payment for these
securities may take as long as a month or more after the date of the purchase
commitment, but will take place no more than 120 days after the trade date. The
payment obligation and the interest rates that will be received are each fixed
at the time the Portfolio enters into the commitment and no interest accrues to
the Portfolio until settlement. Thus, it is possible that the market value at
the time of settlement could be higher or lower than the purchase price if the
general level of interest rates has changed. When the Portfolio agrees to
purchase When-Issued or delayed delivery securities, it will earmark or
segregate cash or liquid securities in an amount equal to the Portfolio's
commitment to purchase these securities.
Derivatives
The Portfolio is permitted to utilize various exchange-traded and over-the-
counter derivative instruments and derivative securities, both for hedging and
non-hedging purposes. Permitted derivative products include, but are not
limited to futures contracts ("futures"); forward contracts ("forwards");
options; swaps, caps, collars and floors; structured notes; and other
derivative products yet to be developed, so long as these new products are used
in a manner consistent with the objective of the Portfolio. These derivative
products may be based upon a wide variety of underlying rates, indices,
instruments, securities and other products, such as interest rates, foreign
currencies, foreign and domestic fixed income and equity securities, groups or
"baskets" of securities and securities indices (for each derivative product,
the "underlying"). The Portfolio will limit its use of derivatives for non-
hedging purposes to 33 1/3% of its total assets measured by the aggregate
national amount of outstanding derivatives. The Portfolio's investments in
foreign currency forward contracts and derivatives used for hedging purposes
are not subject to the foregoing limits.
11
<PAGE>
The term hedging, generally, means that the Portfolio is using a derivative
product as a way to reduce or limit risk. For example, the Portfolio may hedge
in order to limit the effects of a change in the value of a particular foreign
currency versus the U.S. dollar or the Portfolio could use a portion of its
cash to buy securities futures in order to hedge the risk of not being fully
invested. The Portfolio also may use certain complex hedging techniques. For
example, the Portfolio may use a type of hedge known as a cross hedge or a
proxy hedge, where the Portfolio hedges the risk associated with one underlying
by purchasing or selling a derivative product with an underlying that is
different. There is no limit on the use of foreign currency forward contracts
or other derivative products for hedging purposes.
The Portfolio may use derivative products under a number of different
circumstances to further its investment objectives. For example, a Portfolio
may purchase derivatives to gain exposure to a market or currency quickly in
response to changes in the Portfolio's investment strategy, upon the inflow of
investable cash or when the derivative provides greater liquidity than the
underlying market. The Portfolio may use derivatives when it is restricted from
directly owning the "underlying" or when derivatives provide a pricing
advantage or lower transaction costs. The Portfolio also may purchase
combinations of derivatives in order to gain exposure to an investment in lieu
of actually purchasing such investment. Derivatives may also be used by a
Portfolio for hedging or risk management purposes and in other circumstances
when the Adviser believes it advantageous to do so consistent with the
Portfolio's investment objectives and policies. Except under circumstances
where a segregated account is not required under the 1940 Act or the rules
adopted thereunder, the Portfolio will earmark cash or liquid securities or
place them in a segregated account in an amount necessary to cover the
Portfolio's obligations under such derivative transactions.
The use of derivative products is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolio will be less favorable than it would have been in
these investment techniques had not been used.
Some of the derivative products in which the Portfolios may invest and some of
the risks related thereto are described in further detail below.
Futures Contracts (Futures) and Forward Contracts (Forwards). The Portfolio may
purchase and sell futures contracts, including futures on securities indices,
baskets of securities, foreign currencies and interest rates of the type
generally known as financial futures. These are standardized contracts that are
bought and sold on organized exchanges. A futures contract obligates a party to
buy or sell a specific amount of the "underlying," such as a particular foreign
currency, on a specified future date at a specified price or to settle the
value in cash.
The Portfolio may also purchase and sell forward contracts, such as forward
rate agreements and other financial forward contracts. The Portfolio may also
use foreign currency forward contracts which are separately discussed under
"Foreign Currency Transactions." These forward contracts are privately
negotiated and are bought and sold in the over-the-counter market. Like a
future, a forward contract obligates a party to buy or sell a specific amount
of the underlying on a specified future date at a specified price. The terms of
the forward contract are customized. Forward contracts, like other over-the-
counter contracts that are negotiated directly with an individual counterparty,
subject the Portfolio to the risk of counterparty default.
In some cases, the Portfolio may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Portfolio will use these products only as
permitted by applicable laws and regulations. Some of the ways in which the
Portfolio may use futures contracts, forward contracts and related options are
as follows:
The Portfolio may sell securities index futures contracts and/or options
thereon in anticipation of or during a market decline to attempt to offset the
decrease in market value of investments in its portfolio, or may purchase
securities index futures or options in order to gain market exposure. There
currently are limited securities index futures and options on such futures in
many countries, particularly emerging markets. The nature of the strategies
adopted by the Adviser and the extent to which those strategies are used, may
depend on the development of such markets. The Portfolio may also purchase and
sell foreign currency futures to lock in rates or to adjust their exposure to a
particular currency.
The Portfolio may engage in transactions in interest rate futures and related
products. The value of these contracts rises and falls inversely with change in
interest rates. The Portfolio may engage in such transactions to hedge their
holdings of debt instruments against future changes in interest rates or for
other purposes.
Gains and losses on future contracts, forward contracts and related options
depend on the Adviser's ability to predict correctly the direction of movement
of securities prices, interest rates and other economic factors. Other risks
associated with the use of these instruments include (i) imperfect correlation
between the changes in market value of investments held by the Portfolio and
the prices of derivative products relating to investments purchased or sold by
the Portfolio, and (ii) possible lack of a liquid secondary market for a
derivative product and the resulting inability to close out a position. The
Portfolio will seek to minimize the risk by only entering into transactions for
which there appears to be a liquid exchange or secondary market. In some
strategies, the risk of loss in trading on futures and related transactions
12
<PAGE>
can be substantial, due both to the low margin deposits required and the
extremely high degree of leverage involved in pricing.
Under rules adopted by the Commodity Futures Trading Commission (the "CFTC"),
the Portfolio may, without registering with the CFTC as a Commodity Pool
Operator, enter into futures contracts and options thereon for both hedging and
non-hedging purposes, provided that not more than 5% of the Portfolio's total
assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to non-bona
fide hedging activities.
Options. The Portfolio may seek to increase their returns or may hedge their
portfolio investments through options transactions with respect to individual
securities, indices or baskets in which the Portfolio may invest; other
financial instruments; and foreign currency. Various options may be purchased
and sold on exchanges or over-the-counter markets.
The Portfolio may purchase put and call options. Purchasing a put option gives
the Portfolio the right, but not the obligation, to sell the underlying (such
as a securities index or a particular foreign currency) at the exercise price
either on a specific date or during a specified exercise period. The purchaser
pays a premium to the seller (also known as the writer) of the option.
The Portfolio also may write put and call options on investments held in the
portfolio, as well as foreign currency options. The Portfolio that has written
an option receives a premium that increases the Portfolio's return on the
underlying in the event the option expires unexercised or is closed out at a
profit. However, by writing a call option, the Portfolio will limit its
opportunity to profit from an increase in the market value of the underlying
above the exercise price of the option. By writing a put option, the Portfolio
will be exposed to the amount by which the price of the underlying is less than
the strike price.
By writing an option, the Portfolio incurs an obligation either to buy (in the
case of a put option) or sell (in the case of a call option) the underlying
from the purchaser of the option at the option's exercise price, upon exercise
by the purchaser. Pursuant to guidelines established by the Board of Directors,
the Portfolio may only write options that are "covered." A covered call option
means that until the expiration of the option, the Portfolio will either
earmark or segregate sufficient liquid assets to cover its obligations under
the option or will continue to own (i) the underlying; (ii) securities or
instruments convertible or exchangeable without the payment of any
consideration into the underlying; or (iii) a call option on the same
underlying with a strike price no higher than the price at which the underlying
was sold pursuant to a short option position. In the case of a put option, the
Portfolio will either earmark or segregate sufficient liquid assets to cover
its obligations under the option or will own another put option on the same
underlying with an equal or higher strike price.
There currently are limited options markets in many countries, particularly
emerging market countries, and the nature of the strategies adopted by the
Adviser and the extent to which those strategies are used will depend on the
development of these options markets. The primary risks associated with the
Portfolio's use of options as described include (i) imperfect correlation
between the change in market value of investments held, purchased or sold by
the Portfolio and the prices of options relating to such investments, and (ii)
possible lack of a liquid secondary market for an option.
Swaps, Caps, Collars and Floors. Swaps are privately negotiated over-the-
counter derivative products in which two parties agree to exchange payment
streams calculated in relation to a rate, index, instrument or certain
securities and a particular "notional amount." As with many of the other
derivative products available to the Portfolio, the underlying may include an
interest rate (fixed or floating), a currency exchange rate, a commodity price
index, and a security, securities index or a combination thereof. A great deal
of flexibility is possible in the way the products may be structured, with the
effect being that the parties may have exchanged amounts equal to the return on
one rate, index or group of securities for another. For example, in a simple
fixed-to-floating interest rate swap, one party makes payments equivalent to a
fixed interest rate, and the other make payments equivalent to a specified
interest rate index. The Portfolio may engage in simple or more complex swap
transactions involving a wide variety of underlyings. The currency swaps that
the Portfolio may enter will generally involve an agreement to pay interest
streams in one currency based on a specified index in exchange for receiving
interest streams denominated in another currency. Such swaps may involve
initial and final exchanges that correspond to the agreed upon notional amount.
Caps, collars and floors are privately-negotiated option-based derivative
products. The Portfolio may use one or more of these products in addition to or
in lieu of a swap involving a similar rate or index. As in the case of a put or
call option, the buyer of a cap or floor pays a premium to the writer. In
exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other than foreign
currency swaps), the entire notional amount is not exchanged and thus is not at
risk. A collar is a combination product in which the same party, such as the
Portfolio, buys a cap from and sells a floor to the other party. As with put
and call options, the amount at risk is limited for the buyer, but, if the cap
or floor in not hedged or covered, may be unlimited for the seller. Under
current market
13
<PAGE>
practice, caps, collars and floors between the same two parties are generally
documented under the same "master agreement." In some cases, options and
forward agreements may also be governed by the same master agreement. In the
event of a default, amounts owed under all transactions entered into under, or
covered by, the same master agreement would be netted and only a single payment
would be made.
Swaps, caps, collars and floors are credit-intensive products. The Portfolio
that enters into a swap transaction bears the risk of default, i.e. nonpayment,
by the other party. The guidelines under which the Portfolio enters derivative
transactions, along with some features of the transactions themselves, are
intended to reduce these risks to the extent reasonably practicable, although
they cannot eliminate the risks entirely. Under guidelines established by the
Board of Directors, the Portfolio may enter into swaps only with parties that
meet certain credit rating guidelines. Consistent with current market
practices, the Portfolio will generally enter into swap transactions on a net
basis, and all swap transactions with the same party will be documented under a
single master agreement to provide for net payment upon default. In addition,
the Portfolio's obligations under an agreement will be accrued daily (offset
against any amounts owing to the Portfolio) and any accrued, but unpaid, net
amounts owed to the other party to a master agreement will be covered by the
maintenance of a segregated account consisting of cash or liquid securities.
Interest rate and total rate of return (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, the Portfolio's risk of loss will consist of the
payments that the Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, the Portfolio may have contractual
remedies under the agreements related to the transaction.
Taxes
The following is only a summary of certain additional federal income tax
considerations generally affecting the Portfolio and its shareholders that are
not described in the Portfolio's prospectus. No attempt is made to present a
detailed explanation of the tax treatment of the Portfolio or its shareholders,
and the discussion here and in the Portfolio's prospectus is not intended as a
substitute for careful tax planning. Shareholders are urged to consult their
tax advisors with specific reference to their own tax situations, including
their state and local tax liabilities.
Federal Income Tax Treatment of Dividends and Distributions
The following general discussion of certain federal income tax consequences is
based on the Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations issued thereunder as in effect on the date of this Statement of
Additional Information. New legislation, as well as administrative charges or
court decisions, may significantly change the conclusions expressed herein, and
may have a retroactive effect with respect to the transactions contemplated
herein.
The Portfolio is generally treated as a separate corporation for federal income
tax purposes, and thus the provisions of the Code generally will be applied to
the Portfolio separately rather than to the Fund as a whole.
Qualification as a Regulated Investment Company
The Fund intends that the Portfolio qualify and elect to be treated for each
taxable year as a regulated investment company ("RIC") under Subchapter M of
the Code. Accordingly, the Portfolio must, among other things, (a) derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to security loans, gains from the sale or other
disposition of stock, securities or foreign currencies, and certain other
related income, including generally, certain gains from options, futures and
forward contracts; and (b) diversify its holdings so that, at the end of each
fiscal quarter of the Portfolio's taxable year, (i) at least 50% of the market
value of the Portfolio's total assets is represented by cash and cash items,
United States Government securities, securities or other RICs, and other
securities, with such other securities limited, in respect to any one issuer,
to an amount not greater than 5% of the value of the Portfolio's total assets
or 10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its total assets is invested in the securities (other
than United States Government securities or securities of other RICs) of any
one issuer or two or more issuers which the Portfolio controls and which are
engaged in the same, similar, or related trades or business. For purposes of
the 90% of gross income requirement described above, foreign currency gains
which are not directly related to the Portfolio's principal business of
investing in stock or securities (or options or futures with respect to stock
or securities) may be excluded from income that qualifies under the 90%
requirement.
