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DEAN WITTER
FUND OF FUNDS
PROSPECTUS--OCTOBER 3, 1997
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DEAN WITTER FUND OF FUNDS (THE "FUND") IS AN OPEN-END, NON-DIVERSIFIED
MANAGEMENT INVESTMENT COMPANY CURRENTLY CONSISTING OF TWO SEPARATE PORTFOLIOS
(INDIVIDUALLY A "PORTFOLIO" AND COLLECTIVELY THE "PORTFOLIOS") WHICH SEEK TO
ACHIEVE THEIR INVESTMENT OBJECTIVES BY INVESTING IN SHARES OF OTHER OPEN-END
MANAGEMENT INVESTMENT COMPANIES THAT ARE EITHER MEMBERS OF THE DEAN WITTER
FAMILY OF FUNDS OR MANAGED BY AN INVESTMENT ADVISER THAT IS AN AFFILIATE OF DEAN
WITTER INTERCAPITAL INC. (INDIVIDUALLY, AN "UNDERLYING FUND" AND COLLECTIVELY,
THE "UNDERLYING FUNDS"). THE INTERNATIONAL PORTFOLIO HAS AN INVESTMENT OBJECTIVE
OF LONG-TERM CAPITAL APPRECIATION AND INVESTS IN A SELECTION OF UNDERLYING FUNDS
WHICH INVEST THEIR ASSETS PRIMARILY IN THE INTERNATIONAL EQUITY MARKETS. THE
INVESTMENT OBJECTIVE OF THE DOMESTIC PORTFOLIO IS TO MAXIMIZE TOTAL INVESTMENT
RETURN THROUGH CAPITAL GROWTH AND INCOME BY INVESTING IN A SELECTION OF
UNDERLYING FUNDS WHICH INVEST THEIR ASSETS PRIMARILY IN THE U.S. EQUITY AND
FIXED-INCOME MARKETS. SEE "INVESTMENT OBJECTIVE AND POLICIES".
INITIAL OFFERING--Shares are being offered in an underwriting by Dean Witter
Distributors Inc. at $10.00 per share for Class B, Class C and Class D shares
with all proceeds going to the Fund and at $10.00 per share plus a sales charge
for Class A shares with the sales charge paid to the Underwriter and the net
asset value of $10.00 per share going to the Fund. All expenses in connection
with the organization of the Fund and this offering will be paid by the
Investment Manager and Underwriter except for a maximum of $250,000 of
organizational expenses to be reimbursed by the Fund. The initial offering will
run from approximately October 27, 1997 through November 20, 1997.
CONTINUOUS OFFERING--A continuous offering will commence approximately two weeks
after the closing date of the initial offering which is anticipated for November
25, 1997. Class B, Class C and Class D shares will be priced at the net asset
value per share and Class A shares will be priced at the net asset value per
share plus a sales charge, in each case as next determined following receipt of
an order.
The Fund offers four classes of shares (each, a "Class"), each with a different
combination of sales charges, ongoing fees and other features. The different
distribution arrangements permit an investor to choose the method of purchasing
shares that the investor believes is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances. (See "Purchase of Fund Shares--Alternative
Purchase Arrangements.")
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Prospectus Summary................................ 2
Summary of Fund Expenses.......................... 4
The Fund and its Management....................... 6
Investment Objective and Policies................. 8
Risk Considerations............................. 30
Investment Restrictions........................... 38
Underwriting...................................... 38
Purchase of Fund Shares........................... 39
Shareholder Services.............................. 45
Redemptions and Repurchases....................... 47
Dividends, Distributions and Taxes................ 48
Performance Information........................... 49
Additional Information............................ 49
</TABLE>
This Prospectus sets forth concisely the information you should know before
investing in the Fund. It should be read and retained for future reference.
Additional information about the Fund is contained in the Statement of
Additional Information, dated October 3, 1997, which has been filed with the
Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone numbers listed on this page. The
Statement of Additional Information is incorporated herein by reference.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
DEAN WITTER
FUND OF FUNDS
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 392-2550 or
(800) 869-NEWS (toll free)
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
DEAN WITTER DISTRIBUTORS INC., DISTRIBUTOR
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PROSPECTUS SUMMARY
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<TABLE>
<S> <C>
THE FUND The Fund is an open-end, non-diversified management investment company currently consisting of two
separate Portfolios: The International Portfolio and the Domestic Portfolio. The International
Portfolio currently invests in a selection of the following Underlying Funds: Dean Witter European
Growth Fund Inc., Dean Witter International SmallCap Fund, Dean Witter Japan Fund, and Dean Witter
Pacific Growth Fund Inc. The Domestic Portfolio currently invests in a selection of the following
Underlying Funds: Dean Witter American Value Fund, Dean Witter Capital Appreciation Fund, Dean
Witter Capital Growth Securities, Dean Witter Convertible Securities Trust, Dean Witter Developing
Growth Securities, Dean Witter Dividend Growth Securities Inc., Dean Witter Financial Services
Trust, Dean Witter Health Sciences Trust, Dean Witter High Yield Securities Inc., Dean Witter
Information Fund, Dean Witter Intermediate Income Securities, Dean Witter Market Leader Trust,
Dean Witter Mid-Cap Growth Fund, Dean Witter Natural Resource Development Securities, Inc., Dean
Witter Precious Metals and Minerals Trust, Dean Witter S&P 500 Index Fund, Dean Witter Short-Term
Bond Fund, Dean Witter Special Value Fund, Dean Witter U.S. Government Securities Trust, Dean
Witter Utilities Fund and Dean Witter Value-Added Market Series/Equity Portfolio. The Underlying
Funds in which each Portfolio may invest may be changed from time to time and additional or
different Underlying Funds may be added or substituted.
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SHARES OFFERED Shares of beneficial interest with $0.01 par value (see page 49). The Fund offers four Classes of
shares, each with a different combination of sales charges, ongoing fees and other features (see
page 39).
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INITIAL Shares are being offered in an underwriting by Dean Witter Distributors Inc. at $10.00 per share
OFFERING for each of Class B, Class C and Class D and $10.00 per share plus a sales charge for Class A. The
minimum purchase for each Class is 100 shares; however, Class D shares are only available to
persons who are otherwise qualified to purchase such shares. The initial offering will run
approximately from October 27, 1997 through November 20, 1997. The closing will take place on
November 25, 1997 or such other date as may be agreed upon by Dean Witter Distributors Inc. and
the Fund (the "Closing Date"). Shares will not be issued and dividends will not be declared by the
Fund until after the Closing Date. If any orders received during the initial offering period are
accompanied by payment, such payment will be returned unless an accompanying request for
investment in a Dean Witter money market fund is received at the time the payment is made. Any
purchase order may be cancelled at any time prior to the Closing Date.
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CONTINUOUS A continuous offering, if any, will commence within approximately two weeks after the Closing
OFFERING/ Date. The minimum initial investment for each Class is $1,000 ($100 if the account is opened
MINIMUM through EasyInvest-SM-). Class D shares are only available to persons investing $5 million or more
PURCHASE and to certain other limited categories of investors. For the purpose of meeting the minimum $5
million investment for Class D shares, and subject to the $1,000 minimum initial investment for
each Class of each Portfolio of the Fund, an investor's existing holdings of Class A shares and
shares of funds for which Dean Witter InterCapital serves as investment manager ("Dean Witter
Funds") that are sold with a front-end sales charge, and concurrent investments in Class D shares
of the Fund and other Dean Witter Funds that are multiple class funds will be aggregated. The
minimum subsequent investment is $100 (see page 39).
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INVESTMENT The investment objective of the International Portfolio is long-term capital appreciation. The
OBJECTIVE investment objective of the Domestic Portfolio is to maximize total investment return (see page
8).
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INVESTMENT Dean Witter InterCapital Inc. ("InterCapital"), the Investment Manager of the Fund, and its
MANAGER wholly-owned subsidiary, Dean Witter Services Company Inc., serve in various investment
management, advisory, management and administrative capacities to 102 investment companies and
other portfolios with assets of approximately $102.3 billion at September 30, 1997.
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MANAGEMENT The Fund pays no management fee. However, the Fund, through its investments in the Underlying
FEE Funds, will pay its pro rata share of the management or advisory or sub-advisory fees to the
Investment Manager and/or Sub-Advisors or Advisor of the Underlying Funds (see pages 4-7).
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UNDERWRITER AND Dean Witter Distributors Inc. (the "Distributor") is the Fund's Underwriter and Distributor. The
DISTRIBUTOR Fund has adopted a distribution plan pursuant to Rule 12b-1 under the Investment Company Act (the
AND "12b-1 Plan") with respect to the distribution fees paid by the Class A, Class B and Class C
DISTRIBUTION FEE shares of each Portfolio of the Fund to the Distributor. The entire 12b-1 fee payable by Class A
and a portion of the 12b-1 fee payable by each of Class B and Class C equal to 0.25% of the
average daily net assets of the Class are currently each characterized as a service fee within the
meaning of the National Association of Securities Dealers, Inc. guidelines. The remaining portion
of the 12b-1 fee, if any, is characterized as an asset-based sales charge (see pages 39 and 44).
Each Portfolio of the Fund will invest in the Class D or no load shares of the Underlying Funds
set forth below and accordingly will not pay any sales load or 12b-1 service or distribution fees
in connection with its investments in shares of the Underlying Funds.
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ALTERNATIVE Four classes of shares are offered:
PURCHASE
ARRANGEMENTS - Class A shares are offered with a front-end sales charge, starting at 5.25% and reduced for
larger purchases. Investments of $1 million or more (and investments by certain other limited
categories of investors) are not subject to any sales charge at the time of purchase but a
contingent deferred sales charge ("CDSC") of 1.0% may be imposed on redemptions within one year of
purchase. The Fund, on behalf of each Portfolio, is authorized to reimburse the Distributor for
specific expenses incurred in promoting the distribution of each Portfolio's Class A shares and
servicing shareholder accounts pursuant to the Fund's 12b-1 Plan. Reimbursement may in no event
exceed an amount equal to payments at an annual rate of 0.25% of average daily net assets of the
Class of each respective Portfolio (see pages 39, 41 and 44).
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2
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- Class B shares are offered without a front-end sales charge, but will in most cases be subject
to a CDSC (scaled down from 5.0% to 1.0%) if redeemed within six years after purchase. The CDSC
will be imposed on any redemption of shares if after such redemption the aggregate current value
of a Class B account with the Fund falls below the aggregate amount of the investor's purchase
payments made during the six years preceding the redemption. A different CDSC schedule applies to
investments by certain qualified plans. Class B shares are also subject to a 12b-1 fee assessed at
the annual rate of 1.0% of the average daily net assets of Class B of each respective Portfolio.
Class B shares convert to Class A shares approximately ten years after the date of the original
purchase (see pages 39, 43 and 44).
- Class C shares are offered without a front-end sales charge, but will in most cases be subject
to a CDSC of 1.0% if redeemed within one year after purchase. The Fund, on behalf of each
Portfolio, is authorized to reimburse the Distributor for specific expenses incurred in promoting
the distribution of each Portfolio's Class C shares and servicing shareholder accounts pursuant to
the Fund's 12b-1 Plan. Reimbursement may in no event exceed an amount equal to payments at an
annual rate of 1.0% of average daily net assets of the Class of each respective Portfolio (see
pages 39 and 44).
- Class D shares are offered only to investors meeting an initial investment minimum of $5 million
and to certain other limited categories of investors. Class D shares are offered without a
front-end sales charge or CDSC and are not subject to any 12b-1 fee (see pages 39 and 44).
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DIVIDENDS AND Dividends from net investment income and distributions from net capital gains, if any, are paid at
CAPITAL GAINS least once per year. Each Portfolio of the Fund may, however, determine to retain all or part of
DISTRIBUTIONS any net long-term capital gains in any year for reinvestment. Dividends and capital gains
distributions paid on shares of a Class are automatically reinvested in additional shares of the
same Class at net asset value unless the shareholder elects to receive cash. Shares acquired by
dividend and distribution reinvestment will not be subject to any sales charge or CDSC (see pages
45 and 48).
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REDEMPTION Shares are redeemable by the shareholder at net asset value less any applicable CDSC on Class A,
Class B or Class C shares. An account may be involuntarily redeemed if the total value of the
account is less than $100 or, if the account was opened through EasyInvest-SM-, if after twelve
months the shareholder has invested less than $1,000 in the account (see page 47).
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RISK The net asset value of each Portfolio's shares will fluctuate with changes in the market value of
CONSIDERATIONS its portfolio securities, and each Portfolio's investment performance will reflect the performance
of the Underlying Funds and the investment selections made by the Fund's Investment Manager.
Investment in either Portfolio of the Fund involves the same risks as an investment in the
Underlying Funds in which each such Portfolio invests. The Fund is a non-diversified management
investment company and, as a result, a relatively high percentage of each Portfolio's shares may
be invested in a limited number of issuers. Investing in lesser known, smaller and medium sized
capitalization companies may involve greater risk of volatility in the Underlying Funds which
invest in such companies and consequently in net asset value of each Portfolio than is customarily
associated with investing in larger, more established companies. To the extent that the
International Portfolio invests in Underlying Funds which concentrate their investments in
particular geographical regions or countries (i.e., Latin America, the Pacific Rim, Japan), the
Portfolio will be subject to the risks of adverse social, political or economic events which occur
in or affect those regions or countries. These may include the risk of expropriation,
nationalization or confiscation of assets or the imposition of restrictions on foreign investment
or repatriation of capital invested, political and social uncertainties, high levels of inflation
and non-uniform corporate disclosure standards and governmental regulation which may lead to less
publicly available and less reliable information than is generally the case for U.S. issuers.
Additionally, it should be recognized that certain foreign securities and markets may pose
different and greater risks than those customarily associated with domestic securities and their
markets such as fluctuations in foreign currency exchange rates (i.e., if a substantial portion of
an Underlying Fund's assets is denominated in foreign currencies which decrease in value with
respect to the U.S. dollar, the value of the investor's shares and the distributions made on those
shares will, likewise, decrease in value), foreign securities exchange controls and foreign tax
rates. The prices of interest-bearing securities are, generally, inversely affected by changes in
interest rates and, therefore, are subject to the risk of market price fluctuations. The values of
fixed-income securities also may be affected by changes in the credit rating or financial
condition of the issuing entities. Mortgage-backed securities are subject to prepayments or
refinancings of the mortgage pools underlying such securities which may have an impact upon the
yield and the net asset value of an Underlying Fund's shares. Certain of the mortgage-backed
securities in which an Underlying Fund may invest have higher yields than traditional
mortgage-backed securities and will have concomitant greater price volatility. Asset-backed
securities involve risks resulting mainly from the fact that such securities do not usually
contain the complete benefit of a security interest in the related collateral. Certain of the high
yield, high risk fixed-income securities in which an Underlying Fund may invest are subject to
greater risk of loss of income and principal than the higher rated lower yielding fixed-income
securities. Certain of the Underlying Funds in which each Portfolio may invest may enter into
repurchase agreements, reverse repurchase agreements and dollar rolls, may purchase securities on
a when-issued, delayed delivery or forward commitment basis or on a "when, as and if issued" basis
which entail certain risks and may utilize certain investment techniques including options and
futures transactions and forward foreign currency exchange transactions which may be considered
speculative in nature and may involve greater risks than those customarily assumed by other
investment companies which do not utilize such instruments. (See pages 30-37).
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</TABLE>
THE ABOVE IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION APPEARING
ELSEWHERE IN THIS PROSPECTUS
AND IN THE STATEMENT OF ADDITIONAL INFORMATION.
3
<PAGE>
SUMMARY OF FUND EXPENSES
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The following table illustrates all expenses and fees that a shareholder of each
Portfolio of the Fund will incur. The expenses and fees set forth in the table
are based on the fees and estimated other expenses for the fiscal period ending
July 31, 1998.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B CLASS C CLASS D
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price)........................... 5.25%(1) None None None
Sales Charge Imposed on Dividend Reinvestments........... None None None None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds)...... None(2) 5.00%(3) 1.00%(4) None
Redemption Fees.......................................... None None None None
Exchange Fee............................................. None None None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS)
<S> <C> <C> <C> <C>
Management Fees.......................................... None None None None
12b-1 Fees (5) (6)....................................... 0.25% 1.00% 1.00% None
Other Expenses*.......................................... 0.30% 0.30% 0.30% 0.30%
Total Fund Operating Expenses* (7)....................... 0.55% 1.30% 1.30% 0.30%
</TABLE>
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* The Investment Manager has agreed to assume all operating expenses (except
for brokerage and 12b-1 fees) for each Portfolio until such time as the
respective Portfolio has $50 million of net assets or until six months from
commencement of the Fund's operations, whichever occurs first.
(1) Reduced for purchases of $25,000 and over (see "Purchase of Fund
Shares--Initial Sales Charge Alternative--Class A Shares").
(2) Investments that are not subject to any sales charge at the time of purchase
are subject to a CDSC of 1.00% that will be imposed on redemptions made
within one year after purchase, except for certain specific circumstances
(see "Purchase of Fund Shares--Initial Sales Charge Alternative--Class A
Shares").
(3) The CDSC is scaled down to 1.00% during the sixth year, reaching zero
thereafter.
(4) Only applicable to redemptions made within one year after purchase (see
"Purchase of Fund Shares--Level Load Alternative--Class C Shares").
(5) The 12b-1 fee is accrued daily and payable monthly. The entire 12b-1 fee
payable by Class A and a portion of the 12b-1 fee payable by each of Class B
and Class C of each Portfolio equal to 0.25% of the average daily net assets
of the Class are currently each characterized as a service fee within the
meaning of National Association of Securities Dealers, Inc. ("NASD")
guidelines and are payments made for personal service and/or maintenance of
shareholder accounts. The remainder of the 12b-1 fee, if any, is an
asset-based sales charge, and is a distribution fee paid to the Distributor
to compensate it for the services provided and the expenses borne by the
Distributor and others in the distribution of each Portfolio of the Fund's
shares (see "Purchase of Fund Shares--Plan of Distribution").
(6) Upon conversion of Class B shares to Class A shares, such shares will be
subject to the lower 12b-1 fee applicable to Class A shares. No sales charge
is imposed at the time of conversion of Class B shares to Class A shares.
Class C shares do not have a conversion feature and, therefore, are subject
to an ongoing 1.00% distribution fee (see "Purchase of Fund
Shares--Alternative Purchase Arrangements").
(7) "Total Fund Operating Expenses," as shown above with respect to each Class,
are based upon the sum of 12b-1 Fees, and estimated "Other Expenses."
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS
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<S> <C> <C>
You would pay the following expenses on a $1,000 investment in each of the Portfolios
assuming (1) a 5% annual return and (2) redemption at the end of each time period:
Class A............................................................................ $ 58 $ 69
Class B............................................................................ $ 63 $ 71
Class C............................................................................ $ 23 $ 41
Class D............................................................................ $ 3 $ 10
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<CAPTION>
EXAMPLE 1 YEAR 3 YEARS
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You would pay the following expenses on the same $1,000 investment in each of the
Portfolios assuming no redemption at the end of the period:
Class A............................................................................ $ 58 $ 69
Class B............................................................................ $ 13 $ 41
Class C............................................................................ $ 13 $ 41
Class D............................................................................ $ 3 $ 10
</TABLE>
EXPENSE RATIOS OF THE UNDERLYING FUNDS
The Portfolios will invest only in the Class D or no load shares of the
Underlying Funds and, accordingly, will not pay any sales load or 12b-1 service
or distribution fees in connection with their investments in shares of the
Underlying Funds. The
4
<PAGE>
Portfolios, however, will indirectly bear their pro rata share of the fees and
expenses incurred by the Underlying Funds that are applicable to Class D
shareholders. The investment returns of the respective Portfolios, therefore,
will be net of the expenses of the Underlying Funds in which they are invested.
The following charts shows the expense ratios applicable to the Class D
shareholders of each Underlying Fund held by a Portfolio, based on operating
expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
INTERNATIONAL PORTFOLIO--EXPENSE RATIOS OF MANAGEMENT OTHER TOTAL
UNDERLYING FUNDS FEES 12B-1 FEE EXPENSES EXPENSES
- ------------------------------------------------------------ --------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Dean Witter European Growth Fund Inc........................ 0.97% 0% 0.25% 1.22%
Dean Witter Pacific Growth Fund Inc......................... 0.98% 0% 0.41% 1.39%
Dean Witter International SmallCap Fund..................... 1.25% 0% 0.64% 1.89%
Dean Witter Japan Fund...................................... 1.00% 0% 0.43% 1.43%
</TABLE>
<TABLE>
<CAPTION>
DOMESTIC PORTFOLIO--EXPENSE RATIOS MANAGEMENT OTHER TOTAL
OF UNDERLYING FUNDS FEES 12B-1 FEE EXPENSES EXPENSES
- ------------------------------------------------------------ --------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Dean Witter American Value Fund............................. 0.51% 0% 0.14% 0.65%
Dean Witter Capital Appreciation Fund....................... 0.75% 0% 0.29% 1.04%
Dean Witter Capital Growth Securities....................... 0.65% 0% 0.19% 0.84%
Dean Witter Convertible Securities Trust.................... 0.60% 0% 0.29% 0.89%
Dean Witter Developing Growth Securities.................... 0.49% 0% 0.20% 0.69%
Dean Witter Dividend Growth Securities Inc.................. 0.39% 0% 0.09% 0.48%
Dean Witter Financial Services Trust........................ 0.75% 0% 0.29% 1.04%
Dean Witter Health Sciences Trust........................... 1.00% 0% 0.20% 1.20%
Dean Witter High Yield Securities Inc....................... 0.50% 0% 0.16% 0.66%
Dean Witter Information Fund................................ 0.75% 0% 0.26% 1.01%
Dean Witter Intermediate Income Securities.................. 0.60% 0% 0.17% 0.77%
Dean Witter Market Leader Trust............................. 0.75% 0% 0.38% 1.13%
Dean Witter Mid-Cap Growth Fund............................. 0.75% 0% 0.24% 0.99%
Dean Witter Natural Resource Development Securities Inc..... 0.62% 0% 0.24% 0.86%
Dean Witter Precious Metals and Minerals Trust.............. 0.80% 0% 0.47% 1.27%
Dean Witter S&P 500 Index Fund.............................. 0.22% 0% 0.28% 0.50%
Dean Witter Short-Term Bond Fund............................ 0.23% 0% 0.25% 0.48%
Dean Witter Special Value Fund.............................. 0.75% 0% 0.36% 1.11%
Dean Witter U.S. Government Securities Trust................ 0.42% 0% 0.08% 0.50%
Dean Witter Utilities Fund.................................. 0.53% 0% 0.11% 0.64%
Dean Witter Value-Added Market Series/Equity Portfolio...... 0.47% 0% 0.14% 0.61%
</TABLE>
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF EACH CLASS MAY BE GREATER OR LESS
THAN THOSE SHOWN.
The purpose of this table is to assist the investor in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"The Fund and its Management," "Purchase of Fund Shares--Plan of Distribution"
and "Redemptions and Repurchases."
Long-term shareholders of Class B and Class C may pay more in sales charges,
including distribution fees, than the economic equivalent of the maximum
front-end sales charges permitted by the NASD.
5
<PAGE>
THE FUND AND ITS MANAGEMENT
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Dean Witter Fund of Funds (the "Fund") is an open-end, non-diversified
management investment company. The Fund is a trust of the type commonly known as
a "Massachusetts business trust" and was organized under the laws of the
Commonwealth of Massachusetts on July 3, 1997.
Dean Witter InterCapital Inc. ("InterCapital or the "Investment Manager"),
whose address is Two World Trade Center, New York, New York 10048, is the Fund's
Investment Manager. The Investment Manager, which was incorporated in July,
1992, is a wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover &
Co., a preeminent global financial services firm that maintains leading market
positions in each of its three primary businesses--securities, asset management
and credit services.
InterCapital and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to 102 investment companies, thirty of which are
listed on the New York Stock Exchange, with combined assets of approximately
$98.6 billion as of August 31, 1997. The Investment Manager also manages and
advises portfolios of pension plans, other institutions and individuals which
aggregated approximately $3.7 billion at such date.
The Fund has retained the Investment Manager to provide administrative
services, manage its business affairs and manage the investment of the Fund's
assets, which includes the allocation of each Portfolio's assets among the
Underlying Funds. InterCapital has retained Dean Witter Services Company Inc. to
perform the aforementioned administrative services for the Fund. The Fund's
Board of Trustees reviews the various services provided by or under the
direction of the Investment Manager to ensure that each Portfolio's general
investment policies and programs are being properly carried out and that
administrative services are being provided to the Fund in a satisfactory manner.
The Investment Manager does not receive a management fee from either
Portfolio of the Fund for providing the aforementioned investment management
services. However, each Portfolio, through its investments in the Class D or no
load shares of the Underlying Funds, will pay its pro rata share of the
management fees and certain other expenses of the Underlying Funds. The Fund's
direct expenses are expected to include certain legal and auditing fees,
transfer agency fees, custodian fees, compensation to the Independent Trustees
and printing and out-of-pocket expenses relating to the Fund's operations which
expenses will be allocated to each Portfolio on the basis of asset size of each
Portfolio. The Investment Manager has agreed to assume all operating expenses
(except for brokerage and 12b-1 fees) for each Portfolio until such time as the
respective Portfolio has $50 million of net assets or until six months from
commencement of the Fund's operations, whichever occurs first.
In addition to serving as the Fund's Investment Manager, InterCapital also
serves as Investment Manager to the following Underlying Funds in which the Fund
may invest: Dean Witter American Value Fund, Dean Witter Capital Appreciation
Fund, Dean Witter Capital Growth Securities, Dean Witter Convertible Securities
Trust, Dean Witter Developing Growth Securities, Dean Witter Dividend Growth
Securities Inc., Dean Witter European Growth Fund Inc., Dean Witter Financial
Services Trust, Dean Witter Health Sciences Trust, Dean Witter High Yield
Securities Inc., Dean Witter Information Fund, Dean Witter Intermediate Income
Securities, Dean Witter International SmallCap Fund, Dean Witter Japan Fund,
Dean Witter Market Leader Trust, Dean Witter Mid-Cap Growth Fund, Dean Witter
Natural Resource Development Securities Inc., Dean Witter Pacific Growth Fund
Inc., Dean Witter Precious Metals and Minerals Trust, Dean Witter S&P 500 Index
Fund, Dean Witter Short-Term Bond Fund, Dean Witter Special Value
Fund--contingent upon a "re-opening", Dean Witter U.S. Government Securities
Trust, Dean Witter Utilities Fund and Dean Witter Value-Added Market
Series/Equity Portfolio. Under Sub-Advisory Agreements between Morgan Grenfell
Investment Services Limited ("Morgan Grenfell") and the Investment Manager,
Morgan Grenfell provides investment advice and portfolio management to Dean
Witter European Growth Fund, Dean Witter International SmallCap Fund, Dean
Witter Japan Fund, and Dean Witter Pacific Growth Fund subject to the overall
supervision of the Investment Manager.
Morgan Grenfell, whose address is 20 Finsbury Circus, London, England,
manages, as of August 31, 1997, assets of approximately $15 billion for U.S.
corporate and public employee benefit plans, investment companies, endowments
and foundations. Morgan Grenfell is an indirect subsidiary of Deutsche Bank AG,
the largest commercial bank in Germany.
Set forth below is the compensation received by the Investment Manager, and
Morgan Grenfell for their management, investment advisory services or
sub-advisory services to the aforementioned Underlying Funds set forth below. As
full compensation for the services and facilities furnished to the fund and for
expenses of the fund assumed by the Investment Manager, the fund pays the
Investment Manager monthly compensation calculated daily by applying the
following annual rates:
DEAN WITTER AMERICAN VALUE FUND. 0.625% to the portion of daily net assets not
exceeding $250 million; 0.50% to such assets exceeding $250 million but not
exceeding $2.5 billion and scaled down at various asset levels to 0.45% on such
assets exceeding $3.5 billion.
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DEAN WITTER CAPITAL APPRECIATION FUND. 0.75% to the Fund's average daily net
assets not exceeding $500 million; and 0.725% to such assets exceeding $500
million.
DEAN WITTER CAPITAL GROWTH SECURITIES. 0.65% to the Fund's average daily net
assets not exceeding $500 million scaled down at various asset levels to 0.475%
on such assets exceeding $1.5 billion.
DEAN WITTER CONVERTIBLE SECURITIES TRUST. 0.60% to the portion of the Fund's
average daily net assets not exceeding $750 million, scaled down at various
asset levels to 0.425% on such assets exceeding $3 billion.
DEAN WITTER DEVELOPING GROWTH SECURITIES. 0.50% to the Fund's average daily net
assets not exceeding $500 million and 0.475% to such assets exceeding $500
million.
DEAN WITTER DIVIDEND GROWTH SECURITIES INC. 0.625% to the Fund's average daily
net assets up to $250 million, scaled down at various asset levels to 0.30% on
such assets over $10 billion and 0.275% on such assets over $15 billion.
DEAN WITTER EUROPEAN GROWTH FUND INC. 1.0% to the portion of the daily net
assets not exceeding $500 million and scaled down at various asset levels to
0.90% to such assets exceeding $2 billion. As compensation for its services
provided pursuant to the Sub-Advisory Agreement, the Investment Manager pays to
Morgan Grenfell 40% of its monthly compensation.
DEAN WITTER FINANCIAL SERVICES TRUST. 0.75% to the Fund's average daily net
assets.
DEAN WITTER HEALTH SCIENCES TRUST. 1.0% to the Fund's average daily net assets
up to $500 million and 0.95% to such assets exceeding $500 million.
DEAN WITTER HIGH YIELD SECURITIES INC. 0.50% to the Fund's average daily net
assets up to $500 million scaled down at various asset levels to 0.30% on such
assets exceeding $3 billion.
DEAN WITTER INFORMATION FUND. 0.75% to the Fund's average daily net assets up
to $500 million and 0.725% to such assets exceeding $500 million.
DEAN WITTER INTERMEDIATE INCOME SECURITIES. 0.60% to the Fund's average daily
net assets up to $500 million scaled down at various asset levels to 0.30% on
assets exceeding $1 billion.
DEAN WITTER INTERNATIONAL SMALLCAP FUND. 1.25% to the Fund's average daily net
assets. As compensation for its
services provided pursuant to the Sub-Advisory Agreement, the Investment Manager
pays to Morgan Grenfell 40% of its monthly compensation.
DEAN WITTER JAPAN FUND. 1.0% to the Fund's average daily net assets. As
compensation for its services provided pursuant to the Sub-Advisory Agreement,
the Investment Manager pays 40% of its monthly compensation to Morgan Grenfell.
DEAN WITTER MARKET LEADER TRUST. 0.75% to the Fund's average daily net assets.
DEAN WITTER MID-CAP GROWTH FUND. 0.75% to the Fund's average daily net assets.
DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC. 0.625% to the Fund's
daily net assets not exceeding $250 million and 0.50% to such assets exceeding
$250 million.
DEAN WITTER PACIFIC GROWTH FUND INC. 1.0% to the portion of the Fund's average
daily net assets not exceeding $500 million and scaled down at various asset
levels to 0.90% of the portion to such assets exceeding $2 billion. As
compensation for its services provided pursuant to the Sub-Advisory Agreement,
the Investment Manager pays to Morgan Grenfell 40% of its monthly compensation.
DEAN WITTER PRECIOUS METALS AND MINERALS TRUST. 0.80% to the Fund's average
daily net assets.
DEAN WITTER S&P 500 INDEX FUND. 0.40% to the Fund's average daily net assets.
DEAN WITTER SHORT-TERM BOND FUND. 0.70% to the Fund's average daily net assets.
DEAN WITTER SPECIAL VALUE FUND. 0.75% to the Fund's average daily net assets.
DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST. 0.50% to the portion of the
Fund's average daily net assets up to $1 billion, scaled down at various asset
levels to 0.30% to such assets over $12.5 billion.
DEAN WITTER UTILITIES FUND. 0.65% to the portion of the Fund's average daily
net assets up to $500 million, scaled down at various asset levels to 0.425% to
such assets exceeding $5 billion.
DEAN WITTER VALUE-ADDED MARKET SERIES--EQUITY PORTFOLIO. 0.50% to the Fund's
average daily net assets up to $500 million, scaled down at various asset levels
to 0.425% on such assets exceeding $1 billion.
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INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund currently consists of two Portfolios: the International Portfolio and
the Domestic Portfolio. The investment objective of the International Portfolio
is long-term capital appreciation; the investment objective of the Domestic
Portfolio is to maximize total investment return. The investment objective of
the International Portfolio and the investment objective of the Domestic
Portfolio are fundamental policies and may not be changed without shareholder
approval of each respective Portfolio. There is no assurance that the objective
of each Portfolio will be achieved.
The International Portfolio seeks to achieve its investment objective by
currently investing, under normal circumstances, at least 65% of its total
assets in the following Dean Witter Underlying Funds: Dean Witter European
Growth Fund Inc., Dean Witter International SmallCap Fund, Dean Witter Japan
Fund and Dean Witter Pacific Growth Fund Inc. These Underlying Funds have been
selected in order to give the International Portfolio, as well as investors, the
opportunity for broad international exposure. The Investment Manager will
allocate that Portfolio's assets among the selected Underlying Funds in
accordance with the Portfolio's investment objective, the Investment Manager's
outlook for the various economies and financial markets worldwide and the
relative market valuation of the selected Underlying Funds.
The Domestic Portfolio seeks to achieve its investment objective by
currently investing, under normal circumstances, at least 65% of its total
assets in the following Dean Witter Underlying Funds: Dean Witter American Value
Fund, Dean Witter Capital Appreciation Fund, Dean Witter Capital Growth
Securities, Dean Witter Convertible Securities Trust, Dean Witter Developing
Growth Securities, Dean Witter Dividend Growth Securities Inc., Dean Witter
Financial Services Trust, Dean Witter Health Sciences Trust, Dean Witter High
Yield Securities Inc., Dean Witter Information Fund, Dean Witter Intermediate
Income Securities, Dean Witter Market Leader Trust, Dean Witter Mid-Cap Growth
Fund, Dean Witter Natural Resource Development Securities Inc., Dean Witter
Precious Metals and Minerals Trust, Dean Witter S&P 500 Index Fund, Dean Witter
Short-Term Bond Fund, Dean Witter Special Value Fund (contingent upon a
"re-opening"), Dean Witter U.S. Government Securities Trust, Dean Witter
Utilities Fund and Dean Witter Value-Added Market Series/Equity Portfolio. These
Underlying Funds have been selected in order to give the Domestic Portfolio, as
well as investors, the opportunity for broad exposure to the U.S. equity and
fixed-income markets. The Investment Manager will allocate the Portfolio's
assets among the selected Underlying Funds in accordance with the Portfolio's
investment objective, the Investment Manager's outlook for the U.S. economy and
financial markets and the relative market valuation of the selected Underlying
Funds. Under normal circumstances, the Domestic Portfolio expects to invest
between 50%-100% of its assets in Underlying Funds which invest primarily in
equity securities and between 0%-50% of its assets in Underlying Funds which
invest primarily in fixed-income securities.
The Investment Manager may vary the relative portions of each Portfolio's
assets invested in the Underlying Funds in response to changes in economic
conditions and international and/or domestic markets and therefore the
percentages of each Portfolio's assets invested in any one Underlying Fund as
well as the number of the Underlying Funds in which each Portfolio may invest
may vary at any time. There are no minimum or maximum percentages in which each
Portfolio may invest in any Underlying Fund. Additionally, the Underlying Funds
in which each Portfolio may invest may be changed from time to time and
additional or different Underlying Funds may be added or substituted if such
Underlying Funds are deemed appropriate for investment by each respective
Portfolio.
Each Portfolio may invest up to 35% of its total assets in money market
instruments or cash. The money market instruments in which the Fund may invest
are securities issued or guaranteed by the U.S. Government (Treasury bills,
notes and bonds (including zero coupon securities)) American bank obligations;
Eurodollar certificates of deposit; obligations of American savings
institutions; fully insured certificates of deposit; and commercial paper of
American issuers rated within the two highest grades by Moody's Investors
Service Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") or, if not
rated, issued by a company having an outstanding debt issue rated at least AA by
S&P or Aa by Moody's.
There may be periods during which market conditions warrant reduction of
some or all of the Fund's securities holdings. During such periods, the Fund may
adopt a temporary "defensive" posture in which up to 100% of each Portfolio's
net assets are invested in cash or money market instruments.
Each Portfolio may also enter into repurchase agreements, which may be
viewed as a type of secured lending by a Portfolio, and which typically involve
the acquisition by the Portfolio of debt securities from a selling financial
institution such as a bank, savings and loan association or broker-dealer. The
agreement provides that the Portfolio will sell back to the institution, and
that the institution will repurchase, the underlying security at a specified
price and at a fixed time in the future, usually not more than seven days from
the date of purchase. While repurchase agreements involve certain risks not
associated with direct investments in debt securities, including the risks of
default or bankruptcy of the selling financial institution, each Portfolio
follows procedures designed to minimize such risks. These procedures include
effecting repurchase transactions only with large, well-capitalized and well-
established financial institutions and maintaining adequate collateralization.
It is the current policy of each Portfolio
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not to invest in repurchase agreements that do not mature within seven days if
any such investment amounts to more than 15% of each Portfolio's net assets in
keeping with each Portfolio's policy on illiquid securities.
The Fund is classified as a non-diversified investment company under the
Investment Company Act of 1940, as amended (the "Act"), and as such is not
limited by the Act in the proportion of its assets that it may invest in the
obligations of a single issuer. However, the Fund intends to conduct its
operations so as to qualify as a "regulated investment company" under Subchapter
M of the Internal Revenue Code. See "Dividends, Distributions and Taxes." Any
investment in the Underlying Funds will be qualifying assets. To the extent that
a relatively high percentage of the Fund's assets may be invested in the
securities of a limited number of issuers, the Fund's portfolio securities may
be more susceptible to any single economic, political or regulatory occurrence
than the portfolio securities of a diversified investment company. The
limitations described in this paragraph are not fundamental policies and may be
revised to the extent applicable Federal income tax requirements are revised.
Except as specifically noted, all investment objectives, policies and
practices discussed above are not fundamental policies of either Portfolio of
the Fund and, as such, may be changed without shareholder approval.
INVESTMENT OBJECTIVES AND POLICIES OF THE UNDERLYING FUNDS
Set forth below are brief descriptions of the Investment Objectives and Policies
of the Underlying Funds in which the Portfolios of the Fund may invest.
Shareholders, or those who wish to invest in the Underlying Fund directly, are
referred to the Prospectuses of those funds for more detailed information.
DEAN WITTER AMERICAN VALUE FUND. The investment objective of this fund is
long-term capital growth consistent with an effort to reduce volatility. The
fund seeks to achieve its investment objective by investing in a diversified
portfolio of securities consisting principally of common stocks. The fund
utilizes an investment process that places primary emphasis on seeking to
identify industries, rather than individual companies, as prospects for capital
appreciation and whereby the Investment Manager seeks to invest assets of the
fund in industries it considers to be undervalued at the time of purchase and to
sell those it considers overvalued.
After selection of the fund's target industries, specific company
investments are selected. In this process, the Investment Manager seeks to
identify companies whose prospects are deemed attractive on the basis of an
evaluation of valuation screens and prospective company fundamentals.
Following selection of the fund's specific investments, the Investment
Manager will attempt to allocate the assets of the fund so as to reduce the
volatility of its portfolio. In doing so, the fund may hold a portion of its
portfolio in fixed-income securities (including zero coupon securities) in an
effort to moderate extremes of price fluctuations. The fund may invest up to 35%
of its portfolio in common stocks of non-U.S. companies, in companies in
non-classified industries, and in convertible debt securities, convertible
preferred securities, U.S. Government securities (securities issued or
guaranteed as to principal and interest by the United States or its agencies and
instrumentalities) and investment grade corporate debt securities when, in the
opinion of the Investment Manager, the projected total return on such securities
is equal to or greater than the expected total return on common stocks, or when
such holdings might be expected to reduce the volatility of the portfolio, and
in money market instruments under any one or more of the following
circumstances: (i) pending investment of proceeds of sale of fund shares or of
portfolio securities; (ii) pending settlement of purchases of portfolio
securities; or (iii) to maintain liquidity for the purpose of meeting
anticipated redemptions. Greater than 35% of the fund's total assets may be
invested in money market instruments to maintain, temporarily, a "defensive"
posture when, in the opinion of the Investment Manager, it is advisable to do so
because of economic or market conditions.
Because prices of stocks fluctuate from day to day, the value of an
investment in the fund will vary based upon the fund's investment performance.
The fund's emphasis on "undervalued" industries reflects investment views which
are frequently contrary to general market assessments and which may involve
risks associated with departure from general investment opinions.
The fund has adopted the following specific policies which are not
fundamental investment policies and may be changed by the Board of Trustees.
1. At least 65% of the fund's total assets will be invested in common
stocks of U.S. companies which, at the time of purchase, were in undervalued
or moderately valued industries as determined by the Investment Manager,
except as stated in Paragraph (3) below.
2. Up to 35% of the value of the fund's total assets may be invested in:
(a) common stocks of non-U.S. companies, or companies in non-classified
industries, including American Depository Receipts (which are custody
receipts with respect to foreign securities) (the fund's investments in
unlisted foreign securities are deemed to be illiquid securities, which
under the fund's current investment policies may not in the aggregate amount
to more than 15% of the fund's net assets); (b) convertible debt securities
(bonds, debentures, corporate notes, preferred stock and other securities)
which are convertible into common stock; (c) U.S. Government securities and
investment grade corporate debt securities, when, in the opinion of the
Investment Manager, the projected total return on such securities is equal
to or greater than the expected total return on equity securi-
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ties, or when such holdings might be expected to reduce the volatility of
the portfolio; and (d) money market instruments under any one or more of the
following circumstances: (i) pending investment of proceeds of sale of
shares of the fund or of portfolio securities; (ii) pending settlement of
purchases of portfolio securities; or (iii) to maintain liquidity for the
purpose of meeting anticipated redemptions.
3. Notwithstanding any of the foregoing limitations, the fund may invest
more than 35% of the fund's total assets in money market instruments to
maintain, temporarily, a "defensive" posture when, in the opinion of the
Investment Manager, it is advisable to do so because of economic or market
conditions, including, for example, times during which the Investment
Manager believes the risk, or volatility, relative to expected returns of
the securities it monitors, is excessive.
The foregoing limitations apply at the time of acquisition based on the last
determined market value of the fund's assets, and any subsequent change in any
applicable percentage resulting from market fluctuations or other changes in
total assets will not require elimination of any security from the portfolio.
DEAN WITTER CAPITAL APPRECIATION FUND. The investment objective of this fund is
long-term capital appreciation. The fund seeks to achieve its investment
objective by investing, under normal circumstances, at least 65% of its total
assets in the common stocks of U.S. companies that, in the opinion of the
Investment Manager, offer the potential for either superior earnings growth
and/or appear to be undervalued.
The Investment Manager will base the selection of stocks for the fund's
portfolio on research and analysis, taking into account, among other factors, a
company's price/earnings ratio (that is whether the current stock price appears
undervalued in relation to earnings, projected cash flow, or asset value per
share; or the price-to-earnings ratio is attractive relative to the company's
underlying earnings growth rate), growth in sales, market-to-book ratio, the
quality of a company's balance sheet, sales-per-share and profitability in order
to determine whether the current market valuation is less than the Investment
Manager's view of a company's intrinsic value. Also, when reviewing investments
for selection, the Investment Manager will consider the following
characteristics of a company: capable management; attractive business niches;
pricing flexibility; sound financial and accounting practices and a demonstrated
ability or prospects to consistently grow revenues, earnings and cash flow.
Stocks may also be selected on the basis of whether the Investment Manager
believes that the potential exists for some catalyst (such as increased investor
attention, asset sales, a new product/innovation, or a change in management) to
cause the stock's price to rise. Such factors are part of the Investment
Manager's overall investment selection process.
The Investment Manager has no general criteria as to asset size, earnings or
industry type which would make an investment unsuitable for purchase by the
fund. In addition, since the Investment Manager is seeking investments in
companies whose securities may appear to be undervalued, there is no limitation
on the stock price of any particular investment. However, as a result of the
selection process, which focuses on fundamentals in relation to prices, such
review of investments will include companies with low-priced stocks. In this
category are large companies with low-priced stocks (so called "fallen angels")
which, in the opinion of the Investment Manager, may appear to be undervalued
because they are overlooked by many investors; may not be closely followed
through investment research and/or their prices may reflect pessimism about the
companies' (and/or their industries') outlook. Such companies, by virtue of
their stock price, may be takeover candidates. Low-priced stocks are also
associated with smaller companies whose securities' value may reflect a discount
because of smaller size and lack of research coverage, emerging growth companies
and private companies undergoing their initial public offering. The fund will
invest in companies of all sizes. For a discussion of the risks of investing in
the securities of such companies, see "Risk Considerations and Investment
Practices of the Underlying Funds" below.
Consequently, the fund looks for quality businesses with an investment
outlook based upon a mix of growth potential, financial strength and fundamental
value. The focus on price and fundamentals sets the fund apart from pure
"growth" or pure "value" funds. The fund's holdings will be widely diversified
by industry and company and under most circumstances, at the time of initial
purchase, the average position will be less than 1.5% of the fund's net assets.
In addition to U.S. common stock, up to 35% of the fund's total assets may
be invested in debt or preferred equity securities convertible into or
exchangeable for equity securities, rights and warrants, when considered by the
Investment Manager to be consistent with the fund's investment objective. (For a
discussion of the risks of investing in each of these securities, see "Risk
Considerations and Investment Practices of the Underlying Funds" below.)
The fund may also invest in other debt securities without regard to quality
or rating, if in the opinion of the Investment Manager such securities meet the
investment criteria of the fund. The fund will not purchase a non-investment
grade debt security (or junk bond) if, immediately after such purchase, the fund
would have more than 5% of its total assets invested in such securities.
The fund may invest up to 10% of its assets in foreign securities, including
non-dollar denominated securities traded outside of the U.S. and U.S.
dollar-denominated securities such as American Depository Receipts ("ADRs").
(For a discussion of the risks of investing in foreign securities, see "Risk
Considerations and Investment Practices of the Underlying Funds" below.)
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant a reduction
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of some or all of the fund's securities holdings. During such periods, the fund
may adopt a temporary "defensive" posture in which greater than 35% of its total
assets is invested in money market instruments or cash, including obligations
issued or guaranteed as to principal or interest by the United States
Government, its agencies or instrumentalities, certificates of deposit, bankers'
acceptances and other obligations of domestic banks having total assets of $1
billion or more, and short-term commercial paper of corporations organized under
the laws of any state or political subdivision of the United States.
The securities in which the fund invests may or may not be listed on a
national stock exchange, but if they are not so listed, will generally have an
established over-the-counter market.
DEAN WITTER CAPITAL GROWTH SECURITIES. The investment objective of this fund is
long-term capital growth. The fund seeks to achieve its investment objective by
investing, under normal circumstances, at least 65% of its total assets in
common stocks. As part of its management of the fund, the Investment Manager
utilizes a two-stage computerized screening process. The first stage of the
process involves the screening of a database of approximately 3,000 companies
for those companies demonstrating a history of consistent growth in earnings and
revenues for the past several years. If further refinement of the list of
companies obtained from the first screen is required, those companies are then
applied against two additional screens designed to measure current earnings
momentum and current price valuations, respectively, in order to further refine
the list of companies for potential investment by the fund, which investment may
be on an equally-weighted basis. (Current earnings momentum refers to the rate
of change in earnings growth over the prior four quarters and current price
valuations refers to the current price of a company's stock in relation to a
theoretical value based upon current dividends, projected growth rates and the
rate of inflation.) Subject to the fund's investment objective, the Investment
Manager, without notice, may modify the foregoing screening process and/or may
utilize additional or different screening processes in connection with the
investment of the fund's assets. Dividend income will not be a consideration in
the selection of stocks for purchase.
Although the fund invests primarily in common stocks, the fund may invest up
to 35% of its total assets (taken at current value and subject to any
restrictions appearing elsewhere in the fund's Prospectus), in any combination
of the following: (a) U.S. Government securities (securities issued or
guaranteed as to principal and interest by the U.S. Government or its agencies
or instrumentalities) and investment grade fixed-income securities; (b)
convertible securities; (c) money market instruments; (d) options on equity and
debt securities; and (e) futures contracts and related options thereon, as
described below. The fund may also purchase unit offerings (where corporate debt
securities are offered as a unit with convertible securities, preferred or
common stocks, warrants, or any combination thereof). U.S. Government securities
in which the fund may invest include zero coupon securities. Convertible
securities in which the fund may invest include bonds, debentures, corporate
notes, preferred stock and other securities. The fund may also purchase
securities on a when-issued or delayed delivery basis, may purchase or sell
securities on a forward commitment basis, and may purchase securities on a
"when, as and if issued" basis.
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant reduction of some or all of the fund's securities
holdings. During such periods, the fund may adopt a temporary "defensive"
posture in which greater than 35% of its total assets are invested in cash or
money market instruments. Money market instruments in which the fund may invest
are securities issued or guaranteed by the U.S. Government (Treasury bills,
notes and bonds, including zero coupon securities); bank obligations; Eurodollar
certificates of deposit; obligations of savings institutions; fully insured
certificates of deposit; and commercial paper rated within the two highest
grades by Moody's or S&P or, if not rated, are issued by a company having an
outstanding debt issue rated at least AA by S&P or Aa by Moody's.
