<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 30, 1998
REGISTRATION NO.: 333-30765
811-08283
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 2 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 /X/
AMENDMENT NO. 3 /X/
-------------------
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
(FORMERLY NAMED DEAN WITTER FUND OF FUNDS)
(A MASSACHUSETTS BUSINESS TRUST)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 392-1600
BARRY FINK, ESQ.
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPY TO:
DAVID M. BUTOWSKY, ESQ.
GORDON ALTMAN BUTOWSKY
WEITZEN SHALOV & WEIN
114 WEST 47TH STREET
NEW YORK, NEW YORK 10036
----------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this registration statement.
-------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE
BOX)
__X___immediately upon filing pursuant to paragraph (b)
______on (date) pursuant to paragraph (b)
______60 days after filing pursuant to paragraph (a)
______on (date) pursuant to paragraph (a) of rule 485.
AMENDING THE PROSPECTUS AND UPDATING FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
CROSS-REFERENCE SHEET
FORM N-1A
<TABLE>
<CAPTION>
ITEM CAPTION
- -------------------------------------- ----------------------------------------------------------
<S> <C>
PART A PROSPECTUS
1. ................................. Cover Page
2. ................................. Prospectus Summary; Summary of Fund Expenses
3. ................................. Financial Highlights; Performance Information
4. ................................. Investment Objective and Policies; The Fund and its
Management; Cover Page; Investment Restrictions;
Prospectus Summary
5. ................................. The Fund and Its Management; Back Cover; Investment
Objective and Policies
6. ................................. Dividends, Distributions and Taxes; Additional Information
7. ................................. Underwriting; Purchase of Fund Shares; Shareholder
Services
8. ................................. Redemptions and Repurchases; Shareholder Services
9. ................................. Not Applicable
PART B STATEMENT OF ADDITIONAL INFORMATION
10. ................................. Cover Page
11. ................................. Table of Contents
12. ................................. The Fund and Its Management
13. ................................. Investment Practices and Policies; Investment
Restrictions; Portfolio Transactions and Brokerage
14. ................................. The Fund and Its Management; Trustees and Officers
15. ................................. Trustees and Officers
16. ................................. The Fund and Its Management; The Distributor; Shareholder
Services; Custodian and Transfer Agent; Independent
Accountants
17. ................................. Portfolio Transactions and Brokerage
18. ................................. Description of Shares
19. ................................. The Distributor; Purchase of Fund Shares; Redemptions and
Repurchases; Statement of Assets and Liabilities;
Shareholder Services
20. ................................. Dividends, Distributions and Taxes
21. ................................. Purchase of Fund Shares
22. ................................. Performance Information
23. ................................. Experts
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
PROSPECTUS
NOVEMBER 30, 1998
Morgan Stanley 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 Morgan Stanley Dean Witter Family of Funds or managed by an investment
advisor that is an affiliate of Morgan Stanley Dean Witter Advisors 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".
The Fund offers four classes of shares (each, a "Class"), each
with a different combination of sales charges, ongoing fees and other features.
The different distribution arrangements permit an investor to choose the method
of purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. (See "Purchase of Fund
Shares--Alternative Purchase Arrangements.")
This Prospectus sets forth concisely the information you should
know before investing in the Fund. It should be read and retained for future
reference. Additional information about the Fund is contained in the Statement
of Additional Information, dated November 30, 1998, which has been filed with
the Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone numbers listed on this page. The
Statement of Additional Information is incorporated herein by reference.
MORGAN STANLEY DEAN WITTER DISTRIBUTORS INC.
DISTRIBUTOR
TABLE OF CONTENTS
Prospectus Summary/2
Summary of Fund Expenses/5
Financial Highlights/9
The Fund and its Management/10
Investment Objective and Policies/13
Risk Considerations/55
Investment Restrictions/68
Purchase of Fund Shares/68
Shareholder Services/79
Redemptions and Repurchases/83
Dividends, Distributions and Taxes/84
Performance Information/85
Additional Information/85
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Morgan Stanley Dean Witter
Fund of Funds
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll free)
<PAGE>
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The The Fund is an open-end, non-diversified management investment company currently consisting of two separate
Fund Portfolios: The International Portfolio and the Domestic Portfolio. The International Portfolio currently
invests in a selection of the following Underlying Funds: Morgan Stanley Dean Witter European Growth Fund Inc.,
Morgan Stanley Dean Witter International SmallCap Fund, Morgan Stanley Dean Witter Japan Fund, and Morgan
Stanley Dean Witter Pacific Growth Fund Inc. The Domestic Portfolio currently invests in a selection of the
following Underlying Funds: Morgan Stanley Dean Witter American Value Fund, Morgan Stanley Dean Witter Capital
Appreciation Fund, Morgan Stanley Dean Witter Capital Growth Securities, Morgan Stanley Dean Witter Competitive
Edge Fund, Morgan Stanley Dean Witter Convertible Securities Trust, Morgan Stanley Dean Witter Developing Growth
Securities, Morgan Stanley Dean Witter Dividend Growth Securities Inc., Morgan Stanley Dean Witter Financial
Services Trust, Morgan Stanley Dean Witter Growth Fund, Morgan Stanley Dean Witter Health Sciences Trust, Morgan
Stanley Dean Witter High Yield Securities Inc., Morgan Stanley Dean Witter Income Builder Fund, Morgan Stanley
Dean Witter Information Fund, Morgan Stanley Dean Witter Intermediate Income Securities, Morgan Stanley Dean
Witter Market Leader Trust, Morgan Stanley Dean Witter Mid-Cap Growth Fund, Morgan Stanley Dean Witter Mid-Cap
Dividend Growth Securities, Morgan Stanley Dean Witter Natural Resource Development Securities Inc., Morgan
Stanley Dean Witter Precious Metals and Minerals Trust, Morgan Stanley Dean Witter S&P 500 Index Fund, Morgan
Stanley Dean Witter Short-Term Bond Fund, Morgan Stanley Dean Witter Special Value Fund, Morgan Stanley Dean
Witter U.S. Government Securities Trust, Morgan Stanley Dean Witter Utilities Fund and Morgan Stanley 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.
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Offered Shares of beneficial interest with $0.01 par value (see page 85). Each portfolio of the Fund offers four Classes
of shares, each with a different combination of sales charges, ongoing fees and other features (see page 68).
- ------------------------------------------------------------------------------------------------------------------------------------
Minimum The minimum initial investment for each Class is $1,000 ($100 if the account is opened through EasyInvest-SM-).
Purchase Class D shares are only available to persons investing $5 million ($25 million for certain qualified plans) or
more and to certain other limited categories of investors. For the purpose of meeting the minimum $5 million (or
$25 million) investment for Class D shares, and subject to the $1,000 minimum initial investment for each Class
of each Portfolio of the Fund, an investor's existing holdings of Class A and Class D shares and shares of funds
for which Morgan Stanley Dean Witter Advisors Inc. serves as investment manager ("Morgan Stanley Dean Witter
Funds") that are sold with a front-end sales charge, and concurrent investments in Class D shares of the Fund
and other Morgan Stanley Dean Witter Funds that are multiple class funds will be aggregated. The minimum
subsequent investment is $100 (see page 68).
- ------------------------------------------------------------------------------------------------------------------------------------
Investment The investment objective of the International Portfolio is long-term capital appreciation. The investment
Objective objective of the Domestic Portfolio is to maximize total investment return (see page 13).
- ------------------------------------------------------------------------------------------------------------------------------------
Investment Morgan Stanley Dean Witter Advisors Inc., the Investment Manager of the Fund, and its wholly-owned subsidiary,
Manager Morgan Stanley Dean Witter Services Company Inc., serve in various investment management, advisory, management
and administrative capacities to 100 investment companies and other portfolios with assets of approximately
$117.3 billion at October 31, 1998 (see page 10).
- ------------------------------------------------------------------------------------------------------------------------------------
Management The Fund pays no management fee. However, the Fund, through its investments in the Underlying Funds, will pay
Fee 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 page 10).
</TABLE>
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Distributor and Morgan Stanley Dean Witter Distributors Inc. is the Fund's Underwriter and Distributor. The Fund has adopted a
Distribution Fee distribution plan pursuant to Rule 12b-1 under the Investment Company Act (the "12b-1 Plan") with respect to the
distribution fees paid by the Class A, Class B and Class C 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 68 and 77).
- ------------------------------------------------------------------------------------------------------------------------------------
Alternative Each Portfolio of the Fund will invest in the Class D or no load shares of the Underlying Funds set forth below
Purchase and accordingly will not pay any sales load or 12b-1 service or distribution fees in connection with its
Arrangements investments in shares of the Underlying Funds.
Four classes of shares are offered:
- 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 68, 72 and 77).
- 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 68, 74 and 77).
- 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 68 and 77).
- Class D shares are offered only to investors meeting an initial investment minimum of $5 million ($25 million
for certain qualified plans) and to certain other limited categories of investors. Class D shares are offered
without a front-end sales charge or CDSC and are not subject to any 12b-1 fee (see pages 68 and 77).
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends and Dividends from net investment income and distributions from net capital gains, if any, are paid at least once
Capital Gains per year. Each Portfolio of the Fund may, however, determine to retain all or part of any net long-term capital
Distributions 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 79 and 84).
</TABLE>
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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 83).
- ------------------------------------------------------------------------------------------------------------------------------------
Risk The net asset value of each Portfolio's shares will fluctuate with changes in the market value of its portfolio
Considerations 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 55-67).
</TABLE>
- --------------------------------------------------------------------------------
THE ABOVE IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION APPEARING
ELSEWHERE IN THE PROSPECTUS AND IN THE STATEMENT
OF ADDITIONAL INFORMATION.
4
<PAGE>
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
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 other expenses for the fiscal period ended
September 30, 1998.
DOMESTIC PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
--------- ------- --------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)... 5.25%(1) None None None
Sales Charge Imposed on Dividend Reinvestments.................................. None None None None
Maximum Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds)................................................. None(2) 5.00%(3) 1.00%(4) None
Redemption Fees................................................................. None None None None
Exchange Fee.................................................................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
- --------------------------------------------------------------------------------
Management Fees................................................................. None None None None
12b-1 Fees (5) (6).............................................................. 0.25% 1.00% 1.00% None
Other Expenses*................................................................. 0.90% 0.90% 0.90% 0.90%
Total Fund Operating Expenses* (7).............................................. 1.15% 1.90% 1.90% 0.90%
</TABLE>
INTERNATIONAL PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
--------- ------- --------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)... 5.25%(1) None None None
Sales Charge Imposed on Dividend Reinvestments.................................. None None None None
Maximum Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds)................................................. None(2) 5.00%(3) 1.00%(4) None
Redemption Fees................................................................. None None None None
Exchange Fee.................................................................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
- --------------------------------------------------------------------------------
Management Fees................................................................. None None None None
12b-1 Fees (5) (6).............................................................. 0.25% 1.00% 1.00% None
Other Expenses*................................................................. 5.91% 5.91% 5.91% 5.91%
Total Fund Operating Expenses* (7).............................................. 6.16% 6.91% 6.91% 5.91%
</TABLE>
- ------------
* THE INVESTMENT MANAGER HAD AGREED TO ASSUME ALL OPERATING EXPENSES (EXCEPT
FOR BROKERAGE AND 12b-1 FEES) FOR EACH PORTFOLIO UNTIL SUCH TIME AS THE
RESPECTIVE PORTFOLIO HAD $50 MILLION OF NET ASSETS OR UNTIL SIX MONTHS FROM
COMMENCEMENT OF THE FUND'S OPERATIONS, WHICHEVER OCCURRED FIRST AND HAS
AGREED TO EXTEND SUCH EXPENSE ASSUMPTION THROUGH NOVEMBER 30, 1999. AS A
RESULT OF SUCH WAIVER AND ASSUMPTION OF OTHER
5
<PAGE>
EXPENSES, FOR THE FISCAL PERIOD ENDED SEPTEMBER 30, 1998, THE ACTUAL "OTHER
EXPENSES" AMOUNTED TO 0.00% FOR EACH CLASS OF THE DOMESTIC PORTFOLIO AND
0.00% FOR EACH CLASS OF THE INTERNATIONAL PORTFOLIO AND "TOTAL FUND OPERATING
EXPENSES" AMOUNTED TO 0.22%, 0.92%, 0.92% AND 0.00% FOR CLASS A, B, C AND D
RESPECTIVELY OF THE DOMESTIC PORTFOLIO AND 0.25%, 0.94%, 0.92% AND 0.00% FOR
CLASS A, B, C AND D RESPECTIVELY OF THE INTERNATIONAL PORTFOLIO.
(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 "OTHER EXPENSES" AND DO NOT
INCLUDE ANY EXPENSES INCURRED AS A RESULT OF INVESTMENT IN THE UNDERLYING
FUNDS.
6
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Domestic Portfolio International Portfolio
-------------------------- ----------------------------
EXAMPLE 1 Year 3 Years 1 Year 3 Years
- ----------------------------------------------------------------------- ------------- ----------- --------------- -----------
<S> <C> <C> <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............................................................ $ 55 $ 59 55 60
Class B............................................................ $ 59 $ 59 60 60
Class C............................................................ $ 19 $ 29 19 29
Class D............................................................ $ 0 $ 0 0 0
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............................................................ $ 55 $ 59 55 60
Class B............................................................ $ 9 $ 29 10 30
Class C............................................................ $ 9 $ 29 9 29
Class D............................................................ $ 0 $ 0 0 0
</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 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 show 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 or, in the case of a fund which
recently commenced operations*, the projected annualized expenses:
<TABLE>
<CAPTION>
INTERNATIONAL PORTFOLIO-- OTHER TOTAL
EXPENSE RATIOS OF UNDERLYING FUNDS MANAGEMENT FEES 12b-1 FEE EXPENSES EXPENSES
- ------------------------------------------------------------ --------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Morgan Stanley Dean Witter European Growth Fund Inc......... 0.97% 0% 0.23% 1.20%
Morgan Stanley Dean Witter Pacific Growth Fund Inc.......... 0.94% 0% 0.45% 1.39%
Morgan Stanley Dean Witter International SmallCap Fund...... 1.15% 0% 0.85% 2.00%
Morgan Stanley Dean Witter Japan Fund....................... 0.95% 0% 0.48% 1.43%
</TABLE>
7
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DOMESTIC PORTFOLIO-- OTHER TOTAL
EXPENSE RATIOS OF UNDERLYING FUNDS MANAGEMENT FEES 12b-1 FEE EXPENSES EXPENSES
- ------------------------------------------------------------ --------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Morgan Stanley Dean Witter American Value Fund.............. 0.50% 0% 0.13% 0.63%
Morgan Stanley Dean Witter Capital Appreciation Fund........ 0.75% 0% 0.25% 1.00%
Morgan Stanley Dean Witter Capital Growth Securities........ 0.65% 0% 0.19% 0.84%
Morgan Stanley Dean Witter Competitive
Edge Fund*................................................. 0.60% 0% 0.21% 0.81%
Morgan Stanley Dean Witter Convertible Securities Trust..... 0.60% 0% 0.24% 0.84%
Morgan Stanley Dean Witter Developing Growth Securities..... 0.49% 0% 0.20% 0.69%
Morgan Stanley Dean Witter Dividend Growth Securities
Inc........................................................ 0.37% 0% 0.08% 0.45%
Morgan Stanley Dean Witter Financial Services Trust......... 0.75% 0% 0.23% 0.98%
Morgan Stanley Dean Witter Growth Fund...................... 0.79% 0% 0.14% 0.93%
Morgan Stanley Dean Witter Health Sciences Trust............ 1.00% 0% 0.26% 1.26%
Morgan Stanley Dean Witter High Yield Securities Inc........ 0.40% 0% 0.11% 0.51%
Morgan Stanley Dean Witter Income Builder Fund.............. 0.75% 0% 0.17% 0.92%
Morgan Stanley Dean Witter Information Fund................. 0.75% 0% 0.30% 1.05%
Morgan Stanley Dean Witter Intermediate Income Securities... 0.60% 0% 0.26% 0.86%
Morgan Stanley Dean Witter Market Leader Trust.............. 0.75% 0% 0.18% 0.93%
Morgan Stanley Dean Witter Mid-Cap Growth Fund.............. 0.75% 0% 0.24% 0.99%
Morgan Stanley Dean Witter Mid-Cap Dividend Growth
Securities*................................................ 0.75% 0% 0.30% 1.05%
Morgan Stanley Dean Witter Natural Resource Development
Securities Inc............................................. 0.61% 0% 0.20% 0.81%
Morgan Stanley Dean Witter Precious Metals and Minerals
Trust...................................................... 0.80% 0% 0.56% 1.36%
Morgan Stanley Dean Witter S&P 500 Index Fund*.............. 0.26% 0% 0.24% 0.50%
Morgan Stanley Dean Witter Short-Term Bond Fund............. 0.70% 0% 0.40% 1.10%
Morgan Stanley Dean Witter Special Value Fund............... 0.75% 0% 0.19% 0.94%
Morgan Stanley Dean Witter U.S. Government Securities
Trust...................................................... 0.43% 0% 0.08% 0.51%
Morgan Stanley Dean Witter Utilities Fund................... 0.55% 0% 0.12% 0.67%
Morgan Stanley Dean Witter Value-Added Market Series/ Equity
Portfolio.................................................. 0.46% 0% 0.12% 0.58%
</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.
8
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following ratios and per share data for a share of beneficial interest
outstanding throughout the period have been audited by PricewaterhouseCoopers
LLP, the Fund's independent accountants. The financial highlights should be read
in conjunction with the financial statements, notes thereto and the unqualified
report of independent accountants, which are contained in the Statement of
Additional Information. Further information about the performance of the Fund is
contained in the Fund's Annual Report to Shareholders, which may be obtained
without charge upon request to the Fund.
<TABLE>
<CAPTION>
FOR THE PERIOD NOVEMBER 25, 1997* THROUGH SEPTEMBER 30, 1998**
---------------------------------------------------------------------------------------------------------------
INTERNATIONAL DOMESTIC
----------------------------------------------------- -----------------------------------------------------
CLASS A CLASS B CLASS C CLASS D CLASS A CLASS B CLASS C CLASS D
SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES
---------- --------- --------- ---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset
value,
beginning of
period........ $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
---------- --------- --------- ---------- --------- --------- ---------- ----------
Net investment
income........ 0.05 0.03 0.04 0.14 0.21 0.14 0.13 0.22
Net realized
and unrealized
loss.......... (0.88) (0.91) (0.92) (0.96) (0.44) (0.42) (0.41) (0.43)
---------- --------- --------- ---------- --------- --------- ---------- ----------
Total from
investment
operations.... (0.83) (0.88) (0.88) (0.82) (0.23) (0.28) (0.28) (0.21)
---------- --------- --------- ---------- --------- --------- ---------- ----------
Less dividends
from net
investment
income........ (0.09) (0.09) (0.09) (0.09) (0.05) (0.05) (0.05) (0.05)
---------- --------- --------- ---------- --------- --------- ---------- ----------
Net asset
value, end of
period........ $ 9.08 $ 9.03 $ 9.03 $ 9.09 $ 9.72 $ 9.67 $ 9.67 $ 9.74
---------- --------- --------- ---------- --------- --------- ---------- ----------
---------- --------- --------- ---------- --------- --------- ---------- ----------
TOTAL INVESTMENT
RETURN(1)+...... (8.36)% (8.87)% (8.87)% (8.26)% (2.33)% (2.83)% (2.83)% (2.13)%
RATIOS TO AVERAGE
NET
ASSETS(2)(6):
Expenses(5).... 0.25%(3) 0.94%(3) 0.92%(3) 0.00%(3) 0.22%(4) 0.92%(4) 0.92%(4) 0.00%(4)
Net investment
income........ 1.01%(3) 0.32%(3) 0.34%(3) 1.26%(3) 2.21%(4) 1.51%(4) 1.51%(4) 2.43%(4)
SUPPLEMENTAL
DATA:
Net assets, end
of period, in
thousands..... $596 $3,241 $105 $11 $1,359 $24,338 $1,702 $12
Portfolio
turnover
rate(1)....... 135% 135% 135% 135% 227% 227% 227% 227%
</TABLE>
- ---------------
* COMMENCEMENT OF OPERATIONS.
** THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) IF THE FUND HAD BORNE ALL OF ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT MANAGER, THE ANNUALIZED EXPENSE AND NET INVESTMENT LOSS
RATIOS WOULD HAVE BEEN 6.16% AND (4.90)%, RESPECTIVELY, FOR CLASS A SHARES,
6.91% AND (5.65)%, RESPECTIVELY, FOR CLASS B SHARES, 6.91% AND (5.65)%,
RESPECTIVELY, FOR CLASS C SHARES AND 5.91% AND (4.65)%, RESPECTIVELY, FOR
CLASS D SHARES.
(4) IF THE FUND HAD BORNE ALL OF ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT MANAGER, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME
RATIOS WOULD HAVE BEEN 1.15% AND 1.28%, RESPECTIVELY, FOR CLASS A SHARES,
1.90% AND 0.53%, RESPECTIVELY, FOR CLASS B SHARES, 1.90% AND 0.53%,
RESPECTIVELY, FOR CLASS C SHARES AND 0.90% AND 1.53%, RESPECTIVELY, FOR
CLASS D SHARES.
(5) DOES NOT INCLUDE ANY EXPENSES INCURRED AS A RESULT OF INVESTMENT IN THE
UNDERLYING FUNDS.
(6) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
9
<PAGE>
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
Morgan Stanley Dean Witter Fund of Funds (formerly named 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.
Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors or the "Investment
Manager"), whose address is Two World Trade Center, New York, New York 10048, is
the Fund's Investment Manager. The Investment Manager is a wholly-owned
subsidiary of Morgan Stanley Dean Witter & Co., a preeminent global financial
services firm that maintains leading market positions in each of its three
primary businesses--securities, asset management and credit services. The
Investment Manager, which was incorporated in July, 1992 under the name Dean
Witter InterCapital Inc., changed its name to Morgan Stanley Dean Witter
Advisors Inc. on June 22, 1998.
MSDW Advisors and its wholly-owned subsidiary, Morgan Stanley Dean Witter
Services Company Inc., serve in various investment management, advisory,
management and administrative capacities to 100 investment companies, 28 of
which are listed on the New York Stock Exchange, with combined assets of
approximately $112.9 billion as of October 31, 1998. The Investment Manager also
manages and advises portfolios of pension plans, other institutions and
individuals which aggregated approximately $4.4 billion at such date.
The Fund has retained the 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. MSDW Advisors has retained Morgan Stanley 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 had agreed to assume all operating expenses
(except for brokerage and 12b-1 fees) for each Portfolio until such time as the
respective Portfolio had $50 million of net assets or until six months from
commencement of the Fund's operations, whichever occurred first, and has agreed
to extend such expense assumption through November 30, 1999.
In addition to serving as the Fund's Investment Manager, MSDW Advisors also
serves as Investment Manager to the following Underlying Funds in which the Fund
may invest: Morgan Stanley Dean Witter American Value Fund, Morgan Stanley Dean
Witter Capital Appreciation Fund, Morgan Stanley Dean Witter Capital Growth
Securities, Morgan Stanley Dean Witter Competitive Edge Fund, Morgan Stanley
Dean Witter Convertible Securities Trust, Morgan Stanley Dean Witter Developing
Growth Securities, Morgan Stanley Dean Witter Dividend Growth Securities Inc.,
Morgan Stanley Dean Witter European Growth Fund Inc., Morgan Stanley Dean Witter
Financial Services Trust, Morgan Stanley Dean Witter Health Sciences Trust,
Morgan
10
<PAGE>
Stanley Dean Witter High Yield Securities Inc., Morgan Stanley Dean Witter
Income Builder Fund, Morgan Stanley Dean Witter Information Fund, Morgan Stanley
Dean Witter Intermediate Income Securities, Morgan Stanley Dean Witter
International SmallCap Fund, Morgan Stanley Dean Witter Japan Fund, Morgan
Stanley Dean Witter Market Leader Trust, Morgan Stanley Dean Witter Mid-Cap
Growth Fund, Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities,
Morgan Stanley Dean Witter Natural Resource Development Securities Inc., Morgan
Stanley Dean Witter Pacific Growth Fund Inc., Morgan Stanley Dean Witter
Precious Metals and Minerals Trust, Morgan Stanley Dean Witter S&P 500 Index
Fund, Morgan Stanley Dean Witter Short-Term Bond Fund, Morgan Stanley Dean
Witter Special Value Fund, Morgan Stanley Dean Witter U.S. Government Securities
Trust, Morgan Stanley Dean Witter Utilities Fund and Morgan Stanley Dean Witter
Value-Added Market Series/Equity Portfolio. Under Sub-Advisory Agreements
between Morgan Stanley Asset Management Inc. ("MSAM" or the "Sub-Advisor") and
the Investment Manager, MSAM provides investment advice and portfolio management
to Morgan Stanley Dean Witter Growth Fund, Morgan Stanley Dean Witter European
Growth Fund (effective December 1, 1998), Morgan Stanley Dean Witter Japan Fund,
Morgan Stanley Dean Witter International SmallCap Fund and Morgan Stanley Dean
Witter Pacific Growth Fund and, subject to the overall supervision of the
Investment Manager.
MSAM, whose address is 1221 Avenue of the Americas, New York, New York,
together with its institutional investment management affiliates manages, as of
January 31, 1998, assets of approximately $148.7 billion primarily for U.S.
corporate and public employee benefit plans, investment companies, endowments,
foundations and wealthy individuals. MSAM, like MSDW Advisors, is a wholly-owned
subsidiary of MSDW.
Set forth below is the compensation received by the Investment Manager and
MSAM 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:
MORGAN STANLEY 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 $2.25 billion and scaled down at various asset levels
to 0.425% on such assets exceeding $4.5 billion.
MORGAN STANLEY 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.
MORGAN STANLEY 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.
MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND. 0.65% to each portfolio
of Fund's average daily net assets up to $1.5 billion and 0.625% to such assets
exceeding $1.5 billion.
MORGAN STANLEY 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.
MORGAN STANLEY 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.
MORGAN STANLEY 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.
11
<PAGE>
MORGAN STANLEY 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 0.85% to such assets exceeding $2 billion. As compensation for its
services provided pursuant to the Sub-Advisory Agreement, the Investment Manager
pays to MSAM 40% of its monthly compensation.
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST. 0.75% to the Fund's
average daily net assets.
MORGAN STANLEY DEAN WITTER GROWTH FUND. 0.80% to the Fund's average daily
net assets up to $750 million, scaled down at various asset levels to 0.70% on
assets over $1.5 billion. As compensation for its services provided pursuant to
the Sub-Advisory Agreement, the Investment Manager pays to MSAM 40% of its
monthly compensation.
MORGAN STANLEY 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.
MORGAN STANLEY 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.
MORGAN STANLEY DEAN WITTER INCOME BUILDER FUND. 0.75% to the Fund's average
daily net assets up to $500 million and 0.725% to such assets exceeding $500
million.
MORGAN STANLEY 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.
MORGAN STANLEY 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.
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND. 1.15% 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 MSAM 40% of its
monthly compensation.
MORGAN STANLEY DEAN WITTER JAPAN FUND. 0.95% 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 MSAM.
MORGAN STANLEY DEAN WITTER MARKET LEADER TRUST. 0.75% to the Fund's average
daily net assets.
MORGAN STANLEY DEAN WITTER MID-CAP DIVIDEND GROWTH SECURITIES. 0.75% to the
Fund's average daily net assets.
MORGAN STANLEY DEAN WITTER MID-CAP GROWTH FUND. 0.75% to the Fund's average
daily net assets.
MORGAN STANLEY 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.
MORGAN STANLEY DEAN WITTER PACIFIC GROWTH FUND INC. 0.95% to the portion of
the Fund's average daily net assets not exceeding $500 million and scaled down
at various asset levels to 0.85% 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 MSAM 40% of its monthly compensation.
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST. 0.80% to the
Fund's average daily net assets.
MORGAN STANLEY DEAN WITTER S&P 500 INDEX FUND. 0.40% to the Fund's average
daily net assets.
12
<PAGE>
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND. 0.70% to the Fund's
average daily net assets.
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND. 0.75% to the Fund's average
daily net assets.
MORGAN STANLEY 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.
MORGAN STANLEY 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.
MORGAN STANLEY 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 0.40% on such assets exceeding $2
billion.
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 Morgan Stanley Dean Witter Underlying Funds: Morgan
Stanley Dean Witter European Growth Fund Inc., Morgan Stanley Dean Witter
International SmallCap Fund, Morgan Stanley Dean Witter Japan Fund and Morgan
Stanley 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 Morgan Stanley Dean Witter Underlying Funds: Morgan
Stanley Dean Witter American Value Fund, Morgan Stanley Dean Witter Capital
Appreciation Fund, Morgan Stanley Dean Witter Capital Growth Securities, Morgan
Stanley Dean Witter Competitive Edge Fund, Morgan Stanley Dean Witter
Convertible Securities Trust, Morgan Stanley Dean Witter Developing Growth
Securities, Morgan Stanley Dean Witter Dividend Growth Securities Inc., Morgan
Stanley Dean Witter Financial Services Trust, Morgan Stanley Dean Witter Growth
Fund, Morgan Stanley Dean Witter Health Sciences Trust, Morgan Stanley Dean
Witter High Yield Securities Inc., Morgan Stanley Dean Witter Information Fund,
Morgan Stanley Dean Witter Intermediate Income Securities, Morgan Stanley Dean
Witter Market Leader Trust, Morgan Stanley Dean Witter Mid-Cap Growth Fund,
Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities, Morgan Stanley
Dean Witter Natural Resource Development Securities Inc., Morgan Stanley Dean
Witter Precious Metals and Minerals Trust, Morgan Stanley Dean Witter S&P 500
Index Fund, Morgan Stanley Dean Witter Short-Term Bond Fund, Morgan Stanley Dean
Witter Special Value
13
<PAGE>
Fund (contingent upon a "re-opening"), Morgan Stanley Dean Witter U.S.
Government Securities Trust, Morgan Stanley Dean Witter Utilities Fund and
Morgan Stanley 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 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
14
<PAGE>
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.
MORGAN STANLEY 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
15
<PAGE>
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
securities, 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.
MORGAN STANLEY 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.
16
<PAGE>
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 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.
17
<PAGE>
MORGAN STANLEY 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
18
<PAGE>
Considerations and Investment Practices of the Underlying Funds" below.
MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND. This fund currently
consists of two separate portfolios, each of which is operated as an open-end,
diversified management investment company. The investment objective of the
portfolio contained in the fund's current Prospectus, the "Best Ideas" Portfolio
(the " 'Best Ideas' Portfolio" or the "Portfolio"), is long-term capital growth.
The "Best Ideas" Portfolio seeks to achieve its investment objective by
investing, under normal circumstances, at least 80% of its net assets in the
common stock (including depository receipts, such as ADRs or EDRs) of U.S. and
non-U.S. companies included in the "Best Ideas" subgroup of "Global Investing:
The Competitive Edge," a research compilation assembled and maintained by Morgan
Stanley Dean Witter Equity Research ("MSDW Equity Research") and such
Supplemental Securities (as defined below) chosen by the Investment Manager.
MSDW EQUITY RESEARCH. MSDW Equity Research is recognized as a world leader
in global financial research and provides comprehensive research and in-depth
knowledge about general markets and specific companies from around the world. It
believes that companies with a sustainable competitive edge in the operations of
their businesses are worth more than their weaker competitors. Through its
on-going research and analysis, MSDW Equity Research has developed and
undertaken a comprehensive study which it calls "Global Investing: The
Competitive Edge" which represents the list of those companies.
Specifically, MSDW Equity Research group's research analysts and strategists
presently evaluate approximately 2,000 companies in 21 industry sectors
worldwide (the "MSDW Covered Securities"). An initial comprehensive review was
conducted in October 1996 and identified 238 companies from the MSDW Covered
Securities (then nearly 1,650) as having a long-term sustainable competitive
advantage in the global arena (the "Competitive Edge List"). The criteria used
to select companies that have a global competitive advantage vary according to
industry sector. The Competitive Edge List is currently updated annually. From
the Competitive Edge List, MSDW Equity Research then assembled a subgroup of 40
companies which it considered at that time to be the most attractive investment
opportunities of the companies identified as having a long-term sustainable
competitive advantage in the global arena (the "Competitive Edge 'Best Ideas'
List"). MSDW Equity Research's Competitive Edge List and Competitive Edge "Best
Ideas" List are not compiled with any particular client or product in mind and
are not, and will not be, compiled with the fund in mind. When selecting the
companies for its Competitive Edge "Best Ideas" List, MSDW Equity Research does
not take into account country or currency risk, and country or industry sector
diversification concerns. MSDW publishes other lists of recommended securities
that could be appropriate for Portfolio investors but which will not be used by
the Investment Manager for choosing securities for the Portfolio. MSDW could at
any time cease publishing the Competitive Edge List and the Competitive Edge
"Best Ideas" List. In that event the Board of Trustees will make a determination
of how to proceed in the best interests of shareholders of the Portfolio
consistent with the Portfolio's investment objective. A list of the companies
contained on the Competitive Edge "Best Ideas" List as of September 30, 1997 is
set forth in the fund's Statement of Additional Information. The Competitive
Edge "Best Ideas" List is currently updated by MSDW Equity Research quarterly.
In accordance with the Portfolio's investment restrictions described below,
the Portfolio will not invest 25% or more of the value of its total assets in
any one industry. In addition, as the Portfolio principally invests in the
securities of companies on the Competitive Edge "Best Ideas" List, which
currently
19
<PAGE>
consists of only 40 companies, the Portfolio will invest in a relatively small
universe of securities. Accordingly, the Portfolio may be highly invested in any
one industry or country. It is the intention of the Investment Manager that at
least 1% and not more than 5% of the Portfolio's net assets will be invested in
each company on the Competitive Edge "Best Ideas" List, determined at the time
of investment and subject to the specific investment policies and restrictions
described below. However, the Investment Manager may eliminate or reduce its
investment in any company on the Competitive Edge "Best Ideas" List below 1% of
the Portfolio's net assets, in the following circumstances: (a) the stock is no
longer publicly traded, such as in the case of a leveraged buyout or merger; (b)
in the view of the Investment Manager, there is a material adverse development
with respect to a company, including but not limited to the downgrading of the
company's rating by MSDW Equity Research; (c) concerns that, in view of the
price of the company's securities, the depth of the market in those securities
and the amount of those securities held or to be held by the Portfolio,
retaining shares of that company or making additional purchases would be
inadvisable because of liquidity concerns; or (d) the diversification and other
requirements that apply to registered investment companies. The Investment
Manager will monitor on an ongoing basis all companies falling within any of the
circumstances described in this paragraph, and may increase the Portfolio's
holdings in such company's shares when and if those conditions cease to exist.
The Portfolio will purchase any security which is added to the Competitive Edge
"Best Ideas" List, and will sell a security which is eliminated from the
Competitive Edge "Best Ideas" List and any related Supplemental Security (as
defined below), as soon as practicable after the Competitive Edge "Best Ideas"
List has been updated by MSDW Equity Research, unless the Investment Manager
decides to hold such security as a Supplemental Security. Accordingly,
securities may be purchased and sold by the Portfolio when such purchases and
sales would not be made under traditional investment criteria. The Investment
Manager will not have access to the Competitive Edge "Best Ideas" List prior to
its quarterly update by MSDW Equity Research.
While the Portfolio intends to invest in securities on the Competitive Edge
"Best Ideas" List, the Portfolio may purchase one or more supplemental
securities ("Supplemental Securities") that are not included on the Competitive
Edge "Best Ideas" List but are on the Competitive Edge List or, in the event no
suitable securities are on the Competitive Edge List, such other securities
deemed suitable by the Investment Manager. Supplemental Securities will
generally be selected by the Investment Manager from the same or similar
industry sector as the security which they are supplementing or replacing.
Accordingly, the Portfolio's holdings may not be limited to those on the
Competitive Edge "Best Ideas" List. While there is no limit on the total number
of Supplemental Securities that the Portfolio may hold, Supplemental Securities
and all other securities that are not on the Competitive Edge "Best Ideas" List
generally will not exceed 35% of the Portfolio's total assets. In addition, each
security on the Competitive Edge "Best Ideas" List which is supplemented or
replaced, together with its corresponding Supplemental Securities, will have a
combined weighting of no more than 5% of the Portfolio's net assets, determined
at the time of investment.
The Portfolio may invest up to 20% of its total assets in money market
instruments or cash. The money market instruments in which the Portfolio 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 or S&P or, if
not rated, issued
20
<PAGE>
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 Portfolio's securities holdings. During such periods, the
Portfolio may adopt a temporary "defensive" posture in which up to 100% of the
Portfolio's net assets are invested in cash or money market instruments.
COMPETITIVE EDGE "BEST IDEAS" SELECTION. The net asset value of the
Portfolio will fluctuate depending upon, among other things, the performance of
the securities included on the Competitive Edge "Best Ideas" List, which
currently consists of 40 companies and which is only updated quarterly. The
Portfolio is subject to all the risks associated with investing in a small
universe of securities. There can be no assurance that the securities contained
in the Competitive Edge "Best Ideas" List will perform as anticipated. The
selection of companies on the Competitive Edge "Best Ideas" List is a subjective
determination by MSDW Equity Research. Past performance of the securities and
issuers included in the Competitive Edge "Best Ideas" List cannot be used to
predict future results of the Portfolio, which is actively managed by the
Investment Manager and the results of which are expected to vary from the
performance of the Competitive Edge "Best Ideas" List.
POTENTIAL INVESTMENT RESTRICTIONS. The activities of an affiliate of the
Investment Manager, including but not limited to Dean Witter Reynolds Inc.
("DWR") or Morgan Stanley & Co. Incorporated ("Morgan Stanley"), may from time
to time limit the Portfolio's ability to purchase or sell securities on the
Competitive Edge "Best Ideas" List. For instance, when DWR or Morgan Stanley or
one of their affiliates is engaged in an underwriting or other distribution of
stock of an issuer, the Investment Manager may be prohibited from purchasing the
stock of that issuer for the Portfolio. In addition, the Competitive Edge "Best
Ideas" List is available to other clients of MSDW and its affiliates, including
the Investment Manager, as well as the Portfolio. The lists are also subject to
restrictions related to MSDW's other businesses and particular securities may or
may not be on the lists due to other business concerns of, or legal restrictions
applicable to, MSDW.
As a diversified financial services firm, with three primary
businesses--securities, asset management and credit services, MSDW provides a
wide range of financial services to issuers of securities and investors in
securities. MSDW and others associated with it may create markets or specialize
in, have positions in and affect transactions in securities of companies
included on its research lists and may also perform or seek to perform
investment banking services for those companies. Within the last three years
MSDW may have managed or co-managed public security offerings for companies
included on their research lists, and they or their employees may have a long or
short position on holdings in the securities, or options on securities, or other
related investments of companies included on their research lists.
The Best Ideas Portfolio may invest in foreign securities and private
placements, may engage in options and futures transactions, may enter into
forward foreign currency exchange contracts, may enter into repurchase
agreements 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.
MORGAN STANLEY 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.
21
<PAGE>
(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.
(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.
MORGAN STANLEY 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
22
<PAGE>
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.
MORGAN STANLEY 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 market 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
23
<PAGE>
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 fund's
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."
MORGAN STANLEY 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
24
<PAGE>
Currency Unit (a weighted composite of the currencies of member states of the
European Monetary System) and, beginning on January 1, 1999, the euro, a single
currency expected to be adopted by many European countries. 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").
MORGAN STANLEY 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 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
25
<PAGE>
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 Securities and Exchange Commission ("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.
MORGAN STANLEY DEAN WITTER GROWTH FUND. The investment objective of this
fund is long-term
26
<PAGE>
growth of capital. The fund invests primarily in common stocks and securities
convertible into common stocks of companies which offer the prospect for growth
of earnings. The fund seeks to achieve its investment objective by investing
under normal circumstances at least 65% of its total assets in common stocks and
convertible securities. There are no minimum rating or quality requirements with
respect to convertible securities in which the fund may invest and, thus, all or
some of such securities may be below investment grade. See the Appendix to the
Statement of Additional Information for a discussion of ratings of fixed-income
securities.
The Sub-Advisor invests the fund's assets by pursuing its "equity growth"
philosophy. That strategy involves a two-step process to achieve value for the
fund's shareholders by taking advantage of unrecognized appreciation potential
created by changes in the economic, social and political environments. Pursuant
to its approach, the Sub-Advisor emphasizes individual security selection.
Individual companies are chosen for investment by the fund, based on factors
including but not limited to: potential growth in earnings and dividends;
quality of management; new products and/or new markets; research and development
capabilities; historical rate of return on equity and invested capital; cash
flow and balance sheet strength; and forcing value through company initiatives
such as cost reduction or share repurchase. As a second step, the Sub-Advisor
considers the weightings that the selected companies and industries will have in
the portfolio.
The fund intends to invest primarily, but not exclusively, in companies
having stock market capitalizations (calculated by multiplying the number of
outstanding shares of a company by the current market price) of at least $1
billion. The Sub-Advisor anticipates that the fund will focus its investments in
fewer than 100 companies, although the Sub-Advisor continuously monitors up to
250 companies for possible investment by the fund. The fund's holdings are
changed by the Sub-Advisor as warranted based on changes in the overall market
or economic environment, as well as factors specific to particular companies.
While the fund invests primarily in common stocks and securities convertible
into common stock, under ordinary circumstances it may invest up to 35% of its
total assets in money market instruments, which are short-term (maturities of up
to thirteen months) fixed-income securities issued by private and governmental
institutions. 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 S&P or, if not rated, issued by a company having an
outstanding debt issue rated AAA by S&P or Aaa by Moody's.
There may be periods during which, in the opinion of the Investment Manager
or Sub-Advisor, 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% and, in some circumstances up to
100%, of its assets is invested in money market instruments or cash.
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." In
order to qualify, among other requirements, the fund will limit its investments
so that at the close of each quarter of the taxable year, (i) not
27
<PAGE>
more than 25% of the market value of the fund's total assets will be invested in
the securities of a single issuer, and (ii) with respect to 50% of the market
value of its total assets not more than 5% will be invested in the securities of
a single issuer and the fund will not own more than 10% of the outstanding
voting securities of a single issuer. 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.
The fund may also invest in real estate investment trusts, private
placements and restricted securities and zero coupon securities, may enter into
repurchase agreements, may engage in options and futures transactions and may
purchase securities on a when-issued, delayed delivery basis and on a when, as
and if issued basis. For a discussion of the risks of investing in these
securities, see "Risk Considerations and Investment Practices of the Underlying
Funds" below.
MORGAN STANLEY 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 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
28
<PAGE>
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.
MORGAN STANLEY 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 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
29
<PAGE>
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.
MORGAN STANLEY DEAN WITTER INCOME BUILDER FUND. The primary investment
objective of this fund is to seek reasonable income. Growth of capital is the
secondary objective. The fund seeks to achieve its objectives by investing,
under normal market conditions, at least 65% of its total assets in
income-producing equity securities, including common stock, preferred stock and
convertible securities. Up to 35% of the fund's assets may be invested in
fixed-income securities or common stocks that do not pay a regular dividend but
are expected to contribute to the fund's ability to meet its investment
objectives.
The fund will invest, under normal market conditions, primarily in common
stocks of large-cap companies which have a record of paying dividends and, in
the opinion of the Investment Manager, have the potential for maintaining
dividends, in preferred stock and in securities convertible into common stocks
of small and mid-cap companies. The Investment Manager intends to use a
value-oriented investment style in the selection of securities for the fund's
portfolio. A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed amount
of common stock of the same or a different issuer within a particular period of
time at a specified price or based on a specified formula. Convertible
securities rank senior to common stocks in a corporation's capital structure
and, therefore, entail less risk than the corporation's common stock. The value
of a convertible security is a function of its "investment value" (its value as
if it did not have a conversion privilege), and its "conversion value" (the
security's worth if it were to be exchanged for the underlying security, at
market value, pursuant to its conversion privilege).
The fund also may invest up to 20% in fixed-income securities rated below
investment grade. Securities below investment grade are the equivalent of high
yield, high risk bonds (commonly known as "junk bonds"). Investment grade is
generally considered to be debt securities rated BBB or higher by S&P or Baa or
higher by Moody's. (fixed-income securities rated BBB by S&P or Baa by Moody's
which generally are regarded as having an adequate capacity to pay interest and
repay principal, have speculative characteristics.) However, the fund will not
invest in fixed-income securities that are rated lower than B by S&P or Moody's
or, if not rated, determined to be of comparable quality by the Investment
Manager. The fund will not invest in fixed-income securities that are in default
in payment of principal or interest. The 20% limitation on securities rated
below investment grade in which the fund may invest does not include securities
convertible into common stock. A description of fixed-income securities ratings
is contained in the appendix to this fund's Prospectus as well as in the
Statement of Additional Information of the Fund.
The fund may invest in equity securities of foreign issuers. However, the
fund will not invest more
30
<PAGE>
than 25% of the value of its total assets, at the time of purchase, in
securities of foreign issuers (other than securities of Canadian issuers
registered under the Securities Exchange Act of 1934 or American Depository
Receipts, on which there is no such limit). The fund may invest in 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. 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.
A portion of the fund's assets may be invested in investment grade fixed
income (fixed-rate and adjustable rate) securities such as corporate notes and
bonds and obligations issued or guaranteed by the U.S. Government, its agencies
and instrumentalities.
The non-governmental debt securities in which the fund will invest will
include: (a) corporate debt securities, including bonds, notes and commercial
paper, rated in the four highest categories by a nationally recognized
statistical rating organization ("NRSRO") including Moody's, S&P, Duff and
Phelps, Inc. and Fitch Investors Service, Inc.; and (b) bank obligations,
including CDs, banker's acceptances and time deposits, issued by banks with a
long-term CD rating in one of the four highest categories by a NRSRO.
Investments in securities rated within the four highest rating categories by a
NRSRO are considered "investment grade." However, such securities rated within
the fourth highest rating category by a NRSRO have speculative characteristics
and, therefore, changes in economic conditions or other circumstances are more
likely to weaken their capacity to make principal and interest payments than
would be the case with investments in securities with higher credit ratings.
Where a fixed-income security is not rated by a NRSRO (as may be the case with a
foreign security) the Investment Manager will make a determination of its
creditworthiness and may deem it to be investment grade. A description of
fixed-income security ratings is contained in the appendix to the Prospectus.
The Investment Manager intends to follow a "bottom-up" approach in the
selection of convertible securities. Beginning with a universe of about 500
companies, the Investment Manager will narrow the focus to small and mid-cap
companies and review the issues to determine if the convertible is trading with
the underlying equity security. The yield of the underlying equity security will
be evaluated and company fundamentals will be studied to evaluate cash flow,
risk/reward balance, valuation and the prospects for growth. The Investment
Manager intends to select convertible securities that, in its judgment, are
issued by companies with sound management practices and that represent good
value.
To the extent that a convertible security's investment value is greater than
its conversion value, its price will be primarily a reflection of such
investment value and its price will be likely to increase when interest rates
fall and decrease when interest rates rise, as with a fixed-income security (the
credit standing of the issuer and other factors may also have an effect on the
convertible security's value). If the conversion value exceeds the investment
value, the price of the convertible security will rise above its investment
value and, in addition, may sell at some premium over its conversion value.
(This premium represents the price investors are willing to pay for the
privilege of purchasing a fixed-income security with a possibility of capital
appreciation due to the conversion privilege.) At such times the price of the
convertible security will tend to fluctuate directly with the price of the
underlying equity security.