In addition to the requirements described above, in order to qualify as a RIC,
the Portfolio must distribute at least 90% of the Portfolio's net investment
income (that generally includes dividends, taxable interest, and the excess of
net short-term capital gains over net long-term capital losses less operating
expenses) and at least 90% of its net tax-exempt interest income, if any, to
shareholders. If a Portfolio meets all of the RIC requirements, it will not be
subject to federal income tax on any of its net investment income or capital
gains that it distributes to shareholders.
14
<PAGE>
The Portfolio may make investments in securities (such as STRIPS) that bear
"original issue discount" or "acquisition discount" (collectively, "OID
Securities"). The holder of such securities is deemed to have received interest
income even though no cash payments have been received. Accordingly, OID
Securities may not produce sufficient current cash receipts to match the amount
of distributable net investment income the Portfolio must distribute to satisfy
the Distribution Requirement. In some cases, the Portfolio may have to borrow
money or dispose of other investments in order to make sufficient cash
distributions to satisfy the Distribution Requirement.
Although the Portfolio intends to distribute substantially all of its net
investment income and may distribute its capital gains for any taxable year,
the Portfolio will be subject to federal income taxation to the extent any such
income or gains are not distributed.
If the Portfolio fails to qualify for any taxable year as a RIC, all of its
taxable income will be subject to tax at regular corporate income tax rates
without any deduction for distributions to shareholders and such distributions
generally will be taxable to shareholders as ordinary dividends to the extent
of such Portfolio's current and accumulated earnings and profits. In this
event, distributions generally will be eligible for the dividends-received
deduction for corporate shareholders.
For certain transactions, the Portfolio is required for federal income tax
purposes to recognize as gain or loss its net unrealized gains or losses on
forward currency and futures contracts as of the end of each taxable year, as
well as those actually realized during the year. In most cases, any such gain
or loss recognized with respect to a regulated futures contract is considered
to be 60% long-term capital gain or loss and 40% short-term capital gain or
loss, without regard to the holding period of the contract. Realized gain or
loss attributable to a foreign currency forward contract is treated as 100%
ordinary income. Furthermore, foreign currency futures contracts which are
intended to hedge against a change in the value of securities held by the
Portfolio may affect the holding period of such securities and, consequently,
the nature of the gain or loss on such securities upon disposition.
Short sales engaged in by the Portfolio may reduce the holding period of
property held by the Portfolio which is substantially identical to the property
sold short. This rule may have the effect of converting capital gains
recognized by the Portfolio from long-term to short-term as well as converting
capital losses recognized by the Portfolio from short-term to long-term.
The Portfolio will provide a statement annually to shareholders as to the
federal tax status of distributions paid (or deemed to be paid) by the
Portfolio during the year, including the amount of dividends eligible for the
corporate dividends-received deduction.
Federal Excise Tax
If the Portfolio fails to distribute in a calendar year at least 98% of its
ordinary income for the year and 98% of its capital gain net income (the excess
of short and long term capital gains over short and long term capital losses)
for the one-year period ending October 31 of that year (and any retained amount
from the prior calendar year), the Portfolio will be subject to a nondeductible
4% Federal excise tax on the undistributed amounts. Each Portfolio intends to
make sufficient distributions to avoid imposition of this tax, or to retain, at
most its net capital gains and pay tax thereon.
Foreign Income Taxes
The Portfolio that invests in foreign securities may be subject to foreign
withholding taxes with respect to its dividend and interest income from foreign
countries, thus reducing the net amount available for distribution to a
Portfolio's shareholders. The United States has entered into tax treaties with
many foreign countries that may entitle the Portfolio to a reduced rate of, or
exemption from, taxes on such income. It is impossible to determine the
effective rate of foreign tax in advance because the amount of the Portfolio's
assets to be invested within various countries is not known.
If more than 50% of the value of the Portfolio's total assets at the close of
its taxable year consists of the stock or securities of foreign corporations,
the Portfolio may elect to "pass through" to its shareholders the amount of
foreign income taxes paid by the Portfolio (the "Foreign Tax Election").
Pursuant to the Foreign Tax Election, shareholders would be required to (i)
include in gross income, even though not actually received, their respective
pro-rata shares of the foreign income taxes paid by the Portfolio; (ii) either
deduct their pro-rata share of foreign taxes in computing their taxable income,
or use such share (subject to various Code limitations) as a foreign tax credit
against federal income tax (but not both). In determining the source and
character of distributions received from the Portfolio for purposes of the
foreign tax credit limitation rules of the Code, shareholders would, if the
Portfolio makes the Foreign Tax Election, be required to treat their pro-rata
shares of such foreign taxes and allocable portions of Portfolio distributions
as foreign source income.
Purchase of the Shares of the Portfolio
Shares of the Portfolio will be purchased by life insurance companies for their
separate accounts under variable annuity contracts and variable life insurance
policies and by other entities under qualified pension and retirement plans.
Under the provisions of the Code currently in effect, net income and realized
capital gains of Portfolio of the Fund are not currently taxable when left to
accumulate within a variable annuity contract or variable life insurance policy
or under a qualified pension or retirement plan.
15
<PAGE>
For information on federal income taxation of a life insurance company with
respect to its receipt of distributions from the Fund and federal income
taxation of owners of the company's variable annuity contracts or variable life
insurance policies, refer to the life insurance company's variable annuity
contract or variable life insurance policy prospectus.
State and Local Tax Considerations
Rules of U.S. state and local taxation of dividend and capital gains
distributions from regulated investment companies often differ from the rules
for U.S. federal income taxation described above. Shareholders are urged to
consult their tax advisers as to the consequences of these and other U.S. state
and local tax rules regarding an investment in the Portfolio.
Purchase of Shares
The purchase price of the Portfolio is the net asset value next determined
after the order is received. An order received prior to the close of the New
York Stock Exchange (the "NYSE") (normally 4:00 pm Eastern Time) will be
executed at the price computed on the date of receipt; and an order received
after the close of the NYSE will be executed at the price computed on the next
day the NYSE is open as long as the Fund's transfer agent receives payment by
check or in Federal Funds prior to the close of the NYSE on such day. Shares of
the Fund may be purchased on any day the NYSE is open. The NYSE will be closed
on the following days: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day, and on the preceding Friday or subsequent Monday when any of
these holidays falls on a Saturday or Sunday, respectively.
The Portfolio reserves the right in its sole discretion to suspend the offering
of its shares and to reject purchase orders when in the judgment of management
such rejection is in the best interest of the Portfolio.
Redemption of Shares
Redemptions. The Portfolio may suspend redemption privileges or postpone the
date of payment (i) during any period that the NYSE is closed, or trading on
the NYSE is restricted as determined by the SEC, (ii) during any period when an
emergency exists as defined by the rules of the SEC as a result of which it is
not reasonably practicable for a Portfolio to dispose of securities owned by
it, or fairly to determine the value of its assets, and (iii) for such other
periods as the SEC may permit.
Distributions In Kind. If the Board of Directors determines that it would be
detrimental to the best interests of the shareholders of the Portfolio to make
a redemption payment wholly in cash, and subject to applicable agreements with
life insurance companies and other qualified investors, the Fund may pay a
portion of a redemption by distribution in kind of portfolio securities in lieu
of cash. Securities issued in a distribution in kind will be readily
marketable, although shareholders receiving distributions in kind may incur
brokerage commissions when subsequently selling shares of those securities.
Investment Limitations
Fundamental Limitations
The Portfolio has adopted the following restrictions, which are fundamental
policies and may not be changed without the approval of the lesser of: (1) at
least 67% of the voting securities of the Portfolio present at a meeting if the
holders of more than 50% of the outstanding voting securities of the Portfolio
are present or represented by proxy, or (2) more than 50% of the outstanding
voting securities of the Portfolio. The Portfolio of the Fund will not:
(1) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except this shall not prevent the
Portfolio from purchasing or selling futures contracts or options thereon or
from investing in securities or other instruments backed by physical
commodities);
(2) purchase or sell real estate, although it may purchase and sell securities
of companies that deal in real estate and may purchase and sell securities that
are secured by interests in real estate;
(3) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or repurchase agreements;
(4) issue senior securities and will not borrow, except from banks in an
amount not in excess of 33 1/3% of its total assets (including the amount
borrowed) less liabilities;
(5) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the 1933 Act
in the disposition of restricted securities; and
(6) acquire any securities of companies within one industry if, as a result of
such acquisition, more than 25% of the value of the Portfolio's total assets
would be invested in securities of companies within such industry; provided,
that (i) there shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities; (ii)
utility companies will be divided according to their services, for example,
gas, gas transmission, electric and telephone will each be considered a
separate industry; (iii) financial service companies will be classified
according to the end users of their services, for example, automobile finance,
bank finance and diversified
16
<PAGE>
finance will each be considered a separate industry; and (iv) ABSs will be
classified according to the underlying assets securing such securities; and
provided further that the Portfolio may invest more than 25% of its assets in
securities of companies in the technology or technology-related industries.
Non-fundamental Limitations
In addition, the Portfolio has adopted non-fundamental investment limitations
as stated below. Such limitations may be changed without shareholder approval.
The Portfolio of the Fund will not:
(1) sell short (other than "against the box") unless the Portfolio's
obligation is covered by unencumbered liquid assets in a segregated account and
by collateral held by the lending broker; provided that transactions in futures
contracts and options are not deemed to constitute selling securities short;
(2) invest for the purpose of exercising control over management of any
company;
(3) invest its assets in securities of any investment company except as may be
permitted by the 1940 Act;
(4) invest more than an aggregate or 15% of the net assets of the Portfolio,
determined at the time of investment, in illiquid securities;
(5) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitations as
described in the prospectus) that are publicly distributed, and (ii) by lending
its portfolio securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the 1940 Act or
the Rules and Regulations or interpretations of the SEC thereunder;
(6) purchase on margin, except for use of short-term credit as may be
necessary for the clearance of purchases and sales of securities, but it may
make margin deposits in connection with transactions in options, futures, and
options on futures; and
The Portfolio will diversify its holdings so that, at the close of each quarter
of its taxable year, (i) at least 50% of the market value of the Portfolio's
total assets is represented by cash (including cash items and receivables),
U.S. Government securities, and other securities, with such other securities
limited, in respect of any one issuer, for purposes of this calculation to an
amount not greater than 5% of the value of the Portfolio's total assets and 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets is invested in the securities of any one
issuer (other than U.S. Government securities).
The percentage limitations contained in these restrictions apply at the time of
purchase of securities. Future Portfolios of the Fund may adopt different
limitations.
The investments of life insurance company separate accounts made under variable
annuity contracts and variable life insurance policies are subject to state
insurance laws and regulations. The Fund and its Portfolios will, when
required, comply with investment restrictions imposed under such laws and
regulations on life insurance company separate accounts investing in the
Portfolios.
In addition, Section 817(h) of the Internal Revenue Code requires that the
assets of the Portfolio be adequately diversified so that insurance companies,
and not variable contract owners, are considered the owners for federal income
tax purposes of the assets held in the separate accounts. To meet the
diversification requirements of regulations issued under Section 817(h), the
Portfolio will meet the following test: no more than 55% of the assets will be
invested in any one investment; no more than 70% of the assets will be invested
in any two investments; no more than 80% of the assets will be invested in any
three investments; and no more than 90% will be invested in any four
investments. The Portfolio must meet the above diversification requirements
within 30 days of the end of each calendar quarter.
17
<PAGE>
Management Of The Fund
Officers and Directors
The Fund's officers, under the supervision of the Board of Directors, manage
the day-to-day operations of the Fund. The Directors set broad policies for the
Fund and choose its officers. Directors and officers of the Fund are also
directors and officers of some or all of the other investment companies
managed, administered, advised or distributed by the Advisers or their
affiliates. Two Directors and all of the officers of the Fund are directors,
officers or employees of the Fund's advisers, distributor or administrators.
The other Directors have no affiliation with the Fund's advisers, distributor
or administrators. A list of the Directors and officers of the Fund and a brief
statement of their present positions and principal occupations during the past
five years is set forth below:
<TABLE>
<CAPTION>
Name, Address and
Date of Birth Position with Fund Principal Occupation During Past Five Years
----------------- ---------------------------- -------------------------------------------
<S> <C> <C>
Barton M. Biggs* Chairman and Director Chairman, Director and Managing Director of Morgan
Morgan Stanley Dean Witter Stanley Dean Witter Investment Management Inc. and
Investment Management Morgan Stanley Dean Witter Investment Management
1221 Avenue of the Americas Limited; Managing Director of Morgan Stanley & Co.
New York, NY 10020 Incorporated; Director of Rand McNally Company;
11/26/32 Member of the Yale Development Board; Chairman and
Director of various U.S. registered investment
companies managed by Morgan Stanley Dean Witter
Investment Management Inc.
Michael F. Klein* Director and President Principal of Morgan Stanley & Co. Incorporated and
Morgan Stanley Dean Witter Morgan Stanley Dean Witter Investment Management
Investment Management Inc.; President and Officer of various U.S.
1221 Avenue of the Americas registered investment companies managed by Morgan
New York, NY 10020 Stanley Dean Witter Investment Management Inc.
12/12/58 Previously practiced law with the New York law
firm of Rogers & Wells.
John D. Barrett, II Director Chairman and Director of Barrett Associates, Inc.
Barrett Associates Inc. (investment counseling); Director of the Ashforth
521 Fifth Avenue Company (real estate); Director of Morgan Stanley
New York, NY 10135 Dean Witter Institutional Fund, Inc. and Morgan
8/21/35 Stanley Dean Witter Strategic Adviser Fund, Inc.
Gerard E. Jones Director Partner in Richards & O'Neil LLP (law firm);
Richards & O'Neil LLP Director of Morgan Stanley Dean Witter
43 Arch Street Institutional Fund, Inc. and Morgan Stanley Dean
Greenwich, CT 06830 Witter Strategic Adviser Fund, Inc.