The fund may invest in securities of foreign companies. However, the fund
will not invest more than 25% of the value of its total assets, at the time of
purchase, in foreign securities (other than securities of Canadian issuers
registered under the Securities Exchange Act of 1934 or American Depository
Receipts, on which there is no such limit). The fund's investments in unlisted
foreign securities are subject to the overall restrictions applicable to its
investments in illiquid securities. For a discussion of the risks of investing
in foreign securities, see "Risk Considerations and Investment Practices of the
Underlying Funds" below.
DEAN WITTER CONVERTIBLE SECURITIES TRUST. The investment objective of this fund
is to seek a high level of total return on its assets through a combination of
current income and capital appreciation.
(1) The fund will normally invest at least 65% of its total assets (taken at
current value) in "convertible securities," i.e., securities (bonds, debentures,
corporate notes, preferred stocks and other securities) which are convertible
into common stock. Securities received upon conversion may be retained in the
fund's portfolio to permit orderly disposition or to establish long-term holding
periods for federal income tax purposes. The fund is not required to sell these
securities for the purpose of assuring that 65% of its assets are invested in
convertible securities.
(2) The fund may invest up to 35% of its total assets (taken at current
value and subject to any restrictions appearing elsewhere in its Prospectus) in
any combination and quantity of the following securities: (a) common stock; (b)
nonconvertible preferred stock; (c) nonconvertible corporate debt securities;
(d) options on debt and equity securities; (e) financial futures contracts and
related options thereon; and (f) money market instruments.
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(3) Notwithstanding paragraphs (1) and (2) above, when market conditions
dictate a "defensive" investment strategy, the fund may invest without limit in
money market instruments, including commercial paper, certificates of deposit,
bankers' acceptances and other obligations of domestic banks or domestic
branches of foreign banks, or foreign branches of domestic banks, in each case
having total assets of at least $500 million, and obligations issued or
guaranteed by the United States Government, or foreign governments or their
respective instrumentalities or agencies.
The fund may invest in fixed-income securities rated Baa or lower by
Moody's, or BBB or lower by S&P. Fixed-income securities rated Baa by Moody's or
BBB by S&P have speculative characteristics greater than those of more highly
rated bonds, while fixed-income securities rated Ba or BB or lower by Moody's
and S&P, respectively, are considered to be speculative investments.
Furthermore, the fund does not have any minimum quality rating standard for its
investments. As such, the fund may invest in securities rated as low as Caa, Ca
or C by Moody's or CCC, CC, C or C1 by S&P. Fixed-income securities rated Caa or
Ca by Moody's may already be in default on payment of interest or principal,
while bonds rated C by Moody's, their lowest bond rating, can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Bonds rated C1 by S&P, their lowest bond rating, are no longer making interest
payments. Non-rated securities are also considered for investment by the fund
when the Investment Manager believes that the financial condition of the issuers
of such securities, or the protection afforded by the terms of the securities
themselves, makes them appropriate investments for the fund. A general
description of Moody's and S&P's ratings is set forth in the Appendix to the
Statement of Additional Information.
The fund may invest in securities of foreign companies, may purchase private
placements, real estate investment trusts, repurchase agreements, zero coupon
securities, may purchase securities on a when-issued delayed delivery or forward
commitment basis and may lend its portfolio securities. For a discussion of the
risks of investing in these securities, see "Risk Considerations and Investment
Practices of the Underlying Funds" below.
DEAN WITTER DEVELOPING GROWTH SECURITIES. The Investment objective of this fund
is long-term capital growth. The fund seeks to achieve capital growth which
significantly exceeds the historical total return of common stocks as measured
by the Standard & Poor's 500 index. The primary emphasis is on the securities of
smaller and medium-sized companies that, in the opinion of the Investment
Manager, have the potential to grow much more rapidly than the economy; at
times, investments may also be made in the securities of larger, established
companies which also have such growth potential. The fund will normally invest
at least 65% of its total assets in the securities of such companies. In
addition to common stock, this portion of the portfolio may also include
convertible securities, preferred stocks and warrants.
The Investment Manager attempts to identify companies whose earnings growth
will be significantly higher than the average. Dividend income is not generally
a consideration in the selection of stocks for purchase.
The Investment Manager focuses its stock selection for the fund upon a
diversified group of emerging growth companies which have moved beyond the
difficult and extremely risky "start-up" phase and which at the time of
selection show positive earnings with the prospects of achieving significant
further profit gains in at least the next two-to-three years after acquisition.
New technologies, techniques, products or services, cost-reducing measures,
changes in management, capitalization or asset deployment, changes in government
regulations or favorable shifts in other external circumstances may all
contribute to the anticipated phase of growth.
The application of the fund's investment policies is basically dependent
upon the judgment of the Investment Manager. The proportions of the fund's
assets invested in particular industries will shift from time to time in
accordance with the judgment of the Investment Manager.
The fund may invest up to 35% of its total assets in corporate debt
securities which are rated at the time of purchase Baa or better by Moody's or
BBB or better by S&P or which, if not rated, are deemed to be of comparable
quality by the Investment Manager, and money market instruments. There may be
periods during which, in the opinion of the Investment Manager, general market
conditions warrant reduction of some or all of the fund's securities holdings.
During such periods, the fund may adopt a temporary "defensive" posture in which
greater than 35% of its total assets are invested in cash or money market
instruments, including obligations issued or guaranteed as to principal or
interest by the United States Government, its agencies or instrumentalities,
certificates of deposit, bankers' acceptances and other obligations of domestic
banks having total assets of $1 billion or more, and short-term commercial paper
of corporations organized under the laws of any state or political subdivision
of the United States.
The securities in which the fund invests may or may not be listed on a
national stock exchange, but if they are not so listed, will generally have an
established over-the-counter market.
The fund may invest in foreign securities, real estate investment trusts and
private placements, enter into repurchase agreements, borrow money for the
purpose of leveraging its investments, purchase securities on a when-issued or
delayed delivery basis, purchase or sell securities on a forward commitment
basis, purchase securities on a "when, as and if issued" basis, and lend its
portfolio securities, as discussed under "Risk Considerations and Investment
Practices of the Underlying Funds" below.
DEAN WITTER DIVIDEND GROWTH SECURITIES INC. The investment objective of the
fund is to provide reasonable current income and long-term growth of income and
capital. The fund seeks to achieve its investment objective primarily through
investments in common stock of companies with a record of paying dividends and
the potential for increasing dividends. Net asset value of the fund's shares
will fluctuate with changes in mar-
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ket values of portfolio securities. The fund will attempt to avoid speculative
securities or those with speculative characteristics.
This fund has adopted the following specific policies which are not
fundamental investment policies and which may be changed by the fund's Board of
Directors:
1. Up to 30% of the value of the fund's total assets may be invested in:
(a) convertible debt securities, convertible preferred securities, U.S.
Government securities (securities issued or guaranteed as to principal and
interest by the United States or its agencies and instrumentalities),
investment grade corporate debt securities and/or money market instruments
when, in the opinion of the Investment Manager, the projected total return
on such securities is equal to or greater than the expected total return on
equity securities or when such holdings might be expected to reduce the
volatility of the portfolio (for purposes of this provision, the term "total
return" means the difference between the cost of a security and the
aggregate of its market value and income earned); or (b) in money market
instruments under any one or more of the following circumstances: (i)
pending investment of proceeds of sale of fund shares or of portfolio
securities; (ii) pending settlement of purchases of portfolio securities; or
(iii) to maintain liquidity for the purpose of meeting anticipated
redemptions.
2. Notwithstanding any of the foregoing limitations, the fund may invest
more than 30% of its total assets in money market instruments to maintain,
temporarily, a "defensive" posture when, in the opinion of the Investment
Manager, it is advisable to do so because of economic or market conditions.
The foregoing limitations will apply at the time of acquisition based on the
last determined value of the fund's assets. Any subsequent change in any
applicable percentage resulting from fluctuations in value or other change in
total assets will not require elimination of any security from the portfolio.
The fund may purchase securities on a when-issued or delayed delivery basis, may
purchase or sell securities on a forward commitment basis and may purchase
securities on a "when, as and if issued" basis as described below under "Risk
Considerations and Investment Practices of the Underlying Funds."
DEAN WITTER EUROPEAN GROWTH FUND INC. The investment objective of this fund is
to maximize capital appreciation. The fund seeks to achieve its investment
objective by investing at least 65% of its total assets in securities issued by
issuers located in countries located in Europe. Such issuers will include
companies (i) which are organized under the laws of a European country and have
a principal office in a European country, or (ii) which derive 50% or more of
their total revenues from business in Europe, or (iii) the equity securities of
which are traded principally on a stock exchange in Europe. The securities
invested in will primarily consist of equity securities issued by companies
based in European countries, but may also include fixed-income securities issued
or guaranteed by European governments (including zero coupon treasury
securities), when it is deemed that such investments are consistent with the
fund's investment objective. The principal countries in which such issuers will
be located are France; the United Kingdom; Germany; the Netherlands; Spain;
Sweden; Switzerland and Italy. The fund currently intends to invest more than
25% of its total assets in the United Kingdom. As such, the investment
performance of the fund will be subject to social, political and economic events
occurring in the United Kingdom to a greater extent than those occurring in
other European countries.
The remainder of the fund's portfolio equalling, at times, up to 35% of its
total assets, may be invested in equity and/or government and convertible
securities issued by issuers located anywhere in the world, including the United
States, subject to its investment objective. In addition, this portion of its
portfolio will consist of various other financial instruments such as forward
foreign exchange contracts, futures contracts and options (see below under "Risk
Considerations and Investment Practices of the Underlying Funds").
It is anticipated that the securities held by the fund in its portfolio will
be denominated, principally, in liquid European currencies. Such currencies
include the German mark, French franc, British pound, Dutch guilder, Swiss
franc, Swedish krona, Italian lira, and Spanish peseta. In addition, the fund
may hold securities denominated in the European Currency Unit (a weighted
composite of the currencies of member states of the European Monetary System).
Securities of issuers within a given country may be denominated in the currency
of a different country.
The fund may also invest in securities of foreign issuers in the form of
American Depository Receipts (ADRs), European Depository Receipts (EDRs) or
other similar securities convertible into securities of foreign issuers (as
described below under "Risk Considerations and Investment Practices of the
Underlying Funds").
DEAN WITTER FINANCIAL SERVICES TRUST. The investment objective of this fund is
long-term capital appreciation. The fund seeks to achieve its investment
objective by investing, under normal circumstances, at least 65% of its total
assets in the equity securities of companies in the financial services and
financial services related industries. Issuers in these industries provide
financial services or financial products to companies and individuals or to
other financial services providers. The financial services companies in which
the fund may invest include but are not limited to the following: asset
management companies, securities brokerage firms, financial planners, regional
and money center banks, merchant banks, mortgage companies, consumer finance
companies, savings banks and thrift institutions, insurance companies, insurance
brokerage firms, leasing companies, government-sponsored agencies, credit and
finance companies and foreign financial service companies. Examples of companies
in which the fund may invest which provide products and services to the
aforementioned financial services companies include but are not limited to the
following: providers of financial publishing and news services, credit research
and rating services, financial
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advertising (including Internet site development), financial equipment and
technology (including financial software), data processing and payroll services
and other financial products or services which do not involve the providing of
credit, brokerage or management of assets.
The equity securities in which the fund may invest may be issued either by
large, established, well-capitalized companies or by newly-formed small
capitalization companies. There are no restrictions on the market capitalization
size of the fund's holdings. While the equity securities in which the fund may
invest will consist primarily of common stocks, the fund may also invest in
other types of equity securities such as preferred and convertible securities,
rights and warrants.
The fund's equity investments will be determined pursuant to an investment
process that seeks to identify companies that show good appreciation prospects
and value. This approach to stock selection involves a fundamental analysis of
individual companies through an analysis of their balance sheets, income
statements, products and services. Also, the Investment Manager will take into
consideration certain criteria which include, among other things, capable
management, attractive business niches or product innovation, sound financial
and accounting practices, ability to grow revenues, earnings and cash flows
consistently, and stock prices and growth potential which, in the opinion of the
Investment Manager, appear to be undervalued or temporarily unrecognized by the
market.
Companies considered to be in the financial services and financial services
related industries will be those which derive at least 35% of their revenues or
earnings from the aforementioned respective activities, or devote at least 35%
of their assets to such respective activities.
Up to 35% of the fund's total assets may be invested in equity securities of
issuers not in the financial services or financial services related industries,
investment grade fixed-income securities, convertible securities, rights and
warrants of issuers not in the financial services or financial services related
industries, U.S. Government securities (including zero coupon securities) or
money market instruments. With respect to corporate non-convertible fixed-income
securities, the term "investment grade" means securities which are rated Baa or
higher by Moody's or BBB or higher by S&P or, if not rated, are deemed by the
Investment Manager to be of comparable quality. The fund may invest up to 25% of
its total assets in the securities of foreign issuers.
Money market instruments in which the fund may invest are securities issued
or guaranteed by the U.S. Government or its agencies (Treasury bills, notes and
bonds); obligations of banks subject to regulation by the U.S. Government and
having total assets of $1 billion or more; Eurodollar certificates of deposit;
obligations of savings banks and savings and loan associations having total
assets of $1 billion or more; fully insured certificates of deposit; and
commercial paper rated within the two highest grades by Moody's or S&P or, if
not rated, issued by a company having an outstanding debt issue rated AA by S&P
or Aa by Moody's.
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant reduction of some or all of the fund's securities
holdings. During such periods, the fund may adopt a temporary "defensive"
posture in which up to 100% of its total assets is invested in money market
instruments or cash.
In accordance with SEC rules, the fund will not purchase the security of any
company which in its most recent fiscal year derived more than 15% of its gross
revenues from securities related activities (defined by the SEC as activities as
a broker, dealer, underwriter or investment adviser) if immediately after such
purchase the fund: (i) would own more than 5% of any class of equity securities
of the company; (ii) would own more than 10% of the outstanding principal amount
of the company's debt securities; or (iii) would have invested more than 5% of
its total assets in securities of such company.
The fund may invest in convertible securities. Up to 20% of the fund's
assets in convertible fixed-income securities can be rated below investment
grade or, if unrated, are of comparable quality as determined by the Investment
Manager. Securities rated below investment grade are the equivalent of high
yield, high risk bonds (commonly known as "junk bonds"). The fund will not
invest in convertible fixed-income securities that are in default in payment of
principal or interest. In the event that the fund's investments in convertible
securities rated below investment grade, including downgraded convertible
securities, constitute more than 20% of the fund's total assets, the fund will
seek immediately to sell sufficient securities to reduce the total to below the
applicable percentage. See "Risk Considerations and Investment Practices of the
Underlying Funds" below for a discussion of the risks of investing in
convertible securities and lower-rated and unrated fixed-income securities and
the Appendix to the Statement of Additional Information for a description of
fixed-income security ratings.
As noted above, the fund may invest in securities of foreign companies. Such
investments may also be in the form of ADRs, EDRs or other similar securities
convertible into securities of foreign issuers as described below. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. The fund's investments in unlisted
foreign securities are subject to the fund's overall policy limiting its
investment in illiquid securities to 15% or less of its net assets. The fund may
also engage in options and futures transactions and forward foreign currency
exchange contracts, may invest in repurchase agreements, private placements,
zero coupon securities, convertible securities, real estate investment trusts,
may purchase securities on a when-issued delayed delivery or forward committment
basis and may lend its portfolio securities. For a discussion of the risks of
these investments or techniques, see "Risk Considerations and Investment
Practices of the Underlying Funds" below.
DEAN WITTER HEALTH SCIENCES TRUST. The investment objective of this fund is
capital appreciation. The fund will seek to achieve its investment objective by
investing at least 65% of
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its total assets in the equity securities of health science companies throughout
the world. A health science company is defined as a company which is principally
engaged in the health sciences industry. A company is deemed to be "principally
engaged" if it has at least 50% of its earnings or revenues derived from health
sciences activities, as defined below, or at least 50% of its assets is devoted
to such activities, based upon the financial statements of the company's most
recently reported fiscal year.
In addition, the Investment Manager may invest in companies other than
health science companies if it considers that such companies have potential for
capital appreciation primarily as a result of particular products, technology,
patents or other market advantages in the health sciences industry. The fund
does not anticipate that companies not principally engaged in the health
sciences industry will represent more than 20% of the fund's investments.
Health sciences activities are defined as activities which consist of the
research, development, production or distribution of products and services by
health science companies which include, but are not limited to, companies such
as: pharmaceutical companies; companies involved in the ownership and/or
operation or delivery of health care services such as hospitals, clinical test
laboratories, convalescent and mental health care facilities, rehabilitation
centers, and products and services for home care; companies involved in
biotechnology, medical diagnostics, biochemical, and nuclear research and
development; and companies that produce and manufacture medical, dental and
optical supplies and equipment.
The fund's portfolio will primarily consist of common stocks. The fund may
also invest up to 35% of its total assets in preferred stock and in investment
grade domestic and foreign debt securities of any type of issuer (such as
foreign and domestic corporations and foreign and domestic governments and their
political subdivisions), including bonds, notes, debentures and debt securities
convertible into equity if the Investment Manager believes that such securities
present a favorable opportunity for capital appreciation. The term investment
grade consists of debt instruments rated Baa or higher by Moody's or BBB or
higher by S&P or, if not rated, determined to be of comparable quality by the
Investment Manager. Investments in securities rated either Baa by Moody's or BBB
by S&P may have speculative characteristics and, therefore, changes in economic
conditions or other circumstances are more likely to weaken their capacity to
make principal and interest payments than would be the case with investments in
securities with higher credit ratings. If a debt instrument held by the fund is
rated BBB or Baa and is subsequently downgraded by a rating agency, the fund
will retain such security in its portfolio until the Investment Manager
determines that it is practicable to sell the security without undue market or
tax consequences to the fund. In the event that such downgraded securities
constitute 5% or more of the fund's total assets, the Investment Manager will
sell immediately sufficient securities to reduce the total to below 5%. The fund
may invest in various other financial instruments such as warrants and forward
foreign currency exchange contracts, futures and options, including stock index
futures contracts and related options in an attempt to hedge its portfolio (see
below under "Risk Considerations and Investment Practices of the Underlying
Funds").
While the fund expects that, from time to time, a significant portion of its
investments will be in securities of U.S. companies, the fund's Investment
Manager believes that a portfolio comprised only of U.S. securities does not
provide the greatest potential for capital appreciation from an investment in
the health sciences industry. It believes that a worldwide focus is necessary if
the fund is to take advantage of the increasing opportunities presented by
health science companies headquartered throughout the world. The fund may invest
substantially in securities denominated in one or more currencies. The
Investment Manager believes that by investing worldwide, the fund can better
position itself to take advantage of available health sciences investment
opportunities.
The fund may also invest in securities of foreign issuers in the form of
ADRs, EDRs or other similar securities convertible into securities of foreign
issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted (see below). The
fund may also engage in options and futures transactions and forward foreign
currency exchange contracts and enter into repurchase agreements, may purchase
securities on a when-issued delayed delivery or forward commitment basis and may
lend its portfolio securities. For a discussion of the risks of investing in
these securities, see "Risk Considerations and Investment Practices of the
Underlying Funds" below.
DEAN WITTER HIGH YIELD SECURITIES INC. The primary investment objective of this
fund is to earn a high level of current income. As a secondary objective, the
fund will seek capital appreciation, but only when consistent with its primary
objective. Capital appreciation may result, for example, from an improvement in
the credit standing of an issuer whose securities are held in the fund's
portfolio or from a general decline in interest rates, or a combination of both.
Conversely, capital depreciation may result, for example, from a lowered credit
standing or a general rise in interest rates, or a combination of both. The
higher yields sought by the fund are generally obtainable from securities rated
in the lower categories by recognized rating services. The fund seeks high
current income by investing principally in fixed-income securities rated Baa or
lower by Moody's, or BBB or lower by S&P. Fixed-income securities rated Baa by
Moody's or BBB by Standard & Poor's have speculative characteristics greater
than those of more highly rated bonds, while fixed-income securities rated Ba or
BB or lower by Moody's and S&P, respectively, are considered to be speculative
investments. Furthermore, the fund does not have any minimum quality rating
standard for its investments. As such, the fund may invest in securities rated
as low as Caa, Ca or C by Moody's or CCC, CC, C or C1 by S&P. Fixed-income
securities rated Caa or Ca by Moody's may already be in default on payment of
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<PAGE>
interest or principal, while bonds rated C by Moody's, their lowest bond rating,
can be regarded as having extremely poor prospects of ever attaining any real
investment standing. Bonds rated C1 by S&P, their lowest bond rating, are no
longer making interest payments. For a further discussion of the characteristics
and risks associated with high yield securities, see "Risk Considerations and
Investment Practices of the Underlying Funds" below. A description of corporate
bond ratings is contained in the Appendix to the Statement of Additional
Information.
Non-rated securities will also be considered for investment by the fund when
the Investment Manager believes that the financial condition of the issuers of
such securities, or the protection afforded by the terms of the securities
themselves, makes them appropriate investments for the fund.
In circumstances where the Investment Manager determines that investment in
municipal obligations would facilitate the fund's ability to accomplish its
investment objectives, it may invest up to 10% of its total assets in such
obligations, including municipal bonds issued at a discount.
The fund may also invest in securities of foreign companies, may purchase
common stock, repurchase agreements, private placements, zero coupon securities,
may engage in options and futures transactions, may purchase securities on a
when-issued delayed delivery or forward commitment basis and may lend its
portfolio securities. For a discussion of the risks of investing in these
securities, see "Risk Considerations and Investment Practices of the Underlying
Funds" below.
DEAN WITTER INFORMATION FUND. The investment objective of this Fund is
long-term capital appreciation. The fund seeks to achieve its investment
objective by investing under normal circumstances at least 65% of its total
assets in common stocks and securities convertible into common stocks of
domestic or foreign companies which are involved in all areas, including
emerging areas, of the communications and information industry. The fund will
not have more than 10% of its total assets invested in convertible securities
determined as of the time of purchase. Under normal circumstances, the fund will
invest in equity securities of issuers located in at least three countries, one
of which is the United States.
The communications and information industry is experiencing widespread
changes and expansion due to rapidly changing technologies (including enabling
technologies), industry migration in search of new markets, communications needs
in developing countries, competitive pressures and changes in governmental
regulation. Additionally, a number of traditional communications industries have
either converged or evolved into new corporate forms and some of these
industries are only beginning to emerge. The Investment Manager believes that as
technologies develop, many of the traditional distinctions and characteristics
of these industries will blur. The Investment Manager believes that the
communications and information industry will continue to grow in the future and
that the fund's investment policies as outlined below are designed to take
advantage of the investment opportunities present in this industry.
Companies in the communications and information industry will be considered
those companies engaged in designing, developing, manufacturing or providing the
following products and services, or the enabling technology with respect
thereto, throughout the world: regular telephone service; communications
equipment and services (including equipment and services for both data and voice
transmission); electronic components and equipment; broadcasting (including
television and radio, satellite, microwave and cable television and
narrow-casting); computer equipment, enabling software, mobile communications
and cellular radio/paging; electronic mail and other electronic data
transmission services; local and wide area networking and linkage of word and
data processing systems; publishing and information systems, including the
storage and transmission of information; video text and teletext; and emerging
technologies combining telephone, television and/or computer systems; the
creation, packaging, distribution, and ownership of entertainment and
information programming throughout the world including but not limited to
prerecorded music, feature length motion pictures, made for T.V. movies,
television series, documentaries, educational tutorials, animation, game shows,
sports programming, news programs, and live events such as professional sporting
events, concerts and theatrical exhibitions and academic courses or tutorials;
television and radio broadcasting via VHF, UHF, satellite and microwave
transmission, cable television programming and systems, and broadcast and cable
networks, wireless cable television and other emerging distribution
technologies, home video, and interactive/multimedia programming including
financial services, education, home shopping, video games and multiplayer games;
publishing including newspapers, magazines and books, advertising agencies and
niche advertising mediums such as in-store and direct mail, emerging
technologies combining television, telephone and computer systems, computer
hardware and software, and equipment used in the creation and distribution of
entertainment programming such as that required in the provision of broadcast,
cable or telecommunications services.
Companies considered to be in communications and information industry will
be those which derive at least 35% of their revenues or earnings from the
aforementioned respective activities, or devote at least 35% of their assets to
such respective activities.
Up to 35% of the fund's total assets may be invested in investment grade
fixed-income securities, U.S. Government securities (including zero coupon
securities) or money market instruments. With respect to corporate fixed-income
securities, the term "investment grade" means securities which are rated Baa or
higher by Moody's or BBB or higher by S&P or, if not rated, are deemed by the
Investment Manager to be of comparable quality.
Investments in fixed-income securities rated either BBB by S&P or Baa by
Moody's (the lowest credit ratings designated "investment grade") have
speculative characteristics and, therefore, changes in economic conditions or
other circumstances are more likely to weaken their capacity to make principal
and interest payments than would be the case with
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<PAGE>
investments in securities with higher credit ratings. If a fixed-income or
convertible security held by the fund is rated BBB or Baa and is subsequently
downgraded by a rating agency, or otherwise falls below investment grade the
Fund will sell such securities as soon as is practicable without undue market or
tax consequences to the fund. See the Appendix to the Statement of Additional
Information for a discussion of ratings of fixed-income securities.
The fund may invest up to 50% of its total assets in the securities of
foreign issuers. The fund will not invest 25% or more of its total assets in any
one foreign country.
Money market instruments in which the fund may invest are securities issued
or guaranteed by the U.S. Government or its agencies (Treasury bills, notes and
bonds); obligations of banks subject to regulation by the U.S. Government and
having total assets of $1 billion or more; Eurodollar certificates of deposit;
obligations of savings banks and savings and loan associations having total
assets of $1 billion or more; fully insured certificates of deposit; and
commercial paper rated within the two highest grades by Moody's or S&P or, if
not rated, issued by a company having an outstanding debt issue rated AA by S&P
or Aa by Moody's.
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant reduction of some or all of the fund's securities
holdings. During such periods, the fund may adopt a temporary "defensive"
posture in which greater than 35% of its total assets is invested in money
market instruments or cash.
The fund may invest in investment grade convertible securities. A
convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. Convertible securities rank senior to
common stocks in a corporation's capital structure and, therefore, entail less
risk than the corporation's common stock. The value of a convertible security is
a function of its "investment value" (its value as if it did not have a
conversion privilege), and its "conversion value" (the security's worth if it
were to be exchanged for the underlying security, at market value, pursuant to
its conversion privilege).
As noted above, the fund may also invest in securities of foreign companies.
Such investments may also be in the form of ADRs, EDRs or other similar
securities convertible into securities of foreign issuers (see below). These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. The fund's investments in unlisted
foreign securities are subject to the fund's overall policy limiting its
investment in illiquid securities to 15% or less of its net assets.
This fund concentrates its investments in the communications and information
industry. Because of this concentration, the value of the fund's shares may be
more volatile than that of investment companies that do not similarly
concentrate their investments. The communications and information industry may
be subject to greater changes in governmental policies and governmental
regulation than in many other industries in the United States and worldwide.
Regulatory approval requirements, ownership restrictions and restrictions on
rates of return and types of services that may be offered may materially affect
the products and services of this industry. Additionally, the products and
services of companies in this industry may be subject to faster obsolescence as
a result of greater competition, advancing technological developments, and
changing market and consumer preferences. As a result, the stocks of companies
in this industry may exhibit greater price volatility than those of companies in
other industries.
The fund may engage in options and futures contracts and forward foreign
currency exchange contracts, may enter into repurchase agreements, may purchase
private placements, convertible securities, zero coupon securities, when, as and
if issued securities, securities of other investment companies, may purchase
securities on a when-issued delayed delivery or forward commitment basis and may
lend its portfolio securities. For a discussion of the risks of investing in
these securities, see "Risk Considerations and Investment Practices of the
Underlying Funds" below.
DEAN WITTER INTERMEDIATE INCOME SECURITIES. The investment objective of this
fund is high current income consistent with safety of principal. The fund seeks
to achieve its objective by investing at least 65% of its total assets in
intermediate term, investment grade fixed-income securities. The fund will
maintain an average weighted maturity of approximately seven years or less and
may not invest in securities with remaining maturities greater than twelve
years. Under normal conditions, the fund's average weighted maturity will not be
less than three years. (Under the current interpretation by the staff of the
Securities and Exchange Commission, an intermediate bond fund must have an
average weighted maturity between three and ten years.)
Under normal circumstances, the fund will invest primarily in corporate debt
securities and preferred stock of investment grade, which consists of securities
which are rated at the time of purchase Baa or better by Moody's or BBB or
better by S&P, or which, if unrated, are deemed to be of comparable quality by
the fund's Trustees. Fixed-income securities rated Baa by Moody's have
speculative characteristics. (A more detailed description of bond ratings is
contained in the Appendix to the Statement of Additional Information.) The fund
may also purchase U.S. Government securities (securities guaranteed as to
principal and interest by the United States or its agencies or
instrumentalities) and investment grade securities, denominated in U.S. Dollars,
issued by foreign governments or issuers. U.S. Government securities in which
the Fund may invest include zero coupon securities and mortgage-backed
securities, such as securities issued by the Government National Mortgage
Association, the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation. There can be no assurance that the investment objective of
the fund will be achieved.
The Investment Manager believes that the fund's policies of purchasing
intermediate term securities will reduce
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the volatility of the fund's net asset value over the long term. Although the
values of fixed-income securities generally increase during periods of declining
interest rates and decrease during periods of increasing interest rates, the
extent of these fluctuations has historically generally been smaller for
intermediate term securities than for securities with longer maturities.
Conversely, the yield available on intermediate term securities has also
historically been lower than those available from long term securities.
Investment by the fund in U.S. Dollar denominated fixed-income securities
issued by foreign governments and other foreign issuers may involve certain
risks not associated with U.S. issued securities. Those risks include the
political or economic instability of the issuer or of the country of issue, the
difficulty of predicting international trade patterns and the possibility of
imposition of exchange controls. In addition, there may be less publicly
available information about a foreign company than about a domestic company. The
fund believes that those risks are substantially lessened because the foreign
securities in which the fund may invest are investment grade.
While the fund will invest primarily in investment grade fixed-income
securities, under ordinary circumstances it also may invest up to 35% of its
total assets in money market instruments, repurchase agreements, as discussed
below, and up to 5% of the fund's net assets may be invested in lower rated
fixed-income securities.
Lower rated fixed-income securities, which are those rated from Ba to C or
BB to C by Moody's or S&P, respectively, are considered to be speculative
investments. Such lower rated securities, while producing higher yields than
investment grade securities, are subject to credit risk to a greater extent than
investment grade securities. The fund does not have any minimum quality rating
standard with respect to the portion (up to 5%) of its net assets which may be
invested in lower rated securities.
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant reduction of some or all of the fund's securities
holdings. During such periods, the fund may adopt a temporary "defensive"
posture in which greater than 35% of its total assets are invested in cash or
money market instruments. Money market instruments in which the fund may invest
are securities issued or guaranteed by the U.S. Government (Treasury bills,
notes and bonds, including zero coupon securities); bank obligations; Eurodollar
certificates of deposit; obligations of savings institutions; fully insured
certificates of deposit; and commercial paper rated within the two highest
grades by Moody's or S&P or, if not rated, are issued by a company having an
outstanding debt issue rated at least AA by S&P or Aa by Moody's.
The fund may also purchase private placements, zero coupon securities, when,
as and if issued securities, may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a when-issued delayed delivery
or forward commitment basis and may lend its portfolio securities. For a
discussion of the risks of investing in these securities, see "Risk
Considerations and Investment Practices of the Underlying Funds" below.
DEAN WITTER INTERNATIONAL SMALLCAP FUND. The investment objective of this fund
is long-term growth of capital. The fund seeks to achieve its investment
objective by investing, under normal circumstances, at least 65% of its total
assets in equity securities of "small capitalization" companies located outside
of the United States. A "small capitalization" company is defined as being, at
the time of purchase of its equity securities by the fund, among the smallest
capitalized companies (where capitalization is calculated by multiplying the
total number of outstanding shares of common stock of the company by their
market price and by ranking the resulting companies from smallest to largest
capitalization) principally located in a given country, whose aggregate
capitalizations comprise no more than 25% of the total market capitalization of
the country. Equity securities in which the fund may invest include common
stocks, rights or warrants to purchase common stocks and securities convertible
into common stocks. The fund will invest in securities issued by issuers located
in at least three countries outside of the U.S. An issuer of a security will be
considered to be located in a given country if it: (i) is organized under the
laws of the country; (ii) derives at least 50% of its revenues from goods
produced or sold, investments made, or services performed in the country; (iii)
maintains at least 50% of its assets in the country; or (iv) has securities
which are principally traded on a stock exchange in the country. The fund
currently intends to invest, from time to time, more than 25% of its total
assets in securities issued by issuers located in each of the United Kingdom and
Japan.
The remainder of the fund's portfolio equalling, at times, up to 35% of the
fund's total assets, may be invested in (i) securities issued by companies whose
market capitalizations place them outside the fund's definition of "small
capitalization" and/or (ii) fixed-income securities issued or guaranteed by
foreign governments. In addition, this portion of the fund's portfolio will
consist of various other financial instruments such as forward foreign exchange
contracts, futures contracts and options (see below).
The fund may also invest in securities of foreign issuers in the form of
American Depository Receipts (ADRs), European Depository Receipts (EDRs) or
other similar securities convertible into securities of foreign issuers (as
described below under "Risk Considerations and Investment Practices of the
Underlying Funds").
DEAN WITTER JAPAN FUND. The investment objective of this fund is long-term
capital appreciation. The fund seeks to achieve its investment objective by
investing, under normal circumstances, at least 65% of its total assets in
equity securities issued by issuers located in Japan. Such issuers will include
companies (i) which are organized under the laws of Japan and have a principal
office in Japan; (ii) which derive 50% or more of their total revenues from
operating bus-
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iness(es) in Japan; or (iii) the equity securities of which are traded
principally on a stock exchange in Japan. Equity securities in which the fund
may invest include common and preferred stocks and rights or warrants to
purchase common stocks. The fund may invest up to 25% of its total assets in
equity securities of Japanese companies traded on the Second Sections of the
Main Japanese exchanges and in the over-the-counter market. These would
generally be smaller companies with above-average growth potential.
The remainder of the fund's portfolio equalling, at times, up to 35% of the
fund's total assets, may be invested in fixed-income and convertible securities
of issuers located in Japan or guaranteed by the Japanese government when it is
deemed that such investments are consistent with the fund's investment
objective. This remainder may also include equity, government, fixed-income and
convertible securities issued by issuers located in developed economies in Asia,
Europe and North America, including the United States, subject to the fund's
investment objective. Although the fund may invest up to 35% of its net assets
in fixed-income and convertible securities which are either not rated or rated
below investment grade, the fund has no current intention of investing in excess
of 10% of its net assets in unrated or lower rated convertible securities nor in
excess of 5% of its net assets in unrated or lower rated non-convertible debt
securities. In addition, this portion of the fund's portfolio will consist of
various other financial instruments such as forward foreign exchange contracts,
futures contracts and options (see below).
The fund may also invest in securities of Japanese and other foreign issuers
in the form of American Depository Receipts (ADRs), European Depository Receipts
(EDRs) or other similar securities convertible into securities of foreign
issuers (as described below under "Risk Considerations and Investment Practices
of the Underlying Funds").
DEAN WITTER MARKET LEADER TRUST. The investment objective of this fund is
long-term growth of capital. The fund seeks to achieve its objective by
investing, under normal circumstances, at least 65% of its total assets in
equity securities of companies that, in the opinion of the Investment Manager,
are established leaders in their respective fields in growing industries in
domestic and foreign markets. The equity securities in which the fund may invest
in include common stocks, preferred stocks and debt or preferred stocks
convertible into or exchangeable for common stocks. These companies generally
will possess well-recognized proprietary skills or products, will have equity
market capitalizations in excess of $1 billion and will be listed on a United
States stock exchange (including U.S. dollar-denominated securities such as
ADRs. Generally these companies will be considered "leaders," in the view of the
Investment Manager, if they are nationally-known and have established a strong
reputation for quality management, products and services in the United States
and/or globally.
In addition to equity securities of market leader companies, up to 35% of
the fund's total assets may be invested in equity securities or debt securities
convertible into or exchangeable for equity securities of other companies, in
non-convertible debt securities, including U.S. Government securities and money
market instruments, and in rights and warrants. (For a discussion of the risks
of investing in each of these securities, see "Risk Considerations and
Investment Practices of the Underlying Funds" below.)
The Investment Manager intends to use both "top down" and "bottom-up"
approaches. The "top down" approach seeks to identify growing industries in
domestic and foreign markets. Within these industries, the Investment Manager
will apply a "bottom-up" fundamental analysis to identify the most attractive
securities to purchase, giving particular attention to companies with the
following attributes: recognized product and service leadership within its
industry, strong financial position (strong financial fundamentals) relative to
its peers, strong history of earnings growth or momentum often exceeding
consensus analyst expectations, evidence of corporate management's attention to
equity structure (evidenced by, among other things, stock buy-backs, the extent
to which management exercises stock options or otherwise acquires shares of the
company and sound financing decisions) as well as other attributes which the
Investment Manager believes are indicators of sustainable long-term growth.
Fixed-income securities in which this fund may invest include corporate
notes and bonds and obligations issued or guaranteed by the United States
Government, its agencies and instrumentalities. The non-governmental debt
securities in which the fund will invest will include: (a) corporate debt
securities, including bonds, notes and commercial paper, rated in the four
highest categories by a nationally recognized statistical rating organization
("NRSRO") including Moody's, S&P, Duff and Phelps, Inc. and Fitch Investors
Service, Inc., or, if unrated, of comparable quality as determined by the
Investment Manager, and (b) bank obligations, including CDs, banker's
acceptances and time deposits, issued by banks with a long-term CD rating in one
of the four highest categories by a NRSRO. Investments in securities rated
within the four highest rating categories by a NRSRO are considered "investment
grade." However, such securities rated within the fourth highest rating category
by a NRSRO have speculative characteristics and, therefore, changes in economic
conditions or other circumstances are more likely to weaken the capacity of
their issuers to make principal and interest payments than would be the case
with investments in securities with higher credit ratings. Where a fixed-income
security is not rated by a NRSRO, the Investment Manager will make a
determination of its creditworthiness and may deem it to be investment grade. If
a fixed-income non-convertible security held by the fund is subsequently
downgraded by a rating agency below investment grade, the fund will sell such
securities as soon as practicable without undue market or tax consequences to
the fund. See the Appendix to the Statement of Additional Information for a
discussion of ratings of fixed income securities.
The U.S. Government securities in which this fund may invest include
securities which are direct obligations of the
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United States Government, such as United States treasury bills, notes and bonds
(including zero coupon bonds), and which are backed by the full faith and credit
of the United States; securities which are backed by the full faith and credit
of the United States but which are obligations of a United States agency or
instrumentality (E.G., obligations of the Government National Mortgage
Association); securities issued by a United States agency or instrumentality
which has the right to borrow, to meet its obligations, from an existing line of
credit with the United States Treasury (E.G., obligations of the Federal
National Mortgage Association); and securities issued by a United States agency
or instrumentality which is backed by the credit of the issuing agency or
instrumentality (E.G., obligations of the Federal Farm Credit System).
Money market instruments in which the fund may invest include securities
issued or guaranteed by the U.S. Government, its agencies and instrumentalities
(Treasury bills, notes and bonds, including zero coupon securities); bank
obligations; Euro-dollar certificates of deposit; obligations of savings
institutions; fully insured certificates of deposit; and commercial paper rated
within the four highest grades by Moody's or S&P or, if not rated, issued by a
company having an outstanding debt issue rated at least AA by S&P or Aa by
Moody's. Such securities may be used to invest uncommitted cash balances.
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant reduction of some or all of the fund's securities
holdings. During such periods, the fund may adopt a temporary "defensive"
posture in which up to 100% of its total assets is invested in money market
instruments or cash.
The fund may invest in convertible securities. A convertible security is a
bond, debenture, note, preferred stock or other security that may be converted
into or exchanged for a prescribed amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. Convertible securities rank senior to common stocks in a corporation's
capital structure and, therefore, entail less risk than the corporation's common
stock. The value of a convertible security is a function of its "investment
value" (its value as if it did not have a conversion privilege), and its
"conversion value" (the security's worth if it were to be exchanged for the
underlying security, at market value, pursuant to its conversion privilege).
Up to 20% of this fund's assets in convertible fixed-income securities can
be rated below investment grade or, if unrated, of comparable quality as
determined by the Investment Manager. Securities rated below investment grade
are the equivalent of high yield, high risk bonds (commonly known as "junk
bonds"). The fund will not invest in convertible fixed-income securities that
are in default in payment of principal or interest. In the event that the fund's
investments in convertible securities rated below investment grade, including
downgraded convertible securities, constitute more than 20% of the fund's total
assets, the fund will seek immediately to sell sufficient securities to reduce
the total to below the applicable percentage. See "Risk Considerations and
Investment Practices of the Underlying Funds" below for a discussion of the
risks of investing in lower-rated and unrated fixed-income securities and the
Appendix to the Statement of Additional Information for a description of fixed
income security ratings.
This fund may also purchase and sell futures contracts on stock indexes, may
invest in repurchase agreements, private placements, zero coupon securities and
real estate investment trusts, may purchase securities on a when-issued, delayed
delivery or forward commitment basis, may purchase securities on a "when, as and
if issued" basis, and may lend its portfolio securities, as discussed under
"Risk Considerations and Investment Practices of the Underlying Funds" below.
DEAN WITTER MID-CAP GROWTH FUND. The investment objective of this fund is
long-term capital growth. This fund seeks to achieve its investment objective by
investing, under normal circumstances, at least 65% of its total assets in a
diversified portfolio of domestic and foreign equity securities of "mid-cap"
companies. A mid-cap company is a company whose market capitalization falls
within the range of $250 million to $5 billion. The fund may invest up to 35% of
its total assets in (i) U.S. Government Securities and investment grade
corporate debt securities; or (ii) equity securities of companies with market
capitalizations which fall outside of the range of $250 million to $5 billion at
the time of purchase as long as such investments are consistent with the fund's
investment objective. The fund may invest up to 35% of its total assets in the
equity securities of non-U.S. companies, including American or other Depository
Receipts, rights, warrants, and the direct purchase of foreign securities.
Equity securities in which the fund may invest include common stocks and
securities convertible into common stocks. The fund utilizes an investment
process that places primary emphasis on seeking to identify industries, rather
than individual companies, as prospects for capital appreciation and whereby the
Investment Manager seeks to invest assets of the fund in industries it considers
to be attractive at the time of purchase and to sell those it considers
overvalued. The Investment Manager will invest principally in those mid-cap
companies that in the opinion of the Investment Manager have above-average
relative growth potential. Mid-cap companies typically have a better growth
potential than their large-cap counterparts because they are still in the early
and more dynamic period of their corporate existences. Often mid-size companies
and the industries in which they are focused are still evolving as opposed to
the more mature industries served by large-cap companies. Moreover, mid-cap
companies are not considered "emerging" stocks, nor are they as volatile as
small-cap firms. This is due to the fact that mid-cap companies have increased
liquidity, attributable to their larger market capitalization as well as longer
and more established track records, and a stronger market presence and dominance
than small-cap firms. Consequently, because of the better growth inherent in
these companies and their industries, mid-cap companies offer superior return
potential to large-cap companies, yet owing to their relatively larger size and
better recognition in the investment
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community, they have a reduced risk profile compared to smaller, emerging or
micro-cap companies.
In selecting stocks within the mid-cap universe, the Investment Manager will
use an industry approach that seeks to diversify the assets of the fund in
approximately 18 to 35 industries. The fund will hold less than 5% of its net
assets in any one security and will hold less than 10% of its net assets in any
one industry. Companies will be selected based on at least three-year track
records, and purchases will be primarily focused on companies that: (1) have the
potential for above-average relative earnings growth; (2) are focused in
industries that are rapidly expanding or have the potential to see increasing
sales or earnings; (3) historically have had well-defined and recurring
revenues; or (4) are attractive based on an assessment of private market or
franchise values.
After selection of the fund's target industries, specific company
investments are selected. In this process, the Investment Manager seeks to
identify companies whose prospects are deemed attractive on the basis of an
evaluation of valuation screens and prospective company fundamentals. From the
total of all companies included in the industry valuation process, the
Investment Manager selects a limited number from each industry as representative
of that industry. Such selections are made on the basis of various criteria,
including size and quality of a company, the visibility of its earnings and
various valuation parameters. Valuation screens may include dividend discount
model values, price-to-book ratios, price-to-cash flow values, relative and
absolute price-to-earnings ratios and ratios of price-earnings multiples to
earnings growth. Price and earnings momentum ratings derived from external
sources are also factored into the stock selection decision. Those companies
which the Investment Manager believes to be attractive investments are finally
selected for inclusion in the fund. For a discussion of the risks of mid-cap
stocks, see "Risk Considerations and Investment Practices of the Underlying
Funds" below.
Common stocks, particularly those sought for possible capital appreciation,
have historically experienced a great amount of price fluctuation. The
Investment Manager believes it is desirable to attempt to reduce the risks of
extreme price fluctuations even if such an attempt results, as it likely will at
times, in reducing the probabilities of obtaining greater capital appreciation.
Accordingly, the Investment Manager's investment process incorporates elements
which may reduce, although certainly not eliminate, the volatility of a
portfolio. The fund may hold a portion of its portfolio in investment grade
fixed-income securities, including convertible securities, in an effort to
moderate extremes of price fluctuation. The determination of the appropriate
asset allocation as between equity and fixed-income investments will be made by
the Investment Manager in its discretion, based upon its evaluation of economic
and market conditions.
DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC. The investment
objective of this fund is capital growth. The fund will invest primarily in
common stock of companies in the natural resources and related areas, and will
invest at least 65% of its net assets at all times, except for temporary and
defensive purposes, in the securities of companies engaged in these areas. A
portfolio company is considered to be so engaged when at least 50% of its assets
and/or revenues are currently the result of ownership or development of assets
in such areas. Such companies include those engaged in the exploration for and
development, production and distribution of natural resources, in the
development of energy-efficient technologies or in other natural
resource-related supplies or services.
The fund will seek capital growth by investing in securities of issuers
believed to be responsive to domestic and world demand for natural resources. As
a result of the challenges presented by natural resource needs, the fund
believes that opportunities for growth can be found in securities of issuers
which: (1) own or process natural resources, such as precious metals, other
minerals, water, timberland and forest products; (2) own or produce sources of
energy such as oil, natural gas, coal, uranium, geothermal, oil shale and
biomass; (3) participate in the exploration for and development of natural
resources supplies from new and conventional sources; (4) own or control oil,
gas, or other mineral leases (which may not produce recoverable energy or
resources), rights or royalty interests; (5) provide natural resources
transportation, distribution or processing services, such as refining and
pipeline services; (6) provide related services or supplies, such as drilling,
well servicing, chemicals, parts and equipment; and (7) contribute
energy-efficient technologies, such as systems for energy conversion,
conservation and pollution control. Emphasis on natural resources may result in
exposure of some portfolio companies to foreign political and currency risks and
substantial price fluctuations.
The fund may purchase zero coupon securities and private placements, may
also purchase securities on a when issued or delayed delivery basis, may
purchase or sell securities on a forward commitment basis and may purchase
securities on a "when, as and if issued" basis, may enter into repurchase
agreements and may invest in options and futures transactions all as described
below under "Risk Considerations and Investment Practices of the Underlying
Funds."
DEAN WITTER PACIFIC GROWTH FUND INC. The investment objective of this fund is
to maximize capital appreciation. The fund seeks to achieve its investment
objective by investing at least 65% of its total assets in securities issued by
issuers located in Asia, Australia and New Zealand. Such issuers will include
companies which are organized under the laws of an Asian country, Australia or
New Zealand and have a principal office in an Asian country, Australia or New
Zealand, or which derive 50% or more of their total rev-
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enues from business in an Asian country, Australia or New Zealand. The
securities invested in will primarily consist of equity securities issued by
companies based in Asian countries, Australia and New Zealand which the
Investment Manager and/or Sub-Adviser believe are most likely to help the fund
meet its investment objective, but may also include fixed-income securities
issued or guaranteed by (or the direct obligations of) the governments of such
countries (including zero coupon treasury securities), when it is deemed by the
Investment Manager or Sub-Adviser that such investments are consistent with the
fund's investment objective. The principal countries in which such issuers will
be located are Japan, Australia, Malaysia, Singapore, Hong Kong, Thailand, the
Philippines, Indonesia, Taiwan and South Korea. The fund may invest more than
25% of its total assets in Japan, reflecting the dominance of the Japanese stock
market in the Pacific basin. The fund also may invest over 25% of its total
assets in securities issued by issuers located in Hong Kong. The fund may also
purchase securities issued by various agencies and instrumentalities of the U.S.
Government and may invest up to 10% of its total assets in securities issued by
other investment companies in order to participate in certain foreign markets
where foreigners are prohibited from investing directly in the securities of
foreign issuers.
The remainder of the fund's portfolio equalling, at times, up to 35% of the
fund's total assets, may be invested in equity and/or fixed-income and
convertible securities issued by issuers located anywhere in the world,
including the United States, subject to the fund's investment objective. In
addition, this portion of the fund's portfolio will consist of various other
financial instruments such as forward foreign exchange contracts, futures
contracts and options (see below under "Risk Considerations and Investment
Practices of the Underlying Funds").