The fund may invest up to 25% of its total assets in "enhanced" convertible
securities. Enhanced convertible securities offer holders the opportunity to
obtain higher current income than would be available from a traditional equity
security issued by the same company, in return for reduced participation or a
cap on appreciation in the underlying common stock of the issuer which the
holder can realize. In
31
<PAGE>
addition, in many cases, enhanced convertible securities are convertible into
the underlying common stock of the issuer automatically at maturity, unlike
traditional convertible securities which are convertible only at the option of
the security holder. Enhanced convertible securities may be more volatile than
traditional convertible securities due to the mandatory conversion feature.
The fund also may invest up to 10% in "synthetic" convertible securities.
Unlike traditional convertible securities whose conversion values are based on
the common stock of the issuer of the convertible security,
"synthetic"convertible securities are preferred stocks or debt obligations of an
issuer which are combined with an equity component whose conversion value is
based on the value of the common stock of a different issuer or a particular
benchmark (which may include a foreign issuer or basket of foreign stocks, or a
company whose stock is not yet publicly traded). In many cases, "synthetic"
convertible securities are not convertible prior to maturity, at which time the
value of the security is paid in cash by the issuer.
"Synthetic" convertible securities may be less liquid than traditional
convertible securities and their price changes may be more volatile. Reduced
liquidity may have an adverse impact on the fund's ability to sell particular
synthetic securities promptly at favorable prices and may also make it more
difficult for the fund to obtain market quotations based on actual trades, for
purposes of valuing the fund's portfolio securities.
The fund may invest without limitation in "exchangeable" convertible bonds
and convertible preferred stock which are issued by one company, but convertible
into the common stock of a different publicly traded company. These securities
generally have liquidity trading and risk characteristics similar to traditional
convertible securities noted above.
The U.S. Government securities in which the fund may invest include
securities which are direct obligations of the United States Government, such as
United States treasury bills, notes and bonds, and which are backed by the full
faith and credit of the United States; securities which are backed by the full
faith and credit of the United States but which are obligations of a United
States agency or instrumentality (E.G., obligations of the Government National
Mortgage Association); securities issued by a United States agency or
instrumentality which has the right to borrow, to meet its obligations, from an
existing line of credit with the United States Treasury (E.G., obligations of
the Federal National Mortgage Association); securities issued by a United States
agency or instrumentality which is backed by the credit of the issuing agency or
instrumentality (E.G., obligations of the Federal Farm Credit System).
Money market instruments in which the fund may invest include securities
issued or guaranteed by the U.S. Government, its agencies and instrumentalities
(Treasury bills, notes and bonds, including zero coupon securities); bank
obligations; 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 also purchase when-issued and delayed delivery securities, when
as and if issued securities, zero coupon securities, real estate investment
trusts and restricted securities and may enter into repurchase agreements. For a
discussion of the risks of investing in these securities, see "Risk
Considerations and Investment Practices of the Underlying Funds" below.
32
<PAGE>
MORGAN STANLEY 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.
33
<PAGE>
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 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
34
<PAGE>
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.
MORGAN STANLEY 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 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
35
<PAGE>
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.
MORGAN STANLEY 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 35% 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 may 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
36
<PAGE>
(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").
MORGAN STANLEY 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 business(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, in securities traded on Japanese Regional
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").
MORGAN STANLEY 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.
37
<PAGE>
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 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).
38
<PAGE>
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.
MORGAN STANLEY 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.
39
<PAGE>
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 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,
40
<PAGE>
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.
MORGAN STANLEY DEAN WITTER MID-CAP DIVIDEND GROWTH SECURITIES. The
investment objective of this fund is to seek total return. Total return consists
of capital appreciation (including realized and unrealized capital gains and
losses) and current income (including dividends, interest and, in the case of
discounted instruments, discount accruals).
The 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 companies whose
capitalization falls within the range of companies comprising the Standard &
Poor's Mid-Cap 400 Index ("S&P 400"), which capitalization range is
approximately between $220 million and $13 billion as of February 24, 1998, and
that currently pay dividends and that have the potential for increasing
dividends. The fund may invest up to 35% of its total assets in common stocks of
U.S. companies that fall outside the range of mid-cap securities or in non-
dividend paying mid-cap securities and in 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 dividends received); or in
money market instruments under any one or more of the following circumstances:
(i) pending investment of proceeds of sale of the fund's 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.
The fund may also invest up to 35% of its net assets in convertible bonds or
preferred stocks that are convertible into common stock, or in rights and
warrants, so long as each such investment is consistent with the fund's
investment objective. There are no minimum rating or quality requirements with
respect to convertible securities in which the fund may invest and, thus, all or
some of such securities may be below investment grade. The fund will not invest
in convertible securities that are in default in payment of principal or
interest.
In the opinion of the Investment Manager, 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 because 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, albeit with greater risk, yet owing to their
relatively larger size and better recognition in the investment community, they
have a reduced risk profile compared to smaller, emerging or
41
<PAGE>
micro-cap companies, but offer less opportunity for capital appreciation.
The fund may invest up to 25% of the value of its total assets, at the time
of purchase, in equity securities, rights and warrants issued by foreign
issuers. The fund will invest in foreign securities whose market capitalization
is within the range of the companies comprising the S&P 400. Although certain of
these securities may not be mid-cap companies in the foreign markets in which
they trade, they will be included in the mid-cap securities in which the fund
may invest. Such investments may also be in the form of ADRs, EDRs or other
similar securities of foreign issuers. 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.
Notwithstanding the fund's investment objective of seeking total return, the
fund may, for defensive purposes, without limitation, invest in: obligations of
the United States Government, its agencies or instrumentalities; cash & cash
equivalents in major currencies; repurchase agreements; zero coupon securities;
money market instruments; and commercial paper.
The fund may also invest in private placements and restricted securities,
zero coupon securities and real estate investment trusts and may purchase
securities on a when-issued delayed delivery basis or on a when, as and if
issued 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.
MORGAN STANLEY 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
42
<PAGE>
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."
MORGAN STANLEY 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
revenues 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-Advisor 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-Advisor 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, South Korea and India. 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, Malaysia,
South Korea and Taiwan. 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, South Korean won and Indian rupee. 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").
MORGAN STANLEY 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.
43
<PAGE>
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 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.
44
<PAGE>
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.
MORGAN STANLEY 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
45
<PAGE>
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 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 accommodate 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
46
<PAGE>
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.
MORGAN STANLEY 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; 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
47
<PAGE>
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; European Currency Unit; and,
beginning on January 1, 1999, the single European Currency, the euro. 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.
MORGAN STANLEY 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.
48
<PAGE>
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 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-
49
<PAGE>
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
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
50
<PAGE>
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.
MORGAN STANLEY 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
51
<PAGE>
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 residential 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
52
<PAGE>
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.
MORGAN STANLEY 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 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.
53
<PAGE>
MORGAN STANLEY 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,
54
<PAGE>
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.
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
different 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
55
<PAGE>
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.
Many European countries are about to adopt a single European currency, the
euro (the "Euro Conversion"). The consequences of the Euro Conversion for
foreign exchange rates, interest rates and the value of European securities
eligible for purchase by an Underlying Fund are presently unclear. Such
consequences may adversely affect the value and/or increase the volatility of
securities held by an Underlying Fund.
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 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 Advisor or
Sub-Advisor 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 Advisor or Sub-Advisor 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.
56
<PAGE>
In addition, when a fund's Investment Manager or Advisor or Sub-Advisor
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 Advisor or Sub-Advisor. 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-
57
<PAGE>
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
currency 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 Advisor or Sub-Advisor 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
58
<PAGE>
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 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
59
<PAGE>
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.
60
<PAGE>
Because of the special nature of investments in lower rated debt securities,
a fund's Investment Manager or Advisor or Sub-Advisor must take account of
certain special considerations in assessing the risks associated with such
investments. The prices of lower rated securities have been found to be less
sensitive to changes in prevailing interest rates than higher rated investments,
but are likely to be more sensitive to adverse economic changes or individual
corporate developments. During an economic downturn or substantial period of
rising interest rates, highly leveraged issuers may experience financial stress
which would adversely affect their ability to service their principal and
interest payment obligations, to meet their projected business goals or to
obtain additional financing. If the issuer of a fixed-income security owned by 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
61
<PAGE>
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 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.
62
<PAGE>
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 Depository Receipts
63
<PAGE>
(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 Morgan Stanley 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
64
<PAGE>
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. Morgan Stanley Dean Witter Pacific
Growth Fund Inc., Morgan Stanley Dean Witter International SmallCap Fund and
Morgan Stanley Dean Witter Japan Fund all may invest large portions of 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
65
<PAGE>
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.
YEAR 2000. The investment management services provided to each Portfolio of
the Fund by the Investment Manager and the services provided to
66
<PAGE>
shareholders by the Distributor and the Transfer Agent depend on the smooth
functioning of their computer systems. Many computer software systems in use
today cannot recognize the year 2000, but revert to 1900 or some other date, due
to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the handling of securities trades, pricing and account
services for each Portfolio of the Fund as well as for the Underlying Funds. The
Investment Manager, the Distributor and the Transfer Agent have been actively
working on necessary changes to their own computer systems to prepare for the
year 2000 and expect that their systems will be adapted before that date, but
there can be no assurance that they will be successful, or that interaction with
other non-complying computer systems will not impair their services at that
time.
In addition, it is possible that the markets for securities in which the
Underlying Funds invest may be detrimentally affected by computer failures
throughout the financial services industry beginning January 1, 2000. Improperly
functioning trading systems may result in settlement problems and liquidity
issues. In addition, corporate and governmental data processing errors may
result in production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial and may be reported inconsistently in U.S. and
foreign financial statements. Accordingly, the Underlying Funds' investments and
each Portfolio's investments in the Underlying Funds may be adversely affected.
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.
Although the Fund does not intend to engage in short-term trading, it may
sell Underlying Funds and portfolio securities without regard to the length of
time they have been held when such sale will, in the opinion of the Investment
Manager, contribute to each Portfolio's investment objective. The portfolio
turnover rate for each Portfolio (I.E., the rate at which each Portfolio buys
and sells shares of the Underlying Funds) is not expected to exceed 200% in any
one year.
The Fund will incur brokerage costs commensurate with its portfolio turnover
rate. Short term gains and losses may result from such portfolio transactions.
See "Dividends, Distributions and Taxes" for a discussion of the tax
implications of the Fund's trading policy. A more extensive discussion of the
Fund's portfolio brokerage policies is set forth in the Statement of Additional
Information.
67
<PAGE>
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 Morgan Stanley Dean Witter Funds or investment companies
managed by an advisor 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.
PURCHASE OF FUND SHARES
- --------------------------------------------------------------------------------
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 Morgan Stanley Dean Witter Distributors Inc. ("MSDW Distributors" or
the "Distributor"), an affiliate of the Investment Manager, shares of each
Portfolio of the Fund are distributed by the Distributor and offered by Dean
Witter Reynolds Inc. ("DWR"), a selected dealer and subsidiary of Morgan Stanley
Dean Witter & Co., and other dealers which have entered into 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. It
is anticipated that DWR will undergo a change of corporate name which is
expected to incorporate the brand name of "Morgan Stanley Dean Witter," pending
approval of various regulatory authorities.
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
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
68
<PAGE>
most redemptions made within one year after purchase. Class D shares are sold
without an initial sales charge or CDSC and are available only to investors
meeting an initial investment minimum of $5 million ($25 million for certain
qualified plans), and to certain other limited categories of investors. At the
discretion of the Board of Trustees of the Fund, Class A shares may be sold to
categories of investors in addition to those set forth in this prospectus at net
asset value without a front-end sales charge, and Class D shares may be sold to
certain other categories of investors, in each case as may be described in the
then current prospectus of the Fund. See "Alternative Purchase Arrangements--
Selecting a Particular Class" for a discussion of factors to consider in
selecting which Class of shares to purchase.
The minimum initial purchase is $1,000 for each Class of shares, although
Class D shares are only available to persons investing $5 million ($25 million
for certain qualified plans) or more and to certain other limited categories of
investors. For the purpose of meeting the minimum $5 million (or $25 million)
initial investment for Class D shares, and subject to the $1,000 minimum initial
investment for each Class of the Fund, an investor's existing holdings of Class
A and Class D shares of the Fund and other Morgan Stanley Dean Witter Funds that
are multiple class funds ("Morgan Stanley Dean Witter Multi-Class Funds") and
shares of Morgan Stanley Dean Witter Funds sold with a front-end sales charge
("FSC Funds") and concurrent investments in Class D shares of the Fund and other
Morgan Stanley Dean Witter Multi-Class Funds will be aggregated. Subsequent
purchases of $100 or more may be made by sending a check, payable to Morgan
Stanley Dean Witter Fund of Funds, directly to Morgan Stanley Dean Witter Trust
FSB (the "Transfer Agent" or "MSDW Trust") at P.O. Box 1040, Jersey City, NJ
07303 or by contacting a Morgan Stanley Dean Witter Financial Advisor or other
Selected Broker-Dealer representative. When purchasing shares of the Fund,
investors must specify 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. The
minimum initial purchase in the case of an "Education IRA" is $500, if the
Distributor has reason to believe that additional investments will increase the
investment in the account to $1,000 within three years. In the case of
investments pursuant to (i) Systematic Payroll Deduction Plans (including
Individual Retirement Plans), (ii) the MSDW Advisors mutual fund asset
allocation program and (iii) fee-based programs approved by the Distributor,
pursuant to which participants pay an asset-based fee for services in the nature
of investment advisory, administrative and/or brokerage services, the Fund, in
its discretion, may accept investments without regard to any minimum amounts
which would otherwise be required, provided, in the case of Systematic Payroll
Deduction Plans, that the Distributor has reason to believe that additional
investments will increase the investment in all accounts under such Plans to at
least $1,000. Certificates for shares purchased will not be issued unless a
request is made by the shareholder in writing to the Transfer Agent.
Shares of the Fund are sold through the Distributor on a normal three
business day settlement basis; that is, payment is due on the third business day
(settlement date) after the order is placed with the Distributor. Since DWR and
other Selected Broker-Dealers forward investors' funds on settlement date, they
will benefit from the temporary use of the funds if payment is made prior
thereto. As noted above, orders placed directly with the Transfer Agent must be
accompanied by payment. Investors will be entitled to receive income dividends
and capital gains distributions if their order is received by the close of
business on the day prior to the
69
<PAGE>
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 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."
70
<PAGE>
CLASS C SHARES. Class C shares are sold at net asset value with no initial
sales charge but are subject to a CDSC of 1.0% on redemptions made within one
year after purchase. This CDSC may be waived for certain redemptions. They are
subject to an annual 12b-1 fee of up to 1.0% of the average daily net assets of
the Class C shares. The Class C shares' distribution fee may cause that Class to
have higher expenses and pay lower dividends than Class A or Class D shares. See
"Level Load Alternative--Class C Shares."
CLASS D SHARES. Class D shares are available only to limited categories of
investors (see "No Load Alternative--Class D Shares" below). Class D shares are
sold at net asset value with no initial sales charge or CDSC. They are not
subject to any 12b-1 fees. See "No Load Alternative--Class D Shares."
SELECTING A PARTICULAR CLASS. In deciding which Class of Fund shares to
purchase, investors should consider the following factors, as well as any other
relevant facts and circumstances:
The decision as to which Class of shares is more beneficial to an investor
depends on the amount and intended length of his or her investment. Investors
who prefer an initial sales charge alternative may elect to purchase Class A
shares. Investors qualifying for significantly reduced or, in the case of
purchases of $1 million or more, no initial sales charges may find Class A
shares particularly attractive because similar sales charge reductions are not
available with respect to Class B or Class C shares. Moreover, Class A shares
are subject to lower ongoing expenses than are Class B or Class C shares over
the term of the investment. As an alternative, Class B and Class C shares are
sold without any initial sales charge so the entire purchase price is
immediately invested in the Fund. Any investment return on these additional
investment amounts may partially or wholly offset the higher annual expenses of
these Classes. Because the Fund's future return cannot be predicted, however,
there can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, although Class C shares are subject to a significantly lower
CDSC upon redemptions, they do not, unlike Class B shares, convert into Class A
shares after approximately ten years, and, therefore, are subject to an ongoing
12b-1 fee of 1.0% (rather than the 0.25% fee applicable to Class A shares) for
an indefinite period of time. Thus, Class B shares may be more attractive than
Class C shares to investors with longer term investment outlooks. Other
investors, however, may elect to purchase Class C shares if, for example, they
determine that they do not wish to be subject to a front-end sales charge and
they are uncertain as to the length of time they intend to hold their shares.
For the purpose of meeting the $5 million (or $25 million) minimum
investment amount for Class D shares, holdings of Class A and Class D shares in
all Morgan Stanley Dean Witter Multi-Class Funds, shares of FSC Funds and shares
of Morgan Stanley Dean Witter Funds for which such shares have been exchanged,
will be included together with the current investment amount.
Sales personnel may receive different compensation for selling each Class of
shares. Investors should understand that the purpose of a CDSC is the same as
that of 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:
71
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------
CONVERSION
CLASS SALES CHARGE 12b-1 FEE FEATURE
<C> <S> <C> <C>
- -----------------------------------------------------------
A Maximum 5.25% 0.25% No
initial sales
charge reduced for
purchases of
$25,000 and over;
shares sold
without an initial
sales charge
generally subject
to a 1.0% CDSC
during first year.
- -----------------------------------------------------------
B Maximum 5.0% CDSC 1.0% B shares convert
during the first to A shares
year decreasing to automatically
0 after six years after
approximately
ten years
- -----------------------------------------------------------
C 1.0% CDSC during 1.0% No
first year
- -----------------------------------------------------------
D None None No
</TABLE>
See "Purchase of Fund Shares" and "The Fund and its Management" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Determination of Net Asset Value," "Dividends,
Distributions and Taxes" and "Shareholder Services--Exchange Privilege" for
other differences between the Classes of shares.
INITIAL SALES CHARGE ALTERNATIVE--
CLASS A SHARES
Class A shares are sold at net asset value plus an initial sales charge. In
some cases, reduced sales charges may be available, as described below.
Investments of $1 million or more (and investments by certain other limited
categories of investors) are not subject to any sales charges at the time of
purchase but are subject to a CDSC of 1.0% on redemptions made within one year
after purchase (calculated from the last day of the month in which the shares
were purchased), except for certain specific circumstances. The CDSC will be
assessed on an amount equal to the lesser of the current market value or the
cost of the shares being redeemed. The CDSC will not be imposed (i) in the
circumstances set forth below in the section "Contingent Deferred Sales Charge
Alternative--Class B Shares--CDSC Waivers," except that the references to six
years in the first paragraph of that section shall mean one year in the case of
Class A shares, and (ii) in the circumstances identified in the section
"Additional Net Asset Value Purchase Options" below. Class A shares are also
subject to an annual 12b-1 fee of up to 0.25% of the average daily net assets of
the Class.
The offering price of Class A shares will be the net asset value per share
next determined following receipt of an order (see "Determination of Net Asset
Value" below), plus a sales charge (expressed as a percentage of the offering
price) on a single transaction as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------------------
PERCENTAGE OF APPROXIMATE
AMOUNT OF PUBLIC OFFERING PERCENTAGE OF AMOUNT
SINGLE 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 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
72
<PAGE>
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 Morgan Stanley Dean Witter Multi-Class Funds and shares of FSC
Funds. The sales charge payable on the purchase of the Class A shares of the
Fund, the Class A shares of the other Morgan Stanley Dean Witter Multi-Class
Funds and the shares of the FSC Funds will be at their respective rates
applicable to the total amount of the combined concurrent purchases of such
shares.
RIGHT OF ACCUMULATION. The above persons and entities may benefit from a
reduction of the sales charges in accordance with the above schedule if the
cumulative net asset value of Class A shares purchased in a single transaction,
together with shares of the Fund and other Morgan Stanley Dean Witter Funds
previously purchased at a price including a front-end sales charge (including
shares of the Fund and other Morgan Stanley Dean Witter Funds acquired in
exchange for those shares, and including in each case shares acquired through
reinvestment of dividends and distributions), which are held at the time of such
transaction, amounts to $25,000 or more. If such investor has a cumulative net
asset value of shares of FSC Funds and Class A and Class D shares that, together
with the current investment amount, is equal to at least $5 million ($25 million
for certain qualified plans), such investor is eligible to purchase Class D
shares subject to the $1,000 minimum initial investment requirement of that
Class of the Fund. See "No Load Alternative--Class D Shares" below.
The Distributor must be notified by DWR or a Selected Broker-Dealer or the
shareholder at the time a purchase order is placed that the purchase qualifies
for the reduced charge under the Right of Accumulation. Similar notification
must be made in writing by the dealer or shareholder when such an order is
placed by mail. The reduced sales charge will not be granted if: (a) such
notification is not furnished at the time of the order; or (b) a review of the
records of the Selected Broker-Dealer or the Transfer Agent fails to confirm the
investor's represented holdings.
LETTER OF INTENT. The foregoing schedule of reduced sales charges will also
be available to investors who enter into a written Letter of Intent providing
for the purchase, within a thirteen-month period, of Class A shares of the Fund
from DWR or other Selected Broker-Dealers. The cost of Class A shares of the
Fund or shares of other Morgan Stanley Dean Witter Funds which were previously
purchased at a price including a front-end sales charge during the 90-day period
prior to the date of receipt by the Distributor of the Letter of Intent, or of
Class A shares of the Fund or shares of other Morgan Stanley Dean Witter Funds
acquired in exchange for shares of such funds purchased during such period at a
price including a front-end sales charge, which are still owned by the
shareholder, may also be included in determining the applicable reduction.
ADDITIONAL NET ASSET VALUE PURCHASE OPTIONS. In addition to investments of
$1 million or more,
73
<PAGE>
Class A shares also may be purchased at net asset value by the following:
(1) trusts for which MSDW Trust (which is an affiliate of the Investment
Manager) provides discretionary trustee services;
(2) persons participating in a fee-based program approved by the
Distributor, pursuant to which such persons pay an asset based fee for services
in the nature of investment advisory, administrative and/or brokerage services
(such investments are subject to all of the terms and conditions of such
programs, which may include termination fees, mandatory redemption upon
termination and such other circumstances as specified in the programs'
agreements, and restrictions on transferability of Fund shares);
(3) employer-sponsored 401(k) and other plans qualified under Section 401(a)
of the Internal Revenue Code ("Qualified Retirement Plans") with at least 200
eligible employees and for which MSDW Trust serves as Trustee or DWR's
Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement;
(4) Qualified Retirement Plans for which MSDW Trust serves as Trustee or
DWR's Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement whose Class B shares have converted to Class A
shares, regardless of the plan's asset size or number of eligible employees;
(5) investors who are clients of a Morgan Stanley Dean Witter Financial
Advisor who joined Morgan Stanley Dean Witter from another investment firm
within six months prior to the date of purchase of Fund shares by such
investors, if the shares are being purchased with the proceeds from a redemption
of shares of an open-end proprietary mutual fund of the Financial Advisor's
previous firm which imposed either a front-end or deferred sales charge,
provided such purchase was made within sixty days after the redemption and the
proceeds of the redemption had been maintained in the interim in cash or a money
market fund; and
(6) other categories of investors, at the discretion of the Board, as
disclosed in the then current prospectus of the Fund.
No CDSC will be imposed on redemptions of shares purchased pursuant to
paragraphs (1), (2) or (5), above.
For further information concerning purchases of the Fund's shares, contact
DWR or another Selected Broker-Dealer or consult the Statement of Additional
Information.
CONTINGENT DEFERRED SALES CHARGE
ALTERNATIVE--CLASS B SHARES
Class B shares are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Fund. A CDSC, however, will be imposed on
most Class B shares redeemed within six years after purchase. The CDSC will be
imposed on any redemption of shares if after such redemption the aggregate
current value of a Class B account with the Fund falls below the aggregate
amount of the investor's purchase payments for Class B shares made during the
six years (or, in the case of shares held by certain Qualified Retirement Plans,
three years) preceding the redemption. In addition, Class B shares are subject
to an annual 12b-1 fee of 1.0% of the 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
74
<PAGE>
will depend upon how long the shares have been held, as set forth in the
following table:
<TABLE>
<CAPTION>
CDSC AS A
YEAR SINCE 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 purchased by Qualified Retirement
Plans for which MSDW Trust serves as Trustee or DWR's Retirement Plan Services
serves as recordkeeper pursuant to a written Recordkeeping Services Agreement,
shares held for three years or more after purchase (calculated as described in
the paragraph above) will not be subject to any CDSC upon redemption. However,
shares redeemed earlier than three years after purchase may be subject to a CDSC
(calculated as described in the paragraph above), the percentage of which will
depend on how long the shares have been held, as set forth in the following
table:
<TABLE>
<CAPTION>
CDSC AS A
YEAR SINCE 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 Qualified Retirement Plans, three years)
preceding the redemption; (ii) the current net asset value of shares purchased
more than six years (or, in the case of shares held by certain Qualified
Retirement Plans, three years) prior to the redemption; and (iii) the current
net asset value of shares purchased through reinvestment of dividends or
distributions and/or shares acquired in exchange for shares of FSC Funds or of
other Morgan Stanley Dean Witter Funds acquired in exchange for such shares.
Moreover, in determining whether a CDSC is applicable it will be assumed that
amounts described in (i), (ii) and (iii) above (in that order) are redeemed
first.
In addition, the CDSC, if otherwise applicable, will be waived in the case
of:
(1) redemptions of shares held at the time a shareholder dies or becomes
disabled, only if the shares are: (A) registered either in the name of an
individual shareholder (not a trust), or in the names of such shareholder and
his or her spouse as joint tenants with right of survivorship; or (B) held in a
qualified corporate or self-employed retirement plan, Individual Retirement
Account ("IRA") or Custodial Account under Section 403(b)(7) of the Internal
Revenue Code ("403(b) Custodial Account"), provided in either case that the
redemption is requested within one year of the death or initial determination of
disability;
(2) redemptions in connection with the following retirement plan
distributions: (A) lump-sum or other distributions from a qualified corporate
or self-employed retirement plan following retirement (or, in the case of a "key
employee" of a "top heavy" plan, following attainment of age 59 1/2); (B)
distributions from an IRA or 403(b) Custodial Account following attainment of
age 59 1/2; or (C) a tax-free return of an excess contribution to an IRA;
(3) all redemptions of shares held for the benefit of a participant in a
Qualified Retirement Plan which offers investment companies managed by the
Investment Manager or its subsidiary, MSDW Services, as self-directed investment
alternatives and for which MSDW Trust serves as Trustee or DWR's Retirement Plan
Services serves as recordkeeper pursuant to a written Recordkeeping Services
Agreement ("Eligible Plan"), provided that either: (A) the plan continues to be
an Eligible Plan after the redemption; or (B) the redemption is in connection
with the complete termination of the
75
<PAGE>
plan involving the distribution of all plan assets to participants; and
(4) certain redemptions pursuant to the Fund's Systematic Withdrawal Plan
(see "Shareholder Services--Systematic Withdrawal Plan").
With reference to (1) above, for the purpose of determining disability, the
Distributor utilizes the definition of disability contained in Section 72(m)(7)
of the Internal Revenue Code, which relates to the inability to engage in
gainful employment. With reference to (2) above, the term "distribution" does
not encompass a direct transfer of IRA, 403(b) Custodial Account or retirement
plan assets to a successor custodian or trustee. All waivers will be granted
only following receipt by the Distributor of confirmation of the shareholder's
entitlement.
CONVERSION TO CLASS A SHARES. Class B shares will convert automatically to
Class A shares, based on the relative net asset values of the shares of the two
Classes on the conversion date, which will be approximately ten (10) years after
the date of the original purchase. The ten year period is calculated from the
last day of the month in which the shares were purchased or, in the case of
Class B shares acquired through an exchange or a series of exchanges from the
last day of the month in which the original Class B shares were purchased,
provided that shares acquired in exchange for shares of another fund originally
purchased before May 1, 1997 will convert to Class A shares in May, 2007. The
conversion of shares purchased on or after May 1, 1997 will take place in the
month following the tenth anniversary of the purchase. There will also be
converted at that time such proportion of Class B shares acquired through
automatic reinvestment of dividends and distributions owned by the shareholder
as the total number of his or her Class B shares converting at the time bears to
the total number of outstanding Class B shares purchased and owned by the
shareholder. In the case of Class B shares held by a Qualified Retirement Plan
for which MSDW Trust serves as Trustee or DWR's Retirement Plan Services serves
as recordkeeper pursuant to a written Recordkeeping Services Agreement, the plan
is treated as a single investor and all Class B shares will convert to Class A
shares on the conversion date of the first shares of a Morgan Stanley Dean
Witter Multi-Class Fund purchased by that plan. In the case of Class B shares
previously exchanged for shares of an "Exchange Fund" (see "Shareholder
Services-- Exchange Privilege"), the period of time the shares were held in the
Exchange Fund (calculated from the last day of the month in which the Exchange
Fund shares were acquired) is excluded from the holding period for conversion.
If those shares are subsequently re-exchanged for Class B shares of a Morgan
Stanley Dean Witter Multi-Class Fund, the holding period resumes on the last day
of the month in which Class B shares are reacquired.
If a shareholder has received share certificates for Class B shares, such
certificates must be delivered to the Transfer Agent at least one week prior to
the date for conversion. Class B shares evidenced by share certificates that are
not received by the Transfer Agent at least one week prior to any conversion
date will be converted into Class A shares on the next scheduled conversion date
after such certificates are received.
Effectiveness of the conversion feature is subject to the continuing
availability of a ruling of the Internal Revenue Service or an opinion of
counsel that (i) the conversion of shares does not constitute a taxable event
under the Internal Revenue Code, (ii) Class A shares received on conversion will
have a basis equal to the shareholder's basis in the converted Class B shares
immediately prior to the conversion, and (iii) Class A shares received on
conversion will have a holding period that includes the holding period of the
converted Class B shares. The conversion feature may be suspended if the ruling
or opinion is no longer available. In such event, Class B shares would continue
to be subject to Class B 12b-1 fees.
76
<PAGE>
LEVEL LOAD ALTERNATIVE--CLASS C SHARES
Class C shares are sold at net asset value next determined without an
initial sales charge but are subject to a CDSC of 1.0% on most redemptions made
within one year after purchase (calculated from the last day of the month in
which the shares were purchased). The CDSC will be assessed on an amount equal
to the lesser of the current market value or the cost of the shares being
redeemed. The CDSC will not be imposed in the circumstances set forth above in
the section "Contingent Deferred Sales Charge Alternative--Class B Shares--CDSC
Waivers," except that the references to six years in the first paragraph of that
section shall mean one year in the case of Class C shares. Class C shares are
subject to an annual 12b-1 fee of up to 1.0% of the average daily net assets of
the Class. Unlike Class B shares, Class C shares have no conversion feature and,
accordingly, an investor that purchases Class C shares will be subject to 12b-1
fees applicable to Class C shares for an indefinite period subject to annual
approval by the Fund's Board of Trustees and regulatory limitations.
NO LOAD ALTERNATIVE--CLASS D SHARES
Class D shares are offered without any sales charge on purchase or
redemption and without any 12b-1 fee. Class D shares are offered only to
investors meeting an initial investment minimum of $5 million ($25 million for
Qualified Retirement Plans for which MSDW Trust serves as Trustee or DWR's
Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement) and the following categories of investors: (i)
investors participating in the MSDW Advisors mutual fund asset allocation
program pursuant to which such persons pay an asset based fee; (ii) persons
participating in a fee-based program approved by the Distributor, pursuant to
which such persons pay an asset based fee for services in the nature of
investment advisory, administrative and/or brokerage services (subject to all of
the terms and conditions of such programs referred to in (i) and (ii) above,
which may include termination fees, mandatory redemption upon termination and
such other circumstances as specified in the programs' agreements, and
restrictions on transferability of Fund shares); (iii) employee benefit plans
maintained by Morgan Stanley Dean Witter & Co. or any of its subsidiaries for
the benefit of certain employees of Morgan Stanley Dean Witter & Co. and its
subsidiaries; (iv) certain Unit Investment Trusts sponsored by DWR; (v) certain
other open-end investment companies whose shares are distributed by the
Distributor; (vi) investors who were shareholders of Dean Witter Retirement
Series on September 11, 1998 (with respect to additional purchases for their
former Dean Witter Retirement Series accounts); and (vii) other categories of
investors, at the discretion of the Board, as disclosed in the then current
prospectus of the Fund. Investors who require a $5 million (or $25 million)
minimum initial investment to qualify to purchase Class D shares may satisfy
that requirement by investing that amount in a single transaction in Class D
shares of the Fund and other Morgan Stanley Dean Witter Multi-Class Funds,
subject to the $1,000 minimum initial investment required for that Class of the
Fund. In addition, for the purpose of meeting the $5 million (or $25 million)
minimum investment amount, holdings of Class A and Class D shares in all Morgan
Stanley Dean Witter Multi-Class Funds, shares of FSC Funds and shares of 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
77
<PAGE>
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 services provided and the expenses borne
by the Distributor and others in the distribution of the shares of those
Classes, including the payment of commissions for sales of the shares of those
Classes and incentive compensation to and expenses of Morgan Stanley Dean Witter
Financial Advisors and others who engage in or support distribution of shares or
who service shareholder accounts, including overhead and telephone expenses;
printing and distribution of prospectuses and reports used in connection with
the offering of the Fund's shares to other than current shareholders; and
preparation, printing and distribution of sales literature and advertising
materials. In addition, the Distributor may utilize fees paid pursuant to the
Plan in the case of Class B shares to compensate DWR and other Selected
Broker-Dealers for their opportunity costs in advancing such amounts, which
compensation would be in the form of a carrying charge on any unreimbursed
expenses.
For the fiscal period ended September 30, 1998, Class B shares of the
Domestic Portfolio and the International Portfolio accrued payments under the
Plan amounting to $187,858 and $23,647 (net of amounts waived), respectively,
which amounts are equal to 0.92% of the average daily net assets of Class B of
the Domestic Portfolio and 0.94% of the average daily net assets of Class B of
the International Portfolio for the fiscal period. For the fiscal period ended
September 30, 1998, Class A and Class C shares of the Domestic Portfolio and the
International Portfolio of the Fund accrued payments under the Plan amounting to
$3,390 and $877, respectively for Class A and, $14,042 and $835, respectively
for Class C, which amounts are equal to 0.22% and 0.25%, respectively, of the
average daily net assets of Class A and 0.92% of the average daily net assets of
Class C, respectively, for each Portfolio, for the fiscal year.
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. The Distributor has informed the Fund that such excess amounts,
including the carrying charge described above, totalled $1,709,171 for the
Domestic Portfolio and $659,369 for the International Portfolio at September 30,
1998, which was equal to 7.02% and 20.34% respectively of the net assets of
Class B of the Domestic Portfolio and Class B of the International Portfolio
respectively, for the fiscal period. 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,
78
<PAGE>
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 Morgan
Stanley Dean Witter Financial Advisors and other Selected Broker-Dealer
representatives at the time of sale may be reimbursed in the subsequent calendar
year. The Distributor has advised the Fund that unreimbursed expenses
representing a gross sales commission credited to Morgan Stanley Dean Witter
Financial Advisors and other Selected Broker-Dealer representatives at the time
of sale totalled $11,139 for the Domestic Portfolio and $541 for the
International Portfolio in the case of Class C for each Portfolio at December
31, 1997, which amounts were equal to 0.89% and 0.75% respectively of the net
assets of Class C of the Domestic Portfolio and the International Portfolio on
such date, and that there were no such expenses that may be reimbursed in the
subsequent year in the case of Class A on such date. No interest or other
financing charges will be incurred on any Class A or Class C distribution
expenses incurred by the Distributor under the Plan or on any unreimbursed
expenses due to the Distributor pursuant to the Plan.
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 as
of 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 Morgan Stanley Dean
Witter Fund), unless the shareholder requests that they be paid in cash. Shares
so acquired are acquired at net asset value and are not subject to the
imposition of a front-end sales charge or a CDSC (see "Redemptions and
Repurchases").
INVESTMENT OF DIVIDENDS 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
79
<PAGE>
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 checking or savings account or following
redemption of shares of a Morgan Stanley Dean Witter money market fund, on a
semi-monthly, monthly or quarterly basis, to the Transfer Agent for investment
in shares of the Fund. (See "Purchase of Fund Shares" and "Redemptions and
Repurchases--Involuntary Redemption").
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan (the "Withdrawal
Plan") is available for shareholders whose shares of Morgan Stanley Dean Witter
Funds have an aggregate value of $10,000 or more. Shares of any Fund from which
redemptions will be made pursuant to the Plan must have a value of $1,000 or
more (referred to as a "SWP Fund"). The required share values are determined on
the date the shareholder establishes the Withdrawal Plan. The Withdrawal Plan
provides for monthly, quarterly, semi-annual or annual payments in any amount
not less than $25, or in any whole percentage of the value of the SWP Funds'
shares, on an annualized basis. Any applicable CDSC will be imposed on shares
redeemed under the Withdrawal Plan (see "Purchase of Fund Shares"), except that
the CDSC, if any, will be waived on redemptions under the Withdrawal Plan of up
to 12% annually of the value of each SWP Fund account, based on the share values
next determined after the shareholder establishes the Withdrawal Plan.
Redemptions for which this CDSC waiver policy applies may be in amounts up to 1%
per month, 3% per quarter, 6% semi-annually or 12% annually. Under this CDSC
waiver policy, amounts withdrawn each period will be paid by first redeeming
shares not subject to a CDSC because the shares were purchased by the
reinvestment of dividends or capital gains distributions, the CDSC period has
elapsed or some other waiver of the CDSC applies. If shares subject to a CDSC
must be redeemed, shares held for the longest period of time will be redeemed
first and continuing with shares held the next longest period of time until
shares held the shortest period of time are redeemed. Any shareholder
participating in the Withdrawal Plan will have sufficient shares redeemed from
his or her account so that the proceeds (net of any applicable CDSC) to the
shareholder will be the designated monthly, quarterly, semi-annual or annual
amount.
A shareholder may suspend or terminate participation in the Withdrawal Plan
at any time. A shareholder who has suspended participation may resume payments
under the Withdrawal Plan, without requiring a new determination of the account
value for the 12% CDSC waiver. The Withdrawal Plan may be terminated or revised
at any time by the Fund.
Prior to adding an additional SWP Fund to
an existing Withdrawal Plan, the required $10,000/$1,000 share values must be
met, to be calculated on the date the shareholder adds the additional SWP Fund.
However, the addition of a new SWP Fund will not change the account value for
the 12% CDSC waiver for the SWP Funds already participating in the Withdrawal
Plan.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic Withdrawal Plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted. Each withdrawal constitutes a
redemption of shares and any gain or loss realized must be recognized for
federal income tax purposes.
Shareholders should contact their Morgan Stanley Dean Witter Financial
Advisor or other Selected Broker-Dealer representative or the Transfer Agent for
further information about any of the above services.
80
<PAGE>
TAX-SHELTERED RETIREMENT PLANS. Retirement plans are available for use by
corporations, the self-employed, Individual Retirement Accounts and Custodial
Accounts under Section 403(b)(7) of the Internal Revenue Code. Adoption of such
plans should be on advice of legal counsel or tax advisor.
For further information regarding plan administration, custodial fees and
other details, investors should contact their Morgan Stanley Dean Witter
Financial Advisor or other Selected Broker-Dealer representative or the Transfer
Agent.
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class of any
other Morgan Stanley Dean Witter Multi-Class Fund without the imposition of any
exchange fee. Shares may also be exchanged for shares of the following funds:
Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust, Morgan Stanley Dean
Witter Limited Term Municipal Trust, Morgan Stanley Dean Witter Short-Term Bond
Fund and five Morgan Stanley Dean Witter funds which are money market funds (the
"Exchange Funds"). Class A shares may also be exchanged for shares of Morgan
Stanley Dean Witter Multi-State Municipal Series Trust and Morgan Stanley Dean
Witter Hawaii Municipal Trust, which are Morgan Stanley Dean Witter Funds sold
with a front-end sales charge ("FSC Funds"). Exchanges may be made after the
shares of the Fund acquired by purchase (not by exchange or dividend
reinvestment) have been held for thirty days. There is no waiting period for
exchanges of shares acquired by exchange or dividend reinvestment.
An exchange to another Morgan Stanley Dean Witter Multi-Class Fund, any FSC
Fund or any Exchange Fund that is not a money market fund is on the basis of the
next calculated net asset value per share of each fund after the exchange order
is received. When exchanging into a money market fund from the Fund, shares of
the Fund are redeemed out of the Fund at their next calculated net asset value
and the proceeds of the redemption are used to purchase shares of the money
market fund at the net asset value determined the following business day.
Subsequent exchanges between any of the Morgan Stanley Dean Witter Multi-Class
Funds, FSC Funds or any Exchange Fund that is not a money market fund can be
effected on the same basis.
No CDSC is imposed at the time of any exchange of shares, although any
applicable CDSC will be imposed upon ultimate redemption. During the period of
time the shareholder remains in an Exchange Fund (calculated from the last day
of the month in which the Exchange Fund shares were acquired), the holding
period (for the purpose of determining the rate of the CDSC) is frozen. If those
shares are subsequently re-exchanged for shares of a Morgan Stanley Dean Witter
Multi-Class Fund, the holding period previously frozen when the first exchange
was made resumes on the last day of the month in which shares of a Morgan
Stanley Dean Witter Multi-Class Fund are reacquired. Thus, the CDSC is based
upon the time (calculated as described above) the shareholder was invested in
shares of a Morgan Stanley Dean Witter Multi-Class Fund (see "Purchase of Fund
Shares"). In the case of exchanges of Class A shares which are subject to a
CDSC, the holding period also includes the time (calculated as described above)
the shareholder was invested in shares of a FSC Fund. In the case of shares
exchanged into an Exchange Fund on or after April 23, 1990, upon a redemption of
shares which results in a CDSC being imposed, a credit (not to exceed the amount
of the CDSC) will be given in an amount equal to the Exchange Fund 12b-1
distribution fees incurred on or after that date which are attributable to those
shares. (Exchange Fund 12b-1 distribution fees are described in the prospectuses
for those funds.) Class B shares of the Fund acquired in exchange for Class B
shares of another Morgan Stanley Dean Witter Multi-Class Fund having a different
CDSC schedule than that of this Fund will be subject to the higher CDSC
schedule, even if such shares are subsequently re-exchanged for shares of the
fund with the lower CDSC schedule.
81
<PAGE>
ADDITIONAL INFORMATION REGARDING EXCHANGES
Purchases and exchanges should be made for investment purposes only. A
pattern of frequent exchanges may be deemed by the Investment Manager to be
abusive and contrary to the best interests of the Fund's other shareholders and,
at the Investment Manager's discretion, may be limited by the Fund's refusal to
accept additional purchases and/ or exchanges from the investor. Although the
Fund does not have any specific definition of what constitutes a pattern of
frequent exchanges, and will consider all relevant factors in determining
whether a particular situation is abusive and contrary to the best interests of
the Fund and its other shareholders, investors should be aware that the Fund and
each of the other Morgan Stanley Dean Witter Funds may in their discretion limit
or otherwise restrict the number of times this Exchange 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 Morgan
Stanley Dean Witter Funds for which shares of the Fund have been exchanged, upon
such notice as may be required by applicable regulatory agencies. Shareholders
maintaining margin accounts with DWR or another Selected Broker-Dealer are
referred to their Morgan Stanley Dean Witter Financial Advisor or other Selected
Broker-Dealer representative regarding restrictions on exchange of shares of the
Fund pledged in the margin account.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain a copy and 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 Morgan
Stanley Dean Witter Funds (for which the Exchange Privilege is available)
pursuant to this Exchange Privilege by contacting their Morgan Stanley Dean
Witter Financial Advisor or other Selected Broker-Dealer representative (no
Exchange Privilege Authorization Form is required). Other shareholders (and
those 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.
82
<PAGE>
Telephone exchange instructions will be accepted if received by the Transfer
Agent between 9:00 a.m. and 4:00 p.m., New York time, on any day the New York
Stock Exchange is open. Any shareholder wishing to make an exchange who has
previously filed an Exchange Privilege Authorization Form and who is unable to
reach the Fund by telephone should contact his or her Morgan Stanley Dean Witter
Financial Advisor or other Selected Broker-Dealer representative, if
appropriate, or make a written exchange request. Shareholders are advised that
during periods of drastic economic or market changes, it is possible that the
telephone exchange procedures may be difficult to implement, although this has
not been the experience with the Morgan Stanley Dean Witter Funds in the past.
Shareholders should contact their Morgan Stanley Dean Witter Financial
Advisor or other Selected Broker-Dealer representative or the Transfer Agent for
further information about the Exchange Privilege.
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 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 Morgan Stanley Dean Witter Financial Advisor
or other Selected Broker-Dealer representative regarding restrictions on
redemption of shares of the Fund pledged in the margin account.
83
<PAGE>
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.
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.
84
<PAGE>
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 advisors 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
85
<PAGE>
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 MSDW Advisors, MSDW
Services and MSDW Distributors are subject to a strict Code of Ethics adopted by
those companies. The Code of Ethics is intended to ensure that the interests of
shareholders and other clients are placed ahead of any personal interest, that
no undue personal benefit is obtained from a person's employment activities and
that actual and potential conflicts of interest are avoided. To achieve these
goals and comply with regulatory requirements, the Code of Ethics requires,
among other things, that personal securities transactions by employees of the
companies be subject to an advance clearance process to monitor that no Morgan
Stanley Dean Witter Fund is engaged at the same time in a purchase or sale of
the same security. The Code of Ethics bans the purchase of securities in an
initial public offering, and 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
Morgan Stanley Dean Witter Fund managed by them. Any violations of the Code of
Ethics are subject to sanctions, including reprimand, demotion or suspension or
termination of employment. The Code of Ethics comports with regulatory
requirements and the recommendations in the 1994 report by the Investment
Company Institute Advisory Group on Personal Investing.
MASTER/FEEDER CONVERSION. 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.
86
<PAGE>
Morgan Stanley
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
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley
Dean Witter Advisors Inc.
MORGAN STANLEY
DEAN WITTER
FUND OF FUNDS
[GRAPHIC]
PROSPECTUS -- NOVEMBER 30, 1998
<PAGE>
STATEMENT OF ADDITIONAL MORGAN STANLEY DEAN WITTER
INFORMATION FUND OF FUNDS
NOVEMBER 30, 1998
- --------------------------------------------------------------------------------
Morgan Stanley 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 Morgan Stanley 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 November 30, 1998, 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, Morgan Stanley Dean Witter Distributors Inc., or
from Dean Witter Reynolds Inc. at any of its branch offices. This Statement of
Additional Information is not a Prospectus. It contains information in addition
to and more detailed than that set forth in the Prospectus. It is intended to
provide you additional information regarding the activities and operations of
the Fund, and should be read in conjunction with the Prospectus.