1/23/37
Andrew McNally IV Director Director of Mercury Finance (consumer finance);
8255 North Central Zenith Electronics, Hubbell, Inc. (industrial
Park Avenue electronics); Director of Morgan Stanley Dean
Skokie, IL 60076 Witter Institutional Fund, Inc. and Morgan Stanley
11/11/39 Dean Witter Strategic Adviser Fund, Inc.; Formerly
Chairman and Chief Executive Officer of Rand
McNally & Company (publishing).
Samuel T. Reeves Director President, Pinnacle Trading L.L.C. (investments);
8211 North Fresno Street Director of Morgan Stanley Dean Witter
Fresno, CA 93720 Institutional Fund, Inc. and Morgan Stanley Dean
7/28/34 Witter Strategic Adviser Fund, Inc. and Morgan
Stanley India Investment Fund, Inc.
Fergus Reid Director Chairman and Chief Executive Officer of LumeLite
85 Charles Colman Blvd Plastics Corporation (injection molding); Trustee
Pawling, NY 12564 and Director of Vista Mutual Fund Group; Director
8/12/32 of Morgan Stanley Dean Witter Institutional Fund,
Inc. and Morgan Stanley Dean Witter Strategic
Adviser Fund, Inc.
Frederick O. Robertshaw Director Of Counsel, Copple, Chamberlin & Boehm, P.C.;
2025 North Third Street Formerly, of Counsel, Bryan, Cave LLP (law firms);
Suite 300 Director of Morgan Stanley Dean Witter
Phoenix, AZ 85004 Institutional Fund, Inc. and Morgan Stanley Dean
1/24/34 Witter Strategic Adviser Fund, Inc.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Name, Address and
Date of Birth Position with Fund Principal Occupation During Past Five Years
----------------- -------------------------- -------------------------------------------
<S> <C> <C>
Harold J. Schaaff, Jr. Vice President Principal of Morgan Stanley & Co. Incorporated
Morgan Stanley Dean Witter and Morgan Stanley Dean Witter Investment
Investment Management Management Inc.; General Counsel and Secretary
1221 Avenue of the Americas of Morgan Stanley Dean Witter Investment
New York, NY 10020 Management Inc.; Vice President of various U.S.
6/10/60 registered investment companies managed by
Morgan Stanley Dean Witter Investment Management
Inc.
Joseph P. Stadler Vice President Principal of Morgan Stanley & Co. Incorporated
Morgan Stanley Dean Witter and Morgan Stanley Dean Witter Investment
Investment Management Management Inc.; Previously with Price
1221 Avenue of the Americas Waterhouse LLP (now PricewaterhouseCoopers LLP)
New York, NY 10020 (accounting); Vice President of various U.S.
6/7/54 registered investment companies managed by
Morgan Stanley Dean Witter Investment Management
Inc.
Richard J. Shoch Vice President Vice President of Morgan Stanley Dean Witter &
Miller Anderson & Sherrerd, Co.; Fund Administration Manager, Miller
LLP Anderson & Sherrerd, LLP; Secretary of MAS
One Tower Bridge Funds; formerly Fund Legal Administrator and
West Conshohocken, PA 19428 then Counsel, Vice President and Assistant
10/28/66 Secretary, SEI Corporation.
Stefanie V. Chang Vice President Vice President of Morgan Stanley & Co.
Morgan Stanley Dean Witter Incorporated and Morgan Stanley Dean Witter
Investment Management Investment Management Inc.; Vice President of
1221 Avenue of the Americas various U.S. registered investment companies
New York, NY 10020 managed by Morgan Stanley Dean Witter Investment
11/30/66 Management Inc. Previously practiced law with
the New York law firm of Rogers & Wells.
Mary E. Mullin Secretary Vice President of Morgan Stanley & Co.
Morgan Stanley Dean Witter Incorporated and Morgan Stanley Dean Witter
Investment Management Inc. Investment Management Inc.; Secretary of various
1221 Avenue of the Americas U.S. registered investment companies managed by
New York, NY 10020 Morgan Stanley Dean Witter Investment Mangement
3/22/67 Inc. Previously practiced law with the New York
law firms of McDermott, Will & Emery and
Skadden, Arps, Slate, Meagher & Flom LLP.
James A. Gallo Vice President Vice President of Morgan Stanley Dean Witter &
Miller Anderson & Sherrerd, Co.; Head of Fund Administration, Miller
LLP Anderson & Sherrerd, LLP; Vice President and
One Tower Bridge Treasurer MAS Funds; formerly Manager, Internal
West Conshohocken, PA 19428 Accounting and then Vice President and Director
6/18/64 of Investment Accounting, PFPC, Inc.
Karl O. Hartmann Assistant Secretary Senior Vice President, Secretary and General
Chase Global Funds Services Counsel of Chase Global Funds Services Company;
Company Previously President, Secretary and General
73 Tremont Street Counsel, Leland, O'Brien, Rubinstein Associates,
Boston, MA 02108-3913 Inc. (investments).
3/7/55
Belinda A. Brady Assistant Treasurer Fund Administration Manager, Chase Global Funds
Chase Global Funds Services Services Company; Assistant Treasurer of various
Company U.S. registered investment companies managed by
73 Tremont Street Morgan Stanley Dean Witter Investment Management
Boston, MA 02108-3913 Inc. Previously was senior auditor at Price
1/23/68 Waterhouse LLP (now PricewaterhouseCoopers LLP).
</TABLE>
- -------
* "Interested Person" within the meaning of the 1940 Act.
19
<PAGE>
Remuneration of Directors and Officers
Members of the Board of Directors who are not "interested persons" within the
meaning of the 1940 Act ("Non-interested Directors") receive compensation from
the Fund and from other investment companies advised by MSDW Investment
Management or MAS (or by affiliated companies) (the Fund and such other
investment companies are referred to as the "Fund Complex"). The open-end
investment companies in the Fund Complex pay each of the Noninterested
Directors an annual aggregate compensation of $65,000, plus out-of-pocket
expenses, and pay each of the Noninterested Directors on the Board Audit
Committees additional annual aggregate compensation of $10,000 for serving on
such committees. The aggregate of such compensation for each Noninterested
Director is allocated among the open-end investment companies in direct
proportion to their respective average annual net assets. For the fiscal year
ended December 31, 1998, the Fund paid approximately $8,655 in Directors fees
and expenses. Column (2) in the following table sets forth the portions of the
annual aggregate compensation paid by the Fund to each Director for serving as
a Director of the Fund for the fiscal year ended December 31, 1998. Column (5)
in the table sets forth aggregate compensation paid by the Fund and Fund
Complex to each Director during the fiscal year ended December 31, 1998.
Compensation amounts do not include reimbursements of out-of-pocket expenses.
Directors who are officers or otherwise "interested persons" receive no
remuneration for their services as Directors. Directors and Officers of the
Fund do not own shares of the Fund.
Compensation Table
<TABLE>
<CAPTION>
(5)
Total
(3) (4) Compensation
Pension or Estimated From Fund
(2) Retirement Annual and Fund
Aggregate Benefits Accrued Benefits Complex
(1) Compensation as Part of Fund Upon Paid to
Name of Director From Fund Expenses Retirement Directors
---------------- ------------ ---------------- ---------- ------------
<S> <C> <C> <C> <C>
Barton M. Biggs $ 0 $ 0 $ 0 $ 0
Michael F. Klein 0 0 0 0
John D. Barrett, II(a) 1,340 0 0 65,000(c)
Gerard E. Jones(a) 1,340 0 0 72,100(c)(d)
Andrew McNally, IV(a)(b) 1,545 0 0 81,808(c)
Samuel T. Reeves(a)(b) 1,545 0 0 95,078(c)
Fergus Reid(a) 1,340 0 0 107,774(c)(d)
Frederick O. 1,545 0 0 75,000(c)
Robertshaw(a)(b)
</TABLE>
- -------
(a) Of the amounts payable to Messrs. Barrett, Jones, McNally, Reeves, Reid and
Robertshaw, nothing was deferred pursuant to the Fund's deferred
compensation plan in the fiscal year ended December 31, 1998.
(b) Member of Audit Committee of the Board of Directors of the Fund.
(c) Number of other investment companies in Fund Complex from whom Director
received compensation: Mr. Barrett--2; Mr. Jones--3; Mr. McNally--2; Mr.
Reeves--3; Mr. Reid--3; Mr. Robertshaw--2.
(d) Includes amounts paid for service as Director of a closed-end investment
company in the Fund Complex, in addition to amounts paid by the open-end
investment companies.
The Fund maintains an unfunded Deferred Compensation Plan which allows each
independent Director to defer payment of all, or a portion, of the fees he or
she receives for attending meetings of the Board of Directors throughout the
year. Each eligible Director generally may elect to have the deferred amounts
credited with a return equal to either of the following: (i) a rate equal to
the prevailing rate for 90-day U.S. Treasury Bills, or (ii) a rate equal to the
total return on one or more portfolios of the Fund or other funds in the Fund
Complex selected by the Director. Distributions generally are in the form of
equal annual installments over a period of five years beginning on the first
day of the year following the year in which the Director's service terminates,
except that the Board of Directors, in its sole discretion, may accelerate or
extend such distribution. The Fund intends that the Deferred Compensation Plan
shall be maintained at all times on an unfunded basis for federal income tax
purposes under the Internal Revenue Code of 1986, as amended (the "Code"). The
rights of an eligible Director and the beneficiaries to the amounts held under
the Deferred Compensation Plan are unsecured and such amounts are subject to
the claims of the creditors of the Fund.
Investment Advisory, Sub-Advisory And Administrative Agreements
MSDW Investment Management is a wholly owned subsidiary of Morgan Stanley Dean
Witter & Co. ("MSDW"). The principal offices of MSDW are located at 1585
Broadway, New York, N.Y. 10036 and the principal offices of MSDW Investment
Management are located at 1221 Avenue of the Americas, New York, N.Y. 10020.
Miller Anderson & Sherrerd, LLP ("MAS"), with principal offices located at One
Tower Bridge, West Conshohocken, Pennsylvania 19428, is also a subsidiary of
MSDW.
20
<PAGE>
Pursuant to an investment advisory agreement, MSDW Investment Management and
MAS receive compensation for providing investment advisory services in the
amounts described below.
Advisory Fees
The following table shows the advisory fee paid by the Portfolios for each of
the past three fiscal years.
MSDW Investment Management Advised Portfolios:*
<TABLE>
<CAPTION>
Advisory Fee Paid (000)
---------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
Portfolio 1998 1997 1996
- --------- -------------------------------- --------------------------------- --------------------------------
<S> <C> <C> <C>
Equity Growth Portfolio $26 (net of fee waivers of $136) $0/1/ (net of fee waivers of $30 N/A
and reimbursements of $36)
U.S. Real Estate $24 (net of fee waivers of $92) $0/2/ (net of fee waivers of $49 N/A
Portfolio and reimbursements of $26)
Emerging Markets Debt $74 (net of fee waivers of $143) $8/3/ (net of fee waivers of $63) N/A
Portfolio
Global Equity Portfolio $95 (net of fee waivers of $141) $0/1/ (net of fee waivers of $62 N/A
and reimbursements of $37)
International Magnum $51 (net of fee waivers of $220) $0/1/ (net of fee waivers of $116 N/A
Portfolio and reimbursements of $119)
Emerging Markets Equity $0 (net of fee waivers of $447 $0 (net of fee waivers of $279 $0/4/ (net of fee waivers of $32
Portfolio and reimbursements of $87) and reimbursements of $240) and reimbursements of $82)
Asian Equity Portfolio $0 (net of fee waivers of $93 $0/2/ (net of fee waivers of $68 N/A
and reimbursements of $91) and reimbursements of $81)
</TABLE>
- -------
* The Money Market, Latin American, Active International Allocation and
Technology Portfolios were not operational in the fiscal years ended December
31, 1998, 1997 and 1996. Consequently, no advisory fees were paid by these
Portfolios.
/1/For the period from January 2, 1997 to December 31, 1997.
/2/For the period from March 3, 1997 to December 31, 1997.
/3/For the period from June 16, 1997 to December 31, 1997.
/4/For the period from October 1, 1996 to December 31, 1996.
MAS Advised Portfolios:**
<TABLE>
<CAPTION>
Advisory Fee Paid (000)
-----------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
Portfolio 1998 1997 1996
- --------- ------------------------------- -------------------------------- ------------
<S> <C> <C> <C>
Fixed Income Portfolio $17 (net of fee waivers of $93) $0/1/ (net of fee waivers of $38 N/A
and reimbursements of $58)
High Yield Portfolio $34 (net of fee waivers of $77) $0/1/ (net of fee waivers of $49 N/A
and reimbursements of $36)
Value Portfolio $14 (net of fee waivers of $86) $0/1/ (net of fee waivers of $38 N/A
and reimbursements of $32)
Mid Cap Value Portfolio $44 (net of fee waivers of $99) $0/1/ (net of fee waivers of $47 N/A
and reimbursements of $22)
</TABLE>
- -------
** The Balanced, Core Equity, International Fixed Income, Mid Cap Growth and
Multi-Asset-Class Portfolios were not operational in the fiscal years ended
December 31, 1998, 1997 and 1996. Consequently, no advisory fees were paid
by these Portfolios.
/1/For the period from January 2, 1997 to December 31, 1997.
Sub-Advisory Fees
Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors"), with principal
offices at Two World Trade Center, New York, New York 10048, serves as the
investment sub-adviser to the Money Market Portfolio pursuant to an investment
sub-advisory agreement with MSDW Investment Management. As compensation for
managing the day-to-day investments of the Money Market Portfolio, MSDW
Investment Management pays MSDW Advisors 40% of the investment advisory fee
that MSDW Investment Management receives from this Portfolio.