It is anticipated that the securities held by the fund in its portfolio will
be denominated, principally, in the liquid Asian currencies and the Australian
dollar. Such currencies include the Japanese yen, Malaysian ringgit, Singapore
dollar, Hong Kong dollar, Thai baht, Philippine peso, Indonesia rupiah, Taiwan
dollar and South Korean won. Securities of issuers within a given country may be
denominated in the currency of a different country.
The fund may also invest in securities of foreign issuers in the form of
American Depository Receipts (ADRs) or other similar securities convertible into
securities of foreign issuers (as described below under "Risk Considerations and
Investment Practices of the Underlying Funds").
DEAN WITTER PRECIOUS METALS AND MINERALS TRUST. The investment objective of
this fund is long-term capital appreciation. The fund will attempt to achieve
its investment objective by investing principally in the securities of foreign
and domestic companies engaged in the exploration, mining, fabrication,
processing, distribution or trading of precious metals and minerals or in
companies engaged in financing, managing, controlling or operating companies
engaged in these activities and also by investing a portion of its assets in
gold, silver, platinum and palladium bullion and coins.
Except during temporary defensive periods, the fund will invest at least 65%
of its total assets in precious metals and minerals securities and precious
metals bullion and coins as well as other precious metals-related investments
(such as debt instruments indexed to or payable in precious metals warrants).
This concentration policy is a fundamental policy of the fund.
The precious metals and minerals securities in which the fund will invest
include foreign and domestic common stocks, securities convertible into common
stocks, preferred stocks, debt securities, precious metals indexed debt
securities and options issued by companies engaged in the exploration, mining,
fabricating, processing, distributing or trading of precious metals and
minerals. A company will be considered to be principally engaged in such
activities if it derives more than 50% of its income or devotes 50% or more of
its assets to such activities.
Up to 35% of the fund's total assets may be invested in (a) common stocks of
companies that derive less than 50% of their income or devote 50% or less of
their assets to precious metals and minerals activities, (b) long-term U.S.
Government securities (securities guaranteed as to principal and interest by the
U.S. Government or its agencies or instrumentalities) (including zero coupon
bonds) and (c) short-term money market instruments such as obligations of, or
guaranteed by, the United States government, its agencies or instrumentalities
(including zero coupon bonds); commercial paper; bankers' acceptances and
certificates of deposit of U.S. domestic banks, including foreign branches of
domestic banks, with assets of $500 million or more; time deposits; or debt
securities rated within the two highest grades by Moody's or S&P or, if not
rated, are of comparable quality as determined by the Investment Manager and
which mature within one year from the date of purchase. Investments in
short-term money market instruments may equal more than 35% of the fund's assets
during temporary defensive periods. Additionally, within the percentage
limitation described above, up to 20% of the fund's total assets may be invested
in long-term U.S. Government securities in order to offset the possible decline
in the value of precious metals and precious metals securities during periods of
low inflation rates.
Because most of the world's gold production is outside of the United States,
the fund expects that a majority of its assets will be invested in the
securities of foreign issuers. The percentage of assets invested in particular
countries or regions, however, will change from time to time according to the
Investment Manager's judgement of their political stability and economic
outlook. Under normal market conditions, the Fund intends to invest at least 30%
of its assets in the securities of foreign issuers. Such securities may be
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in the form of ADRs, EDRs or other similar securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by a United States bank or trust
company evidencing ownership of the underlying securities. EDRs are European
receipts evidencing a similar arrangement with a European bank. Generally, ADRs
in registered form, are designed for use in the United States securities markets
and EDRs, in bearer form, are designed for use in the European securities
markets. In the event that ADRs or EDRs are not available for a particular
security, the fund nevertheless may invest in that security. Such securities may
or may not be listed on a foreign securities exchange.
The fund will also invest a portion of its assets in gold, silver, platinum
and palladium bullion and coins (or certificates, receipts or contracts
representing ownership interests in these precious metals). While it is intended
that no more than 25% of the fund's total assets will be invested in such
bullion or coins, the fund's investment in bullion or coins may be further
restricted in order to comply with regulations of states where the fund's shares
are qualified for sale.
Bullion and coins will only be bought from and sold to U.S. and foreign
banks, regulated U.S. commodities exchanges, exchanges affiliated with a
regulated U.S. stock exchange, and dealers who are members of, or affiliated
with members of, a regulated U.S. commodities exchange, in accordance with
applicable investment laws. Gold, silver, platinum and palladium bullion will
not be purchased in any form that is not readily marketable. Coins will not be
purchased for their numismatic value and will not be considered for purchase if
they cannot be bought or sold in an active market. Any bullion or coins
purchased by the fund will be delivered to and stored with a qualified custodian
bank in the U.S. Investors should note that bullion and coins do not generate
income, offering only the potential for capital appreciation or depreciation,
and in these transactions the fund may encounter higher custody and transaction
costs than those normally associated with the ownership of securities, as well
as shipping and insurance costs. The fund may attempt to minimize the costs
associated with actual custody of bullion or coins by the use of receipts or
certificates representing ownership interests in these precious metals. The
fund's Investment Manager believes that investments in precious metals
themselves could serve to moderate fluctuations in the value of the fund's
portfolio since at times the prices of precious metals have tended not to
fluctuate as widely as the securities of issuers engaged in the mining of such
metals.
Investments related to gold and other precious metals and minerals are
considered speculative and are impacted by a host of world-wide economic,
financial and political factors. Prices of gold and other precious metals may
fluctuate sharply over short periods of time due to changes in inflation or
expectations regarding inflation in various countries, the availability of
supplies of these precious metals, changes in industrial and commercial demand,
metal sales by governments, central banks or international agencies, investment
speculation, monetary and other economic policies of various governments and
governmental restrictions on the private ownership of certain precious metals
and minerals. Additionally, the precious metals and minerals securities in which
the fund may invest may not necessarily move in tandem with the prices of actual
precious metals and minerals.
At the present time, there are five major producers of gold bullion. In
order of magnitude they are: the Republic of South Africa, the successor states
of the former Soviet Union, Canada, the United States and Australia. Political
and economic conditions in these countries may have a direct effect on the
mining, distribution and price of gold and sales of central bank gold holdings.
The fund may engage in options and futures transactions and forward currency
exchange transactions, may purchase private placements, zero coupon securities,
when, as and if issued securities, may purchase securities on a when-issued
delayed delivery or forward commitment basis and may lend its portfolio
securities. For a discussion of the risks of investing in these securities, see
"Risk Considerations and Investment Practices of the Underlying Funds" below.
DEAN WITTER S&P 500 INDEX FUND. The investment objective of this fund is to
provide investment results that, before expenses, correspond to the total return
(i.e., the combination of capital changes and income) of the Standard &
Poor's-Registered Trademark- 500 Composite Stock Price Index (the "S&P 500
Index").
The fund seeks to achieve its objective by investing, under normal
circumstances, at least 80% of its total assets in common stocks included in the
S&P 500 Index in approximately the same weightings as the Index. The fund
intends to invest in substantially all of the stocks that comprise the S&P 500
Index in approximately the same weightings as they are represented in the Index.
The fund operates as a "straight" index fund and will not be actively managed;
as such, adverse performance of a security will ordinarily not result in the
elimination of the security from the fund's portfolio. The fund will remain
invested in common stocks even when stock prices are generally falling.
Ordinarily, portfolio securities will not be sold except to reflect additions or
deletions of the stocks that comprise the S&P 500 Index, including mergers,
reorganizations and similar transactions, or as may be necessary to satisfy
redemption requests.
Over the long term, the Investment Manager seeks a correlation between the
performance of the fund, before expenses, and that of the S&P 500 Index of 0.95
or better. A figure of 1.00 would indicate perfect correlation. The fund's
ability to correlate its performance, before expenses, with
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the S&P 500 Index may be affected by, among other things, changes in securities
markets, the manner in which the S&P 500 Index is calculated and the timing of
purchases and redemptions. The fund's ability to correlate its performance to
the Index also depends to some extent on the size of the fund's portfolio and
the size of cash flows into and out of the fund. To accomodate these cash flows,
investment changes may be made to maintain the similarity of the fund's
portfolio to the S&P 500 Index to the maximum practicable extent. The Investment
Manager regularly monitors the correlation and, in the event the desired
correlation is not achieved, the Investment Manager will determine what
additional investment changes may need to be made.
STOCK INDEX FUTURES CONTRACTS. The fund may purchase and sell stock index
futures contracts ("futures contracts") that are traded on U.S. commodity
exchanges on the S&P 500 Index ("stock index" futures). As a futures contract
purchaser, the fund incurs an obligation to take delivery of a specified amount
of the obligation underlying the contract at a specified time in the future for
a specified price. As a seller of a futures contract, the fund incurs an
obligation to deliver the specified amount of the underlying obligation at a
specified time in return for an agreed upon price. The fund will purchase or
sell stock index futures contracts for the following reasons: to simulate full
investment in the S&P 500 Index while retaining a cash balance for fund
management purposes, to facilitate trading, to reduce transaction costs or to
seek higher investment returns when a futures contract is priced more
attractively than stocks comprising the S&P 500 Index. The fund may enter into
such instruments provided that not more than 5% of its assets are required as an
initial margin deposit and provided that the contract prices of the stock index
futures contracts do not exceed 20% of its total assets. While such instruments
can be used as leveraged investments, the fund may not use them to leverage its
assets.
ADDITIONAL INFORMATION CONCERNING THE S&P 500 INDEX. The S&P 500 Index is a
well-known stock market index that includes common stocks of 500 companies from
several industrial sectors representing a significant portion of the market
value of all common stocks publicly traded in the United States, most of which
are listed on the New York Stock Exchange Inc. (the "NYSE"). Stocks in the S&P
500 Index are weighted according to their market capitalization (i.e., the
number of shares outstanding multiplied by the stock's current price). The
Investment Manager believes that the performance of the S&P 500 Index is
representative of the performance of publicly traded common stocks in general.
The composition of the S&P 500 Index is determined by S&P and is based on such
factors as the market capitalization and trading activity of each stock and its
adequacy as a representation of stocks in a particular industry group, and may
be changed from time to time.
"Standard & Poor's-Registered Trademark-," "S&P-Registered Trademark-," "S&P
500-Registered Trademark-," "Standard & Poor's 500," and "500" are trademarks of
The McGraw Hill Companies, Inc. and have been licensed for use by the fund. The
fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, a
division of The McGraw Hill Companies, Inc. ("Standard & Poor's") and Standard &
Poor's makes no representation regarding the advisability of investing in the
fund.
The fund may also invest in repurchase agreements, zero coupon securities
and may lend its portfolio securities, as discussed under "Risk Considerations
and Investment Practices of the Underlying Funds" below.
The fund reserves the right to seek to achieve its investment objective by
converting to a "master/feeder" fund structure.
DEAN WITTER SHORT-TERM BOND FUND. The investment objective of this fund is to
provide investors with a high level of current income, consistent with the
preservation of capital. The fund seeks to achieve its investment objective by
investing in short-term, fixed-income securities with a dollar-weighted average
portfolio maturity of less than three years. The fund may invest in nominally
longer-term securities that have many of the characteristics of shorter-term
securities which will be deemed to have maturities earlier than their ultimate
maturity dates (E.G., securities with demand features). A substantial portion of
the fund's portfolio will consist of fixed-income securities issued by U.S.
corporate issuers and by the U.S. Government, its agencies and
instrumentalities.
Under normal market conditions, at least 65% of the fund's total assets will
be invested in bonds (for purposes of this provision, debt securities, which had
at time of issuance a maturity of greater than one year, are defined as
"bonds"). Furthermore, a portion of the fund's portfolio (up to 25% of the
fund's total assets) may be invested in fixed-income securities issued by
foreign corporate and government issuers.
The fund is designed for the investor who seeks a higher yield than a money
market fund and less fluctuation in net asset value than a longer-term bond
fund. In addition, while an investment in the fund is not federally insured and
there is no guarantee of price stability (the fund is not a money market fund
with a virtually constant net asset value per share), an investment in the fund
- -- unlike a certificate of deposit ("CD") -- is not frozen for any specific
period of time, may be redeemed at any time without incurring early withdrawal
penalties, and may also provide a higher yield.
The non-governmental debt securities in which the fund will invest will
include: (a) corporate debt securities, including bonds, notes and commercial
paper, rated in the four highest categories by a nationally recognized
statistical rating organization ("NRSRO") including Moody's, S&P, Duff and
Phelps, Inc. and Fitch Investors Service, Inc.; (b) bank obligations, including
CDs, bankers' acceptances and time deposits, issued by banks with a long-term CD
rating in one of the four highest categories by a NRSRO;
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and (c) investment grade fixed-rate and adjustable rate Mortgage-Backed and
Asset-Backed securities of corporate issuers. Investments in securities rated
within the four highest rating categories by a NRSRO are considered "investment
grade." However, such securities rated within the fourth highest rating category
by a NRSRO may have speculative characteristics and, therefore, changes in
economic conditions or other circumstances are more likely to weaken their
capacity to make principal and interest payments than would be the case with
investments in securities with higher credit ratings. Where a fixed-income
security is not rated by a NRSRO (as may be the case with a foreign security)
the Investment Manager will make a determination of its creditworthiness and may
deem it to be investment grade.
The fund may also invest in preferred stocks rated in one of the four
highest categories by a NRSRO.
Up to 5% of the fund's net assets may be invested in fixed-income securities
rated below investment grade. Such lower-rated securities are considered to be
speculative investments and, while producing higher yields than investment grade
securities, are subject to greater credit risks. The fund does not have any
minimum quality rating standards with respect to this portion of its portfolio.
If an investment grade fixed-income security held by the fund is downgraded by a
rating agency to a grade below investment grade, the fund may retain such
security in its portfolio unless such downgraded security, together with all
other non-investment grade fixed-income securities held by the fund constitute,
in the aggregate, more than 5% of the fund's net assets. In such event, the
Investment Manager will seek to sell such securities from its portfolio, as soon
as is reasonably practicable, in sufficient amounts to reduce this total to
below 5% of its net assets. A description of fixed-income security ratings is
contained in the Appendix to the Statement of Additional Information.
The United States Government securities (including zero coupon securities)
in which the fund will invest include securities which are direct obligations of
the United States Government, such as United States treasury bills, and which
are backed by the full faith and credit of the United States; securities which
are backed by the full faith and credit of the United States but which are
obligations of a United States agency or instrumentality (E.G., obligations of
the Government National Mortgage Association); securities issued by a United
States agency or instrumentality which has the right to borrow, to meet its
obligations, from an existing line of credit with the United States Treasury
(E.G., obligations of the Federal National Mortgage Association); securities
issued by a United States agency or instrumentality which is backed by the
credit of the issuing agency or instrumentality (E.G., obligations of the
Federal Farm Credit System); and governmentally issued mortgage-backed
securities.
In addition, as stated above, up to 25% of the fund's total assets may be
invested in securities issued by foreign corporations and governments and their
agencies and instrumentalities. Such securities may be denominated in foreign
currencies. The principal foreign currencies in which such securities will be
denominated are: the Australian dollar; Deutsche mark; Japanese yen; French
franc; British pound; Canadian dollar; Mexican peso; Swiss franc; Dutch guilder;
Austrian schilling; Spanish Peseta; Swedish Krona; and European Currency Unit.
The fund will only invest in foreign securities which are rated by a NRSRO as
investment grade or which, if unrated, are deemed by the Investment Manager to
be of investment grade creditworthiness.
The fund may also purchase foreign securities, repurchase agreements, when,
as and if issued securities, zero coupon securities, may purchase securities on
a when-issued delayed delivery or forward commitment basis and may lend its
portfolio securities. For a discussion of the risks of investing in these
securities, see "Risk Considerations and Investment Practices of the Underlying
Funds" below.
DEAN WITTER SPECIAL VALUE FUND. The investment objective of this fund is
long-term capital appreciation. This fund seeks to achieve its objectives by
investing primarily in equity securities issued by companies whose equity market
capitalization, at the time of purchase, falls within the range of $100 million
to $1 billion and that, in the opinion of the Investment Manager, appear
undervalued relative to the marketplace or to investments in similar companies.
Under normal market conditions, the fund will invest at least 65% of its total
assets in common stocks issued by these small-sized companies. Up to 35% of the
fund's total assets may be invested in common stocks not meeting the foregoing
small company equity market parameters, in debt or preferred equity securities
convertible into or exchangeable for equity securities, in non-convertible debt
or preferred equity securities, and in rights and warrants.
The Investment Manager intends to pursue a value-oriented approach in
selecting securities for the fund's portfolio. This approach seeks to identify
securities whose market value, in the Investment Manager's view, is less than
their intrinsic value. The Investment Manager believes that securities of
certain small companies often trade at a discount from their intrinsic value
(sometimes also referred to as "business value" or "investment worth").
Stocks of small companies are often under-researched and not widely
recognized by stock analysts or the financial press and, as a result, may be
less efficiently priced than larger, better-known companies. In addition, small
companies may have other unique attributes which make them relatively
undervalued in the market place compared to other similar larger companies. The
Investment Manager will attempt to identify and invest in such securities for
the fund with the expectation that the "value discount" may
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narrow over time and lead to capital appreciation for the fund.
As part of the value-oriented approach, the Investment Manager, based on
research and analysis, will seek to identify companies with attributes which the
Investment Manager believes provide growth opportunities but are not fairly
valued in the market place. Such attributes may include, among other things, one
or more of the following: valuable franchises or other intangibles; ownership of
valuable trademarks or trade names; control of distribution networks or of other
market share for particular products; ownership of real estate, the value of
which is understated; underutilized liquidity and other factors that would
identify the issuer as a potential takeover target or turnaround candidate.
In addition to, or instead of, seeking companies with attributes such as
those described above, the Investment Manager may select securities for
investment by the fund on the basis of the Investment Manager's belief that the
potential exists for some catalyst to cause a stock's price to rise. Such a
catalyst might include, among other things, one or more of the following:
increased investor attention, asset sales, corporate restructurings or
reorganizations, a cyclical turnaround of a depressed business or industry, a
new product/innovation, or significant changes in management and regulatory or
environmental shifts.
In its security selection process, the Investment Manager will focus
initially on securities with market-to-book ratios and price-earnings ratios
which are lower than those of the general market averages or those of securities
of similar companies, although the fund is not restricted to selecting only
securities with those characteristics if other indicators of a value discount
exist. In evaluating a company as a potential investment of the fund, the
Investment Manager will consider factors such as the company's dividend yield
(if any), growth in sales, balance sheet, average sales-per-share, cash flow per
share, management capabilities, attractiveness of business opportunities,
pricing flexibility, financial and accounting practices and an ability or
prospects to increase revenues, earning and cash flow, and profitability, in an
effort to determine whether the company's intrinsic value is greater than its
market price.
The fund's strategy of investing in small companies will involve investment
in a large number of portfolio securities which may be volatile and long-term in
nature. Such investments may include "micro-cap" companies (generally, companies
with equity market capitalization of less than $150 million) which represent
some of the smallest and least liquid equity securities in the U.S. markets. An
investment in the fund, therefore, should be considered a long-term holding and
not a complete investment program and may not be suitable for all investors, For
a further discussion of the risks of investing in smaller companies, see "Risk
Considerations and Investment Practices of the Underlying Funds" below.
Fixed-income securities in which the fund may invest include corporate notes
and bonds and obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities. The non-governmental debt securities in which
the fund will invest will include: (a) corporate debt securities, including
bonds, notes and commercial paper, rated in the four highest categories by a
NRSRO including Moody's, S&P, Duff and Phelps, Inc. and Fitch Investors Service,
Inc., or, if unrated, of comparable quality as determined by the Investment
Manager, and (b) bank obligations, including CDs, banker's acceptances and time
deposits, issued by banks with a long-term CD rating in one of the four highest
categories by a NRSRO. Investments in securities rated within the four highest
rating categories by a NRSRO are considered "investment grade." However, such
securities rated within the fourth highest rating category by a NRSRO have
speculative characteristics and, therefore, changes in economic conditions or
other circumstances are more likely to weaken the capacity of their issuers to
make principal and interest payments than would be the case with investments in
securities with higher credit ratings. Where a fixed-income security is not
rated by a NRSRO, the Investment Manager will make a determination of its
creditworthiness and may deem it to be investment grade.
This fund also may invest up to 20% of its total assets in convertible
fixed-income securities rated below investment grade or, if unrated, of
comparable quality as determined by the Investment Manager. In addition, the
fund may invest up to 5% of its total assets in non-convertible fixed-income
securities rated below investment grade or, if unrated, of comparable quality as
determined by the Investment Manager. Securities below investment grade are the
equivalent of high yield, high risk bonds (commonly known as " junk bonds"). The
fund will not invest in fixed-income securities that are in default in payment
of principal or interest. In the event that the fund's investments in securities
rated below investment grade, including downgraded securities, constitute more
than 20% (in the case of convertible fixed-income securities) or 5% (in the case
of non-convertible fixed-income securities) of the fund's total assets, the fund
will seek immediately to sell sufficient securities to reduce the total to below
the applicable percentage. See "Risk Considerations and Investment Practices of
the Underlying Funds" below for a discussion of the risks of investing in
lower-rated and unrated fixed-income securities and the Appendix to the
Statement of Additional Information for a description of fixed-income security
ratings.
The U.S. Government securities in which the fund may invest include
securities which are direct obligations of the United States Government, such as
United States treasury bills, notes and bonds, and which are backed by the full
faith and credit of the United States; securities which are backed by the full
faith and credit of the United States but which are obligations of a United
States agency or instrumentality (E.G., obligations of the Government National
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Mortgage Association); securities issued by a United States agency or
instrumentality which has the right to borrow, to meet its obligations, from an
existing line of credit with the United States Treasury (E.G., obligations of
the Federal National Mortgage Association); securities issued by the United
States agency or instrumentality which is backed by the credit of the issuing
agency or instrumentality (E.G., obligations of the Federal Farm Credit System).
Money market instruments in which the fund may invest include securities
issued or guaranteed by the U.S. Government, its agencies and instrumentalities
(Treasury bills, notes and bonds, including zero coupon securities); bank
obligations; Eurodollar certificates of deposit; obligations of savings
institutions; fully insured certificates of deposit; and commercial paper rated
within the four highest grades by Moody's or S&P or, if not rated, issued by a
company having an outstanding debt issue rated at least AA by S&P or Aa by
Moody's. Such securities may be used to invest uncommitted cash balances.
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant reduction of some of all of the fund's securities
holdings. During such periods, the fund may adopt a temporary "defensive"
posture in which up to 100% of its total assets is invested in money market
instruments or cash.
The fund may invest in American Depository Receipts and securities of
Canadian issuers registered under the Securities Act of 1934, but under current
policy the fund will not otherwise invest in foreign securities. The fund may
also purchase and sell futures contracts on stock indexes, may invest in
repurchase agreements, private placements, zero coupon securities and real
estate investment trusts, may purchase securities on a when-issued, delayed
delivery or forward commitment basis, may purchase securities on a "when, as and
if issued" basis, and may lend its portfolio securities, as discussed under
"Risk Considerations and Investment Practices of the Underlying Funds" below.
The fund intends to suspend the offering of its shares to new investors
whenever the Investment Manager determines that doing so is in the best
interests of prudent portfolio management. During any such suspension, current
shareholders of the fund will continue to be able to purchase additional fund
shares. The fund currently anticipates suspending the offering of its shares to
new investors if its net assets reach a level of approximately $250 million,
unless the Investment Manager determines that the continued offering of the
fund's shares is consistent at that time with prudent portfolio management.
Subsequently, the fund may recommence offering its shares to new investors from
time to time as may be consistent with prudent portfolio management.
DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST. The investment objective of this
fund is high current income consistent with safety of principal. The fund seeks
to achieve its objective by investing in obligations issued or guaranteed by the
U.S. Government or its instrumentalities ("U.S. Government securities"). All
such obligations are backed by the "full faith and credit" of the United States.
Investments may be made in obligations of instrumentalities of the U.S.
Government only where such obligations are guaranteed by the U.S. Government.
U.S. Government securities include U.S. Treasury securities consisting of
Treasury bills, Treasury notes and Treasury bonds. Some of the other U.S.
Government securities in which the fund may invest include securities of the
Federal Housing Administration, the Government National Mortgage Association,
the Department of Housing and Urban Development, the Export-Import Bank, the
Farmers Home Administration, the General Services Administration, the Maritime
Administration, Resolution Funding Corporation and the Small Business
Administration. The maturities of such securities usually range from three
months to thirty years.
The fund is not limited as to the maturities of the U.S. Government
securities in which it may invest, except that the fund will not purchase zero
coupon securities with remaining maturities of longer than ten years. For a
discussion of the risks of investing in U.S. Government securities (including
such securities purchased on a when-issued, delayed delivery or firm commitment
basis and zero coupon securities), see "Risk Considerations and Investment
Practices of the Underlying Funds" below.
While the fund has the ability to invest in any securities backed by the
full faith and credit of the United States, it is currently anticipated that a
substantial portion of the fund's assets will be invested in Certificates of the
Government National Mortgage Association (GNMA). Should market or economic
conditions warrant, this policy is subject to change at any time at the
discretion of the Investment Manager.
Yields on pass-through securities are typically quoted by investment dealers
and vendors based on the maturity of the underlying instruments and the
associated average life assumption. In periods of falling interest rates the
rate of prepayment tends to increase, thereby shortening the actual average life
of a pool of mortgage-related securities. Conversely, in periods of rising rates
the rate of prepayment tends to decrease, thereby lengthening the actual average
life of the pool. Reinvestment by the fund of prepayments may occur at higher or
lower interest rates than the original investment. Historically, actual average
life has been consistent with the twelve-year assumption referred to above. The
actual yield of each GNMA Certificate is influenced by the prepayment experience
of the mortgage pool underlying the Certificates. Interest on GNMA Certificates
is paid monthly rather than semi-annually as for traditional bonds.
The fund will invest in mortgage pass-through securities representing
participation interests in pools of res-
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idential mortgage loans originated by United States governmental or private
lenders such as banks, broker-dealers and financing corporations and guaranteed,
to the extent provided in such securities, by the United States Government or
one of its agencies or instrumentalities. Such securities, which are ownership
interests in the underlying mortgage loans, differ from conventional debt
securities, which provide for periodic payment of interest in fixed amounts
(usually semi-annually) and principal payments at maturity or on specified call
dates. Mortgage pass-through securities provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees paid to the guarantor of such securities and the servicer of the
underlying mortgage loans. The guaranteed mortgage pass-through securities in
which the fund may invest include those issued or guaranteed by GNMA or other
entities which securities are backed by the full faith and credit of the United
States.
Certificates for mortgage-backed securities evidence an interest in a
specific pool of mortgages. These certificates are, in most cases, "modified
pass-through" instruments, wherein the issuing agency guarantees the payment of
principal and interest on mortgages underlying the certificates, whether or not
such amounts are collected by the issuer on the underlying mortgages.
The fund may also invest in adjustable rate mortgage securities ("ARMs"),
which are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. ARMs eligible for inclusion in a mortgage
pool generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve or thirteen scheduled monthly payments. Thereafter, the
interest rates are subject to periodic adjustment based on changes to a
designated benchmark index.
The fund may also invest in collateralized mortgage obligations or "CMOs"
which are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by GNMA, FNMA or
FHLMC Certificates, but also may be collateralized by whole loans or private
mortgage pass-through securities (such collateral collectively hereinafter
referred to as "Mortgage Assets"). Multiclass pass-through securities are equity
interests in a trust composed of Mortgage Assets. Payments of principal of and
interest on the Mortgage Assets, and any reinvestment income thereon, provide
the funds to pay debt service on the CMOs or make scheduled distributions on the
multiclass pass-through securities. CMOs may be issued by agencies or
instrumentalities of the United States government, or by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. However, the fund will only invest in CMOs which
are backed by the full faith and credit of the United States.
The fund also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
For a discussion of the risks of investing in mortgage-backed securities,
see "Risk Considerations and Investment Practices of the Underlying Funds"
below.
DEAN WITTER UTILITIES FUND. The investment objective of this fund is to provide
current income and long-term growth of income and capital. The fund seeks to
achieve its investment objective by investing primarily in equity and
fixed-income securities of companies engaged in the public utilities industry.
The term "public utilities industry" consists of companies engaged in the
manufacture, production, generation, transmission, sale and distribution of gas
and electric energy, as well as companies engaged in the communications field,
including telephone, telegraph, satellite, microwave and other companies
providing communication facilities for the public, but excluding public
broadcasting companies.
The fund invests in both equity securities (common stocks and securities
convertible into common stock) and fixed income securities (bonds and preferred
stock) in the public utilities industry. The fund does not have any set policies
to concentrate within any particular segment of the utilities industry.
Fixed-income securities in which the fund may invest are debt securities and
preferred stocks, which are rated at the time of purchase Baa or better by
Moody's or BBB or better by S&P, or which, if unrated, are deemed to be of
comparable quality by the fund's Trustees. The fund may also purchase equity and
fixed-income securities issued by foreign issuers.
Investments in fixed-income securities rated either BBB by S&P or Baa by
Moody's (the lowest credit ratings designated "investment grade") may have
speculative characteristics and, therefore, changes in economic conditions or
other circumstances are more likely to weaken their capacity to make principal
and interest payments than would be the case with investments in securities with
higher credit ratings. If a fixed-income security held by the fund is rated BBB
or Baa and is subsequently downgraded by a rating agency, the fund will retain
such security in its portfolio until the Investment Manager determines that it
is practicable to sell the security without undue market or
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tax consequences to the fund. In the event that such downgraded securities
constitute 5% or more of the fund's total assets, the Investment Manager will
sell immediately securities sufficient to reduce the total to below 5%.
While the fund will invest primarily in the securities of public utility
companies, under ordinary circumstances it may invest up to 35% of its total
assets in U.S. Government securities (securities issued or guaranteed as to
principal and interest by the United States or its agencies and
instrumentalities), money market instruments and repurchase agreements. U.S.
Government securities in which the fund may invest include zero coupon
securities.
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant reduction of some or all of the fund's securities
holdings. During such periods, the fund may adopt a temporary "defensive"
posture in which greater than 35% of its net assets are invested in cash or
money market instruments.
The fund may invest in securities of foreign companies, may purchase private
placements, zero coupon securities, when, as and if issued securities, may enter
into repurchase agreements, may purchase securities on a when-issued delayed
delivery or forward commitment basis and may lend its portfolio securities. For
a discussion of the risks of investing in these securities, see "Risk
Considerations and Investment Practices of the Underlying Funds" below.
DEAN WITTER VALUE-ADDED MARKET SERIES--EQUITY PORTFOLIO. The investment
objective of the Equity Portfolio, currently this fund's single investment
portfolio, is to achieve a high level of total return on its assets through a
combination of capital appreciation and current income. The fund will seek to
attain the Equity Portfolio's investment objective by investing on an
equally-weighted basis in a diversified portfolio of common stocks of the
companies which are included in the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index"). The S&P 500 Index consists of 500 common stocks
selected by S&P, most of which are listed on the New York Stock Exchange.
Inclusion of a stock in the S&P 500 Index implies no opinion by S&P as to the
quality of the stock as an investment. The S&P 500 Index is determined, composed
and calculated by S&P without regard to the fund. S&P is neither a sponsor of,
nor in any way affiliated with, the fund, and S&P makes no representation or
warranty, express or implied, on the advisability of investing in the fund or as
to the ability of the S&P Index to track general stock market performance, and
S&P disclaims all warranties of merchantability or fitness for a particular
purpose or use with respect to the S&P Index or any data included therein. S&P
has no connection with the fund other than the licensing to the Investment
Manager of the use of the S&P 500 Index in connection with the fund.
The fund invests in the stocks included in the S&P 500 Index on an
equally-weighted basis; that is, to the extent practicable and subject to the
specific investment policies and restrictions described below, an equal portion
of the fund's assets is invested in each of the 500 securities in the S&P 500
Index. This differs from the S&P 500 Index and nearly all other major indexes,
which generally are weighted on a market-capitalization basis. For example, the
50 largest capitalization issuers in the S&P 500 Index represent approximately
45% of the S&P 500 Index. However, in accordance with its investment policies,
the fund will strive to maintain each stock holding equally, so that, subject to
the specific investment policies and investment restrictions described below,
approximately 0.20 of 1% of the fund's total invested assets will be invested in
each of the 500 companies included in the S&P 500 Index. The equal-weighting
technique is based on the Investment Manager's statistical analysis that most
portfolio performance is usually generated by only one-quarter to one-third of
the portfolio. Since there is no certainty that any specific company or industry
selection, even within a broad-based index such as the S&P 500 Index, will
achieve superior performance, the Investment Manager believes equal-weighting
may benefit the fund in seeking to attain its investment objective.
The holdings of the fund will be adjusted by the Investment Manager not less
than quarterly to reflect changes in the fund's asset levels and in the relative
values of the common stocks in the fund's portfolio so that following each
adjustment the value of the fund's investment in each security will be equal to
the extent practicable. In addition, whenever a company is eliminated from or
added to the S&P 500 Index, the fund will sell or purchase the stock of such
company, as the case may be, as soon as practicable. Accordingly, securities may
be purchased and sold by the fund when such purchases and sales would not be
made under traditional investment criteria.
In addition, the Investment Manager may eliminate one or more securities (or
elect not to increase the fund's position in such securities), notwithstanding
the continued listing of such securities in the S&P 500 Index, in the following
circumstances: (a) the stock is no longer publicly traded, such as in the case
of a leveraged buyout or merger; (b) an unexpected adverse development with
respect to a company, such as bankruptcy or insolvency; (c) in the view of the
Investment Manager, there is a high degree of risk with respect to a company
that bankruptcy or insolvency will occur; or (d) in the view of the Investment
Manager, based on its consideration of the price of a company's securities, the
depth of the market in those securities and the amount of those securities held
or to be held by the fund, retaining shares of a company or making any
additional purchases would be inadvisable because of liquidity risks. The
Investment Manager will monitor on an ongoing basis all companies falling within
any of the circumstances described in this paragraph, and will return such
company's shares to the fund's portfolio, or recommence purchases, when and if
those conditions cease to exist.
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RISK CONSIDERATIONS AND INVESTMENT PRACTICES OF THE UNDERLYING FUNDS
The net asset value of each Portfolio of the Fund's shares will fluctuate with
changes in the market value of the Fund's portfolio securities. The market value
of the Fund's portfolio securities will increase or decrease due to a variety of
economic, market or political factors which cannot be predicted. At times,
purchases or redemptions of the Underlying Funds by the Fund could adversely
impact the Underlying Fund. An Underlying Fund may be required to sell
securities at inopportune times in order to meet Fund redemption requests. In
addition, there may be tax consequences associated with sales of securities and
such sales may also increase transaction costs. The Investment Manager will seek
to minimize the impact of allocation decisions on the Underlying Funds and may,
at times, allocate or re-allocate assets in greater or lesser amounts among
funds than it otherwise would have had the Investment Manager not taken such
factors into account. A general description and the risks involved of the
various investment practices and techniques which some or all of the Underlying
Funds (in this section "fund" or "funds") may engage in is set forth below. A
more detailed discussion can be found in this Fund's Statement of Additional
Information as well as in the Prospectus and Statement of Additional Information
of each Underlying Fund.
FOREIGN SECURITIES. Investors should carefully consider the risks of investing
in securities of foreign issuers and securities denominated in non-U.S.
currencies. Fluctuations in the relative rates of exchange between the
currencies of different nations will affect the value of a fund's investments.
Changes in foreign currency exchange rates relative to the U.S. dollar will
affect the U.S. dollar value of a funds' assets denominated in that currency and
thereby impact upon the fund's total return on such assets.
Foreign currency exchange rates are determined by forces of supply and
demand on the foreign exchange markets. These forces are themselves affected by
the international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. Moreover,
foreign currency exchange rates may be affected by the regulatory control of the
exchanges on which the currencies trade.
Investments in foreign securities will also occasion risks relating to
political and economic developments abroad, including the possibility of
expropriations or confiscatory taxation, limitations on the use or transfer of a
fund's assets and any effects of foreign social, economic or political
instability. Political and economic developments in Asia may have profound
effects upon the value of a large segment of a fund's portfolio. Foreign
companies are not subject to the regulatory requirements of U.S. companies and,
as such, there may be less publicly available information about such companies.
Moreover, foreign companies are not subject to uniform accounting, auditing and
financial reporting standards and requirements comparable to those applicable to
U.S. companies.
Securities of foreign issuers may be less liquid than comparable securities
of U.S. issuers and, as such, their price changes may be more volatile.
Furthermore, foreign exchanges and broker-dealers are generally subject to less
government and exchange scrutiny and regulation than their American
counterparts. Brokerage commissions, dealer concessions and other transaction
costs may be higher on foreign markets than in the U.S. In addition, differences
in clearance and settlement procedures on foreign markets may occasion delays in
settlements of fund trades effected in such markets. Inability to dispose of
portfolio securities due to settlement delays could result in losses to a fund
due to subsequent declines in value of such securities and the inability of the
fund to make intended security purchases due to settlement problems could result
in a failure of the fund to make potentially advantageous investments.
The foreign securities in which the Fund will be investing through its
investments in the Underlying Funds may be issued by issuers located in
developing countries. Compared to the United States and other developed
countries, developing countries may have relatively unstable governments,
economies based on only a few industries, and securities markets which trade a
small number of securities. Prices of these securities tend to be especially
volatile and, in the past, securities in these countries have offered greater
potential for gain (as well as loss) than securities of companies located in
developed countries.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Certain Underlying Funds may enter
into forward foreign currency exchange contracts ("forward contracts") in
connection with their foreign securities investments.
A forward contract involves an obligation to purchase or sell a currency at
a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
A fund may enter into forward contracts as a hedge against fluctuations in
future foreign exchange rates.
A fund will enter into forward contracts under various circumstances. When a
fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it may, for example, desire to "lock in" the price of the
security in U.S. dollars or some other foreign currency which the fund is
temporarily holding in its portfolio. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars or other currency, of the
amount of foreign currency involved in the underlying security transactions, the
fund will be able to protect itself against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar or other currency
which is being used for the security purchase (by the fund or the counterparty)
and the foreign currency in which the
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security is denominated during the period between the date on which the security
is purchased or sold and the date on which payment is made or received.
At other times, when, for example, a fund's Investment Manager or Adviser or
Sub-Adviser believe that the currency of a particular foreign country may suffer
a substantial decline against the U.S. dollar or some other foreign currency,
the fund may enter into a forward contract to sell, for a fixed amount of
dollars or other currency, the amount of foreign currency approximating the
value of some or all of the fund's securities holdings (or securities which the
fund has purchased for its portfolio) denominated in such foreign currency.
Under identical circumstances, a fund may enter into a forward contract to sell,
for a fixed amount of U.S. dollars or other currency, an amount of foreign
currency other than the currency in which the securities to be hedged are
denominated approximating the value of some or all of the portfolio securities
to be hedged. This method of hedging, called "cross-hedging," will be selected
by the Investment Manager or Adviser or Sub-Adviser when it is determined that
the foreign currency in which the portfolio securities are denominated has
insufficient liquidity or is trading at a discount as compared with some other
foreign currency with which it tends to move in tandem.
In addition, when a fund's Investment Manager or Adviser or Sub-Adviser
anticipate purchasing securities at some time in the future, and wishes to lock
in the current exchange rate of the currency in which those securities are
denominated against the U.S. dollar or some other foreign currency, the fund may
enter into a forward contract to purchase an amount of currency equal to some or
all of the value of the anticipated purchase, for a fixed amount of U.S. dollars
or other currency. The fund may, however, close out the forward contract without
purchasing the security which was the subject of the "anticipatory" hedge.
In all of the above circumstances, if the currency in which a fund's
securities holdings (or anticipated portfolio securities) are denominated rises
in value with respect to the currency which is being purchased (or sold), then
the fund will have realized fewer gains than had the fund not entered into the
forward contracts. Moreover, the precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible,
since the future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. A fund is not
required to enter into such transactions with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Investment Manager or Adviser or Sub-Adviser. A fund generally will not
enter into a forward contract with a term of greater than one year, although it
may enter into forward contracts for periods of up to five years. A fund may be
limited in its ability to enter into hedging transactions involving forward
contracts by the Internal Revenue Code requirements relating to qualification as
a regulated investment company.
OPTIONS AND FUTURES TRANSACTIONS. Certain of the Underlying Funds may purchase
and sell (write) call and put options on (i) portfolio securities which are
denominated in either U.S. dollars or foreign currencies; (ii) stock indexes;
and (iii) the U.S. dollar and foreign currencies. Such options are or may in the
future be listed on several U.S. and foreign securities exchanges or may be
traded in over-the-counter transactions ("OTC options"). OTC options are
purchased from or sold (written) to dealers or financial institutions which have
entered into direct agreements with the fund.
A fund is permitted to write covered call options on portfolio securities
and the U.S. dollar and foreign currencies, without limit, in order to hedge
against the decline in the value of a security or currency in which such
security is denominated (although such hedge is limited to the value of the
premium received) and to close out long call option positions. A fund may write
covered put options, under which the fund incurs an obligation to buy the
security (or currency) underlying the option from the purchaser of the put at
the option's exercise price at any time during the option period, at the
purchaser's election.
A fund may purchase listed and OTC call and put options in amounts equalling
up to 5% of its total assets. A fund may purchase call options to close out a
covered call position or to protect against an increase in the price of a
security it anticipates purchasing or, in the case of call options on a foreign
currency, to hedge against an adverse exchange rate change of the currency in
which the security it anticipates purchasing is denominated vis-a-vis the
currency in which the exercise price is denominated. A fund may purchase put
options on securities which it holds in its portfolio to protect itself against
a decline in the value of the security and to close out written put positions in
a manner similar to call option closing purchase transactions. There are no
other limits on a fund's ability to purchase call and put options other than
compliance with the foregoing policies.
A fund may purchase and sell futures contracts that are currently traded, or
may in the future be traded, on U.S. and foreign commodity exchanges on
underlying portfolio securities, on any currency ("currency" futures), on U.S.
and foreign fixed-income securities ("interest rate" futures) and on such
indexes of U.S. or foreign equity or fixed-income securities as may exist or
come into being ("index" futures). A fund may purchase or sell interest rate
futures contracts for the purpose of hedging some or all of the value of its
portfolio securities (or anticipated portfolio securities) against changes in
prevailing interest rates. A fund may purchase or sell index futures contracts
for the purpose of hedging some or all of its portfolio (or anticipated
portfolio) securities against changes in their prices. A fund may purchase or
sell currency futures contracts to hedge against an anticipated rise or decline
in the value of the cur-
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rency in which a portfolio security is denominated vis-a-vis another currency.
As a futures contract purchaser, a fund incurs an obligation to take delivery of
a specified amount of the obligation underlying the contract at a specified time
in the future for a specified price. As a seller of a futures contract, a fund
incurs an obligation to deliver the specified amount of the underlying
obligation at a specified time in return for an agreed upon price.
A fund also may purchase and write call and put options on futures contracts
which are traded on an exchange and enter into closing transactions with respect
to such options to terminate an existing position.
New futures contracts, options and other financial products and various
combinations thereof continue to be developed. A fund may invest in any such
futures, options or products as may be developed, to the extent consistent with
its investment objective and applicable regulatory requirements.
RISKS OF OPTIONS AND FUTURES TRANSACTIONS. A fund may close out its position as
writer of an option, or as a buyer or seller of a futures contract, only if a
liquid secondary market exists for options or futures contracts of that series.
There is no assurance that such a market will exist, particularly in the case of
OTC options, as such options may generally only be closed out by entering into a
closing purchase transaction with the purchasing dealer. Also, exchanges may
limit the amount by which the price of many futures contracts may move on any
day. If the price moves equal the daily limit on successive days, then it may
prove impossible to liquidate a futures position until the daily limit moves
have ceased.
Futures contracts and options transactions may be considered speculative in
nature and may involve greater risks than those customarily assumed by other
investment companies which do not invest in such instruments. One such risk is
that the Investment Manager or Adviser or Sub-Adviser could be incorrect in its
expectations as to the direction or extent of various interest rate or price
movements or the time span within which the movements take place. For example,
if a fund sold futures contracts for the sale of securities in anticipation of
an increase in interest rates, and then interest rates went down instead,
causing bond prices to rise, the fund would lose money on the sale. Another risk
which will arise in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities, currencies
and indexes subject to futures contracts (and thereby the futures contract
prices) may correlate imperfectly with the behavior of the U.S. dollar cash
prices of a fund's portfolio securities and their denominated currencies. See
the Statement of Additional Information for a further discussion of these risks.
REPURCHASE AGREEMENTS. Certain Underlying Funds may enter into repurchase
agreements, which may be viewed as a type of secured lending, and which
typically involve the acquisition by a fund of debt securities, from a selling
financial institution such as a bank, savings and loan association or
broker-dealer. The agreement provides that the fund will sell back to the
institution, and that the institution will repurchase, the underlying security
at a specified price and at a fixed time in the future, usually not more than
seven days from the date of purchase. While repurchase agreements involve
certain risks not associated with direct investments in debt securities,
including the risks of default or bankruptcy of the selling financial
institution, a fund follows procedures to minimize such risks. These procedures
include effecting repurchase transactions only with large, well-capitalized and
well-established financial institutions and maintaining adequate
collateralization.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. Certain Underlying Funds may
also use reverse repurchase agreements and dollar rolls as part of their
investment strategy. Reverse repurchase agreements involve sales by a fund of
portfolio assets concurrently with an agreement by that fund to repurchase the
same assets at a later date at a fixed price. A fund may enter into dollar rolls
in which the fund sells securities and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. Reverse repurchase agreements and dollar rolls involve the risk that the
market value of the securities the fund is obligated to repurchase under the
agreement may decline below the repurchase price. In the event the buyer of
securities under a reverse repurchase agreement or dollar roll files for
bankruptcy or becomes insolvent, the fund's use of proceeds of the agreement may
be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the fund's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls are speculative techniques
involving leverage, and are considered borrowings by a fund.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From time
to time, in the ordinary course of business, certain of the Underlying Funds may
purchase securities on a when-issued or delayed delivery basis or may purchase
or sell securities on a forward commitment basis. When such transactions are
negotiated, the price is fixed at the time of the commitment, but delivery and
payment can take place a month or more after the date of the commitment. There
is no overall limit on the percentage of the fund's assets which may be
committed to the purchase of securities on a when-issued, delayed delivery or
forward commitment basis. An increase in the percentage of the fund's assets
committed to the purchase of securities on a when-issued, delayed delivery or
forward commitment basis may increase the volatility of a fund's net asset
value.
WHEN, AS AND IF ISSUED SECURITIES. Certain Underlying Funds may purchase
securities on a "when, as and if issued" basis under which the issuance of the
security depends upon the occurrence of a subsequent event, such as approval of
a merger, corporate reorganization, leveraged
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buyout or debt restructuring. If the anticipated event does not occur and the
securities are not issued, the fund will have lost an investment opportunity.
There is no overall limit on the percentage of a fund's assets which may be
committed to the purchase of securities on a "when, as and if issued" basis. An
increase in the percentage of a fund's assets committed to the purchase of
securities on a "when, as and if issued" basis may increase the volatility of
its net asset value.
ZERO COUPON SECURITIES. A portion of the fixed-income securities purchased by
certain Underlying Funds may be zero coupon securities. Such securities are
purchased at a discount from their face amount, giving the purchaser the right
to receive their full value at maturity. The interest earned on such securities
is, implicitly, automatically compounded and paid out at maturity. While such
compounding at a constant rate eliminates the risk of receiving lower yields
upon reinvestment of interest if prevailing interest rates decline, the owner of
a zero coupon security will be unable to participate in higher yields upon
reinvestment of interest received on interest-paying securities if prevailing
interest rates rise.
A zero coupon security pays no interest to its holder during its life.
Therefore, to the extent the fund invests in zero coupon securities, it will not
receive current cash available for distribution to shareholders. In addition,
zero coupon securities are subject to substantially greater price fluctuations
during periods of changing prevailing interest rates than are comparable
securities which pay interest on a current basis. Current federal tax law
requires that a holder (such as a fund) of a zero coupon security accrue a
portion of the discount at which the security was purchased as income each year
even though the fund receives no interest payments in cash on the security
during the year.
PRIVATE PLACEMENTS. Certain Underlying Funds may invest up to either 5% or 10%
of their total assets in securities which are subject to restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), or which are otherwise not readily marketable.
(Securities eligible for resale pursuant to Rule 144A under the Securities Act,
and determined to be liquid pursuant to the procedures discussed in the
following paragraph, are not subject to the foregoing restriction.) These
securities are generally referred to as private placements or restricted
securities. Limitations on the resale of such securities may have an adverse
effect on their marketability, and may prevent a fund from disposing of them
promptly at reasonable prices. A fund may have to bear the expense of
registering such securities for resale and the risk of substantial delays in
effecting such registration.
The Securities and Exchange Commission has adopted Rule 144A under the
Securities Act, which permits a fund to sell restricted securities to qualified
institutional buyers without limitation. The Investment Manager, pursuant to
procedures adopted by the Trustees of each Underlying Fund, will make a
determination as to the liquidity of each restricted security purchased by that
fund. If a restricted security is determined to be "liquid," such security will
not be included within the category "illiquid securities," which under current
policy may not exceed 15% of each Underlying Fund's net assets.
CONVERTIBLE SECURITIES. Certain Underlying Funds may acquire, through purchase
or a distribution by the issuer of a security held in its portfolio, a
fixed-income security which is convertible into common stock of the issuer. A
convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. Convertible securities rank senior to
common stocks in a corporation's capital structure and, therefore, entail less
risk than the corporation's common stock. The value of a convertible security is
a function of its "investment value" (its value as if it did not have a
conversion privilege), and its "conversion value" (the security's worth if it
were to be exchanged for the underlying security, at market value, pursuant to
its conversion privilege).