Morgan Stanley 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.................................................................. 7
Investment Practices and Policies of the Fund.......................................... 13
Investment Practices and Policies of the Underlying Funds.............................. 14
Investment Restrictions................................................................ 34
Portfolio Transactions and Brokerage................................................... 35
The Distributor........................................................................ 36
Determination of Net Asset Value....................................................... 40
Purchase of Fund Shares................................................................ 40
Shareholder Services................................................................... 43
Redemptions and Repurchases............................................................ 48
Dividends, Distributions and Taxes..................................................... 49
Performance Information................................................................ 50
Description of Shares of The Fund...................................................... 52
Custodian and Transfer Agent........................................................... 53
Independent Accountants................................................................ 53
Reports to Shareholders................................................................ 53
Legal Counsel.......................................................................... 53
Experts................................................................................ 53
Registration Statement................................................................. 53
Financial Statements--September 30, 1998............................................... 54
Report of Independent Accountants...................................................... 66
Appendix--Ratings of Investments....................................................... 67
</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. On June 22, 1998, the Trustees of the Fund adopted an Amendment to
the Declaration of Trust of the Fund changing the name of the Fund from Dean
Witter Fund of Funds to Morgan Stanley Dean Witter Fund of Funds.
THE INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc. (the "Investment Manager" or "MSDW
Advisors"), a Delaware corporation, whose address is Two World Trade Center, New
York, New York, 10048, is the Fund's investment manager. MSDW Advisors is a
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. ("MSDW"), a Delaware
corporation. The daily management of the Fund is conducted by or under the
direction of officers of the Fund and of the 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."
MSDW Advisors is the investment manager or investment advisor of the
following investment companies, which are collectively referred to as the
"Morgan Stanley Dean Witter Funds":
<TABLE>
<CAPTION>
OPEN-END FUNDS
<C> <S>
1 Active Assets California Tax-Free Trust
2 Active Assets Government Securities Trust
3 Active Assets Money Trust
4 Active Assets Tax-Free Trust
5 Morgan Stanley Dean Witter American Value Fund
6 Morgan Stanley Dean Witter Balanced Growth Fund
7 Morgan Stanley Dean Witter Balanced Income Fund
8 Morgan Stanley Dean Witter California Tax-Free Daily Income Trust
9 Morgan Stanley Dean Witter California Tax-Free Income Fund
10 Morgan Stanley Dean Witter Capital Appreciation Fund
11 Morgan Stanley Dean Witter Capital Growth Securities
12 Morgan Stanley Dean Witter Competitive Edge Fund, "BEST IDEAS" Portfolio
13 Morgan Stanley Dean Witter Convertible Securities Trust
14 Morgan Stanley Dean Witter Developing Growth Securities Trust
15 Morgan Stanley Dean Witter Diversified Income Trust
16 Morgan Stanley Dean Witter Dividend Growth Securities Inc.
17 Morgan Stanley Dean Witter Equity Fund
18 Morgan Stanley Dean Witter European Growth Fund Inc.
19 Morgan Stanley Dean Witter Federal Securities Trust
20 Morgan Stanley Dean Witter Financial Services Trust
21 Morgan Stanley Dean Witter Fund of Funds
22 Morgan Stanley Dean Witter Global Dividend Growth Securities
23 Morgan Stanley Dean Witter Global Short-Term Income Fund Inc.
24 Morgan Stanley Dean Witter Global Utilities Fund
25 Morgan Stanley Dean Witter Growth Fund
26 Morgan Stanley Dean Witter Hawaii Municipal Trust
27 Morgan Stanley Dean Witter Health Sciences Trust
28 Morgan Stanley Dean Witter High Yield Securities Inc.
29 Morgan Stanley Dean Witter Income Builder Fund
30 Morgan Stanley Dean Witter Information Fund
31 Morgan Stanley Dean Witter Intermediate Income Securities
32 Morgan Stanley Dean Witter International SmallCap Fund
33 Morgan Stanley Dean Witter Japan Fund
</TABLE>
3
<PAGE>
<TABLE>
<C> <S>
34 Morgan Stanley Dean Witter Limited Term Municipal Trust
35 Morgan Stanley Dean Witter Liquid Asset Fund Inc.
36 Morgan Stanley Dean Witter Market Leader Trust
37 Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities
38 Morgan Stanley Dean Witter Mid-Cap Growth Fund
39 Morgan Stanley Dean Witter Multi-State Municipal Series Trust
40 Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
41 Morgan Stanley Dean Witter New York Municipal Money Market Trust
42 Morgan Stanley Dean Witter New York Tax-Free Income Fund
43 Morgan Stanley Dean Witter Pacific Growth Fund Inc.
44 Morgan Stanley Dean Witter Precious Metals and Minerals Trust
45 Morgan Stanley Dean Witter Select Dimensions Investment Series
46 Morgan Stanley Dean Witter Select Municipal Reinvestment Fund
47 Morgan Stanley Dean Witter Short-Term Bond Fund
48 Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
49 Morgan Stanley Dean Witter Special Value Fund
50 Morgan Stanley Dean Witter S&P 500 Index Fund
51 Morgan Stanley Dean Witter S&P 500 Select Fund
52 Morgan Stanley Dean Witter Strategist Fund
53 Morgan Stanley Dean Witter Tax-Exempt Securities Trust
54 Morgan Stanley Dean Witter Tax-Free Daily Income Trust
55 Morgan Stanley Dean Witter U.S. Government Money Market Trust
56 Morgan Stanley Dean Witter U.S. Government Securities Trust
57 Morgan Stanley Dean Witter Utilities Fund
58 Morgan Stanley Dean Witter Value-Added Market Series
59 Morgan Stanley Dean Witter Value Fund
60 Morgan Stanley Dean Witter Variable Investment Series
61 Morgan Stanley Dean Witter World Wide Income Trust
<CAPTION>
CLOSED-END FUNDS
<C> <S>
1 InterCapital California Insured Municipal Income Trust
2 InterCapital California Quality Municipal Securities
3 Dean Witter Government Income Trust
4 High Income Advantage Trust
5 High Income Advantage Trust II
6 High Income Advantage Trust III
7 InterCapital Income Securities Inc.
8 InterCapital Insured California Municipal Securities
9 InterCapital Insured Municipal Bond Trust
10 InterCapital Insured Municipal Income Trust
11 InterCapital Insured Municipal Securities
12 InterCapital Insured Municipal Trust
13 Municipal Income Opportunities Trust
14 Municipal Income Opportunities Trust II
15 Municipal Income Opportunities Trust III
16 Municipal Income Trust
17 Municipal Income Trust II
18 Municipal Income Trust III
19 Municipal Premium Income Trust
20 InterCapital New York Quality Municipal Securities
21 Morgan Stanley Dean Witter Prime Income Trust
22 InterCapital Quality Municipal Income Trust
23 InterCapital Quality Municipal Investment Trust
24 InterCapital Quality Municipal Securities
</TABLE>
4
<PAGE>
In addition, Morgan Stanley Dean Witter Services Company Inc. ("MSDW
Services"), a wholly-owned subsidiary of MSDW Advisors, serves as manager for
the following investment companies for which TCW Funds Management, Inc. is the
investment advisor (the "TCW/DW Funds"):
<TABLE>
<CAPTION>
OPEN-END FUNDS
<C> <S>
1 TCW/DW Emerging Markets Opportunities Trust
2 TCW/DW Global Telecom Trust
3 TCW/DW Income and Growth Fund
4 TCW/DW Latin American Growth Fund
5 TCW/DW Mid-Cap Equity Trust
6 TCW/DW North American Government Income Trust
7 TCW/DW Small Cap Growth Fund
8 TCW/DW Total Return Trust
<CAPTION>
CLOSED-END FUNDS
<C> <S>
1 TCW/DW Term Trust 2000
2 TCW/DW Term Trust 2002
3 TCW/DW Term Trust 2003
</TABLE>
MSDW Advisors also serves as: (i) administrator of The BlackRock Strategic
Term Trust Inc., a closed-end investment company; (ii) sub-administrator of
Templeton Global Governments Income Trust, a closed-end investment company; and
(iii) investment advisor of Offshore Dividend Growth Fund and Offshore Money
Market Fund, mutual funds established under the laws of the Cayman Islands and
available only to investors who are participants in the International Active
Assets Account program and are neither citizens nor residents of the United
States.
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
5
<PAGE>
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 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 had agreed to assume all operating expenses (except
for brokerage and 12b-1 fees) for each Portfolio until such time as the
respective Portfolio had $50 million of net assets or six months from the date
of commencement of the Fund's operations, whichever occurred first and has
agreed to extend such expense assumption through November 30, 1999.
The Investment Manager incurred organizational expenses of the Fund incurred
prior to the offering of the Fund's shares in the amount of approximately
$50,000. Such expenses 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 Investment Manager incurred
additional offering expenses on behalf of the Fund consisting in the amount of
approximately $200,000 ($100,000 per Portfolio) which were to be reimbursed for
the full amount thereof. Such expenses were deferred and fully amortized as of
September 30, 1998. The Investment Manager waived all such reimbursements.
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 Dean Witter InterCapital Inc., 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
6
<PAGE>
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 following persons owned 5% or more of the outstanding shares of a Class
of the Domestic Portfolio on November 6, 1998: Class A--Dean Witter Reynolds as
Custodian for James E. Naudain, IRA Rollover, dated 08/13/97, 1181 Main St., Apt
8J, Rahway, NJ 07065-5047--17.50%; Rebecca Volchko, Trustee, Nordis Roberts
Trust, FBO Nancy Jarvis U/A/D, 11/17/85, 106 NW Curtis Street, Port St. Lucie,
FL 34983-1629--14.30%; Rebecca Volchko, Trustee, Nordis Roberts Trust FBO,
Rebecca Volchko U/A/D, 11/17/85, 106 NW Curtis Street, Port St. Lucie, FL
34983-1629--14.30%; C. Rex Ahlstrom & Linda H. Ahlstrom, as Joint Tenants, P.O.
Box 654, Cedar City, UT 84721-0654--8.60%; Alice Muck & Clement E. Muck Jr., as
Joint Tenants, 2563 North L Street, Washougal, WA 98671-9277--6.90%; Class
C--Dean Witter Reynolds, as Custodian for Frank J. Simms, IRA Rollover, dated
09/03/97, 8088 Sacred Heart LN, Cincinnati, OH 45255-3123--5.0%; Class D--Morgan
Stanley Dean Witter Advisors Inc., ATTN: Frank Devito, 2 World Trade Center,
73rd Fl, New York, NY 10048-0203--99.92%.
The following persons owned 5% or more of the outstanding shares of a Class
of the International Portfolio on November 6, 1998: Class A--James P. Rogers,
4628 IDS Center, 80 South Eighth Street, Minneapolis, MN 55402-2100--60.90%;
Dean Witter Reynolds, as Custodian for Adrienne Casanova, IRA Standard, dated
02/07/94, 21416 West Prescott Ct., Kildeer, IL 60047-8859--9.70%; Dean Witter
Reynolds as Custodian for W. Blaine Burton, IRA Rollover, dated 02/02/98, 433
Parkway Circle, Idaho Falls, Idaho 83401-4256--6.80%; Class C--Ann Fingarette
Hasse, 1084 Cragmont Avenue, Berkeley, CA 94708-1434--13.10%; Morgan Stanley
Dean Witter Advisors, Inc., Attn: Frank DeVito, 2 World Trade Center, 73rd Fl.,
New York, NY 10048-0203--10.90% Lena Rose Gould, Trustee for The Gould Family
Trust, dated 12/30/86, 23623 Los Grandes, Laguna Hills, CA 92656-1123--8.70%;
Nancy Grant Lopez and Dorren Greenfield, co-Trustees of the John R. Grant Trust,
dated 07/27/97, 9101 113th Street SW, Tacoma, WA 98498-3643--8.70%; Thomas
Bruseth, 4119 W. GreenTree Road, Milwaukee, WI 53209-3018--12.30%; Class
D--Morgan Stanley Dean Witter Advisors Inc., Attn: Frank DeVito, 2 World Trade
Center, 73rd Fl., New York, NY 10048-0203--99.92%.
The Fund has acknowledged that the name "Morgan Stanley Dean Witter" is a
property right of MSDW. The Fund has agreed that MSDW, or any corporate
affiliate of MSDW, may use or, at any time, permit others to use, the name
"Morgan Stanley Dean Witter." The Fund has also agreed that in the event the
Agreement is terminated, or if the affiliation between MSDW Advisors and its
parent company is terminated, the Fund will eliminate the name "Morgan Stanley
Dean Witter" from its name if MSDW, or any corporate affiliate of MSDW, shall so
request.
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 MSDW
Advisors, and with the 85 Morgan Stanley Dean Witter Funds and the 11 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 (57) Chairman and Chief Executive Officer of Levitz Furniture
Trustee Corporation (since November, 1995); Director or Trustee of
c/o Levitz Furniture Corporation the Morgan Stanley Dean Witter Funds; formerly President
7887 N. Federal Highway and Chief Executive Officer of Hills Department Stores
Boca Raton, Florida (May, 1991-July, 1995); formerly variously Chairman, Chief
Executive Officer, President and Chief Operating Officer
(1987-1991) of the Sears Merchandise Group of Sears,
Roebuck and Co.; Director of Eaglemark Financial Services,
Inc. and Weirton Steel Corporation.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
<S> <C>
Charles A. Fiumefreddo* (65) Chairman, Director or Trustee, President and Chief
Chairman, President Executive Officer of the Morgan Stanley Dean Witter Funds;
Chief Executive Officer and Trustee Chairman, Chief Executive Officer and Trustee of the
Two World Trade Center TCW/DW Funds; formerly Chairman, Chief Executive Officer
New York, New York and Director of MSDW Advisors, MSDW Distributors and MSDW
Services, Executive Vice President and Director of Dean
Witter Reynolds Inc. ("DWR"), Chairman and Director of
Morgan Stanley Dean Witter Trust FSB ("MSDW Trust"), and
Director and/or officer of various MSDW subsidiaries
(until June, 1998).
Edwin J. Garn (65) Director or Trustee of the Morgan Stanley Dean Witter
Trustee Funds; formerly United States Senator (R-Utah) (1974-1992)
c/o Huntsman Corporation and Chairman, Senate Banking Committee (1980-1986);
500 Huntsman Way formerly Mayor of Salt Lake City, Utah (1972-1974);
Salt Lake City, Utah formerly Astronaut, Space Shuttle Discovery (April 12-19,
1985); Vice Chairman, Huntsman Corporation; Director of
Franklin Covey (time management systems) and John Alden
Financial Corp. (health insurance); United Space Alliance
(joint venture between Lockheed Martin and Boeing Company)
and Nuskin Asia (multilevel marketing); member of the
board of various civic and charitable organizations.
John R. Haire (73) Chairman of the Audit Committee and Director or Trustee of
Trustee the Morgan Stanley Dean Witter Funds; Chairman of the
Two World Trade Center Audit Committee and Trustee of the TCW/DW Funds; formerly
New York, New York Chairman of the Independent Directors or Trustees of the
Morgan Stanley Dean Witter Funds and the TCW/DW Funds
(until June, 1998); formerly President, Council for Aid to
Education (1978-1989) and Chairman and Chief Executive
Officer of Anchor Corporation, an Investment Adviser
(1964-1978).
Wayne E. Hedien (64) Retired, Director or Trustee of the Morgan Stanley Dean
Trustee Witter Funds; Director of The PMI Group, Inc. (private
c/o Gordon Altman Butowsky mortgage insurance); Trustee and Vice Chairman of The
Weitzen Shalov & Wein Field Museum of Natural History; formerly associated with
Counsel to the Independent Trustees the Allstate Companies (1966-1994), most recently as
114 West 47th Street Chairman of The Allstate Corporation (March,
New York, New York 1993-December, 1994) and Chairman and Chief Executive
Officer of its wholly-owned subsidiary, Allstate Insurance
Company (July, 1989-December, 1994); director of various
other business and charitable organizations.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
<S> <C>
Dr. Manuel H. Johnson (49) Senior Partner, Johnson Smick International, Inc., a
Trustee consulting firm; Co-Chairman and a founder of the Group of
c/o Johnson Smick International, Inc. Seven Council (G7C), an international economic commission;
1133 Connecticut Avenue, N.W. Director or Trustee of the Morgan Stanley Dean Witter
Washington, DC Funds; Trustee of the TCW/DW Funds; Director of Greenwich
Capital Markets, Inc. (broker-dealer) and NVR Inc. (home
construction); Director of NASDAQ (since June, 1995);
Chairman and Trustee of the Financial Accounting
Foundation (oversight organization for the Financial
Accounting Standards Board); formerly Vice Chairman of the
Board of Governors of the Federal Reserve System
(1986-1990) and Assistant Secretary of the U.S. Treasury
(1982-1986).
Michael E. Nugent (62) General Partner, Triumph Capital, L.P., a private in-
Trustee vestment partnership; Director or Trustee of the Morgan
c/o Triumph Capital, L.P. Stanley Dean Witter Funds; Trustee of the TCW/DW Funds;
237 Park Avenue formerly Vice President, Bankers Trust Company and BT
New York, New York Capital Corporation (1984-1988); director of various
business organizations.
Philip J. Purcell* (55) Chairman of the Board of Directors and Chief Executive
Trustee Officer of MSDW, DWR and Novus Credit Services Inc.;
1585 Broadway Director of MSDW Distributors; Director or Trustee of the
New York, New York Morgan Stanley Dean Witter Funds; Director and/or officer
of various MSDW subsidiaries.
John L. Schroeder (68) Retired; Director or Trustee of the Morgan Stanley Dean
Trustee Witter Funds; Trustee of the TCW/DW Funds; Director of
c/o Gordon Altman Butowsky Weitzen Citizens Utilities Company; formerly Executive Vice
Shalov & Wein President and Chief Investment Officer of the Home
Counsel to the Independent Trustees Insurance Company (August, 1991-September, 1995).
114 West 47th Street
New York, New York
Barry Fink (43) Senior Vice President (since March, 1997), Secretary and
Vice President, Secretary General Counsel (since February, 1997) and Director (since
and General Counsel July, 1998) of MSDW Advisors and MSDW Services; Senior
Two World Trade Center Vice President (since March, 1997) and Assistant Secretary
New York, New York and Assistant General Counsel (since February, 1997) of
MSDW Distributors; Assistant Secretary of DWR (since Au-
gust, 1996); Vice President, Secretary and General Counsel
of the Morgan Stanley Dean Witter Funds and the TCW/DW
Funds (since February, 1997); previously First Vice
President (June, 1993-February, 1997), Vice President
(until June, 1993) and Assistant Secretary and Assistant
General Counsel of MSDW Advisors and MSDW Services and
Assistant Secretary of the Morgan Stanley Dean Witter
Funds and the TCW/DW Funds.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
<S> <C>
Thomas F. Caloia (52) First Vice President and Assistant Treasurer of MSDW
Treasurer Advisors and MSDW Services; Treasurer of the Morgan
Two World Trade Center Stanley Dean Witter Funds and 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, Mitchell M. Merin, President and Chief Executive Officer and
Director of MSDW Advisors and MSDW Services, Chairman and Director of MSDW
Distributors and MSDW Trust and Director of MSDW Trust, Executive Vice President
and Director of DWR and Director of various other MSDW subsidiaries, Robert M.
Scanlan, President and Chief Operating Officer and Director of MSDW Advisors and
MSDW Services, Executive Vice President of MSDW Distributors and MSDW Trust and
Director of MSDW Trust, Ronald E. Robison, Executive Vice President and Chief
Administrative Officer of MSDW Advisors and MSDW Services, Joseph J. McAlinden,
Executive Vice President and Chief Investment Officer of MSDW Advisors and
Director of MSDW Trust, Robert S. Giambrone, Senior Vice President of MSDW
Advisors, MSDW Services, MSDW Distributors and MSDW Trust and a Director of MSDW
Trust, and Paul D. Vance and Guy D. Rutherford, Jr., Senior Vice Presidents of
MSDW Advisors, are Vice Presidents of the Fund, and Marilyn K. Cranney and
Carsten Otto, First Vice Presidents and Assistant General Counsels of MSDW
Advisors and MSDW Services, Lou Anne D. McInnis, Ruth Rossi, and Frank
Bruttomesso, Vice Presidents and Assistant General Counsels of MSDW Advisors and
MSDW Services, and Todd Lebo, a Staff Attorney with MSDW Advisors, are Assistant
Secretaries of the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees consists of nine (9) trustees. These same individuals
also serve as directors or trustees for all of the Morgan Stanley 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 121 portfolios. As of October 31, 1998, the Dean Witter Funds had
total net assets of approximately $109.2 billion and more than six million
shareholders.
Seven Trustees (77% of the total number) have no affiliation or business
connection with MSDW Advisors or any of its affiliated persons and do not own
any stock or other securities issued by MSDW Advisors parent company, MSDW.
These are the "disinterested" or "independent" Trustees. 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 Morgan Stanley Dean Witter Funds seek as
Independent Trustees individuals of distinction and experience in business and
finance, government service or academia; these are people whose advice and
counsel are in demand by others and for whom there is often competition. To
accept a position on the Funds' Boards, such individuals may reject other
attractive assignments because the Funds make substantial demands on their time.
Indeed, by serving on the Funds' Boards, certain Trustees who would otherwise be
qualified and in demand to serve on bank boards would be prohibited by law from
doing so.
All of the Independent Trustees serve as members of the Audit Committee.
Three of them also serve as members of the Derivatives Committee. In addition,
three of the Trustees, including two Independent Trustees, serve as members of
the Insurance Committee. During the calendar year ended December 31, 1997, the
Audit Committee, the Derivatives Committee and the Independent Trustees held a
combined total of seventeen meetings.
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
10
<PAGE>
matters that arise from time to time. The Independent Trustees are required to
select and nominate individuals to fill any Independent Trustee vacancy on the
Board of any Fund that has a Rule 12b-1 plan of distribution. Most of the Morgan
Stanley Dean Witter Funds have such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of such services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; and reviewing the adequacy of the Fund's system of internal
controls.
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.
Finally, the Board of each Fund has formed an Insurance Committee to review
and monitor the insurance coverage maintained by the Fund.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL DEAN
WITTER FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the Morgan Stanley Dean Witter Funds
avoids the duplication of effort that would arise from having different groups
of individuals serving as Independent Trustees for each of the Funds or even of
sub-groups of Funds. They believe that having the same individuals serve as
Independent Trustees of all the Funds tends to increase their knowledge and
expertise regarding matters which affect the Fund complex generally and enhances
their ability to negotiate on behalf of each Fund with the Fund's service
providers. This arrangement also precludes the possibility of separate groups of
Independent Trustees arriving at conflicting decisions regarding operations and
management of the Funds and avoids the cost and confusion that would likely
ensue. Finally, having the same Independent Trustees serve on all Fund Boards
enhances the ability of each Fund to obtain, at modest cost to each separate
Fund, the services of Independent Trustees, and a Chairman of their Committees,
of the caliber, experience and business acumen of the individuals who serve as
Independent Trustees of the Morgan Stanley Dean Witter Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Fund intends to pay each Independent Trustee an annual fee of $800 plus
a per meeting fee of $50 for meetings of the Board of Trustees, the Independent
Trustees or Committees of the Board of Trustees attended by the Trustee (the
Fund intends to pay the Chairman of the Audit Committee an additional annual fee
of $750). If a Board meeting and a meeting of the Independent Trustees, or a
Committee meeting, or a meeting of the Independent Trustees and/or more than one
Committee meeting, take place on a single day, the Trustees are paid a single
meeting fee by the Fund. The Fund will also reimburse such Trustees for travel
and other out-of-pocket expenses incurred by them in connection with attending
such meetings. Trustees 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 for their services as Trustee. Mr. Haire
currently serves as Chairman of the Audit Committee. Payments will commence as
of the time the Fund begins to bear expenses, which, pursuant to undertakings by
the Investment Manager, will be on December 1, 1999.
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
11
<PAGE>
committee meetings as were held by the other Morgan Stanley Dean Witter Funds
during the calendar year ended December 31, 1997, 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................................................. $1,600
Edwin J. Garn................................................. 1,600
John R. Haire................................................. 3,550
Wayne E. Hedien............................................... 1,600
Dr. Manuel H. Johnson......................................... 1,600
Michael E. Nugent............................................. 1,600
John L. Schroeder............................................. 1,600
</TABLE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1997 for services
to the 84 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, 1997.
Mr. Haire serves as Chairman of the Audit Committee of each Morgan Stanley Dean
Witter Fund and each TCW/DW Fund, and prior to June 1, 1998, also served as
Chairman of Independent Directors or Trustees of those Funds. 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
Morgan Stanley Dean Witter Money Market Funds. Mr. Hedien's term as Director or
Trustee of each Morgan Stanley Dean Witter Fund commenced on September 1, 1997.
CASH COMPENSATION FROM DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
FOR SERVICE AS
CHAIRMAN OF FOR SERVICE AS TOTAL CASH
COMMITTEES OF CHAIRMAN OF COMPENSATION
FOR SERVICE AS INDEPENDENT COMMITTEES OF PAID FOR
DIRECTOR OR DIRECTORS/ INDEPENDENT SERVICES TO
TRUSTEE AND FOR SERVICE AS TRUSTEES AND TRUSTEES 84 MORGAN
COMMITTEE MEMBER TRUSTEE AND AUDIT COMMITTEES AND AUDIT STANLEY DEAN
OF 84 MORGAN COMMITTEE MEMBER OF 84 MORGAN COMMITTEES WITTER FUNDS
STANLEY DEAN OF 14 TCW/DW STANLEY 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.............. $133,602 -- -- -- $133,602
Edwin J. Garn.............. 149,702 -- -- -- 149,702
John R. Haire.............. 149,702 $ 73,725 $157,463 $ 25,350 406,240
Wayne E. Hedien............ 39,010 -- -- -- 39,010
Dr. Manuel H. Johnson...... 145,702 71,125 -- -- 216,827
Michael E. Nugent.......... 149,702 73,725 -- -- 223,427
John L. Schroeder.......... 149,702 73,725 -- -- 223,427
</TABLE>
As of the date of this Statement of Additional Information, 57 of the Morgan
Stanley Dean Witter Funds, not including the Fund, have adopted a retirement
program under which an Independent Trustee who retires after serving for at
least five years (or such lesser period as may be determined by the Board) as an
Independent Director or Trustee of any Morgan Stanley Dean Witter Fund that has
adopted the retirement program (each such Fund referred to as an "Adopting Fund"
and each such Trustee referred to as an "Eligible Trustee") is entitled to
retirement payments upon reaching the eligible retirement age (normally, after
attaining age 72). Annual payments are based upon length of service. Currently,
upon retirement, each Eligible Trustee is entitled to receive from the Adopting
Fund, commencing as of his or her retirement date and continuing for the
remainder of his or her life, an annual retirement benefit (the "Regular
Benefit") equal to 29.41% of his or her Eligible Compensation plus 0.4901667% of
such Eligible Compensation for each full month of service as an Independent
Director or Trustee of any Adopting Fund in excess of five years up to a maximum
of 58.82% after ten years of service. The foregoing
12
<PAGE>
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 Morgan Stanley Dean Witter Funds (not
including the Fund) for the year ended December 31, 1997, and the estimated
retirement benefits for the Fund's Independent Trustees, to commence upon their
retirement, from the 57 Morgan Stanley Dean Witter Funds as of December 31,
1997.
RETIREMENT BENEFITS FROM ALL MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
ESTIMATED
ANNUAL
RETIREMENT BENEFITS
ESTIMATED BENEFITS UPON
CREDITED YEARS ESTIMATED ACCRUED AS RETIREMENT
OF SERVICE AT PERCENTAGE OF EXPENSES FROM ALL
RETIREMENT ELIGIBLE BY ALL ADOPTING ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUNDS FUNDS(2)
- --------------------------------------------- --------------------- ----------------- ---------------- -------------
<S> <C> <C> <C> <C>
Michael Bozic................................ 10 58.82% $ 20,499 $ 55,026
Edwin J. Garn................................ 10 58.82 30,878 55,026
John R. Haire................................ 10 58.82 (19,823)(3) 132,002
Wayne E. Hedien.............................. 9 50.00 0 46,772
Dr. Manuel H. Johnson........................ 10 58.82 12,832 55,026
Michael E. Nugent............................ 10 58.82 22,546 55,026
John L. Schroeder............................ 8 49.02 39,350 46,123
</TABLE>
- ------------
(1) An Eligible Trustee may elect alternate payments of his or her retirement
benefits based upon the combined life expectancy of such Eligible Trustee
and his or her spouse on the date of such Eligible Trustee's retirement.
The amount estimated to be payable under this method, through the remainder
of the later of the lives of such Eligible Trustee and spouse, will be the
actuarial equivalent of the Regular Benefit. In addition, the Eligible
Trustee may elect that the surviving spouse's periodic payment of benefits
will be equal to either 50% or 100% of the previous periodic amount, an
election that, respectively, increases or decreases the previous periodic
amount so that the resulting payments will be the actuarial equivalent of
the Regular Benefit.
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1)
above.
(3) This number reflects the extension of Mr. Haire's term until May 1, 1999.
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's officers
and Trustees as a group was less than 1 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;
13
<PAGE>
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.
- MORGAN STANLEY 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.
- MORGAN STANLEY 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.
- MORGAN STANLEY DEAN WITTER CAPITAL GROWTH SECURITIES seeks to provide
long-term capital growth by investing principally in common stocks.
- MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND--"BEST IDEAS"
PORTFOLIO seeks long-term capital growth and invests primarily in the
common stocks of U.S. and non-U.S. companies included in the "Best Ideas"
subgroup of "Global Investing: The Competitive Edge," a research
compilation assembled and maintained by Morgan Stanley Dean Witter Equity
Research.
- MORGAN STANLEY 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.
- MORGAN STANLEY 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.
14
<PAGE>
- MORGAN STANLEY 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.
- MORGAN STANLEY 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.
- MORGAN STANLEY 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.
- MORGAN STANLEY DEAN WITTER GROWTH FUND seeks long-term growth of capital
by investing primarily in common stocks and securities convertible into
common stocks issued by domestic and foreign companies.
- MORGAN STANLEY DEAN WITTER HEALTH SCIENCE TRUST seeks capital appreciation
by investing in securities of companies in the health sciences industry
throughout the world.
- MORGAN STANLEY 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.
- MORGAN STANLEY DEAN WITTER INCOME BUILDER FUND seeks reasonable income
with growth of capital as a secondary objective by investing in a
diversified portfolio of income-producing common stocks and preferred
stocks and in securities convertible into common stock.
- MORGAN STANLEY 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.
- MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES seeks high
current income by investing primarily in intermediate term, investment
grade fixed-income securities.
- MORGAN STANLEY 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.
- MORGAN STANLEY 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.
- MORGAN STANLEY 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.
- MORGAN STANLEY DEAN WITTER JAPAN FUND seeks long-term capital appreciation
by investing primarily in securities issued by issuers located in Japan.
- MORGAN STANLEY 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.
- MORGAN STANLEY DEAN WITTER MID-CAP DIVIDEND GROWTH SECURITIES seeks total
return by investing principally in equity securities of companies whose
market capitalization falls within the range of companies comprising the
Standard & Poor's MidCap 400 Index.
15
<PAGE>
- MORGAN STANLEY DEAN WITTER MID-CAP GROWTH PORTFOLIO seeks long-term
capital growth by investing principally in equity securities of "mid-cap"
companies.
- MORGAN STANLEY 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.
- MORGAN STANLEY 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.
- MORGAN STANLEY 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.
- MORGAN STANLEY 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.
- MORGAN STANLEY 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.
- MORGAN STANLEY 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.
- MORGAN STANLEY 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
16
<PAGE>
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
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. During the fiscal period ended
September 30, 1998, neither Portfolio of the Fund entered into repurchase
agreements in an amount exceeding 5% of each Portfolio's respective net assets.
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. During the fiscal
period ended September 30, 1998, neither Portfolio of the Fund lost any of its
portfolio 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
17
<PAGE>
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. During the fiscal period ended September
30, 1998, neither Portfolio of the Fund purchased when-issued, delayed delivery
or forward commitment securities.
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
recognized 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.
During the fiscal period ended September 30, 1998, neither Portfolio of the Fund
purchased securities on a when, as or if issued basis.
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
18
<PAGE>
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.
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
19
<PAGE>
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).
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
counter-
20
<PAGE>
parts. 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 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.
21
<PAGE>
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
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
22
<PAGE>
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 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
23
<PAGE>
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 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
24
<PAGE>
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.
COVERED CALL WRITING. Certain funds are 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
25
<PAGE>
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.
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
26
<PAGE>
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.
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
27
<PAGE>
(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.
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
28
<PAGE>
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 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.
29
<PAGE>
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 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
30
<PAGE>
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. 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
31
<PAGE>
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.
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.
32
<PAGE>
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.
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 200% in any one year. A 200% turnover rate would occur, for
example, if 200% of the securities held in a Portfolio
33
<PAGE>
of the Fund (excluding all securities whose maturities at acquisition were one
year or less) were sold and replaced within one year. During the fiscal period
ended September 30, 1998, the portfolio turnover rate for the Domestic Portfolio
was 227% and the portfolio turnover rate for the International Portfolio was
135% due to initial structuring of the Portfolios.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
In addition to the investment restrictions enumerated in the Prospectus, the
investment restrictions listed below have been adopted by the Fund as
fundamental policies 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.
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.
34
<PAGE>
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
- --------------------------------------------------------------------------------
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 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. During the fiscal period ended September 30, 1998, the Portfolios paid no
brokerage commissions.
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 DWR. The Portfolios will limit their transactions with DWR 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
DWR only when the price available from DWR 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 DWR, Morgan Stanley & Co. Incorporated ("MS & Co.") and
other brokers and dealers that are affiliates of the Investment Manager. In
order for an affiliated broker or dealer to effect portfolio transactions for
any of the Portfolios, the commissions, fees or other remuneration received by
the affiliated broker or dealer must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
an exchange during a comparable period of time. This standard would allow the
affiliated broker or dealer to receive no more than the remuneration which would
be expected to be received by an unaffiliated broker in a commensurate
arm's-length transaction. Furthermore, the Trustees of the Fund, including a
majority of the Trustees who are not
35
<PAGE>
"interested" Trustees, have adopted procedures which are reasonably designed to
provide that any commissions, fees or other remuneration paid to an affiliated
broker or dealer are consistent with the foregoing standard.
THE DISTRIBUTOR
- --------------------------------------------------------------------------------
As discussed in the Prospectus, shares of each Portfolio of the Fund are
distributed by Morgan Stanley Dean Witter Distributors Inc. (the "Distributor").
The Distributor has entered into a selected dealer agreement with DWR, which
through its own sales organization sells shares of the Fund. In addition, the
Distributor may enter into selected dealer agreements with other selected
broker-dealers. The Distributor, a Delaware corporation, is a wholly-owned
subsidiary of MSDW. 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 had an initial term ending April 30, 1998 and will
remain in effect from year to year thereafter if approved by the Board. At their
meeting held on April 30, 1998, the Trustees, including a majority of the
Independent Trustees, approved the continuance of the Distribution Agreement
until April 30, 1999.
The Distributor bears all expenses it may incur in providing services under
the Distribution Agreement. Such expenses include the payment of commissions for
sales of the Fund's shares and incentive compensation to Morgan Stanley Dean
Witter Financial Advisors and other selected broker-dealers. 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 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, with respect to the Domestic Portfolio
and International Portfolio, it and/or DWR received (a) approximately $32,706
and $3,623, respectively, in contingent deferred sales charges from Class B for
the fiscal period ended September 30, 1998, (b) approximately $1,153 and $79,
respectively, in contingent deferred sales charges from Class C for the fiscal
period ended September 30, 1998, (c) $0 in contingent deferred sales charges
from Class A for the fiscal period ended September 30, 1998, and (d)
approximately $19,992 and $5,645, respectively, in front-end sales charges from
Class A for the fiscal year period September 30, 1998, none of which was
retained by the Distributor.
The Distributor has informed the Fund that the entire fee payable by Class A
and a portion of the fees payable by each of Class B and Class C each year
pursuant to the Plan equal to 0.25% of such Class's
36
<PAGE>
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. Class B shares of the Domestic Portfolio and
the International Portfolio of the Fund accrued amounts payable to the
Distributor under the Plan of $187,858 and $23,647 (net of amounts waived),
respectively during the fiscal period ended September 30, 1998. These amounts
are equal to 0.92% of the average daily net assets of Class B of the Domestic
Portfolio and 0.94% of the average daily net assets of the International
Portfolio for the fiscal period. During the fiscal period ended September 30,
1998, Class A shares of the Domestic Portfolio and the International Portfolio
accrued payments under the plan amounting to $3,033 and $866 (net of amounts
waived), respectively which amounts were equal to 0.22% and 0.25%, respectively,
of the average daily net assets of the Domestic Portfolio and the International
Portfolio for the fiscal period. With respect to Class C shares, the Domestic
Portfolio and the International Portfolio accrued payments under the Plan
amounting to $12,913 and $765 (net of amounts waived), respectively during the
fiscal period ended September 30, 1998 which amounts were equal to 0.92% of the
average daily net assets.
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 Financial Advisors by
paying them, from proceeds of the front-end sales charge, commissions for the
sale of Class A shares, currently a gross sales credit of up to 5.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.25% of the current value of
the respective accounts for which they are the Financial Advisors or dealers of
record in all cases. On orders of $1 million or more (for which no sales charge
was paid) or net asset value purchases by 401(k) plans or other
employer-sponsored 401(k) and other plans qualified under Section 401(a) of the
Internal Revenue Code ("Qualified Retirement Plans") for which Morgan Stanley
Dean Witter Trust FSB ("MSDW Trust") serves as Trustee or DWR's Retirement Plan
Services serves as recordkeeper pursuant to a written Recordkeeping Services
Agreement, the Investment Manager compensates DWR's Financial Advisors by paying
them, from its own funds, a gross sales credit of 1.0% of the amount sold.
With respect to Class B shares, DWR compensates its Financial Advisors by
paying them, from its own funds, commissions for the sale of Class B shares,
currently a gross sales credit of up to 5.0% of the amount sold (except as
provided in the following sentence) and an annual residual commission, currently
a residual of up to 0.25% of the current value (not including reinvested
dividends or distributions) of the amount sold in all cases. In the case of
Class B shares purchased on or after July 28, 1997 by Qualified Retirement Plans
for which MSDW Trust serves as Trustee or DWR's Retirement Plan Services serves
as recordkeeper, pursuant to a written Recordkeeping Services Agreement, DWR
compensates its Financial Advisors by paying them, from its own funds, a gross
sales credit of 3.0% of the amount sold.
With respect to Class C shares, DWR compensates its Financial Advisors by
paying them, from its own funds, commissions for the sale of Class C shares,
currently a gross sales credit of up to 1.0% of the amount sold and an annual
residual commission, currently a residual of up to 1.0% of the current value of
the respective accounts for which they are the Financial Advisors of record.
37
<PAGE>
With respect to Class D shares other than shares held by participants in the
MSDW Advisors mutual fund asset allocation program, the Investment Manager
compensates DWR's Financial Advisors by paying them, from its own funds,
commissions for the sale of Class D shares, currently a gross sales credit of up
to 1.0% of the amount sold. There is a chargeback of 100% of the amount paid if
the Class D shares are redeemed in the first year and a chargeback of 50% of the
amount paid if the Class D shares are redeemed in the second year after
purchase. The Investment Manager also compensates DWR's Financial Advisors by
paying them, from its own funds, an annual residual commission, currently a
residual of up to 0.10% of the current value of the respective accounts for
which they are the Financial Advisors of record (not including accounts of
participants in the MSDW Advisors mutual fund asset allocation program).
The gross sales credit is a charge which reflects commissions paid by DWR to
its Financial Advisors and DWR's Fund-associated distribution-related expenses,
including sales compensation, and overhead and other 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 Morgan Stanley Dean Witter Financial
Advisors and other selected broker-dealer representatives, such amounts shall be
determined at the beginning of each calendar quarter by the Trustees, including
a majority of the Independent 12b-1 Trustees. Expenses representing the service
fee (for Class A) or a gross sales credit or a residual to Morgan Stanley Dean
Witter Financial Advisors and other selected broker-dealer representatives (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.
Each Class of the Domestic Portfolio paid 100% of the amounts accrued under
the Plan with respect to that Class for the fiscal period ended September 30,
1998 to the Distributor. The Distributor and DWR
38
<PAGE>
estimate that they have spent, pursuant to the Plan, $1,945,848 on behalf of
Class B of the Domestic Portfolio since the inception of the Plan. It is
estimated that this amount was spent in approximately the following ways: (i)
24.27% ($472,218)--advertising and promotional expenses; (ii) 3.98% ($77,441)--
printing of prospectuses for distribution to other than current shareholders;
and (iii) 71.75% ($1,396,189)--other expenses, including the gross sales credit
and the carrying charge, of which 3.35% ($46,821) represents carrying charges,
39.53% ($551,892) represents commission credits to DWR branch offices and other
selected broker-dealers for payments of commissions to Morgan Stanley Dean
Witter Financial Advisors and other selected broker-dealer representatives, and
57.12% ($797,476) represents overhead and other branch office
distribution-related expenses. The amounts accrued by Class A and Class C for
distribution during the fiscal period ended September 30, 1998 were for expenses
which relate to compensation of sales personnel and associated overhead
expenses.
Each Class of the International Portfolio paid 100% of the amounts accrued
under the Plan with respect to that Class for the fiscal period ended September
30, 1998 to the Distributor. The Distributor and DWR estimate that they have
spent, pursuant to the Plan, $688,273 on behalf of Class B of the International
Portfolio since the inception of the Plan. It is estimated that this amount was
spent in approximately the following ways: (i) 63.28% ($435,518)--advertising
and promotional expenses; (ii)13.28% ($91,387)--printing of prospectuses for
distribution to other than current shareholders; and (iii) 23.44%
($161,367)--other expenses, including the gross sales credit and the carrying
charge, of which 3.19% ($5,153) represents carrying charges, 39.59% ($63,892)
represents commission credits to DWR branch offices and other selected
broker-dealers for payments of commissions to Morgan Stanley Dean Witter
Financial Advisors and other selected broker-dealer representatives, and 57.22%
($92,322) represents overhead and other branch office distribution-related
expenses. The amounts accrued by Class A and Class C for distribution during the
fiscal period ended September 30, 1998 were for expenses which relate to
compensation of sales personnel and associated overhead expenses.
In the case of Class B shares, at any given time, the expenses 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.
The Distributor has advised the Fund that in the case of Class B shares of the
Domestic and International Portfolio, the excess distribution expenses,
including the carrying charge designed to approximate the opportunity costs
incurred by DWR which arise from it having advanced monies without having
received the amount of any sales charges imposed at the time of sale of each
Portfolio's Class B shares, totalled $1,709,171 and $659,369, respectively, as
of September 30, 1998. Because there is no requirement under the Plan that the
Distributor be reimbursed for all distribution expenses with respect to Class B
shares or any requirement that the Plan be continued from year to year, this
excess amount does not constitute a liability of the Fund. Although there is no
legal obligation for the Fund to pay 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. 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,
MSDW Advisors, MSDW Services, DWR or certain of their employees may be deemed to
have such an interest as a result of benefits derived from the successful
operation of the Plan or as a result of receiving a portion of the amounts
expended thereunder by the Fund.
Under its terms, the Plan had an initial term ending April 30, 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. At their
meeting held on April 30, 1998, the Board of Trustees, including a majority of
the Independent 12b-1 Trustees, approved the continuation of the Plan for one
year until April 30, 1999. Prior to approving the continuation of the Plan, the
Trustees requested and received from the Distributor
39
<PAGE>
and reviewed all the information which they deemed necessary to arrive at an
informed determination. In making their determination to continue the Plan, the
Trustees considered: (1) the Fund's experience under the Plan and whether such
experience indicates that the Plan is operating as anticipated; (2) the benefits
the Fund had obtained, was obtaining and would be likely to obtain under the
Plan; and (3) what services had been provided and were continuing to be provided
under the Plan to the Fund and its shareholders. Based upon their review, the
Trustees of the Fund, including each of the Independent 12b-1 Trustees,
determined that continuation of the Plan would be in the best interest of the
Fund and would have a reasonable likelihood of continuing to benefit the Fund
and its shareholders. In the Trustees' quarterly review of the Plan, they will
consider its continued appropriateness and the level of compensation provided
therein.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of the
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 Morgan Stanley Dean Witter Funds that are
multiple class funds ("Morgan Stanley Dean Witter Multi-Class Funds") or shares
of other Morgan Stanley Dean Witter Funds sold with a front-end sales charge
40
<PAGE>
purchased at a price including a front-end sales charge having a current value
of $5,000, and purchases $20,000 of additional shares of the Fund, the sales
charge applicable to the $20,000 purchase would be 4.75% of the offering price.
The Distributor must be notified by the selected broker-dealer or the
shareholder at the time a purchase order is placed that the purchase qualifies
for the reduced charge under the Right of Accumulation. Similar notification
must be made in writing by the selected broker-dealer or shareholder when such
an order is placed by mail. The reduced sales charge will not be granted if: (a)
such notification is not furnished at the time of the order; or (b) a review of
the records of the Distributor or Morgan Stanley Dean Witter Trust FSB (the
"Transfer Agent") fails to confirm the investor's represented holdings.
LETTER OF INTENT. As discussed in the Prospectus, reduced sales charges are
available to investors who enter into a written Letter of Intent providing for
the purchase, within a thirteen-month period, of Class A shares of the Fund from
the Distributor or from a single Selected Broker-Dealer.
A Letter of Intent permits an investor to establish a total investment goal
to be achieved by any number of purchases over a thirteen-month period. Each
purchase of Class A shares made during the period will receive the reduced sales
commission applicable to the amount represented by the goal, as if it were a
single purchase. A number of shares equal in value to 5% of the dollar amount of
the Letter of Intent will be held in escrow by the Transfer Agent, in the name
of the shareholder. The initial purchase under a Letter of Intent must be equal
to at least 5% of the stated investment goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the investor is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and sales charges actually paid. Such payment may be
made directly to the Distributor or, if not paid, the Distributor is authorized
by the shareholder to liquidate a sufficient number of his or her escrowed
shares to obtain such difference.
If the goal is exceeded and purchases pass the next sales charge level, the
sales charge on the entire amount of the purchase that results in passing that
level and on subsequent purchases will be subject to further reduced sales
charges in the same manner as set forth above under "Right of Accumulation," but
there will be no retroactive reduction of sales charges on previous purchases.
For the purpose of determining whether the investor is entitled to a further
reduced sales charge applicable to purchases at or above a sales charge level
which exceeds the stated goal of a Letter of Intent, the cumulative current net
asset value of any shares owned by the investor in any other Morgan Stanley 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
Morgan Stanley 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
Morgan Stanley 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 the Fund
is less than the dollar amount of all payments by the shareholder for the
purchase of Class B
41
<PAGE>
shares during the preceding six years (or, in the case of shares held by certain
Qualified Retirement Plans, three years). However, no CDSC will be imposed to
the extent that the net asset value of the shares redeemed does not exceed: (a)
the current net asset value of shares purchased more than six years (or, in the
case of shares held by certain Qualified Retirement Plans, three years) prior to
the redemption, plus (b) the current net asset value of shares purchased through
reinvestment of dividends or distributions of the Fund or another Morgan Stanley
Dean Witter Fund (see "Shareholder Services-- Targeted Dividends"), plus (c) the
current net asset value of shares acquired in exchange for (i) shares of Morgan
Stanley Dean Witter front-end sales charge funds, or (ii) shares of other Morgan
Stanley 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 determining the applicability of the CDSC to each redemption, the amount
which represents an increase in the net asset value of the investor's shares
above the amount of the total payments for the purchase of shares within the
last six years (or, in the case of shares held by certain Qualified Retirement
Plans, three years) will be redeemed first. In the event the redemption amount
exceeds such increase in value, the next portion of the amount redeemed will be
the amount which represents the net asset value of the investor's shares
purchased more than six (three) years prior to the redemption and/or shares
purchased through reinvestment of dividends or distributions and/or shares
acquired in exchange for shares of Morgan Stanley Dean Witter front-end sales
charge funds, or for shares of other Morgan Stanley 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 Qualified Retirement 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>
The following table sets forth the rates of the CDSC applicable to Class B
shares of the Fund, purchased by Qualified Retirement Plans for which MSDW Trust
serves as Trustee or DWR's Retirement Plan Services serves as recordkeeper
pursuant to a written Recordkeeping Services Agreement.