21
<PAGE>
Administration Fees
Pursuant to separate Administration Agreements with the Fund, MSDW Investment
Management and MAS provide administrative services to MSDW Investment
Management Advised Portfolios and MAS Advised Portfolios, respectively. For its
services under the Administration agreement, the Fund pays each Adviser a
monthly fee which on an annual basis equals 0.25% of the average daily net
assets of each Portfolio managed by that Adviser.
Under a Sub-Administration Agreement between each Adviser and Chase Global
Funds Services Company ("Chase Global"), a corporate affiliate of The Chase
Manhattan Bank, Chase Global provides certain administrative services to the
Fund. Chase Global's business address is 73 Tremont Street, Boston,
Massachusetts 02108-3913.
European Currency Transition. On January 1, 1999, the European Monetary Union
(EMU) implemented a new currency unit, the Euro, which is expected to reshape
financial markets, banking systems and monetary policies in Europe and other
parts of the world. Implementation of this plan means that financial
transactions and market information, including share quotations and company
accounts, in participating countries are now denominated in Euros. Monetary
policy for participating countries is uniformly managed by a new central bank,
the European Central Bank (ECB).
The transition to the Euro may change the economic environment and behavior of
investors, particularly in European markets. For example, the process of
implementing the Euro may adversely affect financial markets world-wide and may
result in changes in the relative strength and value of the U.S. dollar or
other major currencies, as well as possible adverse tax consequences. The
transition to the Euro is likely to have a significant impact on fiscal and
monetary policy in the participating countries and may produce unpredictable
effects on trade and commerce generally. These resulting uncertainties could
create increased volatility in financial markets world-wide.
Year 2000
The management and distribution services provided to the Fund by the Advisers,
MSDW Advisors and Morgan Stanley & Co. Incorporated ("'Morgan Stanley") 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 Advisers, MSDW Advisors and Morgan Stanley
have been actively working on necessary changes to their own computer systems
to deal with the year 2000 problem and expect that their systems will be
adapted before that date. There can be no assurance, however, that they will be
successful. In addition, other unaffiliated service providers may be faced with
similar problems. The Advisers, MSDW Advisors and Morgan Stanley are monitoring
their remedial efforts, however, there can be no assurance that they and the
services they provide will not be adversely affected.
In addition, it is possible that the markets for securities in which the
Portfolios invest 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 Portfolios' investments may be
adversely affected.
Distribution of Fund Shares
Under a Distribution Agreement with the Fund, Morgan Stanley, a subsidiary of
MSDW, serves as exclusive distributor of the Portfolio and sells shares of the
Portfolio on the terms described in the Fund's Prospectus.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics under Rule 17j-
I of the 1940 Act which incorporates the Code of Ethics of each Adviser
(together, the "Codes"). The Codes restrict the personal investing activities
of all employees of each Adviser and, as described below, impose additional,
more onerous, restrictions on the Fund's investment personnel.
The Codes require that all employees of each Adviser preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Adviser include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
22
<PAGE>
In addition, no employee may purchase or sell any security that at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Adviser. Furthermore, the Codes provide for trading "blackout periods" that
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security.
Principal Holders of Securiites
As of June 30, 1999, the following persons were beneficial owners of 5% or more
of the outstanding shares of the following Portfolios:
<TABLE>
<CAPTION>
Percent of
Outstanding
Portfolio Name of Beneficial Owner Shares
--------- ------------------------ -----------
<S> <C> <C>
Fixed Income Allmerica Financial Life 41%
Portfolio Insurance & Annuity Company*/1/
440 Lincoln St., S-310
Worcester, MA 01653
General American Life Insurance Company* 21%
700 Market Street
St. Louis, MO 63101
Transamerica Life Insurance and Annuity Company* 8%
Separate Account VA6
401 North Tryon Street
Charlotte, NC 28210
ICMG Registered Variable Life* 8%
Separate Account
P.O. Box 2999
Hartford, CT 06104
Annuity Investors Life Insurance Company* 7%
P. O. Box 5423
Cincinnati, OH 45201
American General Life Insurance Company* 6%
P. O. Box 1591
Houston, TX 77251
High Yield Hartford Life & Annuity Insurance Company*/2 37%
Portfolio / Separate Account Three
P. O. Box 2999
Hartford, CT 06104
American General Life Insurance Company* 18%
P. O. Box 1591
Houston, TX 77251
Integrity Life Insurance Company* 17%
515 West Market Street
Louisville, KY 40202
National Integrity Life Insurance Company* 9%
515 West Market Street
Louisville, KY 40202
Transamerica Life Insurance and Annuity Company* 9%
Separate Account VA6
401 North Tryon Street
Charlotte, NC 28210
Equity Growth Northbrook Life Insurance Company*/3/ 49%
Portfolio 3100 Sanders Road
Northbrook, IL 60062
American General Life Insurance Company*/4 26%
/ P. O. Box 1591
Houston, TX 77251
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Percent of
Outstanding
Portfolio Name of Beneficial Owner Shares
--------- ------------------------ -----------
<S> <C> <C>
AIG Life Insurance Company* 13%
1 Alico Plaza
Wilmington, DE 19801
General American Life Insurance Company* 7%
700 Market Street
St. Louis, MO 63101
Value Portfolio American General Life Insurance Company*/4 44%
/ P. O. Box 1591
Houston, TX 77251
AIG Life Insurance Company* 22%
1 Alico Plaza
Wilmington, DE 19801
The Travelers Insurance Company* 13%
One Tower Square
Hartford, CT 06183
General American Life Insurance Company* 10%
700 Market Street
St. Louis, MO 63101
Mid Cap Value American General Life Insurance Company*/4/ 47%
Portfolio P. O. Box 1591
Houston, TX 77251
Hartford Life & Annuity Insurance Company*/2/ 33%
Separate Account Three
P. O. Box 2999
Hartford, CT 06104
The Travelers Insurance Company* 12%
One Tower Square
Hartford, CT 06183
U.S. Real Estate Northbrook Life Insurance Company/3 27%
Portfolio / 3100 Sanders Road
Northbrook, IL 60062
Ameritas Variable Life Insurance Company* 24%
Separate Account VA-2
P.O. Box 82550
Lincoln, NE 68501
Integrity Life Insurance Company* 14%
515 West Market Street
Louisville, KY 40202
CIGNA Corporate Insurance* 11%
P.O. Box 2975
Hartford, CT 06104
Annuity Investors Life Insurance Company* 9%
P. O. Box 5423
Cincinnati, OH 45201
Ameritas Variable Life Insurance Company* 6%
Separate Account
P.O. Box 82550
Lincoln, NE 68501
National Integrity Life Insurance Company* 5%
515 West Market Street
Louisville, KY 40202
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Percent of
Outstanding
Portfolio Name of Beneficial Owner Shares
--------- ------------------------ -----------
<S> <C> <C>
Global Equity Fidelity Investments Life Insurance Company*/6/ 39%
Portfolio 82 Devonshire Street, R258
Boston, MA 02109
Ameritas Variable Life Insurance Company* 21%
Separate Account VA-2
P.O. Box 82550
Lincoln, NE 68501
American General Life Insurance Company* 19%
P.O. Box 1591
Houston, TX 77251
The Travelers Insurance Company* 8%
One Tower Square
Hartford, CT 06183
Ameritas Variable Life Insurance Company* 5%
P.O. Box 82550
Lincoln, NE 68501
International Fidelity Investments Life Insurance Company*/6 25%
Magnum / 82 Devonshire Street, R258
Portfolio Boston, MA 02109
General American Life Insurance Company* 20%
700 Market Street
St. Louis, MO 63101
American General Life Insurance Company* 19%
P.O. Box 1591
Houston, TX 77251
Ameritas Variable Life Insurance Company* 13%
P.O. Box 82550
Lincoln, NE 68501
Northbrook Life Insurance Company* 11%
3100 Sanders Road
Northbrook, IL 60062
Emerging Fidelity Investments Life Insurance Company*/6/ 31%
Markets 82 Devonshire Street, R258
Equity Boston, MA 02109
Portfolio
New York Life Insurance and Annuity Corporation*/7 26%
/ 300 Interpace Parkway
Parsippany, NJ 07054
Northbrook Life Insurance Company* 9%
3100 Sanders Road
Northbrook, IL 60062
Ameritas Variable Life Insurance Company* 6%
P.O. Box 82550
Lincoln, NE 68501
Empire Fidelity Investments Life Insurance Company* 6%
200 Liberty Street
One Financial Center
New York, NY 10281
Penn Mutual Life Insurance Company* 5%
Variable Annuity Account 03
Independence Square
Philadelphia, PA 19172
Asian Equity Morgan Stanley Dean Witter & Co./8/ 35%
Portfolio 1585 Broadway
New York, NY 10036
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Percent of
Outstanding
Portfolio Name of Beneficial Owner Shares
--------- ------------------------ -----------
<S> <C> <C>
Ameritas Variable Life Insurance Company* 24%
P.O. Box 82550
Lincoln, NE 68501
Integrity Life Insurance Company* 21%
515 West Market Street
Louisville, KY 40202
National Integrity Life Insurance Company* 10%
515 West Market Street
Louisville, KY 40202
American General Life Insurance Company* 6%
P.O. Box 1591
Houston, TX 77251
Emerging Markets Debt Nationwide Life Insurance Company*/9/ 31%
Portfolio P.O. Box 182029
Columbus, OH 43218
Nationwide Life Insurance Company* 18%
P.O. Box 182029
Columbus, OH 43218
Morgan Stanley Dean Witter & Co. 16%
1585 Broadway
New York, NY 10036
Integrity Life Insurance Company* 12%
515 West Market Street
Louisville, KY 40202
Fidelity Investments Life Insurance Company* 10%
82 Devonshire Street, R258
Boston, MA 02109
Money Market Portfolio AIG Life Insurance Company*/5/ 100%
1 Alico Plaza
Wilmington, DE 19801
</TABLE>
- -------
* Shares of the Portfolio are sold to insurance companies for their variable
annuity contracts and variable life insurance policies.
/1/Allmerica Financial Life Insurance & Annuity Company's state of
incorporation is Massachusetts.
/2/Hartford Life & Annuity Insurance Company's parent company is The Hartford
Financial Services Group and its state of incorporation is Connecticut.
/3/Northbrook Life Insurance Company's parent company is Allstate Life
Insurance Company and its state of incorporation is Arizona.
/4/American General Life Insurance Company's parent company is American General
Corporation and its state of incorporation is Texas.
/5/AIG Life Insurance Company's parent company is American International Group
and its state of incorporation is Delaware.
/6/Fidelity Investments Life Insurance Company's parent company is FMR
Corporation and its state of incorporation is Utah.
/7/New York Life Insurance and Annuity Corporation's parent company is New York
Life Insurance company and its state of incorporation is Delaware.
/8/Morgan Stanley Dean Witter & Co.'s state of incorporation is Delaware.
/9/Nationwide Life Insurance Company's parent company is Nationwide Financial
Services, Inc. and its state of incorporation is Ohio.
As currently required under law, the insurance companies vote their shares of
the Portfolios in accordance with instructions received from their variable
annuity contract and variable life insurance policy owners. MSDW will vote the
shares of each Portfolio that it owns in the same proportions as shares of the
Portfolio are voted by the insurance companies. Accordingly, neither MSDW nor
the insurance companies are deemed to be in control of the Portfolios.
Portfolio Transactions
The policy of the Fund regarding purchase and sales of securities for the
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 commissions generally
26
<PAGE>
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 Adviser. The Adviser may pay broker-dealers (other than their
affiliates) higher commissions than another broker-dealer may have charged on
the Fund's brokerage transactions in recognition of research services. 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 terminal 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 information and services received by the Adviser from brokers and dealers
may be of benefit to them in the management of accounts of some of their other
clients and may not in all cases benefit the Fund directly. While the receipt
of such information and services is useful in varying decrees 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 fees paid to an Adviser is not reduced by any amount that may be
attributable to the value of such services.
In over-the-counter transactions, orders are placed directly with a principal
market-maker and such purchases normally include a mark-up over the bid to the
broker-dealer based on the spread between the bid and the asked price for the
security.
Portfolio securities will not be purchased from, or through, or sold to or
through, the Adviser or MSDW or any of its affiliates when such entities are
acting as principals, except to the extent permitted by law.
Brokerage Fees
The following table shows the brokerage commissions paid by the Portfolios to
Morgan Stanley and its affiliates for the fiscal years ended December 31, 1998.
<TABLE>
<CAPTION>
Brokerage Commissions Paid During
Fiscal Year Ended December 31, 1998
------------------------------------------------
Commissions Paid to Morgan Stanley
------------------------------------
Percent of
Total Percent of Total
Commissions Total Total Brokered
Portfolio* Paid Commissions Commissions Transactions
---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Global Equity $ 90,498.00 $11,900.00 13.15% 13.95%
International Magnum 92,226.00 8,842.00 9.58 9.01
Emerging Markets Equity 221,754.00 8,780.00 3.96 3.19
Asian Equity 106,953.00 3,438.00 3.21 4.05
</TABLE>
- -------
* The Fixed Income, High Yield, Equity Growth, Value, Mid Cap Value, U.S. Real
Estate and Emerging Markets Debt Portfolios did not pay any commissions to
affiliated brokers for the fiscal year ended December 31, 1998. The Money
Market, Latin American, Active International Allocation, Technology,
Balanced, Core Equity, International Fixed Income, Mid Cap Growth and Multi-
Asset-Class Portfolios were not operational in the fiscal year ended
December 31, 1998, and consequently, no brokerage fees were paid by these
Portfolios.
27
<PAGE>
The following table shows the brokerage commissions paid by the Portfolios to
Morgan Stanley and its affiliates for the fiscal years ended December 31, 1997.