To the extent that a convertible security's investment value is greater than
its conversion value, its price will be primarily a reflection of such
investment value and its price will be likely to increase when interest rates
fall and decrease when interest rates rise, as with a fixed-income security (the
credit standing of the issuer and other factors may also have an effect on the
convertible security's value). If the conversion value exceeds the investment
value, the price of the convertible security will rise above its investment
value and, in addition, will sell at some premium over its conversion value.
(This premium represents the price investors are willing to pay for the
privilege of purchasing a fixed-income security with a possibility of capital
appreciation due to the conversion privilege.) At such times the price of the
convertible security will tend to fluctuate directly with the price of the
underlying equity security.
A portion of the fixed-income and convertible securities in which certain
Underlying Funds may invest are not rated; when rated, such ratings will
generally be below investment grade. Securities below investment grade are the
equivalent of high yield, high risk bonds, commonly known as "junk bonds."
Investment grade is generally considered to be debt securities rated BBB or
higher by S&P or Baa or higher by Moody's. However, the aforementioned funds
will not invest in debt securities that are in default in payment of principal
or interest.
Because of the special nature of investments in lower rated debt securities,
a fund's Investment Manager or Adviser or Sub-Adviser must take account of
certain special considerations in assessing the risks associated with such
investments. The prices of lower rated securities have
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been found to be less sensitive to changes in prevailing interest rates than
higher rated investments, but are likely to be more sensitive to adverse
economic changes or individual corporate developments. During an economic
downturn or substantial period of rising interest rates, highly leveraged
issuers may experience financial stress which would adversely affect their
ability to service their principal and interest payment obligations, to meet
their projected business goals or to obtain additional financing. If the issuer
of a fixed-income security owned by a fund defaults, the fund may incur
additional expenses to seek recovery. In addition, periods of economic
uncertainty and change can be expected to result in an increased volatility of
market prices of lower rated securities and a corresponding volatility in the
net asset value of a share of a fund holding such securities.
HIGH YIELD SECURITIES. All fixed-income securities are subject to two types of
risks: the credit risk and the interest rate risk. The credit risk relates to
the ability of the issuer to meet interest or principal payments or both as they
come due. Generally, higher yielding bonds are subject to a credit risk to a
greater extent than higher quality bonds. The interest rate risk refers to the
fluctuations in net asset value of any portfolio of fixed-income securities
resulting solely from the inverse relationship between price and yield of
fixed-income securities; that is, when the general level of interest rates
rises, the prices of outstanding fixed-income securities generally decline, and
when interest rates fall, prices generally rise.
The ratings of fixed-income securities by Moody's and Standard & Poor's are
a generally accepted barometer of credit risk.
Because of the special nature of a fund's investment in high yield
securities, commonly known as junk bonds, the Investment Manager must take
account of certain special considerations in assessing the risks associated with
such investments. Although the growth of the high yield securities market in the
1980s had paralleled a long economic expansion, recently many issuers have been
affected by adverse economic and market conditions. It should be recognized that
an economic downturn or increase in interest rates is likely to have a negative
effect on the high yield bond market and on the value of the high yield
securities held by a fund, as well as on the ability of the securities' issuers
to repay principal and interest on their borrowings.
The prices of high yield securities have been found to be less sensitive to
changes in prevailing interest rates than higher-rated investments, but are
likely to be more sensitive to adverse economic changes or individual corporate
developments. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress which
would adversely affect their ability to service their principal and interest
payment obligations, to meet their projected business goals or to obtain
additional financing. If the issuer of a fixed-income security owned by a fund
defaults, the fund may incur additional expenses to seek recovery. In addition,
periods of economic uncertainty and change can be expected to result in an
increased volatility of market prices of high yield securities and a concomitant
volatility in the net asset value of a share of a fund. Moreover, the market
prices of certain of a fund's portfolio securities which are structured as zero
coupon and payment-in-kind securities are affected to a greater extent by
interest rate changes and thereby tend to be more volatile than securities which
pay interest periodically and in cash.
The secondary market for high yield securities may be less liquid than the
markets for higher quality securities and, as such, may have an adverse effect
on the market prices of certain securities. The limited liquidity of the market
may also adversely affect the ability of a fund's Directors/Trustees to arrive
at a fair value for certain high yield securities at certain times and could
make it difficult for the fund to sell certain securities. In addition, new laws
and potential new laws may have an adverse effect upon the value of high yield
securities and a concomitant negative impact upon the net asset value of a share
of a fund.
MORTGAGE-BACKED SECURITIES. As stated above, a portion of a fund's investments
may be in Mortgage-Backed securities. Mortgage-Backed securities are securities
that directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans secured by real property. The term Mortgage-Backed
securities as used herein includes adjustable rate mortgage securities and
derivative mortgage products such as collateralized mortgage obligations,
stripped Mortgage-Backed securities and other products described below.
There are currently three basic types of Mortgage-Backed securities: (i)
those issued or guaranteed by the United States Government or one of its
agencies or instrumentalities, such as the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC") (securities issued by GNMA, but
not those issued by FNMA or FHLMC, are backed by the "full faith and credit" of
the United States); (ii) those issued by private issuers that represent an
interest in or are collateralized by Mortgage-Backed securities issued or
guaranteed by the United States Government or one of its agencies or
instrumentalities; and (iii) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or Mortgage-Backed
securities without a government guarantee but usually having some form of
private credit enhancement.
Mortgage-Backed securities have certain different characteristics than
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that principal
may be prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at
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any time. As a result, if a fund purchases such a security at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield to maturity. Alternatively, if a fund purchases these
securities at a discount, faster than expected prepayments will increase, while
slower than expected prepayments will reduce, yield to maturity. A fund may
invest a portion of its assets in derivative Mortgage-Backed securities such as
Stripped Mortgage-Backed securities which are highly sensitive to changes in
prepayment and interest rates. The Investment Manager seeks to manage these
risks (and potential benefits) by investing in a variety of such securities and
through hedging techniques.
Mortgage-Backed securities, like all fixed income securities, generally
decrease in value as a result of increases in interest rates. In addition,
although generally the value of fixed-income securities increases during periods
of falling interest rates and, as stated above, decreases during periods of
rising interest rates, as a result of prepayments and other factors, this is not
always the case with respect to Mortgage-Backed securities.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by a fund are likely to be greater during a period of
declining interest rates and, as a result, likely to be reinvested at lower
interest rates than during a period of rising interest rates. Mortgage-Backed
securities generally decrease in value as a result of increases in interest
rates and may benefit less than other fixed-income securities from declining
interest rates because of the risk of prepayment.
There are certain risks associated specifically with CMOs. CMOs issued by
private entities are not U.S. Government securities and are not guaranteed by
any government agency, although the securities underlying a CMO may be subject
to a guarantee. Therefore, if the collateral securing the CMO, as well as any
third party credit support or guarantees, is insufficient to make payment, the
holder could sustain a loss. Also, a number of different factors, including the
extent of prepayment of principal of the Mortgage Assets, affect the
availability of cash for principal payments by the CMO issuer on any payment
date and, accordingly, affect the timing of principal payments on each CMO
class. In addition, CMO classes with higher yields tend to be more volatile with
respect to cash flow of the underlying mortgages; as a result the market prices
of a yield on these classes tend to be more volatile.
Asset-Backed securities represent the securitization techniques used to
develop Mortgage-Backed securities applied to a broad range of other assets.
Through the use of trusts and special purpose corporations, various types of
assets, primarily automobile and credit card receivables and home equity loans,
are being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a pay-through structure similar to
the CMO structure. Asset-Backed securities involve certain risks that are not
posed by Mortgage-Backed securities, resulting mainly from the fact that
Asset-Backed securities do not usually contain the complete benefit of a
security interest in the related collateral. For example, credit card
receivables generally are unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, including the
bankruptcy laws, some of which may reduce the ability to obtain full payment. In
the case of automobile receivables, due to various legal and economic factors,
proceeds for repossessed collateral may not always be sufficient to support
payments on these securities.
RIGHTS AND WARRANTS. Certain Underlying Funds may acquire rights and/or
warrants which are attached to other securities in its portfolio, or which are
issued as a distribution by the issuer of a security held in its portfolio.
Rights and/or warrants are, in effect, options to purchase equity securities at
a specific price, generally valid for a specific period of time, and have no
voting rights, pay no dividends and have no rights with respect to the
corporation issuing them.
REAL ESTATE INVESTMENT TRUSTS. A fund may invest in real estate investment
trusts which pool investors' funds for investments primarily in commercial real
estate properties. Investment in real estate investment trusts may be the most
practical available means for a fund to invest in the real estate industry (a
fund is prohibited from investing in real estate directly). As a shareholder in
a real estate investment trust, a fund would bear its ratable share of the real
estate investment trust's expenses, including its advisory and administration
fees. At the same time the fund would continue to pay its own investment
management fees and other expenses, as a result of which the fund and its
shareholders in effect will be absorbing duplicate levels of fees with respect
to investments in real estate investment trusts.
OTHER INVESTMENT VEHICLES. Certain Underlying Funds may invest a small portion
of their total assets in securities issued by other investment companies. Such
investments may be necessary in order to participate in certain foreign markets
where foreigners are prohibited from investing directly in the securities of
individual issuers. Each fund will incur any indirect expenses incurred through
investment in an investment company, such as the payment of a management fee
(which may result in the payment of an additional advisory fee). Furthermore, it
should be noted that foreign investment companies are not subject to the U.S.
securities laws and may be subject to fewer or less stringent regulations than
U.S. investment companies.
SECURITIES RECEIPTS. Certain Underlying Funds may also invest in securities of
foreign issuers in the form of American
35
<PAGE>
Depository Receipts (ADRs), European Depository Receipts (EDRs) or other similar
securities convertible into securities of foreign issuers. These securities may
not necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by a United States
bank or trust company evidencing ownership of the underlying securities. EDRs
are European receipts evidencing a similar arrangement. Generally, ADRs, in
registered form, are designed for use in the United States securities markets
and EDRs, in bearer form, are designed for use in European securities markets.
INVESTMENTS IN EUROPEAN SECURITIES. The Dean Witter European Growth Fund Inc.
invests its assets primarily in the securities of European issuers. Political
and economic developments in Europe, especially as they relate to changes in the
structure of the European Economic Community and the anticipated development of
a unified common market, may have profound effects upon the value of a large
segment of that fund's portfolio. Continued progress in the evolution of, for
example, a united European common market may be slowed by unanticipated
political or social events and may, therefore, adversely affect the value of
certain of the securities held in that fund's portfolio. Foreign companies are
not subject to the regulatory requirements of U.S. companies and, as such, there
may be less publicly available information about such companies.
The Dean Witter International SmallCap Fund may invest more than 25% of its
total assets in British issuers and that fund's investment performance may be
affected by social, political and economic events occurring in the United
Kingdom.
SMALL-CAP STOCKS. Certain Underlying Funds invest primarily in small
capitalization foreign or U.S. equity securities. Investing in lesser-known,
smaller capitalized companies may involve greater risk of volatility of a fund's
net asset value than is customarily associated with investing in larger, more
established companies. There is typically less publicly available information
concerning foreign and smaller companies than for domestic and larger, more
established companies. Some small companies have limited product lines,
distribution channels and financial and managerial resources and tend to
concentrate on fewer geographic markets than do larger companies. Also, because
smaller companies normally have fewer shares outstanding than larger companies
and trade less frequently, it may be more difficult for the fund to buy and sell
significant amounts of such shares without an unfavorable impact on prevailing
market prices. Some of the companies in which the fund may invest may
distribute, sell or produce products which have recently been brought to market
and may be dependent on key personnel with varying degrees of experience.
MID-CAP STOCKS. Investing in medium-sized market capitalization companies may
involve greater risk of volatility of a fund's net asset value than is
customarily associated with investing in larger, more established companies.
Often mid-size companies and the industries in which they are focused are still
evolving and while this may offer better growth potential than larger,
established companies it also may make them more sensitive to changing market
conditions. Because prices of stocks, including mid-cap stocks, fluctuate from
day to day, the value of an investment in the Underlying Fund will vary based
upon the Underlying Fund's investment performance.
INVESTMENTS IN ASIAN AND PACIFIC RIM SECURITIES. Dean Witter Pacific Growth
Fund Inc. and Dean Witter International SmallCap Fund may invest all or large
portions of their assets in Asian and Pacific Rim securities. Certain Asian and
Pacific Rim countries may be subject to a greater degree of economic, political
and social instability than is the case in the United States and Western
European countries. Such instability may result from, among other things, the
following: (i) authoritarian governments or military involvement in political
and economic decision-making, including changes in government through
extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic and social conditions; (iii) internal insurgencies;
(iv) hostile relations with neighboring countries; and (v) ethnic, religious and
racial disaffection. Such social, political and economic instability could
disrupt the principal financial markets in which the Underlying Funds invest and
adversely affect the value of the assets of these Underlying Funds.
During the past decade, countries in the Asian region have experienced real
economic growth rates exceeding those experienced by many Western industrialized
countries. Certain economic conditions which presently exist in the Asian region
may offer the potential for long-term capital appreciation from investment in
equity securities of Asian issuers. Among these conditions, are the following:
the increasing industrialization of Asian economies, favorable demographics and
competitive wage rates, high rates of domestic savings available to fund
investment, particularly in the area of infrastructure, the ability to attract
foreign direct investment, the emergence of a regional trading zone and rising
per capita incomes available to support local markets for consumer goods. The
rapid ongoing shift from primary industries into industrial manufacturing has
contributed to high rates of economic activity. Between 1970 and 1991, there was
a significant shift in the percentage of gross domestic product ("GDP")
accounted for by the agricultural sector in these markets and a marked increase
in output by the industrial sector, most markedly in Indonesia, Malaysia and
Thailand. Generally, in the Asian countries there is still potential for further
industrialization so as to reach the levels presently attained by the countries
of the industrialized world.
INVESTMENTS IN JAPANESE SECURITIES. Dean Witter Pacific Growth Fund Inc., Dean
Witter International SmallCap Fund and Dean Witter Japan Fund all may invest
large portions of
36
<PAGE>
their assets in Japanese Securities. The concentration of assets in Japanese
issuers will subject these funds to the risks of adverse social, political or
economic events which occur in Japan. Specifically, investments in the Japanese
stock market may entail a higher degree of risk than investments in other
markets as, by fundamental measures of corporate valuation, such as its high
price-earnings ratios and low dividend yields, the Japanese market as a whole
may appear expensive relative to other world stock markets (I.E., the prices of
Japanese stocks may be relatively high). In addition, the prices of securities
traded on the Japanese markets may be more volatile than many other markets.
Overall, Japanese securities markets have declined significantly since 1989
which has contributed to a weakness in the Japanese economy and the impact of a
further decline cannot be ascertained. The common stocks of many Japanese
companies continue, as they have historically, to trade at high price-earnings
ratios in comparison with those in the U.S., even after the recent market
decline. Differences in accounting methods make it difficult to compare the
earnings of Japanese companies with those of companies in other countries,
especially the United States.
The Japanese economy experienced its worst recession since World War II in
the 1990s. While Japan's Economic Planning Agency claims the recession ended in
October 1993, the economy has been largely stagnant since then. In addition,
asset deflation, both financial and in real estate, has exerted a continuous
drag on the economy. The Japanese government has called for a transformation of
the economy away from its high dependency on export-led growth towards greater
stimulation of the domestic economy. The plan calls for direct government
spending on public works and includes measures to support weak land prices and
to revitalize Japan's stagnating financial markets. There is no assurance that
this package, however, will succeed in fueling economic growth. Japan is largely
dependent upon foreign economies for raw materials. International trade is
important to Japan's economy, as exports provide the means to pay for many of
the raw materials it must import. Because of the concentration of Japanese
exports in highly visible products such as automobiles, machine tools and
semiconductors, and the large trade surpluses ensuing therefrom, Japan has
entered a difficult phase in its relations with its trading partners,
particularly with respect to the United States, with whom the trade imbalance is
the greatest. It is possible that differences over trade policy may lead the
U.S. to take actions which may have an adverse effect on the Japanese economy.
INVESTMENTS IN LATIN AMERICAN SECURITIES. The securities markets of Latin
American countries are substantially smaller, less developed, less liquid and
more volatile than the major securities markets in the United States. The
limited size of many Latin American securities markets and limited trading
volume in issuers compared to volume of trading in U.S. securities could cause
prices to be erratic for reasons apart from factors that affect the quality of
the securities. For example, limited market size may cause prices to be unduly
influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on fundamental analysis, may
decrease the value and liquidity of portfolio securities, especially in these
markets.
Latin American companies are not subject to the regulatory requirements of
U.S. companies and, as such, there may be less publicly available information
about such companies. Moreover, Latin American companies are not subject to
uniform accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies. Also, certain Latin American
countries may impose unusually high withholding taxes on dividends payable to a
fund, thereby effectively reducing the fund's investment income.
In addition, Latin American exchanges and broker-dealers are generally
subject to less government and exchange scrutiny and regulation than their
American counterparts. Brokerage commissions, dealer concessions, custodial
expenses and other transaction costs may be higher in foreign markets than in
the U.S.
Political and economic developments in Latin America may have profound
effects upon the value of a fund's portfolio. In the event of expropriation,
nationalization or other complication, a fund could lose its entire investment
in any one country. In addition, individual Latin American countries may place
restrictions on the ability of foreign entities such as the fund to invest in
particular segments of the local economies. Certain Latin American countries are
among the largest debtors to commercial banks and foreign governments. At times
certain Latin American countries have declared moratoria on the payment of
principal and/or interest on external debt. Most Latin American countries have
experienced substantial, and in some periods extremely high, rates of inflation
for many years. Inflation and rapid fluctuations in inflation rates have had and
may continue to have very negative effects on the economies and securities
markets of certain Latin American countries.
In addition, many of the currencies of Latin American countries have
experienced steady devaluations relative to the U.S. dollar, and major
devaluations have historically occurred in certain countries. Any devaluations
in the currencies in which a fund's portfolio securities are denominated may
have a detrimental impact on a fund. Some Latin American countries also may have
managed currencies which are not free floating against the U.S. dollar. In
addition, there is a risk that certain Latin American countries may restrict the
free conversion of their currencies into other currencies. Further, certain
Latin American currencies may not be internationally traded.
See the Statement of Additional Information for additional information
regarding the risks of the Underlying Funds' investment policies.
37
<PAGE>
PORTFOLIO MANAGEMENT
Each Portfolio of the Fund is managed by the Investment Manager with a view to
achieving the respective Portfolio's investment objective. In determining the
selection of the Underlying Funds for each Portfolio, the Investment Manager
will rely on information from various sources, including research, analysis and
appraisals of brokers and dealers, the views of Trustees of the Fund and others
regarding economic developments and interest rate trends, and the Investment
Manager's own analysis of factors it deems relevant.
Each Portfolio of the Fund will be managed by a separate Committee
consisting of, in each case, the Chief Investment Officer of the Investment
Manager as well as Senior Portfolio Managers assigned to the respective
Committees. The investment activities of the International Portfolio and the
Domestic Portfolio will be directed by the International Committee and the
Domestic Committee, respectively.
Each of the Underlying Funds incurs expenses relating to their portfolio
management which costs include custodial costs, brokerage commissions and other
transaction charges related to investing in foreign securities markets which
costs are generally higher than in the United States.
The portfolio turnover rate for each Portfolio (i.e., the rate at which each
Portfolio buys and sells shares of the Underlying Funds) is expected to be under
100%.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The investment restrictions listed below are among the restrictions which have
been adopted by the Fund as fundamental policies of the Portfolios. Under the
Investment Company Act of 1940, as amended (the "Act"), a fundamental policy may
not be changed with respect to a Portfolio, without the vote of a majority of
the outstanding voting securities of that Portfolio, as defined in the Act. For
purposes of the following limitations: (i) all percentage limitations apply
immediately after a purchase or initial investment, and (ii) any subsequent
change in any applicable percentage resulting from market fluctuations or other
changes in total or net assets does not require elimination of any security from
the Portfolio.
Each Portfolio of the Fund may not:
1. Invest 25% or more of the value of its total
assets in securities of issuers in any one industry except that each
Portfolio will concentrate its investments in the mutual fund industry. This
restriction does not apply to a Portfolio's investments in the mutual fund
industry by virtue of its investments in the Underlying Dean Witter Funds or
investment companies managed by an adviser that is an affiliate of the
Investment Manager. This restriction also does not apply to obligations
issued or guaranteed by the United States Government, its agencies or
instrumentalities.
2. Borrow money except a bank for temporary or emergency purposes,
including the meeting of redemption requests in an amount not exceeding
33 1/3% of the value of each Portfolio's total assets (including the amount
borrowed) valued at market less liabilities (not including the amount
borrowed) at the time the borrowing is made.
Notwithstanding any other investment policy or restriction, each Portfolio
of the Fund may seek to achieve its investment objective by investing all or
substantially all of its assets in another investment company having
substantially the same investment objective and policies as the respective
Portfolio.
UNDERWRITING
- --------------------------------------------------------------------------------
Dean Witter Distributors Inc. (the "Underwriter") has agreed to purchase up to
10,000,000 shares from the Fund, which number may be increased or decreased in
accordance with the Underwriting Agreement. The initial offering will run
approximately from October 27, 1997 through November 20, 1997. The Underwriting
Agreement provides that the obligation of the Underwriter is subject to certain
conditions precedent and that the Underwriter will be obligated to purchase the
shares on November 25, 1997, or such other date as may be agreed upon by the
Underwriter and the Fund (the "Closing Date"). Shares will not be issued and
dividends will not be declared by the Fund until after the Closing Date. For
this reason, payment is not required to be made prior to the Closing Date. If
any orders received during the initial offering period are accompanied by
payment, such payment will be returned unless an accompanying request for
investment in a Dean Witter money market fund is received at the time the
payment is made. Prospective investors in money market funds should request and
read the money market fund prospectus prior to investing. All such funds
received and invested in a Dean Witter money market fund will be automatically
invested in the Fund on the Closing Date without any further action by the
investor. Any investor may cancel his or her purchase of Fund shares without
penalty at any time prior to the Closing Date.
The Underwriter will purchase Class B, Class C and Class D shares from the
Fund at $10.00 per share with all proceeds going to the Fund and will purchase
Class A
38
<PAGE>
shares at $10.00 per share plus a sales charge with the sales charge paid to the
Underwriter and the net asset value of $10.00 per share going to the Fund. The
Underwriter may, however, receive contingent deferred sales charges from future
redemptions of Class A, Class B and Class C shares (see "Purchase of Fund
Shares--Continuous Offering").
The Underwriter shall, regardless of its expected underwriting commitment,
be entitled and obligated to purchase only the number of shares for which
purchase orders have been received by the Underwriter prior to 2:00 p.m., New
York time, on the third business day preceding the Closing Date, or such other
date as may be agreed to between the parties.
The minimum number of Fund shares which may be purchased by any shareholder
pursuant to this offering is 100 shares. Certificates for shares purchased will
not be issued unless requested by the shareholder in writing.
PURCHASE OF FUND SHARES--CONTINUOUS OFFERING
- --------------------------------------------------------------------------------
GENERAL
Each Portfolio of the Fund offers each class of its shares for sale to the
public on a continuous basis. Pursuant to a Distribution Agreement between the
Fund and Dean Witter Distributors Inc. (the "Distributor"), an affiliate of the
Investment Manager, shares of each Portfolio of the Fund are distributed by the
Distributor and offered by DWR and other dealers which have entered into
agreements with the Distributor ("Selected Broker-Dealers"). The principal
executive office of the Distributor is located at Two World Trade Center, New
York, New York 10048.
Each Portfolio of the Fund offers four classes of shares (each, a "Class").
Class A shares are sold to investors with an initial sales charge that declines
to zero for larger purchases; however, Class A shares sold without an initial
sales charge are subject to a contingent deferred sales charge ("CDSC") of 1.0%
if redeemed within one year of purchase, except for certain specific
circumstances. Class B shares are sold without an initial sales charge but are
subject to a CDSC (scaled down from 5.0% to 1.0%) payable upon most redemptions
within six years after purchase. (Class B shares purchased by certain qualified
employer-sponsored benefit plans are subject to a CDSC scaled down from 2.0% to
1.0% if redeemed within three years after purchase.) Class C shares are sold
without an initial sales charge but are subject to a CDSC of 1.0% on most
redemptions made within one year after purchase. Class D shares are sold without
an initial sales charge or CDSC and are available only to investors meeting an
initial investment minimum of $5 million, and to certain other limited
categories of investors. At the discretion of the Board of Trustees of the Fund,
Class A shares may be sold to categories of investors in addition to those set
forth in this prospectus at net asset value without a front-end sales charge,
and Class D shares may be sold to certain other categories of investors, in each
case as may be described in the then current prospectus of the Fund. See
"Alternative Purchase Arrangements--Selecting a Particular Class" for a
discussion of factors to consider in selecting which Class of shares to
purchase.
The minimum initial purchase is $1,000 for each Class of shares, although
Class D shares are only available to persons investing $5 million or more and to
certain other limited categories of investors. For the purpose of meeting the
minimum $5 million initial investment for Class D shares, and subject to the
$1,000 minimum initial investment for each Class of the Fund, an investor's
existing holdings of Class A shares of the Fund and other Dean Witter Funds that
are multiple class funds ("Dean Witter Multi-Class Funds") and shares of Dean
Witter Funds sold with a front-end sales charge ("FSC Funds") and concurrent
investments in Class D shares of the Fund and other Dean Witter Multi-Class
Funds will be aggregated. Subsequent purchases of $100 or more may be made by
sending a check, payable to Dean Witter Fund of Funds, directly to Dean Witter
Trust FSB (the "Transfer Agent" or "DWT") at P.O. Box 1040, Jersey City, NJ
07303 or by contacting an account executive of DWR or other Selected Broker-
Dealer. When purchasing shares of the Fund, investors must specify which
Portfolio they wish to invest in and whether the purchase is for Class A, Class
B, Class C or Class D shares. If no Class is specified, the Transfer Agent will
not process the transaction until the proper Class is identified. The minimum
initial purchase, in the case of investments through EasyInvest-SM-, an
automatic purchase plan (see "Shareholder Services"), is $100, provided that the
schedule of automatic investments will result in investments totalling at least
$1,000 within the first twelve months. In the case of investments pursuant to
Systematic Payroll Deduction Plans (including Individual Retirement Plans), the
Fund, in its discretion, may accept investments without regard to any minimum
amounts which would otherwise be required, if the Fund has reason to believe
that additional investments will increase the investment in all accounts under
such Plans to at least $1,000. Certificates for shares purchased will not be
issued unless a request is made by the shareholder in writing to the Transfer
Agent.
Shares of the Fund are sold through the Distributor on a normal three
business day settlement basis; that is, payment is due on the third business day
(settlement date) after the order is placed with the Distributor. Since DWR and
other Selected Broker-Dealers forward investors' funds on settlement date, they
will benefit from the temporary use of the funds if payment is made prior
thereto. As noted above, orders placed directly with the Transfer Agent must be
accompanied by payment. Investors will be enti-
39
<PAGE>
tled to receive income dividends and capital gains distributions if their order
is received by the close of business on the day prior to the record date for
such distributions. Sales personnel of a Selected Broker-Dealer are compensated
for selling shares of the Fund at the time of their sale by the Distributor or
any of its affiliates and/or the Selected Broker-Dealer. In addition, some sales
personnel of the Selected Broker-Dealer will receive various types of non-cash
compensation as special sales incentives, including trips, educational and/or
business seminars and merchandise. The Fund and the Distributor reserve the
right to reject any purchase orders.
ALTERNATIVE PURCHASE ARRANGEMENTS
Each Portfolio of the Fund offers several Classes of shares to investors
designed to provide them with the flexibility of selecting an investment best
suited to their needs. The general public is offered three Classes of shares:
Class A shares, Class B shares and Class C shares, which differ principally in
terms of sales charges and rate of expenses to which they are subject. A fourth
Class of shares, Class D shares, is offered only to limited categories of
investors (see "No Load Alternative--Class D Shares" below).
Each Class A, Class B, Class C or Class D share of each Portfolio of the
Fund represents an identical interest in the respective investment Portfolio of
the Fund except that Class A, Class B and Class C shares bear the expenses of
the ongoing shareholder service fees, Class B and Class C shares bear the
expenses of the ongoing distribution fees and Class A, Class B and Class C
shares which are redeemed subject to a CDSC bear the expense of the additional
incremental distribution costs resulting from the CDSC applicable to shares of
those Classes. The ongoing distribution fees of a Portfolio that are imposed on
Class A, Class B and Class C shares will be imposed directly against those
Classes of that Portfolio and not against all assets of the Fund and,
accordingly, such charges against one Class will not affect the net asset value
of any other Class or have any impact on investors choosing another sales charge
option. See "Plan of Distribution" and "Redemptions and Repurchases."
Set forth below is a summary of the differences between the Classes and the
factors an investor should consider when selecting a particular Class. This
summary is qualified in its entirety by detailed discussion of each Class that
follows this summary.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.25%. The initial sales charge is reduced for certain
purchases. Investments of $1 million or more (and investments by certain other
limited categories of investors) are not subject to any sales charges at the
time of purchase but are subject to a CDSC of 1.0% on redemptions made within
one year after purchase, except for certain specific circumstances. Class A
shares are also subject to a 12b-1 fee of up to 0.25% of the average daily net
assets of the Class. See "Initial Sales Charge Alternative--Class A Shares."
CLASS B SHARES. Class B shares are offered at net asset value with no initial
sales charge but are subject to a CDSC (scaled down from 5.0% to 1.0%) if
redeemed within six years of purchase. (Class B shares purchased by certain
qualified employer-sponsored benefit plans are subject to a CDSC scaled down
from 2.0% to 1.0% if redeemed within three years after purchase.) This CDSC may
be waived for certain redemptions. Class B shares are also subject to an annual
12b-1 fee of 1.0% of the average daily net assets of Class B. The Class B
shares' distribution fee will cause that Class to have higher expenses and pay
lower dividends than Class A or Class D shares.
After approximately ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund, based on the relative net asset
values of the shares of the two Classes on the conversion date. In addition, a
certain portion of Class B shares that have been acquired through the
reinvestment of dividends and distributions will be converted at that time. See
"Contingent Deferred Sales Charge Alternative--Class B Shares."
CLASS C SHARES. Class C shares are sold at net asset value with no initial
sales charge but are subject to a CDSC of 1.0% on redemptions made within one
year after purchase. This CDSC may be waived for certain redemptions. They are
subject to an annual 12b-1 fee of up to 1.0% of the average daily net assets of
the Class C shares. The Class C shares' distribution fee may cause that Class to
have higher expenses and pay lower dividends than Class A or Class D shares. See
"Level Load Alternative--Class C Shares."
CLASS D SHARES. Class D shares are available only to limited categories of
investors (see "No Load Alternative-- Class D Shares" below). Class D shares are
sold at net asset value with no initial sales charge or CDSC. They are not
subject to any 12b-1 fees. See "No Load Alternative-- Class D Shares."
SELECTING A PARTICULAR CLASS. In deciding which Class of Fund shares to
purchase, investors should consider the following factors, as well as any other
relevant facts and circumstances:
The decision as to which Class of shares is more beneficial to an investor
depends on the amount and intended length of his or her investment. Investors
who prefer an initial sales charge alternative may elect to purchase Class A
shares. Investors qualifying for significantly reduced or, in the case of
purchases of $1 million or more, no initial sales charges may find Class A
shares particularly attractive because similar sales charge reductions are not
available with respect to Class B or Class C shares. Moreover, Class A shares
are subject to lower ongoing expenses than are Class B or Class C shares over
the term of the investment. As an alternative, Class B and Class C shares
40
<PAGE>
are sold without any initial sales charge so the entire purchase price is
immediately invested in the Fund. Any investment return on these additional
investment amounts may partially or wholly offset the higher annual expenses of
these Classes. Because the Fund's future return cannot be predicted, however,
there can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, although Class C shares are subject to a significantly lower
CDSC upon redemptions, they do not, unlike Class B shares, convert into Class A
shares after approximately ten years, and, therefore, are subject to an ongoing
12b-1 fee of 1.0% (rather than the 0.25% fee applicable to Class A shares) for
an indefinite period of time. Thus, Class B shares may be more attractive than
Class C shares to investors with longer term investment outlooks. Other
investors, however, may elect to purchase Class C shares if, for example, they
determine that they do not wish to be subject to a front-end sales charge and
they are uncertain as to the length of time they intend to hold their shares.
For the purpose of meeting the $5 million minimum investment amount for
Class D shares, holdings of Class A shares in all Dean Witter Multi-Class Funds,
shares of FSC Funds and shares of Dean Witter Funds for which such shares have
been exchanged, will be included together with the current investment amount.
Sales personnel may receive different compensation for selling each Class of
shares. Investors should understand that the purpose of a CDSC is the same as
that of the initial sales charge in that the sales charges applicable to each
Class provide for the financing of the distribution of shares of that Class.
Set forth below is a chart comparing the sales charge, 12b-1 fees and
conversion options applicable to each Class of shares:
<TABLE>
<CAPTION>
<C> <S> <C> <C>
CONVERSION
CLASS SALES CHARGE 12B-1 FEE FEATURE
A Maximum 5.25% 0.25% No
initial sales charge
reduced for
purchases of $25,000
and over; shares
sold without an
initial sales charge
generally subject to
a 1.0% CDSC during
first year.
B Maximum 5.0% CDSC 1.0% B shares
during the first convert to A
year decreasing to 0 shares
after six years automatically
after
approximately
ten years
C 1.0% CDSC during 1.0% No
first year
D None None No
</TABLE>
See "Purchase of Fund Shares" and "The Fund and its Management" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Determination of Net Asset Value," "Dividends,
Distributions and Taxes" and "Shareholder Services--Exchange Privilege" for
other differences between the Classes of shares.
INITIAL SALES CHARGE ALTERNATIVE-- CLASS A SHARES
Class A shares are sold at net asset value plus an initial sales charge. In some
cases, reduced sales charges may be available, as described below. Investments
of $1 million or more (and investments by certain other limited categories of
investors) are not subject to any sales charges at the time of purchase but are
subject to a CDSC of 1.0% on redemptions made within one year after purchase
(calculated from the last day of the month in which the shares were purchased),
except for certain specific circumstances. The CDSC will be assessed on an
amount equal to the lesser of the current market value or the cost of the shares
being redeemed. The CDSC will not be imposed (i) in the circumstances set forth
below in the section "Contingent Deferred Sales Charge Alternative--Class B
Shares-- CDSC Waivers," except that the references to six years in the first
paragraph of that section shall mean one year in the case of Class A shares, and
(ii) in the circumstances identified in the section "Additional Net Asset Value
Purchase Options" below. Class A shares are also subject to an annual 12b-1 fee
of up to 0.25% of the average daily net assets of the Class.
The offering price of Class A shares will be the net asset value per share
next determined following receipt of an order (see "Determination of Net Asset
Value" below), plus a sales charge (expressed as a percentage of the offering
price) on a single transaction as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------------------
PERCENTAGE OF APPROXIMATE
AMOUNT OF SINGLE PUBLIC OFFERING PERCENTAGE OF AMOUNT
TRANSACTION PRICE INVESTED
- -------------------------- ------------------- ---------------------
<S> <C> <C>
Less than $25,000......... 5.25% 5.54%
$25,000 but less
than $50,000............. 4.75% 4.99%
$50,000 but less
than $100,000............ 4.00% 4.17%
$100,000 but less
than $250,000............ 3.00% 3.09%
$250,000 but less
than $1 million.......... 2.00% 2.04%
$1 million and over....... 0 0
</TABLE>
Upon notice to all Selected Broker-Dealers, the Distributor may reallow up
to the full applicable sales charge as shown in the above schedule during
periods specified in such notice. During periods when 90% or more of the sales
charge is reallowed, such Selected Broker-Dealers may be deemed to be
underwriters as that term is defined in the Securities Act of 1933.
The above schedule of sales charges is applicable to purchases in a single
transaction by, among others: (a) an
41
<PAGE>
individual; (b) an individual, his or her spouse and their children under the
age of 21 purchasing shares for his, her or their own accounts; (c) a trustee or
other fiduciary purchasing shares for a single trust estate or a single
fiduciary account; (d) a pension, profit-sharing or other employee benefit plan
qualified or non-qualified under Section 401 of the Internal Revenue Code; (e)
tax-exempt organizations enumerated in Section 501(c)(3) or (13) of the Internal
Revenue Code; (f) employee benefit plans qualified under Section 401 of the
Internal Revenue Code of a single employer or of employers who are "affiliated
persons" of each other within the meaning of Section 2(a)(3)(c) of the Act; and
for investments in Individual Retirement Accounts of employees of a single
employer through Systematic Payroll Deduction plans; or (g) any other organized
group of persons, whether incorporated or not, provided the organization has
been in existence for at least six months and has some purpose other than the
purchase of redeemable securities of a registered investment company at a
discount.
COMBINED PURCHASE PRIVILEGE. Investors may have the benefit of reduced sales
charges in accordance with the above schedule by combining purchases of Class A
shares of the Fund in single transactions with the purchase of Class A shares of
other Dean Witter Multi-Class Funds and shares of FSC Funds. The sales charge
payable on the purchase of the Class A shares of the Fund, the Class A shares of
the other Dean Witter Multi-Class Funds and the shares of the FSC Funds will be
at their respective rates applicable to the total amount of the combined
concurrent purchases of such shares.
RIGHT OF ACCUMULATION. The above persons and entities may benefit from a
reduction of the sales charges in accordance with the above schedule if the
cumulative net asset value of Class A shares purchased in a single transaction,
together with shares of the Fund and other Dean Witter Funds previously
purchased at a price including a front-end sales charge (including shares of the
Fund and other Dean Witter Funds acquired in exchange for those shares, and
including in each case shares acquired through reinvestment of dividends and
distributions), which are held at the time of such transaction, amounts to
$25,000 or more. If such investor has a cumulative net asset value of shares of
FSC Funds and Class A and Class D shares equal to at least $5 million, such
investor is eligible to purchase Class D shares subject to the $1,000 minimum
initial investment requirement of that Class of the Fund. See "No Load
Alternative--Class D Shares" below.
The Distributor must be notified by DWR or a Selected Broker-Dealer or the
shareholder at the time a purchase order is placed that the purchase qualifies
for the reduced charge under the Right of Accumulation. Similar notification
must be made in writing by the dealer or shareholder when such an order is
placed by mail. The reduced sales charge will not be granted if: (a) such
notification is not furnished at the time of the order; or (b) a review of the
records of the Selected Broker-Dealer or the Transfer Agent fails to confirm the
investor's represented holdings.
LETTER OF INTENT. The foregoing schedule of reduced sales charges will also be
available to investors who enter into a written Letter of Intent providing for
the purchase, within a thirteen-month period, of Class A shares of the Fund from
DWR or other Selected Broker-Dealers. The cost of Class A shares of the Fund or
shares of other Dean Witter Funds which were previously purchased at a price
including a front-end sales charge during the 90-day period prior to the date of
receipt by the Distributor of the Letter of Intent, or of Class A shares of the
Fund or shares of other Dean Witter Funds acquired in exchange for shares of
such funds purchased during such period at a price including a front-end sales
charge, which are still owned by the shareholder, may also be included in
determining the applicable reduction.
ADDITIONAL NET ASSET VALUE PURCHASE OPTIONS. In addition to investments of $1
million or more, Class A shares also may be purchased at net asset value by the
following:
(1) trusts for which DWT (an affiliate of the Investment Manager) provides
discretionary trustee services;
(2) persons participating in a fee-based program approved by the
Distributor, pursuant to which such persons pay an asset based fee for services
in the nature of investment advisory or administrative services (such
investments are subject to all of the terms and conditions of such programs,
which may include termination fees, mandatory redemption upon termination and
such other circumstances as specified in the programs' agreements, and
restrictions on transferability of Fund shares);
(3) retirement plans qualified under Section 401(k) of the Internal Revenue
Code ("401(k) plans") and other employer-sponsored plans qualified under Section
401(a) of the Internal Revenue Code with at least 200 eligible employees and for
which DWT serves as Trustee or the 401(k) Support Services Group of DWR serves
as recordkeeper;
(4) 401(k) plans and other employer-sponsored plans qualified under Section
401(k) of the Internal Revenue Code for which DWT serves as Trustee or the
401(k) Support Services Group of DWR serves as recordkeeper whose Class B shares
have converted to Class A shares, regardless of the plan's asset size or number
of eligible employees;
(5) investors who are clients of a Dean Witter account executive who joined
Dean Witter from another investment firm within six months prior to the date of
purchase of Fund shares by such investors, if the shares are being purchased
with the proceeds from a redemption of shares of an open-end proprietary mutual
fund of the account executive's previous firm which imposed either a front-end
or deferred sales charge, provided such purchase was made within sixty days
after the redemption and the proceeds of the redemp-
42
<PAGE>
tion had been maintained in the interim in cash or a money market fund; and
(6) other categories of investors, at the discretion of the Board, as
disclosed in the then current prospectus of the Fund.
No CDSC will be imposed on redemptions of shares purchased pursuant to
paragraphs (1), (2) or (5), above.
For further information concerning purchases of the Fund's shares, contact
DWR or another Selected Broker-Dealer or consult the Statement of Additional
Information.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Class B shares are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, will be imposed on most Class
B shares redeemed within six years after purchase. The CDSC will be imposed on
any redemption of shares if after such redemption the aggregate current value of
a Class B account with the Fund falls below the aggregate amount of the
investor's purchase payments for Class B shares made during the six years (or,
in the case of shares held by certain employer-sponsored benefit plans, three
years) preceding the redemption. In addition, Class B shares are subject to an
annual 12b-1 fee of 1.0% of the average daily net assets of Class B.
Except as noted below, Class B shares of the Fund which are held for six
years or more after purchase (calculated from the last day of the month in which
the shares were purchased) will not be subject to any CDSC upon redemption.
Shares redeemed earlier than six years after purchase may, however, be subject
to a CDSC which will be a percentage of the dollar amount of shares redeemed and
will be assessed on an amount equal to the lesser of the current market value or
the cost of the shares being redeemed. The size of this percentage will depend
upon how long the shares have been held, as set forth in the following table:
<TABLE>
<CAPTION>
YEAR SINCE CDSC AS A
PURCHASE PERCENTAGE OF
PAYMENT MADE AMOUNT REDEEMED
- ---------------------------------------- ---------------------
<S> <C>
First................................... 5.0%
Second.................................. 4.0%
Third................................... 3.0%
Fourth.................................. 2.0%
Fifth................................... 2.0%
Sixth................................... 1.0%
Seventh and thereafter.................. None
</TABLE>
In the case of Class B shares of the Fund held by 401 (k) plans or other
employer-sponsored plans qualified under Section 401(a) of the Internal Revenue
Code for which DWT serves as Trustee or the 401(k) Support Services Group of DWR
serves as recordkeeper and whose accounts are opened on or after July 28, 1997,
shares held for three years or more after purchase (calculated as described in
the paragraph above) will not be subject to any CDSC upon redemption. However,
shares redeemed earlier than three years after purchase may be subject to a CDSC
(calculated as described in the paragraph above), the percentage of which will
depend on how long the shares have been held, as set forth in the following
table:
<TABLE>
<CAPTION>
YEAR SINCE CDSC AS A
PURCHASE PERCENTAGE OF
PAYMENT MADE AMOUNT REDEEMED
- ---------------------------------------- ---------------------
<S> <C>
First................................... 2.0%
Second.................................. 2.0%
Third................................... 1.0%
Fourth and thereafter................... None
</TABLE>
CDSC WAIVERS. A CDSC will not be imposed on: (i) any amount which represents an
increase in value of shares purchased within the six years (or, in the case of
shares held by certain employer-sponsored benefit plans, three years) preceding
the redemption; (ii) the current net asset value of shares purchased more than
six years (or, in the case of shares held by certain employer-sponsored benefit
plans, three years) prior to the redemption; and (iii) the current net asset
value of shares purchased through reinvestment of dividends or distributions
and/or shares acquired in exchange for shares of other open-end investment
companies for which InterCapital serves as investment manager (collectively,
with the Fund, the "Dean Witter Funds") sold with a front-end sales charge or of
other Dean Witter Funds acquired in exchange for such shares. Moreover, in
determining whether a CDSC is applicable it will be assumed that amounts
described in (i), (ii) and (iii) above (in that order) are redeemed first.
In addition, the CDSC, if otherwise applicable, will be waived in the case
of:
(1) redemptions of shares held at the time a shareholder dies or becomes
disabled, only if the shares are: (A) registered either in the name of an
individual shareholder (not a trust), or in the names of such shareholder and
his or her spouse as joint tenants with right of survivorship; or (B) held in a
qualified corporate or self-employed retirement plan, Individual Retirement
Account ("IRA") or Custodial Account under Section 403(b)(7) of the Internal
Revenue Code ("403(b) Custodial Account"), provided in either case that the
redemption is requested within one year of the death or initial determination of
disability;
(2) redemptions in connection with the following retirement plan
distributions: (A) lump-sum or other distributions from a qualified corporate
or self-employed retirement plan following retirement (or, in the case of a "key
employee" of a "top heavy" plan, following attainment of age 59 1/2); (B)
distributions from an IRA or 403(b) Custodial Account following attainment of
age 59 1/2; or (C) a tax-free return of an excess contribution to an IRA; and
(3) all redemptions of shares held for the benefit of a participant in a
401(k) plan or other employer-sponsored plan qualified under Section 401(a) of
the Internal Revenue
43
<PAGE>
Code which offers investment companies managed by the Investment Manager or its
subsidiary, Dean Witter Services Company Inc., as self-directed investment
alternatives and for which DWT serves as Trustee or the 401(k) Support Services
Group of DWR serves as recordkeeper ("Eligible Plan"), provided that
either: (A) the plan continues to be an Eligible Plan after the redemption;
or (B) the redemption is in connection with the complete termination of the
plan involving the distribution of all plan assets to participants.
With reference to (1) above, for the purpose of determining disability, the
Distributor utilizes the definition of disability contained in Section 72(m)(7)
of the Internal Revenue Code, which relates to the inability to engage in
gainful employment. With reference to (2) above, the term "distribution" does
not encompass a direct transfer of IRA, 403(b) Custodial Account or retirement
plan assets to a successor custodian or trustee. All waivers will be granted
only following receipt by the Distributor of confirmation of the shareholder's
entitlement.
LEVEL LOAD ALTERNATIVE--
CLASS C SHARES
Class C shares are sold at net asset value next determined without an initial
sales charge but are subject to a CDSC of 1.0% on most redemptions made within
one year after purchase (calculated from the last day of the month in which the
shares were purchased). The CDSC will be assessed on an amount equal to the
lesser of the current market value or the cost of the shares being redeemed. The
CDSC will not be imposed in the circumstances set forth above in the section
"Contingent Deferred Sales Charge Alternative-- Class B Shares--CDSC Waivers,"
except that the references to six years in the first paragraph of that section
shall mean one year in the case of Class C shares. Class C shares are subject to
an annual 12b-1 fee of up to 1.0% of the average daily net assets of the Class.
Unlike Class B shares, Class C shares have no conversion feature and,
accordingly, an investor that purchases Class C shares will be subject to 12b-1
fees applicable to Class C shares for an indefinite period subject to annual
approval by the Fund's Board of Trustees and regulatory limitations.
NO LOAD ALTERNATIVE--
CLASS D SHARES
Class D shares are offered without any sales charge on purchase or redemption
and without any 12b-1 fee. Class D shares are offered only to investors meeting
an initial investment minimum of $5 million and the following categories of
investors: (i) investors participating in the InterCapital mutual fund asset
allocation program pursuant to which such persons pay an asset based fee; (ii)
persons participating in a fee-based program approved by the Distributor,
pursuant to which such persons pay an asset based fee for services in the nature
of investment advisory or administrative services (subject to all of the terms
and conditions of such programs referred to in (i) and (ii) above, which may
include termination fees, mandatory redemption upon termination and such other
circumstances as specified in the programs' agreements, and restrictions on
transferability of Fund shares); (iii) 401(k) plans established by DWR and SPS
Transaction Services, Inc. (an affiliate of DWR) for their employees; (iv)
certain Unit Investment Trusts sponsored by DWR; (v) certain other open-end
investment companies whose shares are distributed by the Distributor; and (vi)
other categories of investors, at the discretion of the Board, as disclosed in
the then current prospectus of the Fund. Investors who require a $5 million
minimum initial investment to qualify to purchase Class D shares may satisfy
that requirement by investing that amount in a single transaction in Class D
shares of the Fund and other Dean Witter Multi-Class Funds, subject to the
$1,000 minimum initial investment required for that Class of the Fund. In
addition, for the purpose of meeting the $5 million minimum investment amount,
holdings of Class A shares in all Dean Witter Multi-Class Funds, shares of FSC
Funds and shares of Dean Witter Funds for which such shares have been exchanged
will be included together with the current investment amount. If a shareholder
redeems Class A shares and purchases Class D shares, such redemption may be a
taxable event.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the Act
with respect to the distribution of Class A, Class B and Class C shares of each
Portfolio of the Fund. In the case of Class A and Class C shares, the Plan
provides that the Fund will, on behalf of each Portfolio, reimburse the
Distributor and others for the expenses of certain activities and services
incurred by them specifically on behalf of those shares. Reimbursements for
these expenses will be made in monthly payments by each Portfolio of the Fund to
the Distributor, which will in no event exceed amounts equal to payments at the
annual rates of 0.25% and 1.0% of the average daily net assets of Class A and
Class C, respectively. In the case of Class B shares, the Plan provides that the
Fund, on behalf of each Portfolio, will pay the Distributor a fee, which is
accrued daily and paid monthly, at the annual rate of 1.0% of the average daily
net assets of Class B. The fee is treated by each Portfolio of the Fund as an
expense in the year it is accrued. In the case of Class A shares, the entire
amount of the fee currently represents a service fee within the meaning of the
NASD guidelines. In the case of Class B and Class C shares, a portion of the fee
payable pursuant to the Plan, equal to 0.25% of the average daily net assets of
each of these Classes, is currently characterized as a service fee. A service
fee is a payment made for personal service and/or the maintenance of shareholder
accounts.