<TABLE>
<CAPTION>
YEAR SINCE
PURCHASE CDSC AS A PERCENTAGE OF
PAYMENT MADE AMOUNT REDEEMED
- ------------------------------------------------------------------------------------------ --------------------------
<S> <C>
First..................................................................................... 2.0%
Second.................................................................................... 2.0%
Third..................................................................................... 1.0%
Fourth and thereafter..................................................................... None
</TABLE>
42
<PAGE>
In determining the rate of the CDSC, it will be assumed that a redemption is
made of shares held by the investor for the longest period of time within the
applicable six-year or three-year period. This will result in any such CDSC
being imposed at the lowest possible rate. The CDSC will be imposed, in
accordance with the table shown above, on any redemptions within six years (or,
in the case of shares held by certain Qualified Retirement Plans, three years)
of purchase which are in excess of these amounts and which redemptions do not
qualify for waiver of the CDSC, as described in the Prospectus.
LEVEL LOAD ALTERNATIVE--CLASS C SHARES
Class C shares are sold without a sales charge but are subject to a CDSC of
1.0% on most redemptions made within one year after purchase, except in the
circumstances discussed in the Prospectus.
NO LOAD ALTERNATIVE--CLASS D SHARES
Class D shares are offered without any sales charge on purchase or
redemption. Class D shares are offered only to those persons meeting the
qualifications set forth in the Prospectus.
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
Upon the purchase of shares of the Fund, a Shareholder Investment Account is
opened for the investor on the books of 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 has been and remains the Fund's policy and practice
that, if checks for dividends or distributions paid in cash remain uncashed, no
interest will accrue on amounts represented by such uncashed checks.
TARGETED DIVIDENDS.-SM- In states where it is legally permissible,
shareholders may also have all income dividends and capital gains distributions
automatically invested in shares of any Class of an open-end Morgan Stanley Dean
Witter Fund other than Morgan Stanley Dean Witter Fund of Funds or in another
Class or Portfolio of Morgan Stanley 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
Morgan Stanley 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 Morgan Stanley Dean Witter Fund the next business day. To participate
in the Targeted Dividends program, shareholders should contact their Morgan
Stanley Dean Witter Financial Advisor or other selected broker-dealer
representative or the Transfer Agent. Shareholders of the Fund must be share-
43
<PAGE>
holders of the selected Class of the Morgan Stanley 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 Morgan Stanley
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 Morgan Stanley Dean Witter money market fund, on a
semi-monthly, monthly or quarterly basis, to the Transfer Agent for investment
in shares of the Fund. Shares purchased through EasyInvest will be added to the
shareholder's existing account at the net asset value calculated the same
business day the transfer of funds is effected (subject to any applicable sales
charges). Shares of Morgan Stanley Dean Witter money market funds redeemed in
connection with EasyInvest are redeemed on the business day preceding the
transfer of funds. For further information or to subscribe to EasyInvest,
shareholders should contact their Morgan Stanley Dean Witter Financial Advisor
or other selected broker-dealer representative or the Transfer Agent.
INVESTMENT OF DIVIDENDS OR DISTRIBUTIONS RECEIVED IN CASH. As discussed in
the Prospectus, any shareholder who receives a cash payment representing a
dividend or distribution may invest such dividend or distribution in shares of
the applicable Class at 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 whose
shares of Morgan Stanley Dean Witter Funds have an aggregate value of $10,000 or
more. Shares of any Fund from which redemptions will be made pursuant to the
Plan must have a value of $1,000 or more (referred to as a "SWP Fund"). The
required share values are determined on the date the shareholder establishes the
Withdrawal Plan. The Withdrawal Plan provides for monthly, quarterly,
semi-annual or annual payments in any amount not less than $25, or in any whole
percentage of the value of the SWP Funds' shares, on an annualized basis. Any
applicable Contingent Deferred Sales Charge ("CDSC") will be imposed on shares
redeemed under the Withdrawal Plan (see "Purchase of Fund Shares"), except that
the CDSC, if any, will be waived on redemptions under the Withdrawal Plan of up
to 12% annually of the value of each SWP Fund account, based on the share values
next determined after the shareholder establishes the Withdrawal Plan.
Redemptions for which this CDSC waiver policy applies may be in amounts up to 1%
per month, 3% per quarter, 6% semi-annually or 12% annually. Under this CDSC
waiver policy, amount withdrawn each period will be paid by first redeeming
shares not subject to a CDSC because the shares were purchased by the
reinvestment of dividends or capital gains distributions, the CDSC period has
elapsed or some other waiver of the CDSC applies. If shares subject to a CDSC
must be redeemed, shares held for the longest period of time will be redeemed
first and continuing with shares held the next longest period of time until
shares held the shortest period of time are redeemed. Any shareholder
participating in the Withdrawal Plan will have sufficient shares redeemed from
his or her account so that the proceeds (net of any applicable CDSC) to the
shareholder will be the designated monthly, quarterly, semi-annual or annual
amount.
A shareholder may suspend or terminate participation in the Withdrawal Plan
at any time. A shareholder who has suspended participation may resume payments
under the Withdrawal Plan, without requiring a new determination of the account
value for the 12% CDSC waiver. The Withdrawal Plan may be terminated or revised
at any time by the Fund.
Prior to adding an additional SWP Fund to an existing Withdrawal Plan, the
required $10,000/$1,000 share values must be met, to be calculated on the date
the shareholder adds the additional SWP Fund. However, the addition of a new SWP
Fund will not change the account value for the 12% CDSC waiver for the SWP Funds
already participating in the Withdrawal Plan.
44
<PAGE>
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, quarter, or semi-annual or annual period and normally a check
for the proceeds will be mailed by the Transfer Agent, or amounts credited to a
shareholder's Dean Witter Reynolds Inc. or other selected broker-dealer
brokerage account, or amounts deposited electronically into the shareholder's
bank account via the Automated Clearing House, within five business days after
the date of redemption.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted.
Each withdrawal constitutes a redemption of shares and any gain or loss
realized must be recognized for federal income tax purposes. Although the
shareholder may make additional investments of $2,500 or more under the
Withdrawal Plan, withdrawals made concurrently with purchases of additional
shares may be inadvisable because of sales charges which may be applicable to
purchases or redemptions of shares (see "Purchase of Fund Shares" in the
Prospectus).
Any shareholder who wishes to have payments under the Withdrawal Plan made
to a third party or sent to an address other than the one listed on the account
must send complete written instructions to the Transfer Agent to enroll in the
Withdrawal Plan. The shareholder's signature on such instructions must be
guaranteed by an eligible guarantor acceptable to the Transfer Agent
(shareholders should contact the Transfer Agent for a determination as to
whether a particular institution is such an eligible guarantor). A shareholder
may, at any time, change the amount and interval of withdrawal payments through
his or her Morgan Stanley Dean Witter Financial Advisor or other selected
broker-dealer representative or by written notification to the Transfer Agent.
In addition, the party and/or the address to which checks are mailed may be
changed by written notification to the Transfer Agent, with signature guarantees
required in the manner described above. The shareholder may also terminate the
Withdrawal Plan at any time by written notice to the Transfer Agent. In the
event of such termination, the account will be continued as a regular
Shareholder Investment Account. The shareholder may also redeem all or part of
the shares held in the Withdrawal Plan account (see "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 Morgan Stanley 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 Morgan Stanley 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: Morgan Stanley Dean
Witter Short-Term U.S. Treasury Trust, Morgan Stanley Dean Witter Limited Term
Municipal Trust, Morgan Stanley Dean Witter Short-Term Bond Fund, and five
Morgan Stanley Dean Witter Funds which are money market funds (the foregoing
nine funds are hereinafter referred to as the "Exchange Funds"). Class A shares
may also be exchanged for shares of Morgan Stanley Dean Witter Multi-State
Municipal Series Trust and Morgan Stanley Dean Witter Hawaii Municipal Trust,
which are Morgan Stanley Dean Witter Funds sold with a
45
<PAGE>
front-end sales charge ("FSC Funds"). Exchanges may be made after the shares of
the Fund acquired by purchase (not by exchange or dividend reinvestment) have
been held for thirty days. There is no waiting period for exchanges of shares
acquired by exchange or dividend reinvestment. An exchange 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.)
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 Morgan Stanley
Dean Witter Multi-Class Fund are exchanged for shares of an Exchange Fund, the
exchange is executed at no charge to the shareholder, without the imposition of
the CDSC at the time of the exchange. During the period of time the shareholder
remains in the Exchange Fund (calculated from the last day of the month in which
the Exchange Fund shares were acquired), the holding period or "year since
purchase payment made" is frozen. When shares are redeemed out of the Exchange
Fund, they will be subject to a CDSC which would be based upon the period of
time the shareholder held shares in a Morgan Stanley Dean Witter Multi-Class
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 Morgan Stanley Dean Witter Multi-Class 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 Morgan Stanley Dean Witter
Multi-Class Fund are reacquired. A CDSC is imposed only upon an ultimate
redemption, based upon the time (calculated as described above) the shareholder
was invested in a Morgan Stanley Dean Witter Multi-Class 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 Morgan Stanley Dean Witter Multi-Class
Fund are exchanged for shares of a Morgan Stanley Dean Witter Multi-Class 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 Morgan Stanley 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
46
<PAGE>
treated as Free Shares, and the amount of the purchase payments for the non-Free
Shares of the fund exchanged into will be equal to the lesser of (a) the
purchase payments for, or (b) the current net asset value of, the exchanged
non-Free Shares. If an exchange between funds would result in exchange of only
part of a particular block of non-Free Shares, then shares equal to any
appreciation in the value of the block (up to the amount of the exchange) will
be treated as Free Shares and exchanged first, and the purchase payment for that
block will be allocated on a pro rata basis between the non-Free Shares of that
block to be retained and the non-Free Shares to be exchanged. The prorated
amount of such purchase payment attributable to the retained non-Free Shares
will remain as the purchase payment for such shares, and the amount of purchase
payment for the exchanged non-Free Shares will be equal to the lesser of (a) the
prorated amount of the purchase payment for, or (b) the current net asset value
of, those exchanged non-Free Shares. Based upon the procedures described in the
Prospectus under the caption "Purchase of 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 Morgan Stanley Dean
Witter Liquid Asset Fund Inc., Morgan Stanley Dean Witter Tax-Free Daily Income
Trust, Morgan Stanley Dean Witter California Tax-Free Daily Income Trust and
Morgan Stanley Dean Witter New York Municipal Money Market Trust, 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 Morgan Stanley 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 Morgan Stanley Dean Witter Special Value Fund. The
minimum initial investment for the Exchange Privilege account of each Class of
all other Morgan Stanley 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 Morgan Stanley 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 Morgan Stanley
Dean Witter funds for which shares of the Fund have been exchanged, upon such
notice as may be required by applicable regulatory agencies (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
47
<PAGE>
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 Morgan Stanley Dean Witter Financial Advisor or other
selected broker-dealer representative or the Transfer Agent.
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
48
<PAGE>
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 has been and remains the Fund's policy and practice that, if checks for
redemption proceeds remain uncashed, no interest will accrue on amounts
represented by such uncashed checks. Shareholders maintaining margin accounts
with DWR or another selected broker-dealer are referred to their Morgan Stanley
Dean Witter Financial Advisor or other selected broker-dealer representative
regarding restrictions on redemption of shares of the Fund pledged in the margin
account.
TRANSFERS OF SHARES. In the event a shareholder requests a transfer of any
shares to a new registration, such shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the CDSC or free of such charge (and with regard to the length
of time shares subject to the charge have been held), any transfer involving
less than all 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. In addition, the Fund intends to distribute to its
shareholders each calendar year a sufficient amount of ordinary income and
capital gains to avoid the imposition of a 4% excise tax. Shareholders will
normally have to pay federal income taxes, and any state 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.
49
<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. The Taxpayer Relief Act reduces the maximum
tax rate on long-term capital gains from 28% to 20%. 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 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. 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.
Any Underlying Fund that invests in foreign securities may be subject to
foreign withholding taxes from foreign countries with respect to its dividend
and interest income and capital gains. Because a Portfolio of the Fund is
considered to be invested in the Underlying Fund as a registered investment
company and not the actual foreign portfolio securities of the Underlying Fund,
a Portfolio of the Fund may not elect to treat foreign income or withholding
taxes imposed on an Underlying Fund for United States federal income taxes as
paid directly by the respective Portfolio's shareholders.
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 advisors 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
50
<PAGE>
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.
For periods of less than one year, each Portfolio of the Fund quotes its
total return on a non-annualized basis. Accordingly, 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 assumed that all dividends and distributions
are reinvested. The formula for computing aggregate total return involves a
percentage obtained by dividing the ending value by the initial $1,000
investment and subtracting 1 from the result. The ending redeemable value is
reduced by any CDSC at the end of the period. Based on the foregoing
calculations, the total returns for the Domestic Portfolio for the period
November 25, 1997 (commencement of operations) through September 30, 1998 were
- -7.46%, -7.67%, -3.80%, and -2.13% for Class A, Class B, Class C and Class D,
respectively. The total returns for the International Portfolio for the same
period were -13.17%, -13.38%, -9.77%, and -8.26% for Class A, Class B, Class C
and Class D, respectively. During this period, the Investment Manager assumed
certain expenses of each Portfolio of the Fund. Had each Portfolio borne these
expenses for the stated period, the total returns for Class A, Class B, Class C
and Class D of the Domestic Portfolio would have been -8.51%, -8.43%, -4.60% and
- -3.23%, respectively; the total returns of Class A, Class B, Class C and Class D
of the International Portfolio would have been -16.14%, -17.50%, -14.06% and
- -13.81%, respectively.
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.
Based on this calculation, the aggregate total returns for each Class of the
Domestic Portfolio for the period November 25, 1997 through September 30, 1998
were -2.33%, -2.83%, -2.83% and -2.13% for Class A, Class B, Class C and Class
D, respectively. The total returns for the International Portfolio for the same
period were -8.36%, -8.87%, -8.87% and -8.26% for Class A, Class B, Class C and
Class D, respectively.
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 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.
51
<PAGE>
Investments in the Domestic Portfolio of $10,000, $50,000 and $100,000 in
each Class at inception of the Fund would have declined to the following amounts
at September 30, 1998:
<TABLE>
<CAPTION>
INVESTMENT AT INCEPTION OF:
INCEPTION ----------------------------------------
CLASS DATE $10,000 $50,000 $100,000
- --------------------------------------------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Class A...................................... 11/25/97 $ 9,254 $ 46,882 $ 94,740
Class B...................................... 11/25/97 9,717 48,585 97,170
Class C...................................... 11/25/97 9,717 48,585 97,170
Class D...................................... 11/25/97 9,787 48,935 97,870
</TABLE>
Investments in the International Portfolio of $10,000, $50,000 and $100,000
in each Class at inception of the Fund would have declined to the following
amounts at September 30, 1998:
<TABLE>
<CAPTION>
INVESTMENT AT INCEPTION OF:
INCEPTION ----------------------------------------
CLASS DATE $10,000 $50,000 $100,000
- --------------------------------------------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Class A...................................... 11/25/97 $ 8,683 $ 43,987 $ 88,891
Class B...................................... 11/25/97 9,113 45,565 91,130
Class C...................................... 11/25/97 9,113 45,565 91,130
Class D...................................... 11/25/97 9,174 45,870 91,740
</TABLE>
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.
52
<PAGE>
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.
Morgan Stanley Dean Witter Trust FSB ("MSDW Trust"), Harborside Financial
Center, Plaza Two, Jersey City, New Jersey 07311 is the Transfer Agent of the
Fund's shares and Dividend Disbursing Agent for payment of dividends and
distributions on Fund shares and Agent for shareholders under various investment
plans described herein. MSDW Trust is an affiliate of Morgan Stanley Dean Witter
Advisors Inc., the Fund's Investment Manager, and of Dean Witter Distributors
Inc., the Fund's Distributor. As Transfer Agent and Dividend Disbursing Agent,
MSDW Trust's responsibilities include maintaining shareholder accounts,
disbursing cash dividends and reinvesting dividends, processing account
registration changes, handling purchase and redemption transactions, mailing
prospectuses and reports, mailing and tabulating proxies, processing share
certificate transactions, and maintaining shareholder records and lists. For
these services MSDW Trust receives a per shareholder account fee.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP serves as the independent accountants of the
Fund. The independent accountants are responsible for auditing the annual
financial statements of the Fund.
REPORTS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports showing
the Fund's portfolio and other information. An annual report containing
financial statements audited by independent accountants will be sent to
shareholders each year.
The Fund's fiscal year ends on 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 at September 30, 1998 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
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
53
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS - INTERNATIONAL
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (84.8%)
75,405 Morgan Stanley Dean Witter European Growth Fund Inc...................................... $1,401,782
27,120 Morgan Stanley Dean Witter International SmallCap Fund................................... 193,365
191,230 Morgan Stanley Dean Witter Japan Fund.................................................... 1,135,906
75,202 Morgan Stanley Dean Witter Pacific Growth Fund Inc....................................... 619,661
----------
TOTAL COMMON STOCKS
(IDENTIFIED COST $3,714,266)............................................................. 3,350,714
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
- ---------
<C> <S> <C>
SHORT-TERM INVESTMENT (a) (13.9%)
U.S. GOVERNMENT AGENCY
$ 550 Federal Home Loan Mortgage Corp. 5.38% due 10/01/98 (AMORTIZED COST $550,000)............ 550,000
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $4,264,266) (b)............................................................ 98.7 % 3,900,714
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES.............................................. 1.3 52,884
------ -----------
NET ASSETS.................................................................................. 100.0 % $ 3,953,598
------ -----------
------ -----------
</TABLE>
- ---------------------
(a) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate unrealized depreciation is $363,552.
SEE NOTES TO FINANCIAL STATEMENTS
54
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS - DOMESTIC
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (80.2%)
87,474 Morgan Stanley Dean Witter American Value Fund.......................................... $ 2,797,404
194,491 Morgan Stanley Dean Witter Capital Growth Securities.................................... 2,804,559
226,195 Morgan Stanley Dean Witter Competitive Edge Fund
"Best Ideas" Portfolio................................................................ 1,997,301
134,631 Morgan Stanley Dean Witter Convertible Securities Trust................................. 1,674,804
47,832 Morgan Stanley Dean Witter Developing Growth Securities................................. 977,683
58,097 Morgan Stanley Dean Witter Dividend Growth Securities Inc............................... 3,202,908
79,941 Morgan Stanley Dean Witter Health Sciences Trust........................................ 1,217,502
88,375 Morgan Stanley Dean Witter Information Fund............................................. 1,118,824
87,333 Morgan Stanley Dean Witter Market Leader Trust.......................................... 887,303
123,822 Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities........................... 947,240
19,017 Morgan Stanley Dean Witter Mid-Cap Growth Fund.......................................... 274,419
75,392 Morgan Stanley Dean Witter Natural Resource Development Securities Inc.................. 825,538
142 Morgan Stanley Dean Witter Short-Term Bond Fund......................................... 1,368
53,241 Morgan Stanley Dean Witter Special Value Fund........................................... 557,438
81,368 Morgan Stanley Dean Witter Value-Added Market Series/Equity Portfolio................... 2,710,368
-----------
TOTAL COMMON STOCKS
(IDENTIFIED COST $24,016,031)........................................................... 21,994,659
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
- ---------
<C> <S> <C>
SHORT-TERM INVESTMENT (a) (8.8%)
U.S. GOVERNMENT AGENCY
$ 2,400 Federal Home Loan Mortgage Corp. 5.38% due 10/01/98 (AMORTIZED COST $2,400,000)......... 2,400,000
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $26,416,031) (b).......................................................... 89.0 % 24,394,659
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................................. 11.0 3,016,560
------ ------------
NET ASSETS................................................................................. 100.0 % $ 27,411,219
------ ------------
------ ------------
</TABLE>
- ---------------------
(a) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $32,433 and the
aggregate gross unrealized depreciation is $2,053,805, resulting in net
unrealized depreciation of $2,021,372.
SEE NOTES TO FINANCIAL STATEMENTS
55
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
INTERNATIONAL DOMESTIC
- -----------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments in securities, at value
(identified cost $4,264,266 and
$26,416,031, respectively)............ $ 3,900,714 $ 24,394,659
Cash.................................... 51,780 2,299,185
Receivable for:
Investments sold.................... -- 3,481,605
Shares of beneficial interest
sold.............................. 3,999 48,237
Receivable from affiliate............... 24,408 33,862
Prepaid expenses and other assets....... 15,690 15,204
Deferred organizational expenses........ 20,757 20,757
------------ ------------
TOTAL ASSETS....................... 4,017,348 30,293,509
------------ ------------
LIABILITIES:
Payable for:
Investments purchased............... -- 2,788,481
Shares of beneficial interest
repurchased....................... -- 2,449
Plan of distribution fee............ 2,894 21,539
Organizational expenses................. 20,775 20,922
Accrued expenses and other payables..... 40,081 48,899
------------ ------------
TOTAL LIABILITIES.................. 63,750 2,882,290
------------ ------------
NET ASSETS......................... $ 3,953,598 $ 27,411,219
------------ ------------
------------ ------------
COMPOSITION OF NET ASSETS:
Paid-in-capital......................... $ 4,395,562 $ 28,613,323
Net unrealized depreciation............. (363,552) (2,021,372)
Undistributed net investment income..... -- 255,368
Undistributed net realized gain
(loss)................................ (78,412) 563,900
------------ ------------
NET ASSETS......................... $ 3,953,598 $ 27,411,219
------------ ------------
------------ ------------
CLASS A SHARES:
Net Assets.............................. $595,651 $1,358,728
Shares Outstanding (UNLIMITED
AUTHORIZED, $.01 PAR VALUE)........... 65,604 139,781
NET ASSET VALUE PER SHARE.......... $9.08 $9.72
----- -----
----- -----
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF
NET ASSET VALUE)........................ $9.58 $10.26
----- ------
----- ------
CLASS B SHARES:
Net Assets.............................. $3,241,122 $24,337,990
Shares Outstanding (UNLIMITED
AUTHORIZED, $.01 PAR VALUE)........... 359,031 2,517,533
NET ASSET VALUE PER SHARE.......... $9.03 $9.67
----- -----
----- -----
CLASS C SHARES:
Net Assets.............................. $105,343 $1,702,258
Shares Outstanding (UNLIMITED
AUTHORIZED, $.01 PAR VALUE)........... 11,670 176,082
NET ASSET VALUE PER SHARE.......... $9.03 $9.67
----- -----
----- -----
CLASS D SHARES:
Net Assets.............................. $11,482 $12,243
Shares Outstanding (UNLIMITED
AUTHORIZED, $.01 PAR VALUE)........... 1,263 1,257
NET ASSET VALUE PER SHARE.......... $9.09 $9.74
----- -----
----- -----
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
56
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE PERIOD NOVEMBER 25, 1997* THROUGH SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
INTERNATIONAL DOMESTIC
- ------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME:
INCOME
Dividends............................... $ 14,488 $ 496,466
Interest................................ 22,949 65,705
------------ -------------
TOTAL INCOME....................... 37,437 562,171
------------ -------------
EXPENSES
Plan of distribution fee (Class A
shares)............................... 877 3,390
Plan of distribution fee (Class B
shares)............................... 25,269 203,895
Plan of distribution fee (Class C
shares)............................... 835 14,042
Registration fees....................... 105,129 112,276
Professional fees....................... 41,217 40,868
Shareholder reports and notices......... 14,965 14,933
Transfer agent fees and expenses........ 4,452 21,901
Custodian fees.......................... 3,824 12,294
Organizational expenses................. 4,243 4,243
Other................................... 2,027 2,035
------------ -------------
TOTAL EXPENSES..................... 202,838 429,877
Less: amounts waived/reimbursed......... (177,560) (226,074)
------------ -------------
NET EXPENSES....................... 25,278 203,803
------------ -------------
NET INVESTMENT INCOME.............. 12,159 358,368
------------ -------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on
investments........................... (78,412) 453,719
Capital gain distributions received..... -- 110,181
------------ -------------
NET REALIZED GAIN (LOSS)........... (78,412) 563,900
Net unrealized depreciation............. (363,552) (2,021,372)
------------ -------------
NET LOSS........................... (441,964) (1,457,472)
------------ -------------
NET DECREASE............................ $ (429,805) $ (1,099,104)
------------ -------------
------------ -------------
</TABLE>
- ---------------------
* Commencement of operations.
SEE NOTES TO FINANCIAL STATEMENTS
57
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
NOVEMBER 25, 1997*
THROUGH
SEPTEMBER 30, 1998
------------------------------
INTERNATIONAL DOMESTIC
- -------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................... $ 12,159 $ 358,368
Net realized gain (loss)................ (78,412) 563,900
Net unrealized depreciation............. (363,552) (2,021,372)
------------- -------------
NET DECREASE....................... (429,805) (1,099,104)
------------- -------------
DIVIDENDS TO SHAREHOLDERS FROM NET
INVESTMENT INCOME:
Class A shares.......................... (444) (7,838)
Class B shares.......................... (18,372) (89,059)
Class C shares.......................... (670) (6,042)
Class D shares.......................... (114) (61)
------------- -------------
TOTAL DIVIDENDS.................... (19,600) (103,000)
------------- -------------
Net increase from transactions in shares
of beneficial interest................ 4,353,003 28,563,323
------------- -------------
NET INCREASE....................... 3,903,598 27,361,219
NET ASSETS:
Beginning of period..................... 50,000 50,000
------------- -------------
END OF PERIOD
(INCLUDING UNDISTRIBUTED NET
INVESTMENT INCOME OF $0 AND
$255,368, RESPECTIVELY)............. $ 3,953,598 $ 27,411,219
------------- -------------
------------- -------------
</TABLE>
- ---------------------
* Commencement of operations.
SEE NOTES TO FINANCIAL STATEMENTS
58
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Fund of Funds (the "Fund"), formerly Dean Witter Fund
of Funds, is registered under the Investment Company Act of 1940, as amended
(the "Act"), as a non-diversified, open-end management investment company. The
Fund will invest in Class D shares of other open-end management investment
companies that are either members of the Morgan Stanley Dean Witter Family of
Funds or managed by an investment advisor that is an affiliate of Morgan Stanley
Dean Witter Advisors Inc. (the "Investment Manager"), formerly Dean Witter
InterCapital Inc., (individually, an "Underlying Fund" and collectively, the
"Underlying Funds").
The Fund, which consists of two separate portfolios ("Portfolios"),
International and Domestic, was organized as a Massachusetts business trust on
July 3, 1997 and had no operations other than those relating to organizational
matters and the issuance of 10,000 shares of beneficial interest for $100,000 to
the Investment Manager to effect the Fund's initial capitalization. Each
Portfolio issued 5,000 shares (1,250 per class) of beneficial interest for
$50,000 ($12,500 per class). The Fund commenced operations on November 25, 1997.
The investment objectives of each Portfolio are as follows:
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
International Seeks long-term capital appreciation by
investing in a selection of Underlying Funds
which invest their assets primarily in the
international equity markets.
Domestic Seeks 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.
</TABLE>
Each Portfolio offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
59
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1998, CONTINUED
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) Investments are valued at the net asset value
per share of each Underlying Fund determined as of the close of the New York
Stock Exchange on valuation date; and (2) short-term debt securities having a
maturity date of more than sixty days at time of purchase are valued on a
mark-to-market basis until sixty days prior to maturity and thereafter at
amortized cost based on their value on the 61st day. Short-term debt securities
having a maturity date of sixty days or less at the time of purchase are valued
at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
60
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1998, CONTINUED
F. ORGANIZATIONAL AND PREPAID EXPENSES -- The Investment Manager incurred the
organizational expenses of the Fund in the amount of approximately $50,000
($25,000 per Portfolio) which will be reimbursed for the full amount thereof,
exclusive of amounts waived of $8,486 ($4,243 per Portfolio). Such expenses have
been deferred and are being amortized on the straight-line method over a period
not to exceed five years from the commencement of operations. The Investment
Manager incurred additional expenses on behalf of the Fund consisting primarily
of registration fees in the amount of approximately $200,000 ($100,000 per
Portfolio) which were to be reimbursed for the full amount thereof. Such
expenses were deferred and fully amortized as of September 30, 1998. The
Investment Manager waived all such reimbursements.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays no investment
management fee. 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-Advisors or Advisor 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, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
The Investment Manager has agreed to assume all operating expenses (except for
plan of distribution fees) until such time as the respective Portfolio has $50
million in net assets or November 30, 1999, whichever occurs first. For the
period November 25, 1997 (commencement of operations) through December 31, 1997,
the Investment Manager also assumed the plan of distribution fees of the Fund.
At September 30, 1998, included in the Statement of Assets and Liabilities of
each Portfolio is a receivable from an affiliate which represents expense
reimbursements due to the Fund.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A --
61
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1998, CONTINUED
up to 0.25% of the average daily net assets of Class A; (ii) Class B -- 1.0% of
the average daily net assets of Class B; and (iii) Class C -- up to 1.0% of the
average daily net assets of Class C. In the case of Class A shares, amounts paid
under the Plan are paid to the Distributor for services provided. In the case of
Class B and Class C shares, amounts paid under the Plan are paid to the
Distributor for (1) services provided and the expenses borne by it and others in
the distribution of the shares of these Classes, including the payment of
commissions for sales of these Classes and incentive compensation to, and
expenses of, Morgan Stanley Dean Witter Financial Advisors and others who engage
in or support distribution of the shares or who service shareholder accounts,
including overhead and telephone expenses; (2) printing and distribution of
prospectuses and reports used in connection with the offering of these shares to
other than current shareholders; and (3) preparation, printing and distribution
of sales literature and advertising materials. In addition, the Distributor may
utilize fees paid pursuant to the Plan, in the case of Class B shares, to
compensate Dean Witter Reynolds Inc. ("DWR"), an affiliate of the Investment
Manager and Distributor, and other selected broker-dealers for their opportunity
costs in advancing such amounts, which compensation would be in the form of a
carrying charge on any unreimbursed expenses.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised International and Domestic that such excess amounts,
including carrying charges, totaled $659,369 and $1,709,171, respectively at
September 30, 1998.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the period ended September 30, 1998, the distribution fee was
accrued for International and Domestic Class A shares and Class C shares at the
annual rate of 0.25% and 0.92%, and 0.22% and 0.92%, respectively.
62
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1998, CONTINUED
The Distributor has informed International and Domestic that for the period
ended September 30, 1998, it received contingent deferred sales charges from
certain redemptions of the Fund's shares as follows: Class B shares -- $3,623
and $32,706, respectively; and Class C shares -- $79 and $1,153, respectively;
and received $5,645 and $19,992, respectively, in front-end sales charges from
sales of the Fund's Class A shares. The respective shareholders pay such charges
which are not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the period ended September 30, 1998 aggregated
$7,801,534 and $4,008,856, respectively, for International and $79,506,625 and
$55,944,313, respectively, for Domestic.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Funds transfer agent. At September 30, 1998, Domestic's
receivable for investments sold and payable for investments purchased
represented unsettled trades with the transfer agent of $3,481,605 and
$2,788,481, respectively.
63
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1998, CONTINUED
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD NOVEMBER 25, 1997*
THROUGH SEPTEMBER 30, 1998
---------------------------------------------------------
INTERNATIONAL DOMESTIC
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
CLASS A
Sold............................................................. 67,277 $ 699,140 195,957 $ 1,986,330
Reinvestment of dividends........................................ 45 444 724 7,325
Redeemed......................................................... (2,968) (29,427) (58,150) (627,694)
----------- -------------- ----------- ------------
Net increase - Class A........................................... 64,354 670,157 138,531 1,365,961
----------- -------------- ----------- ------------
CLASS B
Sold............................................................. 397,997 3,985,486 2,941,410 29,850,040
Reinvestment of dividends........................................ 1,770 17,435 7,843 79,375
Redeemed......................................................... (41,986) (424,650) (432,970) (4,524,346)
----------- -------------- ----------- ------------
Net increase - Class B........................................... 357,781 3,578,271 2,516,283 25,405,069
----------- -------------- ----------- ------------
CLASS C
Sold............................................................. 11,806 118,681 208,500 2,140,619
Reinvestment of dividends........................................ 68 670 564 5,713
Redeemed......................................................... (1,454) (14,900) (34,232) (354,110)
----------- -------------- ----------- ------------
Net increase - Class C........................................... 10,420 104,451 174,832 1,792,222
----------- -------------- ----------- ------------
CLASS D
Sold............................................................. 1 10 1 10
Reinvestment of dividends........................................ 12 114 6 61
----------- -------------- ----------- ------------
Net increase - Class D........................................... 13 124 7 71
----------- -------------- ----------- ------------
Net increase in Fund............................................. 432,568 $ 4,353,003 2,829,653 $ 28,563,323
----------- -------------- ----------- ------------
----------- -------------- ----------- ------------
</TABLE>
- ---------------------
* Commencement of operations.
6. FEDERAL INCOME TAX STATUS
Capital losses incurred after October 31 ("post-October" losses) within the
taxable year are deemed to arise on the first business day of the Portfolio's
next taxable year. The International Portfolio incurred and will elect to defer
net capital losses of approximately $4,000 during fiscal 1998.
As of September 30, 1998, the International Portfolio had temporary book/tax
differences attributable to post-October losses and capital loss deferrals on
wash sales and permanent book/tax differences relating to an excise tax
distribution. To reflect reclassifications arising from the permanent
differences, paid-in-capital was charged and undistributed net investment income
was credited $7,441.
64
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE PERIOD NOVEMBER 25, 1997* THROUGH SEPTEMBER 30, 1998**
--------------------------------------------------------------------------------------------------
INTERNATIONAL DOMESTIC
---------------------------------------------- ----------------------------------------------
CLASS A CLASS B CLASS C CLASS D CLASS A CLASS B CLASS C CLASS D
SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning
of period................. $10.00 $10.00 $10.00 $10.00 $10.00 $ 10.00 $10.00 $10.00
------- ------- ------- ------- ------- ------- ------- -------
Net investment income...... 0.05 0.03 0.04 0.14 0.21 0.14 0.13 0.22
Net realized and unrealized
loss...................... (0.88) (0.91) (0.92) (0.96) (0.44) (0.42) (0.41) (0.43)
------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations................ (0.83) (0.88) (0.88) (0.82) (0.23) (0.28) (0.28) (0.21)
------- ------- ------- ------- ------- ------- ------- -------
Less dividends from net
investment income......... (0.09) (0.09) (0.09) (0.09) (0.05) (0.05) (0.05) (0.05)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period.................... $ 9.08 $ 9.03 $ 9.03 $ 9.09 $ 9.72 $ 9.67 $ 9.67 $ 9.74
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
TOTAL INVESTMENT
RETURN(1)+................. (8.36)% (8.87)% (8.87)% (8.26)% (2.33)% (2.83)% (2.83)% (2.13)%
RATIOS TO AVERAGE
NET ASSETS(2)(6):
Expenses(5)................ 0.25%(3) 0.94%(3) 0.92%(3) 0.00%(3) 0.22%(4) 0.92%(4) 0.92%(4) 0.00%(4)
Net investment income...... 1.01%(3) 0.32%(3) 0.34%(3) 1.26%(3) 2.21%(4) 1.51%(4) 1.51%(4) 2.43%(4)
SUPPLEMENTAL DATA:
Net assets, end of period,
in thousands.............. $596 $3,241 $105 $11 $1,359 $24,338 $1,702 $12
Portfolio turnover
rate(1)................... 135% 135% 135% 135% 227% 227% 227% 227%
</TABLE>
- ---------------------
* Commencement of operations.
** The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) If the Fund had borne all of its expenses that were reimbursed or waived by
the Investment Manager, the annualized expense and net investment loss
ratios would have been 6.16% and (4.90)%, respectively, for Class A shares,
6.91% and (5.65)%, respectively, for Class B shares, 6.91% and (5.65)%,
respectively, for Class C shares and 5.91% and (4.65)%, respectively, for
Class D shares.
(4) If the Fund had borne all of its expenses that were reimbursed or waived by
the Investment Manager, the annualized expense and net investment income
ratios would have been 1.15% and 1.28%, respectively, for Class A shares,
1.90% and 0.53%, respectively, for Class B shares, 1.90% and 0.53%,
respectively, for Class C shares and 0.90% and 1.53%, respectively, for
Class D shares.
(5) Does not include any expenses incurred as a result of investment in the
Underlying Funds.
(6) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
65
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER FUND OF FUNDS
In our opinion, the accompanying statement of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the International Portfolio and the
Domestic Portfolio (constituting Morgan Stanley Dean Witter Fund of Funds,
formerly Dean Witter Fund of Funds, hereafter referred to as the "Fund") at
September 30, 1998, and the results of its operations, the changes in its net
assets and the financial highlights for the period November 25, 1997
(commencement of operations) through September 30, 1998, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at September 30, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
NOVEMBER 5, 1998
1998 FEDERAL TAX NOTICE (UNAUDITED)
During the fiscal year ended September 30, 1998, 11.98% of the
income dividends paid by Morgan Stanley Dean Witter Fund of Funds
-- Domestic Portfolio qualified for the dividends received
deduction available to corporations.
66
<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.
67
<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.
</TABLE>
68
<PAGE>
<TABLE>
<S> <C>
CCC Fixed-income securities rated "CCC" have a current identifiable vulnerability to
default, and are dependent upon favorable business, financial and economic
conditions to meet timely payments of interest and repayments of principal. In the
event of adverse business, financial or economic conditions, they are not likely to
have the capacity to pay interest and repay principal.
CC The rating "CC" is typically applied to fixed-income securities subordinated to
senior debt which is assigned an actual or implied "CCC" rating.
C The rating "C" is typically applied to fixed-income securities subordinated to
senior debt which is assigned an actual or implied "CCC-" rating.
CI The rating "CI" is reserved for fixed-income securities on which no interest is
being paid.
NR Indicates that no rating has been requested, that there is insufficient information
on which to base a rating or that Standard & Poor's does not rate a particular type
of obligation as a matter of policy.
Fixed-income securities rated "BB," "B," "CCC," "CC" and "C" are regarded as having
predominantly speculative characteristics with respect to capacity to pay interest
and repay principal. "BB" indicates the least degree of speculation and "C" the
highest degree of speculation. While such fixed-income securities will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or minus (-): The rating from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing with the major ratings
categories.
</TABLE>
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.
<TABLE>
<S> <C>
A-1 indicates that the degree of safety regarding timely payment is very strong.
A-2 indicates capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated "A-1."
A-3 indicates a satisfactory capacity for timely payment. Obligations carrying this
designation are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
</TABLE>
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.
69
<PAGE>
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.
<TABLE>
<S> <C>
AAA rated bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA rated bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal, while very strong, is
somewhat less than for AAA rated securities or more subject to possible change over
the term of the issue.
A rated bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be strong,
but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB rated bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered to
be adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to weaken this ability than bonds with higher ratings.
BB rated bonds are considered speculative and of low investment grade. The obligor's
ability to pay interest and repay principal is not strong and is considered likely
to be affected over time by adverse economic changes.
B rated bonds are considered highly speculative. Bonds in this class are lightly
protected as to the obligor's ability to pay interest over the life of the issue
and repay principal when due.
CCC rated bonds may have certain identifiable characteristics which, if not remedied,
could lead to the possibility of default in either principal or interest payments.
CC rated bonds are minimally protected. Default in payment of interest and/or
principal seems probable.
C rated bonds are in imminent default in payment of interest or principal.
</TABLE>
SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes. Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis on the existence of
liquidity necessary to meet the issuer's obligations in a timely manner. Fitch's
short-term ratings are as follows:
<TABLE>
<S> <C>
Fitch-1+ (Exceptionally Strong Credit Quality) Issues assigned this rating are regarded
as having the strongest degree of assurance for timely payment.
Fitch-1 (Very Strong Credit Quality) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than issues rated Fitch-1+.
Fitch-2 (Good Credit Quality) Issues assigned this rating have a satisfactory degree of
assurance for timely payment but the margin of safety is not as great as the two
higher categories.
</TABLE>
70
<PAGE>
<TABLE>
<S> <C>
Fitch-3 (Fair Credit Quality) Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse change is likely to cause these securities to be rated below
investment grade.
Fitch-S (Weak Credit Quality) Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are vulnerable
to near term adverse changes in financial and economic conditions.
D (Default) Issues assigned this rating are in actual or imminent payment default.
LOC This symbol LOC indicates that the rating is based on a letter of credit issued
by a commercial bank.
</TABLE>
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).
<TABLE>
<CAPTION>
RATING SCALE DEFINITION
<S> <C>
AAA Highest credit quality. The risk factors are negligible, being only slightly more than risk-free
U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest, but may vary slightly from
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.
</TABLE>
71
<PAGE>
<TABLE>
<S> <C>
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.
</TABLE>
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.
<TABLE>
<S> <C>
A. CATEGORY 1: HIGH GRADE
Duff 1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
minor.
Duff- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
B. CATEGORY 2: GOOD GRADE
Duff 2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.
C. CATEGORY 3: SATISFACTORY GRADE
Duff 3 Satisfactory liquidity and other protection factors qualify issue as to
investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
D. CATEGORY 4: NON-INVESTMENT GRADE
Duff 4 Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and
market access may be subject to a high degree of variation.
E. CATEGORY 5: DEFAULT
Duff 5 Issuer failed to meet scheduled principal and/or interest payments.
</TABLE>
72
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
PART C OTHER INFORMATION
Item 24. Financial Statements and Exhibits
a) FINANCIAL STATEMENTS
(1) Financial statements and schedules, included
in Prospectus (Part A):
Page in
Prospectus
----------
Financial Highlights for the period November 25, 1997
(commencement of operations) through September 30, 1998 ... 9
(2) Financial statements included in the Statement of
Additional Information (Part B):
Page in SAI
-----------
Portfolio of Investments at September 30, 1998 ............ 54
Statement of Assets and Liabilities at
September 30, 1998 ........................................ 56
Statement of Operations for the period November 25, 1997
through September 30, 1998 ................................ 57
Statement of Changes in Net Assets for the period
November 25, 1997 (commencement of operations) through
September 30, 1998 ........................................ 58
Notes to Financial Statements at September 30, 1998 ....... 59
Financial Highlights for the period November 25, 1997
(commencement of operations) through September 30, 1998 ... 65
(3) Financial statements included in Part C:
None
b) EXHIBITS
1. Form of Amendment to the Declaration of Trust of the Registrant.
5. Form of Amended Investment Management Agreement between the
Registrant and Morgan Stanley Dean Witter Advisors Inc.
6(a). Form of Amended Distribution Agreement between Registrant and
Morgan Stanley Dean Witter Distributors Inc.
<PAGE>
6(b). Form of Selected Dealer Agreement.
8. Form of Amended and Restated Transfer Agency and Service Agreement
between the Registration and Morgan Stanley Dean Witter Trust FSB.
9. Form of Amended Services Agreement between Morgan Stanley Dean
Witter Advisors Inc. and Morgan Stanley Dean Witter Services
Company Inc.
11. Consent of Independent Accountants.
16. Schedules for Computation of Performance Quotations.
18. Amended Multiple-Class Plan pursuant to Rule 18f-3.
27. Financial Data Schedules as of September 30, 1998.
- --------------------------------------------------------------------------------
All other exhibits were previously filed via EDGAR and are hereby
incorporated by reference.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
Item 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
(1) (2)
Number of Record Holders
Title of Class at October 31, 1998
-------------- ------------------------
<S> <C>
Class A (domestic) 58
Class B (domestic) 2159
Class C (domestic) 159
Class D (domestic) 2
Class A (international) 24
Class B (international) 413
Class C (international) 31
Class D (international) 2
</TABLE>
Item 27. Indemnification
Pursuant to Section 5.3 of the Registrant's Declaration of Trust and under
Section 4.8 of the Registrant's By-laws, the indemnification of the Registrant's
trustees, officers, employees and agents is permitted if it is determined that
they acted under the belief that their actions were in or not opposed to the
best interest of the Registrant, and, with respect to any criminal proceeding,
they had reasonable cause to believe their conduct was not unlawful. In
addition, indemnification is permitted only if it is determined that the actions
in question did not render them liable by reason of willful misfeasance, bad
faith or gross negligence in the performance of their duties or by reason of
reckless disregard of their obligations and duties to the Registrant. Trustees,
officers, employees and agents will be indemnified for the expense of litigation
if it is
2
<PAGE>
determined that they are entitled to indemnification against any liability
established in such litigation. The Registrant may also advance money for
these expenses provided that they give their undertakings to repay the
Registrant unless their conduct is later determined to permit indemnification.
Pursuant to Section 5.2 of the Registrant's Declaration of Trust and
paragraph 8 of the Registrant's Investment Management Agreement, neither the
Investment Manager nor any trustee, officer, employee or agent of the Registrant
shall be liable for any action or failure to act, except in the case of bad
faith, willful misfeasance, gross negligence or reckless disregard of duties to
the Registrant.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a trustee, officer, or controlling person of the Registrant
in connection with the successful defense of any action, suit or proceeding) is
asserted against the Registrant by such trustee, officer or controlling person
in connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act, and will
be governed by the final adjudication of such issue.
The Registrant hereby undertakes that it will apply the indemnification
provision of its by-laws in a manner consistent with Release 11330 of the
Securities and Exchange Commission under the Investment Company Act of 1940, so
long as the interpretation of Sections 17(h) and 17(i) of such Act remains in
effect.
Registrant, in conjunction with the Investment Manager, Registrant's
Trustees, and other registered investment management companies managed by the
Investment Manager, maintains insurance on behalf of any person who is or was a
Trustee, officer, employee, or agent of Registrant, or who is or was serving at
the request of Registrant as a trustee, director, officer, employee or agent of
another trust or corporation, against any liability asserted against him and
incurred by him or arising out of his position. However, in no event will
Registrant maintain insurance to indemnify any such person for any act for which
Registrant itself is not permitted to indemnify him.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
See "The Fund and Its Management" in the Prospectus regarding the business
of the investment advisor. The following information is given regarding
officers of Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors"). MSDW
Advisors is a wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. The
principal address of the Morgan Stanley Dean Witter Funds is Two World Trade
Center, New York, New York 10048.
The term "Morgan Stanley Dean Witter Funds" refers to the following
registered investment companies:
3
<PAGE>
CLOSED-END INVESTMENT COMPANIES
(1) Dean Witter Government Income Trust
(2) High Income Advantage Trust
(3) High Income Advantage Trust II
(4) High Income Advantage Trust III
(5) InterCapital California Insured Municipal Income Trust
(6) InterCapital California Quality Municipal Securities
(7) InterCapital Income Securities Inc.