<TABLE>
<CAPTION>
Brokerage Commissions Paid During
Fiscal Year Ended December 31, 1997
---------------------------------------------------
Commissions Paid to Morgan Stanley
------------------------------------
Percent of
Total Percent of Total
Commissions Total Total Brokered
Portfolio* Paid Commissions Commissions Transactions
---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fixed Income $ 143.75/1/ $ 0 0% 0%
Equity Growth 24,660.00/1/ 24.00 0.10 0.15
Global Equity 27,665.00/1/ 2,406.00 8.70 7.25
International Magnum 48,111.00/1/ 221.00 0.46 0.29
Emerging Markets Equity 170,785.00 7,454.00 4.37 3.86
Asian Equity 164,416.00 1,698.00 1.03 1.87
</TABLE>
- -------
* The High Yield, Value and Mid Cap Value Portfolios did not pay any
commissions to affiliated brokers for the period from January 2, 1997 to
December 31, 1997. The U.S. Real Estate Portfolio did not pay any
commissions to affiliated brokers for the period from March 3, 1997 to
December 31, 1997. The Emerging Markets Debt Portfolio did not pay any
commissions to affiliated brokers for the period from June 16, 1997 to
December 31, 1997. The Money Market, Latin American, Active International
Allocation, Technology, Balanced, Core Equity, International Fixed Income,
Mid Cap Growth and Multi-Asset-Class Portfolios were not operational in the
fiscal year ended December 31, 1997, and consequently, no brokerage fees
were paid by these Portfolios.
/1/For the period from January 2, 1997 to December 31, 1997.
The following table shows the brokerage commissions paid by the Emerging
Markets Equity Portfolio to Morgan Stanley and its affiliates for the period
from October 1, 1996 (commencement of operations) through December 31, 1996.
<TABLE>
<CAPTION>
Brokerage Commissions Paid for the Period from October 1, 1996
(commencement of operations) Through December 31, 1996
----------------------------------------------------------------
Commissions Paid to Morgan Stanley
------------------------------------------------
Percent of
Total Percent of Total
Commissions Total Total Brokered
Portfolio* Paid Commissions Commissions Transactions
---------- ------------------------------- --------------- ----------------
<S> <C> <C> <C> <C>
Emerging Markets Equity $42,941.00 $26.00 0.06% 0%
</TABLE>
- -------
* The Emerging Markets Equity Portfolio was the only Portfolio operational in
the fiscal year ended December 31, 1996.
Directed Brokerage. During the fiscal year ended December 31, 1998, the
Portfolios paid brokerage commissions to brokers because of research services
provided as follows:
<TABLE>
<CAPTION>
Brokerage Commissions in Aggregate Dollar Amount of
Connection with Research Transactions for Which Such
Services Provided for Fiscal Commissions were Paid for
Year Ended December 31, Fiscal Year Ended December 31,
Portfolio 1998 1998
--------- ---------------------------- ------------------------------
<S> <C> <C>
Equity Growth Portfolio $ 76,835 $ 64,149,719
Asian Equity Portfolio $ 35,930 $ 8,264,690
Emerging Markets Equity
Portfolio $221,981 $ 65,707,126
U.S. Real Estate
Portfolio $ 64,188 $ 26,679,693
Emerging Markets Debt
Portfolio $ 0 $ 0
Global Equity Portfolio $ 87,342 $ 32,064,291
International Magnum
Portfolio $ 86,762 $ 37,886,905
Value Portfolio $ 23,125 $ 15,870,713
Fixed Income Portfolio $ 3,864 $290,417,368
Mid Cap Value Portfolio $ 78,285 $ 60,144,010
High Yield Portfolio $ 69 $ 31,408,319
</TABLE>
28
<PAGE>
Portfolio Turnover
The Portfolio generally does not invest for short-term trading purposes,
however, when circumstances warrant, the Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolio will not consider portfolio turnover rate
a limiting factor in making investment decisions consistent with their
investment objectives and policies. Higher portfolio turnover (e.g., over 100%)
necessarily will cause the Portfolio to pay correspondingly increased brokerage
and trading costs.
Performance Information
Performance figures for the Portfolio may be quoted from time to time to
illustrate their past performance.
Performance quotations by investment companies are subject to rules adopted by
the SEC, which require the use of standardized performance quotations. In the
case of total return, non-standardized performance quotations may be quoted but
must be accompanied by certain standardized performance information computed as
required by the SEC. Current yield and average annual compounded total return
quotations are based on the standardized methods of computing performance
mandated by the SEC. An explanation of those and other methods used by the Fund
to compute or express performance follows.
Total Return
Total return on an investment in the Portfolio may be advertised from time to
time. Total return figures are based on historical earnings and are not
intended to indicate future performance. The average annual total return is
determined by finding the average annual compounded rates of return over 1-, 5-
, and 10-year periods (or over the life of the Portfolio) that would equate an
initial hypothetical $1,000 investment to its ending redeemable value. The
calculation assumes that all dividends and distributions are reinvested when
paid. The quotation assumes the amount was completely redeemed at the end of
each 1-, 5-, and 10-year period (or over the life of the Portfolio) and the
deduction of all applicable Fund expenses on an annual basis.
These total returns are calculated according to the following formula:
P(1 + T)n = ERV
where:
P=a hypothetical initial payment of $1,000
T=average annual total return
n=number of years
ERV= ending redeemable value of hypothetical $1,000 payment made at the
beginning of the 1-, 5-, or
10-year periods at the end of the 1-, 5-, or 10-year periods (or
fractional portion thereof).
General Performance Information
The Portfolio's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates,
portfolio expenses and other factors. Performance is one basis investors may
use to analyze the Portfolio as compared to other funds and other investment
vehicles. However, performance of other funds and other investment vehicles may
not be comparable because of the foregoing variables, and differences in the
methods used in valuing their portfolio instruments, computing net asset value
and determining performance.
From time to time, the investment performance of the Portfolio may be compared
to other mutual funds tracked by financial or business publications and
periodicals. For example, Morningstar, Inc. may be quoted in advertising
materials. Morningstar, Inc. is a mutual fund rating service that rates mutual
funds on the basis of risk-adjusted performance. Rankings that compare the
performance of funds to one another in appropriate categories over specific
periods of time may also be quoted in advertising.
Portfolio advertising may include data on historical returns of the capital
markets in the United States compiled or published by Ibbotson Associates of
Chicago, Illinois ("Ibbotson"), including returns on common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation
(based on the Consumer Price Index), and combinations of various capital
markets. The performance of these capital markets is based on the returns of
different indices. Performance of these capital markets may be used in order to
demonstrate general risk-versus-reward investment scenarios. Performance
comparisons may also include the value of a hypothetical investment in any of
these capital markets. The risks associated with the security types in any
capital market may or may not correspond directly to those of the Portfolio.
The Portfolio may also compare its performance to that of other compilations or
indices that may be developed and made available in the future.
Advertisements may include charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, foreign securities, stocks, bonds, treasury bills
and shares of the Portfolio. In addition, advertisements may include a
discussion of certain attributes or benefits to be derived by an investment in
the Portfolio and/or other mutual funds, shareholder profiles and hypothetical
investor scenarios, timely information on financial management, tax and
retirement planning and various investment alternatives.
29
<PAGE>
Advertisements may include discussions or illustrations of the potential
investment goals of a prospective investor (including materials that describe
general principles of investing. such as asset allocation, diversification,
risk tolerance, goal setting questionnaires designed to help create a personal
financial profile, worksheets used to project savings needs based on assumed
rates of inflation and hypothetical rates of return and action plans offering
investment alternatives), investment management techniques, policies or
investment suitability of the Portfolio (such as value investing, market
timing, dollar cost averaging, asset allocation, constant ratio transfer,
automatic account rebalancing, the advantages and disadvantages of investing in
tax- deferred and taxable investments). In addition, advertisements and sales
materials relating to the Portfolio may include information regarding the
background and experience of its portfolio managers; the resources, expertise
and support made available to the portfolio managers by MSDW Investment
Management and MAS; and the portfolio managers' goals, strategies and
investment techniques.
Advertisements may discuss economic and political conditions of the United
States and foreign countries, the relationship between sectors of the U.S., a
foreign, or the global economy and the U.S., a foreign, or the global economy
as a whole and the effects of inflation. Discussions and illustrations of the
growth potential of various global markets including, but not limited to,
Africa, Asia, Europe, Latin America, North America, South America, Emerging
Markets and individual countries, may be included in advertisements. These
discussions may include the past performance of the various markets or market
sectors; forecasts of population, gross national product and market
performance; and the underlying data which supports such forecasts. From time
to time, advertisements, sales literature, communications to shareholders or
other materials may summarize the substance of information contained in the
Portfolio's shareholder reports (including the investment composition of the
Portfolio), as well as the views of MSDW Investment Management and MAS as to
current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to a Portfolio.
The Portfolio's advertisements may quote various measures of volatility and
benchmark correlation and the measures may be compared to those of other funds.
Measures of volatility seek to compare the historical share price fluctuations
or total returns to those of a benchmark. Measures of benchmark correlation
indicate how valid a comparative benchmark may be. Measures of volatility and
correlation may be calculated using averages of historical data. The Portfolio
may also advertise their current interest rate sensitivity, duration, weighted
average maturity or similar maturity characteristics.
The Portfolio may advertise examples of the effects of periodic investment
plans, including the principal of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a Portfolio at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares when
prices are low. While such a strategy does not assure a profit or guard against
loss in a declining market, the investor's average cost per share can be lower
than if fixed numbers of shares are purchased at the same intervals. In
evaluating such a plan, investors should consider their ability to continue
purchasing shares during periods of low price levels.
General Information
Description of Shares and Voting Rights
The Fund's Articles of Incorporation permit the Directors to issue 10.5 billion
shares of common stock, par value $.001 per share, from an unlimited number of
classes ("Portfolios") of shares. Currently the Fund consists of shares of 20
Portfolios.
The shares of each Portfolio of the Fund are fully paid and nonassessable, and
have no preference as to conversion, exchange, dividends, retirement or other
features. The shares of each Portfolio of the Fund have no pre-emptive rights.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of Directors can
elect 100% of the Directors if they choose to do so. A shareholder is entitled
to one vote for each full share held (and a fractional vote for each fractional
share held), then standing in his name on the books of the Fund.
Dividends and Capital Gains Distributions
The Fund's policy is to distribute substantially all of each Portfolio's net
investment income, if any. The Fund may also distribute any net realized
capital gains in the amount and at the times that will avoid both income
(including taxable gains) taxes on it and the imposition of the federal excise
tax on income and capital gains (see discussion under "Taxes" in this Statement
of Additional Information). However, the Fund may also choose to retain net
realized capital gains and pay taxes on such gains. The amounts of any income
dividends or capital gains distributions cannot be predicted. Any dividend or
distribution paid shortly after the purchase of shares of the Portfolio by an
investor may have the effect of reducing the per share net asset value of that
Portfolio by the per share amount of the dividend or distribution.
As set forth in the Prospectus, unless the shareholder elects otherwise in
writing, all dividends and capital gains distributions for a class of shares
are automatically received in additional shares of such class of that Portfolio
of the Fund at the net asset value as of the business day following the record
date. This automatic reinvestment of dividends and distributions will remain in
effect until the Fund is notified by the shareholder in writing at least three
days prior to the record date that either the Income Option (income dividends
30
<PAGE>
in cash and capital gains distributions in additional shares at net asset
value) or the Cash Option (both income dividends and capital gains
distributions in cash) has been elected.
Custody Arrangements
Chase serves as the Custodian of the assets of the Portfolios. Chase is not an
affiliate of either of the Advisers or the Distributor. In maintaining custody
of foreign assets held outside the United States, Chase employs sub-custodians
approved by the Board of Directors of the Fund in accordance with regulations
of the SEC for the purpose of providing custodial services for such assets.
Prior to October 1, 1998, Morgan Stanley Trust Company acted as the Fund's
custodian for foreign assets held outside the United States. MSTC, an affiliate
of MSDW, received custody fees of $369,055 for the period from January 1, 1998
through September 30, 1998.
In the selection of foreign sub-custodians, the Directors or their delegates
consider a number of factors, including, but not limited to, the reliability
and financial stability of the institution, the ability of the institution to
provide efficiently the custodial services required for the Fund, and the
reputation of the institution in the particular country or region.
Legal Matters
Morgan, Lewis & Bockius LLP serves as legal counsel to the Fund.
Description of Ratings
Description of Commercial Paper Ratings
Description of Moody's Ratings of State and Municipal Notes: Moody's ratings
for state and municipal notes and other short-term obligations are designated
Moody's Investment Grade ("MIG"). Symbols used are as follows: MIG-l--best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established broad-based access to the market for
refinancing, or both; MIG-2--high quality with margins of protection ample
although not so large as in the preceding group; MIG-3--favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades.
Description of Moody's Highest Commercial Paper Rating: Prime-1 ("P1")--Judged
to be of the best quality. Their short-term debt obligations carry the smallest
degree of investment risk.
Excerpt From S&P's Rating of Municipal Note Issues: SP-1+ --very strong
capacity to pay principal and interest; SP-2--strong capacity to pay principal
and interest.
Description of S&P's Highest Commercial Paper Ratings: A-1+ --this designation
indicates the degree of safety regarding timely payment is overwhelming. A-1--
this designation indicates the degree of safety regarding timely payment is
very strong.
Description of Moody's Corporate Bond Ratings:
AAA--Bonds 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 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 for 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 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 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.
BA--Bonds 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 thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B--Bonds rated B generally lack characteristics of the 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 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 rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
31
<PAGE>
C--Bonds rated C are the lowest-rated class of bonds and issued so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers 1, 2 and 3, in each generic rating
classification from Aa through B in its corporate bond 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 the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of S&P's Corporate Bond Ratings:
AAA--Debt rated AAA has the highest rating assigned by S&P's to a debt
obligation. 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 higher-rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
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 in higher rated categories.
BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions that could lead to
inadequate capacity to meet timely interest and principal payments.
B--Debt rated B has greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.
CCC--Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment 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--Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating.
C--The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI--The rating CI is reserved for income bonds on which no interest is being
paid.
D--Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating will also be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
32
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) (1) Articles of Incorporation between Registrant and Morgan
Stanley Asset Management Inc. are incorporated by reference
to Exhibit 1(a) to Registrant's Registration Statement on
Form N-1A (File Nos. 333-3013 and 811-7607), as filed with
the Securities and Exchange Commission via EDGAR (Accession
#0000950109-96-002517) on May 1, 1996.
(2) Articles of Amendment to Articles of Incorporation (changing
"Growth Portfolio" to "Equity Growth Portfolio") are
incorporated by reference to Exhibit 1(b) to Post-Effective
Amendment No. 2 to the Registrant's Registration Statement
on Form N-1A (File Nos. 333-3013 and 811-7607), as filed
with the Securities and Exchange Commission via EDGAR
(Accession #0000950109-97-004685) on June 24, 1997.
(3) Articles Supplementary to Articles of Incorporation (adding
Latin American Portfolio and increasing number of authorized
shares) are incorporated by reference to Exhibit 1(c) to
Post-Effective Amendment No. 6 to the Registrant's
Registration Statement on Form N-1A (File Nos. 333-0313 and
811-7607), as filed with the Securities and Exchange
Commission via EDGAR (Accession #0001036050-98-00610) on
April 15, 1998.
(4) Articles of Amendment to Articles of Incorporation (changing
name of the Fund and one of the investment advisers) are
incorporated by reference to Exhibit a(4) to Post-Effective
Amendment No. 7 to the Registrant's Registration Statement
on Form N-1A (File Nos. 333-0313 and 811-7607), as filed
with the Securities and Exchange Commission via EDGAR
(Accession No. 0001036050-99-000128) on January 29, 1999.
(5) Articles Supplementary to Articles of Incorporation (adding
Active International Allocation Portfolio) is filed
herewith.
(6) Form of Articles Supplementary to Articles of Incorporation
(adding Technology Portfolio) is filed herewith.
(b)
By-laws are incorporated by reference to Exhibit 2 to
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and Exchange
Commission via EDGAR (Accession #0000950109-96-002517) on May 1,
1996.
(c) Not applicable.
(d) (1) Investment Advisory Agreement between Registrant and Morgan
Stanley Asset Management Inc. ("MSAM") with respect to the
Money Market, Emerging Markets Debt, Equity Growth, U.S.
Real Estate, Global Equity, International Magnum, Emerging
Markets Equity and Asian Equity Portfolios is incorporated
by reference to Exhibit 5(a) to Post-Effective Amendment No.
5 to the Registrant's Registration Statement on Form N-1A
(File Nos. 333-3013 and 811-7607), as filed with the
Securities and Exchange Commission via EDGAR (Accession
#0001036050-98-000074) on January 28, 1998.
(2) Investment Advisory Agreement between Registrant and Miller
Anderson & Sherrerd, LLP ("MAS") with respect to the Fixed
Income, High Yield, International Fixed Income, Balanced,
Multi-Asset-Class, Value, Core Equity, Mid Cap Growth and
Mid Cap Value Portfolios is incorporated by reference to
Exhibit d(2) to Post-Effective Amendment No. 7 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-0313 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession No.
0001036050-99-000128) on January 29, 1999.
(3) Supplement to Investment Advisory Agreement (adding Latin
American Portfolio) is incorporated by reference to Exhibit
5(c) to Post-Effective Amendment No. 6 to the Registrant's
Registration Statement on Form N-1A (File Nos. 333-3013 and
811-7607), as filed with the
C-1
<PAGE>
Securities and Exchange Commission via EDGAR (Accession
#0001036050-98-000610) on April 15, 1998.
(4) Supplement to Investment Advisory Agreement (adding Active
International Allocation Portfolio) is filed herewith.
(5) Form of Supplement to Investment Advisory Agreement (adding
Technology Portfolio) is filed herewith.
(e) Distribution Agreement between Registrant and Morgan Stanley &
Co. Incorporated is incorporated by reference to Exhibit 6 to
Post-Effective Amendment No. 6 to the Registrant's Registration
Statement on Form N-1A (File Nos. 333-3013 and 811-7607), as
filed with the Securities and Exchange Commission via EDGAR
(Accession #0001036050-98-000610) on April 15, 1998.
(f) Not applicable.
(g) (1) Domestic Mutual Fund Custody Agreement between Registrant
and Chase Manhattan Bank, N.A. is incorporated by reference
to Exhibit (g)(1) to Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession #
0001036050-99-000715) on April 1, 1999.
(2) Form of International Custody Agreement between the
Registrant and Morgan Stanley Trust Company (as assumed by
The Chase Manhattan Bank) is incorporated by reference to
Exhibit 8(b) to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession
#0000950109-96-005973) on September 16, 1996.
(h) (1) Administration Agreement between Registrant and Morgan
Stanley Asset Management Inc. is incorporated by reference
to Exhibit h(1) to Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession #
0001036050-99-000715) on April 1, 1999.
(2) Administration Agreement between Registrant and Miller
Anderson & Sherrerd, LLP is incorporated by reference to
Exhibit h(2) to Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession #
0001036050-99-000715) on April 1, 1999.
(3) Sub-Administration Agreement between Morgan Stanley Asset
Management Inc. and Chase Global Funds Services Company is
incorporated by reference to Exhibit h(3) to Post-Effective
Amendment No. 7 to the Registrant's Registration Statement
on Form N-1A (File Nos. 333-0313 and 811-7607), as filed
with the Securities and Exchange Commission via EDGAR
(Accession No. 0001036050-99-000128) on January 29, 1999.
(4) Sub-Administration Agreement between Miller Anderson &
Sherrerd LLP and Chase Global Funds Services Company is
incorporated by reference to Exhibit (h)(4) to
Post-Effective Amendment No. 8 to the Registrant's
Registration Statement on Form N-1A (File Nos. 333-3013 and
811-7607), as filed with the Securities and Exchange
Commission via EDGAR (Accession # 0001036050-99-000715) on
April 1, 1999.
(i) Opinion of Counsel is incorporated by reference to Exhibit (i) to
Post-Effective Amendment No. 9 to the Registrant's Registration
Statement on Form N-1A(file Nos. 333-3013 and 811-7607), as filed
with the Securities and Exchange Commission via EDGAR (Accession
#0001036050-99-001249) on June 8, 1999.
C-2
<PAGE>
(j) Consent of PricewaterhouseCoopers LLP (formerly, Price
Waterhouse, LLP), Independent Accountants is incorporated by
reference to Exhibit (j) to Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and Exchange
Commission via EDGAR (Accession # 0001036050-99-000715) on April
1, 1999.
(k) Not applicable.
(l) Not applicable.
(m) Not applicable.
(n) Not applicable.
(o) Not applicable.
(p) Powers of Attorney are incorporated by reference to Exhibit 24 to
Post-Effective Amendment No. 6 to Registrant's Registration
Statement on Form N-1A (File Nos. 333-3013 and 811-7607), as
filed with the Securities and Exchange Commission via EDGAR
(Accession #0001036050-98-000610) on April 15, 1998.
- ----------------------------
C-3
<PAGE>
Item 24. Persons Controlled by or Under Common Control with Registrant
Provide a list or diagram of all persons directly or indirectly
controlled by or under common control with the Registrant. For any person
controlled by another person, disclose the percentage of voting securities owned
by the immediately controlling person or other basis of that person's control.
For each company, also provide the state or other sovereign power under the laws
of which the company is organized.
As of June 30, 1999 Morgan Stanley Dean Witter & Co. ("MSDW"), a
Delaware corporation located at 1585 Broadway, New York, New York 10036, owned
of record 35% of the outstanding voting securities of the Asian Equity
Portfolio. MSDW will vote shares of the Portfolios that it owns in the same
proportion as shares of the Portfolios are voted by insurance companies.
Insurance companies vote shares of the Portfolios held in their separate
accounts in accordance with voting instructions of their variable annuity
contract and variable life insurance policy owners. Accordingly, MSDW is not
viewed as in control of the Portfolios and therefore MSDW's affiliates are not
viewed as under common control with the Portfolios.
Item 25. Indemnification
State the general effect of any contract, arrangements or statute under
which any director, officer, underwriter or affiliated person of the Registrant
is insured or indemnified against any liability incurred in their official
capacity, other than insurance provided by any director, officer, affiliated
person, or underwriter for their own protection.
Reference is made to Article SEVEN of the Registrant's Articles of
Incorporation. Insofar as indemnification for liability arising under the
Securities Act of 1933, as amended (the "1933 Act"), may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission (the "Commission") such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
Item 26. Business and Other Connections of Investment Advisers
Describe any other business, profession, vocation or employment of a
substantial nature in which the investment adviser and each director, officer or
partner of the investment adviser, is or has been, engaged within the last two
fiscal years for his or her own account or in the capacity of director, officer,
employee, partner or trustee. (Disclose the name and principal business address
of any company for which a person listed above serves in the capacity of
director, officer, employee, partner or trustee, and the nature of the
relationship.)
Reference is made to the caption "Management of the Fund--Investment
Advisers" in the Prospectuses constituting Part A which is incorporated by
reference to this Registration Statement and "Management of the Fund" in Part B
which is incorporated by reference to this Registration Statement.
C-4
<PAGE>
Listed below are the officers and Directors of Morgan Stanley Dean Witter
Investment Management Inc.:
<TABLE>
<CAPTION>
Name and Position with MSDW
Investment Management Inc. Name of other Company Position with Other Company
-------------------------- --------------------- ---------------------------
<S> <C> <C>
Barton M. Biggs Morgan Stanley & Co. Incorporated Managing Director
Chairman, Director and Managing
Director
Dennis G. Sherva Morgan Stanley & Co. Incorporated Managing Director
Director and Managing Director
Harold J. Schaaff, Jr. Morgan Stanley & Co. Incorporated Principal
General Counsel, Secretary and
Principal
Donald P. Ryan Morgan Stanley & Co. Incorporated Principal
Compliance Officer and Principal
Alexander C. Frank Morgan Stanley & Co. Managing Director
Treasurer Incorporated
Marna C. Whittington Miller Anderson & Sherrerd, LLP Executive Committee Member
Chief Operating Officer, Managing
Director and Member of Executive
Committee
Richard B. Worley Miller Anderson & Sherrerd, LLP Portfolio Manager and Executive
President, Director and Member of Committee Member
Executive Committee
MAS Fund Distribution, Inc. Registered Representative
Morgan Stanley & Co. Incorporated Managing Director
Peter D. Caldecott Morgan Stanley Dean Witter Managing Director
Managing Director and Member of Investment Management Limited
Executive Committee
Thomas L. Bennett Morgan Stanley & Co. Incorporated Managing Director
Member of Executive Committee and
Portfolio
Manager
MAS Fund Distribution, Inc. Director
Miller Anderson & Sherrerd, LLP Portfolio Manager
Frank P. L. Minard Morgan Stanley & Co. Incorporated Managing Director
Managing Director and Member of
Executive Committee
Alan E. Goldberg Morgan Stanley & Co. Incorporated Managing Director
Member of Executive Committee
</TABLE>
In addition, MSDW Investment Management acts as investment adviser or
sub-adviser to the following registered investment companies: American Advantage
International Equity Fund; Fountain Square International Equity Fund; The Latin
American Discovery Fund, Inc.; The Malaysia Fund, Inc.; Morgan Stanley Dean
Witter Africa Investment Fund, Inc.; Morgan Stanley Dean Witter Asia-Pacific
Fund, Inc.; Morgan Stanley Dean Witter Emerging Markets Debt Fund, Inc.;
C-5
<PAGE>
Morgan Stanley Dean Witter Emerging Markets Fund, Inc.; Morgan Stanley Dean
Witter Global Opportunity Bond Fund, Inc.; The Morgan Stanley Dean Witter High
Yield Fund, Inc.; Morgan Stanley Dean Witter Eastern Europe Fund, Inc.(formerly,
Morgan Stanley Russia and New Europe Fund Inc.); Morgan Stanley Dean Witter
India Investment Fund, Inc.; certain portfolios of Morgan Stanley Dean Witter
Universal Funds, Inc.; Morgan Stanley Dean Witter Strategic Adviser Fund, Inc.;
The Pakistan Investment Fund, Inc.; The Thai Fund, Inc.; The Turkish Investment
Fund, Inc.; Aggressive Growth and Asset Allocation Fund, Inc.; Accounts of
Principal Variable Contracts Fund, Inc.; certain portfolios of the SunAmerica
Series Trust; Fortis Series Fund, Inc. - Global Asset Allocation Series; Morgan
Stanley Dean Witter International Fund; Morgan Stanley Dean Witter International
SmallCap Fund; Morgan Stanley Dean Witter Pacific Growth Fund, Inc.; Morgan
Stanley Dean Witter Real Estate Fund; Morgan Stanley Dean Witter Variable
Investment Series - Pacific Growth Portfolio; Morgan Stanley Dean Witter Japan
Fund, Inc.; Morgan Stanley Dean Witter European Growth Fund Inc.; Morgan Stanley
Dean Witter Variable Investment Series - European Growth Portfolio; Morgan
Stanley Dean Witter Growth Fund; Morgan Stanley Dean Witter Select Dimensions
Investment Series -- The Growth Portfolio; Morgan Stanley Dean Witter Worldwide
High Income Fund; Endeavor Series Trust Endeavor Money Market Portfolio;
Endeavor Series Trust - Endeavor Asset Allocation Portfolio; EQ Advisors Trust -
Morgan Stanley Dean Witter Emerging Markets Equity Portfolio; Frank Russell
Investment Company - Diversified Equity Fund; Frank Russell Investment Company -
Equity I Fund; NASL Series Trust - Global Equity Trust; New England Zenith Fund
- - Morgan Stanley Dean Witter International Magnum Equity Series; North American
Funds - Global Equity Fund; Pacific Select Fund The International Portfolio;
Pacific Select Fund - Real Estate Investment Trust ("REIT") Portfolio; SEI
Institutional Investments Trust - Emerging Markets Equity Fund; SEI
Institutional International Trust - Emerging Markets Equity Portfolio; Style
Select Series Inc. - Large Cap Blend Portfolio; TCW/DW Emerging Markets
Opportunities Trust; Van Kampen World Portfolio Series Trust - Global Government
Securities Fund; Van Kampen Life Investment Trust - Global Equity Fund; Van
Kampen Life Investment Trust - Real Estate Securities Fund; Van Kampen Global
Managed Assets Fund; Van Kampen Real Estate Securities Fund; certain portfolios
of the Van Kampen Series Fund, Inc.