Additional amounts paid under the Plan in the case of Class B and Class C
shares are paid to the Distributor for
44
<PAGE>
services provided and the expenses borne by the Distributor and others in the
distribution of the shares of those Classes, including the payment of
commissions for sales of the shares of those Classes and incentive compensation
to and expenses of DWR's account executives and others who engage in or support
distribution of shares or who service shareholder accounts, including overhead
and telephone expenses; printing and distribution of prospectuses and reports
used in connection with the offering of the Fund's shares to other than current
shareholders; and preparation, printing and distribution of sales literature and
advertising materials. In addition, the Distributor may utilize fees paid
pursuant to the Plan in the case of Class B shares to compensate DWR and other
Selected Broker-Dealers for their opportunity costs in advancing such amounts,
which compensation would be in the form of a carrying charge on any unreimbursed
expenses.
In the case of Class B shares, at any given time, the expenses in
distributing Class B shares of each Portfolio of the Fund may be in excess of
the total of (i) the payments made by a Portfolio of the Fund pursuant to the
Plan, and (ii) the proceeds of CDSCs paid by investors upon the redemption of
Class B shares of that Portfolio. For example, if $1 million in expenses in
distributing Class B shares of the Fund had been incurred and $750,000 had been
received as described in (i) and (ii) above, the excess expense would amount to
$250,000. Because there is no requirement under the Plan that the Distributor be
reimbursed for all distribution expenses or any requirement that the Plan be
continued from year to year, such excess amount does not constitute a liability
of that Portfolio of the Fund. Although there is no legal obligation for a
Portfolio of the Fund to pay expenses incurred in excess of payments made to the
Distributor under the Plan, and the proceeds of CDSCs paid by investors upon
redemption of shares, if for any reason the Plan is terminated the Trustees will
consider at that time the manner in which to treat such expenses. Any cumulative
expenses incurred, but not yet recovered through distribution fees or CDSCs, may
or may not be recovered through future distribution fees or CDSCs.
In the case of Class A and Class C shares of any Portfolio, expenses
incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of
the average daily net assets of Class A or Class C, respectively, will not be
reimbursed by a Portfolio of the Fund through payments in any subsequent year,
except that expenses representing a gross sales commission credited to account
executives at the time of sale may be reimbursed in the subsequent calendar
year. No interest or other financing charges will be incurred on any Class A or
Class C distribution expenses incurred by the Distributor under the Plan or on
any unreimbursed expenses due to the Distributor pursuant to the Plan.
Each Portfolio of the Fund will invest in the Class D or no load shares of
the Underlying Funds and accordingly will not pay any sales load or 12b-1
service or distribution fees in connection with its investments in shares of the
Underlying Funds.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Portfolio is determined once daily at 4:00
p.m., New York time, on each day that the New York Stock Exchange is open (or,
on days when the New York Stock Exchange closes prior to 4:00 p.m., at such
earlier time) by taking the net assets of each Portfolio of the Fund, dividing
by the respective number of shares outstanding and adjusting to the nearest
cent. The assets of each Portfolio, belonging to the Class A, Class B, Class C
and Class D shares will be invested together in a single portfolio. The net
asset value of each Class of each Portfolio, however, will be determined
separately by subtracting each Class's accrued expenses and liabilities. The net
asset value per share will not be determined on Good Friday and on such other
federal and non-federal holidays as are observed by the New York Stock Exchange.
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. All income dividends and
capital gains distributions are automatically paid in full and fractional shares
of the applicable Class of each respective Portfolio of the Fund (or, if
specified by the shareholder in shares of any other open-end "Dean Witter
Fund"), unless the shareholder requests that they be paid in cash. Shares so
acquired are acquired at net asset value and are not subject to the imposition
of a front-end sales charge or a CDSC (see "Redemptions and Repurchases").
INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS RECEIVED IN CASH. Any shareholder who
receives a cash payment representing a dividend or capital gains distribution
may invest such dividend or distribution in shares of the applicable Class at
the net asset value per share next determined after receipt by the Transfer
Agent, by returning the check or the proceeds to the Transfer Agent within
thirty days after the payment date. Shares so acquired are acquired at net asset
value are not subject to the imposition of a front-end sales charge or a CDSC
(see "Redemptions and Repurchases").
EASYINVEST-SM-. Shareholders may subscribe to EasyInvest, an automatic purchase
plan which provides for any amount from $100 to $5,000 to be transferred
automatically from a
45
<PAGE>
checking or savings account or following redemption of shares of a Dean Witter
money market fund, on a semi-monthly, monthly or quarterly basis, to the
Transfer Agent for investment in shares of the Fund. (See "Purchase of Fund
Shares" and "Redemptions and Repurchases--Involuntary Redemption").
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan (the "Withdrawal
Plan") is available for shareholders who own or purchase shares of the Fund
having a minimum value of $10,000 based upon the then current net asset value.
The Withdrawal Plan provides for monthly or quarterly (March, June, September
and December) checks in any dollar amount, not less than $25, or in any whole
percentage of the account balance, on an annualized basis. Any applicable CDSC
will be imposed on shares redeemed under the Withdrawal Plan (see "Purchase of
Fund Shares"). Therefore, any shareholder participating in the Withdrawal Plan
will have sufficient shares redeemed from his or her account so that the
proceeds (net of any applicable CDSC) to the shareholder will be the designated
monthly or quarterly amount.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted. Each withdrawal constitutes a
redemption of shares and any gain or loss realized must be recognized for
federal income tax purposes.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about any of the
above services.
TAX-SHELTERED RETIREMENT PLANS. Retirement plans are available for use by
corporations, the self-employed, Individual Retirement Accounts and Custodial
Accounts under Section 403(b)(7) of the Internal Revenue Code. Adoption of such
plans should be on advice of legal counsel or tax adviser.
For further information regarding plan administration, custodial fees and
other details, investors should contact their DWR or other Selected Dealer
account executive or the Transfer Agent.
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class of any other
Dean Witter Multi-Class Fund without the imposition of any exchange fee. Shares
may also be exchanged for shares of the following funds: Dean Witter Short-Term
U.S. Treasury Trust, Dean Witter Limited Term Municipal Trust, Dean Witter
Short-Term Bond Fund, Dean Witter Intermediate Term U.S. Treasury Trust and five
Dean Witter funds which are money market funds (the "Exchange Funds"). Class A
shares may also be exchanged for shares of Dean Witter Multi-State Municipal
Series Trust and Dean Witter Hawaii Municipal Trust, which are Dean Witter Funds
sold with a front-end sales charge ("FSC Funds"). Class B shares may also be
exchanged for shares of Dean Witter Global Short-Term Income Fund Inc., Dean
Witter High Income Securities and Dean Witter National Municipal Trust, which
are Dean Witter Funds offered with a CDSC ("CDSC Funds"). Exchanges may be made
after the shares of the Fund acquired by purchase (not by exchange or dividend
reinvestment) have been held for thirty days. There is no waiting period for
exchanges of shares acquired by exchange or dividend reinvestment.
An exchange to another Dean Witter Multi-Class Fund, any FSC Fund, any CDSC
Fund or any Exchange Fund that is not a money market fund is on the basis of the
next calculated net asset value per share of each fund after the exchange order
is received. When exchanging into a money market fund from the Fund, shares of
the Fund are redeemed out of the Fund at their next calculated net asset value
and the proceeds of the redemption are used to purchase shares of the money
market fund at the net asset value determined the following business day.
Subsequent exchanges between any of the Dean Witter Multi-Class Funds, FSC Funds
or CDSC Funds or any Exchange Fund that is not a money market fund can be
effected on the same basis.
No CDSC is imposed at the time of any exchange of shares, although any
applicable CDSC will be imposed upon ultimate redemption. During the period of
time the shareholder remains in an Exchange Fund (calculated from the last day
of the month in which the Exchange Fund shares were acquired), the holding
period (for the purpose of determining the rate of the CDSC) is frozen. If those
shares are subsequently re-exchanged for shares of a Dean Witter Multi-Class
Fund or shares of a CDSC Fund, the holding period previously frozen when the
first exchange was made resumes on the last day of the month in which shares of
a Dean Witter Multi-Class Fund or shares of a CDSC Fund are reacquired. Thus,
the CDSC is based upon the time (calculated as described above) the shareholder
was invested in shares of a Dean Witter Multi-Class Fund or in shares of a CDSC
Fund (see "Purchase of Fund Shares"). In the case of exchanges of Class A shares
which are subject to a CDSC, the holding period also includes the time
(calculated as described above) the shareholder was invested in shares of a FSC
Fund. In the case of shares exchanged into an Exchange Fund on or after April
23, 1990, upon a redemption of shares which results in a CDSC being imposed, a
credit (not to exceed the amount of the CDSC) will be given in an amount equal
to the Exchange Fund 12b-1 distribution fees incurred on or after that date
which are attributable to those shares. (Exchange Fund 12b-1 distribution fees
are described in the prospectuses for those funds.) Class B shares of the Fund
acquired in exchange for Class B shares of another Dean Witter Multi-Class Fund
or shares of a CDSC Fund having a different
46
<PAGE>
CDSC schedule than that of this Fund will be subject to the higher CDSC
schedule, even if such shares are subsequently re-exchanged for shares of the
fund with the lower CDSC schedule.
ADDITIONAL INFORMATION REGARDING EXCHANGES
Purchases and exchanges should be made for investment purposes only. A
pattern of frequent exchanges may be deemed by the Investment Manager to be
abusive and contrary to the best interests of the Fund's other shareholders and,
at the Investment Manager's discretion, may be limited by the Fund's refusal to
accept additional purchases and/or exchanges from the investor. Although the
Fund does not have any specific definition of what constitutes a pattern of
frequent exchanges, and will consider all relevant factors in determining
whether a particular situation is abusive and contrary to the best interests of
the Fund and its other shareholders, investors should be aware that the Fund and
each of the other Dean Witter Funds may in their discretion limit or otherwise
restrict the number of times this Exchange Privilege may be exercised by any
investor. Any such restriction will be made by the Fund on a prospective basis
only, upon notice of the shareholder not later than ten days following such
shareholder's most recent exchange. Also, the Exchange Privilege may be
terminated or revised at any time by the Fund and/or any of such Dean Witter
Funds for which shares of the Fund have been exchanged, upon such notice as may
be required by applicable regulatory agencies. Shareholders maintaining margin
accounts with DWR or another Selected Broker-Dealer are referred to their
account executive regarding restrictions on exchange of shares of the Fund
pledged in the margin account.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain a copy and examine it carefully
before investing. Exchanges are subject to the minimum investment requirement of
each Class of Shares and any other conditions imposed by each fund. In the case
of any shareholder holding a share certificate or certificates, no exchanges may
be made until all applicable share certificates have been received by the
Transfer Agent and deposited in the shareholder's account. An exchange will be
treated for federal income tax purposes the same as a repurchase or redemption
of shares, on which the shareholder may realize a capital gain or loss. However,
the ability to deduct capital losses on an exchange may be limited in situations
where there is an exchange of shares within ninety days after the shares are
purchased. The Exchange Privilege is only available in states where an exchange
may legally be made.
If DWR or another Selected Broker-Dealer is the current dealer of record and
its account numbers are part of the account information, shareholders may
initiate an exchange of shares of the Fund for shares of any of the Dean Witter
Funds (for which the Exchange Privilege is available) pursuant to this Exchange
Privilege by contacting their account executive (no Exchange Privilege
Authorization Form is required). Other shareholders (and those shareholders who
are clients of DWR or another Selected Broker-Dealer but who wish to make
exchanges directly by writing or telephoning the Transfer Agent) must complete
and forward to the Transfer Agent an Exchange Privilege Authorization Form,
copies of which may be obtained from the Transfer Agent, to initiate an
exchange. If the Authorization Form is used, exchanges may be made in writing or
by contacting the Transfer Agent at (800) 869-NEWS (toll free).
The Fund will employ reasonable procedures to confirm that exchange
instructions communicated over the telephone are genuine. Such procedures may
include requiring various forms of personal identification such as name, mailing
address, social security or other tax identification number and DWR or other
Selected Broker-Dealer account number (if any). Telephone instructions may also
be recorded. If such procedures are not employed, the Fund may be liable for any
losses due to unauthorized or fraudulent instructions.
Telephone exchange instructions will be accepted if received by the Transfer
Agent between 9:00 a.m. and 4:00 p.m., New York time, on any day the New York
Stock Exchange is open. Any shareholder wishing to make an exchange who has
previously filed an Exchange Privilege Authorization Form and who is unable to
reach the Fund by telephone should contact his or her DWR or other Selected
Broker-Dealer account executive, if appropriate, or make a written exchange
request. Shareholders are advised that during periods of drastic economic or
market changes, it is possible that the telephone exchange procedures may be
difficult to implement, although this has not been the experience with the Dean
Witter Funds in the past.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about the
Exchange Privilege.
REDEMPTIONS AND REPURCHASES
- --------------------------------------------------------------------------------
REDEMPTION. Shares of each Class of each Portfolio of the Fund can be redeemed
for cash at any time at the net asset value per share next determined less the
amount of any applicable CDSC in the case of Class A, Class B or Class C shares
(see "Purchase of Fund Shares"). If shares are held in a shareholder's account
without a share certificate, a written request for redemption sent to the Fund's
Transfer Agent at P.O. Box 983, Jersey City, NJ 07303 is required. If
certificates are held by the shareholder(s), the shares may be redeemed by
surrendering the certificates with a written
47
<PAGE>
request for redemption, along with any additional information required by the
Transfer Agent.
REPURCHASE. DWR and other Selected Broker-Dealers are authorized to repurchase
shares represented by a share certificate which is delivered to any of their
offices. Shares held in a shareholder's account without a share certificate may
also be repurchased by DWR and other Selected Broker-Dealers upon the telephonic
or telegraphic request of the shareholder. The repurchase price is the net asset
value next computed (see "Purchase of Fund Shares") after such repurchase order
is received by DWR or other Selected Broker-Dealer, reduced by any applicable
CDSC.
The CDSC, if any, will be the only fee imposed by either the Fund, the
Distributor or DWR or other Selected Broker-Dealer. The offer by DWR and other
Selected Broker-Dealers to repurchase shares may be suspended without notice by
the Distributor at any time. In that event, shareholders may redeem their shares
through the Fund's Transfer Agent as set forth above under "Redemption."
The Fund is not subject to any contingent deferred sales charges at any time
with respect to its investments in the Underlying Funds.
PAYMENT FOR SHARES REDEEMED OR REPURCHASED. Payment for shares presented for
repurchase or redemption will be made by check within seven days after receipt
by the Transfer Agent of the certificate and/or written request in good order.
Such payment may be postponed or the right of redemption suspended under unusual
circumstances; e.g., when normal trading is not taking place on the New York
Stock Exchange. If the shares to be redeemed have recently been purchased by
check, payment of the redemption proceeds may be delayed for the minimum time
needed to verify that the check used for investment has been honored (not more
than fifteen days from the time of receipt of the check by the Transfer Agent).
Shareholders maintaining margin accounts with DWR or another Selected
Broker-Dealer are referred to their account executive regarding restrictions on
redemption of shares of the Fund pledged in the margin account.
REINSTATEMENT PRIVILEGE. A shareholder who has had his or her shares redeemed
or repurchased and has not previously exercised this reinstatement privilege
may, within 35 days after the date of the redemption or repurchase, reinstate
any portion or all of the proceeds of such redemption or repurchase in shares of
the Fund in the same Class and Portfolio from which such shares were redeemed or
repurchased at their net asset value next determined after a reinstatement
request, together with the proceeds, is received by the Transfer Agent and
receive a pro rata credit for any CDSC paid in connection with such redemption
or repurchase.
INVOLUNTARY REDEMPTION. The Fund reserves the right to redeem, on sixty days'
notice and at net asset value, the shares of any shareholder (other than shares
held in an Individual Retirement Account or Custodial Account under Section
403(b)(7) of the Internal Revenue Code) whose shares due to redemptions by the
shareholder have a value of less than $100 or such lesser amount as may be fixed
by the Trustees or, in the case of an account opened through EasyInvest-SM-, if
after twelve months the shareholder has invested less than $1,000 in the
account. However, before the Fund redeems such shares and sends the proceeds to
the shareholder, it will notify the shareholder that the value of the shares is
less than the applicable amount and allow him or her sixty days to make an
additional investment in an amount which will increase the value of his or her
account to at least the applicable amount before the redemption is processed. No
CDSC will be imposed on any involuntary redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. Each Portfolio of the Fund intends to distribute
substantially all of its net investment income and distribute capital gains, if
any, at least once each year. Each Portfolio may, however, determine either to
distribute or to retain all or part of any long-term capital gains in any year
for reinvestment.
All dividends and any capital gains distributions will be paid in additional
shares of the same Class and automatically credited to the shareholder's account
without issuance of a share certificate unless the shareholder requests in
writing that all dividends and/or distributions be paid in cash. Shares acquired
by dividend and distribution reinvestments will not be subject to any front-end
sales charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. Distributions paid on Class A and Class D shares will be higher than
for Class B and Class C shares because distribution fees paid by Class B and
Class C shares are higher. (See "Shareholder Services--Automatic Investment of
Dividends and Distributions.")
TAXES. Because the Fund intends to distribute all of its net investment income
and net short-term capital gains to shareholders and otherwise qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code, it
is not expected that the Fund will be required to pay any Federal income tax on
any such income and capital gains. Shareholders will normally have to pay
Federal income taxes, and any state and local income taxes, on the dividends and
distributions they receive from the Fund. Any dividends declared in the last
quarter of any calendar year which are paid in the following year prior to
February 1 will be deemed for tax purposes to have been received in the prior
year.
48
<PAGE>
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder has
held the Fund's shares and regardless of whether the distribution is received in
additional shares or in cash. Capital gains distributions are not eligible for
the dividends received deduction.
After the end of the calendar year, shareholders will be sent full
information on their dividends and capital gains distributions for tax purposes.
To avoid being subject to a 31% Federal backup withholding tax on taxable
dividends, capital gains distributions and the proceeds of redemptions and
repurchases, shareholders' taxpayer identification numbers must be furnished and
certified as to their accuracy.
Shareholders should consult their tax advisers as to the applicability of
the foregoing to their current situation.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time each Portfolio of the Fund may quote its "total return" in
advertisements and sales literature. These figures are computed separately for
Class A, Class B, Class C and Class D shares. The total return of the Fund is
based on historical earnings and is not intended to indicate future performance.
The "average annual total return" of the Fund refers to a figure reflecting
the average annualized percentage increase (or decrease) in the value of an
initial investment in a Class of the Fund of $1,000 over periods of one, five
and ten years, or the life of the Fund, if less than any of the foregoing.
Average annual total return reflects all income earned by the Fund, any
appreciation or depreciation of the Fund's assets, all expenses incurred by the
applicable Class and all sales charges which will be incurred by shareholders,
for the stated periods. It also assumes reinvestment of all dividends and
distributions paid by the Fund.
In addition to the foregoing, the Fund may advertise its total return for
each Class over different periods of time by means of aggregate, average, and
year-by-year or other types of total return figures. Such calculations may or
may not reflect the deduction of any sales charge which, if reflected, would
reduce the performance quoted. The Fund may also advertise the growth of
hypothetical investments of $10,000, $50,000 and $100,000 in each Class of
shares of the Fund. The Fund from time to time may also advertise its
performance relative to certain performance rankings and indexes compiled by
independent organizations, such as mutual fund performance rankings of Lipper
Analytical Services, Inc.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS. All shares of beneficial interest of the Fund are of $0.01 par
value and are equal as to earnings, assets and voting privileges except that
each Class of each Portfolio will have exclusive voting privileges with respect
to matters relating to distribution expenses borne solely by such Class or any
other matter in which the interests of one Class differ from the interests of
any other Class. In addition, Class B shareholders will have the right to vote
on any proposed material increase in Class A's expenses, if such proposal is
submitted separately to Class A shareholders. Also, as discussed herein, Class
A, Class B and Class C of each Portfolio bear the expenses related to the
distribution of their respective shares.
The Fund is not required to hold Annual Meetings of Shareholders and, in
ordinary circumstances, the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances the Trustees may be removed by action of the Trustees or by the
shareholders.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for obligations of the
Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that Fund
obligations include such disclaimer, and provides for indemnification and
reimbursement of expenses out of the Fund's property for any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability, and
the nature of the Fund's assets and operations, in the opinion of Massachusetts
counsel to the Fund, the risk to shareholders of personal liability is remote.
CODE OF ETHICS. Directors, officers and employees of the Investment Manager,
Dean Witter Services Company Inc. and the Distributor are subject to a strict
Code of Ethics adopted by those companies. The Code of Ethics is intended to
ensure that the interests of shareholders and other clients are placed ahead of
any personal interest, that no undue personal benefit is obtained from a
person's employment activities and that actual and potential conflicts of
interest are avoided. To achieve these goals and comply with regulatory
requirements, the Code of Ethics requires, among other things, that personal
securities transactions by employees of the companies be subject to an advance
clearance process to monitor that no Dean Witter Fund is engaged at the same
time in a purchase or sale of the same security. The Code of Ethics bans the
49
<PAGE>
purchase of securities in an initial public offering, and also prohibits
engaging in futures and options transactions and profiting on short-term trading
(that is, a purchase within sixty days of a sale or a sale within sixty days of
a purchase) of a security. In addition, investment personnel may not purchase or
sell a security for their personal account within thirty days before or after
any transaction in any Dean Witter Fund managed by them. Any violations of the
Code of Ethics are subject to sanctions, including reprimand, demotion or
suspension or termination of employment. The Code of Ethics comports with
regulatory requirements and the recommendations in the 1994 report by the
Investment Company Institute Advisory Group on Personal Investing.
MASTER/FEEDER CONVERSION. Each Portfolio of the Fund reserves the right to seek
to achieve its investment objective by investing all of its investable assets in
a diversified, open-end management investment company having the same investment
objective and policies and substantially the same investment restrictions as
those applicable to the respective Portfolio.
SHAREHOLDER INQUIRIES. All inquiries regarding the Fund should be directed to
the Fund at the telephone numbers or address set forth on the front cover of
this Prospectus.
The Investment Manager provided the initial capital for the Fund by
purchasing 1,250 shares each of Class A, Class B, Class C and Class D of each
Portfolio for $12,500, respectively, on July 28, 1997. As of the date of this
Prospectus, the Investment Manager owned 100% of the outstanding shares of the
Fund. The Investment Manager may be deemed to control the Fund until such time
as it owns less than 25% of the outstanding shares of the Fund.
50
<PAGE>
DEAN WITTER
FUND OF FUNDS
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Manuel N. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286
TRANSFER AGENT
AND DIVIDEND
DISBURSING AGENT
Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
<PAGE>
STATEMENT OF ADDITIONAL DEAN WITTER
INFORMATION FUND OF FUNDS
OCTOBER 3, 1997
- --------------------------------------------------------------------------------
Dean Witter Fund of Funds (the "Fund") is an open-end, non-diversified
management investment company currently consisting of two separate portfolios
(individually a "Portfolio" and collectively the "Portfolios") which seek to
achieve their investment objectives by investing in shares of other open-end
management investment companies that are either members or affiliates of the
Dean Witter Family of Funds (individually, an "Underlying Fund" and
collectively, the "Underlying Funds"). The INTERNATIONAL PORTFOLIO has an
investment objective of long-term capital appreciation and invests in a
selection of Underlying Funds which invest their assets primarily in the
international equity markets. The investment objective of the DOMESTIC PORTFOLIO
is to maximize total investment return by investing in a selection of Underlying
Funds which invest primarily in the U.S. equity and fixed-income markets.
A Prospectus for the Fund dated October 3, 1997, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge from the Fund at its address or telephone numbers listed below or
from the Fund's Distributor, Dean Witter Distributors Inc., or from Dean Witter
Reynolds Inc. at any of its branch offices. This Statement of Additional
Information is not a Prospectus. It contains information in addition to and more
detailed than that set forth in the Prospectus. It is intended to provide you
additional information regarding the activities and operations of the Fund, and
should be read in conjunction with the Prospectus.
Dean Witter
Fund of Funds
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The Fund and its Management............................................................ 3
Trustees and Officers.................................................................. 6
Investment Practices and Policies of the Fund.......................................... 12
Investment Practices and Policies of the Underlying Funds.............................. 12
Investment Restrictions................................................................ 31
Portfolio Transactions and Brokerage................................................... 32
Underwriting........................................................................... 33
The Distributor........................................................................ 34
Determination of Net Asset Value....................................................... 37
Purchase of Fund Shares................................................................ 37
Shareholder Services................................................................... 40
Redemptions and Repurchases............................................................ 45
Dividends, Distributions and Taxes..................................................... 46
Performance Information................................................................ 47
Description of Shares of The Fund...................................................... 48
Custodian and Transfer Agent........................................................... 48
Independent Accountants................................................................ 49
Reports to Shareholders................................................................ 49
Legal Counsel.......................................................................... 49
Experts................................................................................ 49
Registration Statement................................................................. 49
Statements of Assets and Liabilities at September 11, 1997 ........................... 50
Report of Independent Accountants...................................................... 53
Appendix--Ratings of Investments....................................................... 54
</TABLE>
2
<PAGE>
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
THE FUND
The Fund is a trust of the type commonly known as a "Massachusetts business
trust" and was organized under the laws of the Commonwealth of Massachusetts on
July 3, 1997.
THE INVESTMENT MANAGER
Dean Witter InterCapital Inc. (the "Investment Manager" or "InterCapital"),
a Delaware corporation, whose address is Two World Trade Center, New York, New
York, 10048, is the Fund's investment manager. InterCapital is a wholly-owned
subsidiary of Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD"), a Delaware
corporation. In an internal reorganization which took place in January, 1993,
InterCapital assumed the investment advisory, administrative and management
activities previously performed by the InterCapital Division of Dean Witter
Reynolds Inc. ("DWR"), a broker-dealer affiliate of InterCapital. (As
hereinafter used in this Statement of Additional Information, the terms
"InterCapital" and "Investment Manager" refer to DWR's InterCapital Division
prior to the internal reorganization and Dean Witter InterCapital Inc.
thereafter.) The daily management of the Fund is conducted by or under the
direction of officers of the Fund and of the Investment Manager, subject to
review by the Fund's Board of Trustees. Information as to these Trustees and
officers is contained under the caption, "Trustees and Officers."
InterCapital is also the investment manager or investment adviser of the
following investment companies: Dean Witter Liquid Asset Fund Inc., InterCapital
Income Securities Inc., Dean Witter High Yield Securities Inc., Dean Witter
Tax-Free Daily Income Trust, Dean Witter Value-Added Market Series, Dean Witter
Tax-Exempt Securities Trust, Dean Witter Natural Resource Development Securities
Inc., Dean Witter Dividend Growth Securities Inc., Dean Witter American Value
Fund, Dean Witter U.S. Government Money Market Trust, Dean Witter Variable
Investment Series, Dean Witter World Wide Investment Trust, Dean Witter Select
Municipal Reinvestment Fund, Dean Witter U.S. Government Securities Trust, Dean
Witter California Tax-Free Income Fund, Dean Witter New York Tax-Free Income
Fund, Dean Witter Convertible Securities Trust, Dean Witter Federal Securities
Trust, High Income Advantage Trust, High Income Advantage Trust II, High Income
Advantage Trust III, Dean Witter Government Income Trust, Dean Witter Utilities
Fund, Dean Witter California Tax-Free Daily Income Trust, Dean Witter Strategist
Fund, Dean Witter World Wide Income Trust, Dean Witter Intermediate Income
Securities, Dean Witter New York Municipal Money Market Trust, Dean Witter
Capital Growth Securities, Dean Witter European Growth Fund Inc., Dean Witter
Precious Metals and Minerals Trust, Dean Witter Global Short-Term Income Fund
Inc., Dean Witter Pacific Growth Fund Inc., Dean Witter Multi-State Municipal
Series Trust, Dean Witter Short-Term U.S. Treasury Trust, InterCapital Insured
Municipal Bond Trust, InterCapital Insured Municipal Trust, InterCapital Insured
Municipal Income Trust, InterCapital California Insured Municipal Income Trust,
InterCapital Quality Municipal Investment Trust, InterCapital Quality Municipal
Income Trust, InterCapital Quality Municipal Securities, InterCapital California
Quality Municipal Securities, InterCapital New York Quality Municipal
Securities, Dean Witter Diversified Income Trust, Dean Witter Health Sciences
Trust, Dean Witter Retirement Series, Dean Witter Global Dividend Growth
Securities, Dean Witter Limited Term Municipal Trust, InterCapital Insured
Municipal Securities, InterCapital Insured California Municipal Securities, Dean
Witter Short-Term Bond Fund, Dean Witter Global Utilities Fund, Dean Witter
National Municipal Trust, Dean Witter High Income Securities, Dean Witter
International SmallCap Fund, Dean Witter Mid-Cap Growth Fund, Dean Witter Select
Dimensions Investment Series, Dean Witter Balanced Growth Fund, Dean Witter
Balanced Income Fund, Dean Witter Hawaii Municipal Trust, Dean Witter Capital
Appreciation Fund, Dean Witter Information Fund, Dean Witter Intermediate Term
U.S. Treasury Trust, Dean Witter Capital Appreciation Fund, Dean Witter
Information Fund, Dean Witter Japan Fund, Dean Witter Income Builder Fund, Dean
Witter Special Value Fund, Dean Witter Financial Services Trust, Dean Witter
Market Leader Trust, Dean Witter S&P 500 Index Fund, Active Assets Money Trust,
Active Assets Tax-Free Trust, Active Assets California Tax-Free Trust, Active
Assets Government Securities Trust, Municipal Income Trust, Municipal Income
Trust II, Municipal Income Trust III, Municipal Income Opportunities Trust,
Municipal Income Opportunities Trust II, Munici-
3
<PAGE>
pal Income Opportunities Trust III, Municipal Premium Income Trust and Prime
Income Trust. The foregoing investment companies, together with the Fund, are
collectively referred to as the Dean Witter Funds.
In addition, Dean Witter Services Company Inc. ("DWSC"), a wholly-owned
subsidiary of InterCapital, serves as manager for the following companies for
which TCW Funds Management, Inc. is the investment adviser: TCW/DW Core Equity
Trust, TCW/DW North American Government Income Trust, TCW/DW Latin American
Growth Fund, TCW/DW Income and Growth Fund, TCW/DW Small Cap Growth Fund, TCW/DW
Balanced Fund, TCW/DW Total Return Trust, TCW/DW Mid-Cap Equity Trust, TCW/DW
Global Telecom Trust, TCW/DW Strategic Income Trust, TCW/DW Emerging Markets
Opportunities Trust, TCW/DW Term Trust 2000, TCW/DW Term Trust 2002 and TCW/DW
Term Trust 2003 (the "TCW/ DW Funds"). InterCapital also serves as: (i)
administrator of The BlackRock Strategic Term Trust Inc., a closed-end
investment company; and (ii) sub-administrator of MassMutual Participation
Investors and Templeton Global Governments Income Trust, closed-end investment
companies.
Pursuant to an Investment Management Agreement (the "Agreement") with the
Investment Manager, the Fund has retained the Investment Manager to manage the
investment of the Fund's assets, including the placing of orders for the
purchase and sale of portfolio securities. The Investment Manager obtains and
evaluates such information and advice relating to the economy, securities
markets, and specific securities as it considers necessary or useful to
continuously manage the assets of the Fund in a manner consistent with its
investment objective and policies. The Investment Manager does not receive a
management fee from either Portfolio of the Fund for providing the
aforementioned investment management services. However, through its investments
in the Class D Shares of the Underlying Funds, each Portfolio will pay its pro
rata share of the management fees and certain other expenses of the Underlying
Funds.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, such office space, facilities,
equipment, clerical help, bookkeeping and certain legal services as the Fund may
reasonably require in the conduct of its business, including the preparation of
prospectuses, proxy statements and reports required to be filed with federal and
state securities commissions (except insofar as the participation or assistance
of independent accountants and attorneys is, in the opinion of the Investment
Manager, necessary or desirable). In addition, the Investment Manager pays the
salaries of all personnel, including officers of the Fund, who are employees of
the Investment Manager. The Investment Manager also bears the cost of telephone
service, heat, light, power and other utilities provided to the Fund.
Each Portfolio pays all expenses incurred in its operation and a portion of
the Fund's general administrative expenses allocated on the basis of asset size
of the respective Portfolio. Expenses not expressly assumed by the Investment
Manager under the Agreement or by the Distributor of the Fund's shares, Dean
Witter Distributors Inc. ("Distributors" or the "Distributor") (see "The
Distributor"), will be paid by the Fund. These expenses will be allocated among
the four classes of shares of each Portfolio of the Fund (each, a "Class") pro
rata based on the net assets of each Portfolio of the Fund attributable to each
Class, except as described below. Such expenses include, but are not limited to:
expenses of the Plan of Distribution pursuant to Rule 12b-1 (the "12b-1 fee")
(see "The Distributor"); charges and expenses of any registrar, custodian, share
transfer and dividend disbursing agent; brokerage commissions; taxes; engraving
and printing share certificates; registration costs of the Fund and its shares
under federal and state securities laws; the cost and expenses of printing,
including typesetting, and distributing prospectuses of the Fund and supplements
thereto to the Fund's shareholders; all expenses of shareholders' and Trustees'
meetings and of preparing, printing and mailing proxy statements and reports to
shareholders; fees and travel expenses of Trustees or members of any advisory
board or committee who are not employees of the Investment Manager or any
corporate affiliate of the Investment Manager; all expenses incident to any
dividend, withdrawal or redemption options; any charges and expenses of any
outside service used for pricing of the Fund's shares; fees and expenses of
legal counsel, including counsel to the Trustees who are not interested persons
of the Fund or of the
4
<PAGE>
Investment Manager (not including compensation or expenses of attorneys who are
employees of the Investment Manager) and independent accountants; membership
dues of industry associations; interest on Fund borrowings; postage; insurance
premiums on property or personnel (including officers and Trustees) of the Fund
which inure to its benefit; extraordinary expenses (including, but not limited
to, legal claims and liabilities and litigation costs and any indemnification
relating thereto; depending upon the nature of the legal claim, liability or
lawsuit, the costs of litigation, payment of legal claims or liabilities or
indemnification relating thereto may be directly applicable to a particular
Portfolio or may be proportionately allocated on the basis of the size of each
Portfolio. The Trustees have determined that this is an appropriate method of
allocation of such expenses); and all other costs of the Fund's operation
properly payable by the Fund and allocable on the basis of size of the
respective Portfolio. The 12b-1 fees relating to a particular Class of a
particular Portfolio will be allocated directly to that Class. In addition,
other expenses associated with a particular Class of a particular Portfolio
(except custodial fees) may be allocated directly to that Class, provided that
such expenses are reasonably identified as specifically attributable to that
Class and the direct allocation to that Class is approved by the Trustees.
The Investment Manager has agreed to assume all operating expenses (except
for brokerage and 12b-1 fees) for each Portfolio until such time as the
respective Portfolio has $50 million of net assets or six months from the date
of commencement of the Fund's operations, whichever occurs first.
The Investment Manager will pay the organizational expenses of the Fund
incurred prior to the offering of the Fund's shares. The Fund has agreed to bear
and reimburse the Investment Manager for such expenses, in an amount of up to a
maximum of $250,000. The organizational expenses of the Fund have been deferred
by the Fund and are being amortized on the straight line method over a period
not to exceed five years from the date of commencement of the Fund's operations.
The Fund pays no management fee to the Investment Manager. However, the
Fund, through its investments in the Underlying Funds, will pay its pro rata
share of the management or advisory or sub-advisory fees to the Investment
Manager and/or Sub-Advisor or Advisor of the Underlying Funds.
The Agreement provides that in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations thereunder, the
Investment Manager is not liable to the Fund or any of its investors for any act
or omission by the Investment Manager or for any losses sustained by the Fund or
its investors. The Agreement in no way restricts the Investment Manager from
acting as investment manager or adviser to others.
The Agreement was initially approved by the Board of Trustees on July 23,
1997 and by InterCapital, as the then sole shareholder, on July 28, 1997. The
Agreement may be terminated with respect to any Portfolio, at any time, without
penalty, on thirty days' notice by the Board of Trustees of the Fund, by the
holders of a majority, as defined in the Investment Company Act of 1940 (the
"Act"), of the outstanding shares of the respective Portfolio of the Fund, or by
the Investment Manager. The Agreement will automatically terminate in the event
of its assignment (as defined in the Act).
Under its terms, the Agreement has an initial term ending April 30, 1999 and
will remain in effect from year to year thereafter with respect to each
Portfolio, provided continuance of the Agreement is approved at least annually
by the vote of the holders of a majority, as defined in the Act, of the
outstanding shares of each Portfolio of the Fund, or by the Board of Trustees of
the Fund; provided that in either event such continuance is approved annually by
the vote of a majority of the Trustees of the Fund who are not parties to the
Agreement or "interested persons" (as defined in the Act) of any such party (the
"Independent Trustees"), which vote must be cast in person at a meeting called
for the purpose of voting on such approval.
The Fund has acknowledged that the name "Dean Witter" is a property right of
DWR. The Fund has agreed that DWR or its parent company may use or, at any time,
permit others to use, the name "Dean Witter." The Fund has also agreed that in
the event the Agreement is terminated, or if the affiliation between
InterCapital and its parent company is terminated, the Fund will eliminate the
name "Dean Witter" from its name if DWR or its parent company shall so request.
5
<PAGE>
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The Trustees and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with
InterCapital, and with the 85 Dean Witter Funds and the 14 TCW/DW Funds are
shown below:
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
<S> <C>
Michael Bozic (56) Chairman and Chief Executive Officer of Levitz Furniture
Trustee Corporation (since November, 1995); Director or Trustee of
c/o Levitz Furniture Corporation the Dean Witter Funds; formerly President and Chief
6111 Broken Sound Parkway, N.W. Executive Officer of Hills Department Stores (May,
Boca Raton, Florida 1991-July, 1995); formerly variously Chairman, Chief
Executive Officer, President and Chief Operating Officer
(1987-1991) of the Sears Merchandise Group of Sears,
Roebuck and Co.; Director of Eaglemark Financial Services,
Inc., the United Negro College Fund and Weirton Steel
Corporation.
Charles A. Fiumefreddo* (64) Chairman, Chief Executive Officer and Director of
Chairman, President InterCapital, DWSC and Distributors; Executive Vice
Chief Executive Officer and Trustee President and Director of DWR; Chairman, Director or
Two World Trade Center Trustee, President and Chief Executive Officer of the Dean
New York, New York Witter Funds; Chairman, Chief Executive Officer and
Trustee of the TCW/DW Funds; Chairman and Director of Dean
Witter Trust FSB ("DWT"); Director and/or officer of
various MSDWD subsidiaries; formerly Executive Vice
President and Director of Dean Witter, Discover & Co.
(until February, 1993).
Edwin J. Garn (64) Director or Trustee of the Dean Witter Funds; formerly
Trustee United States Senator (R-Utah) (1974-1992) and Chairman,
c/o Huntsman Corporation Senate Banking Committee (1980-1986); formerly Mayor of
500 Huntsman Way Salt Lake City, Utah (1972-1974); formerly Astronaut,
Salt Lake City, Utah Space Shuttle Discovery (April 12-19, 1985); Vice
Chairman, Huntsman Corporation (since January, 1993);
Director of Franklin Quest (time management systems) and
John Alden Financial Corp. (health insurance); member of
the board of various civic and charitable organizations.
John R. Haire (72) Chairman of the Audit Committee and Chairman of the
Trustee Committee of the Independent Directors or Trustees and
Two World Trade Center Director or Trustee of the Dean Witter Funds; Chairman of
New York, New York the Audit Committee and Chairman of the Committee of the
Independent Trustees and Trustee of the TCW/DW Funds;
formerly President, Council for Aid to Education
(1978-1989) and Chairman and Chief Executive Officer of
Anchor Corporation, an Investment Adviser (1964-1978);
Director of Washington National Corporation (insurance).
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
<S> <C>
Wayne E. Hedien (63) Retired, Director or Trustee of the Dean Witter Funds;
Trustee Director of The PMI Group, Inc. (private mortgage
c/o Gordon Altman Butowsky insurance); Trustee and Vice Chairman of The Field Museum
Weitzen Shalov & Wein of Natural History; formerly associated with the Allstate
Counsel to the Independent Trustees Companies (1966-1994), most recently as Chairman of The
114 West 47th Street Allstate Corporation (March, 1993-December, 1994) and
New York, New York Chairman and Chief Executive Officer of its wholly-owned
subsidiary, Allstate Insurance Company (July,
1989-December, 1994); director of various other business
and charitable organizations.
Dr. Manuel H. Johnson (48) Senior Partner, Johnson Smick International, Inc., a
Trustee consulting firm; Co-Chairman and a founder of the Group of
c/o Johnson Smick International, Inc. Seven Council (G7C), an international economic commission;
1133 Connecticut Avenue, N.W. Trustee of the TCW/DW Funds; Director of Greenwich Capital
Washington, DC Markets, Inc. (broker-dealer); Director of NASDAQ (since
June, 1995); Trustee of the Financial Accounting
Foundation (oversight organization for the Financial
Accounting Standards Board); formerly Vice Chairman of the
Board of Governors of the Federal Reserve System
(1986-1990) and Assistant Secretary of the U.S. Treasury
(1982-1986).
Michael E. Nugent (61) General Partner, Triumph Capital, L.P., a private in-
Trustee vestment partnership; Director or Trustee of the Dean
c/o Triumph Capital, L.P. Witter Funds; Trustee of the TCW/DW Funds; formerly Vice
237 Park Avenue President, Bankers Trust Company and BT Capital
New York, New York Corporation (1984-1988); director of various business
organizations.
Philip J. Purcell* (54) Chairman of the Board of Directors and Chief Executive
Trustee Officer of MSDWD, DWR and Novus Credit Services Inc.;
1585 Broadway Director of InterCapital, DWSC and Distributors; Director
New York, New York or Trustee of the Dean Witter Funds; Director and/or
officer of various MSDWD subsidiaries.
John L. Schroeder (67) Retired; Director or Trustee of the Dean Witter Funds;
Trustee Trustee of the TCW/DW Funds; Director of Citizens
c/o Gordon Altman Butowsky Weitzen Utilities Company; formerly Executive Vice President and
Shalov & Wein Chief Investment Officer of the Home Insurance Company
Counsel to the Independent Trustees (August, 1991-September, 1995).
114 West 47th Street
New York, New York
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
<S> <C>
Barry Fink (42) Senior Vice President (since March, 1997) and Secretary
Vice President, Secretary and General Counsel (since February, 1997) of InterCapital
and General Counsel and DWSC; Senior Vice President (since March, 1997) and
Two World Trade Center Assistant Secretary and Assistant General Counsel (since
New York, New York February, 1997) of Distributors; Assistant Secretary of
DWR (since August, 1996); Vice President, Secretary and
General Counsel of the Dean Witter Funds and the TCW/DW
Funds (since February, 1997); previously First Vice
President (June, 1993-February, 1997), Vice President
(until June, 1993) and Assistant Secretary and Assistant
General Counsel of InterCapital and DWSC and Assistant
Secretary of the Dean Witter Funds and the TCW/DW Funds.
Thomas F. Caloia (51) First Vice President and Assistant Treasurer of Inter-
Treasurer Capital and DWSC; Treasurer of the Dean Witter Funds and
Two World Trade Center the TCW/DW Funds.
New York, New York
</TABLE>
- ------------
* Denotes Trustees who are "interested persons" of the Fund, as defined in the
Act.
In addition, Robert M. Scanlan, President and Chief Operating Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWT and
Director of DWT, Mitchell M. Merin, President and Chief Strategic Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWT and
Director of DWT, Executive Vice President, Chief Administrative Officer and
Director of DWR and Director of SPS Transaction Services, Inc. and various other
MSDWD subsidiaries, Joseph J. McAlinden, Executive Vice President and Chief
Investment Officer of InterCapital and Director of DWT, Robert S. Giambrone,
Senior Vice President of InterCapital, DWSC, Distributors and DWT and a Director
of DWT, and Paul D. Vance and Guy D. Rutherford, Jr., Senior Vice Presidents of
InterCapital, are Vice Presidents of the Fund, and Marilyn K. Cranney, First
Vice President and Assistant General Counsel of InterCapital and DWSC, Lou Anne
D. McInnis, Carsten Otto and Ruth Rossi, Vice Presidents and Assistant General
Counsels of InterCapital and DWSC, and Frank Bruttomesso and Todd Lebo, Staff
Attorneys with InterCapital, are Assistant Secretaries of the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees consists of nine (9) trustees. These same individuals
also serve as directors or trustees for all of the Dean Witter Funds, and are
referred to in this section as Trustees. As of the date of this Statement of
Additional Information, there are a total of 85 Dean Witter Funds, comprised of
128 portfolios. As of September 30, 1997, the Dean Witter Funds had total net
assets of approximately $93.2 billion and more than five million shareholders.
Seven Trustees (77% of the total number) have no affiliation or business
connection with InterCapital or any of its affiliated persons and do not own any
stock or other securities issued by InterCapital's parent company, MSDWD. These
are the "disinterested" or "independent" Trustees. The other two Trustees (the
"management Trustees") are affiliated with InterCapital. Four of the seven
Independent Trustees are also Independent Trustees of the TCW/DW Funds.
Law and regulation establish both general guidelines and specific duties for
the Independent Trustees. The Dean Witter Funds seek as Independent Trustees
individuals of distinction and experience in business and finance, government
service or academia; these are people whose advice and counsel are in demand by
others and for whom there is often competition. To accept a position on the
Funds'
8
<PAGE>
Boards, such individuals may reject other attractive assignments because the
Funds make substantial demands on their time. Indeed, by serving on the Funds'
Boards, certain Trustees who would otherwise be qualified and in demand to serve
on bank boards would be prohibited by law from doing so.
All of the Independent Trustees serve as members of the Audit Committee and
the Committee of the Independent Trustees. Three of them also serve as members
of the Derivatives Committee. During the calendar year ended December 31, 1996,
the three Committees held a combined total of sixteen meetings. The Committees
hold some meetings at InterCapital's offices and some outside InterCapital.
Management Trustees or officers do not attend these meetings unless they are
invited for purposes of furnishing information or making a report.
The Committee of the Independent Trustees is charged with recommending to
the full Board approval of management, advisory and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing Fund performance; checking on the pricing of portfolio securities,
brokerage commissions, transfer agent costs and performance, and trading among
Funds in the same complex; and approving fidelity bond and related insurance
coverage and allocations, as well as other matters that arise from time to time.
The Independent Trustees are required to select and nominate individuals to fill
any Independent Trustee vacancy on the Board of any Fund that has a Rule 12b-1
plan of distribution. Most of the Dean Witter Funds have such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of such services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; reviewing the adequacy of the Fund's system of internal
controls; and preparing and submitting Committee meeting minutes to the full
Board.
Finally, the Board of each Fund has formed a Derivatives Committee to
establish parameters for and oversee the activities of the Fund with respect to
derivative investments, if any, made by the Fund.
DUTIES OF CHAIRMAN OF COMMITTEE OF THE INDEPENDENT TRUSTEES AND AUDIT COMMITTEE
The Chairman of the Committee of the Independent Trustees and the Audit
Committee maintains an office at the Funds' headquarters in New York. He is
responsible for keeping abreast of regulatory and industry developments and the
Funds' operations and management. He screens and/or prepares written materials
and identifies critical issues for the Independent Trustees to consider,
develops agendas for Committee meetings, determines the type and amount of
information that the Committees will need to form a judgment on various issues,
and arranges to have that information furnished to Committee members. He also
arranges for the services of independent experts and consults with them in
advance of meetings to help refine reports and to focus on critical issues.
Members of the Committees believe that the person who serves as Chairman of both
Committees and guides their efforts is pivotal to the effective functioning of
the Committees.
The Chairman of the Committees also maintains continuous contact with the
Funds' management, with independent counsel to the Independent Trustees and with
the Funds' independent auditors. He arranges for a series of special meetings
involving the annual review of investment advisory, management and other
operating contracts of the Funds and, on behalf of the Committees, conducts
negotiations with the Investment Manager and other service providers. In effect,
the Chairman of the Committees serves as a combination of chief executive and
support staff of the Independent Trustees.