(8) InterCapital Insured California Municipal Securities
(9) InterCapital Insured Municipal Bond Trust
(10) InterCapital Insured Municipal Income Trust
(11) InterCapital Insured Municipal Securities
(12) InterCapital Insured Municipal Trust
(13) InterCapital New York Quality Municipal Securities
(14) InterCapital Quality Municipal Income Trust
(15) InterCapital Quality Municipal Investment Trust
(16) InterCapital Quality Municipal Securities
(17) Municipal Income Opportunities Trust
(18) Municipal Income Opportunities Trust II
(19) Municipal Income Opportunities Trust III
(20) Municipal Income Trust
(21) Municipal Income Trust II
(22) Municipal Income Trust III
(23) Municipal Premium Income Trust
(24) Morgan Stanley Dean Witter Prime Income Trust
OPEN-END INVESTMENT COMPANIES
(1) Active Assets California Tax-Free Trust
(2) Active Assets Government Securities Trust
(3) Active Assets Money Trust
(4) Active Assets Tax-Free Trust
(5) Morgan Stanley Dean Witter American Value Fund
(6) Morgan Stanley Dean Witter Balanced Growth Fund
(7) Morgan Stanley Dean Witter Balanced Income Fund
(8) Morgan Stanley Dean Witter California Tax-Free Daily Income Trust
(9) Morgan Stanley Dean Witter California Tax-Free Income Fund
(10) Morgan Stanley Dean Witter Capital Appreciation Fund
(11) Morgan Stanley Dean Witter Capital Growth Securities
(12) Morgan Stanley Dean Witter Competitive Edge Fund, "BEST IDEAS PORTFOLIO"
(13) Morgan Stanley Dean Witter Convertible Securities Trust
(14) Morgan Stanley Dean Witter Developing Growth Securities Trust
(15) Morgan Stanley Dean Witter Diversified Income Trust
(16) Morgan Stanley Dean Witter Dividend Growth Securities Inc.
(17) Morgan Stanley Dean Witter Equity Fund
(18) Morgan Stanley Dean Witter European Growth Fund Inc.
(19) Morgan Stanley Dean Witter Federal Securities Trust
(20) Morgan Stanley Dean Witter Financial Services Trust
(21) Morgan Stanley Dean Witter Fund of Funds
(22) Morgan Stanley Dean Witter Global Dividend Growth Securities
(23) Morgan Stanley Dean Witter Global Short-Term Income Fund Inc.
(24) Morgan Stanley Dean Witter Global Utilities Fund
4
<PAGE>
(25) Morgan Stanley Dean Witter Growth Fund
(26) Morgan Stanley Dean Witter Hawaii Municipal Trust
(27) Morgan Stanley Dean Witter Health Sciences Trust
(28) Morgan Stanley Dean Witter High Yield Securities Inc.
(29) Morgan Stanley Dean Witter Income Builder Fund
(30) Morgan Stanley Dean Witter Information Fund
(31) Morgan Stanley Dean Witter Intermediate Income Securities
(32) Morgan Stanley Dean Witter International SmallCap Fund
(33) Morgan Stanley Dean Witter Japan Fund
(34) Morgan Stanley Dean Witter Limited Term Municipal Trust
(35) Morgan Stanley Dean Witter Liquid Asset Fund Inc.
(36) Morgan Stanley Dean Witter Market Leader Trust
(37) Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities
(38) Morgan Stanley Dean Witter Mid-Cap Growth Fund
(39) Morgan Stanley Dean Witter Multi-State Municipal Series Trust
(40) Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
(41) Morgan Stanley Dean Witter New York Municipal Money Market Trust
(42) Morgan Stanley Dean Witter New York Tax-Free Income Fund
(43) Morgan Stanley Dean Witter Pacific Growth Fund Inc.
(44) Morgan Stanley Dean Witter Precious Metals and Minerals Trust
(45) Morgan Stanley Dean Witter S&P 500 Index Fund
(46) Morgan Stanley Dean Witter S&P 500 Select Fund
(47) Morgan Stanley Dean Witter Select Dimensions Investment Series
(48) Morgan Stanley Dean Witter Select Municipal Reinvestment Fund
(49) Morgan Stanley Dean Witter Short-Term Bond Fund
(50) Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
(51) Morgan Stanley Dean Witter Special Value Fund
(52) Morgan Stanley Dean Witter Strategist Fund
(53) Morgan Stanley Dean Witter Tax-Exempt Securities Trust
(54) Morgan Stanley Dean Witter Tax-Free Daily Income Trust
(55) Morgan Stanley Dean Witter U.S. Government Money Market Trust
(56) Morgan Stanley Dean Witter U.S. Government Securities Trust
(57) Morgan Stanley Dean Witter Utilities Fund
(58) Morgan Stanley Dean Witter Value-Added Market Series
(59) Morgan Stanley Dean Witter Value Fund
(60) Morgan Stanley Dean Witter Variable Investment Series
(61) Morgan Stanley Dean Witter World Wide Income Trust
The term "TCW/DW Funds" refers to the following registered investment
companies:
OPEN-END INVESTMENT COMPANIES
(1) TCW/DW Emerging Markets Opportunities Trust
(2) TCW/DW Global Telecom Trust
(3) TCW/DW Income and Growth Fund
(4) TCW/DW Latin American Growth Fund
(5) TCW/DW Mid-Cap Equity Trust
(6) TCW/DW North American Government Income Trust
(7) TCW/DW Small Cap Growth Fund
(8) TCW/DW Total Return Trust
5
<PAGE>
CLOSED-END INVESTMENT COMPANIES
(1) TCW/DW Term Trust 2000
(2) TCW/DW Term Trust 2002
(3) TCW/DW Term Trust 2003
<TABLE>
<CAPTION>
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION WITH
MORGAN STANLEY DEAN OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
WITTER ADVISORS INC. AND NATURE OF CONNECTION
- -------------------- -----------------------------------------------------
<S> <C>
Mitchell M. Merin Chairman and Director of Morgan Stanley Dean Witter
President, Chief Distributors Inc. ("MSDW Distributors") and Morgan
Executive Officer and Stanley Dean Witter Trust FSB ("MSDW Trust"); President,
Director Chief Executive Officer and Director of Morgan Stanley
Dean Witter Services Company Inc. ("MSDW Services");
Executive Vice President and Director of Dean Witter
Reynolds Inc. ("DWR"); Director of various Morgan Stanley
Dean Witter & Co. ("MSDW") subsidiaries.
Thomas C. Schneider Executive Vice President and Chief Strategic and
Executive Vice Administrative Officer of MSDW; Executive Vice
President and Chief President and Chief Financial Officer of MSDW Services;
Financial Officer Director of DWR and MSDW.
Robert M. Scanlan President, Chief Operating Officer and Director of MSDW
President, Chief Services, Executive Vice President of MSDW Distributors;
Operating Officer Executive Vice President and Director of MSDW Trust;
and Director Vice President of the Morgan Stanley Dean Witter Funds
and the TCW/DW Funds.
Joseph J. McAlinden Vice President of the Morgan Stanley Dean Witter Funds
Executive Vice President and Director of MSDW Trust.
and Chief Investment
Officer
Ronald E. Robison Executive Vice President and Chief Administrative Officer
Executive Vice President of MSDW Services; Vice President of the Morgan Stanley
and Chief Administrative Dean Witter Funds.
Officer
Edward C. Oelsner, III
Executive Vice President
Barry Fink Assistant Secretary of DWR; Senior Vice President,
Senior Vice President, Secretary, General Counsel and Director of MSDW
Secretary, General Services; Senior Vice President, Assistant Secretary and
Counsel and Director Assistant General Counsel of MSDW Distributors; Vice
President, Secretary and General Counsel of the Morgan
Stanley Dean Witter Funds and the TCW/DW Funds.
Peter M. Avelar Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
6
<PAGE>
<CAPTION>
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION WITH
MORGAN STANLEY DEAN OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
WITTER ADVISORS INC. AND NATURE OF CONNECTION
- -------------------- -----------------------------------------------------
<S> <C>
Mark Bavoso Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Rosalie Clough
Senior Vice President
and Director of Marketing
Richard Felegy
Senior Vice President
Edward F. Gaylor Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Robert S. Giambrone Senior Vice President of MSDW Services, MSDW
Senior Vice President Distributors and MSDW Trust and Director of MSDW Trust;
Vice President of the Morgan Stanley Dean Witter Funds
and the TCW/DW Funds.
Rajesh Gupta Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Kenton J. Hinchliffe Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Kevin Hurley Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Margaret Iannuzzi
Senior Vice President
Jenny Beth Jones Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
John B. Kemp, III President of MSDW Distributors.
Senior Vice President
Anita H. Kolleeny Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Jonathan R. Page Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Ira N. Ross Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Guy G. Rutherfurd, Jr. Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
7
<PAGE>
<CAPTION>
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION WITH
MORGAN STANLEY DEAN OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
WITTER ADVISORS INC. AND NATURE OF CONNECTION
- -------------------- -----------------------------------------------------
<S> <C>
Rochelle G. Siegel Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Jayne M. Stevlingson Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Paul D. Vance Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Elizabeth A. Vetell
Senior Vice President
and Director of Shareholder
Communication
James F. Willison Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Ronald J. Worobel Vice President of various Morgan Stanley Dean Witter
Senior Vice President Funds.
Douglas Brown
First Vice President
Thomas F. Caloia First Vice President and Assistant Treasurer of
First Vice President MSDW Services; Assistant Treasurer of MSDW
and Assistant Distributors; Treasurer and Chief Financial Officer of the
Treasurer Morgan Stanley Dean Witter Funds and the TCW/DW
Funds.
Thomas Chronert
First Vice President
Marilyn K. Cranney Assistant Secretary of DWR; First Vice President and
First Vice President Assistant Secretary of MSDW Services; Assistant
and Assistant Secretary Secretary of the Morgan Stanley Dean Witter Funds and
the TCW/DW Funds.
Salvatore DeSteno Vice President of MSDW Services.
First Vice President
Michael Interrante First Vice President and Controller of MSDW Services;
First Vice President Assistant Treasurer of MSDW Distributors; First Vice
and Controller President and Treasurer of MSDW Trust.
David Johnson
First Vice President
8
<PAGE>
<CAPTION>
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION WITH
MORGAN STANLEY DEAN OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
WITTER ADVISORS INC. AND NATURE OF CONNECTION
- -------------------- -----------------------------------------------------
<S> <C>
Stanley Kapica
First Vice President
Carsten Otto First Vice President and Assistant Secretary of MSDW
First Vice President Services; Assistant Secretary of the Morgan Stanley
and Assistant Secretary Dean Witter Funds and the TCW/DW Funds.
Robert Zimmerman
First Vice President
Dale Albright
Vice President
Joan G. Allman
Vice President
Andrew Arbenz
Vice President
Joseph Arcieri Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
Nancy Belza
Vice President
Maurice Bendrihem
Vice President and
Assistant Controller
Frank Bruttomesso Vice President and Assistant Secretary of MSDW
Vice President and Services; Assistant Secretary of the Morgan Stanley Dean
Assistant Secretary Witter Funds and the TCW/DW Funds.
Ronald Caldwell
Vice President
Joseph Cardwell
Vice President
Philip Casparius
Vice President
David Dineen Vice President of Dean Witter Global Asset Allocation
Vice President Fund.
9
<PAGE>
<CAPTION>
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION WITH
MORGAN STANLEY DEAN OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
WITTER ADVISORS INC. AND NATURE OF CONNECTION
- -------------------- -----------------------------------------------------
<S> <C>
Bruce Dunn
Vice President
Michael Durbin
Vice President
Sheila Finnerty
Vice President
Jeffrey D. Geffen
Vice President
Michael Geringer
Vice President
Ellen Gold
Vice President
Stephen Greenhut
Vice President
Sandra Grossman
Vice President
Peter W. Gurman
Vice President
Matthew Haynes Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
Peter Hermann Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
Elizabeth Hinchman
Vice President
David Hoffman
Vice President
Christopher Jones
Vice President
Kevin Jung
Vice President
Carol Espejo Kane
Vice President
Michelle Kaufman Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
10
<PAGE>
<CAPTION>
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION WITH
MORGAN STANLEY DEAN OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
WITTER ADVISORS INC. AND NATURE OF CONNECTION
- -------------------- -----------------------------------------------------
<S> <C>
Paula LaCosta Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
Thomas Lawlor
Vice President
Gerard J. Lian Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
Nancy Login
Vice President
Steven MacNamara
Vice President
Catherine Maniscalco Vice President of Morgan Stanley Dean Witter Natural
Vice President Resource Development Securities Inc.
Albert McGarity
Vice President
LouAnne D. McInnis Vice President and Assistant Secretary of MSDW
Vice President and Services; Assistant Secretary of the Morgan Stanley Dean
Assistant Secretary Witter Funds and the TCW/DW Funds.
Sharon K. Milligan
Vice President
Julie Morrone
Vice President
Mary Beth Mueller
Vice President
David Myers Vice President of Morgan Stanley Dean Witter Natural
Vice President Resource Development Securities Inc.
Richard Norris
Vice President
George Paoletti
Vice President
Anne Pickrell Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
11
<PAGE>
<CAPTION>
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION WITH
MORGAN STANLEY DEAN OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
WITTER ADVISORS INC. AND NATURE OF CONNECTION
- -------------------- -----------------------------------------------------
<S> <C>
Michael Roan
Vice President
John Roscoe
Vice President
Hugh Rose
Vice President
Robert Rossetti Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
Ruth Rossi Vice President and Assistant Secretary of MSDW
Vice President and Services; Assistant Secretary of the Morgan Stanley Dean
Assistant Secretary Witter Funds and the TCW/DW Funds.
Carl F. Sadler
Vice President
Deborah Santaniello
Vice President
Peter J. Seeley Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
Robert Stearns
Vice President
Naomi Stein
Vice President
Kathleen H. Stromberg Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
Marybeth Swisher
Vice President
Robert Vanden Assem
Vice President
James P. Wallin
Vice President
Alice Weiss Vice President of various Morgan Stanley Dean Witter
Vice President Funds.
12
<PAGE>
<CAPTION>
NAME AND POSITION OTHER SUBSTANTIAL BUSINESS, PROFESSION, VOCATION WITH
MORGAN STANLEY DEAN OR EMPLOYMENT, INCLUDING NAME, PRINCIPAL ADDRESS
WITTER ADVISORS INC. AND NATURE OF CONNECTION
- -------------------- -----------------------------------------------------
<S> <C>
John Wong
Vice President
</TABLE>
Item 29. PRINCIPAL UNDERWRITERS
(a) Morgan Stanley Dean Witter Distributors Inc. ("MSDW Distributors"), a
Delaware corporation, is the principal underwriter of the Registrant. MSDW
Distributors is also the principal underwriter of the following investment
companies:
(1) Active Assets California Tax-Free Trust
(2) Active Assets Government Securities Trust
(3) Active Assets Money Trust
(4) Active Assets Tax-Free Trust
(5) Morgan Stanley Dean Witter American Value Fund
(6) Morgan Stanley Dean Witter Balanced Growth Fund
(7) Morgan Stanley Dean Witter Balanced Income Fund
(8) Morgan Stanley Dean Witter California Tax-Free Daily Income Trust
(9) Morgan Stanley Dean Witter California Tax-Free Income Fund
(10) Morgan Stanley Dean Witter Capital Appreciation Fund
(11) Morgan Stanley Dean Witter Capital Growth Securities
(12) Morgan Stanley Dean Witter Competitive Edge Fund, "BEST IDEAS PORTFOLIO"
(13) Morgan Stanley Dean Witter Convertible Securities Trust
(14) Morgan Stanley Dean Witter Developing Growth Securities Trust
(15) Morgan Stanley Dean Witter Diversified Income Trust
(16) Morgan Stanley Dean Witter Dividend Growth Securities Inc.
(17) Morgan Stanley Dean Witter Equity Fund
(18) Morgan Stanley Dean Witter European Growth Fund Inc.
(19) Morgan Stanley Dean Witter Federal Securities Trust
(20) Morgan Stanley Dean Witter Financial Services Trust
(21) Morgan Stanley Dean Witter Fund of Funds
(22) Morgan Stanley Dean Witter Global Dividend Growth Securities
(23) Morgan Stanley Dean Witter Global Short-Term Income Fund Inc.
(24) Morgan Stanley Dean Witter Global Utilities Fund
(25) Morgan Stanley Dean Witter Growth Fund
(26) Morgan Stanley Dean Witter Hawaii Municipal Trust
(27) Morgan Stanley Dean Witter Health Sciences Trust
(28) Morgan Stanley Dean Witter High Yield Securities Inc.
(29) Morgan Stanley Dean Witter Income Builder Fund
(30) Morgan Stanley Dean Witter Information Fund
(31) Morgan Stanley Dean Witter Intermediate Income Securities
(32) Morgan Stanley Dean Witter International SmallCap Fund
(33) Morgan Stanley Dean Witter Japan Fund
(34) Morgan Stanley Dean Witter Limited Term Municipal Trust
(35) Morgan Stanley Dean Witter Liquid Asset Fund Inc.
(36) Morgan Stanley Dean Witter Market Leader Trust
(37) Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities
(38) Morgan Stanley Dean Witter Mid-Cap Growth Fund
13
<PAGE>
(39) Morgan Stanley Dean Witter Multi-State Municipal Series Trust
(40) Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
(41) Morgan Stanley Dean Witter New York Municipal Money Market Trust
(42) Morgan Stanley Dean Witter New York Tax-Free Income Fund
(43) Morgan Stanley Dean Witter Pacific Growth Fund Inc.
(44) Morgan Stanley Dean Witter Precious Metals and Minerals Trust
(45) Morgan Stanley Dean Witter Prime Income Trust
(46) Morgan Stanley Dean Witter S&P 500 Index Fund
(47) Morgan Stanley Dean Witter S&P 500 Select Fund
(48) Morgan Stanley Dean Witter Short-Term Bond Fund
(49) Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
(50) Morgan Stanley Dean Witter Special Value Fund
(51) Morgan Stanley Dean Witter Strategist Fund
(52) Morgan Stanley Dean Witter Tax-Exempt Securities Trust
(53) Morgan Stanley Dean Witter Tax-Free Daily Income Trust
(54) Morgan Stanley Dean Witter U.S. Government Money Market Trust
(55) Morgan Stanley Dean Witter U.S. Government Securities Trust
(56) Morgan Stanley Dean Witter Utilities Fund
(57) Morgan Stanley Dean Witter Value-Added Market Series
(58) Morgan Stanley Dean Witter Value Fund
(59) Morgan Stanley Dean Witter Variable Investment Series
(60) Morgan Stanley Dean Witter World Wide Income Trust
(1) TCW/DW Emerging Markets Opportunities Trust
(2) TCW/DW Global Telecom Trust
(3) TCW/DW Income and Growth
(4) TCW/DW Latin American Growth Fund
(5) TCW/DW Mid-Cap Equity Trust
(6) TCW/DW North American Government Income Trust
(7) TCW/DW Small Cap Growth Fund
(8) TCW/DW Total Return Trust
(b) The following information is given regarding directors and officers of MSDW
Distributors not listed in Item 28 above. The principal address of MSDW
Distributors is Two World Trade Center, New York, New York 10048. None of the
following persons has any position or office with the Registrant.
<TABLE>
<CAPTION>
Name Positions and Office with MSDW Distributors
- ---- -------------------------------------------
<S> <C>
Christine Edwards Executive Vice President, Secretary, Director and Chief Legal
Officer.
Michael T. Gregg Vice President and Assistant Secretary.
James F. Higgins Director
Fredrick K. Kubler Senior Vice President, Assistant Secretary and Chief Compliance
Officer.
Philip J. Purcell Director
14
<PAGE>
<CAPTION>
Name Positions and Office with MSDW Distributors
- ---- -------------------------------------------
<S> <C>
John Schaeffer Director
Charles Vidala Senior Vice President and Financial Principal
</TABLE>
Item 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder are
maintained by the Investment Manager at its offices, except records relating to
holders of shares issued by the Registrant, which are maintained by the
Registrant's Transfer Agent, at its place of business as shown in the
prospectus.
Item 31. MANAGEMENT SERVICES
Registrant is not a party to any such management-related service contract.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York on the 30th day of November, 1998.
MORGAN STANLEY DEAN WITTER
FUND OF FUNDS
By /s/ Barry Fink
--------------------------------
Barry Fink
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 2 has been signed below by the following persons in
the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
(1) Principal Executive Officer President, Chief
Executive Officer,
Trustee and Chairman
By /s/ Charles A. Fiumefreddo 11/30/98
-------------------------------
Charles A. Fiumefreddo
(2) Principal Financial Officer Treasurer and Principal
Accounting Officer
By /s/ Thomas F. Caloia 11/30/98
-------------------------------
Thomas F. Caloia
(3) Majority of the Trustees
Charles A. Fiumefreddo (Chairman)
Philip J. Purcell
By /s/ Barry Fink 11/30/98
-------------------------------
Barry Fink
Attorney-in-Fact
Michael Bozic Manuel H. Johnson
Edwin J. Garn Michael E. Nugent
John R. Haire John L. Schroeder
Wayne E. Hedien
By /s/ Stuart M. Strauss 11/30/98
-------------------------------
Stuart M. Strauss
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
1. Form of Amendment to the Declaration of Trust of the Registrant.
5. Form of Amended Investment Management Agreement between the Registrant
and Morgan Stanley Dean Witter Advisors Inc.
6(a). Form of Amended Distribution Agreement between Registrant and Morgan
Stanley Dean Witter Distributors Inc.
6(b). Form of Selected Dealer Agreement.
8. Form of Amended and Restated Transfer Agency and Service Agreement
between the Registration and Morgan Stanley Dean Witter Trust FSB.
9. Form of Amended Services Agreement between Morgan Stanley Dean Witter
Advisors Inc. and Morgan Stanley Dean Witter Services Company Inc.
11. Consent of Independent Accountants.
16. Schedules for Computation of Performance Quotations.
18. Amended Multiple-Class Plan pursuant to Rule 18f-3.
27. Financial Data Schedules as of September 30, 1998.
<PAGE>
CERTIFICATE
The undersigned hereby certifies that he is the Secretary of Dean Witter
Fund of Funds (the "Trust"), an unincorporated business trust organized under
the laws of the Commonwealth of Massachusetts, that annexed hereto is an
Amendment to the Declaration of Trust of the Trust adopted by the Trustees of
the Trust on April 30, 1998 as provided in Section 9.3 of the said Declaration,
said Amendment to take effect on June 22, 1998, and I do hereby further certify
that such amendment has not been amended and is on the date hereof in full force
and effect.
Dated this 22nd day of June, 1998.
-----------------------------------
Barry Fink
Secretary
<PAGE>
AMENDMENT
Dated: June 22, 1998
To be Effective: June 22, 1998
TO
DEAN WITTER FUND OF FUNDS
DECLARATION OF TRUST
DATED
JULY 3, 1997
<PAGE>
Amendment dated June 22, 1998 to the Declaration of Trust
(the "Declaration") of Dean Witter Fund of Funds (the "Trust")
dated July 3, 1997
WHEREAS, the Trust was established by the Declaration on the date
hereinabove set forth under the laws of the Commonwealth of Massachusetts; and
WHEREAS, the Trustees of the Trust have deemed it advisable to change the
name of the Trust to "Morgan Stanley Dean Witter Fund of Funds," such change to
be effective on June 22, 1998;
NOW, THEREFORE:
1. Section 1.1 of Article I of the Declaration is hereby amended so that
that Section shall read in its entirety as follows:
"Section 1.1. NAME. The name of the Trust created hereby is the
Morgan Stanley Dean Witter Fund of Funds and so far as may be
practicable the Trustees shall conduct the Trust's activities, execute
all documents and sue or be sued under that name, which name (and the
word "Trust" whenever herein used) shall refer to the Trustees as
Trustees, and not as individuals, or personally, and shall not refer
to the officers, agents, employees or Shareholders of the Trust.
Should the Trustees determine that the use of such name is not
advisable, they may use such other name for the Trust as they deem
proper and the Trust may hold its property and conduct its activities
under such other name."
2. Subsection (p) of Section 1.2 of Article I of the Declaration is hereby
amended so that that subsection shall read in its entirety as follows:
"Section 1.2. DEFINITIONS...
"(p) "TRUST" means the Morgan Stanley Dean Witter Fund of Funds."
3. Section 11.7 of Article XI of the Declaration is hereby amended so that
that section shall read as follows:
"Section 11.7. USE OF THE NAME "MORGAN STANLEY DEAN WITTER." Morgan
Stanley Dean Witter & Co. ("MSDW") has consented to the use by the
Trust of the identifying name "Morgan Stanley Dean Witter," which is a
property right of MSDW. The Trust will only use the name "Morgan
Stanley Dean Witter" as a component of its name and for no other
purpose, and will not purport to grant to any
<PAGE>
third party the right to use the name "Morgan Stanley Dean Witter" for
any purpose. MSDW, or any corporate affiliate of MSDW, may use or
grant to others the right to use the name "Morgan Stanley Dean
Witter," or any combination or abbreviation thereof, as all or a
portion of a corporate or business name or for any commercial purpose,
including a grant of such right to any other investment company. At
the request of MSDW or any corporate affiliate of MSDW, the Trust will
take such action as may be required to provide its consent to the use
of the name "Morgan Stanley Dean Witter," or any combination or
abbreviation thereof, by MSDW or any corporate affiliate of MSDW, or
by any person to whom MSDW or a corporate affiliate of MSDW shall have
granted the right to such use. Upon the termination of any investment
advisory agreement into which a corporate affiliate of MSDW and the
Trust may enter, the Trust shall, upon request of MSDW or any
corporate affiliate of MSDW, cease to use the name "Morgan Stanley
Dean Witter" as a component of its name, and shall not use the name,
or any combination or abbreviation thereof, as part of its name or for
any other commercial purpose, and shall cause its officers, Trustees
and Shareholders to take any and all actions which MSDW or any
corporate affiliate of MSDW may request to effect the foregoing and to
reconvey to MSDW any and all rights to such name."
4. The Trustees of the Trust hereby reaffirm the Declaration, as amended,
in all respects.
5. This Amendment may be executed in more than one counterpart, each of
which shall be deemed an original, but all of which together shall constitute
one and the same document.
<PAGE>
IN WITNESS WHEREOF, the undersigned, the Trustees of the Trust, have
executed this instrument this 22nd day of June, 1998.
/s/ Michael Bozic /s/ Manuel H. Johnson
- ------------------------------- -------------------------------
Michael Bozic, as Trustee Manuel H. Johnson, as Trustee
and not individually and not individually
c/o Levitz Furniture Corp. c/o Johnson Smick International Inc.
6111 Broken Sound Parkway, NW 1133 Connecticut Avenue, NW
Boca Raton, FL 33487 Washington, D.C. 20036
/s/ Charles A. Fiumefreddo /s/ Michael E. Nugent
- ------------------------------- -------------------------------
Charles A. Fiumefreddo, as Trustee Michael E. Nugent, as Trustee
and not individually and not individually
Two World Trade Center c/o Triumph Capital, L.P.
New York, NY 10048 237 Park Avenue
New York, NY 10017
/s/ Edwin J. Garn /s/ Philip J. Purcell
- ------------------------------- -------------------------------
Edwin J. Garn, as Trustee Philip J. Purcell, as Trustee
and not individually and not individually
c/o Huntsman Corporation 1585 Broadway
500 Huntsman Way New York, NY 10036
Salt Lake City, UT 84111
/s/ John R. Haire /s/ John L. Schroeder
- ------------------------------- -------------------------------
John R. Haire, as Trustee John L. Schroeder, as Trustee
and not individually and not individually
Two World Trade Center c/o Gordon Altman Butowsky Weitzen
New York, NY 10048 Shalov & Wein
Counsel to the Independent Trustees
114 West 47th Street
New York, NY 10036
/s/ Wayne E. Hedien
- -------------------------------
Wayne E. Hedien, as Trustee
and not individually
c/o Gordon Altman Butowsky Weitzen
Shalov & Wein
Counsel to the Independent Trustees
114 West 47th Street
New York, NY 10036
<PAGE>
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On this 22nd day of June, 1998, MICHAEL BOZIC, CHARLES A. FIUMEFREDDO,
EDWIN J. GARN, JOHN R. HAIRE, WAYNE E. HEDIEN, MANUEL H. JOHNSON,
MICHAEL E. NUGENT, PHILIP J. PURCELL and JOHN L. SCHROEDER, known to
me to be the individuals described in and who executed the foregoing
instrument, personally appeared before me and they severally
acknowledged the foregoing instrument to be their free act and deed.
/s/ Marilyn K. Cranney
----------------------
Notary Public
MARILYN K. CRANNEY
NOTARY PUBLIC, State of New York
No. 24-4795538
Qualified in Kings County
Commission Expires May 31, 1999
<PAGE>
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made as of the 28th day of July, 1997, and amended as of April 30,
1998, by and between Dean Witter Fund of Funds, a Massachusetts business trust
(hereinafter called the "Fund"), and Dean Witter InterCapital Inc., a Delaware
corporation (hereinafter called the "Investment Manager"):
WHEREAS, The Fund is engaged in business as an open-end management
investment company and is registered as such under the Investment Company Act of
1940, as amended (the "Act"); and
WHEREAS, The Investment Manager is registered as an investment adviser under
the Investment Advisers Act of 1940, and engages in the business of acting as
investment adviser; and
WHEREAS, The Fund desires to retain the Investment Manager to render
management and investment advisory services in the manner and on the terms and
conditions hereinafter set forth; and
WHEREAS, The Investment Manager desires to be retained to perform services
on said terms and conditions:
Now, Therefore, this Agreement
W I T N E S S E T H:
that in consideration of the premises and the mutual covenants hereinafter
contained, the Fund and the Investment Manager agree as follows:
1. The Fund hereby retains the Investment Manager to act as investment
manager of the Fund and, subject to the supervision of the Board of Trustees, to
supervise the investment activities of the Fund as hereinafter set forth.
Without limiting the generality of the foregoing, the Investment Manager shall
obtain and evaluate such information and advice relating to the economy,
securities and commodities markets and securities and commodities as it deems
necessary or useful to discharge its duties hereunder; shall continuously manage
the assets of the Fund in a manner consistent with the investment objectives and
policies of the Fund; shall determine the securities and commodities to be
purchased, sold or otherwise disposed of by the Fund and the timing of such
purchases, sales and dispositions; and shall take such further action, including
the placing of purchase and sale orders on behalf of the Fund, as the Investment
Manager shall deem necessary or appropriate. The Investment Manager shall also
furnish to or place at the disposal of the Fund such of the information,
evaluations, analyses and opinions formulated or obtained by the Investment
Manager in the discharge of its duties as the Fund may, from time to time,
reasonably request.
In the event the Fund establishes another Portfolio other than the current
Portfolio with respect to which it desires to retain the Investment Manager to
render investment advisory services hereunder, it shall notify the Investment
Manager in writing. If the Investment Manager is willing to render such
services, it shall notify the Fund in writing, whereupon such other Portfolio
shall become a Portfolio hereunder.
2. The Investment Manager shall, at its own expense, maintain such staff
and employ or retain such personnel and consult with such other persons as it
shall from time to time determine to be necessary or useful to the performance
of its obligations under this Agreement. Without limiting the generality of the
foregoing, the staff and personnel of the Investment Manager shall be deemed to
include persons employed or otherwise retained by the Investment Manager to
furnish statistical and other factual data, advice regarding economic factors
and trends, information with respect to technical and scientific developments,
and such other information, advice and assistance as the Investment Manager may
desire. The Investment Manager shall, as agent for the Fund, maintain the Fund's
records and books of account (other than those maintained by the Fund's transfer
agent, registrar, custodian and other agencies). All such books and records so
maintained shall be the property of the Fund and, upon request therefor, the
Investment Manager shall surrender to the Fund such of the books and records so
requested.
3. The Fund will, from time to time, furnish or otherwise make available to
the Investment Manager such financial reports, proxy statements and other
information relating to the business and affairs of the Fund as the Investment
Manager may reasonably require in order to discharge its duties and obligations
hereunder.
<PAGE>
4. The Investment Manager shall bear the cost of rendering the investment
management and supervisory services to be performed by it under this Agreement,
and shall, at its own expense, pay the compensation of the officers and
employees, if any, of the Fund who are also directors, officers, or employees of
the Investment Manager, and provide such office space, facilities and equipment
and such clerical help and bookkeeping services as the Fund shall reasonably
require in the conduct of its business. The Investment Manager shall also bear
the cost of telephone service, heat, light, power and other utilities provided
to the Fund.
5. The Fund assumes and shall pay or cause to be paid all other expenses of
the Fund, including without limitation, fees pursuant to any plan of
distribution that the Fund may adopt; the charges and expenses of any registrar,
any custodian or depository appointed by the Fund for the safekeeping of its
cash, portfolio securities or commodities and other property, and any stock
transfer or dividend agent or agents appointed by the Fund; brokers' commissions
chargeable to the Fund in connection with portfolio transactions to which the
Fund is a party; all taxes, including securities or commodities issuance and
transfer taxes, and fees payable by the Fund to federal, state or other
governmental agencies; the cost and expense of engraving or printing
certificates representing shares of the Fund; all costs and expenses in
connection with the registration and maintenance of registration of the Fund and
its shares with the Securities and Exchange Commission and various states and
other jurisdictions (including filing fees and legal fees and disbursements of
counsel); the cost and expense of printing, including typesetting, and
distributing prospectuses and statements of additional information of the Fund
and supplements thereto to the Fund's shareholders; all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing
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 the payment of any dividend, distribution, withdrawal or
redemption, whether in shares or in cash; charges and expenses of any outside
service used for pricing of the Fund's shares; charges and expenses of legal
counsel, including counsel to the Trustees of the Fund who are not interested
persons (as defined in the Act) of the Fund or the Investment Manager, and of
independent accountants, in connection with any matter relating to the Fund;
membership dues of industry associations; interest payable 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 related thereto); and all other charges and costs of the
Fund's operation unless otherwise explicitly provided herein.
6. The Investment Manager will render services, furnish facilities and
assume expenses under this Agreement without separate compensation therefor, it
being understood that the Investment Manager is receiving management fees in
connection with each of the "Underlying Funds" (as such term is defined in the
Fund's Registration Statement).
7. The Investment Manager will use its best efforts in the supervision and
management of the investment activities of the Fund, but in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations hereunder, the Investment Manager shall not be liable to the Fund or
any of its investors for any error of judgment or mistake of law or for any act
or omission by the Investment Manager or for any losses sustained by the Fund or
its investors.
8. Nothing contained in this Agreement shall prevent the Investment Manager
or any affiliated person of the Investment Manager from acting as investment
adviser or manager for any other person, firm or corporation and shall not in
any way bind or restrict the Investment Manager or any such affiliated person
from buying, selling or trading any securities or commodities for their own
accounts or for the account of others for whom they may be acting. Nothing in
this Agreement shall limit or restrict the right of any Director, officer or
employee of the Investment Manager to engage in any other business or to devote
his or her time and attention in part to the management or other aspects of any
other business whether of a similar or dissimilar nature.
9. This Agreement shall remain in effect until April 30, 1998 and from year
to year thereafter with respect to each Portfolio provided such continuance with
respect to a Portfolio is approved at least annually
2
<PAGE>
by the vote of holders of a majority, as defined in the Investment Company Act
of 1940, as amended (the "Act"), of the outstanding voting securities of such
Portfolio or by the Trustees of the Fund; provided, that in either event such
continuance is also approved annually by the vote of a majority of the Trustees
of the Fund who are not parties to this Agreement or "interested persons" (as
defined in the Act) of any such party, which vote must be cast in person at a
meeting called for the purpose of voting on such approval; provided, however,
that (a) the Fund may, at any time and without the payment of any penalty,
terminate this Agreement upon thirty days' written notice to the Investment
Manager, either by majority vote of the Trustees of the Fund or, with respect to
a Portfolio, by the vote of a majority of the outstanding voting securities of
such Portfolio; (b) this Agreement shall immediately terminate in the event of
its assignment (to the extent required by the Act and the rules thereunder)
unless such automatic terminations shall be prevented by an exemptive order of
the Securities and Exchange Commission; and (c) the Investment Manager may
terminate this Agreement without payment of penalty on thirty days' written
notice to the Fund. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed post-paid, to the other party at the
principal office of such party.
Any approval of this Agreement by the holders of a majority of the
outstanding voting securities of any Portfolio shall be effective to continue
this Agreement with respect to such Portfolio notwithstanding (a) that this
Agreement has not been approved by the holders of a majority of the outstanding
voting securities of any other Portfolio or (b) that this Agreement has not been
approved by the vote of a majority of the outstanding voting securities of the
Fund, unless such approval shall be required by any other applicable law or
otherwise.
10. This Agreement may be amended by the parties without the vote or consent
of the shareholders of the Fund to supply any omission, to cure, correct or
supplement any ambiguous, defective or inconsistent provision hereof, or if they
deem it necessary to conform this Agreement to the requirements of applicable
federal laws or regulations, but neither the Fund nor the Investment Manager
shall be liable for failing to do so.
11. This Agreement shall be construed in accordance with the laws of the
State of New York and the applicable provisions of the Act. To the extent the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Act, the latter shall control.
12. The Investment Manager and the Fund each agree that the name "Dean
Witter," which comprises a component of the Fund's name, is a property right of
Dean Witter Reynolds Inc. The Fund agrees and consents that (i) it will only use
the name "Dean Witter" as a component of its name and for no other purpose, (ii)
it will not purport to grant to any third party the right to use the name "Dean
Witter" for any purpose, (iii) the Investment Manager or its parent, Morgan
Stanley Dean Witter & Co., or any corporate affiliate of the Investment
Manager's parent, may use or grant to others the right to use the name "Dean
Witter," or any combination or abbreviation thereof, as all or a portion of a
corporate or business name or for any commercial purpose, including a grant of
such right to any other investment company, (iv) at the request of the
Investment Manager or its parent, the Fund will take such action as may be
required to provide its consent to the use of the name "Dean Witter," or any
combination or abbreviation thereof, by the Investment Manager or its parent or
any corporate affiliate of the Investment Manager's parent, or by any person to
whom the Investment Manager or its parent or any corporate affiliate of the
Investment Manager's parent shall have granted the right to such use, and (v)
upon the termination of any investment advisory agreement into which the
Investment Manager and the Fund may enter, or upon termination of affiliation of
the Investment Manager with its parent, the Fund shall, upon request by the
Investment Manager or its parent, cease to use the name "Dean Witter" as a
component of its name, and shall not use the name, or any combination or
abbreviation thereof, as a part of its name or for any other commercial purpose,
and shall cause its officers, trustees and shareholders to take any and all
actions which the Investment Manager or its parent may request to effect the
foregoing and to reconvey to the Investment Manager or its parent any and all
rights to such name.
13. The Declaration of Trust establishing Dean Witter Fund of Funds, dated
July 3, 1997, a copy of which, together with all amendments thereto (the
"Declaration"), is on file in the office of the Secretary of the Commonwealth of
Massachusetts, provides that the name Dean Witter Fund of Funds refers to the
3
<PAGE>
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of Dean
Witter Fund of Funds shall be held to any personal liability, nor shall resort
be had to their private property for the satisfaction of any obligation or claim
or otherwise, in connection with the affairs of said Dean Witter Fund of Funds,
but the Trust Estate only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement, as amended, on April 30, 1998 in New York, New York.
DEAN WITTER FUND OF FUNDS
By: /s/ BARRY FINK
...................................
Attest:
/s/ FRANK BRUTTOMESSO
..................................
DEAN WITTER INTERCAPITAL INC.
By: /s/ CHARLES A. FIUMEFREDDO
...................................
Attest:
/s/ MARILYN K. CRANNEY
..................................
4
<PAGE>
MORGAN STANLEY DEAN WITTER FUNDS
DISTRIBUTION AGREEMENT
AGREEMENT made as of this 28th day of July, 1997, and amended as of June 22,
1998, between each of the open-end investment companies to which Morgan Stanley
Dean Witter Advisors Inc. acts as investment manager, that are listed on
Schedule A, as may be amended from time to time (each, a "Fund" and
collectively, the "Funds"), and Morgan Stanley Dean Witter Distributors Inc., a
Delaware corporation (the "Distributor").
W I T N E S S E T H:
WHEREAS, each Fund is registered as an open-end investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and it is in the
interest of each Fund to offer its shares for sale continuously, and
WHEREAS, each Fund and the Distributor wish to enter into an agreement with
each other with respect to the continuous offering of each Fund's transferable
shares, of $0.01 par value (the "Shares"), to commence on the date listed above,
in order to promote the growth of each Fund and facilitate the distribution of
its shares.
NOW, THEREFORE, the parties agree as follows:
SECTION 1. APPOINTMENT OF THE DISTRIBUTOR.
(a) Each Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Fund to sell Shares to the public on the terms set forth
in this Agreement and that Fund's prospectus and the Distributor hereby accepts
such appointment and agrees to act hereunder. Each Fund, during the term of this
Agreement, shall sell Shares to the Distributor upon the terms and conditions
set forth herein.
(b) The Distributor agrees to purchase Shares, as principal for its own
account, from each Fund and to sell Shares as principal to investors, and
securities dealers, including Dean Witter Reynolds Inc. ("DWR"), an affiliate of
the Distributor, upon the terms described herein and in that Fund's prospectus
(the "Prospectus") and statement of additional information included in the
Fund's registration statement (the "Registration Statement") most recently filed
from time to time with the Securities and Exchange Commission (the "SEC") and
effective under the Securities Act of 1933, as amended (the "1933 Act"), and the
1940 Act or as the Prospectus may be otherwise amended or supplemented and filed
with the SEC pursuant to Rule 497 under the 1933 Act.
SECTION 2. EXCLUSIVE NATURE OF DUTIES. The Distributor shall be the
exclusive principal underwriter and distributor of each Fund, except that the
exclusive rights granted to the Distributor to sell the Shares shall not apply
to Shares issued by each Fund: (i) in connection with the merger or
consolidation of any other investment company or personal holding company with
the Fund or the acquisition by purchase or otherwise of all (or substantially
all) the assets or the outstanding shares of any such company by the Fund; (ii)
pursuant to reinvestment of dividends or capital gains distributions; or (iii)
pursuant to the reinstatement privilege afforded redeeming shareholders.
SECTION 3. PURCHASE OF SHARES FROM EACH FUND. The Shares are offered in
four classes (each, a "Class"), as described in the Prospectus, as amended or
supplemented from time to time.
(a) The Distributor shall have the right to buy from each Fund the Shares of
the particular class needed, but not more than the Shares needed (except for
clerical errors in transmission), to fill unconditional orders for Shares of the
applicable class placed with the Distributor by investors or securities dealers.
The price which the Distributor shall pay for the Shares so purchased from the
Fund shall be the net asset value, determined as set forth in the Prospectus,
used in determining the public offering price on which such orders were based.
(b) The Shares are to be resold by the Distributor at the public offering
price of Shares of the applicable class as set forth in the Prospectus, to
investors or to securities dealers, including DWR, who
1
<PAGE>
have entered into selected dealer agreements with the Distributor upon the terms
and conditions set forth in Section 7 hereof ("Selected Dealers").
(c) Each Fund shall have the right to suspend the sale of the Shares at
times when redemption is suspended pursuant to the conditions set forth in
Section 4(f) hereof. Each Fund shall also have the right to suspend the sale of
the Shares if trading on the New York Stock Exchange shall have been suspended,
if a banking moratorium shall have been declared by federal or New York
authorities, or if there shall have been some other extraordinary event which,
in the judgment of a Fund, makes it impracticable to sell its Shares.
(d) Each Fund, or any agent of a Fund designated in writing by the Fund,
shall be promptly advised of all purchase orders for Shares received by the
Distributor. Any order may be rejected by a Fund; provided, however, that a Fund
will not arbitrarily or without reasonable cause refuse to accept orders for the
purchase of Shares. The Distributor will confirm orders upon their receipt, and
each Fund (or its agent) upon receipt of payment therefor and instructions will
deliver share certificates for such Shares or a statement confirming the
issuance of Shares. Payment shall be made to the Fund in New York Clearing House
funds. The Distributor agrees to cause such payment and such instructions to be
delivered promptly to the Fund (or its agent).
(e) With respect to Shares sold by any Selected Dealer, the Distributor is
authorized to direct each Fund's transfer agent to receive instructions directly
from the Selected Dealer on behalf of the Distributor as to registration of
Shares in the names of investors and to confirm issuance of the Shares to such
investors. The Distributor is also authorized to instruct the transfer agent to
receive payment directly from the Selected Dealer on behalf of the Distributor,
for prompt transmittal to each Fund's custodian, of the purchase price of the
Shares. In such event the Distributor shall obtain from the Selected Dealer and
maintain a record of such registration instructions and payments.
SECTION 4. REPURCHASE OR REDEMPTION OF SHARES.
(a) Any of the outstanding Shares of a Fund may be tendered for redemption
at any time, and each Fund agrees to redeem its Shares so tendered in accordance
with the applicable provisions set forth in its Prospectus. The price to be paid
to redeem the Shares shall be equal to the net asset value determined as set
forth in the Prospectus less any applicable contingent deferred sales charge
("CDSC"). Upon any redemption of Shares the Fund shall pay the total amount of
the redemption price in New York Clearing House funds in accordance with
applicable provisions of the Prospectus.
(b) The redemption by a Fund of any of its Class A Shares purchased by or
through the Distributor will not affect the applicable front-end sales charge
secured by the Distributor or any Selected Dealer in the course of the original
sale, except that if any Class A Shares are tendered for redemption within seven
business days after the date of the confirmation of the original purchase, the
right to the applicable front-end sales charge shall be forfeited by the
Distributor and the Selected Dealer which sold such Shares.
(c) The proceeds of any redemption of Class A, Class B or Class C Shares
shall be paid by each Fund as follows: (i) any applicable CDSC shall be paid to
the Distributor or to the Selected Dealer, or, when applicable, pursuant to the
Rules of the Association of the National Association of Securities Dealers, Inc.
("NASD"), retained by the Fund and (ii) the balance shall be paid to the
redeeming shareholders, in each case in accordance with applicable provisions of
its Prospectus in New York Clearing House funds. The Distributor is authorized
to direct a Fund to pay directly to the Selected Dealer any CDSC payable by a
Fund to the Distributor in respect of Class A, Class B, or Class C Shares sold
by the Selected Dealer to the redeeming shareholders.
(d) The Distributor is authorized, as agent for the Fund, to repurchase
Shares, represented by a share certificate which is delivered to any office of
the Distributor in accordance with applicable provisions set forth in each
Fund's Prospectus. The Distributor shall promptly transmit to the transfer agent
of the Fund for redemption all Shares so delivered. The Distributor shall be
responsible for the accuracy of instructions transmitted to the Fund's transfer
agent in connection with all such repurchases.
2
<PAGE>
(e) The Distributor is authorized, as agent for each Fund, to repurchase
Shares held in a shareholder's account with a Fund for which no share
certificate has been issued, upon the telephonic request of the shareholders, or
at the discretion of the Distributor. The Distributor shall promptly transmit to
the transfer agent of the Fund, for redemption, all such orders for repurchase
of Shares. Payment for Shares repurchased may be made by a Fund to the
Distributor for the account of the shareholder. The Distributor shall be
responsible for the accuracy of instructions transmitted to the Fund's transfer
agent in connection with all such repurchases.
(f) Redemption of its Shares or payment by a Fund may be suspended at times
when the New York Stock Exchange is closed, when trading on said Exchange is
restricted, when an emergency exists as a result of which disposal by a Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for a Fund fairly to determine the value of its net assets, or
during any other period when the SEC, by order, so permits.
(g) With respect to its Shares tendered for redemption or repurchase by any
Selected Dealer on behalf of its customers, the Distributor is authorized to
instruct the transfer agent of a Fund to accept orders for redemption or
repurchase directly from the Selected Dealer on behalf of the Distributor and to
instruct the Fund to transmit payments for such redemptions and repurchases
directly to the Selected Dealer on behalf of the Distributor for the account of
the shareholder. The Distributor shall obtain from the Selected Dealer, and
shall maintain, a record of such orders. The Distributor is further authorized
to obtain from the Fund, and shall maintain, a record of payment made directly
to the Selected Dealer on behalf of the Distributor.