MAS is a Pennsylvania limited liability partnership founded in 1969. MAS
provides investment services to employee benefit plans, endowment funds,
foundations and other institutional investors as well as serving as investment
adviser to MAS Funds, a registered investment company.
<TABLE>
<CAPTION>
Name and Position with MSDW Name of Other Company Position with Other Company
Investment Management Inc. --------------------- ---------------------------
- --------------------------
<S> <C> <C>
Richard Brown Worley Morgan Stanley & Co. Incorporated Managing Director
Portfolio Manager Morgan Stanley Dean Witter Investment Portfolio Manager
Executive Committee Member Management Inc.
MAS Fund Distribution, Inc. Registered Representative
Thomas Leonard Bennett Morgan Stanley Dean Witter Universal Director
Portfolio Manager Funds, Inc. Managing Director
Executive Committee Member Morgan Stanley & Co. Incorporated Portfolio Manager
Morgan Stanley Dean Witter Investment
Management Inc. Chairman
MAS Funds Director
MAS Fund Distribution, Inc.
Gilbert Schlarbaum Morgan Stanley & Co. Incorporated Managing Director
Portfolio Manager Morgan Stanley Dean Witter Investment Portfolio Manager
Executive Committee Member Management Inc.
MAS Fund Distribution, Inc. Director
Robert J. Marcin Morgan Stanley Dean Witter Investment Portfolio Manager
Portfolio Manager Management Inc. Managing Director
Executive Committee Member Morgan Stanley & Co. Incorporated Registered Representative
MAS Fund Distribution, Inc.
Marna C. Whittington Morgan Stanley & Co. Incorporated Managing Director
Executive Committee Member MAS Fund Distribution, Inc. CEO
Rohm Haas Director
</TABLE>
C-6
<PAGE>
Item 27. Principal Underwriters
(a) State the name of each investment company (other than the Registrant)
for which each principal underwriter currently distributing securities of the
Registrant also acts as a principal underwriter, depositor or investment
adviser.
Morgan Stanley & Co. Incorporated ("MS&Co.") is distributor for Morgan
Stanley Dean Witter Universal Funds, Inc., Morgan Stanley Dean Witter
Institutional Fund, Inc. and Morgan Stanley Dean Witter Strategic Adviser Fund,
Inc.
(b) Provide the information with respect to each director, officer or
partner of each principal underwriter named in answer to Item 20.
<TABLE>
<CAPTION>
Name and Principal Business Position and Offices with Principal Position and Offices with
Address* Underwriter Registrant
- --------------------------- ----------------------------------- -------------------------
<S> <C> <C>
Barton M. Biggs Chairman and Director Chairman and Director
Bruce D. Fiedorek Director and Vice Chairman
Richard B. Fisher Director and Chairman of the Board
Takeo Kani Director
Peter F. Karches Director and President and Chief
Operating Officer
John J. Mack Director
Robert A. Metzler Director
Stephan F. Newhouse Director and Vice Chairman
Ralph L. Pellechio Director and General Counsel and
Secretary
Joseph R. Perella Director
Robert G. Scott Director and Chief Financial Officer
John S. Wadsworth, Jr. Director
Sir David Alan Walker Director
J. Steven W. Ward Director
</TABLE>
*Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
C-7
<PAGE>
Item 28. Location of Accounts and Records
State the name and address of each person maintaining principal
possession of each account, book or other document required to be maintained by
section 31(a) of the 1940 Act [15 U.S.C. 80a-30(a)] and the rules under that
section.
The books, accounts and other documents required by Section 31(a) under
the Investment Company Act of 1940, as amended, and the rules promulgated
thereunder are maintained in the physical possession of the Registrant;
Registrant's Transfer Agent, Chase Global Funds Services Company, P.O. Box 2798,
Boston, Massachusetts 02208-2798; and the Registrant's custodian banks,
including sub-custodians.
Item 29. Management Services
Provide a summary of the substantive provisions of any management-
related service contract not discussed in Part A or Part B, disclosing the
parties to the contract and the total amount paid and by whom, for the Fund's
last three fiscal years.
Each of MSDW Investment Management and MAS have entered into Sub-
Administration Agreements with Chase Global Funds Services Companies ("Chase")
(filed as Exhibit Nos. 9(c) and 9(d) to Pre-Effective Amendment No.1 to the
Registration Statement) pursuant to which Chase will provide fund
administration, fund accounting and transfer agency services to specified
Portfolios of the Registrant.
Item 30. Undertakings
In initial registration statements filed under the Securities Act,
provide an undertaking to file an amendment to the registration statement with
certified financial statements showing the initial capital received before
accepting subscriptions from more than 25 persons if the Fund intends to raise
its initial capital under section 14(a)(3)[15U.S.C. 80a-14(a)(3)].
(a) Not Applicable.
(b) Registrant hereby undertakes that whenever a Shareholder or
Shareholders who meet the requirements of Section 16(c) of the 1940 Act inform
the Board of Directors of his or their desire to communicate with other
Shareholders of the Fund, the Directors will inform such Shareholder(s) as to
the approximate number of Shareholders of record and the approximate costs of
mailing or afford said Shareholders access to a list of Shareholders.
(c) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's annual report to
shareholders, upon request and without charge.
C-8
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, as amended (the
"1933 Act"), and the Investment Company Act of 1940, as amended, the Registrant
has duly caused this Amendment to its Registration Statement to be signed on its
behalf by the undersigned, duly authorized, in the City of New York and State of
New York, on July 16, 1999.
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
By: /s/Michael F. Klein
-----------------------
Michael F. Klein
President and Director
Pursuant to the requirements of the 1933 Act, this Amendment to the
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
- --------- -------- ----
<S> <C> <C>
/s/ Michael F. Klein Director, President July 16, 1999
- ------------------------------------ (Chief Executive
Michael F. Klein Officer)
*/s/ Barton M. Biggs Director (Chairman) July 16, 1999
- ------------------------------------
Barton M. Biggs
*/s/ Fergus Reid Director July 16, 1999
- ------------------------------------
Fergus Reid
*/s/ Frederick O. Robertshaw Director July 16, 1999
- ------------------------------------
Frederick O. Robertshaw
*/s/ Andrew McNally, IV Director July 16, 1999
- ---------------------------
Andrew McNally, IV
*/s/ John D. Barrett, II Director July 16, 1999
- ------------------------------------
John D. Barrett, II
*/s/ Gerard E. Jones Director July 16, 1999
- ------------------------------------
Gerard E. Jones
*/s/ Samuel T. Reeves Director July 16, 1999
- ------------------------------------
Samuel T. Reeves
/s/ Belinda Anne Brady Treasurer July 16, 1999
- ------------------------------------
Belinda Anne Brady
</TABLE>
*By: /s/Michael F. Klein
----------------------------
Michael F. Klein
Attorney-In-Fact
C-9
<PAGE>
EXHIBIT INDEX
EDGAR
Exhibit
Number
- -------
Description
-----------
(a)(1) Articles of Incorporation between Registrant and Morgan
Stanley Asset Management Inc. are incorporated by reference
to Exhibit 1(a) to Registrant's Registration Statement on
Form N-1A (File Nos. 333-3013 and 811-7607), as filed with
the Securities and Exchange Commission via EDGAR (Accession
#0000950109-96-002517) on May 1, 1996.
(2) Articles of Amendment to Articles of Incorporation (changing
"Growth Portfolio" to "Equity Growth Portfolio") are
incorporated by reference to Exhibit 1(b) to Post-Effective
Amendment No. 2 to the Registrant's Registration Statement
on Form N-1A (File Nos. 333-3013 and 811-7607), as filed
with the Securities and Exchange Commission via EDGAR
(Accession #0000950109-97-004685) on June 24, 1997.
(3) Articles Supplementary to Articles of Incorporation (adding
Latin American Portfolio and increasing number of authorized
shares) are incorporated by reference to Exhibit 1(c) to
Post-Effective Amendment No. 6 to the Registrant's
Registration Statement on Form N-1A (File Nos. 333-0313 and
811-7607), as filed with the Securities and Exchange
Commission via EDGAR (Accession #0001036050-98-00610) on
April 15, 1998.
(4) Articles of Amendment to Articles of Incorporation (changing
name of the Fund and one of the investment advisers) are
incorporated by reference to Exhibit a(4) to Post-Effective
Amendment No. 7 to the Registrant's Registration Statement
on Form N-1A (File Nos. 333-0313 and 811-7607), as filed
with the Securities and Exchange Commission via EDGAR
(Accession No. 0001036050-99-000128) on January 29, 1999.
EX-99 (5) Articles Supplementary to Articles of Incorporation (adding
Active International Allocation Portfolio) is filed
herewith.
EX-99 (6) Form of Articles Supplementary to Articles of Incorporation
(adding Technology Portfolio) is filed herewith
(b) By-laws are incorporated by reference to Exhibit 2 to Registrant's
Registration Statement on Form N-1A (File Nos. 333-3013 and 811-7607),
as filed with the Securities and Exchange Commission via EDGAR
(Accession #0000950109-96-002517) on May 1, 1996.
(c) Not applicable.
(d)(1) Investment Advisory Agreement between Registrant and Morgan
Stanley Asset Management Inc. ("MSAM") with respect to the
Money Market, Emerging Markets Debt, Equity Growth, U.S.
Real Estate, Global Equity, International Magnum, Emerging
Markets Equity and Asian Equity Portfolios is incorporated
by reference to Exhibit 5(a) to Post-Effective Amendment No.
5 to the Registrant's Registration Statement on Form N-1A
(File Nos. 333-3013 and 811-7607), as filed with the
Securities and Exchange Commission via EDGAR (Accession
#0001036050-98-000074) on January 28, 1998.
(2) Investment Advisory Agreement between Registrant and Miller
Anderson & Sherrerd, LLP ("MAS") with respect to the Fixed
Income, High Yield, International Fixed Income, Balanced,
Multi-Asset-Class, Value, Core Equity, Mid Cap Growth and
Mid Cap Value Portfolios is incorporated by reference to
C-10
<PAGE>
Exhibit d(2) to Post-Effective Amendment No. 7 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-0313 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession No.
0001036050-99-000128) on January 29, 1999.
(3) Supplement to Investment Advisory Agreement (adding Latin
American Portfolio) is incorporated by reference to Exhibit
5(c) to Post-Effective Amendment No. 6 to the Registrant's
Registration Statement on Form N-1A (File Nos. 333-3013 and
811-7607), as filed with the Securities and Exchange
Commission via EDGAR (Accession #0001036050-98-000610) on
April 15, 1998.
EX-99 (4) Supplement to Investment Advisory Agreement (adding Active
International Allocation Portfolio) is filed herewith.
EX-99 (5) Form of Supplement to Investment Advisory Agreement (adding
Technology Portfolio) is filed herewith.
(e) Distribution Agreement between Registrant and Morgan Stanley & Co.
Incorporated is incorporated by reference to Exhibit 6 to Post-
Effective Amendment No. 6 to the Registrant's Registration Statement
on Form N-1A (File Nos. 333-3013 and 811-7607), as filed with the
Securities and Exchange Commission via EDGAR (Accession #0001036050-
98-000610) on April 15, 1998.
(f) Not applicable.
(g)(1) Domestic Mutual Fund Custody Agreement between Registrant and
Chase Manhattan Bank, N.A. is incorporated by reference to
Exhibit (g)(1) to Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession # 0001036050-99-
000715) on April 1, 1999.
(2) Form of International Custody Agreement between the
Registrant and Morgan Stanley Trust Company (as assumed by
The Chase Manhattan Bank) is incorporated by reference to
Exhibit 8(b) to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession #0000950109-96-
005973) on September 16, 1996.
(h)(1) Administration Agreement between Registrant and Morgan
Stanley Asset Management Inc. is incorporated by reference to
Exhibit h(1) to Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession # 0001036050-99-
000715) on April 1, 1999.
(2) Administration Agreement between Registrant and Miller
Anderson & Sherrerd, LLP is incorporated by reference to
Exhibit h(2) to Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession # 0001036050-99-
000715) on April 1, 1999.
(3) Sub-Administration Agreement between Morgan Stanley Asset
Management Inc. and Chase Global Funds Services Company is
incorporated by reference to Exhibit h(4) to Post-Effective
Amendment No. 7 to the Registrant's Registration Statement on
Form N-1A (File Nos. 333-0313 and 811-7607), as
C-11
<PAGE>
filed with the Securities and Exchange Commission via EDGAR
(Accession No. 0001036050-99-000128) on January 29, 1999.
(4) Sub-Administration Agreement between Miller Anderson &
Sherrerd LLP and Chase Global Funds Services Company is
incorporated by reference to Exhibit (h)(4) to Post-Effective
Amendment No. 8 to the Registrant's Registration Statement on
Form N-1A (File Nos. 333-3013 and 811-7607), as filed with
the Securities and Exchange Commission via EDGAR (Accession #
0001036050-99-000715) on April 1, 1999.