The Chairman of the Committee of the Independent Trustees and the Audit
Committee is not employed by any other organization and devotes his time
primarily to the services he performs as Committee Chairman and Independent
Trustee of the Dean Witter Funds and as an Independent Trustee
9
<PAGE>
and, since July 1, 1996, as Chairman of the Committee of the Independent
Trustees and the Audit Committee of the TCW/DW Funds. The current Committee
Chairman has had more than 35 years experience as a senior executive in the
investment company industry.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL DEAN
WITTER FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the Dean Witter Funds avoids the
duplication of effort that would arise from having different groups of
individuals serving as Independent Trustees for each of the Funds or even of
sub-groups of Funds. They believe that having the same individuals serve as
Independent Trustees of all the Funds tends to increase their knowledge and
expertise regarding matters which affect the Fund complex generally and enhances
their ability to negotiate on behalf of each Fund with the Fund's service
providers. This arrangement also precludes the possibility of separate groups of
Independent Trustees arriving at conflicting decisions regarding operations and
management of the Funds and avoids the cost and confusion that would likely
ensue. Finally, having the same Independent Trustees serve on all Fund Boards
enhances the ability of each Fund to obtain, at modest cost to each separate
Fund, the services of Independent Trustees, and a Chairman of their Committees,
of the caliber, experience and business acumen of the individuals who serve as
Independent Trustees of the Dean Witter Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Fund intends to pay each Independent Trustee an annual fee of $1,000
plus a per meeting fee of $50 for meetings of the Board of Trustees or
committees of the Board of Trustees attended by the Trustee (the Fund intends to
pay the Chairman of the Audit Committee an annual fee of $750 and the Chairman
of the Committee of the Independent Trustees an additional annual fee of
$1,200). If a Board meeting and a Committee meeting, or more than one Committee
meeting, take place on a single day, the Trustees are paid a single meeting fee
by the Fund. The Fund will also reimburse such Trustees for travel and other
out-of-pocket expenses incurred by them in connection with attending such
meetings. Trustees and officers of the Fund who are or have been employed by the
Investment Manager or an affiliated company will receive no compensation or
expense reimbursement from the Fund. Payments will commence as of the time the
Fund begins paying management fees, which, pursuant to an undertaking by the
Investment Manager, will be at such time as the Fund has $50 million of net
assets or six months from the date of commencement of the Fund's operations,
whichever occurs first.
At such time as the Fund has been in operation, and has paid fees to the
Independent Trustees, for a full fiscal year, and assuming that during such
fiscal year the Fund holds the same number of Board and committee meetings as
were held by the other Dean Witter Funds during the calendar year ended December
31, 1996, it is estimated that the compensation paid to each Independent Trustee
during such fiscal year will be the amount shown in the following table:
FUND COMPENSATION (ESTIMATED)
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- -------------------------------------------------------------- ---------------
<S> <C>
Michael Bozic................................................. $1,900
Edwin J. Garn................................................. 1,900
John R. Haire................................................. 3,850
Dr. Manuel H. Johnson......................................... 1,900
Michael E. Nugent............................................. 1,900
John L. Schroeder............................................. 1,900
</TABLE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1996 for services
to the 82 Dean Witter Funds and, in the case of Messrs. Haire, Johnson, Nugent
and Schroeder, the 14 TCW/DW Funds that were in operation at December 31, 1996.
With respect to Messrs. Haire, Johnson, Nugent and Schroeder, the TCW/DW Funds
are included solely because of a limited exchange privilege between those Funds
and five Dean Witter Money Market Funds.
10
<PAGE>
CASH COMPENSATION FROM DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
FOR SERVICE AS FOR SERVICE AS
CHAIRMAN OF CHAIRMAN OF TOTAL CASH
COMMITTEES OF COMMITTEES OF COMPENSATION
FOR SERVICE AS INDEPENDENT INDEPENDENT PAID FOR
DIRECTOR OR FOR SERVICE AS DIRECTORS/ TRUSTEES SERVICES TO
TRUSTEE AND TRUSTEE AND TRUSTEES AND AND AUDIT 82 DEAN
COMMITTEE MEMBER COMMITTEE MEMBER AUDIT COMMITTEES COMMITTEES WITTER FUNDS
OF 82 DEAN OF 14 TCW/DW OF 82 DEAN OF 14 AND 14 TCW/DW
NAME OF INDEPENDENT TRUSTEE WITTER FUNDS FUNDS WITTER FUNDS TCW/DW FUNDS FUNDS
- --------------------------- ---------------- ---------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Michael Bozic.............. $138,850 -- -- -- $138,850
Edwin J. Garn.............. 140,900 -- -- -- 140,900
John R. Haire.............. 106,400 $ 64,283 $195,450 $ 12,187 378,320
Dr. Manuel H. Johnson...... 137,100 66,483 -- -- 203,583
Michael E. Nugent.......... 138,850 64,283 -- -- 203,133
John L. Schroeder.......... 137,150 69,083 -- -- 206,233
</TABLE>
As of the date of this Statement of Additional Information, 57 of the Dean
Witter Funds, not including the Fund, have adopted a retirement program under
which an Independent Trustee who retires after serving for at least five years
(or such lesser period as may be determined by the Board) as an Independent
Director or Trustee of any Dean Witter Fund that has adopted the retirement
program (each such Fund referred to as an "Adopting Fund" and each such Trustee
referred to as an "Eligible Trustee") is entitled to retirement payments upon
reaching the eligible retirement age (normally, after attaining age 72). Annual
payments are based upon length of service. Currently, upon retirement, each
Eligible Trustee is entitled to receive from the Adopting Fund, commencing as of
his or her retirement date and continuing for the remainder of his or her life,
an annual retirement benefit (the "Regular Benefit") equal to 25.0% of his or
her Eligible Compensation plus 0.4166666% of such Eligible Compensation for each
full month of service as an Independent Director or Trustee of any Adopting Fund
in excess of five years up to a maximum of 50.0% after ten years of service. The
foregoing percentages may be changed by the Board.(1) "Eligible Compensation" is
one-fifth of the total compensation earned by such Eligible Trustee for service
to the Adopting Fund in the five year period prior to the date of the Eligible
Trustee's retirement. Benefits under the retirement program are not secured or
funded by the Adopting Funds.
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the 57 Dean Witter Funds (not including the Fund)
for the year ended December 31, 1996, and the estimated retirement benefits for
the Fund's Independent Trustees, to commence upon their retirement, from the 57
Dean Witter Funds as of December 31, 1996.
RETIREMENT BENEFITS FROM ALL DEAN WITTER FUNDS
<TABLE>
<CAPTION>
ESTIMATED
RETIREMENT ANNUAL
BENEFITS BENEFITS
ESTIMATED ACCRUED AS UPON
CREDITED YEARS ESTIMATED EXPENSES RETIREMENT
OF SERVICE AT PERCENTAGE OF BY ALL FROM ALL
RETIREMENT ELIGIBLE ADOPTING ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUNDS FUNDS(2)
- --------------------------------------------- --------------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
Michael Bozic................................ 10 50.0% $ 20,147 $ 51,325
Edwin J. Garn................................ 10 50.0 27,772 51,325
John R. Haire................................ 10 50.0 46,952 129,550
Dr. Manuel H. Johnson........................ 10 50.0 10,926 51,325
Michael E. Nugent............................ 10 50.0 19,217 51,325
John L. Schroeder............................ 8 41.7 38,700 42,771
</TABLE>
- ------------
(1) An Eligible Trustee may elect alternate payments of his or her retirement
benefits based upon the combined life expectancy of such Eligible Trustee
and his or her spouse on the date of such Eligible Trustee's retirement.
The amount estimated to be payable under this method, through the remainder
of the later of the lives of such Eligible Trustee and spouse, will be the
actuarial equivalent of the Regular Benefit. In addition, the Eligible
Trustee may elect that the surviving spouse's periodic payment of benefits
will be equal to either 50% or 100% of the previous periodic amount, an
election that, respectively, increases or decreases the previous periodic
amount so that the resulting payments will be the actuarial equivalent of
the Regular Benefit.
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1)
above.
11
<PAGE>
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's officers
and Trustees as a group was less than 1 percent of the Fund's shares of
beneficial interest outstanding.
INVESTMENT PRACTICES AND POLICIES OF THE FUND
- --------------------------------------------------------------------------------
As stated in the Prospectus, the money market instruments which each
Portfolio of the Fund or Underlying Fund may purchase include U.S. Government
securities, bank obligations, Eurodollar certificates of deposit, obligations of
savings institutions, fully insured certificates of deposit and commercial
paper. Such securities are limited to:
U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed as to
principal and interest by the United States or its agencies (such as the
Export-Import Bank of the United States, Federal Housing Administration and
Government National Mortgage Association) or its instrumentalities (such as the
Federal Home Loan Bank), including Treasury bills, notes and bonds;
BANK OBLIGATIONS. Obligations (including certificates of deposit and
bankers' acceptances) of banks subject to regulation by the U.S. Government and
having total assets of $1,000,000,000 or more, and instruments secured by such
obligations, not including obligations of foreign branches of domestic banks
except to the extent below;
EURODOLLAR CERTIFICATES OF DEPOSIT. Eurodollar certificates of deposit
issued by foreign branches of domestic banks, having total assets of
$1,000,000,000 or more;
OBLIGATIONS OF SAVINGS INSTITUTIONS. Certificates of deposit of savings
banks and savings and loan associations, having total assets of $1,000,000,000
or more;
FULLY INSURED CERTIFICATES OF DEPOSIT. Certificates of deposit of banks and
savings institutions, having total assets of less than $1,000,000,000, if the
principal amount of the obligation is insured by the Federal Deposit Insurance
Corporation, limited to $100,000 principal amount per certificate and to 10% or
less of each Portfolio's total assets;
COMMERCIAL PAPER. Commercial paper rated within the two highest grades by
Standard & Poor's (S&P) or the highest grade by Moody's or, if not rated, issue
by a company having an outstanding debt issue rated at least AA by S&P or Aa by
Moody's.
REPURCHASE AGREEMENTS. Each Portfolio of the Fund may also invest in
repurchase agreements as described in the Prospectus and below under "Investment
Practices and Policies of the Underlying Funds". It is the current policy of
each Portfolio not to invest in repurchase agreements that do not mature within
seven days if any such investment amounts to more than 15% of each Portfolio's
net assets in keeping with each Portfolio's policy on illiquid securities.
INVESTMENT PRACTICES AND POLICIES OF THE UNDERLYING FUNDS
- --------------------------------------------------------------------------------
Set forth below are brief descriptions of the investment objectives of the
Underlying Funds in which the Portfolios of the Fund may invest. A description
of the various investment practices and techniques in which certain or all of
the Underlying Funds may engage is set forth below as well as in the Prospectus.
Shareholders, or those who wish to invest in the Underlying Fund directly, are
referred to the Prospectuses of those funds for more detailed information.
- DEAN WITTER AMERICAN VALUE FUND seeks long-term growth consistent with an
effort to reduce volatility by investing principally in common stock of
companies in industries which, at the time of the investment, are believed
to be attractively valued given their above average relative earnings
growth potential at that time.
12
<PAGE>
- DEAN WITTER CAPITAL APPRECIATION FUND seeks long-term capital appreciation
by investing primarily in the common stocks of U.S. companies that offer
the potential for either superior earnings growth and/or appear to be
undervalued.
- DEAN WITTER CAPITAL GROWTH SECURITIES seeks to provide long-term capital
growth by investing principally in common stocks.
- DEAN WITTER CONVERTIBLE SECURITIES TRUST seeks a high level of total
return through a combination of current income and capital appreciation by
investing principally in convertible securities.
- DEAN WITTER DEVELOPING GROWTH SECURITIES seeks long-term capital growth by
investing primarily in common stocks of smaller and medium-sized companies
that, in the opinion of the Investment Manager, have the potential for
growing more rapidly than the economy and which may benefit from new
products or services, technological developments or changes in management.
- DEAN WITTER DIVIDEND GROWTH SECURITIES INC. seeks to provide reasonable
current income and long-term growth of income and capital by investing
primarily in common stock of companies with a record of paying dividends
and the potential for increasing dividends.
- DEAN WITTER EUROPEAN GROWTH FUND INC. seeks to maximize the capital
appreciation of its investments by investing primarily in securities
issued by issuers located in Europe.
- DEAN WITTER FINANCIAL SERVICES TRUST seeks long-term capital appreciation
by investing in the equity securities of companies in the financial
services and financial services related industries.
- DEAN WITTER HEALTH SCIENCE TRUST seeks capital appreciation by investing
in securities of companies in the health sciences industry throughout the
world.
- DEAN WITTER HIGH YIELD SECURITIES INC. seeks a high level of current
income and, secondarily, capital appreciation by investing principally in
fixed-income securities which are rated in the lower categories by
established rating services (Baa or lower by Moody's Investors Service,
Inc. or BBB or lower by Standard & Poor's Corporation) or are non-rated
securities of comparable quality.
- DEAN WITTER INFORMATION FUND seeks long-term capital appreciation by
investing common stocks and securities convertible into common stocks of
domestic and foreign companies which are involved in all areas and
emerging areas of the communications and information industry.
- DEAN WITTER INTERMEDIATE INCOME SECURITIES seeks high current income by
investing primarily in intermediate term, investment grade fixed-income
securities.
- DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST seeks high current income
consistent with safety of principal by investing in obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
- DEAN WITTER UTILITIES FUND seeks current income and long-term growth of
income and capital by investing primarily in equity and fixed-income
securities of companies engaged in the public utilities industry.
- DEAN WITTER INTERNATIONAL SMALL CAP FUND seeks long-term growth of capital
by investing in equity securities of "small capitalization" companies
located outside of the United States.
- DEAN WITTER JAPAN FUND seeks long-term capital appreciation by investing
primarily in securities issued by issuers located in Japan.
- DEAN WITTER MARKET LEADER TRUST seeks long-term growth of capital by
investing primarily in equity securities that, in the opinion of the
Investment Manager, are established leaders in their respective fields in
growing industries in domestic and foreign markets.
- DEAN WITTER MID-CAP GROWTH PORTFOLIO seeks long-term capital growth by
investing principally in equity securities of "mid-cap" companies.
13
<PAGE>
- DEAN WITTER PACIFIC GROWTH FUND INC. seeks to maximize the capital
appreciation of its investments by investing primarily in securities
issued by issuers located in Asia, Australia and New Zealand.
- DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC. seeks capital
growth by investing primarily in common stocks of companies in the natural
resources and related areas.
- DEAN WITTER PRECIOUS METALS AND MINERALS TRUST seeks capital appreciation
by investing in the securities of foreign and domestic companies engaged
in the exploration, mining, fabrication, processing, distribution or
trading of precious metals and minerals and by investing a portion of its
assets in precious metals and minerals.
- DEAN WITTER S&P 500 INDEX FUND seeks to provide investment results that,
before expenses, correspond to the total return of the Standard & Poor's
500 Composite Stock Price Index by investing in common stocks included in
the S&P 500 Index in approximately the same weightings as the Index.
- DEAN WITTER SHORT-TERM BOND FUND seeks a high level of current income
consistent with preservation of capital by investing in a diversified
portfolio of short-term fixed income securities with a dollar-weighted
average maturity of less than three years.
- DEAN WITTER SPECIAL VALUE FUND seeks long-term capital appreciation by
investing primarily in equity securities issued by companies whose equity
market capitalization, at the time of purchase, falls within the range of
$100 million to $1 billion and that, in the opinion of the Investment
Manager, appear undervalued relative to the marketplace or to investments
in similar companies.
- DEAN WITTER VALUE-ADDED MARKET SERIES--EQUITY PORTFOLIO seeks to achieve a
high level of total return on its assets through a combination of capital
appreciation and current income by investing, on an equally weighted
basis, in a diversified portfolio of common stocks of the companies which
are represented in the Standard & Poor's 500 Composite Stock Price Index.
REPURCHASE AGREEMENTS. As discussed in the Prospectus, when cash may be
available for only a few days, it may be invested by the Underlying Funds
("fund" or "funds") in repurchase agreements until such time as it may otherwise
be invested or used for payments of obligations of the fund. These agreements,
which may be viewed as a type of secured lending by the fund, typically involve
the acquisition by the fund of debt securities from a selling financial
institution such as a bank, savings and loan association or broker-dealer. The
agreement provides that the fund will sell back to the institution, and that the
institution will repurchase, the underlying security ("collateral") at a
specified price and at a fixed time in the future, usually not more than seven
days from the date of purchase. The collateral will be maintained in a
segregated account and will be marked to market daily to determine that the
value of the collateral, as specified in the agreement, does not decrease below
the purchase price plus accrued interest. If such decrease occurs, additional
collateral will be requested and, when received, added to the account to
maintain full collateralization. The fund will accrue interest from the
institution until the time when the repurchase is to occur. Although such date
is deemed by the fund to be the maturity date of a repurchase agreement, the
maturities of securities subject to repurchase agreements are not subject to any
limits.
While repurchase agreements involve certain risks not associated with direct
investments in debt securities, the fund follows procedures designed to minimize
such risks. These procedures include effecting repurchase transactions only with
large, well-capitalized and well-established financial institutions whose
financial condition will be continually monitored by the Investment Manager
subject to procedures established by the Board of Trustees of the fund. In
addition, as described above, the value of the collateral underlying the
repurchase agreement will be at least equal to the repurchase price, including
any accrued interest earned on the repurchase agreement. In the event of a
default or bankruptcy by a selling financial institution, the fund will seek to
liquidate such collateral. However, the exercising of the fund's right to
liquidate such collateral could involve certain costs or delays and, to the
extent that proceeds from any sale upon a default of the obligation to
repurchase were less than the repurchase price, the fund could suffer a loss. It
is the current policy of the funds not to invest in
14
<PAGE>
repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by a fund, amounts to
more than 15% of its net assets. A fund's investments in repurchase agreements
may at times be substantial when, in the view of the Investment Manager,
liquidity, tax or other considerations warrant.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, a fund may lend its portfolio securities to brokers, dealers and
other financial institutions, provided that such loans are callable at any time
by the fund (subject to notice provisions described below), and are at all times
secured by cash or cash equivalents, which are maintained in a segregated
account pursuant to applicable regulations and that are equal to at least the
market value, determined daily, of the loaned securities. The advantage of such
loans is that the fund continues to receive the income on the loaned securities
while at the same time earning interest on the cash amounts deposited as
collateral, which will be invested in short-term obligations. A fund will not
lend its portfolio securities if such loans are not permitted by the laws or
regulations of any state in which its shares are qualified for sale and will not
lend more than 25% of the value of its total assets. A loan may be terminated by
the borrower on one business days' notice, or by the fund on four business days'
notice. If the borrower fails to deliver the loaned securities within four days
after receipt of notice, the fund could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will only be made to firms deemed by the fund's management to be
creditworthy and when the income which can be earned from such loans justifies
the attendant risks. Upon termination of the loan, the borrower is required to
return the securities to the fund. Any gain or loss in the market price during
the loan period would inure to the fund. The creditworthiness of firms to which
the fund lends its portfolio securities will be monitored on an ongoing basis by
the Investment Manager pursuant to procedures adopted and reviewed, on an
ongoing basis, by the Board of Trustees of the fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the fund will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of such rights
if the matters involved would have a material effect on the fund's investment in
such loaned securities. A fund will pay reasonable finder's, administrative and
custodial fees in connection with a loan of its securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. As
discussed in the Prospectus, from time to time a fund may purchase securities on
a when-issued or delayed delivery basis or may purchase or sell securities on a
forward commitment basis. When such transactions are negotiated, the price is
fixed at the time of the commitment, but delivery and payment can take place a
month or more after the date of commitment. While a fund will only purchase
securities on a when-issued, delayed delivery or forward commitment basis with
the intention of acquiring the securities, the fund may sell the securities
before the settlement date, if it is deemed advisable. The securities so
purchased or sold are subject to market fluctuation and no interest or dividends
accrue to the purchaser prior to the settlement date. At the time a fund makes
the commitment to purchase or sell securities on a when-issued, delayed delivery
or forward commitment basis, it will record the transaction and thereafter
reflect the value, each day, of such security purchased, or if a sale, the
proceeds to be received, in determining its net asset value. At the time of
delivery of the securities, the value may be more or less than the purchase or
sale price. The fund will also establish a segregated account with its custodian
bank in which it will continually maintain cash or cash equivalents or other
liquid portfolio securities equal in value to commitments to purchase securities
on a when-issued, delayed delivery or forward commitment basis. Subject to the
foregoing restrictions, a fund may purchase securities on such basis without
limit.
WHEN, AS AND IF ISSUED SECURITIES. As discussed in the Prospectus, a fund
may purchase securities on a "when, as and if issued" basis under which the
issuance of the security depends upon the occurrence of a subsequent event, such
as approval of a merger, corporate reorganization, leveraged buyout or debt
restructuring. The commitment for the purchase of any such security will not be
recog-
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nized in the portfolio of the fund until the Investment Manager determines that
issuance of the security is probable. At such time, the fund will record the
transaction and, in determining its net asset value, will reflect the value of
the security daily. At such time, the fund will also establish a segregated
account with its custodian bank in which it will maintain cash or cash
equivalents or other liquid portfolio securities equal in value to recognized
commitments for such securities. Once a segregated account has been established,
if the anticipated event does not occur and the securities are not issued, the
Fund will have lost an investment opportunity. The value of a fund's commitments
to purchase the securities of any one issuer, together with the value of all
securities of such issuer owned by the fund, may not exceed 5% of the value of
the fund's total assets at the time the initial commitment to purchase such
securities is made (see "Investment Restrictions" in each fund's Prospectus and
Statement of Additional Information). Subject to the foregoing restrictions, a
fund may purchase securities on such basis without limit. An increase in the
percentage of the Fund's assets committed to the purchase of securities on a
"when, as and if issued" basis may increase the volatility of its net asset
value. A fund may also sell securities on a "when, as and if issued" basis
provided that the issuance of the security will result automatically from the
exchange or conversion of a security owned by the fund at the time of the sale.
PRIVATE PLACEMENTS. As discussed in the Prospectus, a fund may invest up to
either 5% or 10% of its total assets in securities which are subject to
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or which are
otherwise not readily marketable. (Securities eligible for resale pursuant to
Rule 144A of the Securities Act, and determined to be liquid pursuant to the
procedures discussed in the following paragraph, are not subject to the
foregoing restriction.) Limitations on the resale of such securities may have an
adverse effect on their marketability, and may prevent a fund from disposing of
them promptly at reasonable prices. The fund may have to bear the expense of
registering such securities for resale and the risk of substantial delays in
effecting such registration.
The Securities and Exchange Commission ("SEC") has adopted Rule 144A under
the Securities Act, which permits the Fund to sell restricted securities to
qualified institutional buyers without limitation. The Investment Manager,
pursuant to procedures adopted by the Trustees of the funds, will make a
determination as to the liquidity of each restricted security purchased by a
fund. The procedures require that the following factors be taken into account in
making a liquidity determination: (1) the frequency of trades and price quotes
for the security; (2) the number of dealers and other potential purchasers who
have issued quotes on the security; (3) any dealer undertakings to make a market
in the security; and (4) the nature of the security and the nature of the
marketplace trades (the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). If a restricted security is
determined to be "liquid", such security will not be included within the
category "illiquid securities", which under the SEC's current policies may not
exceed 15% of a fund's net assets, and will not be subject to the 10% limitation
set out in the preceding paragraph.
The Rule 144A marketplace of sellers and qualified institutional buyers is
new and still developing and may take a period of time to develop into a mature
liquid market. As such, the market for certain private placements purchased
pursuant to Rule 144A may be initially small or may, subsequent to purchase,
become illiquid. Furthermore, the Investment Manager may not posses all the
information concerning an issue of securities that it wishes to purchase in a
private placement to which it would normally have had access, had the
registration statement necessitated by a public offering been filed with the
Securities and Exchange Commission.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. As discussed in the
Prospectus, certain funds may also use reverse repurchase agreements and dollar
rolls as part of its investment strategy. Reverse repurchase agreements involve
sales by a fund of portfolio assets concurrently with an agreement by the fund
to repurchase the same assets at a later date at a fixed price. Generally, the
effect of such a transaction is that the fund can recover all or most of the
cash invested in the portfolio securities involved during the term of the
reverse repurchase agreement, while it will be able to keep the interest income
associated with those portfolio securities. Such transactions are only
advantageous if the interest cost to the fund of the reverse repurchase
transaction is less than the cost of obtaining the cash otherwise.
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A fund may enter into dollar rolls in which the fund sells securities for
delivery in the current months and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the fund forgoes principal and interest paid on
the securities. The fund is compensated by the difference between the current
sales price and the lower forward price for the future purchase (often referred
to as the "drop") as well as by the interest earned on the cash proceeds of the
initial sale.
A fund will establish a segregated account with its custodian bank in which
it will maintain cash, U.S. Government Securities or other liquid portfolio
securities equal in value to its obligations in respect of reverse repurchase
agreements and dollar rolls. Reverse repurchase agreements and dollar rolls
involve the risk that the market value of the securities the fund is obligated
to repurchase under the agreement may decline below the repurchase price. In the
event the buyer of securities under a reverse repurchase agreement or dollar
roll files for bankruptcy or becomes insolvent, a fund's use of proceeds of the
agreement may be restricted pending a determination by the other party, or its
trustee or receiver, whether to enforce a fund's obligation to repurchase the
securities. Reverse repurchase agreements and dollar rolls are speculative
techniques involving leverage, and are considered borrowings by a fund.
ZERO COUPON SECURITIES. As discussed in the Prospectus, a portion of the
U.S. Government Securities purchased by a fund may be "zero coupon" Treasury
securities. These are U.S. Treasury bills, notes and bonds which have been
stripped of their unmatured interest coupons and receipts or which are
certificates representing interests in such stripped debt obligations and
coupons. In addition, a portion of the fixed-income securities purchased by such
fund may be "zero coupon" securities. "Zero coupon" securities are purchased at
a discount from their face amount, giving the purchaser the right to receive
their full value at maturity. A zero coupon security pays no interest to its
holder during at least a portion of its life. Its value to an investor consists
of the difference between its face value at the time of maturity and the price
for which it was acquired, which is generally an amount significantly less than
its face value (sometimes referred to as a "deep discount" price).
The interest earned on such securities is, implicitly, automatically
compounded and paid out at maturity. While such compounding at a constant rate
eliminates the risk of receiving lower yields upon reinvestment of interest if
prevailing interest rates decline, the owner of a zero coupon security will be
unable to participate in higher yields upon reinvestment of interest received if
prevailing interest rates rise. For this reason, zero coupon securities are
subject to substantially greater market price fluctuations during periods of
changing prevailing interest rates than are comparable debt securities which
make current distributions of interest. Current federal tax law requires that a
holder (such as a fund) of a zero coupon security accrue a portion of the
discount at which the security was purchased as income each year even though the
fund receives no interest payments in cash on the securities during the year.
Currently, the only U.S. Treasury security issued without coupons is the
Treasury bill. However, in the last few years a number of banks and brokerage
firms have separated ("stripped") the principal portions from the coupon
portions of the U.S. Treasury bonds and notes and sold them separately in the
form of receipts or certificates representing undivided interests in these
instruments (which instruments are generally held by a bank in a custodial or
trust account).
RIGHTS AND WARRANTS. As stated in the Prospectus, a fund may acquire rights
and warrants which are attached to other securities in its portfolio, or which
are issued as a distribution by the issuer of a security held in its portfolio.
Warrants are, in effect, an option to purchase equity securities at a specific
price, generally valid for a specific period of time, and have no voting rights,
pay no dividends and have no rights with respect to the corporation issuing
them.
CONVERTIBLE SECURITIES. As stated in the Prospectus, certain of the
fixed-income securities purchased by certain funds may be convertible into
common stock of the issuer. Convertible securities rank senior to common stocks
in a corporation's capital structure and, therefore, entail less risk than the
corporation's common stock. The value of a convertible security is a function of
its "investment value" (its value as if it did not have a conversion privilege),
and its "conversion value" (the security's worth if it were to be exchanged for
the underlying security, at market value, pursuant to its conversion privilege).
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To the extent that a convertible security's investment value is greater than
its conversion value, its price will be primarily a reflection of such
investment value and its price will be likely to increase when interest rates
fall and decrease when interest rates rise, as with a fixed-income security (the
credit standing of the issuer and other factors may also have an effect on the
convertible security's value). If the conversion value exceeds the investment
value, the price of the convertible security will rise above its investment
value and, in addition, will sell at some premium over its conversion value.
(This premium represents the price investors are willing to pay for the
privilege of purchasing a fixed-income security with a possibility of capital
appreciation due to the conversion privilege.) At such times the price of the
convertible security will tend to fluctuate directly with the price of the
underlying equity security. Convertible securities may be purchased by a fund at
varying price levels above their investments values and/or their conversion
values in keeping with the fund's objective.
FOREIGN SECURITIES. As stated in the Prospectus, foreign securities
investments may be affected by changes in currency rates or exchange control
regulations, changes in governmental administration or economic or monetary
policy (in the United States and abroad) or changed circumstances in dealings
between nations. Fluctuations in the relative rates of exchange between the
currencies of different nations will affect the value of a fund's investments
denominated in foreign currency. Changes in foreign currency exchange rates
relative to the U.S. dollar will affect the U.S. dollar value of a fund's assets
denominated in that currency and thereby impact upon the fund's total return on
such assets.
Foreign currency exchange rates are determined by forces of supply and
demand on the foreign exchange markets. These forces are themselves affected by
the international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. Moreover,
foreign currency exchange rates may be affected by the regulatory control of the
exchanges on which the currencies trade. The foreign currency transactions of a
fund will be conducted on a spot basis or through forward contracts or futures
contracts (described in the Statement of Additional Information). A fund will
incur certain costs in connection with these currency transactions.
Investments in foreign securities will also occasion risks relating to
political and economic developments abroad, including the possibility of
expropriations or confiscatory taxation, limitations on the use or transfer of
Fund assets and any effects of foreign social, economic or political
instability. Foreign companies are not subject to the regulatory requirements of
U.S. companies and, as such, there may be less publicly available information
about such companies. Moreover, foreign companies are not subject to the more
rigorous uniform accounting, auditing and financial reporting standards and
requirements applicable to U.S. companies.
Securities of foreign issuers may be less liquid than comparable securities
of U.S. issuers and, as such, their price changes may be more volatile.
Furthermore, foreign exchanges and broker-dealers are generally subject to less
government and exchange scrutiny and regulation than their American
counterparts. Brokerage commissions, dealer concessions and other transaction
costs may be higher on foreign markets than in the U.S. In addition, differences
in clearance and settlement procedures on foreign markets may occasion delays in
settlements of certain fund trades effected in such markets. Inability to
dispose of portfolio securities due to settlement delays could result in losses
to the fund due to subsequent declines in value of such securities and the
inability of the fund to make intended security purchases due to settlement
problems could result in a failure of the fund to make potentially advantageous
investments. To the extent a fund purchases Eurodollar certificates of deposit
issued by foreign branches of domestic United States banks, consideration will
be given to their domestic marketability, the lower reserve requirements
normally mandated for overseas banking operations, the possible impact of
interruptions in the flow of international currency transactions, and future
international political and economic developments which might adversely affect
the payment of principal or interest.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. As stated in the Prospectus,
certain funds may enter into forward foreign currency exchange contracts
("forward contracts") as a hedge against fluctuations in future foreign exchange
rates. A fund will conduct its foreign currency exchange transactions either on
a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange
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market, or through entering into forward contracts to purchase or sell foreign
currencies. A forward contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large, commercial and investment
banks) and their customers. Such forward contracts will only be entered into
with United States banks and their foreign branches or foreign banks, insurance
companies and other dealers whose assets total $1 billion or more. A forward
contract generally has no deposit requirement, and no commissions are charged at
any stage for trades.
When management of a fund believes that the currency of a particular foreign
country may suffer a substantial movement against the U.S. dollar, it may enter
into a forward contract to purchase or sell, for a fixed amount of dollars or
other currency, the amount of foreign currency approximating the value of some
or all of the fund's portfolio securities denominated in such foreign currency.
A fund will enter into forward contracts under various circumstances. When
the fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may, for example, desire to "lock in" the
price of the security in U.S. dollars or some other foreign currency which the
fund is temporarily holding in its portfolio. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars or other
currency, of the amount of foreign currency involved in the underlying security
transactions, a fund will be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar or
other currency which is being used for the security purchase (by the fund or the
counterparty) and the foreign currency in which the security is denominated
during the period between the date on which the security is purchased or sold
and the date on which payment is made or received.
At other times, when, for example, a fund's Investment Manager believes that
the currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar or some other foreign currency, the fund may enter into
a forward contract to sell, for a fixed amount of dollars or other currency, the
amount of foreign currency approximating the value of some or all of the fund's
securities holdings (or securities which the fund has purchased for its
portfolio) denominated in such foreign currency. Under identical circumstances,
a fund may enter into a forward contract to sell, for a fixed amount of U.S.
dollars or other currency, an amount of foreign currency other than the currency
in which the securities to be hedged are denominated approximating the value of
some or all of the portfolio securities to be hedged. This method of hedging,
called "cross-hedging," will be selected by the Investment Manager when it is
determined that the foreign currency in which the portfolio securities are
denominated has insufficient liquidity or is trading at a discount as compared
with some other foreign currency with which it tends to move in tandem.
In addition, when a fund's Investment Manager anticipates purchasing
securities at some time in the future, and wishes to lock in the current
exchange rate of the currency in which those securities are denominated against
the U.S. dollar or some other foreign currency, the fund may enter into a
forward contract to purchase an amount of currency equal to some or all of the
value of the anticipated purchase, for a fixed amount of U.S. dollars or other
currency. The fund may, however, close out the forward contract without
purchasing the security which was the subject of the "anticipatory" hedge.
A fund will not enter into forward contracts or maintain a net exposure to
such contracts where the consummation of the contracts would obligate the fund
to deliver an amount of foreign currency in excess of the value of the fund's
portfolio securities or other assets denominated in that currency. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, the management of the relevant
funds believes that it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of the fund will be
served. The fund's custodian bank will place cash, U.S. Government securities or
other appropriate liquid portfolio securities in a segregated account of the
fund in an amount equal to the value of the fund's total assets committed to the
consummation of forward contracts entered into under the circumstances set forth
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above. If the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will equal the amount of the fund's commitments
with respect to such contracts.
Where, for example, a fund is hedging a portfolio position consisting of
foreign securities denominated in a foreign currency against adverse exchange
rate moves vis-a-vis the U.S. dollar, at the maturity of the forward contract
for delivery by the fund of a foreign currency, the fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the 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 (however, the ability of the fund to terminate a contract is
contingent upon the willingness of the currency trader with whom the contract
has been entered into to permit an offsetting transaction). It is impossible to
forecast the market value of portfolio securities at the expiration of the
contract. Accordingly, it may be necessary for a fund 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 the
fund is obligated to deliver and if a decision is made to sell the security and
make delivery of the foreign currency. Conversely, it may be necessary to sell
on the spot market some of the foreign currency received upon the sale of the
portfolio securities if its market value exceeds the amount of foreign currency
a fund is obligated to deliver.
If a fund retains the portfolio securities and engages in an offsetting
transaction, the fund will incur a gain or loss to the extent that there has
been movement in spot or forward contract prices. If the fund engages in an
offsetting transaction, it may subsequently enter into a new forward contract to
sell the foreign currency. Should forward prices decline during the period
between the fund's entering into a forward contract for the sale of a foreign
currency and the date it enters into an offsetting contract for the purchase of
the foreign currency, the fund will realize a gain to the extent the price of
the currency it has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should forward prices increase, the Fund will suffer a loss
to the extent the price of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell.
If a fund purchases a fixed-income security which is denominated in U.S.
dollars but which will pay out its principal based upon a formula tied to the
exchange rate between the U.S. dollar and a foreign currency, it may hedge
against a decline in the principal value of the security by entering into a
forward contract to sell an amount of the relevant foreign currency equal to
some or all of the principal value of the security.
At times when a fund has written a call option on a security or the currency
in which it is denominated, it may wish to enter into a forward contract to
purchase or sell the foreign currency in which the security is denominated. A
forward contract would, for example, hedge the risk of the security on which a
call option has been written declining in value to a greater extent than the
value of the premium received for the option. A fund will maintain with its
Custodian at all times, cash, U.S. Government securities, or other liquid
portfolio securities in a segregated account equal in value to all forward
contract obligations and option contract obligations entered into in hedge
situations such as this.
Although a fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. It will, however, do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the spread
between the prices at which they are buying and selling various currencies. Thus
a dealer may offer to sell a foreign currency to the fund at one rate, while
offering a lesser rate of exchange should the fund desire to resell that
currency to the dealer.
In all of the above circumstances, if the currency in which a fund
securities holdings (or anticipated portfolio securities) are denominated rises
in value with respect to the currency which is being purchased (or sold), then
the fund will have realized fewer gains than had the fund not entered into the
forward contracts. Moreover, the precise matching of the forward contract
amounts and the value of the
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securities involved will not generally be possible, since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. A fund is not required to enter into
such transactions with regard to its foreign currency-denominated securities and
will not do so unless deemed appropriate by the Investment Manager. A fund
generally will not enter into a forward contract with a term of greater than one
year, although it may enter into forward contracts for periods of up to five
years. A fund may be limited in its ability to enter into hedging transactions
involving forward contracts by the Internal Revenue Code (the "Code")
requirements relating to qualifications as a regulated investment company (see
"Dividends, Distributions and Taxes").
OPTIONS AND FUTURES TRANSACTIONS
As stated in the Prospectus, a fund may write covered call options against
securities held in its portfolio and covered put options on eligible portfolio
securities and stock indexes and purchase options of the same series to effect
closing transactions, and may hedge against potential changes in the market
value of investments (or anticipated investments) and facilitate the
reallocation of a fund's assets into and out of equities and fixed-income
securities by purchasing put and call options on portfolio (or eligible
portfolio) securities and engaging in transactions involving futures contracts
and options on such contracts. A fund may also hedge against potential changes
in the market value of the currencies in which its investments (or anticipated
investments) are denominated by purchasing put and call options on currencies
and engage in transactions involving currency futures contracts and options on
such contracts.
Call and put options on U.S. Treasury notes, bonds and bills and equity
securities are listed on Exchanges and are written in over-the-counter
transactions ("OTC options"). Listed options are issued by the Options Clearing
Corporation ("OCC") and other clearing entities including foreign exchanges.
Ownership of a listed call option gives a fund the right to buy from the OCC the
underlying security covered by the option at the stated exercise price (the
price per unit of the underlying security) by filing an exercise notice prior to
the expiration date of the option. The writer (seller) of the option would then
have the obligation to sell to the OCC the underlying security at that exercise
price prior to the expiration date of the option, regardless of its then current
market price. Ownership of a listed put option would give the fund the right to
sell the underlying security to the OCC at the stated exercise price. Upon
notice of exercise of the put option, the writer of the put would have the
obligation to purchase the underlying security from the OCC at the exercise
price.
OPTIONS ON TREASURY BONDS AND NOTES. Because trading in options written on
Treasury bonds and notes tends to center on the most recently auctioned issues,
the exchanges on which such securities trade will not continue indefinitely to
introduce options with new expirations to replace expiring options on particular
issues. Instead, the expirations introduced at the commencement of options
trading on a particular issue will be allowed to run their course, with the
possible addition of a limited number of new expirations as the original ones
expire. Options trading on each issue of bonds or notes will thus be phased out
as new options are listed on more recent issues, and options representing a full
range of expirations will not ordinarily be available for every issue on which
options are traded.
OPTIONS ON TREASURY BILLS. Because a deliverable Treasury bill changes from
week to week, writers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of the
option, the position may be
hedged from a risk standpoint by the writing of a call option. For so long as
the call option is outstanding, the Fund will hold the Treasury bills in a
segregated account with its Custodian, so that they will be treated as being
covered.
OPTIONS ON FOREIGN CURRENCIES. A fund may purchase and write options on
foreign currencies for purposes similar to those involved with investing in
forward foreign currency exchange contracts. For example, in order to protect
against declines in the dollar value of portfolio securities which are
denominated in a foreign currency, a fund may purchase put options on an amount
of such foreign currency
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equivalent to the current value of the portfolio securities involved. As a
result, a fund would be enabled to sell the foreign currency for a fixed amount
of U.S. dollars, thereby "locking in" the dollar value of the portfolio
securities (less the amount of the premiums paid for the options). Conversely, a
fund may purchase call options on foreign currencies in which securities it
anticipates purchasing are denominated to secure a set U.S. dollar price for
such securities and protect against a decline in the value of the U.S. dollar
against such foreign currency. A fund may also purchase call and put options to
close out written option positions.
A fund may also write call options on foreign currency to protect against
potential declines in its portfolio securities which are denominated in foreign
currencies. If the U.S. dollar value of the portfolio securities falls as a
result of a decline in the exchange rate between the foreign currency in which a
security is denominated and the U.S. dollar, then a loss to a fund occasioned by
such value decline would be ameliorated by receipt of the premium on the option
sold. At the same time, however, the fund gives up the benefit of any rise in
value of the relevant portfolio securities above the exercise price of the
option and, in fact, only receives a benefit from the writing of the option to
the extent that the value of the portfolio securities falls below the price of
the premium received. A fund may also write options to close out long call
option positions.
The markets in foreign currency options are relatively new and a fund's
ability to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. Although the funds will not purchase
or write such options unless and until, in the opinion of the management of the
funds, the market for them has developed sufficiently to ensure that the risks
in connection with such
options are not greater than the risks in connection with the underlying
currency, there can be no assurance that a liquid secondary market will exist
for a particular option at any specific time. In addition, options on foreign
currencies are affected by all of those factors which influence foreign exchange
rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and have no relationship to the investment merits of a foreign security,
including foreign securities held in a "hedged" investment portfolio. Because
foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that are not reflected in the options market.
OTC OPTIONS. Exchange-listed options are issued by the OCC which assures
that all transactions in such options are properly executed. OTC options are
purchased from or sold (written) to dealers or financial institutions which have
entered into direct agreements with the respective funds. With OTC options, such
variables as expiration date, exercise price and premium will be agreed upon
between a fund and the transacting dealer, without the intermediation of a third
party such as the OCC. If the transacting dealer fails to make or take delivery
of the securities underlying an option it has written, in accordance with the
terms of that option, the fund would lose the premium paid for the option as
well as any anticipated benefit of the transaction. A fund will engage in OTC
option transactions only with primary U.S. Government securities dealers
recognized by the Federal Reserve Bank of New York.
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COVERED CALL WRITING. Certain funds is permitted to write covered call
options on portfolio securities and the U.S. dollar and foreign currencies,
without limit. Generally, a call option is "covered" if the Fund owns, or has
the right to acquire, without additional cash consideration (or for additional
cash consideration held for the fund by its Custodian in a segregated account)
the underlying security (currency) subject to the option except that in the case
of call options on U.S. Treasury Bills, a fund might own U.S. Treasury Bills of
a different series from those underlying the call option, but with a principal
amount and value corresponding to the exercise price and a maturity date no
later than that of the securities (currency) deliverable under the call option.
A call option is also covered if a fund holds a call on the same security
(currency) as the underlying security (currency) of the written option, where
the exercise price of the call used for coverage is equal to or less than the
exercise price of the call written or greater than the exercise price of the
call written if the mark to market difference is maintained by the fund in cash,
U.S. Government securities or other liquid portfolio securities which the fund
holds in a segregated account maintained with its Custodian.
A fund will receive from the purchaser, in return for a call it has written,
a "premium"; i.e., the price of the option. Receipt of these premiums may better
enable the fund to achieve a greater total return than would be realized from
holding the underlying securities (currency) alone. Moreover, the income
received from the premium will offset a portion of the potential loss incurred
by the fund if the securities (currency) underlying the option are ultimately
sold (exchanged) by the fund at a loss. The premium received will fluctuate with
varying economic market conditions. If the market value of the portfolio
securities (or the currencies in which they are denominated) upon which call
options have been written increases, the Fund may receive less total return from
the portion of its portfolio upon which calls have been written than it would
have had such calls not been written.
As regards listed options and certain OTC options, during the option period,
a fund may be required, at any time, to deliver the underlying security
(currency) against payment of the exercise price on any calls it has written
(exercise of certain listed and OTC options may be limited to specific
expiration dates). This obligation is terminated upon the expiration of the
option period or at such earlier time when the writer effects a closing purchase
transaction. A closing purchase transaction is accomplished by purchasing an
option of the same series as the option previously written. However, once a fund
has been assigned an exercise notice, the fund will be unable to effect a
closing purchase transaction.
Closing purchase transactions are ordinarily effected to realize a profit on
an outstanding call option to prevent an underlying security (currency) from
being called, to permit the sale of an underlying security (or the exchange of
the underlying currency) or to enable a fund to write another call option on the
underlying security (currency) with either a different exercise price or
expiration date or both. Also, effecting a closing purchase transaction will
permit the cash or proceeds from the concurrent sale of any securities subject
to the option to be used for other investments by the fund. A fund may realize a
net gain or loss from a closing purchase transaction depending upon whether the
amount of the premium received on the call option is more or less than the cost
of effecting the closing purchase transaction. Any loss incurred in a closing
purchase transaction may be wholly or partially offset by unrealized
appreciation in the market value of the underlying security (currency).
Conversely, a gain resulting from a closing purchase transaction could be offset
in whole or in part or exceeded by a decline in the market value of the
underlying security (currency).
If a call option expires unexercised, a fund realizes a gain in the amount
of the premium on the option less the commission paid. Such a gain, however, may
be offset by depreciation in the market value of the underlying security
(currency) during the option period. If a call option is exercised, the Fund
realizes a gain or loss from the sale of the underlying security (currency)
equal to the difference between the purchase price of the underlying security
(currency) and the proceeds of the sale of the security (currency) plus the
premium received for on the option less the commission paid.
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Options written by a fund normally have expiration dates of from up to nine
months (equity securities) to eighteen months (fixed-income securities) from the
date written. The exercise price of a call option may be below, equal to or
above the current market value of the underlying security (currency) at the time
the option is written. See "Risks of Options and Futures Transactions," below.
COVERED PUT WRITING. As a writer of a covered put option, a fund incurs an
obligation to buy the security underlying the option from the purchaser of the
put, at the option's exercise price at any time during the option period, at the
purchaser's election (certain listed and OTC put options written by the fund
will be exercisable by the purchaser only on a specific date). A put is
"covered" if, at all times, the fund maintains, in a segregated account
maintained on its behalf at the Fund's Custodian, cash, U.S. Government
securities or other high grade obligations in an amount equal to at least the
exercise price of the option, at all times during the option period. Similarly,
a short put position could be covered by the fund by its purchase of a put
option on the same security as the underlying security of the written option,
where the exercise price of the purchased option is equal to or more than the
exercise price of the put written or less than the exercise price of the put
written if the mark to market difference is maintained by the fund in cash, U.S.
Government securities or other liquid portfolio securities which the fund holds
in a segregated account maintained at its Custodian. In writing puts, a fund
assumes the risk of loss should the market value of the underlying security
decline below the exercise price of the option (any loss being decreased by the
receipt of the premium on the option written). In the case of listed options,
during the option period, the fund may be required, at any time, to make payment
of the exercise price against delivery of the underlying security. The operation
of and limitations on covered put options in other respects are substantially
identical to those of call options.
A fund will write put options for two purposes: (1) to receive the income
derived from the premiums paid by purchasers; and (2) when the Investment
Manager wishes to purchase the security underlying the option at a price lower
than its current market price, in which case it will write the covered put at an
exercise price reflecting the lower purchase price sought. The potential gain on
a covered put option is limited to the premium received on the option (less the
commissions paid on the transaction) while the potential loss equals the
difference between the exercise price of the option and the current market price
of the underlying securities when the put is exercised, offset by the premium
received (less the commissions paid on the transaction).
PURCHASING CALL AND PUT OPTIONS. A fund may purchase listed and OTC call
and put options in amounts equalling up to 5% of its total assets. A fund may
purchase call options in order to close out a covered call position (see
"Covered Call Writing" above) or purchase call options on securities they intend
to purchase. A fund may also purchase a call option on foreign currency to hedge
against an adverse exchange rate move of the currency in which the security it
anticipates purchasing is denominated vis-a-vis the currency in which the
exercise price is denominated. The purchase of the call option to effect a
closing transaction or a call written over-the-counter may be a listed or an OTC
option. In either case, the call purchased is likely to be on the same
securities (currencies) and have the same terms as the written option. If
purchased over-the-counter, the option would generally be acquired from the
dealer or financial institution which purchased the call written by a fund.
A fund may purchase put options on securities (currency) which it holds (or
has the right to acquire) in its portfolio only to protect itself against a
decline in the value of the security (currency). If the value of the underlying
security (currency) were to fall below the exercise price of the put purchased
in an amount greater than the premium paid for the option, the fund would incur
no additional loss. A fund may also purchase put options to close out written
put positions in a manner similar to call options closing purchase transactions.
In addition, the fund may sell a put option which it has previously purchased
prior to the sale of the securities (currency) underlying such option. Such a
sale would result in a net gain or loss depending on whether the amount received
on the sale is more or less than the premium and other transaction costs paid on
the put option which is sold. Any such gain or loss could be offset in whole or
in part by a change in the market value of the underlying security (currency).
If a put option purchased by the fund expired without being sold or exercised,
the premium would be lost.
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RISKS OF OPTIONS TRANSACTIONS. During the option period, the covered call
writer has, in return for the premium on the option, given up the opportunity
for capital appreciation above the exercise price should the market price of the
underlying security (or the currency in which it is denominated) increase, but
has retained the risk of loss should the price of the underlying security
(currency) decline. The covered put writer also retains the risk of loss should
the market value of the underlying security (currency) decline below the
exercise price of the option less the premium received on the sale of the
option. In both cases, the writer has no control over the time when it may be
required to fulfill its obligation as a writer of the option. Once an option
writer has received an exercise notice, it cannot effect a closing purchase
transaction in order to terminate its obligation under the option and must
deliver or receive the underlying securities (currency) at the exercise price.