SECTION 5. DUTIES OF THE FUND.
(a) Each Fund shall furnish to the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of its Shares, including one
certified copy, upon request by the Distributor, of all financial statements
prepared by the Fund and examined by independent accountants. Each Fund shall,
at the expense of the Distributor, make available to the Distributor such number
of copies of its Prospectus as the Distributor shall reasonably request.
(b) Each Fund shall take, from time to time, but subject to the necessary
approval of its shareholders, all necessary action to fix the number of its
authorized Shares and to register Shares under the 1933 Act, to the end that
there will be available for sale such number of Shares as investors may
reasonably be expected to purchase.
(c) Each Fund shall use its best efforts to pay the filing fees for an
appropriate number of its Shares to be sold under the securities laws of such
states as the Distributor and the Fund may approve. Any qualification to sell
its Shares in a state may be withheld, terminated or withdrawn by a Fund at any
time in its discretion. As provided in Section 8(c) hereof, such filing fees
shall be paid by the Fund. The Distributor shall furnish any information and
other material relating to its affairs and activities as may be required by a
Fund in connection with the sale of its Shares in any state.
(d) Each Fund shall, at the expense of the Distributor, furnish, in
reasonable quantities upon request by the Distributor, copies of its annual and
interim reports.
SECTION 6. DUTIES OF THE DISTRIBUTOR.
(a) The Distributor shall sell shares of each Fund through DWR and may sell
shares through other securities dealers and its own Financial Advisors, and
shall devote reasonable time and effort to promote sales of the Shares, but
shall not be obligated to sell any specific number of Shares. The services of
the Distributor hereunder are not exclusive and it is understood that the
Distributor may act as principal underwriter for other registered investment
companies, so long as the performance of its obligations hereunder is not
impaired thereby. It is also understood that Selected Dealers, including DWR,
may also sell shares for other registered investment companies.
3
<PAGE>
(b) Neither the Distributor nor any Selected Dealer shall give any
information or make any representations, other than those contained in the
Registration Statement or related Prospectus and any sales literature
specifically approved by the appropriate Fund.
(c) The Distributor agrees that it will at all times comply with the
applicable terms and limitations of the Rules of the Association of the NASD.
SECTION 7. SELECTED DEALERS AGREEMENTS.
(a) The Distributor shall have the right to enter into selected dealer
agreements with Selected Dealers for the sale of Shares. In making agreements
with Selected Dealers, the Distributor shall act only as principal and not as
agent for a Fund. Shares sold to Selected Dealers shall be for resale by such
dealers only at the public offering price set forth in the Prospectus. With
respect to Class A Shares, in such agreement the Distributor shall have the
right to fix the portion of the applicable front-end sales charge which may be
allocated to the Selected Dealers.
(b) Within the United States, the Distributor shall offer and sell Shares
only to Selected Dealers that are members in good standing of the NASD.
(c) The Distributor shall adopt and follow procedures, as approved by each
Fund, for the confirmation of sales of its Shares to investors and Selected
Dealers, the collection of amounts payable by investors and Selected Dealers on
such sales, and the cancellation of unsettled transactions, as may be necessary
to comply with the requirements of the NASD, as such requirements may from time
to time exist.
SECTION 8. PAYMENT OF EXPENSES.
(a) Each Fund shall bear all costs and expenses of the Fund, including fees
and disbursements of legal counsel including counsel to the Directors/Trustees
of each Fund who are not interested persons (as defined in the 1940 Act) of the
Fund or the Distributor, and independent accountants, in connection with the
preparation and filing of any required Registration Statements and Prospectuses
and all amendments and supplements thereto, and the expense of preparing,
printing, mailing and otherwise distributing prospectuses and statements of
additional information, annual or interim reports or proxy materials to
shareholders.
(b) The Distributor shall bear all expenses incurred by it in connection
with its duties and activities under this Agreement including the payment to
Selected Dealers of any sales commissions, service fees and other expenses for
sales of a Fund's Shares (except such expenses as are specifically undertaken
herein by a Fund) incurred or paid by Selected Dealers, including DWR. The
Distributor shall bear the costs and expenses of preparing, printing and
distributing any supplementary sales literature used by the Distributor or
furnished by it for use by Selected Dealers in connection with the offering of
the Shares for sale. Any expenses of advertising incurred in connection with
such offering will also be the obligation of the Distributor. It is understood
and agreed that, so long as a Fund's Plan of Distribution pursuant to Rule 12b-1
under the 1940 Act ("Rule 12b-1 Plan") continues in effect, any expenses
incurred by the Distributor hereunder may be paid in accordance with the terms
of such Rule 12b-1 Plan.
(c) Each Fund shall pay the filing fees, and, if necessary or advisable in
connection therewith, bear the cost and expense of qualifying each Fund as a
broker or dealer, in such states of the United States or other jurisdictions as
shall be selected by the Fund and the Distributor pursuant to Section 5(c)
hereof and the cost and expenses payable to each such state for continuing to
offer Shares therein until the Fund decides to discontinue selling Shares
pursuant to Section 5(c) hereof.
SECTION 9. INDEMNIFICATION.
(a) Each Fund shall indemnify and hold harmless the Distributor and each
person, if any, who controls the Distributor against any loss, liability, claim,
damage or expense (including the reasonable cost of investigating or defending
any alleged loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith) arising by reason of any person acquiring
any Shares, which may be based upon the 1933 Act, or on any other statute or at
common law, on the ground that the Registration Statement or related Prospectus
and Statement of Additional Information, as from time to time amended
4
<PAGE>
and supplemented, or the annual or interim reports to shareholders of a Fund,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make the statements
therein not misleading, unless such statement or omission was made in reliance
upon, and in conformity with, information furnished to the Fund in connection
therewith by or on behalf of the Distributor; provided, however, that in no case
(i) is the indemnity of a Fund in favor of the Distributor and any such
controlling persons to be deemed to protect the Distributor or any such
controlling persons thereof against any liability to a Fund or its security
holders to which the Distributor or any such controlling persons would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of its duties or by reason of reckless disregard of its
obligations and duties under this Agreement; or (ii) is a Fund to be liable
under its indemnity agreement contained in this paragraph with respect to any
claim made against the Distributor or any such controlling persons, unless the
Distributor or any such controlling persons, as the case may be, shall have
notified the Fund in writing within a reasonable time after the summons or other
first legal process giving information of the nature of the claim shall have
been served upon the Distributor or uch controlling persons (or after the
Distributor or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Fund of any such
claim shall not relieve it from any liability which it may have to the person
against whom such action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. Each Fund will be entitled to participate
at its own expense in the defense, or, if it so elects, to assume the defense,
of any such suit brought to enforce any such liability, but if a Fund elects to
assume the defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Distributor or such controlling person or persons, defendant
or defendants in the suit. In the event the Fund elects to assume the defense of
any such suit and retain such counsel, the Distributor or such controlling
person or persons, defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, but, in case the Fund does
not elect to assume the defense of any such suit, it will reimburse the
Distributor or such controlling person or persons, defendant or defendants in
the suit, for the reasonable fees and expenses of any counsel retained by them.
Each Fund shall promptly notify the Distributor of the commencement of any
litigation or proceedings against it or any of its officers or
Directors/Trustees in connection with the issuance or sale of the Shares.
(b) (i) The Distributor shall indemnify and hold harmless each Fund and each
of its Directors/ Trustees and officers and each person, if any, who controls
the Fund against any loss, liability, claim, damage, or expense described in the
indemnity contained in subsection (a) of this Section, but only with respect to
statements or omissions made in reliance upon, and in conformity with,
information furnished to a Fund in writing by or on behalf of the Distributor
for use in connection with the Registration Statement or related Prospectus and
Statement of Additional Information, as from time to time amended, or the annual
or interim reports to shareholders.
(ii) The Distributor shall indemnify and hold harmless each Fund and
each Fund's transfer agent, individually and in its capacity as the Fund's
transfer agent, from and against any claims, damages and liabilities which arise
as a result of actions taken pursuant to instructions from, or on behalf of, the
Distributor to: (1) redeem all or a part of shareholder accounts in the Fund
pursuant to Section 4(g) hereof and pay the proceeds to, or as directed by, the
Distributor for the account of each shareholder whose Shares are so redeemed;
and (2) register Shares in the names of investors, confirm the issuance thereof
and receive payment therefor pursuant to Section 3(e) hereof.
(iii) In case any action shall be brought against a Fund or any person
so indemnified by this Section 9(b) in respect of which indemnity may be sought
against the Distributor, the Distributor shall have the rights and duties given
to a Fund, and the Fund and each person so indemnified shall have the rights and
duties given to the Distributor, by the provisions of subsection (a) of this
Section 9.
(c) If the indemnification provided for in this Section 9 is unavailable or
insufficient to hold harmless an indemnified party under subsection (a) or (b)
above in respect of any losses, claims, damages, liabilities or expenses (or
actions in respect thereof) referred to herein, then each indemnifiying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) in such proportion as is appropriate to reflect the relative
benefits received by a Fund on the one hand and the Distributor on the other
from the
5
<PAGE>
offering of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law, then each indemnifying
party shall contribute to such amount paid or payable by such indemnified party
in such proportion as is appropriate to reflect not only such relative benefits
but also the relative fault of a Fund on the one hand and the Distributor on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by a Fund on the one hand and the Distributor on the other
shall be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Fund bear to the total
compensation received by the Distributor, in each case as set forth in the
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by a Fund or the Distributor and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. Each Fund and the Distributor agree that it would not be
just and equitable ifcontribution were determined by pro rata allocation or by
any other method of allocation which does not take into account the equitable
considerations referred to above. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, liabilities or expenses (or
actions in respect thereof) referred to above shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such claim. Notwithstanding the
provisions of this subsection (c), the Distributor shall not be required to
contribute any amount in excess of the amount by which the total price at which
the Shares distributed by it to the public were offered to the public exceeds
the amount of any damages which it has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
SECTION 10. DURATION AND TERMINATION OF THIS AGREEMENT. This Agreement
shall remain in force until April 30, 1999, and thereafter, but only so long as
such continuance is specifically approved at least annually by (i) the Board of
Directors/Trustees of each Fund, or by the vote of a majority of the outstanding
voting securities of the Fund, cast in person or by proxy, and (ii) a majority
of those Directors/ Trustees who are not parties to this Agreement or interested
persons of any such party and who have no direct or indirect financial interest
in this Agreement or in the operation of the Fund's Rule 12b-1 Plan or in any
agreement related thereto, cast in person at a meeting called for the purpose of
voting upon such approval.
This Agreement may be terminated at any time without the payment of any
penalty, by the Directors/ Trustees of a Fund, by a majority of the
Directors/Trustees of a Fund who are not interested persons of the Fund and who
have no direct or indirect financial interest in this Agreement, or by vote of a
majority of the outstanding voting securities of a Fund, or by the Distributor,
on sixty days' written notice to the other party. This Agreement shall
automatically terminate in the event of its assignment.
The terms "vote of a majority of the outstanding voting securities,"
"assignment" and "interested person," when used in this Agreement, shall have
the respective meanings specified in the 1940 Act.
SECTION 11. AMENDMENTS OF THIS AGREEMENT. This Agreement may be amended by
the parties only if such amendment is specifically approved by (i) the
Directors/Trustees of a Fund, or by the vote of a majority of outstanding voting
securities of a Fund, and (ii) a majority of those Directors/Trustees of a Fund
who are not parties to this Agreement or interested persons of any such party
and who have no direct or indirect financial interest in this Agreement or in
any Agreement related to the Fund's Rule 12b-1 Plan, cast in person at a meeting
called for the purpose of voting on such approval.
SECTION 12. ADDITIONAL FUNDS. If at any time another Fund desires to
appoint the Distributor as its principal underwriter and distributor under this
Agreement, it shall notify the Distributor in writing. If the Distributor is
willing to serve as the Fund's principal underwriter and distributor under this
Agreement, it shall notify the Fund in writing, whereupon such other Fund shall
become a Fund hereunder.
SECTION 13. GOVERNING LAW. This Agreement shall be construed in accordance
with the law of the State of New York and the applicable provisions of the 1940
Act. To the extent the applicable law of the
6
<PAGE>
State of New York, or any of the provisions herein, conflicts with the
applicable provisions of the 1940 Act, the latter shall control.
SECTION 14. PERSONAL LIABILITY. With respect to any Fund that is organized
as an unincorporated business trust under the laws of the Commonwealth of
Massachusetts, its Declaration of the Trust (each, a "Declaration") is on file
in the office of the Secretary of the Commonwealth of Massachusetts. Each
Declaration provides that the name of the Fund refers to the Trustees under the
Declaration collectively as Trustees, but not as individuals or personally; and
no Trustee, shareholder, officer, employee or agent of any Fund shall be held to
any personal liability, nor shall resort be had to their private property for
the satisfaction of any obligation or claim or otherwise, in connection with the
affairs of any Fund, but the Trust Estate only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement, as amended, on June 22, 1998 in New York, New York.
ON BEHALF OF THE FUNDS SET FORTH ON
SCHEDULE A, ATTACHED HERETO
By: ..................................
MORGAN STANLEY DEAN WITTER
DISTRIBUTORS INC.
By: ..................................
7
<PAGE>
MORGAN STANLEY DEAN WITTER FUNDS
DISTRIBUTION AGREEMENT
SCHEDULE A
AT JULY 22, 1998
<TABLE>
<S> <C>
1) Morgan Stanley Dean Witter American Value Fund
2) Morgan Stanley Dean Witter Balanced Growth Fund
3) Morgan Stanley Dean Witter Balanced Income Fund
4) Morgan Stanley Dean Witter California Tax-Free Income Fund
5) Morgan Stanley Dean Witter Capital Appreciation Fund
6) Morgan Stanley Dean Witter Capital Growth Securities
7) Morgan Stanley Dean Witter Competitive Edge Fund
8) Morgan Stanley Dean Witter Convertible Securities Trust
9) Morgan Stanley Dean Witter Developing Growth Securities Trust
10) Morgan Stanley Dean Witter Diversified Income Trust
11) Morgan Stanley Dean Witter Dividend Growth Securities Inc.
12) Morgan Stanley Dean Witter Equity Fund
13) Morgan Stanley Dean Witter European Growth Fund Inc.
14) Morgan Stanley Dean Witter Federal Securities Trust
15) Morgan Stanley Dean Witter Financial Services Trust
16) Morgan Stanley Dean Witter Fund of Funds
17) Dean Witter Global Asset Allocation Fund
18) Morgan Stanley Dean Witter Global Dividend Growth Securities
19) Morgan Stanley Dean Witter Global Utilities Fund
20) Morgan Stanley Dean Witter Growth Fund
21) Morgan Stanley Dean Witter Health Sciences Trust
22) Morgan Stanley Dean Witter High Yield Securities Inc.
23) Morgan Stanley Dean Witter Income Builder Fund
24) Morgan Stanley Dean Witter Information Fund
25) Morgan Stanley Dean Witter Intermediate Income Securities
26) Morgan Stanley Dean Witter International SmallCap Fund
27) Morgan Stanley Dean Witter Japan Fund
28) Morgan Stanley Dean Witter Market Leader Trust
29) Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities
30) Morgan Stanley Dean Witter Mid-Cap Growth Fund
31) Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
32) Morgan Stanley Dean Witter New York Tax-Free Income Fund
33) Morgan Stanley Dean Witter Pacific Growth Fund Inc.
34) Morgan Stanley Dean Witter Precious Metals and Minerals Trust
35) Morgan Stanley Dean Witter Research Fund
36) Morgan Stanley Dean Witter Special Value Fund
37) Morgan Stanley Dean Witter S&P 500 Index Fund
38) Morgan Stanley Dean Witter S&P 500 Select Fund
39) Morgan Stanley Dean Witter Strategist Fund
40) Morgan Stanley Dean Witter Tax-Exempt Securities Trust
41) Morgan Stanley Dean Witter U.S. Government Securities Trust
42) Morgan Stanley Dean Witter Utilities Fund
43) Morgan Stanley Dean Witter Value-Added Market Series
44) Morgan Stanley Dean Witter Value Fund
45) Morgan Stanley Dean Witter Worldwide High Income Fund
46) Morgan Stanley Dean Witter World Wide Income Trust
</TABLE>
8
<PAGE>
MORGAN STANLEY DEAN WITTER DISTRIBUTORS INC.
OMNIBUS SELECTED DEALER AGREEMENT
Dear Sir or Madam:
We, Morgan Stanley Dean Witter Distributors Inc. (the "Distributor") have a
distribution agreement (the "Distribution Agreement") with each of the open-end
investment companies listed in Schedule A attached hereto (each, a "Fund"),
pursuant to which we act as the Distributor for the sale of each Fund's shares
of common stock or beneficial interest, as the case may be, (the "Shares").
Under the Distribution Agreement, we have the right to distribute Shares for
resale.
Each Fund is an open-end management investment company registered under the
Investment Company Act of 1940, as amended, and the Shares being offered to the
public are registered under the Securities Act of 1933, as amended (the
"Securities Act"). You have received a copy of the Distribution Agreements
between us and each Fund and reference is made herein to certain provisions of
such Distribution Agreements. The terms used herein, including "Prospectus" and
"Registration Statement" of each Fund and "Selected Dealer" shall have the same
meaning in this Agreement as in the Distribution Agreements. As principal, we
offer to sell Shares to your customers, upon the following terms and conditions:
1. In all sales of Shares to the public you shall act on behalf of your
customers which for purposes of this Agreement are limited to customers for
which Nations Banc Investments, Inc. is the Introducing Broker, and in no
transaction shall you have any authority to act as agent for a Fund, for us or
for any Selected Dealer.
2. Orders received from you will be accepted through us or on our behalf
only at the public offering price applicable to each order, as set forth in the
applicable current Prospectus. The procedure relating to the handling of orders
shall be subject to written instructions which we or the applicable Fund shall
forward from time to time to you. All orders are subject to acceptance or
rejection by us or a Fund in the sole discretion of either. The Distributor of
the Fund will promptly notify you in writing of any such rejection.
3. You shall not place orders for any Shares unless you have already
received purchase orders for such Shares at the applicable public offering price
and subject to the terms hereof and of the applicable Distribution Agreement and
Prospectus. In connection herewith, you agree to abide by the terms of the
applicable Distribution Agreement and Prospectus to the extent required
hereunder. Furthermore, you agree that (i) you will offer or sell any of the
Shares only under circumstances that will result in compliance with all
applicable Federal and state securities laws; (ii) you will not furnish or cause
to be furnished to any person any information relating to the Shares which is
inconsistent in any respect with the information contained in the applicable
Prospectus (as then amended or supplemented) or cause any advertisements to be
published by radio or television or in any newspaper or posted in any public
place or use any sales promotional material without our consent and the consent
of the applicable Fund; and (iii) you will endeavor to obtain proxies from
purchasers of Shares. You also agree that you will be liable to Distributor for
payment of the purchase price for Shares purchased by customers and that you
shall make payment for such shares when due.
4. We will compensate you for sales of shares of the Funds and personal
services to Fund shareholders by paying you a sales charge and/or other
commission (which may be in the form of a gross sales credit and/or an annual
residual commission) and/or a service fee, each as separately agreed by you and
us with respect to each Fund.
5. If any Shares sold to your customers under the terms of this Agreement
are repurchased by us for the account of a Fund or are tendered for redemption
within seven business days after the date of the confirmation of the original
purchase by you, it is agreed that you shall forfeit your right to, and refund
to us, any commission received by you with respect to such Shares.
6. No person is authorized to make any representations concerning the Shares
or the Funds except those contained in the current applicable Prospectus and in
such printed information subsequently issued by us or a Fund as information
supplemental to such Prospectus. In selling Shares, you shall rely solely on the
representations contained in the applicable Prospectus and supplemental
information mentioned above. Any printed information which we furnish you other
than the Prospectus and the Funds' periodic reports and
<PAGE>
proxy solicitation materials are our sole responsibility and not the
responsibility of the Funds, and you agree that the Funds shall have no
liability or responsibility to you in these respects unless expressly assumed in
connection therewith.
7. You are hereby authorized (i) to place orders directly with a Fund or its
agent for shares of the Fund to be sold by us subject to the applicable terms
and conditions governing the placement of orders for the purchase of Fund
Shares, as set forth in the Distribution Agreement, and (ii) to tender Shares
directly to the Fund or its agent for redemption subject to the applicable terms
and conditions set forth in the Distribution Agreement. We will provide you with
copies of any updates to the Distribution Agreement.
8. We reserve the right in our discretion, without notice, to suspend sales
or withdraw the offering of Shares entirely. Each party hereto has the right to
cancel this agreement with respect to one or more Funds upon fifteen days prior
written notice to the other party.
9. I. You shall indemnify and hold us harmless from and against any and all
losses, costs, (including reasonable attorney's fees) claims, damages and
liabilities which arise as a result of action taken pursuant to instructions
from you, or on your behalf to: (a)(i) place orders for Shares of a Fund with
the Fund's transfer agent or direct the transfer agent to receive instructions
for the order of Shares, and (ii) accept monies or direct that the transfer
agent accept monies as payment for the order of such Shares, all as contemplated
by and in accordance with Section 3 of the applicable Distribution Agreement;
(b)(i) place orders for the redemption of Shares of a Fund with the Fund's
transfer agent or direct the transfer agent to receive instruction for the
redemption of such Shares and (ii) to pay redemption proceeds or to direct that
the transfer agent pay redemption proceeds in connection with orders for the
redemption of Shares, all as contemplated by and in accordance with Section 4 of
the applicable Distribution Agreement; Distributor agrees to indemnify and hold
harmless you and your affiliates, officers, directors, control persons and
employees from and against any and all losses, costs (including reasonable
attorney's fees), claims, damages and liabilities which arise as a result of
Distributor's failure to fulfill its obligations hereunder and from any alleged
inaccuracy, omission or misrepresentation contained in any prospectus or any
advertising, or sales literature prepared by Distributor or the Fund provided,
however, that in no case, (i) is this indemnity in favor of you or us and any of
other party's such controlling persons to be deemed to protect us or any such
controlling persons against any liability to which we or any such controlling
persons would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence in the performance of our duties or by reason of reckless
disregard of our obligations and duties under this Agreement or the applicable
Distribution Agreement; or (ii) are you to be liable under the indemnity
agreement contained in this paragraph with respect to any claim made against us
or any such controlling persons, unless we or any such controlling persons, as
the case may be, shall have notified you in writing within a reasonable time
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon us or such controlling persons (or
after we or such controlling persons shall have received notice of such service
on any designated agent), notwithstanding the failure to notify you of any such
claim shall not relieve you from any liability which you may have to the person
against whom such action is brought otherwise than on account of the indemnity
agreement contained in this paragraph.
II. You will be entitled to participate at your own expense in the defense,
or, if you so elect, to assume the defense, of any suit brought to enforce any
such liability, but if you elect to assume the defense, such defense shall be
conducted by counsel chosen by you and reasonably satisfactory to us or such
controlling person or persons, defendant or defendants in the suit. In the event
you elect to assume the defense of any such suit and retain such counsel, we or
such controlling person or persons, defendant or defendants in the suit, shall
bear the fees and expenses of any additional counsel retained by them, but, in
case you do not elect to assume the defense of any such suit, you will reimburse
us or such controlling person or persons, defendant or defendants in the suit,
for the reasonable fees and expenses of any counsel retained by them. Each party
shall promptly notify the other party to this Agreement of the commencement of
any litigation or proceedings against it or any of its officers or directors in
connection with the issuance or sale of the Shares pursuant to this Agreement.
2
<PAGE>
III. If the indemnification provided for in this Section 9 is unavailable or
insufficient to hold harmless the Distributor, as provided above in respect of
any losses, claims, damages, liabilities or expenses (or actions in respect
thereof) referred to herein, then you shall contribute to the amount paid or
payable by us as a result of such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) in such proportion as is appropriate to
reflect the relative benefits received by you on the one hand and us on the
other from the offering of the Shares. If, however, the allocation provided by
the immediately preceding sentence is not permitted by applicable law, then you
shall contribute to such amount paid or payable by such indemnified party in
such proportion as is appropriate to reflect not only such relative benefits but
also your relative fault on the one hand and our relative fault on the other, in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses (or actions in respect thereof), as
well as any other relevant equitable considerations. You and we agree that it
would not be just and equitable if contribution were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to above. The amount paid or payable by us
as a result of the losses, claims, damages, liabilities or expenses (or actions
in respect thereof) referred to above shall be deemed to include any legal or
other expenses reasonably incurred by us in connection with investigating or
defending any such claim. Notwithstanding the provisions of this subsection
(III), you shall not be required to contribute any amount in excess of the
amount by which the total price at which the Shares distributed by you to the
public were offered to the public exceeds the amount of any damages which you
have otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
IV. Notwithstanding the provisions of subsections (I), (II) and (III), we
shall indemnify, defend and hold harmless you and your officers, directors,
employees, affiliates, agents, successors and assigns from and against any and
all claims and all related losses, expenses, damages, cost and liabilities
including reasonable attorneys' fees and expenses incurred in investigation or
defense, arising out of or related to any breach of any representation, warranty
or covenant by us contained in Section 15 of this Agreement.
11. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the distribution and
redemption of Shares. Neither party shall be under any liability to the other
party except for lack of good faith and for obligations expressly assumed
herein. Nothing contained in this paragraph is intended to operate as, and the
provisions of this paragraph shall not in any way whatsoever constitute, a
waiver by you of compliance with any provision of the Securities Act, or of the
rules and regulations of the Securities and Exchange Commission issued
thereunder.
12. Each party represents that it is a member in good standing of the
National Association of Securities Dealers, Inc. and, with respect to any sales
in the United States, each party hereby agrees to abide by the Rules of Fair
Practice of such Association relating to the performance of the obligations
hereunder.
13. We will inform you in writing as to the states in which we believe the
Shares have been qualified for sale under, or are exempt from the requirements
of, the respective securities laws of such states, but we assume no
responsibility or obligation as to your right to sell Shares in any
jurisdiction.
14. Notwithstanding any other provision of this Agreement to the contrary,
we represent and warrant that the names and addresses of your customers (or
customers of your affiliates) which have or which may come to our attention in
connection with this Agreement are confidential and are your exclusive property
and shall not be utilized by us except in connection with the functions
performed by us in connection with this Agreement. Notwithstanding the
foregoing, should a customer request, that we or an organization affiliated with
us, provide services to such customer, we or such affiliated organization shall
in no way violate this representation and warranty, nor be considered in breach
of this Agreement.
15. We represent, warrant, and covenant to you that the marketing materials,
any communications distributed to the public and training materials designed by
us or our agents relating to the product sold under this Agreement are true and
accurate and do not omit to state a fact necessary to make the
3
<PAGE>
information contained therein not misleading and comply with applicable federal
and state laws. We further represent, warrant, and covenant to you that the
performance by us of our obligations under this Agreement in no way constitutes
an infringement on or other violation of copyright, trade secret, trademark,
proprietary information or non-disclosure rights of any other party.
16. We shall maintain a contingency disaster recovery plan, and, in the
event you are so required by any regulatory or governmental agency, we shall
make such plan available to you for inspection at your office upon reasonable
advance notice by you. Each party agrees that it will at all times conduct its
activities under this Agreement in an equitable, legal and professional manner.
17. We understand that the performance of your and our obligations under
this Agreement is subject to examination during business hours by your
authorized representatives and auditors and by federal and state regulatory
agencies, and we agree that upon being given reasonable notice and proper
identification we shall submit or furnish at a reasonable time and place to any
such representative or regulatory agency reports, information, or other data
relating to this Agreement as may reasonably be required or requested by you. We
shall maintain and make available to you upon reasonable notice all material,
data, files, and records relating to this Agreement for a period of not less
than three years after the termination of this Agreement.
18. The sales, advertising and promotional materials designed by either
party or its agents relating to products sold under this Agreement shall comply
with applicable federal and state laws. Each party agrees that the sales,
advertising and promotional materials shall be made available to the other party
prior to distribution to your employees or customers.
19. Any controversy or claim between or among the parties hereto arising out
of or relating to this Agreement, including any claim based on or arising from
an alleged tort, shall be determined by binding arbitration in accordance with
the rules of the National Association of Securities Dealers, Inc. Judgment upon
any arbitration award may be entered in any court having jurisdiction. Any party
to this Agreement may bring an action, including a summary or expedited
proceeding, to compel arbitration of any controversy or claim to which this
Agreement applies in any court having jurisdiction over such action.
20. All notices or other communications under this Agreement shall be in
writing and given as follows:
If to us: Morgan Stanley Dean Witter Distributors
Inc.
Attn: Barry Fink,
Two World Trade Center
New York, NY 10048
If to you: National Financial
Services Corporation
Attn:
4201 Congress Street, Suite 245
Boston, MA
or such other address as the parties may hereafter specify in writing. Each such
notice to any party shall be either hand-delivered or transmitted, postage
prepaid, by registered or certified United States mail with return receipt
requested, and shall be deemed effective only upon receipt.
4
<PAGE>
21. This Agreement shall become effective as of the date of your acceptance
hereof, provided that you return to us promptly a signed and dated copy.
MORGAN STANLEY DEAN WITTER
DISTRIBUTORS INC.
By ...................................
(Authorized Signature)
Please return one signed copy
of this agreement to:
Morgan Stanley Dean Witter
Distributors Inc.
Two World Trade Center
New York, New York 10048
Accepted:
Firm Name: .........................
By: ..................................
Address: ...........................
...................
Date: October , 1998
...................
5
<PAGE>
SCHEDULE A
<TABLE>
<C> <S>
Dean Witter Global Asset Allocation Fund
Morgan Stanley Dean Witter American Value Fund
Morgan Stanley Dean Witter Balanced Growth Fund
Morgan Stanley Dean Witter Balanced Income Fund
Morgan Stanley Dean Witter California Tax-Free Income Fund
Morgan Stanley Dean Witter Capital Appreciation Fund
Morgan Stanley Dean Witter Capital Growth Securities
Morgan Stanley Dean Witter Competitive Edge Fund, "Best Ideas" Portfolio
Morgan Stanley Dean Witter Convertible Securities Trust
Morgan Stanley Dean Witter Developing Growth Securities Trust
Morgan Stanley Dean Witter Diversified Income Trust
Morgan Stanley Dean Witter Dividend Growth Securities Inc.
Morgan Stanley Dean Witter Equity Fund
Morgan Stanley Dean Witter European Growth Fund Inc.
Morgan Stanley Dean Witter Federal Securities Trust
Morgan Stanley Dean Witter Financial Services Trust
Morgan Stanley Dean Witter Fund of Funds
Morgan Stanley Dean Witter Global Dividend Growth Securities
Morgan Stanley Dean Witter Global Short-Term Income Fund Inc.
Morgan Stanley Dean Witter Global Utilities Fund
Morgan Stanley Dean Witter Growth Fund
Morgan Stanley Dean Witter Hawaii Municipal Trust
Morgan Stanley Dean Witter Health Sciences Trust
Morgan Stanley Dean Witter High Yield Securities Inc.
Morgan Stanley Dean Witter Income Builder Fund
Morgan Stanley Dean Witter Information Fund
Morgan Stanley Dean Witter Intermediate Income Securities Inc.
Morgan Stanley Dean Witter International SmallCap Fund
Morgan Stanley Dean Witter Japan Fund
Morgan Stanley Dean Witter Limited Term Municipal Trust
Morgan Stanley Dean Witter Market Leader Trust
Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities
Morgan Stanley Dean Witter Mid-Cap Growth Fund
Morgan Stanley Dean Witter Multi-State Municipal Series Trust
Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
Morgan Stanley Dean Witter New York Tax-Free Income Fund
Morgan Stanley Dean Witter Pacific Growth Fund Inc.
Morgan Stanley Dean Witter Precious Metals and Minerals Trust
Morgan Stanley Dean Witter S&P 500 Index Fund
Morgan Stanley Dean Witter S&P 500 Select Fund
Morgan Stanley Dean Witter Short-Term Bond Fund
Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
Morgan Stanley Dean Witter Special Value Fund
Morgan Stanley Dean Witter Strategist Fund
Morgan Stanley Dean Witter Tax-Exempt Securities Trust
Morgan Stanley Dean Witter U.S. Government Securities Trust
Morgan Stanley Dean Witter Utilities Fund
Morgan Stanley Dean Witter Value-Added Market Series
Morgan Stanley Dean Witter Value Fund
Morgan Stanley Dean Witter World Wide Income Trust
</TABLE>
A-1
<PAGE>
AMENDED AND RESTATED
TRANSFER AGENCY AND SERVICE AGREEMENT
with
MORGAN STANLEY DEAN WITTER TRUST FSB
[open-end funds]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Article 1 Terms of Appointment. . . . . . . . . . . . . . . . . . . 1
Article 2 Fees and Expenses . . . . . . . . . . . . . . . . . . . . 5
Article 3 Representations and Warranties of MSDW TRUST. . . . . . . 6
Article 4 Representations and Warranties of the Fund. . . . . . . . 7
Article 5 Duty of Care and Indemnification. . . . . . . . . . . . . 7
Article 6 Documents and Covenants of the Fund and MSDW TRUST. . . .10
Article 7 Duration and Termination of Agreement . . . . . . . . . .13
Article 8 Assignment. . . . . . . . . . . . . . . . . . . . . . . .14
Article 9 Affiliations. . . . . . . . . . . . . . . . . . . . . . .14
Article 10 Amendment . . . . . . . . . . . . . . . . . . . . . . . .15
Article 11 Applicable Law. . . . . . . . . . . . . . . . . . . . . .15
Article 12 Miscellaneous . . . . . . . . . . . . . . . . . . . . . .15
Article 13 Merger of Agreement . . . . . . . . . . . . . . . . . . .17
Article 14 Personal Liability. . . . . . . . . . . . . . . . . . . .17
</TABLE>
-i-
<PAGE>
AMENDED AND RESTATED TRANSFER AGENCY AND SERVICE AGREEMENT
AMENDED AND RESTATED AGREEMENT made as of the 22nd day of June, 1998
by and between each of the Funds listed on the signature pages hereof, each of
such Funds acting severally on its own behalf and not jointly with any of such
other Funds (each such Fund hereinafter referred to as the "Fund"), each such
Fund having its principal office and place of business at Two World Trade
Center, New York, New York, 10048, and MORGAN STANLEY DEAN WITTER TRUST FSB
("MSDW TRUST"), a federally chartered savings bank, having its principal office
and place of business at Harborside Financial Center, Plaza Two, Jersey City,
New Jersey 07311.
WHEREAS, the Fund desires to appoint MSDW TRUST as its transfer agent,
dividend disbursing agent and shareholder servicing agent and MSDW TRUST desires
to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1 TERMS OF APPOINTMENT; DUTIES OF MSDW TRUST
1.1 Subject to the terms and conditions set forth in this
Agreement, the Fund hereby employs and appoints MSDW TRUST to act as, and MSDW
TRUST agrees to act as, the transfer agent for each series and class of shares
of the Fund, whether now or hereafter authorized or issued ("Shares"), dividend
disbursing agent and shareholder servicing agent in
-1-
<PAGE>
connection with any accumulation, open-account or similar plans provided to the
holders of such Shares ("Shareholders") and set out in the currently effective
prospectus and statement of additional information ("prospectus") of the Fund,
including without limitation any periodic investment plan or periodic withdrawal
program.
1.2 MSDW TRUST agrees that it will perform the following
services:
(a) In accordance with procedures established from time to
time by agreement between the Fund and MSDW TRUST, MSDW TRUST shall:
(i) Receive for acceptance, orders for the purchase of
Shares, and promptly deliver payment and appropriate documentation therefor to
the custodian of the assets of the Fund (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate
number of Shares and issue certificates therefor or hold such Shares in book
form in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and
redemption directions and deliver the appropriate documentation therefor to the
Custodian;
(iv) At the appropriate time as and when it receives monies
paid to it by the Custodian with respect to any redemption, pay over or cause to
be paid over in the appropriate manner such monies as instructed by the
redeeming Shareholders;
-2-
<PAGE>
(v) Effect transfers of Shares by the registered owners
thereof upon receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and
distributions declared by the Fund;
(vii) Calculate any sales charges payable by a Shareholder on
purchases and/or redemptions of Shares of the Fund as such charges may be
reflected in the prospectus;
(viii) Maintain records of account for and advise the Fund and
its Shareholders as to the foregoing; and
(ix) Record the issuance of Shares of the Fund and maintain
pursuant to Rule 17Ad-10(e) under the Securities Exchange Act of 1934 ("1934
Act") a record of the total number of Shares of the Fund which are authorized,
based upon data provided to it by the Fund, and issued and outstanding. MSDW
TRUST shall also provide to the Fund on a regular basis the total number of
Shares that are authorized, issued and outstanding and shall notify the Fund in
case any proposed issue of Shares by the Fund would result in an overissue. In
case any issue of Shares would result in an overissue, MSDW TRUST shall refuse
to issue such Shares and shall not countersign and issue any certificates
requested for such Shares. When recording the issuance of Shares, MSDW TRUST
shall have no obligation to take cognizance of any Blue Sky laws relating to the
issue of sale of such Shares, which functions shall be the sole responsibility
of the Fund.
(b) In addition to and not in lieu of the services set
forth in the above paragraph (a), MSDW TRUST shall:
-3-
<PAGE>
(i) perform all of the customary services of a transfer
agent, dividend disbursing agent and, as relevant, shareholder servicing agent
in connection with dividend reinvestment, accumulation, open-account or similar
plans (including without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to, maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing proxies, receiving and
tabulating proxies, mailing shareholder reports and prospectuses to current
Shareholders, withholding taxes on U.S. resident and non-resident alien
accounts, preparing and filing appropriate forms required with respect to
dividends and distributions by federal tax authorities for all Shareholders,
preparing and mailing confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares and other confirmable
transactions in Shareholder accounts, preparing and mailing activity statements
for Shareholders and providing Shareholder account information;
(ii) open any and all bank accounts which may be necessary or
appropriate in order to provide the foregoing services; and
(iii) provide a system that will enable the Fund to monitor
the total number of Shares sold in each State or other jurisdiction.
(c) In addition, the Fund shall:
(i) identify to MSDW TRUST in writing those transactions and
assets to be treated as exempt from Blue Sky reporting for each State; and
(ii) verify the inclusion on the system prior to activation
of each State in which Fund shares may be sold and thereafter monitor the daily
purchases and sales for shareholders in each State. The responsibility of MSDW
TRUST for the Fund's status under the securities laws of any State or other
jurisdiction is limited to the inclusion on the system of each State as to which
the Fund has informed MSDW TRUST that shares may be sold in
-4-
<PAGE>
compliance with state securities laws and the reporting of purchases and sales
in each such State to the Fund as provided above and as agreed from time to time
by the Fund and MSDW TRUST.
(d) MSDW TRUST shall provide such additional services and
functions not specifically described herein as may be mutually agreed between
MSDW TRUST and the Fund. Procedures applicable to such services may be
established from time to time by agreement between the Fund and MSDW TRUST.
Article 2 FEES AND EXPENSES
2.1 For performance by MSDW TRUST pursuant to this
Agreement, each Fund agrees to pay MSDW TRUST an annual maintenance fee for each
Shareholder account and certain transactional fees, if applicable, as set out in
the respective fee schedule attached hereto as Schedule A. Such fees and
out-of-pocket expenses and advances identified under Section 2.2 below may be
changed from time to time subject to mutual written agreement between the Fund
and MSDW TRUST.
2.2 In addition to the fees paid under Section 2.1 above,
the Fund agrees to reimburse MSDW TRUST for out of pocket expenses in connection
with the services rendered by MSDW TRUST hereunder. In addition, any other
expenses incurred by MSDW TRUST at the request or with the consent of the Fund
will be reimbursed by the Fund.
2.3 The Fund agrees to pay all fees and reimbursable
expenses within a reasonable period of time following the mailing of the
respective billing notice. Postage for mailing of dividends, proxies, Fund
reports and other mailings to all Shareholder accounts shall be
-5-
<PAGE>
advanced to MSDW TRUST by the Fund upon request prior to the mailing date of
such materials.
Article 3 REPRESENTATIONS AND WARRANTIES OF MSDW TRUST
MSDW TRUST represents and warrants to the Fund that:
3.1 It is a federally chartered savings bank whose principal
office is in New Jersey.
3.2 It is and will remain registered with the U.S.
Securities and Exchange Commission ("SEC") as a Transfer Agent pursuant to the
requirements of Section 17A of the 1934 Act.
3.3 It is empowered under applicable laws and by its charter
and By-Laws to enter into and perform this Agreement.
3.4 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.5 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 REPRESENTATIONS AND WARRANTIES OF THE FUND
The Fund represents and warrants to MSDW TRUST that:
4.1 It is a corporation duly organized and existing and in
good standing under the laws of Delaware or Maryland or a trust duly organized
and existing and in good standing under the laws of Massachusetts, as the case
may be.
-6-
<PAGE>
4.2 It is empowered under applicable laws and by its
Articles of Incorporation or Declaration of Trust, as the case may be, and under
its By-Laws to enter into and perform this Agreement.
4.3 All corporate proceedings necessary to authorize it to
enter into and perform this Agreement have been taken.
4.4 It is an investment company registered with the SEC
under the Investment Company Act of 1940, as amended (the "1940 Act").
4.5 A registration statement under the Securities Act of
1933 (the "1933 Act") is currently effective and will remain effective, and
appropriate state securities law filings have been made and will continue to be
made, with respect to all Shares of the Fund being offered for sale.
Article 5 DUTY OF CARE AND INDEMNIFICATION
5.1 MSDW TRUST shall not be responsible for, and the Fund
shall indemnify and hold MSDW TRUST harmless from and against, any and all
losses, damages, costs, charges, counsel fees, payments, expenses and liability
arising out of or attributable to:
(a) All actions of MSDW TRUST or its agents or
subcontractors required to be taken pursuant to this Agreement, provided that
such actions are taken in good faith and without negligence or willful
misconduct.
(b) The Fund's refusal or failure to comply with the terms
of this
-7-
<PAGE>
Agreement, or which arise out of the Fund's lack of good faith, negligence or
willful misconduct or which arise out of breach of any representation or
warranty of the Fund hereunder.
(c) The reliance on or use by MSDW TRUST or its agents or
subcontractors of information, records and documents which (i) are received by
MSDW TRUST or its agents or subcontractors and furnished to it by or on behalf
of the Fund, and (ii) have been prepared and/or maintained by the Fund or any
other person or firm on behalf of the Fund.
(d) The reliance on, or the carrying out by MSDW TRUST or
its agents or subcontractors of, any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any
requirement under the federal securities laws or regulations or the securities
or Blue Sky laws of any State or other jurisdiction that notice of offering of
such Shares in such State or other jurisdiction or in violation of any stop
order or other determination or ruling by any federal agency or any State or
other jurisdiction with respect to the offer or sale of such Shares in such
State or other jurisdiction.
-8-
<PAGE>
5.2 MSDW TRUST shall indemnify and hold the Fund harmless
from or against any and all losses, damages, costs, charges, counsel fees,
payments, expenses and liability arising out of or attributable to any action or
failure or omission to act by MSDW TRUST as a result of the lack of good faith,
negligence or willful misconduct of MSDW TRUST, its officers, employees or
agents.
5.3 At any time, MSDW TRUST may apply to any officer of the
Fund for instructions, and may consult with legal counsel to the Fund, with
respect to any matter arising in connection with the services to be performed by
MSDW TRUST under this Agreement, and MSDW TRUST and its agents or subcontractors
shall not be liable and shall be indemnified by the Fund for any action taken or
omitted by it in reliance upon such instructions or upon the opinion of such
counsel. MSDW TRUST, its agents and subcontractors shall be protected and
indemnified in acting upon any paper or document furnished by or on behalf of
the Fund, reasonably believed to be genuine and to have been signed by the
proper person or persons, or upon any instruction, information, data, records or
documents provided to MSDW TRUST or its agents or subcontractors by machine
readable input, telex, CRT data entry or other similar means authorized by the
Fund, and shall not be held to have notice of any change of authority of any
person, until receipt of written notice thereof from the Fund. MSDW TRUST, its
agents and subcontractors shall also be protected and indemnified in recognizing
stock certificates which are reasonably believed to bear the proper manual or
facsimile signature of the officers of the Fund, and the proper countersignature
of any former transfer agent or registrar, or of a co-transfer agent or
co-registrar.
-9-
<PAGE>
5.4 In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such party shall not be liable for
damages to the other for any damages resulting from such failure to perform or
otherwise from such causes.
5.5 Neither party to this Agreement shall be liable to the
other party for consequential damages under any provision of this Agreement or
for any act or failure to act hereunder.
5.6 In order that the indemnification provisions contained
in this Article 5 shall apply, upon the assertion of a claim for which either
party may be required to indemnify the other, the party seeking indemnification
shall promptly notify the other party of such assertion, and shall keep the
other party advised with respect to all developments concerning such claim. The
party who may be required to indemnify shall have the option to participate with
the party seeking indemnification in the defense of such claim. The party
seeking indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to indemnify it
except with the other party's prior written consent.
Article 6 DOCUMENTS AND COVENANTS OF THE FUND AND MSDW TRUST
6.1 The Fund shall promptly furnish to MSDW TRUST the
following, unless previously furnished to Dean Witter Trust Company, the prior
transfer agent of the Fund:
-10-
<PAGE>
(a) If a corporation:
(i) A certified copy of the resolution of the Board of
Directors of the Fund authorizing the appointment of MSDW TRUST and the
execution and delivery of this Agreement;
(ii) A certified copy of the Articles of Incorporation and
By-Laws of the Fund and all amendments thereto;
(iii) Certified copies of each vote of the Board of Directors
designating persons authorized to give instructions on behalf of the Fund and
signature cards bearing the signature of any officer of the Fund or any other
person authorized to sign written instructions on behalf of the Fund;
(iv) A specimen of the certificate for Shares of the Fund in
the form approved by the Board of Directors, with a certificate of the Secretary
of the Fund as to such approval;
(b) If a business trust:
(i) A certified copy of the resolution of the Board of
Trustees of the Fund authorizing the appointment of MSDW TRUST and the execution
and delivery of this Agreement;
(ii) A certified copy of the Declaration of Trust and By-Laws
of the Fund and all amendments thereto;
-11-
<PAGE>
(iii) Certified copies of each vote of the Board of Trustees
designating persons authorized to give instructions on behalf of the Fund and
signature cards bearing the signature of any officer of the Fund or any other
person authorized to sign written instructions on behalf of the Fund;
(iv) A specimen of the certificate for Shares of the Fund in
the form approved by the Board of Trustees, with a certificate of the Secretary
of the Fund as to such approval;
(c) The current registration statements and any amendments
and supplements thereto filed with the SEC pursuant to the requirements of the
1933 Act or the 1940 Act;
(d) All account application forms or other documents
relating to Shareholder accounts and/or relating to any plan, program or service
offered or to be offered by the Fund; and
(e) Such other certificates, documents or opinions as MSDW
TRUST deems to be appropriate or necessary for the proper performance of its
duties.
6.2 MSDW TRUST hereby agrees to establish and maintain
facilities and procedures reasonably acceptable to the Fund for safekeeping of
Share certificates, check forms and facsimile signature imprinting devices, if
any; and for the preparation or use, and for keeping account of, such
certificates, forms and devices.