(i) Opinion of Counsel is incorporated by reference to Exhibit (i) to
Post-Effective Amendment No. 9 to the Registrant's Registration
Statement on Form N-1A(file Nos. 333-3013 and 811-7607) as filed with
the Securities and Exchange Commission via EDGAR (Accession
#0001036050-99-001249) on June 8, 1999.
(j) Consent of PricewaterhouseCoopers LLP (formerly, Price Waterhouse,
LLP), Independent Accountants is incorporated by reference to Exhibit
(j) to Post-Effective Amendment No. 8 to the Registrant's Registration
Statement on Form N-1A (File Nos. 333-3013 and 811-7607), as filed
with the Securities and Exchange Commission via EDGAR (Accession #
0001036050-99-000715) on April 1, 1999.
(k) Not applicable.
(l) Not applicable.
(m) Not applicable.
(n) Not applicable.
(o) Not applicable.
(p) Powers of Attorney are incorporated by reference to Exhibit 24 to
Post-Effective Amendment No. 6 to Registrant's Registration Statement
on Form N-1A (File Nos. 333-3013 and 811-7607), as filed with the
Securities and Exchange Commission via EDGAR (Accession #0001036050-
98-000610) on April 15, 1998.
C-12
<PAGE>
Ex 99(a)(5)
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC. (the "Corporation"), a
corporation organized under the laws of the State of Maryland, having its
principal place of business at 1221 Avenue of the Americas, New York, NY 10020,
does hereby certify to the State Department of Assessments and Taxation of
Maryland that:
FIRST: The Corporation is registered as an open-end investment company
under the Investment Company Act of 1940, as amended.
SECOND: The Board of Directors of the Corporation at a meeting duly
convened and held on June 22, 1999 adopted a resolution adding one portfolio and
increasing the total number of shares of stock which the Corporation shall have
the authority to issue from nine billion five hundred million (9,500,000,000)
shares of common stock, par value $.001 per share, having an aggregate par value
of nine million five hundred thousand dollars ($9,500,000) designated and
classified in eighteen portfolios as follows:
Number of Shares
of Common Stock
Name of Class Classified and Allocated
- ------------- ------------------------
Money Market Portfolio 1,000,000,000
Fixed Income Portfolio 500,000,000
High Yield Portfolio 500,000,000
International Fixed Income Portfolio 500,000,000
Emerging Markets Debt Portfolio 500,000,000
Balanced Portfolio 500,000,000
Multi-Asset-Class Portfolio 500,000,000
Equity Growth Portfolio 500,000,000
Value Portfolio 500,000,000
Core Equity Portfolio 500,000,000
Mid Cap Growth Portfolio 500,000,000
Mid Cap Value Portfolio 500,000,000
U.S. Real Estate Portfolio 500,000,000
Global Equity Portfolio 500,000,000
International Magnum Portfolio 500,000,000
Emerging Markets Equity Portfolio 500,000,000
Asian Equity Portfolio 500,000,000
Latin American Portfolio 500,000,000
<PAGE>
to ten billion (10,000,000,000) shares of common stock, par value $.001 per
share, having an aggregate par value of ten million dollars ($10,000,000) and
adding one new portfolio so that the common stock par value $.001 per share of
the Corporation authorized to be issued is designated and classified in nineteen
portfolios as follows:
Number of Shares
of Common Stock
Name of Class Classified and Allocated
- ------------- ------------------------
Money Market Portfolio 1,000,000,000
Fixed Income Portfolio 500,000,000
High Yield Portfolio 500,000,000
International Fixed Income Portfolio 500,000,000
Emerging Markets Debt Portfolio 500,000,000
Balanced Portfolio 500,000,000
Multi-Asset-Class Portfolio 500,000,000
Equity Growth Portfolio 500,000,000
Value Portfolio 500,000,000
Core Equity Portfolio 500,000,000
Mid Cap Growth Portfolio 500,000,000
Mid Cap Value Portfolio 500,000,000
U.S. Real Estate Portfolio 500,000,000
Global Equity Portfolio 500,000,000
International Magnum Portfolio 500,000,000
Emerging Markets Equity Portfolio 500,000,000
Asian Equity Portfolio 500,000,000
Latin American Portfolio 500,000,000
Active International Allocation Portfolio 500,000,000
THIRD: Such shares have been duly authorized and classified by the Board
of Directors pursuant to authority and power contained in Section 2-105(c) of
the MGCL and the Corporation's Articles of Incorporation.
FOURTH: The description of the shares of stock designated and classifed as
set forth above, including any preference, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption is as set forth in the Articles of Incorporation and
has not changed in connection with these Articles Supplementary to the Articles
of Incorporation.
<PAGE>
IN WITNESS WHEREOF, Morgan Stanley Dean Witter Universal Funds, Inc.
has caused these Articles Supplementary to be signed in its name and on its
behalf by its President and attested by its Secretary on this 30 day of June,
1999.
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
By: /s/ Michael F. Klein
--------------------
Michael F. Klein
President
Attest:
/s/Mary E. Mullin
- -----------------
Mary E. Mullin
Secretary
<PAGE>
THE UNDERSIGNED, President of MORGAN STANLEY DEAN WITTER UNIVERSAL
FUNDS, INC., who executed on behalf of said corporation the foregoing Articles
Supplementary of which this certificate is made a part, hereby acknowledges, in
the name and on behalf of said corporation, the foregoing Articles Supplementary
to be the corporate act of said corporation and further certifies that, to the
best of his knowledge, information and belief, the matters and facts set forth
herein with respect to the approval thereof are true in all material respects,
under the penalties of perjury.
/s/ Michael F. Klein
--------------------
Michael F. Klein
President
<PAGE>
EX 99(a)(6)
FORM OF
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC. (the "Corporation"), a
corporation organized under the laws of the State of Maryland, having its
principal place of business at 1221 Avenue of the Americas, New York, NY 10020,
does hereby certify to the State Department of Assessments and Taxation of
Maryland that:
FIRST: The Corporation is registered as an open-end investment company
under the Investment Company Act of 1940, as amended.
SECOND: The Board of Directors of the Corporation at a meeting duly
convened and held on __________________________ a resolution adding one
portfolio and increasing the total number of shares of stock which the
Corporation shall have the authority to issue from ten billion (10,000,000,000)
shares of common stock, par value $.001 per share, having an aggregate par value
of ten million dollars ($10,000,000) designated and classified in nineteen
portfolios as follows:
Number of Shares
of Common Stock
Name of Class Classified and Allocated
- ------------- ------------------------
Money Market Portfolio 1,000,000,000
Fixed Income Portfolio 500,000,000
High Yield Portfolio 500,000,000
International Fixed Income Portfolio 500,000,000
Emerging Markets Debt Portfolio 500,000,000
Balanced Portfolio 500,000,000
Multi-Asset-Class Portfolio 500,000,000
Equity Growth Portfolio 500,000,000
Value Portfolio 500,000,000
Core Equity Portfolio 500,000,000
Mid Cap Growth Portfolio 500,000,000
Mid Cap Value Portfolio 500,000,000
U.S. Real Estate Portfolio 500,000,000
Global Equity Portfolio 500,000,000
International Magnum Portfolio 500,000,000
Emerging Markets Equity Portfolio 500,000,000
Asian Equity Portfolio 500,000,000
Latin American Portfolio 500,000,000
Active International Allocation Portfolio 500,000,000
<PAGE>
to ten billion five hundred million (10,500,000,000) shares of common stock, par
value $.001 per share, having an aggregate par value of ten million five hundred
thousand dollars ($10,500,000) and designated and classified in twenty
portfolios as follows:
Number of Shares
of Common Stock
Name of Class Classified and Allocated
- ------------- ------------------------
Money Market Portfolio 1,000,000,000
Fixed Income Portfolio 500,000,000
High Yield Portfolio 500,000,000
International Fixed Income Portfolio 500,000,000
Emerging Markets Debt Portfolio 500,000,000
Balanced Portfolio 500,000,000
Multi-Asset-Class Portfolio 500,000,000
Equity Growth Portfolio 500,000,000
Value Portfolio 500,000,000
Core Equity Portfolio 500,000,000
Mid Cap Growth Portfolio 500,000,000
Mid Cap Value Portfolio 500,000,000
U.S. Real Estate Portfolio 500,000,000
Global Equity Portfolio 500,000,000
International Magnum Portfolio 500,000,000
Emerging Markets Equity Portfolio 500,000,000
Asian Equity Portfolio 500,000,000
Latin American Portfolio 500,000,000
Active International Allocation Portfolio 500,000,000
Technology Portfolio 500,000,000
THIRD: Such shares have been duly authorized and classified by the Board
of Directors pursuant to authority and power contained in Section 2-105(c) of
the MGCL and the Corporation's Articles of Incorporation.
FOURTH: The description of the shares of stock designated and classifed as
set forth above, including any preference, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption is as set forth in the Articles of Incorporation and
has not changed in connection with these Articles Supplementary to the Articles
of Incorporation.
<PAGE>
IN WITNESS WHEREOF, Morgan Stanley Dean Witter Universal Funds, Inc.
has caused these Articles Supplementary to be signed in its name and on its
behalf by its President and attested by its Secretary on this day of , 1999.
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
By: ____________________
Michael F. Klein
President
Attest:
____________________
Mary E. Mullin
Secretary
<PAGE>
THE UNDERSIGNED, President of MORGAN STANLEY DEAN WITTER UNIVERSAL
FUNDS, INC., who executed on behalf of said corporation the foregoing Articles
Supplementary of which this certificate is made a part, hereby acknowledges, in
the name and on behalf of said corporation, the foregoing Articles Supplementary
to be the corporate act of said corporation and further certifies that, to the
best of his knowledge, information and belief, the matters and facts set forth
herein with respect to the approval thereof are true in all material respects,
under the penalties of perjury.
____________________
Michael F. Klein
President
<PAGE>
EX 99(d)(4]
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
SUPPLEMENT TO MSDW INVESTMENT MANAGEMENT INVESTMENT ADVISORY AGREEMENT
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
SUPPLEMENT (the "Supplement") TO INVESTMENT ADVISORY AGREEMENT dated
as of May 31, 1997 by and between Morgan Stanley Universal Funds, Inc. (now
known as Morgan Stanley Dean Witter Universal Funds, Inc.) (the "Fund") and
Morgan Stanley Asset Management Inc. (now known as Morgan Stanley Dean Witter
Investment Management Inc.) (the "Adviser") (the "Agreement").
RECITALS
WHEREAS, the Fund has executed and delivered the Agreement which sets
forth the rights and obligations of the parties with respect to the management
of the portfolios of the Fund set forth on Schedule A to such Agreement, as
amended and supplemented from time to time.
WHEREAS, the Fund has created an additional portfolio, the Active
International Allocation Portfolio (the "Additional Portfolio").
AGREEMENTS
Now, therefore, the parties agree as follows:
As provided in Section 1 of the Agreement, the Fund hereby appoints
the Adviser to act as investment adviser to the Additional Portfolio.
The compensation of the Adviser as set forth in Paragraph 3 of the
Agreement with respect to the Additional Portfolio will be as set forth below:
Assets Active International Allocation Portfolio
- ------------------------------------ ------------------------------------------
First $500 Million 0.80%
From $500 Million to $1 Billion 0.75%
More than $1 Billion 0.70%
This Supplement may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
The parties listed below have executed this Supplement as of the 8th
day of July, 1999.
MORGAN STANLEY DEAN WITTER MORGAN STANLEY DEAN WITTER
INVESTMENT MANAGEMENT INC. UNIVERSAL FUNDS, INC.
/s/ Harold J. Schaaff, Jr. /s/ Michael F. Klein
- ---------------------------- --------------------------
Name: Harold J. Schaaff, Jr. Name: Michael F. Klein
Title: Principal, General Counsel and Title: President
Secretary
<PAGE>
EX 99(d)(5)
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
FORM OF
SUPPLEMENT TO MSDW INVESTMENT MANAGEMENT INVESTMENT ADVISORY AGREEMENT
TECHNOLOGY PORTFOLIO
SUPPLEMENT (the "Supplement") TO INVESTMENT ADVISORY AGREEMENT dated
as of May 31, 1997 by and between Morgan Stanley Universal Funds, Inc. (now
known as Morgan Stanley Dean Witter Universal Funds, Inc.) (the "Fund") and
Morgan Stanley Asset Management Inc. (now known as Morgan Stanley Dean Witter
Investment Management Inc.) (the "Adviser") (the "Agreement").
RECITALS
WHEREAS, the Fund has executed and delivered the Agreement which sets
forth the rights and obligations of the parties with respect to the management
of the portfolios of the Fund set forth on Schedule A to such Agreement, as
amended and supplemented from time to time.
WHEREAS, the Fund has created an additional portfolio, the Technology
Portfolio (the "Additional Portfolio").
AGREEMENTS
Now, therefore, the parties agree as follows:
As provided in Section 1 of the Agreement, the Fund hereby appoints
the Adviser to act as investment adviser to the Additional Portfolio.
The compensation of the Adviser as set forth in Paragraph 3 of the
Agreement with respect to the Additional Portfolio will be as set forth below:
Assets Technology Portfolio
------ --------------------
First $500 Million _________%
From $500 Million to $1 Billion _________%
More than $1 Billion _________%
This Supplement may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
The parties listed below have executed this Supplement as of the __
day of _______________, 199__
MORGAN STANLEY DEAN WITTER MORGAN STANLEY DEAN WITTER
INVESTMENT MANAGEMENT INC. UNIVERSAL FUNDS, INC.
_____________________________________ _________________________
Name: Harold J. Schaaff, Jr. Name: Michael F. Klein
Title: Principal, General Counsel and Title: President
Secretary