Prior to exercise or expiration, an option position can only be terminated
by entering into a closing purchase or sale transaction. If a covered call
option writer is unable to effect a closing purchase transaction or to purchase
an offsetting over-the-counter option, it cannot sell the underlying security
until the option expires or the option is exercised. Accordingly, a covered call
option writer may not be able to sell (exchange) an underlying security
(currency) at a time when it might otherwise be advantageous to do so. A covered
put option writer who is unable to effect a closing purchase transaction or to
purchase an offsetting over-the-counter option would continue to bear the risk
of decline in the market price of the underlying security (currency) until the
option expires or is exercised. In addition, a coveredput writer would be unable
to utilize the amount held in cash or U.S. Government or other liquid portfolio
securities as security for the put option for other investment purposes until
the exercise or expiration of the option.
A fund's ability to close out its position as a writer of an option is
dependent upon the existence of a liquid secondary market on option Exchanges.
There is no assurance that such a market will exist, particularly in the case of
OTC options, as such options will generally only be closed out by entering into
a closing purchase transaction with the purchasing dealer. However, a fund may
be able to purchase an offsetting option which does not close out its position
as a writer but constitutes an asset of equal value to the obligation under the
option written. If the fund is not able to either enter into a closing purchase
transaction or purchase an offsetting position, it will be required to maintain
the securities subject to the call, or the collateral underlying the put, even
though it might not be advantageous to do so, until a closing transaction can be
entered into (or the option is exercised or expires).
Among the possible reasons for the absence of a liquid secondary market on
an Exchange are: (i) insufficient trading interest in certain options; (ii)
restrictions on transactions imposed by an Exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (iv) interruption of the normal
operations on an Exchange; (v) inadequacy of the facilities of an Exchange or
the Options Clearing Corporation ("OCC") to handle current trading volume; or
(vi) a decision by one or more Exchanges to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that Exchange (or in that class or series of options) would cease to
exist, although outstanding options on that Exchange that had been issued by the
OCC as a result of trades on that Exchange would generally continue to be
exercisable in accordance with their terms.
Exchanges limit the amount by which the price of a futures contract may move
on any day. If the price moves equal the daily limit on successive days, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, a fund would continue to
be required to make daily cash payments of variation margin on open futures
positions. In such situations, if the fund has insufficient cash, it may have to
sell portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. In addition, the fund may be required
to take or make delivery of the instruments underlying interest rate futures
contracts it holds at a time when it is disadvantageous to do so. The inability
to close out options and futures positions could also have an adverse impact on
a fund's ability to effectively hedge its portfolio.
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In the event of the bankruptcy of a broker through which a fund engages in
transactions in options, futures or options thereon, the fund could experience
delays and/or losses in liquidating open positions purchased or sold through the
broker and/or incur a loss of all or part of its margin deposits with the
broker. Similarly, in the event of the bankruptcy of the writer of an OTC option
purchased by the fund, the fund could experience a loss of all or part of the
value of the option. Transactions are entered into by the Fund only with brokers
or financial institutions deemed creditworthy by the Investment Manager.
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different Exchanges or are held or written on
one or more accounts or through one or more brokers). An Exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. These position limits may restrict the
number of listed options which a fund may write.
While the futures contracts and options transactions to be engaged in by a
fund for the purpose of hedging the fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such instruments.
One such risk which may arise in employing futures contracts to protect against
the price volatility of portfolio securities is that the prices of securities
and indexes subject to futures contracts (and thereby the futures contract
prices) may correlate imperfectly with the behavior of the cash prices of the
fund's portfolio securities. Another such risk is that prices of interest rate
futures contracts may not move in tandem with the changes in prevailing interest
rates against which the fund seeks a hedge. A correlation may also be distorted
by the fact that the futures market is dominated by short-term traders seeking
to profit from the difference between a contract or security price objective and
their cost of borrowed funds. Such distortions are generally minor and would
diminish as the contract approached maturity.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
STOCK INDEX OPTIONS. Options on stock indexes are similar to options on
stock except that, rather than the right to take or make delivery of stock at a
specified price, an option on a stock index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the stock index upon which the option is based is greater than, in the case of a
call, or less than, in the case of a put, the exercise price of the option. This
amount of cash is equal to such difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple (the "multiplier"). The multiplier for an index option
performs a function similar to the unit of trading for a stock option. It
determines the total dollar value per contract of each point in the difference
between the exercise price of an option and the current level of the underlying
index. A multiplier of 100 means that a one-point difference will yield $100.
Options on different indexes may have different multipliers. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. Unlike stock options, all settlements are in cash and a gain or
loss depends on price movements in the stock market generally (or in a
particular segment of the market) rather than the price movements in individual
stocks. Currently, options are traded on the Standard & Poor's 100 Index and the
Standard & Poor's 500 Index on the Chicago Board Options Exchange, the Major
Market Index and the Computer Technology Index, Oil Index and Institutional
Index on the American Stock Exchange and the NYSE Index and NYSE Beta Index on
the New York Stock Exchange, The Financial News Composite Index on the Pacific
Stock Exchange and the Value Line Index, National O-T-C Index and Utilities
Index on the Philadelphia Stock Exchange, each of which and any similar index on
which options are traded in the future which include stocks that are not limited
to any particular industry or segment of the market is referred to as a "broadly
based stock market index." Options on stock indexes provide a fund with a means
of protecting a fund against the risk of market wide price movements. If the
Investment Manager anticipates a market decline, the fund could purchase a stock
index put option. If the expected market
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decline materialized, the resulting decrease in the value of the fund's
portfolio would be offset to the extent of the increase in the value of the put
option. If the Investment Manager anticipates a market rise, the fund may
purchase a stock index call option to enable the fund to participate in such
rise until completion of anticipated common stock purchases by the fund.
Purchases and sales of stock index options also enable the Investment Manager to
more speedily achieve changes in a fund's equity positions.
A fund will write put options on stock indexes only if such positions are
covered by cash, U.S. Government securities or other liquid portfolio securities
equal to the aggregate exercise price of the puts, which cover is held for the
fund in a segregated account maintained for it by the fund's Custodian. All call
options on stock indexes written by the fund will be covered either by a
portfolio of stocks substantially replicating the movement of the index
underlying the call option or by holding a separate call option on the same
stock index with a strike price no higher than the strike price of the call
option sold by the fund.
RISKS OF OPTIONS ON INDEXES. Because exercises of stock index options are
settled in cash, call writers such as the Fund cannot provide in advance for
their potential settlement obligations by acquiring and holding the underlying
securities. A call writer can offset some of the risk of its writing position by
holding a diversified portfolio of stocks similar to those on which the
underlying index is based. However, most investors cannot, as a practical
matter, acquire and hold a portfolio containing exactly the same stocks as the
underlying index, and, as a result, bear a risk that the value of the securities
held will vary from the value of the index. Even if an index call writer could
assemble a stock portfolio that exactly reproduced the composition of the
underlying index, the writer still would not be fully covered from a risk
standpoint because of the "timing risk" inherent in writing index options. When
an index option is exercised, the amount of cash that the holder is entitled to
receive is determined by the difference between the exercise price and the
closing index level on the date when the option is exercised. As with other
kinds of options, the writer will not learn that it has been assigned until the
next business day, at the earliest. The time lag between exercise and notice of
assignment poses no risk for the writer of a covered call on a specific
underlying security, such as a common stock, because there the writer's
obligation is to deliver the underlying security, not to pay its value as of a
fixed time in the past. So long as the writer already owns the underlying
security, it can satisfy its settlement obligations by simply delivering it, and
the risk that its value may have declined since the exercise date is borne by
the exercising holder. In contrast, even if the writer of an index call holds
stocks that exactly match the composition of the underlying index, it will not
be able to satisfy its assignment obligations by delivering those stocks against
payment of the exercise price. Instead, it will be required to pay cash in an
amount based on the closing index value on the exercise date; and by the time it
learns that it has been assigned, the index may have declined, with a
corresponding decrease in the value of its stock portfolio. This "timing risk"
is an inherent limitation on the ability of index call writers to cover their
risk exposure by holding stock positions.
A holder of an index option who exercises it before the closing index value
for that day is available runs the risk that the level of the underlying index
may subsequently change. If such a change causes the exercised option to fall
out-of-the-money, the exercising holder will be required to pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
If dissemination of the current level of an underlying index is interrupted,
or if trading is interrupted in stocks accounting for a substantial portion of
the value of an index, the trading of options on that index will ordinarily be
halted. If the trading of options on an underlying index is halted, an exchange
may impose restrictions prohibiting the exercise of such options.
FUTURES CONTRACTS. Certain funds may purchase and sell interest rate,
currency and stock index futures contracts ("futures contracts") that are traded
on U.S. and foreign commodity exchanges on such underlying securities as U.S.
Treasury bonds, notes and bills ("interest rate" futures), on the
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U.S. dollar and foreign currencies, and such indexes as the S&P 500 Index, the
Moody's Investment-Grade Corporate Bond Index and the New York Stock Exchange
Composite Index ("index" futures).
As a futures contract purchaser, a fund incurs an obligation to take
delivery of a specified amount of the obligation underlying the contract at a
specified time in the future for a specified price. As a seller of a futures
contract, the fund incurs an obligation to deliver the specified amount of the
underlying obligation at a specified time in return for an agreed upon price.
A fund will purchase or sell interest rate futures contracts and bond index
futures contracts for the purpose of hedging its fixed-income portfolio (or
anticipated portfolio) securities against changes in prevailing interest rates.
If the Investment Manager anticipates that interest rates may rise and,
concomitantly, the price of fixed-income securities fall, a fund may sell an
interest rate futures contract or a bond index futures contract. If declining
interest rates are anticipated, the fund may purchase an interest rate futures
contract to protect against a potential increase in the price of U.S. Government
securities the fund intends to purchase. Subsequently, appropriate fixed-income
securities may be purchased by the fund in an orderly fashion; as securities are
purchased, corresponding futures positions would be terminated by offsetting
sales of contracts.
A fund will purchase or sell futures contracts on the U.S. dollar and on
foreign currencies to hedge against an anticipated rise or decline in the value
of the U.S. dollar or foreign currency in which a portfolio security of the fund
is denominated vis-a-vis another currency.
A fund will purchase or sell stock index futures contracts for the purpose
of hedging its equity portfolio (or anticipated portfolio) securities against
changes in their prices. If the Investment Manager anticipates that the prices
of stock held by a fund may fall, the fund may sell a stock index futures
contract. Conversely, if the Investment Manager wishes to hedge against
anticipated price rises in those stocks which a fund intends to purchase, the
fund may purchase stock index futures contracts. In addition, interest rate and
stock index futures contracts will be bought or sold in order to close out a
short or long position in a corresponding futures contract.
Although most interest rate futures contracts call for actual delivery or
acceptance of securities, the contracts usually are closed out before the
settlement date without the making or taking of delivery. Index futures
contracts provide for the delivery of an amount of cash equal to a specified
dollar amount times the difference between the stock index value at the open or
close of the last trading day of the contract and the futures contract price. A
futures contract sale is closed out by effecting a futures contract purchase for
the same aggregate amount of the specific type of equity security and the same
delivery date. If the sale price exceeds the offsetting purchase price, the
seller would be paid the difference and would realize a gain. If the offsetting
purchase price exceeds the sale price, the seller would pay the difference and
would realize a loss. Similarly, a futures contract purchase is closed out by
effecting a futures contract sale for the same aggregate amount of the specific
type of equity security and the same delivery date. If the offsetting sale price
exceeds the purchase price, the purchaser would realize a gain, whereas if the
purchase price exceeds the offsetting sale price, the purchaser would realize a
loss. There is no assurance that the Fund will be able to enter into a closing
transaction.
INTEREST RATE FUTURES CONTRACTS. When a fund enters into an interest rate
futures contract, it is initially required to deposit with the fund's Custodian,
in a segregated account in the name of the broker performing the transaction, an
"initial margin" of cash or U.S. Government securities or other liquid portfolio
securities equal to approximately 2% of the contract amount. Initial margin
requirements are established by the Exchanges on which futures contracts trade
and may, from time to time, change.
In addition, brokers may establish margin deposit requirements in excess of
those required by the Exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a brokers' client but is, rather, a good faith deposit on the futures
contract which will be returned to the fund upon the proper termination of the
futures contract.
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The margin deposits made are marked to market daily and the fund may be required
to make subsequent deposits called "variation margin", with the Fund's
Custodian, in the account in the name of the broker, which are reflective of
price fluctuations in the futures contract. Currently, interest rates futures
contracts can be purchased on debt securities such as U.S. Treasury Bills and
Bonds, U.S. Treasury Notes with maturities between 6 1/2 and 10 years, GNMA
Certificates and Bank Certificates of Deposit.
INDEX FUTURES CONTRACTS. A fund may invest in index futures contracts. An
index futures contract sale creates an obligation by the fund, as seller, to
deliver cash at a specified future time. An index futures contract purchase
would create an obligation by the fund, as purchaser, to take delivery of cash
at a specified future time. Futures contracts on indexes do not require the
physical delivery of securities, but provide for a final cash settlement on the
expiration date which reflects accumulated profits and losses credited or
debited to each party's account.
A fund is required to maintain margin deposits with brokerage firms through
which it effects index futures contracts in a manner similar to that described
above for interest rate futures contracts. Currently, the initial margin
requirement is approximately 5% of the contract amount for index futures. In
addition, due to current industry practice, daily variations in gains and losses
on open contracts are required to be reflected in cash in the form of variation
margin payments. The fund may be required to make additional margin payments
during the term of the contract.
At any time prior to expiration of the futures contract, a fund may elect to
close the position by taking an opposite position which will operate to
terminate the fund's position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid by or
released to the fund and the fund realizes a loss or a gain.
Currently, index futures contracts can be purchased or sold with respect to,
among others, the Standard & Poor's 500 Stock Price Index and the Standard &
Poor's 100 Stock Price Index on the Chicago Mercantile Exchange, the New York
Stock Exchange Composite Index on the New York Futures Exchange, the Major
Market Index on the American Stock Exchange, the Moody's Investment-Grade
Corporate Bond Index on the Chicago Board of Trade and the Value Line Stock
Index on the Kansas City Board of Trade.
OPTIONS ON FUTURES CONTRACTS. A fund may purchase and write call and put
options on futures contracts and enter into closing transactions with respect to
such options to terminate an existing position. An option on a futures contract
gives the purchaser the right (in return for the premium paid), and the writer
the obligation, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option is accompanied by delivery of the accumulated balance in
the writer's futures margin account, which represents the amount by which the
market price of the futures contract at the time of exercise exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.
A fund will purchase and write options on futures contracts for identical
purposes to those set forth above for the purchase of a futures contract
(purchase of a call option or sale of a put option) and the sale of a futures
contract (purchase of a put option or sale of a call option), or to close out a
long or short position in futures contracts. If, for example, the Investment
Manager wished to protect against an increase in interest rates and the
resulting negative impact on the value of a portion of its fixed-income
portfolio, it might write a call option on an interest rate futures contract,
the underlying security of which correlates with the portion of the portfolio
the Investment Manager seeks to hedge. Any premiums received in the writing of
options on futures contracts may, of course, augment the total return of the
fund and thereby provide a further hedge against losses resulting from price
declines in portions of the fund's portfolio.
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The writer of an option on a futures contract is required to deposit initial
and variation margin pursuant to requirements similar to those applicable to
futures contracts. Premiums received from the writing of an option on a futures
contract are included in initial margin deposits.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. A fund may not
enter into futures contracts or purchase related options thereon if, immediately
thereafter, the amount committed to margin plus the amount paid for premiums for
unexpired options on futures contracts exceeds 5% of the value of the fund's
total assets, after taking into account unrealized gains and unrealized losses
on such contracts it has entered into, provided, however, that in the case of an
option that is in-the-money (the exercise price of the call (put) option is less
(more) than the market price of the underlying security) at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%.
However, there is no overall limitation on the percentage of the fund's assets
which may be subject to a hedge position. In addition, in accordance with the
regulations of the Commodity Futures Trading Commission ("CFTC") under which the
fund is exempted from registration as a commodity pool operator, the fund may
only enter into futures contracts and options on futures contracts transactions
for purposes of hedging a part or all of its portfolio. If the CFTC changes its
regulations so that the fund would be permitted to write options on futures
contracts for purposes other than hedging the fund's investments without CFTC
registration, the fund may engage in such transactions for those purposes.
Except as described above, there are no other limitations on the use of futures
and options thereon by the fund.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. A fund may
sell a futures contract to protect against the decline in the value of
securities held by the fund. However, it is possible that the futures market may
advance and the value of securities held in the portfolio of the fund may
decline. If this occurred, the fund would lose money on the futures contract and
also experience a decline in value of its portfolio securities. However, while
this could occur for a very brief period or to a very small degree, over time
the value of a diversified portfolio will tend to move in the same direction as
the futures contracts.
If a fund purchases a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the fund may determine not to invest in the securities as
planned and will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities.
In addition, if a fund holds a long position in a futures contract or has
sold a put option on a futures contract, it will hold cash, U.S. Government
securities or other liquid portfolio securities equal to the purchase price of
the contract or the exercise price of the put option (less the amount of initial
or variation margin on deposit) in a segregated account maintained for the fund
by its Custodian. Alternatively, the fund could cover its long position by
purchasing a put option on the same futures contract with an exercise price as
high or higher than the price of the contract held by the fund.
If a fund maintains a short position in a futures contract or has sold a
call option on a futures contract, it will cover this position by holding, in a
segregated account maintained at its Custodian, cash, U.S. Government securities
or other liquid portfolio securities equal in value (when added to any initial
or variation margin on deposit) to the market value of the securities underlying
the futures contract or the exercise price of the option. Such a position may
also be covered by owning the securities underlying the futures contract (in the
case of a stock index futures contract a portfolio of securities substantially
replicating the relevant index), or by holding a call option permitting the fund
to purchase the same contract at a price no higher than the price at which the
short position was established.
Exchanges may limit the amount by which the price of futures contracts may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased.
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The extent to which a fund may enter into transactions involving options and
futures contracts may be limited by the Internal Revenue Code's requirements for
qualification as a regulated investment company and the fund's intention to
qualify as such. See "Dividends, Distributions and Taxes" in the Prospectus and
the Statement of Additional Information.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by a fund and the movements in the prices of the
securities which are the subject of the hedge. If participants in the futures
market elect to close out their contracts through offsetting transactions rather
than meet margin deposit requirements, distortions in the normal relationship
between the debt securities and futures markets could result. Price distortions
could also result if investors in futures contracts opt to make or take delivery
of underlying securities rather than engage in closing transactions due to the
resultant reduction in the liquidity of the futures market. In addition, due to
the fact that, from the point of view of speculators, the deposit requirements
in the futures markets are less onerous than margin requirements in the cash
market, increased participation by speculators in the futures market could cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and because of the imperfect correlation between movements in the
prices of securities and movements in the prices of futures contracts, a correct
forecast of interest rate trends by the Investment Manager may still not result
in a successful hedging transaction.
There is no assurance that a liquid secondary market will exist for futures
contracts and related options in which a fund may invest. In the event a liquid
market does not exist, it may not be possible to close out a futures position,
and in the event of adverse price movements, the fund would continue to be
required to make daily cash payments of variation margin. In addition,
limitations imposed by an exchange or board of trade on which futures contracts
are traded may compel or prevent the fund from closing out a contract which may
result in reduced gain or increased loss to the fund. The absence of a liquid
market in futures contracts might cause the fund to make or take delivery of the
underlying securities at a time when it may be disadvantageous to do so.
Compared to the purchase or sale of futures contracts, the purchase of call
or put options on futures contracts involves less potential risk to a fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a futures contract would result in a loss to a fund
notwithstanding that the purchase or sale of a futures contract would not result
in a loss, as in the instance where there is no movement in the prices of the
futures contract or underlying securities.
The Investment Manager has substantial experience in the use of the
investment techniques described above under the heading "Options and Futures
Transactions," which techniques require skills different from those needed to
select the portfolio securities underlying various options and futures
contracts.
PORTFOLIO TURNOVER
It is anticipated that the portfolio turnover rate of each Portfolio of the
Fund will not exceed 100%. A 100% turnover rate would occur, for example, if
100% of the securities held in a Portfolio of the Fund (excluding all securities
whose maturities at acquisition were one year or less) were sold and replaced
within one year.
INVESTMENT RESTRICTIONS
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In addition to the investment restrictions enumerated in the Prospectus, the
investment restrictions listed below have been adopted by the Fund as
fundamental policies of the Portfolios, except as otherwise indicated. Under the
Act, a fundamental policy may not be changed with respect to a Portfolio without
the vote of a majority of the outstanding voting securities of that Portfolio,
as defined in the Act. Such a majority is defined as the lesser of (a) 67% or
more of the shares present at a meeting of shareholders, if the holders of 50%
of the outstanding shares of the Portfolio are present or represented by proxy
or (b) more than 50% of the outstanding shares of the Portfolio.
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Each Portfolio of the Fund may not:
1. Purchase or sell real estate or interests therein, although each
Portfolio may purchase Underlying Funds which purchase securities of issuers
which engage in real estate operations and securities secured by real estate
or interests therein.
2. Borrow money, except that each Portfolio may borrow from a bank for
temporary or emergency purposes in an amount not exceeding 33 1/3% (taken at
the lower of cost or current value) of its total assets (not including the
amount borrowed).
3. Issue senior securities as defined in the Act, except insofar as
permitted in Investment Restriction 2 and except insofar as each Portfolio
may be deemed to have issued a senior security by reason of entering into
repurchase agreements.
4. Make short sales of securities.
5. Engage in the underwriting of securities, except insofar as a
Portfolio or an Underlying Fund may be deemed an underwriter under the
Securities Act of 1933 in disposing of a portfolio security.
6. Invest for the purpose of exercising control or management of any
other issuer.
7. Purchase or sell commodities or commodities contracts except that
each Portfolio may invest in Underlying Funds which may purchase or write
interest rate, currency and stock and bond index futures contracts and
related options thereon.
8. Pledge its assets or assign or otherwise encumber them except to
secure permitted borrowings. (For the purpose of this restriction,
collateral arrangements with respect to the writing of options by the
Underlying Funds and collateral arrangements with respect to initial or
variation margin for futures by the Underlying Funds are not deemed to be
pledges of assets.)
9. Purchase securities on margin (but a Portfolio may obtain short-term
loans as are necessary for the clearance of transactions). The deposit or
payment by an Underlying Fund of initial or variation margin in connection
with futures contracts or related options thereon is not considered the
purchase of a security on margin.
10. Make loans of money or securities, except by investment in
repurchase agreements. (For the purpose of this restriction, lending of
Portfolio securities by the Underlying Funds are not deemed to be loans).
Notwithstanding any other investment policy or restriction, each Portfolio
of the Fund may seek to achieve its investment objectives by investing all or
substantially all of its assets in another investment company having
substantially the same investment objectives and policies as the respective
Portfolio.
Notwithstanding the foregoing investment restrictions, the Underlying Funds
in which the Portfolios may invest have adopted certain investment restrictions
which may be more or less restrictive than those listed above, thereby
permitting a Portfolio to engage in investment strategies indirectly that are
prohibited under the investment restrictions listed above. The investment
restrictions of an Underlying Fund are located in the Prospectus and Statement
of Additional Information of that Underlying Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
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The Investment Manager is responsible for decisions to buy and sell
securities for the Portfolios and arranges for the execution of portfolio
security transactions on behalf of the Trusts. Purchases of portfolio securities
are made from dealers, underwriters and issuers; sales, if any, prior to
maturity, are made to dealers and issuers. The Portfolios do not normally incur
any brokerage commission expense on such transactions. Money market instruments
are generally traded on a "net" basis with dealers acting as principal for their
own accounts without a stated commission, although the price of the security
usually includes a profit to the dealer. Securities purchased in underwritten
offerings include a fixed amount of
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compensation to the underwriter, generally referred to as the underwriter's
concession or discount. When securities are purchased or sold directly from or
to an issuer, no commissions or discounts are paid.
The policy of the Portfolios regarding purchases and sales of securities for
their respective portfolios is that primary consideration will be given to
obtaining the most favorable price and efficient execution of transactions with
those dealers who the Investment Manager believes provide the most favorable
prices and are capable of providing efficient executions. If the Investment
Manager believes such price and execution can be obtained from more than one
dealer, it may give consideration to placing portfolio transactions with those
dealers who also furnish research and other services to the Portfolios or the
Investment Manager. Such services may include but are not limited to, any one or
more of the following: information as to the availability of securities for
purchases or sale; statistical or factual information or opinions pertaining to
investments; wire services; and appraisals or evaluations of portfolio
securities.
The information and services received by the Investment Manager from dealers
may be of benefit to the Investment Manager in the management of accounts of
some or all of its other clients and may not in all cases benefit the Portfolios
directly. While the receipt of such information and services are useful and
important in supplementing its own research and facilities, the Investment
Manager believes the value of such services is not determinable and does not
significantly reduce its expenses.
Pursuant to an order of the Securities and Exchange Commission, the
Portfolios may effect principal transactions in certain money market instruments
with Dean Witter. The Portfolios will limit their transactions with Dean Witter
to U.S. Government and Government Agency Securities, Bank Money Instruments
(i.e., Certificates of Deposit and Banker's Acceptances) and Commercial Paper
(not including Tax-Exempt Municipal Paper). Such transactions will be effected
with Dean Witter only when the price available from Dean Witter is better than
that available from other dealers.
While the Portfolios do not anticipate that they will incur any brokerage
commissions, consistent with the policy described above, brokerage transactions
in securities listed on exchanges or admitted to unlisted trading privileges may
be effected through Dean Witter. In order for Dean Witter to effect portfolio
transactions for any of the Portfolios, the commissions, fees or other
remuneration received by Dean Witter must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
an exchange during a comparable period of time. This standard would allow Dean
Witter to receive no more than the remuneration which would be expected to be
received by an unaffiliated broker in a commensurate arm's-length transaction.
Furthermore, the Trustees of the Fund, including a majority of the Trustees who
are not "interested" Trustees, have adopted procedures which are reasonably
designed to provide that any commissions, fees or other remuneration paid to
Dean Witter are consistent with the foregoing standard.
UNDERWRITING
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Dean Witter Distributors Inc. (the "Underwriter") has agreed to purchase up
to 10,000,000 shares from the Fund, which number may be increased or decreased
in accordance with the Underwriting Agreement. The Underwriting Agreement
provides that the obligation of the Underwriter is subject to certain conditions
precedent (such as the filing of certain forms and documents required by various
federal and state agencies and the rendering of certain opinions of counsel) and
that the Underwriter will be obligated to purchase the shares on November 25,
1997, or such other date as may be agreed upon between the Underwriter and the
Fund (the "Closing Date"). Shares will not be issued and dividends will not be
declared by the Fund until after the Closing Date.
The Underwriter will purchase Class B, Class C and Class D shares from the
Fund at $10.00 per share with all proceeds going to the Fund and will purchase
Class A shares at $10.00 per share plus a sales charge with the sales charge
paid to the Underwriter and the $10.00 per share going to the Fund.
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The Underwriter may, however, receive contingent deferred sales charges for
future redemptions of Class A, Class B and Class C shares (see "Purchase of Fund
Shares--Continuous Offering" in the Prospectus).
The Underwriter shall, regardless of its expected underwriting commitment,
be entitled and obligated to purchase only the number of shares for which
purchase orders have been received by the Underwriter prior to 2:00 p.m., New
York time, on the third business day preceding the Closing Date, or such other
date as may be agreed to between the parties.
The minimum number of Fund shares which may be purchased pursuant to this
offering is 100 shares. Certificates for shares purchased will not be issued
unless requested by the shareholder in writing.
The Underwriter has agreed to pay certain expenses of the initial offering
and the subsequent Continuous Offering of the Fund's shares. The Fund has agreed
to pay certain compensation to the Underwriter pursuant to a Plan of
Distribution pursuant to Rule 12b-1 under the Act, to compensate the Underwriter
for services it renders and the expenses it bears under the Underwriting
Agreement (see "The Distributor"). The Fund will bear the cost of initial
typesetting, printing and distribution of Prospectuses and Statements of
Additional Information and supplements thereto to shareholders. The Fund has
agreed to indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
THE DISTRIBUTOR
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As discussed in the Prospectus, shares of each Portfolio of the Fund are
distributed by Dean Witter Distributors Inc. (the "Distributor"). The
Distributor has entered into a selected dealer agreement with DWR, which through
its own sales organization sells shares of the Fund. In addition, the
Distributor may enter into selected dealer agreements with other selected
broker-dealers. The Distributor, a Delaware corporation, is a wholly-owned
subsidiary of MSDWD. The Trustees of the Fund, including a majority of the
Trustees who are not, and were not at the time they voted, interested persons of
the Fund, as defined in the Act (the "Independent Trustees"), approved, at their
meeting held on July 23, 1997, the current Distribution Agreement appointing the
Distributor as exclusive distributor of the Fund's shares and providing for the
Distributor to bear distribution expenses not borne by the Fund. By its terms,
the Distribution Agreement has an initial term ending April 30, 1998 and will
remain in effect from year to year thereafter if approved by the Board.
The Distributor bears all expenses it may incur in providing services under
the Distribution Agreement. Such expenses include the payment of commissions for
sales of the Fund's shares and incentive compensation to account executives. The
Distributor also pays certain expenses in connection with the distribution of
each Portfolio of the Fund's shares, including the costs of preparing, printing
and distributing advertising or promotional materials, and the costs of printing
and distributing prospectuses and supplements thereto used in connection with
the offering and sale of each Portfolio of the Fund's shares. The Fund bears the
costs of initial typesetting, printing and distribution of prospectuses and
supplements thereto to shareholders. The Fund also bears the costs of
registering the Fund and its shares under federal securities laws and pays
filing fees in accordance with state securities laws. The Fund and the
Distributor have agreed to indemnify each other against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. Under the
Distribution Agreement, the Distributor uses its best efforts in rendering
services to the Fund, but in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations, the Distributor is
not liable to the Fund or any of its shareholders for any error of judgment or
mistake of law or for any act or omission or for losses sustained by the Fund or
its shareholders.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Act (the "Plan") pursuant to which each Class, other than Class D, pays the
Distributor compensation accrued daily and
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<PAGE>
payable monthly at the following annual rates: 0.25%, 1.0% and 1.0% of the
average daily net assets of Class A, Class B and Class C, respectively. The
Distributor also receives the proceeds of front-end sales charges and of
contingent deferred sales charges imposed on certain redemptions of shares,
which are separate and apart from payments made pursuant to the Plan (see
"Purchase of Fund Shares" in the Prospectus).
The Distributor has informed the Fund that the entire fee payable by Class A
and a portion of the fees payable by each of Class B and Class C each year
pursuant to the Plan equal to 0.25% of such Class's average daily net assets are
currently each characterized as a "service fee" under the Rules of the
Association of the National Association of Securities Dealers, Inc. (of which
the Distributor is a member). The "service fee" is a payment made for personal
service and/or the maintenance of shareholder accounts. The remaining portion of
the Plan fees payable by a Class, if any, is characterized as an "asset-based
sales charge" as such is defined by the aforementioned Rules of the Association.
The Plan was adopted by a majority vote of the Board of Trustees, including
all of the Trustees of the Fund who are not "interested persons" of the Fund (as
defined in the Act) and who have no direct or indirect financial interest in the
operation of the Plan (the "Independent 12b-1 Trustees"), cast in person at a
meeting called for the purpose of voting on the Plan, on July 23, 1997.
Under the Plan and as required by Rule 12b-1, the Trustees receive and
review promptly after the end of each calendar quarter a written report provided
by the Distributor of the amounts expended under the Plan and the purpose for
which such expenditures were made.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method each Portfolio of the
Fund offers four Classes of shares, each with a different distribution
arrangement as set forth in the Prospectus.
With respect to Class A shares, DWR compensates its account executives by
paying them, from proceeds of the front-end sales charge, commissions for the
sale of Class A shares, currently a gross sales credit of up to 5.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.25% of the current value of
the respective accounts for which they are the account executives or dealers of
record in all cases. On orders of $1 million or more (for which no sales charge
was paid) or net asset value purchases by 401(k) plans or other
employer-sponsored plans qualified under Section 401(a) of the Internal Revenue
Code for which Dean Witter Trust FSB ("DWT") serves as Trustee or the 401(k)
Support Services Group of DWR serves as recordkeeper, the Investment Manager
compensates DWR's account executives by paying them, from its own funds, a gross
sales credit of 1.0% of the amount sold.
With respect to Class B shares, DWR compensates its account executives by
paying them, from its own funds, commissions for the sale of Class B shares,
currently a gross sales credit of up to 5.0% of the amount sold (except as
provided in the following sentence) and an annual residual commission, currently
a residual of up to 0.25% of the current value (not including reinvested
dividends or distributions) of the amount sold in all cases. In the case of
retirement plans qualified under Section 401(k) of the Internal Revenue Code and
other employer-sponsored plans qualified under Section 401(a) of the Internal
Revenue Code for which DWT serves as Trustee or the 401(k) Support Services
Group of DWR serves as recordkeeper, and which plans are opened on or after July
28, 1997, DWR compensates its account executives by paying them, from its own
funds, a gross sales credit of 3.0% of the amount sold.
With respect to Class C shares, DWR compensates its account executives by
paying them, from its own funds, commissions for the sale of Class C shares,
currently a gross sales credit of up to 1.0% of the amount sold and an annual
residual commission, currently a residual of up to 1.0% of the current value of
the respective accounts for which they are the account executives of record.
With respect to Class D shares other than shares held by participants in
InterCapital's mutual fund asset allocation program, the Investment Manager
compensates DWR's account executives by paying them, from its own funds,
commissions for the sale of Class D shares, currently a gross sales credit of up
to 1.0% of the amount sold. There is a chargeback of 100% of the amount paid if
the Class D shares are
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<PAGE>
redeemed in the first year and a chargeback of 50% of the amount paid if the
Class D shares are redeemed in the second year after purchase. The Investment
Manager also compensates DWR's account executives by paying them, from its own
funds, an annual residual commission, currently a residual of up to 0.10% of the
current value of the respective accounts for which they are the account
executives of record (not including accounts of participants in the InterCapital
mutual fund asset allocation program).
The gross sales credit is a charge which reflects commissions paid by DWR to
its account executives and DWR's Fund-associated distribution-related expenses,
including sales compensation, and overhead and other branch office
distribution-related expenses including (a) the expenses of operating DWR's
branch offices in connection with the sale of Fund shares, including lease
costs, the salaries and employee benefits of operations and sales support
personnel, utility costs, communications costs and the costs of stationery and
supplies, (b) the costs of client sales seminars, (c) travel expenses of mutual
fund sales coordinators to promote the sale of Fund shares and (d) other
expenses relating to branch promotion of Fund sales. The distribution fee that
the Distributor receives from the Fund under the Plan, in effect, offsets
distribution expenses incurred under the Plan on behalf of the Fund and, in the
case of Class B shares, opportunity costs, such as the gross sales credit and an
assumed interest charge thereon ("carrying charge"). In the Distributor's
reporting of the distribution expenses to the Fund, in the case of Class B
shares, such assumed interest (computed at the "broker's call rate") has been
calculated on the gross credit as it is reduced by amounts received by the
Distributor under the Plan and any contingent deferred sales charges received by
the Distributor upon redemption of shares of the Fund. No other interest charge
is included as a distribution expense in the Distributor's calculation of its
distribution costs for this purpose. The broker's call rate is the interest rate
charged to securities brokers on loans secured by exchange-listed securities.
The Fund is authorized to reimburse expenses incurred or to be incurred in
promoting the distribution of the Fund's Class A and Class C shares and in
servicing shareholder accounts. Reimbursement will be made through payments at
the end of each month. The amount of each monthly payment may in no event exceed
an amount equal to a payment at the annual rate of 0.25%, in the case of Class
A, and 1.0%, in the case of Class C, of the average net assets of the respective
Class of each Portfolio during the month. No interest or other financing
charges, if any, incurred on any distribution expenses on behalf of Class A and
Class C will be reimbursable under the Plan. With respect to Class A, in the
case of all expenses other than expenses representing the service fee, and, with
respect to Class C, in the case of all expenses other than expenses representing
a gross sales credit or a residual to account executives, such amounts shall be
determined at the beginning of each calendar quarter by the Trustees, including
a majority of the Independent 12b-1 Trustees. Expenses representing the service
fee (for Class A) or a gross sales credit or a residual to account executives
(for Class C) may be reimbursed without prior determination. In the event that
the Distributor proposes that monies shall be reimbursed for other than such
expenses, then in making quarterly determinations of the amounts that may be
reimbursed by the Fund, the Distributor will provide and the Trustees will
review a quarterly budget of projected distribution expenses to be incurred on
behalf of each Portfolio of the Fund, together with a report explaining the
purposes and anticipated benefits of incurring such expenses. The Trustees will
determine which particular expenses, and the portions thereof, that may be borne
by each Portfolio of the Fund, and in making such a determination shall consider
the scope of the Distributor's commitment to promoting the distribution of the
Fund's Class A and Class C shares.
At any given time, the expenses of distributing shares of the Fund may be
more or less than the total of (i) the payments made by the Fund pursuant to the
Plan and (ii) the proceeds of contingent deferred sales charges paid by
investors upon redemption of shares. Because there is no requirement under the
Plan that the Distributor be reimbursed for all distribution expenses with
respect to Class B shares or any requirement that the Plan be continued from
year to year, this excess amount does not constitute a liability of the Fund.
Although there is no legal obligation for the Fund to pay expenses incurred in
excess of payments made to the Distributor under the Plan and the proceeds of
contingent deferred sales charges paid by investors upon redemption of shares,
if for any reason the Plan is terminated, the
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<PAGE>
Trustees will consider at that time the manner in which to treat such expenses.
Any cumulative expenses incurred, but not yet recovered through distribution
fees or contingent deferred sales charges, may or may not be recovered through
future distribution fees or contingent deferred sales charges.
No interested person of the Fund nor any Trustee of the Fund who is not an
interested person of the Fund, as defined in the Act, has any direct financial
interest in the operation of the Plan except to the extent that the Distributor,
InterCapital, DWR, DWSC or certain of their employees may be deemed to have such
an interest as a result of benefits derived from the successful operation of the
Plan or as a result of receiving a portion of the amounts expended thereunder by
the Fund.
Under its terms, the Plan has an initial term ending April 30, 1998 and will
continue from year to year thereafter, provided such continuance is approved
annually by a vote of the Trustees in the manner described above.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of the
affected Class or Classes of each Portfolio of the Fund, and all material
amendments to the Plan must also be approved by the Trustees in the manner
described above. The Plan may be terminated at any time, without payment of any
penalty, by vote of a majority of the Independent 12b-1 Trustees or by a vote of
a majority of the outstanding voting securities of each Portfolio of the Fund
(as defined in the Act) on not more than thirty days' written notice to any
other party to the Plan. So long as the Plan is in effect, the election and
nomination of Independent 12b-1 Trustees shall be committed to the discretion of
the Independent 12b-1 Trustees.
DETERMINATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
As stated in the Prospectus, short-term securities with remaining maturities
of sixty days or less at the time of purchase are valued at amortized cost,
unless the Trustees determine such does not reflect the securities' market
value, in which case these securities will be valued at their fair value as
determined by the Trustees. Other short-term debt securities will be valued on a
mark-to-market basis until such time as they reach a remaining maturity of sixty
days, whereupon they will be valued at amortized cost using their value on the
61st day unless the Trustees determine such does not reflect the securities'
market value, in which case these securities will be valued at their fair value
as determined by the Trustees. All other securities and other assets are valued
at their fair value as determined in good faith under procedures established by
and under the supervision of the Trustees.
The net asset value per share for each Class of shares of each Portfolio of
the Fund is determined once daily as of 4:00 p.m., New York time (or, on days
when the New York Stock Exchange closes prior to 4:00 p.m., at such earlier
time), on each day that the New York Stock Exchange is open. The New York Stock
Exchange currently observes the following holidays: New Year's Day; Reverend Dr.
Martin Luther King, Jr. Day; Presidents' Day; Good Friday; Memorial Day;
Independence Day; Labor Day; Thanksgiving Day; and Christmas Day.
PURCHASE OF FUND SHARES
- --------------------------------------------------------------------------------
As discussed in the Prospectus, the Fund offers four Classes of shares as
follows:
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
Class A shares are sold to investors with an initial sales charge that
declines to zero for larger purchases; however, Class A shares sold without an
initial sales charge are subject to a contingent deferred sales charge ("CDSC")
of 1.0% if redeemed within one year of purchase, except in the circumstances
discussed in the Prospectus.
RIGHT OF ACCUMULATION. As discussed in the Prospectus, investors may
combine the current value of shares purchased in separate transactions for
purposes of benefitting from the reduced sales charges available for purchases
of shares of the Fund totalling at least $25,000 in net asset value. For
example, if any person or entity who qualifies for this privilege holds Class A
shares of the Fund and/or other Dean
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Witter Funds that are multiple class funds ("Dean Witter Multi-Class Funds") or
shares of other Dean Witter Funds sold with a front-end sales charge purchased
at a price including a front-end sales charge having a current value of $5,000,
and purchases $20,000 of additional shares of the Fund, the sales charge
applicable to the $20,000 purchase would be 4.75% of the offering price.
The Distributor must be notified by the selected broker-dealer or the
shareholder at the time a purchase order is placed that the purchase qualifies
for the reduced charge under the Right of Accumulation. Similar notification
must be made in writing by the selected broker-dealer or shareholder when such
an order is placed by mail. The reduced sales charge will not be granted if: (a)
such notification is not furnished at the time of the order; or (b) a review of
the records of the Distributor or Dean Witter Trust FSB (the "Transfer Agent")
fails to confirm the investor's represented holdings.
LETTER OF INTENT. As discussed in the Prospectus, reduced sales charges are
available to investors who enter into a written Letter of Intent providing for
the purchase, within a thirteen-month period, of Class A shares of the Fund from
the Distributor or from a single Selected Broker-Dealer.
A Letter of Intent permits an investor to establish a total investment goal
to be achieved by any number of purchases over a thirteen-month period. Each
purchase of Class A shares made during the period will receive the reduced sales
commission applicable to the amount represented by the goal, as if it were a
single purchase. A number of shares equal in value to 5% of the dollar amount of
the Letter of Intent will be held in escrow by the Transfer Agent, in the name
of the shareholder. The initial purchase under a Letter of Intent must be equal
to at least 5% of the stated investment goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the investor is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and sales charges actually paid. Such payment may be
made directly to the Distributor or, if not paid, the Distributor is authorized
by the shareholder to liquidate a sufficient number of his or her escrowed
shares to obtain such difference.
If the goal is exceeded and purchases pass the next sales charge level, the
sales charge on the entire amount of the purchase that results in passing that
level and on subsequent purchases will be subject to further reduced sales
charges in the same manner as set forth above under "Right of Accumulation," but
there will be no retroactive reduction of sales charges on previous purchases.
For the purpose of determining whether the investor is entitled to a further
reduced sales charge applicable to purchases at or above a sales charge level
which exceeds the stated goal of a Letter of Intent, the cumulative current net
asset value of any shares owned by the investor in any other Dean Witter Funds
held by the shareholder which were previously purchased at a price including a
front-end sales charge (including shares of the Fund and other Dean Witter Funds
acquired in exchange for those shares, and including in each case shares
acquired through reinvestment of dividends and distributions) will be added to
the cost or net asset value of shares of the Fund owned by the investor.
However, shares of "Exchange Funds" (see "Shareholder Services--Exchange
Privilege") and the purchase of shares of other Dean Witter Funds will not be
included in determining whether the stated goal of a Letter of Intent has been
reached.
At any time while a Letter of Intent is in effect, a shareholder may, by
written notice to the Distributor, increase the amount of the stated goal. In
that event, only shares purchased during the previous 90-day period and still
owned by the shareholder will be included in the new sales charge reduction. The
5% escrow and minimum purchase requirements will be applicable to the new stated
goal. Investors electing to purchase shares of the Fund pursuant to a Letter of
Intent should carefully read such Letter of Intent.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Class B shares are sold without an initial sales charge but are subject to a
CDSC payable upon most redemptions within six years after purchase. As stated in
the Prospectus, a CDSC will be imposed on any redemption by an investor if after
such redemption the current value of the investor's Class B shares of
38
<PAGE>
the Fund is less than the dollar amount of all payments by the shareholder for
the purchase of Class B shares during the preceding six years (or, in the case
of shares held by certain employer-sponsored benefit plans, three years).
However, no CDSC will be imposed to the extent that the net asset value of the
shares redeemed does not exceed: (a) the current net asset value of shares
purchased more than six years (or, in the case of shares held by certain
employer-sponsored benefit plans, three years) prior to the redemption, plus (b)
the current net asset value of shares purchased through reinvestment of
dividends or distributions of the Fund or another Dean Witter Fund (see
"Shareholder Services-- Targeted Dividends"), plus (c) the current net asset
value of shares acquired in exchange for (i) shares of Dean Witter front-end
sales charge funds, or (ii) shares of other Dean Witter Funds for which shares
of front-end sales charge funds have been exchanged (see "Shareholder
Services--Exchange Privilege"), plus (d) increases in the net asset value of the
investor's shares above the total amount of payments for the purchase of Fund
shares made during the preceding six (three) years. The CDSC will be paid to the
Distributor. [In addition, no CDSC will be imposed on redemptions of shares
which are attributable to reinvestment of dividends or distributions from, or
the proceeds of, certain Unit Investment Trusts.]
In determining the applicability of the CDSC to each redemption, the amount
which represents an increase in the net asset value of the investor's shares
above the amount of the total payments for the purchase of shares within the
last six years (or, in the case of shares held by certain employer-sponsored
benefit plans, three years) will be redeemed first. In the event the redemption
amount exceeds such increase in value, the next portion of the amount redeemed
will be the amount which represents the net asset value of the investor's shares
purchased more than six (three) years prior to the redemption and/or shares
purchased through reinvestment of dividends or distributions and/or shares
acquired in exchange for shares of Dean Witter front-end sales charge funds, or
for shares of other Dean Witter funds for which shares of front-end sales charge
funds have been exchanged. A portion of the amount redeemed which exceeds an
amount which represents both such increase in value and the value of shares
purchased more than six years (or, in the case of shares held by certain
employer-sponsored benefit plans, three years) prior to the redemption and/or
shares purchased through reinvestment of dividends or distributions and/or
shares acquired in the above-described exchanges will be subject to a CDSC.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Class B shares of the Fund until
the time of redemption of such shares. For purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments made
during a month will be aggregated and deemed to have been made on the last day
of the month. The following table sets forth the rates of the CDSC applicable to
most Class B shares of the Fund:
<TABLE>
<CAPTION>
YEAR SINCE
PURCHASE CDSC AS A PERCENTAGE OF
PAYMENT MADE AMOUNT REDEEMED
- ------------------------------------------------------------------------------------------ --------------------------
<S> <C>
First..................................................................................... 5.0%
Second.................................................................................... 4.0%
Third..................................................................................... 3.0%
Fourth.................................................................................... 2.0%
Fifth..................................................................................... 2.0%
Sixth..................................................................................... 1.0%
Seventh and thereafter.................................................................... None
</TABLE>
39
<PAGE>
The following table sets forth the rates of the CDSC applicable to Class B
shares of the Fund held by 401(k) plans or other employer-sponsored plans
qualified under Section 401(a) of the Internal Revenue Code for which DWT serves
as Trustee or the 401(k) Support Services Group of DWR serves as recordkeeper
and whose accounts are opened on or after July 28, 1997:
<TABLE>
<CAPTION>
YEAR SINCE
PURCHASE CDSC AS A PERCENTAGE OF
PAYMENT MADE AMOUNT REDEEMED
- ------------------------------------------------------------------------------------------ --------------------------
<S> <C>
First..................................................................................... 2.0%
Second.................................................................................... 2.0%
Third..................................................................................... 1.0%
Fourth and thereafter..................................................................... None
</TABLE>
In determining the rate of the CDSC, it will be assumed that a redemption is
made of shares held by the investor for the longest period of time within the
applicable six-year or three-year period. This will result in any such CDSC
being imposed at the lowest possible rate. The CDSC will be imposed, in
accordance with the table shown above, on any redemptions within six years (or,
in the case of shares held by certain employer-sponsored benefit plans, three
years) of purchase which are in excess of these amounts and which redemptions do
not qualify for waiver of the CDSC, as described in the Prospectus.
LEVEL LOAD ALTERNATIVE--CLASS C SHARES
Class C shares are sold without a sales charge but are subject to a CDSC of
1.0% on most redemptions made within one year after purchase, except in the
circumstances discussed in the Prospectus.
NO LOAD ALTERNATIVE--CLASS D SHARES
Class D shares are offered without any sales charge on purchase or
redemption. Class D shares are offered only to those persons meeting the
qualifications set forth in the Prospectus.
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
Upon the purchase of shares of the Fund, a Shareholder Investment Account is
opened for the investor on the books of each Portfolio of the Fund and
maintained by the Transfer Agent. This is an open account in which shares owned
by the investor are credited by the Transfer Agent in lieu of issuance of a
share certificate. If a share certificate is desired, it must be requested in
writing for each transaction. Certificates are issued only for full shares and
may be redeposited in the account at any time. There is no charge to the
investor for issuance of a certificate. Whenever a shareholder instituted
transaction takes place in the Shareholder Investment Account, the shareholder
will be mailed a confirmation of the transaction from the Fund or from DWR or
other selected broker-dealer.