-12-
<PAGE>
6.3 MSDW TRUST shall prepare and keep records relating to
the services to be performed hereunder, in the form and manner as it may deem
advisable and as required by applicable laws and regulations. To the extent
required by Section 31 of the 1940 Act, and the rules and regulations
thereunder, MSDW TRUST agrees that all such records prepared or maintained by
MSDW TRUST relating to the services performed by MSDW TRUST hereunder are the
property of the Fund and will be preserved, maintained and made available in
accordance with such Section 31 of the 1940 Act, and the rules and regulations
thereunder, and will be surrendered promptly to the Fund on and in accordance
with its request.
6.4 MSDW TRUST and the Fund agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential and shall not be voluntarily disclosed to
any other person except as may be required by law or with the prior consent of
MSDW TRUST and the Fund.
6.5 In case of any request or demands for the inspection of
the Shareholder records of the Fund, MSDW TRUST will endeavor to notify the Fund
and to secure instructions from an authorized officer of the Fund as to such
inspection. MSDW TRUST reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person.
Article 7 DURATION AND TERMINATION OF AGREEMENT
7.1 This Agreement shall remain in full force and effect
until August 1,
-13-
<PAGE>
2000 and from year-to-year thereafter unless terminated by either party as
provided in Section 7.2 hereof.
7.2 This Agreement may be terminated by the Fund on 60 days
written notice, and by MSDW TRUST on 90 days written notice, to the other party
without payment of any penalty.
7.3 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and other
materials will be borne by the Fund. Additionally, MSDW TRUST reserves the
right to charge for any other reasonable fees and expenses associated with such
termination.
Article 8 ASSIGNMENT
8.1 Except as provided in Section 8.3 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
8.2 This Agreement shall inure to the benefit of and be
binding upon the parties and their respective permitted successors and assigns.
8.3 MSDW TRUST may, in its sole discretion and without
further consent by the Fund, subcontract, in whole or in part, for the
performance of its obligations and duties hereunder with any person or entity
including but not limited to companies which are affiliated with MSDW TRUST;
PROVIDED, HOWEVER, that such person or entity has and maintains the
qualifications, if any, required to perform such obligations and duties, and
that MSDW TRUST
-14-
<PAGE>
shall be as fully responsible to the Fund for the acts and omissions of any
agent or subcontractor as it is for its own acts or omissions under this
Agreement.
Article 9 AFFILIATIONS
9.1 MSDW TRUST may now or hereafter, without the consent of
or notice to the Fund, function as transfer agent and/or shareholder servicing
agent for any other investment company registered with the SEC under the 1940
Act and for any other issuer, including without limitation any investment
company whose adviser, administrator, sponsor or principal underwriter is or may
become affiliated with Morgan Stanley Dean Witter & Co. or any of its direct or
indirect subsidiaries or affiliates.
9.2 It is understood and agreed that the Directors or
Trustees (as the case may be), officers, employees, agents and shareholders of
the Fund, and the directors, officers, employees, agents and shareholders of the
Fund's investment adviser and/or distributor, are or may be interested in MSDW
TRUST as directors, officers, employees, agents and shareholders or otherwise,
and that the directors, officers, employees, agents and shareholders of MSDW
TRUST may be interested in the Fund as Directors or Trustees (as the case may
be), officers, employees, agents and shareholders or otherwise, or in the
investment adviser and/or distributor as directors, officers, employees, agents,
shareholders or otherwise.
Article 10 AMENDMENT
10.1 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Board of Directors or the Board of Trustees (as the case may be) of the
Fund.
-15-
<PAGE>
Article 11 APPLICABLE LAW
11.1 This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of the State of New
York.
Article 12 MISCELLANEOUS
12.1 In the event that one or more additional investment
companies managed or administered by Morgan Stanley Dean Witter Advisors Inc. or
any of its affiliates ("Additional Funds") desires to retain MSDW TRUST to act
as transfer agent, dividend disbursing agent and/or shareholder servicing agent,
and MSDW TRUST desires to render such services, such services shall be provided
pursuant to a letter agreement, substantially in the form of Exhibit A hereto,
between MSDW TRUST and each Additional Fund.
12.2 In the event of an alleged loss or destruction of any
Share certificate, no new certificate shall be issued in lieu thereof, unless
there shall first be furnished to MSDW TRUST an affidavit of loss or non-receipt
by the holder of Shares with respect to which a certificate has been lost or
destroyed, supported by an appropriate bond satisfactory to MSDW TRUST and the
Fund issued by a surety company satisfactory to MSDW TRUST, except that MSDW
TRUST may accept an affidavit of loss and indemnity agreement executed by the
registered holder (or legal representative) without surety in such form as MSDW
TRUST deems appropriate indemnifying MSDW TRUST and the Fund for the issuance of
a replacement certificate, in cases where the alleged loss is in the amount of
$1,000 or less.
12.3 In the event that any check or other order for payment
of money on the
-16-
<PAGE>
account of any Shareholder or new investor is returned unpaid for any reason,
MSDW TRUST will (a) give prompt notification to the Fund's distributor
("Distributor") (or to the Fund if the Fund acts as its own distributor) of such
non-payment; and (b) take such other action, including imposition of a
reasonable processing or handling fee, as MSDW TRUST may, in its sole
discretion, deem appropriate or as the Fund and, if applicable, the Distributor
may instruct MSDW TRUST.
12.4 Any notice or other instrument authorized or required by
this Agreement to be given in writing to the Fund or to MSDW TRUST shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Fund:
[Name of Fund]
Two World Trade Center
New York, New York 10048
Attention: General Counsel
To MSDW TRUST:
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
Attention: President
Article 13 MERGER OF AGREEMENT
13.1 This Agreement constitutes the entire agreement between
the parties hereto and supersedes any prior agreement with respect to the
subject matter hereof whether oral or written.
-17-
<PAGE>
Article 14 PERSONAL LIABILITY
14.1 In the case of a Fund organized as a Massachusetts
business trust, a copy of the Declaration of Trust of the Fund is on file with
the Secretary of The Commonwealth of Massachusetts, and notice is hereby given
that this instrument is executed on behalf of the Board of Trustees of the Fund
as Trustees and not individually and that the obligations of this instrument are
not binding upon any of the Trustees or shareholders individually but are
binding only upon the assets and property of the Fund; provided, however, that
the Declaration of Trust of the Fund provides that the assets of a particular
Series of the Fund shall under no circumstances be charged with liabilities
attributable to any other Series of the Fund and that all persons extending
credit to, or contracting with or having any claim against, a particular Series
of the Fund shall look only to the assets of that particular Series for payment
of such credit, contract or claim.
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Agreement to be executed in their names and on their behalf by and
through their duly authorized officers, as of the day and year first above
written.
MORGAN STANLEY DEAN WITTER FUNDS
MONEY MARKET FUNDS
1. Morgan Stanley Dean Witter Liquid Asset Fund Inc.
2. Active Assets Money Trust
3. Morgan Stanley Dean Witter U.S. Government Money Market Trust
4. Active Assets Government Securities Trust
5. Morgan Stanley Dean Witter Tax-Free Daily Income Trust
6. Active Assets Tax-Free Trust
7. Morgan Stanley Dean Witter California Tax-Free Daily Income Trust
8. Morgan Stanley Dean Witter New York Municipal Money Market Trust
9. Active Assets California Tax-Free Trust
-18-
<PAGE>
EQUITY FUNDS
10. Morgan Stanley Dean Witter American Value Fund
11. Morgan Stanley Dean Witter Mid-Cap Growth Fund
12. Morgan Stanley Dean Witter Dividend Growth Securities Inc.
13. Morgan Stanley Dean Witter Capital Growth Securities
14. Morgan Stanley Dean Witter Global Dividend Growth Securities
15. Morgan Stanley Dean Witter Income Builder Fund
16. Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
17. Morgan Stanley Dean Witter Precious Metals and Minerals Trust
18. Morgan Stanley Dean Witter Developing Growth Securities Trust
19. Morgan Stanley Dean Witter Health Sciences Trust
20. Morgan Stanley Dean Witter Capital Appreciation Fund
21. Morgan Stanley Dean Witter Information Fund
22. Morgan Stanley Dean Witter Value-Added Market Series
23. Morgan Stanley Dean Witter European Growth Fund Inc.
24. Morgan Stanley Dean Witter Pacific Growth Fund Inc.
25. Morgan Stanley Dean Witter International SmallCap Fund
26. Morgan Stanley Dean Witter Japan Fund
27. Morgan Stanley Dean Witter Utilities Fund
28. Morgan Stanley Dean Witter Global Utilities Fund
29. Morgan Stanley Dean Witter Special Value Fund
30. Morgan Stanley Dean Witter Financial Services Trust
31. Morgan Stanley Dean Witter Market Leader Trust
32. Morgan Stanley Dean Witter Fund of Funds
33. Morgan Stanley Dean Witter S&P 500 Index Fund
34. Morgan Stanley Dean Witter Competitive Edge Fund
35. Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities
36. Morgan Stanley Dean Witter Equity Fund
37. Morgan Stanley Dean Witter Growth Fund
38. Morgan Stanley Dean Witter S&P 500 Select Fund
BALANCED FUNDS
39. Morgan Stanley Dean Witter Balanced Growth Fund
40. Morgan Stanley Dean Witter Balanced Income Trust
ASSET ALLOCATION FUNDS
41. Morgan Stanley Dean Witter Strategist Fund
42. Dean Witter Global Asset Allocation Fund
-19-
<PAGE>
FIXED INCOME FUNDS
43. Morgan Stanley Dean Witter High Yield Securities Inc.
44. Morgan Stanley Dean Witter High Income Securities
45. Morgan Stanley Dean Witter Convertible Securities Trust
46. Morgan Stanley Dean Witter Intermediate Income Securities
47. Morgan Stanley Dean Witter Short-Term Bond Fund
48. Morgan Stanley Dean Witter World Wide Income Trust
49. Morgan Stanley Dean Witter Global Short-Term Income Fund Inc.
50. Morgan Stanley Dean Witter Diversified Income Trust
51. Morgan Stanley Dean Witter U.S. Government Securities Trust
52. Morgan Stanley Dean Witter Federal Securities Trust
53. Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
54. Morgan Stanley Dean Witter Intermediate Term U.S. Treasury Trust
55. Morgan Stanley Dean Witter Tax-Exempt Securities Trust
56. Morgan Stanley Dean Witter Limited Term Municipal Trust
57. Morgan Stanley Dean Witter California Tax-Free Income Fund
58. Morgan Stanley Dean Witter New York Tax-Free Income Fund
59. Morgan Stanley Dean Witter Hawaii Municipal Trust
60. Morgan Stanley Dean Witter Multi-State Municipal Series Trust
61. Morgan Stanley Dean Witter Select Municipal Reinvestment Fund
SPECIAL PURPOSE FUNDS
62. Dean Witter Retirement Series
63. Morgan Stanley Dean Witter Variable Investment Series
64. Morgan Stanley Dean Witter Select Dimensions Investment Series
TCW/DW FUNDS
65. TCW/DW North American Government Income Trust
66. TCW/DW Latin American Growth Fund
67. TCW/DW Income and Growth Fund
68. TCW/DW Small Cap Growth Fund
69. TCW/DW Total Return Trust
-20-
<PAGE>
70. TCW/DW Global Telecom Trust
71. TCW/DW Mid-Cap Equity Trust
72. TCW/DW Emerging Markets Opportunities Trust
By:
----------------------------------
Barry Fink
Vice President and General Counsel
ATTEST:
- ----------------------------------
Assistant Secretary
MORGAN STANLEY DEAN WITTER TRUST FSB
By:
----------------------------------
John Van Heuvelen
President
ATTEST:
- ----------------------------------
Executive Vice President
-21-
<PAGE>
EXHIBIT A
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, NJ 07311
Gentlemen:
The undersigned, (INSET NAME OF INVESTMENT COMPANY) a (Massachusetts
business trust/Maryland corporation) (the "Fund"), desires to employ and appoint
Morgan Stanley Dean Witter Trust FSB ("MSDW TRUST") to act as transfer agent for
each series and class of shares of the Fund, whether now or hereafter authorized
or issued ("Shares"), dividend disbursing agent and shareholder servicing agent,
registrar and agent in connection with any accumulation, open-account or similar
plan provided to the holders of Shares, including without limitation any
periodic investment plan or periodic withdrawal plan.
The Fund hereby agrees that, in consideration for the payment by the
Fund to MSDW TRUST of fees as set out in the fee schedule attached hereto as
Schedule A, MSDW TRUST shall provide such services to the Fund pursuant to the
terms and conditions set forth in the Transfer Agency and Service Agreement
annexed hereto, as if the Fund was a signatory thereto.
-22-
<PAGE>
Please indicate MSDW TRUST's acceptance of employment and appointment
by the Fund in the capacities set forth above by so indicating in the space
provided below.
Very truly yours,
(NAME OF FUND)
By:
------------------------------------
Barry Fink
Vice President and General Counsel
ACCEPTED AND AGREED TO:
MORGAN STANLEY DEAN WITTER TRUST FSB
By:
------------------------------
Its:
-----------------------------
Date:
----------------------------
-23-
<PAGE>
Schedule A
Fund: Morgan Stanley Dean Witter Fund of Funds
Fees: (1) Annual maintenance fee of $12.65 per shareholder account,
payable monthly.
(2) A fee equal to 1/12 of the fee set forth in (1) above, for
providing Forms 1099 for accounts closed during the year, payable
following the end of the calendar year.
(3) Out-of-pocket expenses in accordance with Section 2.2 of the
Agreement.
(4) Fees for additional services not set forth in this Agreement
shall be as negotiated between the parties.
-24-
<PAGE>
SERVICES AGREEMENT
AGREEMENT made as of the 17th day of April, 1995, and amended as of June 22,
1998, by and between Morgan Stanley Dean Witter Advisors Inc., a Delaware
corporation (herein referred to as "MSDW Advisors"), and Morgan Stanley Dean
Witter Services Company Inc., a Delaware corporation (herein referred to as
"MSDW Services").
WHEREAS, MSDW Advisors has entered into separate agreements (each such
agreement being herein referred to as an "Investment Management Agreement") with
certain investment companies as set forth on Schedule A (each such investment
company being herein referred to as a "Fund" and, collectively, as the "Funds")
pursuant to which MSDW Advisors is to perform, or supervise the performance of,
among other services, administrative services for the Funds (and, in the case of
Funds with multiple portfolios, the Series or Portfolios of the Funds (such
Series and Portfolio being herein individually referred to as "a Series" and,
collectively, as "the Series"));
WHEREAS, MSDW Advisors desires to retain MSDW Services to perform the
administrative services as described below; and
WHEREAS, MSDW Services desires to be retained by MSDW Advisors to perform
such administrative services:
Now, therefore, in consideration of the mutual covenants and agreements of
the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. MSDW Services agrees to provide administrative services to each Fund as
hereinafter set forth. Without limiting the generality of the foregoing, MSDW
Services shall (i) administer the Fund's business affairs and supervise the
overall day-to-day operations of the Fund (other than rendering investment
advice); (ii) provide the Fund with full administrative services, including the
maintenance of certain books and records, such as journals, ledger accounts and
other records required under the Investment Company Act of 1940, as amended (the
"Act"), the notification to the Fund and MSDW Advisors of available funds for
investment, the reconciliation of account information and balances among the
Fund's custodian, transfer agent and dividend disbursing agent and MSDW
Advisors, and the calculation of the net asset value of the Fund's shares; (iii)
provide the Fund with the services of persons competent to perform such
supervisory, administrative and clerical functions as are necessary to provide
effective operation of the Fund; (iv) oversee the performance of administrative
and professional services rendered to the Fund by others, including its
custodian, transfer agent and dividend disbursing agent, as well as accounting,
auditing and other services; (v) provide the Fund with adequate general office
space and facilities; (vi) assist in the preparation and the printing of the
periodic updating of the Fund's registration statement and prospectus (and, in
the case of an open-end Fund, the statement of additional information), tax
returns, proxy statements, and reports to its shareholders and the Securities
and Exchange Commission; and (vii) monitor the compliance of the Fund's
investment policies and restrictions.
In the event that MSDW Advisors enters into an Investment Management
Agreement with another investment company, and wishes to retain MSDW Services to
perform administrative services hereunder, it shall notify MSDW Services in
writing. If MSDW Services is willing to render such services, it shall notify
MSDW Advisors in writing, whereupon such other Fund shall become a Fund as
defined herein.
2. MSDW Services shall, at its own expense, maintain such staff and employ
or retain such personnel and consult with such other persons as it shall from
time to time determine to be necessary or useful to the performance of its
obligations under this Agreement. Without limiting the generality of the
foregoing, the staff and personnel of MSDW Services shall be deemed to include
officers of MSDW Services and persons employed or otherwise retained by MSDW
Services (including officers and employees of MSDW Advisors, with the consent of
MSDW Advisors) to furnish services, statistical and other factual data,
information with respect to technical and scientific developments, and such
other information, advice and assistance as MSDW Services may desire. MSDW
Services shall maintain each Fund's records and books of account
1
<PAGE>
(other than those maintained by the Fund's transfer agent, registrar, custodian
and other agencies). All such books and records so maintained shall be the
property of the Fund and, upon request therefor, MSDW Services shall surrender
to MSDW Advisors or to the Fund such of the books and records so requested.
3. MSDW Advisors will, from time to time, furnish or otherwise make
available to MSDW Services such financial reports, proxy statements and other
information relating to the business and affairs of the Fund as MSDW Services
may reasonably require in order to discharge its duties and obligations to the
Fund under this Agreement or to comply with any applicable law and regulation or
request of the Board of Directors/Trustees of the Fund.
4. For the services to be rendered, the facilities furnished, and the
expenses assumed by MSDW Services, MSDW Advisors shall pay to MSDW Services
monthly compensation calculated daily (in the case of an open-end Fund) or
weekly (in the case of a closed-end Fund) by applying the annual rate or rates
set forth on Schedule B to the net assets of each Fund. Except as hereinafter
set forth, (i) in the case of an open-end Fund, compensation under this
Agreement shall be calculated by applying 1/365th of the annual rate or rates to
the Fund's or the Series' daily net assets determined as of the close of
business on that day or the last previous business day and (ii) in the case of a
closed-end Fund, compensation under this Agreement shall be calculated by
applying the annual rate or rates to the Fund's average weekly net assets
determined as of the close of the last business day of each week. If this
Agreement becomes effective subsequent to the first day of a month or shall
terminate before the last day of a month, compensation for that part of the
month this Agreement is in effect shall be prorated in a manner consistent with
the calculation of the fees as set forth on Schedule B. Subject to the
provisions of paragraph 5 hereof, payment of MSDW Services' compensation for the
preceding month shall be made as promptly as possible after completion of the
computations contemplated by paragraph 5 hereof.
5. In the event the operating expenses of any open-end Fund and/or any
Series thereof, or of InterCapital Income Securities Inc., including amounts
payable to MSDW Advisors pursuant to the Investment Management Agreement, for
any fiscal year ending on a date on which this Agreement is in effect, exceed
the expense limitations applicable to the Fund and/or any Series thereof imposed
by state securities laws or regulations thereunder, as such limitations may be
raised or lowered from time to time, or, in the case of InterCapital Income
Securities Inc. or Morgan Stanley Dean Witter Variable Investment Series or any
Series thereof, the expense limitation specified in the Fund's Investment
Management Agreement, the fee payable hereunder shall be reduced on a pro rata
basis in the same proportion as the fee payable by the Fund under the Investment
Management Agreement is reduced.
6. MSDW Services shall bear the cost of rendering the administrative
services to be performed by it under this Agreement, and shall, at its own
expense, pay the compensation of the officers and employees, if any, of the Fund
employed by MSDW Services, and such clerical help and bookkeeping services as
MSDW Services shall reasonably require in performing its duties hereunder.
7. MSDW Services will use its best efforts in the performance of
administrative activitives on behalf of each Fund, but in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations hereunder, MSDW Services shall not be liable to the Fund or any of
its investors for any error of judgment or mistake of law or for any act or
omission by MSDW Services or for any losses sustained by the Fund or its
investors. It is understood that, subject to the terms and conditions of the
Investment Management Agreement between each Fund and MSDW Advisors, MSDW
Advisors shall retain ultimate responsibility for all services to be performed
hereunder by MSDW Services. MSDW Services shall indemnify MSDW Advisors and hold
it harmless from any liability that MSDW Advisors may incur arising out of any
act or failure to act by MSDW Services in carrying out its responsibilities
hereunder.
8. It is understood that any of the shareholders, Directors/Trustees,
officers and employees of the Fund may be a shareholder, director, officer or
employee of, or be otherwise interested in, MSDW Services, and in any person
controlling, controlled by or under common control with MSDW Services, and that
MSDW Services and any person controlling, controlled by or under common control
with MSDW
2
<PAGE>
Services may have an interest in the Fund. It is also understood that MSDW
Services and any affiliated persons thereof or any persons controlling,
controlled by or under common control with MSDW Services have and may have
advisory, management, administration service or other contracts with other
organizations and persons, and may have other interests and businesses, and
further may purchase, sell or trade any securities or commodities for their own
accounts or for the account of others for whom they may be acting.
9. This Agreement shall continue until April 30, 1999, and thereafter shall
continue automatically for successive periods of one year unless terminated by
either party by written notice delivered to the other party within 30 days of
the expiration of the then-existing period. Notwithstanding the foregoing, this
Agreement may be terminated at any time, by either party on 30 days' written
notice delivered to the other party. In the event that the Investment Management
Agreement between any Fund and MSDW Advisors is terminated, this Agreement will
automatically terminate with respect to such Fund.
10. This Agreement may be amended or modified by the parties in any manner
by written agreement executed by each of the parties hereto.
11. This Agreement may be assigned by either party with the written consent
of the other party.
12. This Agreement shall be construed and interpreted in accordance with the
laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement, as amended, on June 22, 1998 in New York, New York.
MORGAN STANLEY DEAN WITTER ADVISORS INC.
By: ------------------------------------
Attest:
- ----------------------------------
MORGAN STANLEY DEAN WITTER SERVICES
COMPANY INC.
By: ------------------------------------
Attest:
- -----------------------------------
3
<PAGE>
SCHEDULE A
MORGAN STANLEY DEAN WITTER FUNDS
AS AMENDED AS OF JULY 22, 1998
OPEN-END FUNDS
1. Active Assets California Tax-Free Trust
2. Active Assets Government Securities Trust
3. Active Assets Money Trust
4. Active Assets Tax-Free Trust
5. Dean Witter Retirement Series
6. Morgan Stanley Dean Witter American Value Fund
7. Morgan Stanley Dean Witter Balanced Growth Fund
8. Morgan Stanley Dean Witter Balanced Income Fund
9. Morgan Stanley Dean Witter California Tax-Free Daily Income Trust
10. Morgan Stanley Dean Witter California Tax-Free Income Fund
11. Morgan Stanley Dean Witter Capital Appreciation Fund
12. Morgan Stanley Dean Witter Capital Growth Securities
13. Morgan Stanley Dean Witter Competitive Edge Fund, "BEST IDEAS" Portfolio
14. Morgan Stanley Dean Witter Convertible Securities Trust
15. Morgan Stanley Dean Witter Developing Growth Securities Trust
16. Morgan Stanley Dean Witter Diversified Income Trust
17. Morgan Stanley Dean Witter Dividend Growth Securities Inc.
18. Morgan Stanley Dean Witter Equity Fund
19. Morgan Stanley Dean Witter European Growth Fund Inc.
20. Morgan Stanley Dean Witter Federal Securities Trust
21. Morgan Stanley Dean Witter Financial Services Trust
22. Morgan Stanley Dean Witter Fund of Funds
(i) Domestic Portfolio
(ii) International Portfolio
23. Morgan Stanley Dean Witter Global Dividend Growth Securities
24. Morgan Stanley Dean Witter Global Short-Term Income Fund Inc.
25. Morgan Stanley Dean Witter Global Utilities Fund
26. Morgan Stanley Dean Witter Growth Fund
27. Morgan Stanley Dean Witter Hawaii Municipal Trust
28. Morgan Stanley Dean Witter Health Sciences Trust
29. Morgan Stanley Dean Witter High Yield Securities Inc.
30. Morgan Stanley Dean Witter Income Builder Fund
31. Morgan Stanley Dean Witter Information Fund
32. Morgan Stanley Dean Witter Intermediate Income Securities
33. Morgan Stanley Dean Witter Intermediate Term U.S. Treasury Trust
34. Morgan Stanley Dean Witter International SmallCap Fund
35. Morgan Stanley Dean Witter Japan Fund
36. Morgan Stanley Dean Witter Limited Term Municipal Trust
37. Morgan Stanley Dean Witter Liquid Asset Fund Inc.
38. Morgan Stanley Dean Witter Market Leader Trust
39. Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities
40. Morgan Stanley Dean Witter Mid-Cap Growth Fund
41. Morgan Stanley Dean Witter Multi-State Municipal Series Trust
42. Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
43. Morgan Stanley Dean Witter New York Municipal Money Market Trust
A-1
<PAGE>
44. Morgan Stanley Dean Witter New York Tax-Free Income Fund
45. Morgan Stanley Dean Witter Pacific Growth Fund Inc.
46. Morgan Stanley Dean Witter Precious Metals and Minerals Trust
47. Morgan Stanley Dean Witter Select Dimensions Investment Series
(i) American Value Portfolio
(ii) Balanced Growth Portfolio
(iii) Developing Growth Portfolio
(iv) Diversified Income Portfolio
(v) Dividend Growth Portfolio
(vi) Emerging Markets Portfolio
(vii) Global Equity Portfolio
(viii) Growth Portfolio
(ix) Mid-Cap Growth Portfolio
(x) Money Market Portfolio
(xi) North American Government Securities Portfolio
(xii) Utilities Portfolio
(xiii) Value-Added Market Portfolio
48. Morgan Stanley Dean Witter Select Municipal Reinvestment Fund
49. Morgan Stanley Dean Witter U.S. Government Money Market Trust
50. Morgan Stanley Dean Witter Utilities Fund
51. Morgan Stanley Dean Witter Short-Term Bond Fund
52. Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
53. Morgan Stanley Dean Witter Special Value Fund
54. Morgan Stanley Dean Witter Strategist Fund
55. Morgan Stanley Dean Witter S&P 500 Index Fund
56. Morgan Stanley Dean Witter S&P 500 Select Fund
57. Morgan Stanley Dean Witter Tax-Exempt Securities Trust
58. Morgan Stanley Dean Witter Tax-Free Daily Income Trust
59. Morgan Stanley Dean Witter U.S. Government Securities Trust
60. Morgan Stanley Dean Witter Value Fund
61. Morgan Stanley Dean Witter Value-Added Market Series
62. Morgan Stanley Dean Witter Variable Investment Series
(i) Capital Appreciation Portfolio
(ii) Capital Growth Portfolio
(iii) Competitive Edge "Best Ideas" Portfolio
(iv) Dividend Growth Portfolio
(v) Equity Portfolio
(vi) European Growth Portfolio
(vii) Global Dividend Growth Portfolio
(viii) High Yield Portfolio
(ix) Income Builder Portfolio
(x) Money Market Portfolio
(xi) Quality Income Plus Portfolio
(xii) Pacific Growth Portfolio
(xiii) S&P 500 Index Portfolio
(xiv) Strategist Portfolio
(xv) Utilities Portfolio
63. Morgan Stanley Dean Witter World Wide Income Trust
64. Morgan Stanley Dean Witter Worldwide High Income Fund
65. Dean Witter Global Asset Allocation Fund
A-2
<PAGE>
CLOSED-END FUNDS
66. High Income Advantage Trust
67. High Income Advantage Trust II
68. High Income Advantage Trust III
69. InterCapital Income Securities Inc.
70. Dean Witter Government Income Trust
71. InterCapital Insured Municipal Bond Trust
72. InterCapital Insured Municipal Trust
73. InterCapital Insured Municipal Income Trust
74. InterCapital California Insured Municipal Income Trust
75. InterCapital Insured Municipal Securities
76. InterCapital Insured California Municipal Securities
77. InterCapital Quality Municipal Investment Trust
78. InterCapital Quality Municipal Income Trust
79. InterCapital Quality Municipal Securities
80. InterCapital California Quality Municipal Securities
81. InterCapital New York Quality Municipal Securities
A-3
<PAGE>
SCHEDULE B
MORGAN STANLEY DEAN WITTER SERVICES COMPANY INC.
SCHEDULE OF ADMINISTRATIVE FEES
AS AMENDED AS OF JUNE 22, 1998
Monthly compensation calculated daily by applying the following annual rates
to a fund's daily net assets:
<TABLE>
<S> <C>
FIXED INCOME FUNDS
- ------------------
Morgan Stanley Dean Witter Balanced Income Fund 0.060% of the daily net assets.
Morgan Stanley Dean Witter California Tax-Free Income Fund 0.055% of the portion of the daily net assets not exceeding $500
million; 0.0525% of the portion of the daily net assets exceeding
$500 million but not exceeding $750 million; 0.050% of the
portion of the daily net assets exceeding $750 million but not
exceeding $1 billion; 0.0475% of the portion of the daily net
assets exceeding $1 billion but not exceeding $1.25 billion; and
0.045% of the portion of the daily net assets exceeding $1.25
billion.
Morgan Stanley Dean Witter Convertible Securities Trust 0.060% of the portion of the daily net assets not exceeding $750
million; 0.055% of the portion of the daily net assets exceeding
$750 million but not exceeding $1 billion; 0.050% of the portion
of the daily net assets of the exceeding $1 billion but not
exceeding $1.5 billion; 0.0475% of the portion of the daily net
assets exceeding $1.5 billion but not exceeding $2 billion;
0.045% of the portion of the daily net assets exceeding $2
billion but not exceeding $3 billion; and 0.0425% of the portion
of the daily net assets exceeding $3 billion.
Morgan Stanley Dean Witter Diversified Income Trust 0.040% of the daily net assets.
Morgan Stanley Dean Witter Federal Securities Trust 0.055% of the portion of the daily net assets not exceeding $1
billion; 0.0525% of the portion of the daily net assets exceeding
$1 billion but not exceeding $1.5 billion; 0.050% of the portion
of the daily net assets exceeding $1.5 billion but not exceeding
$2 billion; 0.0475% of the portion of the daily net assets
exceeding $2 billion but not exceeding $2.5 billion; 0.045% of
the portion of the daily net assets exceeding $2.5 billion but
not exceeding $5 billion; 0.0425% of the portion of the daily net
assets exceeding $5 billion but not exceeding $7.5 billion;
0.040% of the portion of the daily net assets exceeding $7.5
billion but not exceeding $10 billion; 0.0375% of the portion of
the daily net assets exceeding $10 billion but not exceeding
$12.5 billion; and 0.035% of the portion of the daily net assets
exceeding $12.5 billion.
Morgan Stanley Dean Witter Global Short-Term Income Fund Inc. 0.055% of the portion of the daily net assets not exceeding $500
million; and 0.050% of the portion of the daily net assets
exceeding $500 million.
</TABLE>
B-1
<PAGE>
<TABLE>
<S> <C>
Morgan Stanley Dean Witter Hawaii Municipal Trust 0.035% of the daily net assets.
Morgan Stanley Dean Witter High Yield Securities Inc. 0.050% of the portion of the daily net assets not exceeding $500
million; 0.0425% of the portion of the daily net assets exceeding
$500 million but not exceeding $750 million; 0.0375% of the
portion of the daily net assets exceeding $750 million but not
exceeding $1 billion; 0.035% of the portion of the daily net
assets exceeding $1 billion but not exceeding $2 billion; 0.0325%
of the portion of the daily net assets exceeding $2 billion but
not exceeding $3 billion; and 0.030% of the portion of daily net
assets exceeding $3 billion.
Morgan Stanley Dean Witter Intermediate Income Securities 0.060% of the portion of the daily net assets not exceeding $500
million; 0.050% of the portion of the daily net assets exceeding
$500 million but not exceeding $750 million; 0.040% of the
portion of the daily net assets exceeding $750 million but not
exceeding $1 billion; and 0.030% of the portion of the daily net
assets exceeding $1 billion.
Morgan Stanley Dean Witter Intermediate Term 0.035% of the daily net assets.
U.S. Treasury Trust
Morgan Stanley Dean Witter Limited Term Municipal Trust 0.050% of the daily net assets.
Morgan Stanley Dean Witter Multi-State Municipal Series Trust 0.035% of the daily net assets.
(10 Series)
Morgan Stanley Dean Witter New York Tax-Free Income Fund 0.055% of the portion of the daily net assets not exceeding $500
million; and 0.0525% of the portion of the daily net assets
exceeding $500 million.
Morgan Stanley Dean Witter Retirement Series--Intermediate Income 0.065% of the daily net assets.
Securities Series
U.S. Government Securities Series 0.065% of the daily net assets.
Morgan Stanley Dean Witter Select Dimensions Investment Series-- 0.039% of the daily net assets.
North American Government Securities Portfolio
Morgan Stanley Dean Witter Select Municipal Reinvestment Fund 0.050% of the daily net assets.
Morgan Stanley Dean Witter Short-Term Bond Fund 0.070% of the daily net assets.
Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust 0.035% of the daily net assets.
</TABLE>
B-2
<PAGE>
<TABLE>
<S> <C>
Morgan Stanley Dean Witter Tax-Exempt Securities Trust 0.050% of the portion of the daily net assets not exceeding $500
million; 0.0425% of the portion of the daily net assets exceeding
$500 million but not exceeding $750 million; 0.0375% of the
portion of the daily net assets exceeding $750 million but not
exceeding $1 billion; and 0.035% of the portion of the daily net
assets exceeding $1 billion but not exceeding $1.25 billion;
.0325% of the portion of the daily net assets exceeding $1.25
billion.
Morgan Stanley Dean Witter U.S. Government Securities Trust 0.050% of the portion of the daily net assets not exceeding $1
billion; 0.0475% of the portion of the daily net assets exceeding
$1 billion but not exceeding $1.5 billion; 0.045% of the portion
of the daily net assets exceeding $1.5 billion but not exceeding
$2 billion; 0.0425% of the portion of the daily net assets
exceeding $2 billion but not exceeding $2.5 billion; 0.040% of
the portion of the daily net assets exceeding $2.5 billion but
not exceeding $5 billion; 0.0375% of the portion of the daily net
assets exceeding $5 billion but not exceeding $7.5 billion;
0.035% of the portion of the daily net assets exceeding $7.5
billion but not exceeding $10 billion; 0.0325% of the portion of
the daily net assets exceeding $10 billion but not exceeding
$12.5 billion; and 0.030% of the portion of the daily net assets
exceeding $12.5 billion.
Morgan Stanley Dean Witter Variable Investment Series--High Yield 0.050% of the portion of the daily net assets not exceeding $500
Portfolio million; and 0.0425% of the daily net assets exceeding $500
million.
Quality Income Plus Portfolio 0.050% of the portion of the daily the net assets up to $500
million; and 0.045% of the portion of the daily net assets
exceeds $500 million.
Morgan Stanley Dean Witter World Wide Income Trust 0.075% of the portion of the daily net assets up to $250 million;
0.060% of the portion of the daily net assets exceeding $250
million but not exceeding $500 million; 0.050% of the portion of
the daily net assets of the exceeding $500 million but not
exceeding $750 million; 0.040% of the portion of the daily net
assets exceeding $750 million but not exceeding $1 billion; and
0.030% of the portion of the daily net assets exceeding $1
billion.
Morgan Stanley Dean Witter Worldwide High Income Fund 0.060% of the daily net assets.
EQUITY FUNDS
- ------------
Morgan Stanley Dean Witter American Value Fund 0.0625% of the portion of the daily net assets not exceeding $250
million; 0.050% of the portion of the daily net assets exceeding
$250 million but not exceeding $2.25 billion; 0.0475% of the
portion of the daily net assets exceeding $2.25 billion but not
exceeding $3.5 billion; 0.0450% of the portion of the daily net
assets exceeding $3.5 billion but not exceeding $4.5 billion; and
0.0425% of the portion of the daily net assets exceeding $4.5
billion.
</TABLE>
B-3
<PAGE>
<TABLE>
<S> <C>
Morgan Stanley Dean Witter Balanced Growth Fund 0.060% of the daily net assets.
Morgan Stanley Dean Witter Capital Appreciation Fund 0.075% of the portion of the daily net assets not exceeding $500
million; and 0.0725% of the portion of the daily net assets
exceeding $500 million.
Morgan Stanley Dean Witter Capital Growth Securities 0.065% of the portion of the daily net assets not exceeding $500
million; 0.055% of the portion exceeding $500 million but not
exceeding $1 billion; 0.050% of the portion of the daily net
assets exceeding $1 billion but not exceeding $1.5 billion; and
0.0475% of the portion of the daily net assets exceeding $1.5
billion.
Morgan Stanley Dean Witter Competitive Edge Fund, "BEST IDEAS" 0.065% of the portion of the daily net assets not exceeding $1.5
Portfolio billion; and 0.0625% of the portion of the daily net assets
exceeding $1.5 billion.
Morgan Stanley Dean Witter Developing Growth Securities Trust 0.050% of the portion of the daily net assets not exceeding $500
million; and 0.0475% of the portion of the daily net assets
exceeding $500 million.
Morgan Stanley Dean Witter Dividend Growth Securities Inc. 0.0625% of the portion of the daily net assets not exceeding $250
million; 0.050% of the portion of the daily net assets exceeding
$250 million but not exceeding $1 billion; 0.0475% of the portion
of the daily net assets exceeding $1 billion but not exceeding $2
billion; 0.045% of the portion of the daily net assets exceeding
$2 billion but not exceeding $3 billion; 0.0425% of the portion
of the daily net assets exceeding $3 billion but not exceeding $4
billion; 0.040% of the portion of the daily net assets exceeding
$4 billion but not exceeding $5 billion; 0.0375% of the portion
of the daily net assets exceeding $5 billion but not exceeding $6
billion; 0.035% of the portion of the daily net assets exceeding
$6 billion but not exceeding $8 billion; 0.0325% of the portion
of the daily net assets exceeding $8 billion but not exceeding
$10 billion; 0.030% of the portion of the daily net assets
exceeding $10 billion but not exceeding $15 billion; and 0.0275%
of the portion of the daily net assets exceeding $15 billion.
Morgan Stanley Dean Witter Equity Fund 0.051% of the daily net assets.
Morgan Stanley Dean Witter European Growth Fund Inc. 0.060% of the portion of the daily net assets not exceeding $500
million; 0.057% of the portion of the daily net assets exceeding
$500 million but not exceeding $2 billion; and 0.054% of the
portion of the daily net assets exceeding $2 billion.
Morgan Stanley Dean Witter Financial Services Trust 0.075% of the daily net assets.
Morgan Stanley Dean Witter Fund of Funds-
Domestic Portfolio None
International Portfolio None
</TABLE>
B-4
<PAGE>
<TABLE>
<S> <C>
Dean Witter Global Asset Allocation Fund 0.070% of the daily net assets.
Morgan Stanley Dean Witter Global Dividend Growth Securities 0.075% of the portion of the daily net assets not exceeding $1
billion; 0.0725% of the portion of the daily net assets exceeding
$1 billion but not exceeding $1.5 billion; 0.070% of the portion
of the daily net assets exceeding $1.5 billion but not exceeding
$2.5 billion; 0.0675% of the portion of the daily net assets
exceeding $2.5 billion but not exceeding $3.5 billion; 0.0650% of
the portion of the daily net assets exceeding $3.5 billion but
not exceeding $4.5 billion; and 0.0625% of the portion of the
daily net assets exceeding $4.5 billion.
Morgan Stanley Dean Witter Global Utilities Fund 0.065% of the portion of the daily net assets not exceeding $500
million; and 0.0625% of the portion of the daily net assets
exceeding $500 million.
Morgan Stanley Dean Witter Growth Fund 0.048% of the portion of daily net assets not exceeding $750
million; 0.045% of the portion of daily net assets exceeding $750
million but not exceeding $1.5 billion; and 0.042% of the portion
of daily net assets exceeding $1.5 billion.
Morgan Stanley Dean Witter Health Sciences Trust 0.10% of the portion of daily net assets not exceeding $500
million; and 0.095% of the portion of daily net assets exceeding
$500 million.
Morgan Stanley Dean Witter Income Builder Fund 0.075% of the portion of the net assets not exceeding $500
million; and 0.0725% of the portion of daily net assets exceeding
$500 million.
Morgan Stanley Dean Witter Information Fund 0.075% of the portion of the daily net assets not exceeding $500
million; and 0.0725% of the portion of the daily net assets
exceeding $500 million.
Morgan Stanley Dean Witter International SmallCap Fund 0.075% of the daily net assets.
Morgan Stanley Dean Witter Japan Fund 0.060% of the daily net assets.
Morgan Stanley Dean Witter Market Leader Trust 0.075% of the daily net assets.
Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities 0.075 of the daily net assets.
Morgan Stanley Dean Witter Mid-Cap Growth Fund 0.075% of the portion of the daily net assets not exceeding $500
million; and 0.0725% of the portion of the daily net assets
exceeding $500 million.
Morgan Stanley Dean Witter Natural Resource Development 0.0625% of the portion of the daily net assets not exceeding $250
Securities Inc. million and 0.050% of the portion of the daily net assets
exceeding $250 million.
</TABLE>
B-5
<PAGE>
<TABLE>
<S> <C>
Morgan Stanley Dean Witter Pacific Growth Fund Inc. 0.060% of the portion of the daily net assets not exceeding $1
billion; 0.057% of the portion of the daily net assets exceeding
$1 billion but not exceeding $2 billion; and 0.054% of the
portion of the daily net assets exceeding $2 billion.
Morgan Stanley Dean Witter Precious Metals and 0.080% of the daily net assets.
Minerals Trust
Dean Witter Retirement Series--
American Value Series 0.085% of the daily net assets.
Capital Growth Series 0.085% of the daily net assets.
Dividend Growth Series 0.075% of the daily net assets.
Global Equity Series 0.10% of the daily net assets.
Strategist Series 0.085% of the daily net assets.
Utilities Series 0.075% of the daily net assets.
Value Added Market Series 0.050% of the daily net assets.
Morgan Stanley Dean Witter Select Dimensions Investment Series--
American Value Portfolio 0.0625% of the daily net assets.
Balanced Growth Portfolio 0.065% of the daily net assets.
Developing Growth Portfolio 0.050% of the daily net assets.
Diversified Income Portfolio 0.040% of the daily net assets.
Dividend Growth Portfolio 0.0625% of the portion of the daily net assets not exceeding $500
million; and 0.050% of the portion of the daily net assets
exceeding $500 million.
Emerging Markets Portfolio 0.075% of the daily net assets.
Global Equity Portfolio 0.10% of the daily net assets.
Growth Portfolio 0.048% of the daily net assets.
Mid-Cap Growth Portfolio 0.075% of the daily net assets
Utilities Portfolio 0.065% of the daily net assets.
Value-Added Market Portfolio 0.050% of the daily net assets.
Morgan Stanley Dean Witter Special Value Fund 0.075% of the daily net assets.
Morgan Stanley Dean Witter Strategist Fund 0.060% of the portion of the daily net assets not exceeding $500
million; 0.055% of the portion of the daily net assets exceeding
$500 million but not exceeding $1 billion; 0.050% of the portion
of the daily net assets exceeding $1 billion but not exceeding
$1.5 billion; 0.0475% of the portion of the daily net assets
exceeding $1.5 billion but not exceeding $2.0 billion; and 0.045%
of the portion of the daily net assets exceeding $2.0 billion.
Morgan Stanley Dean Witter 0.040% of the daily net assets.
S&P 500 Index Fund
Morgan Stanley Dean Witter 0.060% of the daily net assets.
S&P 500 Select Fund
</TABLE>
B-6
<PAGE>
<TABLE>
<S> <C>
Morgan Stanley Dean Witter Utilities Fund 0.065% of the portion of the daily net assets not exceeding $500
million; 0.055% of the portion of the daily net assets exceeding
$500 million but not exceeding $1 billion; 0.0525% of the portion
of the daily net assets exceeding $1 billion but not exceeding
$1.5 billion; 0.050% of the portion of the daily net assets
exceeding $1.5 billion but not exceeding $2.5 billion; 0.0475% of
the portion of the daily net assets exceeding $2.5 billion but
not exceeding $3.5 billion; 0.045% of the portion of the daily
net assets exceeding $3.5 but not exceeding $5 billion; and
0.0425% of the daily net assets exceeding $5 billion.
Morgan Stanley Dean Witter Value Fund 0.10% of the daily net assets.
Morgan Stanley Dean Witter Value-Added Market Series 0.050% of the portion of the daily net assets not exceeding $500
million; 0.45% of the portion of the daily net assets exceeding
$500 million but not exceeding $1 billion; 0.0425% of the portion
of the daily net assets exceeding $1.0 billion but not exceeding
$2.0 billion; and 0.040% of the portion of the daily net assets
exceeding $2 billion.
Morgan Stanley Dean Witter Variable Investment Series--
Capital Appreciation Portfolio 0.075% of the daily net assets.
Capital Growth Portfolio 0.065% of the daily net assets.
Competitive Edge "Best Ideas" Portfolio 0.065% of the daily net assets.
Dividend Growth Portfolio 0.0625% of the portion of the daily net assets not exceeding $500
million; and 0.050% of the portion of the daily net assets
exceeding $500 million but not exceeding $1 billion; 0.0475% of
the portion of the daily net assets exceeding $1.0 billion but
not exceeding $2.0 billion; and 0.045% of the portion of the
daily net assets exceeding $2 billion.
Equity Portfolio 0.050% of the portion of the daily net assets not exceeding $1
billion; and 0.0475% of the portion of the daily net assets
exceeding $1 billion.
European Growth Portfolio 0.060% of the portion of the daily net assets not exceeding $500
million; and 0.057% of the portion of the daily net assets
exceeding $500 million.
Income Builder Portfolio 0.075% of the daily net assets.
S&P 500 Index Portfolio 0.040% of the daily net assets.
Strategist Portfolio 0.050% of the daily net assets.
Utilities Portfolio 0.065% of the portion of the daily net assets not exceeding $500
million and 0.055% of the portion of the daily net assets
exceeding $500 million.
</TABLE>
B-7
<PAGE>
<TABLE>
<S> <C>
MONEY MARKET FUNDS
Active Assets Trusts: 0.050% of the portion of the daily net assets not exceeding $500
(1) Active Assets Money Trust million; 0.0425% of the portion of the daily net assets exceeding
(2) Active Assets Tax-Free Trust $500 million but not exceeding $750 million; 0.0375% of the
(3) Active Assets California Tax-Free Trust portion of the daily net assets exceeding $750 million but not
(4) Active Assets Government Securities Trust exceeding $1 billion; 0.035% of the portion of the daily net
assets exceeding $1 billion but not exceeding $1.5 billion;
0.0325% of the portion of the daily net assets exceeding $1.5
billion but not exceeding $2 billion; 0.030% of the portion of
the daily net assets exceeding $2 billion but not exceeding $2.5
billion; 0.0275% of the portion of the daily net assets exceeding
$2.5 billion but not exceeding $3 billion; and 0.025% of the
portion of the daily net assets exceeding $3 billion.
Morgan Stanley Dean Witter California Tax-Free Daily 0.050% of the portion of the daily net assets not exceeding $500
Income Trust million; 0.0425% of the portion of the daily net assets exceeding
$500 million but not exceeding $750 million; 0.0375% of the
portion of the daily net assets exceeding $750 million but not
exceeding $1 billion; 0.035% of the portion of the daily net
assets exceeding $1 billion but not exceeding $1.5 billion;
0.0325% of the portion of the daily net assets exceeding $1.5
billion but not exceeding $2 billion; 0.030% of the portion of
the daily net assets exceeding $2 billion but not exceeding $2.5
billion; 0.0275% of the portion of the daily net assets exceeding
$2.5 billion but not exceeding $3 billion; and 0.025% of the
portion of the daily net assets exceeding $3 billion.