AUTOMATIC INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. As stated in the
Prospectus, all income dividends and capital gains distributions are
automatically paid in full and fractional shares of the applicable Class of the
Fund, unless the shareholder requests that they be paid in cash. Each purchase
of shares of the Fund is made upon the condition that the Transfer Agent is
thereby automatically appointed as agent of the investor to receive all
dividends and capital gains distributions on shares owned by the investor. Such
dividends and distributions will be paid, at the net asset value per share, in
shares of the applicable Class of the Fund (or in cash if the shareholder so
requests) as of the close of business on the record date. At any time an
investor may request the Transfer Agent, in writing, to have subsequent
dividends and/or capital gains distributions paid to him or her in cash rather
than shares. To assure sufficient time to process the change, such request
should be received by the Transfer Agent at least five business days prior to
the record date of the dividend or distribution. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payments will be made to DWR or other selected
broker-dealer, and will be forwarded to the shareholder, upon the receipt of
proper instructions. It is the Fund's policy and practice that, if checks for
dividends or distributions paid in cash remain uncashed, no interest will accrue
on amounts represented by such uncashed checks.
40
<PAGE>
TARGETED DIVIDENDS.-SM- In states where it is legally permissible,
shareholders may also have all income dividends and capital gains distributions
automatically invested in shares of any Class of an open-end Dean Witter Fund
other than Dean Witter Fund of Funds or in another Class or Portfolio of Dean
Witter Fund of Funds. Such investment will be made as described above for
automatic investment in shares of the applicable Class of the Fund, at the net
asset value per share of the selected Dean Witter Fund as of the close of
business on the payment date of the dividend or distribution and will begin to
earn dividends, if any, in the selected Dean Witter Fund the next business day.
To participate in the Targeted Dividends program, shareholders should contact
their DWR or other selected broker-dealer account executive or the Transfer
Agent. Shareholders of the Fund must be shareholders of the selected Class of
the Dean Witter Fund targeted to receive investments from dividends at the time
they enter the Targeted Dividends program. Investors should review the
prospectus of the targeted Dean Witter Fund before entering the program.
EASYINVEST.-SM- Shareholders may subscribe to EasyInvest, an automatic
purchase plan which provides for any amount from $100 to $5,000 to be
transferred automatically from a checking or savings account or following
redemption of shares of a Dean Witter money market fund, on a semi-monthly,
monthly or quarterly basis, to the Transfer Agent for investment in shares of
the Fund. Shares purchased through EasyInvest will be added to the shareholder's
existing account at the net asset value calculated the same business day the
transfer of funds is effected (subject to any applicable sales charges). For
further information or to subscribe to EasyInvest, shareholders should contact
their DWR or other selected broker-dealer account executive or the Transfer
Agent.
INVESTMENT OF DIVIDENDS OR DISTRIBUTIONS RECEIVED IN CASH. As discussed in
the Prospectus, any shareholder who receives a cash payment representing a
dividend or distribution may invest such dividend or distribution in shares of
the applicable Class at net asset value, without the imposition of a CDSC upon
redemption, by returning the check or the proceeds to the Transfer Agent within
thirty days after the payment date. If the shareholder returns the proceeds of a
dividend or distribution, such funds must be accompanied by a signed statement
indicating that the proceeds constitute a dividend or distribution to be
invested. Such investment will be made at the net asset value per share next
determined after receipt of the check or the proceeds by the Transfer Agent.
SYSTEMATIC WITHDRAWAL PLAN. As discussed in the Prospectus, a systematic
withdrawal plan (the "Withdrawal Plan") is available for shareholders who own or
purchase shares of the Fund having a minimum value of $10,000 based upon the
then current net asset value. The Withdrawal Plan provides for monthly or
quarterly (March, June, September and December) checks in any dollar amount, not
less than $25, or in any whole percentage of the account balance, on an
annualized basis. Any applicable CDSC will be imposed on shares redeemed under
the Withdrawal Plan (see "Purchase of Fund Shares"). Therefore, any shareholder
participating in the Withdrawal Plan will have sufficient shares redeemed from
his or her account so that the proceeds (net of any applicable CDSC) to the
shareholder will be the designated monthly or quarterly amount.
The Transfer Agent acts as agent for the shareholder in tendering to the
Fund for redemption sufficient full and fractional shares to provide the amount
of the periodic withdrawal payment designated in the application. The shares
will be redeemed at their net asset value determined, at the shareholder's
option, on the tenth or twenty-fifth day (or next following business day) of the
relevant month or quarter and normally a check for the proceeds will be mailed
by the Transfer Agent, or amounts credited to a shareholder's DWR or other
selected broker-dealer brokerage account, within five business days after the
date of redemption. The Withdrawal Plan may be terminated at any time by the
Fund.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted.
Each withdrawal constitutes a redemption of shares and any gain or loss
realized must be recognized for federal income tax purposes. Although the
shareholder may make additional investments of
41
<PAGE>
$2,500 or more under the Withdrawal Plan, withdrawals made concurrently with
purchases of additional shares may be inadvisable because of sales charges which
may be applicable to purchases or redemptions of shares (see "Purchase of Fund
Shares").
Any shareholder who wishes to have payments under the Withdrawal Plan made
to a third party or sent to an address other than the one listed on the account
must send complete written instructions to the Transfer Agent to enroll in the
Withdrawal Plan. The shareholder's signature on such instructions must be
guaranteed by an eligible guarantor acceptable to the Transfer Agent
(shareholders should contact the Transfer Agent for a determination as to
whether a particular institution is such an eligible guarantor). A shareholder
may, at any time, change the amount and interval of withdrawal payments through
his or her account executive or by written notification to the Transfer Agent.
In addition, the party and/or the address to which checks are mailed may be
changed by written notification to the Transfer Agent, with signature guarantees
required in the manner described above. The shareholder may also terminate the
Withdrawal Plan at any time by written notice to the Transfer Agent. In the
event of such termination, the account will be continued as a regular
shareholder investment account. The shareholder may also redeem all or part of
the shares held in the Withdrawal Plan account (see "Redemptions and
Repurchases" in the Prospectus) at any time.
DIRECT INVESTMENTS THROUGH TRANSFER AGENT. As discussed in the Prospectus,
shareholders may make additional investments in any Class of shares of any
Portfolio of the Fund for which they qualify at any time by sending a check in
any amount, not less than $100, payable to Dean Witter Fund of Funds, and
indicating the selected Class and Portfolio, directly to the Fund's Transfer
Agent. In the case of Class A shares, after deduction of any applicable sales
charge, the balance will be applied to the purchase of Fund shares, and, in the
case of shares of the other Classes, the entire amount will be applied to the
purchase of Fund shares, at the net asset value per share next computed after
receipt of the check or purchase payment by the Transfer Agent. The shares so
purchased will be credited to the investor's account.
EXCHANGE PRIVILEGE
As discussed in the Prospectus, the Fund makes available to its shareholders
an Exchange Privilege whereby shareholders of each Class of shares of any
Portfolio of the Fund may exchange their shares for shares of the same Class of
shares of any other Portfolio of the Fund or any other Dean Witter Multi-Class
Fund without the imposition of any exchange fee. Shares may also be exchanged
for shares of any of the following funds: Dean Witter Short-Term U.S. Treasury
Trust, Dean Witter Limited Term Municipal Trust, Dean Witter Short-Term Bond
Fund, Dean Witter Intermediate Term U.S. Treasury Trust and five Dean Witter
Funds which are money market funds (the foregoing nine funds are hereinafter
referred to as the "Exchange Funds"). Class A shares may also be exchanged for
shares of Dean Witter Multi-State Municipal Series Trust and Dean Witter Hawaii
Municipal Trust, which are Dean Witter Funds sold with a front-end sales charge
("FSC Funds"). Class B shares may also be exchanged for shares of Dean Witter
Global Short-Term Income Fund Inc., Dean Witter High Income Securities and Dean
Witter National Municipal Trust, which are Dean Witter Funds offered with a CDSC
("CDSC Funds"). Exchanges may be made after the shares of the Fund acquired by
purchase (not by exchange or dividend reinvestment) have been held for thirty
days. There is no waiting period for exchanges of shares acquired by exchange or
dividend reinvestment. An exchange will be treated for federal income tax
purposes the same as a repurchase or redemption of shares, on which the
shareholder may realize a capital gain or loss.
Any new account established through the Exchange Privilege will have the
same registration and cash dividend or dividend reinvestment plan as the present
account, unless the Transfer Agent receives written notification to the
contrary. For telephone exchanges, the exact registration of the existing
account and the account number must be provided.
Any shares held in certificate form cannot be exchanged but must be
forwarded to the Transfer Agent and deposited into the shareholder's account
before being eligible for exchange. (Certificates mailed in for deposit should
not be endorsed.)
42
<PAGE>
As described below, and in the Prospectus under the caption "Purchase of
Fund Shares," a CDSC may be imposed upon a redemption, depending on a number of
factors, including the number of years from the time of purchase until the time
of redemption or exchange ("holding period"). When shares of a Dean Witter
Multi-Class Fund or any CDSC Fund are exchanged for shares of an Exchange Fund,
the exchange is executed at no charge to the shareholder, without the imposition
of the CDSC at the time of the exchange. During the period of time the
shareholder remains in the Exchange Fund (calculated from the last day of the
month in which the Exchange Fund shares were acquired), the holding period or
"year since purchase payment made" is frozen. When shares are redeemed out of
the Exchange Fund, they will be subject to a CDSC which would be based upon the
period of time the shareholder held shares in a Dean Witter Multi-Class Fund or
in a CDSC Fund. However, in the case of shares exchanged into an Exchange Fund
on or after April 23, 1990, upon a redemption of shares which results in a CDSC
being imposed, a credit (not to exceed the amount of the CDSC) will be given in
an amount equal to the Exchange Fund 12b-1 distribution fees incurred on or
after that date which are attributable to those shares. Shareholders acquiring
shares of an Exchange Fund pursuant to this exchange privilege may exchange
those shares back into a Dean Witter Multi-Class Fund or a CDSC Fund from the
Exchange Fund, with no CDSC being imposed on such exchange. The holding period
previously frozen when shares were first exchanged for shares of the Exchange
Fund resumes on the last day of the month in which shares of a Dean Witter
Multi-Class Fund or of a CDSC Fund are reacquired. A CDSC is imposed only upon
an ultimate redemption, based upon the time (calculated as described above) the
shareholder was invested in a Dean Witter Multi-Class Fund or in a CDSC Fund. In
the case of exchanges of Class A shares which are subject to a CDSC, the holding
period also includes the time (calculated as described above) the shareholder
was invested in a FSC Fund.
When shares initially purchased in a Dean Witter Multi-Class Fund or in a
CDSC Fund are exchanged for shares of a Dean Witter Multi-Class Fund, shares of
a CDSC Fund, shares of a FSC Fund, or shares of an Exchange Fund, the date of
purchase of the shares of the fund exchanged into, for purposes of the CDSC upon
redemption, will be the last day of the month in which the shares being
exchanged were originally purchased. In allocating the purchase payments between
funds for purposes of the CDSC, the amount which represents the current net
asset value of shares at the time of the exchange which were (i) purchased more
than one, three or six years (depending on the CDSC schedule applicable to the
shares) prior to the exchange, (ii) originally acquired through reinvestment of
dividends or distributions and (iii) acquired in exchange for shares of FSC
Funds, or for shares of other Dean Witter Funds for which shares of FSC Funds
have been exchanged (all such shares called "Free Shares"), will be exchanged
first. After an exchange, all dividends earned on shares in an Exchange Fund
will be considered Free Shares. If the exchanged amount exceeds the value of
such Free Shares, an exchange is made, on a block-by-block basis, of non-Free
Shares held for the longest period of time (except that, with respect to Class B
shares, if shares held for identical periods of time but subject to different
CDSC schedules are held in the same Exchange Privilege account, the shares of
that block that are subject to a lower CDSC rate will be exchanged prior to the
shares of that block that are subject to a higher CDSC rate). Shares equal to
any appreciation in the value of non-Free Shares exchanged will be treated as
Free Shares, and the amount of the purchase payments for the non-Free Shares of
the fund exchanged into will be equal to the lesser of (a) the purchase payments
for, or (b) the current net asset value of, the exchanged non-Free Shares. If an
exchange between funds would result in exchange of only part of a particular
block of non-Free Shares, then shares equal to any appreciation in the value of
the block (up to the amount of the exchange) will be treated as Free Shares and
exchanged first, and the purchase payment for that block will be allocated on a
pro rata basis between the non-Free Shares of that block to be retained and the
non-Free Shares to be exchanged. The prorated amount of such purchase payment
attributable to the retained non-Free Shares will remain as the purchase payment
for such shares, and the amount of purchase payment for the exchanged non-Free
Shares will be equal to the lesser of (a) the prorated amount of the purchase
payment for, or (b) the current net asset value of, those exchanged non-Free
Shares. Based upon the procedures described in the Prospectus under the
43
<PAGE>
caption "Purchase of Fund Shares," any applicable CDSC will be imposed upon the
ultimate redemption of shares of any fund, regardless of the number of exchanges
since those shares were originally purchased.
With respect to the redemption or repurchase of shares of any Portfolio of
the Fund, the application of proceeds to the purchase of new shares in the Fund
or any other of the funds and the general administration of the Exchange
Privilege, the Transfer Agent acts as agent for the Distributor and for the
shareholder's selected broker-dealer, if any, in the performance of such
functions. With respect to exchanges, redemptions or repurchases, the Transfer
Agent shall be liable for its own negligence and not for the default or
negligence of its correspondents or for losses in transit. The Fund shall not be
liable for any default or negligence of the Transfer Agent, the Distributor or
any selected broker-dealer.
The Distributor and any selected broker-dealer have authorized and appointed
the Transfer Agent to act as their agent in connection with the application of
proceeds of any redemption of Fund shares to the purchase of shares of any other
Portfolio or any other fund and the general administration of the Exchange
Privilege. No commission or discounts will be paid to the Distributor or any
selected broker-dealer for any transactions pursuant to this Exchange Privilege.
Exchanges are subject to the minimum investment requirement and any other
conditions imposed by each fund. (The minimum initial investment for the
Exchange Privilege account of each Class is $5,000 for Dean Witter Liquid Asset
Fund Inc., Dean Witter Tax-Free Daily Income Trust, Dean Witter California
Tax-Free Daily Income Trust and Dean Witter New York Municipal Money Market
Trust, although those funds may, in their discretion, accept initial investments
of as low as $1,000. The minimum initial investment for the Exchange Privilege
account of each Class is $10,000 for Dean Witter Short-Term U.S. Treasury Trust,
although that fund, in its discretion, may accept initial purchases of as low as
$5,000. The minimum initial investment for the Exchange Privilege account of
each Class is $5,000 for Dean Witter Special Value Fund. The minimum initial
investment for the Exchange Privilege account of each Class of all other Dean
Witter Funds for which the Exchange Privilege is available is $1,000.) Upon
exchange into an Exchange Fund, the shares of that fund will be held in a
special Exchange Privilege Account separately from accounts of those
shareholders who have acquired their shares directly from that fund. As a
result, certain services normally available to shareholders of those funds,
including the check writing feature, will not be available for funds held in
that account.
The Fund and each of the other Dean Witter Funds may limit the number of
times this Exchange Privilege may be exercised by any investor within a
specified period of time. Also, the Exchange Privilege may be terminated or
revised at any time by the Fund and/or any of the Dean Witter funds for
whichshares of the Fund have been exchanged, upon such notice as may be required
by applicable regulatory agencies (presently sixty days' prior written notice
for termination or material revision), provided that six months' prior written
notice of termination will be given to the shareholders who hold shares of
Exchange Funds pursuant to the Exchange Privilege, and provided further that the
Exchange Privilege may be terminated or materially revised without notice at
times (a) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (b) when trading on that Exchange is restricted, (c) when
an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, (d) during any
other period when the Securities and Exchange Commission by order so permits
(provided that applicable rules and regulations of the Securities and Exchange
Commission shall govern as to whether the conditions prescribed in (b) or (c)
exist) or (e) if the Fund would be unable to invest amounts effectively in
accordance with its investment objective, policies and restrictions.
For further information regarding the Exchange Privilege, shareholders
should contact their DWR or other selected broker-dealer account executive or
the Transfer Agent.
44
<PAGE>
REDEMPTIONS AND REPURCHASES
- --------------------------------------------------------------------------------
REDEMPTION. As stated in the Prospectus, shares of each Class of each
Portfolio of the Fund can be redeemed for cash at any time at the net asset
value per share next determined; however, such redemption proceeds will be
reduced by the amount of any applicable CDSC. If shares are held in a
shareholder's account without a share certificate, a written request for
redemption to the Fund's Transfer Agent at P.O. Box 983, Jersey City, NJ 07303
is required. If certificates are held by the shareholder, the shares may be
redeemed by surrendering the certificates with a written request for redemption.
The share certificate, or an accompanying stock power, and the request for
redemption, must be signed by the shareholder or shareholders exactly as the
shares are registered. Each request for redemption, whether or not accompanied
by a share certificate, must be sent to the Fund's Transfer Agent, which will
redeem the shares at their net asset value next computed (see "Purchase of Fund
Shares" in the Prospectus) after it receives the request, and certificate, if
any, in good order. Any redemption request received after such computation will
be redeemed at the next determined net asset value.
Whether certificates are held by the shareholder or shares are held in a
shareholder's account, if the proceeds are to be paid to any person other than
the record owner, or if the proceeds are to be paid to a corporation (other than
the Distributor or a selected broker-dealer for the account of the shareholder),
partnership, trust or fiduciary, or sent to the shareholder at an address other
than the registered address, signatures must be guaranteed by an eligible
guarantor acceptable to the Transfer Agent (shareholders should contact the
Transfer Agent for a determination as to whether a particular institution is
such an eligible guarantor). A stock power may be obtained from any dealer or
commercial bank. The Fund may change the signature guarantee requirements from
time to time upon notice to shareholders, which may be by means of a new
prospectus.
REPURCHASE. As stated in the Prospectus, DWR and other selected
broker-dealers are authorized to repurchase shares represented by a share
certificate which is delivered to any of their offices. Shares held in a
shareholder's account without a share certificate may also be repurchased by DWR
and other selected broker-dealers upon the telephonic request of the
shareholder. The repurchase price is the net asset value next computed after
such purchase order is received by DWR or other selected broker-dealer reduced
by any applicable CDSC.
PAYMENT FOR SHARES REDEEMED OR REPURCHASED. As discussed in the Prospectus,
payment for shares of any Class presented for repurchase or redemption will be
made by check within seven days after receipt by the Transfer Agent of the
certificate and/or written request in good order. The term good order means that
the share certificate, if any, and request for redemption are properly signed,
accompanied by any documentation required by the Transfer Agent, and bear
signature guarantees when required by the Fund or the Transfer Agent. Such
payment may be postponed or the right of redemption suspended at times (a) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (b) when trading on that Exchange is restricted, (c) when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (d) during any other period
when the Securities and Exchange Commission by order so permits; provided that
applicable rules and regulations of the Securities and Exchange Commission shall
govern as to whether the conditions prescribed in (b) or (c) exist. If the
shares to be redeemed have recently been purchased by check (including a
certificate or bank cashier's check), payment of redemption proceeds may be
delayed for the minimum time needed to verify that the check used for investment
has been honored (not more than fifteen days from the time of receipt of the
check by the Transfer Agent). It is the Fund's policy and practice that, if
checks for redemption proceeds remain uncashed, no interest will accrue on
amounts represented by such uncashed checks. Shareholders maintaining margin
accounts with DWR or another selected broker-dealer are referred to their
account executive regarding restrictions on redemption of shares of the Fund
pledged in the margin account.
TRANSFERS OF SHARES. In the event a shareholder requests a transfer of any
shares to a new registration, such shares will be transferred without sales
charge at the time of transfer. With regard to the
45
<PAGE>
status of shares which are either subject to the CDSC or free of such charge
(and with regard to the length of time shares subject to the charge have been
held), any transfer involving less than all the shares in an account will be
made on a pro rata basis (that is, by transferring shares in the same proportion
that the transferred shares bear to the total shares in the account immediately
prior to the transfer). The transferred shares will continue to be subject to
any applicable CDSC as if they had not been so transferred.
REINSTATEMENT PRIVILEGE. As discussed in the Prospectus, a shareholder who
has had his or her shares redeemed or repurchased and has not previously
exercised this reinstatement privilege may, within 35 days after the date of the
redemption or repurchase, reinstate any portion or all of the proceeds of such
redemption or repurchase in shares of the Fund in the same Class at the net
asset value next determined after a reinstatement request, together with such
proceeds, is received by the Transfer Agent.
Exercise of the reinstatement privilege will not affect the federal income
tax treatment of any gain or loss realized upon the redemption or repurchase,
except that if the redemption or repurchase resulted in a loss and reinstatement
is made in shares of the Fund, some or all of the loss, depending on the amount
reinstated, will not be allowed as a deduction for federal income tax purposes
but will be applied to adjust the cost basis of the shares acquired upon
reinstatement.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
As discussed in the Prospectus, each Portfolio of the Fund will determine
either to distribute or to retain all or part of any net long-term capital gains
in any year for reinvestment. If any such gains are retained, each Portfolio
will pay federal income tax thereon, and will notify shareholders that,
following an election by the Portfolio, the shareholders will be required to
include such undistributed gains in determining their taxable income and may
claim their share of the tax paid by the Portfolio as a credit against their
individual federal income tax.
Because each Portfolio of the Fund intends to distribute all of its net
investment income and capital gains to shareholders and otherwise continue to
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code, it is not expected that the Fund will be required to pay any
federal income tax. Shareholders will normally have to pay federal income taxes,
and any state income taxes, on the dividends and distributions they receive from
each Portfolio of the Fund. Such dividends and distributions, to the extent that
they are derived from net investment income or short-term capital gains, are
taxable to the shareholder as ordinary income regardless of whether the
shareholder receives such payments in additional shares or in cash. Any
dividends declared in the last quarter of any calendar year which are paid in
the following year prior to February 1 will be deemed received by the
shareholder in the prior calendar year.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder has
held the Fund's shares and regardless of whether the distribution is received in
additional shares or in cash. Capital gains distributions are not eligible for
the dividends received deduction. It is expected that the Treasury will issue
regulations or other guidance to permit shareholders to take into account their
proportionate share of the Fund's capital gains distributions that will be
subject to a reduced rate under the Taxpayer Relief Act of 1997. The Taxpayer
Relief Act reduces the maximum tax on long-term capital gains from 28% to 20%;
however, it also lengthens the required holding period to obtain the lower rate
from more than 12 months to more than 18 months. The lower rates do not apply to
collectibles and certain other assets. Additionally, the maximum capital gain
rate for assets that are held more than 5 years and that are acquired after
December 31, 2000 is 18%.
Any ordinary income dividends or capital gains distributions received by a
shareholder from any investment company will have the effect of reducing the net
asset value of the shareholder's shares in that company by the exact amount of
the dividend or capital gains distribution. Furthermore, capital gains
distributions and ordinary income dividends are subject to federal income taxes.
If the net asset
46
<PAGE>
value of the shares should be reduced below a shareholder's cost as a result of
the payment of dividends or realized long-term capital gains, such payment would
be in part a return of the shareholder's investment to the extent of such
reduction below the shareholder's cost, but nonetheless would be taxable to the
shareholder. Therefore, an investor should consider the tax implications of
purchasing Fund shares immediately prior to a dividend or distribution record
date.
Dividend payments will be eligible for the federal dividends received
deduction available to the Fund's corporate shareholders only to the extent the
aggregate dividends received by the Fund would be eligible for the deduction if
the Fund were the shareholder claiming the dividends received deduction. The
amount of dividends paid by the Fund which may qualify for the dividends
received deduction is limited to the aggregate amount of qualifying dividends
which the Fund derives from its portfolio investments which the Fund has held
for a minimum period, usually 46 days within a 90 day period beginning 45 days
before the ex dividend date of each qualifying dividend. Shareholders must meet
a similar holding period requirement with respect to their shares to claim the
dividends received deduction with respect to any distribution of qualifying
dividends. Any long-term capital gain distributions will also not be eligible
for the dividends received deduction. The ability to take the dividends received
deduction will also be limited in the case of a Fund shareholder which incurs or
continues indebtedness which is directly attributable to its investment in the
Fund.
After the end of the year, shareholders will be sent full information on
their dividends and capital gains distributions for tax purposes, including
information as to the portion taxable as ordinary income, the portion taxable as
long-term capital gains and the portion eligible for the dividends received
deduction. To avoid being subject to a 31% federal backup withholding tax on
taxable dividends, capital gains distributions and the proceeds of redemptions
and repurchases, shareholders' taxpayer identification numbers must be furnished
and certified as to their accuracy.
Shareholders are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, state or local taxes.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
As discussed in the Prospectus, from time to time each Portfolio of the Fund
may quote its "total return" in advertisements and sales literature. These
figures are computed separately for Class A, Class B, Class C and Class D
shares. Each Portfolio's "average annual total return" represents an
annualization of that Portfolio's total return over a specified period and is
computed by finding the annual percentage rate which will result in the ending
redeemable value of a hypothetical $1,000 investment made at the beginning of a
one, five or ten year period, or for the period from the date of commencement of
the Portfolio's operations, if shorter than any of the foregoing. The ending
redeemable value is reduced by any CDSC at the end of the one, five or ten year
or other period. For the purpose of this calculation, it is assumed that all
dividends and distributions are reinvested. The formula for computing the
average annual total return involves a percentage obtained by dividing the
ending redeemable value by the amount of the initial investment, taking a root
of the quotient (where the root is equivalent to the number of years in the
period) and subtracting 1 from the result.
In addition to the foregoing, each Portfolio may advertise its total return
for each Class over different periods of time by means of aggregate, average,
year-by-year or other types of total return figures. Such calculations may or
may not reflect the imposition of the maximum front-end sales charge for Class A
or the deduction of the CDSC for each of Class B and Class C which, if
reflected, would reduce the performance quoted. For example, the average annual
total return of each Portfolio may be calculated in the manner described in the
preceding paragraph, but without deduction for any applicable sales charge.
In addition, each Portfolio may compute its aggregate total return for each
Class for specified periods by determining the aggregate percentage rate which
will result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is
47
<PAGE>
assumed that all dividends and distributions are reinvested. The formula for
computing aggregate total return involves a percentage obtained by dividing the
ending value (without reduction for any sales charge) by the initial $1,000
investment and subtracting 1 from the result.
Each Portfolio may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in each Class of shares of the respective
Portfolio by adding 1 to the respective Portfolio's aggregate total return to
date (expressed as a decimal and without taking into account the effect of any
applicable CDSC) and multiplying by $9,475, $48,000 and $97,000 in the case of
Class A (investments of $10,000, $50,000 and $100,000 adjusted for the initial
sales charge) or by $10,000, $50,000 and $100,000 in the case of each of Class
B, Class C and Class D, as the case may be.
Each Portfolio from time to time may also advertise its performance relative
to certain performance rankings and indexes compiled by independent
organizations.
DESCRIPTION OF SHARES OF THE FUND
- --------------------------------------------------------------------------------
The shareholders of the Fund are entitled to a full vote for each full share
held. The Trustees themselves have the power to alter the number and the terms
of office of the Trustees, and they may at any time lengthen their own terms or
make their terms of unlimited duration and appoint their own successors,
provided that always at least a majority of the Trustees has been elected by the
shareholders of the Fund. Under certain circumstances the Trustees may be
removed by action of the Trustees. The shareholders also have the right under
certain circumstances to remove the Trustees. The voting rights of shareholders
are not cumulative, so that holders of more than 50 percent of the shares voting
can, if they choose, elect all Trustees being selected, while the holders of the
remaining shares would be unable to elect any Trustees.
The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios) and additional classes of shares
within any series. The Trustees have not authorized any such additional series
or classes of shares other than as set forth in the Prospectus.
The Declaration of Trust provides that no Trustee, officer, employee or
agent of the Fund is liable to the Fund or to a shareholder, nor is any Trustee,
officer, employee or agent liable to any third persons in connection with the
affairs of the Fund, except as such liability may arise from his/her or its own
bad faith, willful misfeasance, gross negligence, or reckless disregard of
his/her or its duties. It also provides that all third persons shall look solely
to the Fund property for satisfaction of claims arising in connection with the
affairs of the Fund. With the exceptions stated above, the Declaration of Trust
provides that a Trustee, officer, employee or agent is entitled to be
indemnified against all liability in connection with the affairs of the Fund.
The Fund is authorized to issue an unlimited number of shares of beneficial
interest. The Fund shall be of unlimited duration, subject to the provisions in
the Declaration of Trust concerning termination by action of the shareholders.
CUSTODIAN AND TRANSFER AGENT
- --------------------------------------------------------------------------------
The Bank of New York, 90 Washington Street, New York, New York 10286 is the
Custodian of the Fund's assets. Any of the Fund's cash balances with the
Custodian in excess of $100,000 are unprotected by federal deposit insurance.
Such balances may, at times, be substantial.
Dean Witter Trust FSB, Harborside Financial Center, Plaza Two, Jersey City,
New Jersey 07311 is the Transfer Agent of the Fund's shares and Dividend
Disbursing Agent for payment of dividends and distributions on Fund shares and
Agent for shareholders under various investment plans described herein. Dean
Witter Trust FSB is an affiliate of Dean Witter InterCapital Inc., the Fund's
Investment
48
<PAGE>
Manager, and of Dean Witter Distributors Inc., the Fund's Distributor. As
Transfer Agent and Dividend Disbursing Agent, Dean Witter Trust FSB's
responsibilities include maintaining shareholder accounts, disbursing cash
dividends and reinvesting dividends, processing account registration changes,
handling purchase and redemption transactions, mailing prospectuses and reports,
mailing and tabulating proxies, processing share certificate transactions, and
maintaining shareholder records and lists. For these services Dean Witter Trust
FSB receives a per shareholder account fee.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
Price Waterhouse LLP serves as the independent accountants of the Fund. The
independent accountants are responsible for auditing the annual financial
statements of the Fund.
REPORTS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports showing
the Fund's portfolio and other information. An annual report containing
financial statements audited by independent accountants will be sent to
shareholders each year.
The Fund's fiscal year ends on September 30. The financial statements of the
Fund must be audited at least once a year by independent accountants whose
selection is made annually by the Fund's Board of Trustees.
LEGAL COUNSEL
- --------------------------------------------------------------------------------
Barry Fink, Esq., who is an officer and the General Counsel of the
Investment Manager, is an officer and the General Counsel of the Fund.
EXPERTS
- --------------------------------------------------------------------------------
The financial statements of the Fund included in this Statement of
Additional Information and incorporated by reference in the Prospectus has been
so included and incorporated in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
49
<PAGE>
DEAN WITTER FUND OF FUNDS
STATEMENT OF ASSETS AND LIABILITIES AT SEPTEMBER 11, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO
<TABLE>
<S> <C>
ASSETS:
Cash.................................................................................................... $ 50,000
Deferred organizational expenses (Note 1)............................................................... 125,000
---------
Total Assets........................................................................................ 175,000
---------
LIABILITIES:
Organizational expenses payable (Note 1)................................................................ 125,000
Commitments (Notes 1 and 2).............................................................................
---------
Net Assets.......................................................................................... $ 50,000
---------
---------
CLASS A SHARES:
Net Assets................................................................................................ $ 12,500
Shares Outstanding (unlimited authorized, $.01 par value)................................................. 1,250
NET ASSET VALUE PER SHARE............................................................................. $ 10.00
---------
---------
MAXIMUM OFFERING PRICE
(net asset value plus 5.5% of net asset value)....................................................... $ 10.55
---------
---------
CLASS B SHARES:
Net Assets................................................................................................ $ 12,500
Shares Outstanding (unlimited authorized, $.01 par value)................................................. 1,250
NET ASSET VALUE PER SHARE............................................................................. $ 10.00
---------
---------
CLASS C SHARES:
Net Assets................................................................................................ $ 12,500
Shares Outstanding (unlimited authorized, $.01 par value)................................................. 1,250
NET ASSET VALUE PER SHARE............................................................................. $ 10.00
---------
---------
CLASS D SHARES:
Net Assets................................................................................................ $ 12,500
Shares Outstanding (unlimited authorized, $.01 par value)................................................. 1,250
NET ASSET VALUE PER SHARE............................................................................. $ 10.00
---------
---------
</TABLE>
50
<PAGE>
DEAN WITTER FUND OF FUNDS
STATEMENT OF ASSETS AND LIABILITIES AT SEPTEMBER 11, 1997
- --------------------------------------------------------------------------------
DOMESTIC PORTFOLIO
<TABLE>
<S> <C>
ASSETS:
Cash.................................................................................................... $ 50,000
Deferred organizational expenses (Note 1)............................................................... 125,000
-----------
Total Assets........................................................................................ 175,000
-----------
LIABILITIES:
Organizational expenses payable (Note 1)................................................................ 125,000
Commitments (Notes 1 and 2).............................................................................
-----------
Net Assets.......................................................................................... $ 50,000
-----------
-----------
CLASS A SHARES:
Net Assets................................................................................................ $ 12,500
Shares Outstanding (unlimited authorized, $.01 par value)................................................. 1,250
NET ASSET VALUE PER SHARE............................................................................. $ 10.00
-----------
-----------
MAXIMUM OFFERING PRICE
(net asset value plus 5.5% of net asset value)....................................................... $ 10.55
-----------
-----------
CLASS B SHARES:
Net Assets................................................................................................ $ 12,500
Shares Outstanding (unlimited authorized, $.01 par value)................................................. 1,250
NET ASSET VALUE PER SHARE............................................................................. $ 10.00
-----------
-----------
CLASS C SHARES:
Net Assets................................................................................................ $ 12,500
Shares Outstanding (unlimited authorized, $.01 par value)................................................. 1,250
NET ASSET VALUE PER SHARE............................................................................. $ 10.00
-----------
-----------
CLASS D SHARES:
Net Assets................................................................................................ $ 12,500
Shares Outstanding (unlimited authorized, $.01 par value)................................................. 1,250
NET ASSET VALUE PER SHARE............................................................................. $ 10.00
-----------
-----------
</TABLE>
- ------------
NOTE 1--Dean Witter Fund of Funds (the "Fund") was organized as a Massachusetts
business trust on July 3, 1997. To date the Fund has had no transactions other
than those relating to organizational matters and the sale of 1,250 shares of
beneficial interest for $12,500 of each class of the International Portfolio and
the Domestic Portfolio (the "Portfolios") to Dean Witter InterCapital Inc. (the
"Investment Manager"). The Fund is registered under the Investment Company Act
of 1940, as amended (the "Act"), as a non-diversified, open-end management
investment company. The investment objective of the International Portfolio is
long-term capital appreciation. The investment objective of the Domestic
Portfolio is to maximize total investment return through capital growth and
income. Each portfolio plans to achieve its investment objective by investing in
the Class D or equivalent shares of certain Dean Witter Funds ("Underlying
Funds"). Organizational expenses of the Fund incurred prior to the offering of
the Fund's shares will be paid by the Investment Manager. It is currently
estimated that the Investment Manager will incur, and be reimbursed,
approximately $125,000 by each Portfolio in organizational expenses. Actual
expenses could differ from these estimates. These expenses will be deferred and
amortized by each Portfolio on the straight-line method over a period not to
exceed five years from the date of commencement of the Fund's operations. In the
event that, at any time during the five year period beginning with the date of
commencement of operations, the initial shares acquired by the Investment
Manager prior to such date are redeemed, by any holder thereof, the redemption
proceeds payable in respect of such shares will be reduced by the pro rata share
(based on the proportionate share of the initial Portfolio shares redeemed to
the total number of original Portfolio shares outstanding at the time of
redemption) of the then unamortized deferred organizational expenses as of the
date of such redemption. In the event that the Portfolio liquidates before the
deferred organizational expenses are fully amortized, the Investment Manager
shall bear such unamortized deferred organizational expenses.
NOTE 2--The Fund has entered into an investment management agreement with the
Investment Manager. Certain officers and/or trustees of the Fund are officers
and/or directors of the Investment Manager. The Fund has retained the Investment
Manager to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. Under the terms of the
Investment Management Agreement, the Investment Manager maintains certain of the
Fund's books and records and furnishes, at its own expense, such office space,
facilities, equipment, supplies, clerical help and bookkeeping and certain
51
<PAGE>
legal services as the Fund may reasonably require in the conduct of its
business. In addition, the Investment Manager pays the salaries of all
personnel, including officers of the Fund, who are employees of the Investment
Manager. The Investment Manager also bears the cost of the Fund's telephone
service, heat, light, power and other utilities.
The Investment Manager does not receive a management fee from any Portfolio
of the Fund for providing the aforementioned investment management services.
However, each Portfolio, through its investments in the Class D shares of the
Underlying Funds, will pay its pro rata share of the management fees and certain
other expenses of the Underlying Funds.
Shares of each Portfolio of the Fund will be distributed by Dean Witter
Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager.
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the Act
(the "Plan") with respect to the distribution of Class A, Class B and Class C
shares of each Portfolio of the Fund. The Plan provides that the Distributor
will bear the expense of all promotional and distribution related activities on
behalf of those shares of each Portfolio of the Fund, including the payment of
commissions for sales of such shares and incentive compensation to and expenses
of Dean Witter Reynolds Inc. ("DWR"), an affiliate of the Investment Manager and
the Distributor, account executives and others who engage in or support
distribution of shares or who service shareholder accounts, including overhead
and telephone expenses; printing and distribution of prospectuses and reports
used in connection with the offering of the Portfolios' shares to other than
current shareholders; and preparation, printing and distribution of sales
literature and advertising materials. In addition, with respect to Class B, the
Distributor may utilize fees paid pursuant to the Plan to compensate DWR and
others for their opportunity costs in advancing such amounts, which compensation
would be in the form of a carrying charge on any unreimbursed distribution
expenses incurred.
To compensate the Distributor for the services provided and for the expenses
borne by the Distributor and others under the Plan, Class A, Class B and Class C
of each Portfolio will pay the Distributor compensation accrued daily and
payable monthly at the annual rate of 0.25% of the average daily net assets of
Class A and 1.0% of the average daily net assets of each of Class B and Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Portfolio
pursuant to the Plan and contingent deferred sales charges paid by investors
upon redemption of Class B shares. With respect to Class B, although there is no
legal obligation for the Fund to pay expenses incurred in excess of payments
made to the Distributor under the Plan and the proceeds of contingent deferred
sales charges paid by investors upon redemption of shares, if for any reason the
Plan is terminated, the Trustees will consider at that time the manner in which
to treat such expenses. In the case of Class A shares and Class C shares,
expenses incurred pursuant to the Plan in any calendar year in excess of 0.25%
or 1.00% of the average daily net assets of Class A or Class C, respectively,
will not be reimbursed by the Fund through payments in any subsequent year,
except that expenses representing a gross sales credit to account executives may
be reimbursed in the subsequent calendar year.
Dean Witter Trust FSB, an affiliate of the Investment Manager and the
Distributor, is the transfer agent of the Portfolios' shares, dividend
disbursing agent for payment of dividends and distributions on Portfolio shares
and agent for shareholders under various investment plans.
The Investment Manager has undertaken, with respect to each Portfolio of the
Fund, to assume all operating expenses (except for the Plan fee and brokerage
fees) until such time as a Portfolio has $50 million of net assets or until six
months from the date of commencement of the Portfolio's operations, whichever
occurs first.
52
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholder and Trustees of
Dean Witter Fund of Funds
In our opinion, the accompanying statements of assets and liabilities present
fairly, in all material respects, the financial position of the International
Portfolio and the Domestic Portfolio (constituting Dean Witter Fund of Funds,
hereafter referred to as the "Fund") at September 11, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
September 12, 1997
53
<PAGE>
APPENDIX
- --------------------------------------------------------------------------------
RATINGS OF CORPORATE DEBT INSTRUMENTS INVESTMENTS
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")
FIXED-INCOME SECURITY RATINGS
<TABLE>
<S> <C>
Aaa Fixed-income securities which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Fixed-income securities which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade fixed-income securities. They are rated lower than the best fixed-income
securities because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or there may
other elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A Fixed-income securities which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the future.
Baa Fixed-income securities which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over any
great length of time. Such fixed-income securities lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Fixed-income securities rated Aaa, Aa, A and Baa are considered investment grade.
Ba Fixed-income securities which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and therefore not well safeguarded
during both good and bad times in the future. Uncertainty of position characterizes
bonds in this class.
B Fixed-income securities which are rated B generally lack characteristics of 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 Fixed-income securities which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to principal
or interest.
Ca Fixed-income securities which are rated Ca present obligations which are
speculative in a high degree. Such issues are often in default or have other marked
shortcomings.
C Fixed-income securities which are rated C are the lowest rated class of fixed
income securities, and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
</TABLE>
RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2, and 3 in
each generic rating classification from Aa through B in its municipal
fixed-income security rating system. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and a modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
54
<PAGE>
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess of
nine months. The ratings apply to Municipal Commercial Paper as well as taxable
Commercial Paper. Moody's employs the following three designations, all judged
to be investment grade, to indicate the relative repayment capacity of rated
issuers: Prime-1, Prime-2, Prime-3.
Issuers rated Prime-1 have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 have a strong capacity for
repayment of short-term promissory obligations; and Issuers rated Prime-3 have
an acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S")
FIXED-INCOME SECURITY RATINGS
A Standard & Poor's fixed-income security rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. The
ratings are based, in varying degrees, on the following considerations: (1)
likelihood of default-capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with any rating
and may, on occasion, rely on unaudited financial information. The ratings may
be changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or for other reasons.
<TABLE>
<S> <C>
AAA Fixed-income securities rated "AAA" have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA Fixed-income securities rated "AA" have a very strong capacity to pay interest and
repay principal and differs from the highest-rate issues only in small degree.
A Fixed-income securities rated "A" have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than fixed-income securities in
higher-rated categories.
BBB Fixed-income securities rated "BBB" are regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity to pay interest and repay principal for fixed-income
securities in this category than for fixed-income securities in higher-rated
categories.
Fixed-income securities rated AAA, AA, A and BBB are considered investment grade.
BB Fixed-income securities rated "BB" have less near-term vulnerability to default
than other speculative grade fixed-income securities. However, it faces major
ongoing uncertainties or exposures to adverse business, financial or economic
conditions which could lead to inadequate capacity or willingness to pay interest
and repay principal.
B Fixed-income securities rated "B" have a greater vulnerability to default but
presently have the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
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<S> <C>
CCC Fixed-income securities rated "CCC" have a current identifiable vulnerability to
default, and are dependent upon favorable business, financial and economic
conditions to meet timely payments of interest and repayments of principal. In the
event of adverse business, financial or economic conditions, they are not likely to
have the capacity to pay interest and repay principal.
CC The rating "CC" is typically applied to fixed-income securities subordinated to
senior debt which is assigned an actual or implied "CCC" rating.
C The rating "C" is typically applied to fixed-income securities subordinated to
senior debt which is assigned an actual or implied "CCC-" rating.
CI The rating "CI" is reserved for fixed-income securities on which no interest is
being paid.
NR Indicates that no rating has been requested, that there is insufficient information
on which to base a rating or that Standard & Poor's does not rate a particular type
of obligation as a matter of policy.
Fixed-income securities rated "BB," "B," "CCC," "CC" and "C" are regarded as having
predominantly speculative characteristics with respect to capacity to pay interest
and repay principal. "BB" indicates the least degree of speculation and "C" the
highest degree of speculation. While such fixed-income securities will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or minus (-): The rating from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing with the major ratings
categories.
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COMMERCIAL PAPER RATINGS
Standard and Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The commercial paper rating is not a recommendation to purchase or
sell a security. The ratings are based upon current information furnished by the
issuer or obtained by S&P from other sources it considers reliable. The ratings
may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information. Ratings are graded into group categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Ratings are applicable to both taxable and tax-exempt commercial paper. The
categories are as follows:
Issues assigned A ratings are regarded as having the greatest capacity for
timely payment. Issues in this category are further refined with the designation
1, 2, and 3 to indicate the relative degree of safety.
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A-1 indicates that the degree of safety regarding timely payment is very strong.
A-2 indicates capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated "A-1."
A-3 indicates a satisfactory capacity for timely payment. Obligations carrying this
designation are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
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FITCH INVESTORS SERVICE, INC. ("FITCH")
BOND RATINGS
The Fitch Bond Ratings provides a guide to investors in determining the
investment risk associated with a particular security. The rating represents its
assessment of the issuer's ability to meet the obligations of a specific debt
issue or class of debt in a timely manner. Fitch bond ratings are not
recommendations to buy, sell or hold securities since they incorporate no
information on market price or yield relative to other debt instruments.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the record of the issuer and of
any guarantor, as well as the political and economic environment that might
affect the future financial strength and credit quality of the issuer.
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Bonds which have the same rating are of similar but not necessarily
identical investment quality since the limited number of rating categories
cannot fully reflect small differences in the degree of risk. Moreover, the
character of the risk factor varies from industry to industry and between
corporate, health care and municipal issues.
In assessing credit risk, Fitch Investors Service relies on current
information furnished by the issuer and/or guarantor and other sources which it
considers reliable. Fitch does not perform an audit of the financial statements
used in assigning a rating.
Ratings may be changed, withdrawn or suspended at any time to reflect
changes in the financial condition of the issuer, the status of the issue
relative to other debt of the issuer, or any other circumstances that Fitch
considers to have a material effect on the credit of the obligor.
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AAA rated bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA rated bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal, while very strong, is
somewhat less than for AAA rated securities or more subject to possible change over
the term of the issue.
A rated bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be strong,
but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB rated bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered to
be adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to weaken this ability than bonds with higher ratings.
BB rated bonds are considered speculative and of low investment grade. The obligor's
ability to pay interest and repay principal is not strong and is considered likely
to be affected over time by adverse economic changes.
B rated bonds are considered highly speculative. Bonds in this class are lightly
protected as to the obligor's ability to pay interest over the life of the issue
and repay principal when due.
CCC rated bonds may have certain identifiable characteristics which, if not remedied,
could lead to the possibility of default in either principal or interest payments.
CC rated bonds are minimally protected. Default in payment of interest and/or
principal seems probable.
C rated bonds are in imminent default in payment of interest or principal.
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SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes. Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis on the existence of
liquidity necessary to meet the issuer's obligations in a timely manner. Fitch's
short-term ratings are as follows:
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Fitch-1+ (Exceptionally Strong Credit Quality) Issues assigned this rating are regarded
as having the strongest degree of assurance for timely payment.
Fitch-1 (Very Strong Credit Quality) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than issues rated Fitch-1+.
Fitch-2 (Good Credit Quality) Issues assigned this rating have a satisfactory degree of
assurance for timely payment but the margin of safety is not as great as the two
higher categories.
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Fitch-3 (Fair Credit Quality) Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse change is likely to cause these securities to be rated below
investment grade.
Fitch-S (Weak Credit Quality) Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are vulnerable
to near term adverse changes in financial and economic conditions.
D (Default) Issues assigned this rating are in actual or imminent payment default.
LOC This symbol LOC indicates that the rating is based on a letter of credit issued
by a commercial bank.
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DUFF & PHELPS, INC.
LONG-TERM RATINGS
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and expertise.
The projected viability of the obligor at the trough of the cycle is a critical
determination.
Each rating also takes into account the legal form of the security, (e.g.,
first mortgage bonds, subordinated debt, preferred stock, etc.). The extent of
rating dispersion among the various classes of securities is determined by
several factors including relative weightings of the different security classes
in the capital structure, the overall credit strength of the issuer, and the
nature of covenant protection. Review of indenture restrictions is important to
the analysis of a company's operating and financial constraints.
The Credit Rating Committee formally reviews all ratings once per quarter
(more frequently, if necessary).
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<CAPTION>
RATING SCALE DEFINITION
<S> <C>
AAA Highest credit quality. The risk factors are negligible, being only slightly more than risk-free
U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest, but may vary slightly from
AA time to time because of economic conditions.
AA-
A+ Protection factors are average but adequate. However, risk factors are more variable and greater
A in periods of economic stress.
A
BBB+ Below average protection factors but still considered sufficient for prudent investment.
BBB Considerable variability in risk during economic cycles.
BBB-
BB+ Below investment grade but deemed likely to meet obligations when due. Present or prospective
BB financial protection factors fluctuate according to industry conditions or company fortunes.
BB- Overall quality may move up or down frequently within this category.
B+ Below investment grade and possessing risk that obligations will not be met when due. Financial
B protection factors will fluctuate widely according to economic cycles, industry conditions and/or
B- company fortunes. Potential exists for frequent changes in the quality rating within this
category or into a higher or lower quality rating grade.
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CCC Well below investment grade securities. May be in default or have considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection factors are narrow
and risk can be substantial with unfavorable economic/ industry conditions, and/or with
unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal and/or interest payments.
DP Preferred stock with dividend arrearages.
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SHORT-TERM RATINGS
Duff & Phelps' short-term ratings are consistent with the rating criteria
utilized by money market participants. The ratings apply to all obligations with
maturities of under one year, including commercial paper, the uninsured portion
of certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit, and current maturities of long-term
debt. Asset-backed commercial paper is also rated according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of fund, including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
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A. CATEGORY 1: HIGH GRADE
Duff 1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
minor.
Duff- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
B. CATEGORY 2: GOOD GRADE
Duff 2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.
C. CATEGORY 3: SATISFACTORY GRADE
Duff 3 Satisfactory liquidity and other protection factors qualify issue as to
investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
D. CATEGORY 4: NON-INVESTMENT GRADE
Duff 4 Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and
market access may be subject to a high degree of variation.
E. CATEGORY 5: DEFAULT
Duff 5 Issuer failed to meet scheduled principal and/or interest payments.
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