Morgan Stanley Dean Witter Liquid Asset Fund Inc. 0.050% of the portion of the daily net assets not exceeding $500
million; 0.0425% of the portion of the daily net assets exceeding
$500 million but not exceeding $750 million; 0.0375% of the
portion of the daily net assets exceeding $750 million but not
exceeding $1 billion; 0.035% of the portion of the daily net
assets exceeding $1 billion but not exceeding $1.35 billion;
0.0325% of the portion of the daily net assets exceeding $1.35
billion but not exceeding $1.75 billion; 0.030% of the portion of
the daily net assets exceeding $1.75 billion but not exceeding
$2.15 billion; 0.0275% of the portion of the daily net assets
exceeding $2.15 billion but not exceeding $2.5 billion; 0.025% of
the portion of the daily net assets exceeding $2.5 billion but
not exceeding $15 billion; 0.0249% of the portion of the daily
net assets exceeding $15 billion but not exceeding $17.5 billion;
and 0.0248% of the portion of the daily net assets exceeding
$17.5 billion.
</TABLE>
B-8
<PAGE>
<TABLE>
<S> <C>
Morgan Stanley Dean Witter 0.050% of the portion of the daily net assets not exceeding $500
New York Municipal Money million; 0.0425% of the portion of the daily net assets exceeding
Market Trust $500 million but not exceeding $750 million; 0.0375% of the
portion of the daily net assets exceeding $750 million but not
exceeding $1 billion; 0.035% of the portion of the daily net
assets exceeding $1 billion but not exceeding $1.5 billion;
0.0325% of the portion of the daily net assets exceeding $1.5
billion but not exceeding $2 billion; 0.030% of the portion of
the daily net assets exceeding $2 billion but not exceeding $2.5
billion; 0.0275% of the portion of the daily net assets exceeding
$2.5 billion but not exceeding $3 billion; and 0.025% of the
portion of the daily net assets exceeding $3 billion.
Dean Witter Retirement Series--
Liquid Asset Series 0.050% of the daily net assets.
U.S. Government Money 0.050% of the daily net assets.
Market Series
Morgan Stanley Dean Witter Select Dimensions Investment Series--
Money Market Portfolio 0.050% of the daily net assets.
Morgan Stanley Dean Witter 0.050% of the portion of the daily net assets not exceeding $500
Tax-Free Daily Income Trust million; 0.0425% of the portion of the daily net assets exceeding
$500 million but not exceeding $750 million; 0.0375% of the
portion of the daily net assets exceeding $750 million but not
exceeding $1 billion; 0.035% of the portion of the daily net
assets exceeding $1 billion but not exceeding $1.5 billion;
0.0325% of the portion of the daily net assets exceeding $1.5
billion but not exceeding $2 billion; 0.030% of the portion of
the daily net assets exceeding $2 billion but not exceeding $2.5
billion; 0.0275% of the portion of the daily net assets exceeding
$2.5 billion but not exceeding $3 billion; and 0.025% of the
portion of the daily net assets exceeding $3 billion.
Morgan Stanley Dean Witter U.S. Government Money Market Trust 0.050% of the portion of the daily net assets not exceeding $500
million; 0.0425% of the portion of the daily net assets exceeding
$500 million but not exceeding $750 million; 0.0375% of the
portion of the daily net assets exceeding $750 million but not
exceeding $1 billion; 0.035% of the portion of the daily net
assets exceeding $1 billion but not exceeding $1.5 billion;
0.0325% of the portion of the daily net assets exceeding $1.5
billion but not exceeding $2 billion; 0.030% of the portion of
the daily net assets exceeding $2 billion but not exceeding $2.5
billion; 0.0275% of the portion of the daily net assets exceeding
$2.5 billion but not exceeding $3 billion; and 0.025% of the
portion of the daily net assets exceeding $3 billion.
Morgan Stanley Dean Witter Variable Investment Series-- 0.050% of the daily net assets.
Money Market Portfolio
</TABLE>
B-9
<PAGE>
Monthly compensation calculated weekly by applying the following annual
rates to a fund's weekly net assets:
<TABLE>
<S> <C>
CLOSED-END FUNDS
- ----------------
Dean Witter Government 0.060% of the average weekly net assets.
Income Trust
High Income Advantage Trust 0.075% of the portion of the average weekly net assets not
exceeding $250 million; 0.060% of the portion of average
weekly net assets exceeding $250 million and not exceeding
$500 million; 0.050% of the portion of average weekly net
assets exceeding $500 million and not exceeding $750
million; 0.040% of the portion of average weekly net assets
exceeding $750 million and not exceeding $1 billion; and
0.030% of the portion of average weekly net assets exceeding
$1 billion.
High Income Advantage Trust II 0.075% of the portion of the average weekly net assets not
exceeding $250 million; 0.060% of the portion of average
weekly net assets exceeding $250 million and not exceeding
$500 million; 0.050% of the portion of average weekly net
assets exceeding $500 million and not exceeding $750
million; 0.040% of the portion of average weekly net assets
exceeding $750 million and not exceeding $1 billion; and
0.030% of the portion of average weekly net assets exceeding
$1 billion.
High Income Advantage Trust III 0.075% of the portion of the average weekly net assets not
exceeding $250 million; 0.060% of the portion of average
weekly net assets exceeding $250 million and not exceeding
$500 million; 0.050% of the portion of average weekly net
assets exceeding $500 million and not exceeding $750
million; 0.040% of the portion of the average weekly net
assets exceeding $750 million and not exceeding $1 billion;
and 0.030% of the portion of average weekly net assets
exceeding $1 billion.
InterCapital Income Securities Inc. 0.050% of the average weekly net assets.
InterCapital Insured Municipal Bond Trust 0.035% of the average weekly net assets.
InterCapital Insured Municipal Trust 0.035% of the average weekly net assets.
InterCapital Insured Municipal Income Trust 0.035% of the average weekly net assets.
InterCapital California Insured Municipal 0.035% of the average weekly net assets.
Income Trust
InterCapital Quality Municipal Investment 0.035% of the average weekly net assets.
Trust
InterCapital New York Quality Municipal 0.035% of the average weekly net assets.
Securities
InterCapital Quality Municipal Income Trust 0.035% of the average weekly net assets.
</TABLE>
B-10
<PAGE>
<TABLE>
<S> <C>
InterCapital Quality Municipal Securities 0.035% of the average weekly net assets.
InterCapital California Quality Municipal 0.035% of the average weekly net assets.
Securities
InterCapital Insured Municipal Securities 0.035% of the average weekly net assets.
InterCapital Insured California Municipal 0.035% of the average weekly net assets.
Securities
</TABLE>
B-11
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 2 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
November 5, 1998, relating to the financial statements and financial
highlights of the International Portfolio and the Domestic Portfolio
(constituting Morgan Stanley Dean Witter Fund of Funds, formerly Dean Witter
Fund of Funds), which appears in such Statement of Additional Information,
and to the incorporation by reference of our report into the Prospectus which
constitutes part of this Registration Statement. We also consent to the
references to us under the headings "Independent Accountants" and "Experts"
in such Statement of Additional Information and to the reference to us under
the heading "Financial Highlights" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
November 24, 1998
<PAGE>
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS
FUND OF FUNDS-INTERNATIONAL PORTFOLIO (A)
(A) AVERAGE ANNUAL TOTAL RETURNS (I.E. STANDARDIZED COMPUTATIONS)
_ _
| ______________________ |
FORMULA: | | |
| /\ n | ERV |
T = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
T = AVERAGE ANNUAL COMPOUND RETURN
n = NUMBER OF YEARS
ERV = ENDING REDEEMABLE VALUE
P = INITIAL INVESTMENT
<TABLE>
<CAPTION>
(A)
$1,000 ERV AS OF AGGREGATE NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 TOTAL RETURN YEARS - n COMPOUND RETURN - T
- ------------- ----------- -------------- ----------- -------------------
<S> <C> <C> <C> <C>
25-Nov-97 $868.30 -13.17% 0.85 NA
</TABLE>
(B) AVERAGE ANNUAL TOTAL RETURNS (STANDARIZED COMPUTATIONS) WITHOUT WAIVER OF
FEES AND ASSUMPTION OF EXPENSES.
_ _
| ______________________ |
FORMULA: | | |
| /\ n | EVb |
tb = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
tb = AVERAGE ANNUAL COMPOUND RETURN
(DEDUCTION FOR EXPENSES ASSUMED BY FUND MANAGER)
n = NUMBER OF YEARS
EVb = ENDING VALUE (DEDUCTION FOR EXPENSES
ASSUMED BY FUND MANAGER)
P = INITIAL INVESTMENT
<TABLE>
<CAPTION>
(B)
$1,000 EVb AS OF AGGREGATE NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 TOTAL RETURN YEARS - n COMPOUND RETURN - tb
- ------------- ----------- ----------- ----------------- --------------------
<S> <C> <C> <C> <C>
25-Nov-97 $838.60 -16.14% 0.85 NA
</TABLE>
(C) AVERAGE ANNUAL TOTAL RETURNS WITHOUT DEDUCTION FOR APPLICABLE
SALES CHARGE (NON STANDARD COMPUTATIONS)
(D) TOTAL RETURN WITHOUT DEDUCTION FOR APPLICABLE SALES CHARGE
(NON STANDARD COMPUTATIONS)
_ _
| ______________________ |
FORMULA: | | |
| /\ n | EV |
t = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
EV
TR = ---------- - 1
P
t = AVERAGE ANNUAL COMPOUND RETURN
(NO DEDUCTION FOR APPLICABLE SALES CHARGE)
n = NUMBER OF YEARS
EV = ENDING VALUE (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
P = INITIAL INVESTMENT
TR = TOTAL RETURN (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
<TABLE>
<CAPTION>
(D) (C)
$1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 RETURN - TR YEARS - n COMPOUND RETURN - t
- ------------- ----------- ----------- ----------------- ------------------------
<S> <C> <C> <C> <C>
25-Nov-97 $916.40 -8.36% 0.85 NA
</TABLE>
(E) GROWTH OF $10,000*
(F) GROWTH OF $50,000*
(G) GROWTH OF $100,000*
FORMULA: G= (TR+1)*P
G= GROWTH OF INITIAL INVESTMENT
P= INITIAL INVESTMENT
TR= TOTAL RETURN SINCE INCEPTION
<TABLE>
<CAPTION>
TOTAL (E) GROWTH OF (F) GROWTH OF (G) GROWTH OF
INVESTED - P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT - G $100,000 INVESTMENT - G
- ------------ ----------- ---------------------- ---------------------- ------------------------
<S> <C> <C> <C> <C>
25-Nov-97 -8.36 $8,683 $43,987 $88,891
</TABLE>
*INITIAL INVESTMENT $9,475, $48,000 & 97,000 RESPECTIVELY REFLECTS A 5.25%,
4.0% & 3.0% SALES CHARGE
<PAGE>
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS
FUND OF FUNDS-INTERNATIONAL PORTFOLIO (B)
(A) AVERAGE ANNUAL TOTAL RETURNS (I.E. STANDARDIZED COMPUTATIONS)
_ _
| ______________________ |
FORMULA: | | |
| /\ n | ERV |
T = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
T = AVERAGE ANNUAL COMPOUND RETURN
n = NUMBER OF YEARS
ERV = ENDING REDEEMABLE VALUE
P = INITIAL INVESTMENT
<TABLE>
<CAPTION>
(A)
$1,000 ERV AS OF AGGREGATE NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 TOTAL RETURN YEARS - n COMPOUND RETURN - T
- ------------- ----------- -------------- ----------- -------------------
<S> <C> <C> <C> <C>
25-Nov-97 $866.20 -13.38% 0.85 NA
</TABLE>
(B) AVERAGE ANNUAL TOTAL RETURNS (STANDARIZED COMPUTATIONS) WITHOUT WAIVER OF
FEES AND ASSUMPTION OF EXPENSES.
_ _
| ______________________ |
FORMULA: | | |
| /\ n | EVb |
tb = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
tb = AVERAGE ANNUAL COMPOUND RETURN
(DEDUCTION FOR EXPENSES ASSUMED BY FUND MANAGER)
n = NUMBER OF YEARS
EVb = ENDING VALUE (DEDUCTION FOR EXPENSES
ASSUMED BY FUND MANAGER)
P = INITIAL INVESTMENT
<TABLE>
<CAPTION>
(B)
$1,000 EVb AS OF AGGREGATE NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 TOTAL RETURN YEARS - n COMPOUND RETURN - tb
- ------------- ----------- ----------- ---------- --------------------
<S> <C> <C> <C> <C>
25-Nov-97 $825.00 -17.50% 0.85 NA
</TABLE>
(C) AVERAGE ANNUAL TOTAL RETURNS WITHOUT DEDUCTION FOR APPLICABLE
SALES CHARGE (NON STANDARD COMPUTATIONS)
(D) TOTAL RETURN WITHOUT DEDUCTION FOR APPLICABLE SALES CHARGE
(NON STANDARD COMPUTATIONS)
_ _
| ______________________ |
FORMULA: | | |
| /\ n | EV |
t = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
EV
TR = ---------- - 1
P
t = AVERAGE ANNUAL COMPOUND RETURN
(NO DEDUCTION FOR APPLICABLE SALES CHARGE)
n = NUMBER OF YEARS
EV = ENDING VALUE (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
P = INITIAL INVESTMENT
TR = TOTAL RETURN (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
<TABLE>
<CAPTION>
(D) (C)
$1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 RETURN - TR YEARS - n COMPOUND RETURN - t
- ------------- ----------- ----------- ---------- -------------------
<S> <C> <C> <C> <C>
25-Nov-97 $911.30 -8.87% 0.85 NA
</TABLE>
(E) GROWTH OF $10,000
(F) GROWTH OF $50,000
(G) GROWTH OF $100,000
FORMULA: G= (TR+1)*P
G= GROWTH OF INITIAL INVESTMENT
P= INITIAL INVESTMENT
TR= TOTAL RETURN SINCE INCEPTION
<TABLE>
<CAPTION>
TOTAL (E) GROWTH OF (F) GROWTH OF (G) GROWTH OF
INVESTED - P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT $100,000 INVESTMENT - G
- ----------- ----------- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
25-Nov-97 -8.87 $9,113 $45,565 $91,130
</TABLE>
<PAGE>
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS
FUND OF FUNDS-INTERNATIONAL PORTFOLIO (C)
(A) AVERAGE ANNUAL TOTAL RETURNS (I.E. STANDARDIZED COMPUTATIONS)
_ _
| ______________________ |
FORMULA: | | |
| /\ n | ERV |
T = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
T = AVERAGE ANNUAL COMPOUND RETURN
n = NUMBER OF YEARS
ERV = ENDING REDEEMABLE VALUE
P = INITIAL INVESTMENT
<TABLE>
<CAPTION>
(A)
$1,000 ERV AS OF AGGREGATE NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 TOTAL RETURN YEARS - n COMPOUND RETURN - T
- ------------- ----------- -------------- ----------- ----------------
<S> <C> <C> <C> <C>
25-Nov-97 $902.30 -9.77% 0.85 NA
</TABLE>
(B) AVERAGE ANNUAL TOTAL RETURNS (STANDARIZED COMPUTATIONS) WITHOUT WAIVER OF
FEES AND ASSUMPTION OF EXPENSES.
_ _
| ______________________ |
FORMULA: | | |
| /\ n | EVb |
tb = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
tb = AVERAGE ANNUAL COMPOUND RETURN
(DEDUCTION FOR EXPENSES ASSUMED BY FUND MANAGER)
n = NUMBER OF YEARS
EVb = ENDING VALUE (DEDUCTION FOR EXPENSES
ASSUMED BY FUND MANAGER)
P = INITIAL INVESTMENT
<TABLE>
<CAPTION>
(B)
$1,000 EVb AS OF AGGREGATE NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 TOTAL RETURN YEARS - n COMPOUND RETURN - tb
- ------------- ----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C>
25-Nov-97 $859.40 -14.06% 0.85 NA
</TABLE>
(C) AVERAGE ANNUAL TOTAL RETURNS WITHOUT DEDUCTION FOR APPLICABLE
SALES CHARGE (NON STANDARD COMPUTATIONS)
(D) TOTAL RETURN WITHOUT DEDUCTION FOR APPLICABLE SALES CHARGE
(NON STANDARD COMPUTATIONS)
_ _
| ______________________ |
FORMULA: | | |
| /\ n | EV |
t = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
EV
TR = ---------- - 1
P
t = AVERAGE ANNUAL COMPOUND RETURN
(NO DEDUCTION FOR APPLICABLE SALES CHARGE)
n = NUMBER OF YEARS
EV = ENDING VALUE (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
P = INITIAL INVESTMENT
TR = TOTAL RETURN (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
<TABLE>
<CAPTION>
(D) (C)
$1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 RETURN - TR YEARS - n COMPOUND RETURN - t
- ------------- ----------- ----------- ----------------- ------------------------
<S> <C> <C> <C> <C>
25-Nov-97 $911.30 -8.87% 0.85 NA
</TABLE>
(E) GROWTH OF $10,000
(F) GROWTH OF $50,000
(G) GROWTH OF $100,000
FORMULA: G= (TR+1)*P
G= GROWTH OF INITIAL INVESTMENT
P= INITIAL INVESTMENT
TR= TOTAL RETURN SINCE INCEPTION
<TABLE>
<CAPTION>
TOTAL (E) GROWTH OF (F) GROWTH OF (G) GROWTH OF
INVESTED - P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT $100,000 INVESTMENT - G
- ----------- ----------- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
25-Nov-97 -8.87 $9,113 $45,565 $91,130
</TABLE>
<PAGE>
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS
FUND OF FUNDS-INTERNATIONAL PORTFOLIO (D)
(A) AVERAGE ANNUAL TOTAL RETURNS (NO LOAD FUND)
(B) TOTAL RETURN (NO LOAD FUND)
_ _
| ______________________ |
FORMULA: | | |
| /\ n | ERV |
T = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
T = AVERAGE ANNUAL COMPOUND RETURN
n = NUMBER OF YEARS
ERV = ENDING REDEEMABLE VALUE
P = INITIAL INVESTMENT
<TABLE>
<CAPTION>
(A)
$1,000 ERV AS OF (B) NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 TOTAL RETURN YEARS - n COMPOUND RETURN - T
- ------------- ----------- -------------- ----------- ----------------
<S> <C> <C> <C> <C>
25-Nov-97 $917.40 -8.26% 0.85 NA
</TABLE>
(C) AVERAGE ANNUAL TOTAL RETURNS (NO LOAD FUND) WITHOUT WAIVER OF
FEES AND ASSUMPTION OF EXPENSES.
_ _
| ______________________ |
FORMULA: | | |
| /\ n | EVb |
tb = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
tb = AVERAGE ANNUAL COMPOUND RETURN
(DEDUCTION FOR EXPENSES ASSUMED BY FUND MANAGER)
n = NUMBER OF YEARS
EVb = ENDING VALUE (DEDUCTION FOR EXPENSES
ASSUMED BY FUND MANAGER)
P = INITIAL INVESTMENT
<TABLE>
<CAPTION>
(C)
$1,000 EVb AS OF AGGREGATE NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 TOTAL RETURN YEARS - n COMPOUND RETURN
- ------------- ----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C>
25-Nov-97 $861.90 -13.81% 0.85 NA
</TABLE>
(D) GROWTH OF $10,000
(E) GROWTH OF $50,000
(F) GROWTH OF $100,000
FORMULA: G= (TR+1)*P
G= GROWTH OF INITIAL INVESTMENT
P= INITIAL INVESTMENT
TR= TOTAL RETURN SINCE INCEPTION
<TABLE>
<CAPTION>
TOTAL (D) GROWTH OF (E) GROWTH OF (F) GROWTH OF
INVESTED - P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT $100,000 INVESTMENT - G
- ----------- ----------- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
25-Nov-97 -8.26 $9,174 $45,870 $91,740
</TABLE>
<PAGE>
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS
FUND OF FUNDS-DOMESTIC PORTFOLIO (A)
(A) AVERAGE ANNUAL TOTAL RETURNS (I.E. STANDARDIZED COMPUTATIONS)
_ _
| ______________________ |
FORMULA: | | |
| /\ n | ERV |
T = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
T = AVERAGE ANNUAL COMPOUND RETURN
n = NUMBER OF YEARS
ERV = ENDING REDEEMABLE VALUE
P = INITIAL INVESTMENT
<TABLE>
<CAPTION>
(A)
$1,000 ERV AS OF AGGREGATE NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 TOTAL RETURN YEARS - n COMPOUND RETURN - T
- ------------- ----------- -------------- ----------- -------------------
<S> <C> <C> <C> <C>
25-Nov-97 $925.40 -7.46% 0.85 NA
</TABLE>
(B) AVERAGE ANNUAL TOTAL RETURNS (STANDARIZED COMPUTATIONS) WITHOUT WAIVER OF
FEES AND ASSUMPTION OF EXPENSES.
_ _
| ______________________ |
FORMULA: | | |
| /\ n | EVb |
tb = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
tb = AVERAGE ANNUAL COMPOUND RETURN
(DEDUCTION FOR EXPENSES ASSUMED BY FUND MANAGER)
n = NUMBER OF YEARS
EVb = ENDING VALUE (DEDUCTION FOR EXPENSES
ASSUMED BY FUND MANAGER)
P = INITIAL INVESTMENT
<TABLE>
<CAPTION>
(B)
$1,000 EVb AS OF AGGREGATE NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 TOTAL RETURN YEARS - n COMPOUND RETURN - tb
- ------------- ----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C>
25-Nov-97 $914.90 -8.51% 0.85 NA
</TABLE>
(C) AVERAGE ANNUAL TOTAL RETURNS WITHOUT DEDUCTION FOR APPLICABLE
SALES CHARGE (NON STANDARD COMPUTATIONS)
(D) TOTAL RETURN WITHOUT DEDUCTION FOR APPLICABLE SALES CHARGE
(NON STANDARD COMPUTATIONS)
_ _
| ______________________ |
FORMULA: | | |
| /\ n | EV |
t = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
EV
TR = ---------- - 1
P
t = AVERAGE ANNUAL COMPOUND RETURN
(NO DEDUCTION FOR APPLICABLE SALES CHARGE)
n = NUMBER OF YEARS
EV = ENDING VALUE (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
P = INITIAL INVESTMENT
TR = TOTAL RETURN (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
<TABLE>
<CAPTION>
(D) (C)
$1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 RETURN - TR YEARS - n COMPOUND RETURN - t
- ------------- ----------- ----------- ----------------- ------------------------
<S> <C> <C> <C> <C>
25-Nov-97 $976.70 -2.33% 0.85 NA
</TABLE>
(E) GROWTH OF $10,000*
(F) GROWTH OF $50,000*
(G) GROWTH OF $100,000*
FORMULA: G= (TR+1)*P
G= GROWTH OF INITIAL INVESTMENT
P= INITIAL INVESTMENT
TR= TOTAL RETURN SINCE INCEPTION
<TABLE>
<CAPTION>
TOTAL (E) GROWTH OF (F) GROWTH OF (G) GROWTH OF
INVESTED - P RETURN - TR $10,000 INVESTMENT-G $50,000 INVESTMENT - G $100,000 INVESTMENT - G
- ------------ ----------- -------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
25-Nov-97 -2.33 $9,254 $46,882 $94,740
</TABLE>
*INITIAL INVESTMENT $9,475, $48,000 & 97,000 RESPECTIVELY REFLECTS A 5.25%,
4.0% & 3.0% SALES CHARGE
<PAGE>
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS
FUND OF FUNDS-DOMESTIC PORTFOLIO (B)
(A) AVERAGE ANNUAL TOTAL RETURNS (I.E. STANDARDIZED COMPUTATIONS)
_ _
| ______________________ |
FORMULA: | | |
| /\ n | ERV |
T = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
T = AVERAGE ANNUAL COMPOUND RETURN
n = NUMBER OF YEARS
ERV = ENDING REDEEMABLE VALUE
P = INITIAL INVESTMENT
<TABLE>
<CAPTION>
(A)
$1,000 ERV AS OF AGGREGATE NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 TOTAL RETURN YEARS - n COMPOUND RETURN - T
- ------------- ----------- -------------- ----------- -------------------
<S> <C> <C> <C> <C>
25-Nov-97 $923.30 -7.67% 0.85 N/A
</TABLE>
(B) AVERAGE ANNUAL TOTAL RETURNS (STANDARIZED COMPUTATIONS) WITHOUT WAIVER OF
FEES AND ASSUMPTION OF EXPENSES.
_ _
| ______________________ |
FORMULA: | | |
| /\ n | EVb |
tb = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
tb = AVERAGE ANNUAL COMPOUND RETURN
(DEDUCTION FOR EXPENSES ASSUMED BY FUND MANAGER)
n = NUMBER OF YEARS
EVb = ENDING VALUE (DEDUCTION FOR EXPENSES
ASSUMED BY FUND MANAGER)
P = INITIAL INVESTMENT
<TABLE>
<CAPTION>
(B)
$1,000 EVb AS OF AGGREGATE NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 TOTAL RETURN YEARS - n COMPOUND RETURN - tb
- ------------- ----------- ----------- ----------------- --------------------
<S> <C> <C> <C> <C>
25-Nov-97 $915.70 -8.43% 0.85 N/A
</TABLE>
(C) AVERAGE ANNUAL TOTAL RETURNS WITHOUT DEDUCTION FOR APPLICABLE
SALES CHARGE (NON STANDARD COMPUTATIONS)
(D) TOTAL RETURN WITHOUT DEDUCTION FOR APPLICABLE SALES CHARGE
(NON STANDARD COMPUTATIONS)
_ _
| ______________________ |
FORMULA: | | |
| /\ n | EV |
t = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
EV
TR = ---------- - 1
P
t = AVERAGE ANNUAL COMPOUND RETURN
(NO DEDUCTION FOR APPLICABLE SALES CHARGE)
n = NUMBER OF YEARS
EV = ENDING VALUE (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
P = INITIAL INVESTMENT
TR = TOTAL RETURN (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
<TABLE>
<CAPTION>
(D) (C)
$1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 RETURN - TR YEARS - n COMPOUND RETURN - t
- ------------- ----------- ----------- --------- -------------------
<S> <C> <C> <C> <C>
25-Nov-97 $971.70 -2.83% 0.85 N/A
</TABLE>
(E) GROWTH OF $10,000
(F) GROWTH OF $50,000
(G) GROWTH OF $100,000
FORMULA: G= (TR+1)*P
G= GROWTH OF INITIAL INVESTMENT
P= INITIAL INVESTMENT
TR= TOTAL RETURN SINCE INCEPTION
<TABLE>
<CAPTION>
TOTAL (E) GROWTH OF (F) GROWTH OF (G) GROWTH OF
INVESTED - P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT $100,000 INVESTMENT - G
- ----------- ----------- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
25-Nov-97 -2.83 $9,717 $48,585 $97,170
</TABLE>
<PAGE>
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS
FUND OF FUNDS-DOMESTIC PORTFOLIO (C)
(A) AVERAGE ANNUAL TOTAL RETURNS (I.E. STANDARDIZED COMPUTATIONS)
_ _
| ______________________ |
FORMULA: | | |
| /\ n | ERV |
T = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
T = AVERAGE ANNUAL COMPOUND RETURN
n = NUMBER OF YEARS
ERV = ENDING REDEEMABLE VALUE
P = INITIAL INVESTMENT
<TABLE>
<CAPTION>
(A)
$1,000 ERV AS OF AGGREGATE NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 TOTAL RETURN YEARS - n COMPOUND RETURN - T
- ------------- ----------- -------------- ----------- ----------------
<S> <C> <C> <C> <C>
25-Nov-97 $962.00 -3.80% 0.85 NA
</TABLE>
(B) AVERAGE ANNUAL TOTAL RETURNS (STANDARIZED COMPUTATIONS) WITHOUT WAIVER OF
FEES AND ASSUMPTION OF EXPENSES.
_ _
| ______________________ |
FORMULA: | | |
| /\ n | EVb |
tb = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
tb = AVERAGE ANNUAL COMPOUND RETURN
(DEDUCTION FOR EXPENSES ASSUMED BY FUND MANAGER)
n = NUMBER OF YEARS
EVb = ENDING VALUE (DEDUCTION FOR EXPENSES
ASSUMED BY FUND MANAGER)
P = INITIAL INVESTMENT
<TABLE>
<CAPTION>
(B)
$1,000 EVb AS OF AGGREGATE NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 TOTAL RETURN YEARS - n COMPOUND RETURN - tb
- ------------- ----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C>
25-Nov-97 $954.00 -4.60% 0.85 NA
</TABLE>
(C) AVERAGE ANNUAL TOTAL RETURNS WITHOUT DEDUCTION FOR APPLICABLE
SALES CHARGE (NON STANDARD COMPUTATIONS)
(D) TOTAL RETURN WITHOUT DEDUCTION FOR APPLICABLE SALES CHARGE
(NON STANDARD COMPUTATIONS)
_ _
| ______________________ |
FORMULA: | | |
| /\ n | EV |
t = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
EV
TR = ---------- - 1
P
t = AVERAGE ANNUAL COMPOUND RETURN
(NO DEDUCTION FOR APPLICABLE SALES CHARGE)
n = NUMBER OF YEARS
EV = ENDING VALUE (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
P = INITIAL INVESTMENT
TR = TOTAL RETURN (NO DEDUCTION FOR APPLICABLE SALES CHARGE)
<TABLE>
<CAPTION>
(D) (C)
$1,000 EV AS OF TOTAL NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 RETURN - TR YEARS - n COMPOUND RETURN - t
- ------------- ----------- ----------- ----------------- ------------------------
<S> <C> <C> <C> <C>
25-Nov-97 $971.70 -2.83% 0.85 NA
</TABLE>
(E) GROWTH OF $10,000
(F) GROWTH OF $50,000
(G) GROWTH OF $100,000
FORMULA: G= (TR+1)*P
G= GROWTH OF INITIAL INVESTMENT
P= INITIAL INVESTMENT
TR= TOTAL RETURN SINCE INCEPTION
<TABLE>
<CAPTION>
TOTAL (E) GROWTH OF (F) GROWTH OF (G) GROWTH OF
INVESTED - P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT $100,000 INVESTMENT - G
- ----------- ----------- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
25-Nov-97 -2.83 $9,717 $48,585 $97,170
</TABLE>
<PAGE>
SCHEDULE FOR COMPUTATIONS OF PERFORMANCE QUOTATIONS
FUND OF FUNDS-DOMESTIC PORTFOLIO (D)
(A) AVERAGE ANNUAL TOTAL RETURNS (NO LOAD FUND)
(B) TOTAL RETURN (NO LOAD FUND)
_ _
| ______________________ |
FORMULA: | | |
| /\ n | ERV |
T = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
T = AVERAGE ANNUAL COMPOUND RETURN
n = NUMBER OF YEARS
ERV = ENDING REDEEMABLE VALUE
P = INITIAL INVESTMENT
<TABLE>
<CAPTION>
(A)
$1,000 ERV AS OF (B) NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 TOTAL RETURN YEARS - n COMPOUND RETURN - T
- ------------- ----------- -------------- ----------- ----------------
<S> <C> <C> <C> <C>
25-Nov-97 $978.70 -2.13% 0.85 NA
</TABLE>
(C) AVERAGE ANNUAL TOTAL RETURNS (NO LOAD FUND) WITHOUT WAIVER OF
FEES AND ASSUMPTION OF EXPENSES.
_ _
| ______________________ |
FORMULA: | | |
| /\ n | EVb |
tb = | \ | ------------- | - 1
| \ | P |
| \| |
|_ _|
tb = AVERAGE ANNUAL COMPOUND RETURN
(DEDUCTION FOR EXPENSES ASSUMED BY FUND MANAGER)
n = NUMBER OF YEARS
EVb = ENDING VALUE (DEDUCTION FOR EXPENSES
ASSUMED BY FUND MANAGER)
P = INITIAL INVESTMENT
<TABLE>
<CAPTION>
(C)
$1,000 EVb AS OF AGGREGATE NUMBER OF AVERAGE ANNUAL
INVESTED - P 30-Sep-98 TOTAL RETURN YEARS - n COMPOUND RETURN - tb
- ------------- ----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C>
25-Nov-97 $967.70 -3.23% 0.85 NA
</TABLE>
(D) GROWTH OF $10,000
(E) GROWTH OF $50,000
(F) GROWTH OF $100,000
FORMULA: G= (TR+1)*P
G= GROWTH OF INITIAL INVESTMENT
P= INITIAL INVESTMENT
TR= TOTAL RETURN SINCE INCEPTION
<TABLE>
<CAPTION>
TOTAL (D) GROWTH OF (E) GROWTH OF (F) GROWTH OF
INVESTED - P RETURN - TR $10,000 INVESTMENT - G $50,000 INVESTMENT $100,000 INVESTMENT - G
- ----------- ----------- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
25-Nov-97 -2.13 $9,787 $48,935 $97,870
</TABLE>
<PAGE>
MORGAN STANLEY DEAN WITTER FUNDS
MULTIPLE CLASS PLAN
PURSUANT TO RULE 18f-3
INTRODUCTION
This plan (the "Plan") is adopted pursuant to Rule 18f-3(d) of the
Investment Company Act of 1940, as amended (the "1940 Act"), effective as of
July 28, 1997, and amended as of June 22, 1998. The Plan relates to shares of
the open-end investment companies to which Morgan Stanley Dean Witter Advisors
Inc. acts as investment manager, that are listed on Schedule A, as may be
amended from time to time (each, a "Fund" and collectively, the "Funds"). The
Funds are distributed pursuant to a system (the "Multiple Class System") in
which each class of shares (each, a "Class" and collectively, the "Classes") of
a Fund represents a pro rata interest in the same portfolio of investments of
the Fund and differs only to the extent outlined below.
I. DISTRIBUTION ARRANGEMENTS
One or more Classes of shares of the Funds are offered for purchase by
investors with the sales load structures described below. In addition, pursuant
to Rule 12b-1 under the 1940 Act, the Funds have each adopted a Plan of
Distribution (the "12b-1 Plan") under which shares of certain Classes are
subject to the service and/or distribution fees ("12b-1 fees") described below.
1. CLASS A SHARES
Class A shares are offered with a front-end sales load ("FESL"). The
schedule of sales charges applicable to a Fund and the circumstances under which
the sales charges are subject to reduction are set forth in each Fund's current
prospectus. As stated in each Fund's current prospectus, Class A shares may be
purchased at net asset value (without a FESL): (i) in the case of certain large
purchases of such shares; and (ii) by certain limited categories of investors,
in each case, under the circumstances and conditions set forth in each Fund's
current prospectus. Class A shares purchased at net asset value may be subject
to a contingent deferred sales charge ("CDSC") on redemptions made within one
year of purchase. Further information relating to the CDSC, including the manner
in which it is calculated, is set forth in paragraph 6 below. Class A shares are
also subject to payments under each Fund's 12b-1 Plan to reimburse Morgan
Stanley Dean Witter Distributors Inc., Dean Witter Reynolds Inc. ("DWR"), its
affiliates and other broker-dealers for distribution expenses incurred by them
specifically on behalf of the Class, assessed at an annual rate of up to 0.25%
of average daily net assets. The entire amount of the 12b-1 fee represents a
service fee within the meaning of National Association of Securities Dealers,
Inc. ("NASD") guidelines.
2. CLASS B SHARES
Class B shares are offered without a FESL, but will in most cases be subject
to a six-year declining CDSC which is calculated in the manner set forth in
paragraph 6 below. Class B shares purchased by certain qualified
employer-sponsored benefit plans are subject to a three-year declining CDSC
which is calculated in the manner set forth in paragraph 6 below. The schedule
of CDSC charges applicable to each Fund is set forth in each Fund's current
prospectus. With the exception of certain of the Funds which have a different
formula described below (Morgan Stanley Dean Witter American Value Fund, Morgan
Stanley Dean Witter Natural Resource Development Securities Inc., Morgan Stanley
Dean Witter Strategist Fund and Morgan
1
<PAGE>
Stanley Dean Witter Dividend Growth Securities Inc.)(1), Class B shares are also
subject to a fee under each Fund's respective 12b-1 Plan, assessed at the annual
rate of up to 1.0% of either: (a) the lesser of (i) the average daily aggregate
gross sales of the Fund's Class B shares since the inception of the Fund (not
including reinvestment of dividends or capital gains distributions), less the
average daily aggregate net asset value of the Fund's Class B shares redeemed
since the Fund's inception upon which a CDSC has been imposed or waived, or (ii)
the average daily net assets of Class B; or (b) the average daily net assets of
Class B. A portion of the 12b-1 fee equal to up to 0.25% of the Fund's average
daily net assets is characterized as a service fee within the meaning of the
NASD guidelines and the remaining portion of the 12b-1 fee, if any, is
characterized as an asset-based sales charge. Also, Class B shares have a
conversion feature ("Conversion Feature") under which such shares convert to
Class A shares after a certain holding period. Details of the Conversion Feature
are set forth in Section IV below.
3. CLASS C SHARES
Class C shares are offered without imposition of a FESL, but will in most
cases be subject to a CDSC of 1.0% on redemptions made within one year after
purchase. Further information relating to the CDSC is set forth in paragraph 6
below. In addition, Class C shares, under each Fund's 12b-1 Plan, are subject to
12b-1 payments to reimburse Morgan Stanley Dean Witter Distributors Inc., DWR,
its affiliates and other broker-dealers for distribution expenses incurred by
them specifically on behalf of the Class, assessed at the annual rate of up to
1.0% of the average daily net assets of the Class. A portion of the 12b-1 fee
equal to up to 0.25% of the Fund's average daily net assets is characterized as
a service fee within the meaning of NASD guidelines. Unlike Class B shares,
Class C shares do not have the Conversion Feature.
4. CLASS D SHARES
Class D shares are offered without imposition of a FESL, CDSC or a 12b-1 fee
for purchases of Fund shares by (i) investors meeting an initial minimum
investment requirement and (ii) certain other limited categories of investors,
in each case, as may be approved by the Boards of Directors/Trustees of the
Funds and as disclosed in each Fund's current prospectus.
5. ADDITIONAL CLASSES OF SHARES
The Boards of Directors/Trustees of the Funds have the authority to create
additional Classes, or change existing Classes, from time to time, in accordance
with Rule 18f-3 under the 1940 Act.
- ------------
(1) The payments under the 12b-1 Plan for each of Morgan Stanley Dean Witter
American Value Fund, Morgan Stanley Dean Witter Natural Resource Development
Securities Inc. and Morgan Stanley Dean Witter Dividend Growth Securities Inc.
are assessed at the annual rate of 1.0% of the lesser of: (a) the average daily
aggregate gross sales of the Fund's Class B shares since the inception of the
Fund's Plan (not including reinvestment of dividends or capital gains
distributions), less the average daily aggregate net asset value of the Fund's
Class B shares redeemed since the Plan's inception upon which a contingent
deferred sales charge has been imposed or waived, or (b) the average daily net
assets of Class B attributable to shares issued, net of related shares redeemed,
since inception of the Plan. The payments under the 12b-1 Plan for the Morgan
Stanley Dean Witter Strategist Fund are assessed at the annual rate of: (i) 1%
of the lesser of (a) the average daily aggregate gross sales of the Fund's Class
B shares since the effectiveness of the first amendment of the Plan on November
8, 1989 (not including reinvestment of dividends or capital gains
distributions), less the average daily aggregate net asset value of the Fund's
Class B shares redeemed since the effectiveness of the first amended Plan, upon
which a contingent deferred sales charge has been imposed or waived, or (b) the
average daily net assets of Class B attributable to shares issued, net of
related shares redeemed, since the effectiveness of the first amended Plan; plus
(ii) 0.25% of the average daily net assets of Class B attributable to shares
issued, net of related shares redeemed, prior to effectiveness of the first
amended Plan.
2
<PAGE>
6. CALCULATION OF THE CDSC
Any applicable CDSC is calculated based upon the lesser of net asset value
of the shares at the time of purchase or at the time of redemption. The CDSC
does not apply to amounts representing an increase in share value due to capital
appreciation and shares acquired through the reinvestment of dividends or
capital gains distributions. The CDSC schedule applicable to a Fund and the
circumstances in which the CDSC is subject to waiver are set forth in each
Fund's prospectus.
II. EXPENSE ALLOCATIONS
Expenses incurred by a Fund are allocated among the various Classes of
shares pro rata based on the net assets of the Fund attributable to each Class,
except that 12b-1 fees relating to a particular Class are allocated directly to
that Class. In addition, other expenses associated with a particular Class
(except advisory or custodial fees), may be allocated directly to that Class,
provided that such expenses are reasonably identified as specifically
attributable to that Class and the direct allocation to that Class is approved
by the Fund's Board of Directors/Trustees.
III. CLASS DESIGNATION
All shares of the Funds held prior to July 28, 1997 (other than the shares
held by certain employee benefit plans established by DWR and its affiliate, SPS
Transaction Services, Inc., shares of Funds offered with a FESL, and shares of
Morgan Stanley Dean Witter Balanced Growth Fund and Morgan Stanley Dean Witter
Balanced Income Fund) have been designated Class B shares. Shares held prior to
July 28, 1997 by such employee benefit plans have been designated Class D
shares. Shares held prior to July 28, 1997 of Funds offered with a FESL have
been designated Class D shares. In addition, shares of Morgan Stanley Dean
Witter American Value Fund purchased prior to April 30, 1984, shares of Morgan
Stanley Dean Witter Strategist Fund purchased prior to November 8, 1989 and
shares of Morgan Stanley Dean Witter Natural Resource Development Securities
Inc. and Morgan Stanley Dean Witter Dividend Growth Securities Inc. purchased
prior to July 2, 1984 (with respect to such shares of each Fund, including such
proportion of shares acquired through reinvestment of dividends and capital
gains distributions as the total number of shares acquired prior to each of the
preceding dates in this sentence bears to the total number of shares purchased
and owned by the shareholder of that Fund) have been designated Class D shares.
Shares of Morgan Stanley Dean Witter Balanced Growth Fund and Morgan Stanley
Dean Witter Balanced Income Fund held prior to July 28, 1997 have been
designated Class C shares except that shares of Morgan Stanley Dean Witter
Balanced Growth Fund and Morgan Stanley Dean Witter Balanced Income Fund held
prior to July 28, 1997 that were acquired in exchange for shares of an
investment company offered with a CDSC have been designated Class B shares and
those that were acquired in exchange for shares of an investment company offered
with a FESL have been designated Class A shares.
IV. THE CONVERSION FEATURE
Class B shares held before May 1, 1997 will convert to Class A shares in
May, 2007, except that Class B shares which were purchased before July 28, 1997
by trusts for which Morgan Stanley Dean Witter Trust FSB ("MSDW Trust") provides
discretionary trustee services converted to Class A shares on August 29, 1997
(the CDSC was not applicable to such shares upon the conversion). In all other
instances, Class B shares of each Fund will automatically convert to Class A
shares, based on the relative net asset values of the shares of the two Classes
on the conversion date, which will be approximately ten (10) years after the
date of the original purchase. Conversions will be effected once a month. The 10
year period will be calculated from the last day of the month in which the
shares were purchased or, in the case of Class B shares acquired through an
exchange or a series of exchanges, from the last day of the month in which the
original Class B shares were purchased, provided that shares originally
purchased before May 1, 1997 will convert to Class A shares in May, 2007. Except
as set forth below, the conversion of shares purchased on or after May 1, 1997
will take place in the month following the tenth anniversary of the purchase.
There will also be converted at that time such proportion of Class B shares
acquired through automatic reinvestment of dividends owned by the shareholder as
the total number of his or her Class B shares converting at the time bears to
the total number of outstanding Class B shares purchased and owned by the
shareholder. In the case of Class B shares held by a 401(k) plan or other plan
qualified under Section 401(a) of the Internal Revenue Code (the "Code") and
3
<PAGE>
for which MSDW Trust serves as Trustee or DWR's Retirement Plan Services serves
as recordkeeper pursuant to a written Recordkeeping Services Agreement, all
Class B shares will convert to Class A shares on the conversion date of the
first shares of a Fund purchased by that plan. In the case of Class B shares
previously exchanged for shares of an "Exchange Fund" (as such term is defined
in the prospectus of each Fund), the period of time the shares were held in the
Exchange Fund (calculated from the last day of the month in which the Exchange
Fund shares were acquired) is excluded from the holding period for conversion.
If those shares are subsequently re-exchanged for Class B shares of a Fund, the
holding period resumes on the last day of the month in which Class B shares are
reacquired.
Effectiveness of the Conversion Feature is subject to the continuing
availability of a ruling of the Internal Revenue Service or an opinion of
counsel to the effect that (i) the conversion of shares does not constitute a
taxable event under the Code; (ii) Class A shares received on conversion will
have a basis equal to the shareholder's basis in the converted Class B shares
immediately prior to the conversion; and (iii) Class A shares received on
conversion will have a holding period that includes the holding period of the
converted Class B shares. The Conversion Feature may be suspended if the Ruling
or opinion is no longer available. In such event, Class B shares would continue
to be subject to Class B fees under the applicable Fund's 12b-1 Plan.
V. EXCHANGE PRIVILEGES
Shares of each Class may be exchanged for shares of the same Class of the
other Funds and for shares of certain other investment companies without the
imposition of an exchange fee as described in the prospectuses and statements of
additional information of the Funds. The exchange privilege of each Fund may be
terminated or revised at any time by the Fund upon such notice as may be
required by applicable regulatory agencies as described in each Fund's
prospectus.
VI. VOTING
Each Class shall have exclusive voting rights on any matter that relates
solely to its 12b-1 Plan, except that Class B shareholders will have the right
to vote on any proposed material increase in Class A's expenses, including
payments under the Class A 12b-1 Plan, if such proposal is submitted separately
to Class A shareholders. If the amount of expenses, including payments under the
Class A 12b-1 Plan, is increased materially without the approval of Class B
shareholders, the Fund will establish a new Class A for Class B shareholders
whose shares automatically convert on the same terms as applied to Class A
before the increase. In addition, each Class shall have separate voting rights
on any matter submitted to shareholders in which the interests of one Class
differ from the interests of any other Class.
4
<PAGE>
MORGAN STANLEY DEAN WITTER FUNDS
MULTIPLE CLASS PLAN PURSUANT TO RULE 18f-3
SCHEDULE A
AT JULY 22, 1998
<TABLE>
<S> <C>
1) Morgan Stanley Dean Witter American Value Fund
2) Morgan Stanley Dean Witter Balanced Growth Fund
3) Morgan Stanley Dean Witter Balanced Income Fund
4) Morgan Stanley Dean Witter California Tax-Free Income Fund
5) Morgan Stanley Dean Witter Capital Appreciation Fund
6) Morgan Stanley Dean Witter Capital Growth Securities
7) Morgan Stanley Dean Witter Competitive Edge Fund
8) Morgan Stanley Dean Witter Convertible Securities Trust
9) Morgan Stanley Dean Witter Developing Growth Securities Trust
10) Morgan Stanley Dean Witter Diversified Income Trust
11) Morgan Stanley Dean Witter Dividend Growth Securities Inc.
12) Morgan Stanley Dean Witter Equity Fund
13) Morgan Stanley Dean Witter European Growth Fund Inc.
14) Morgan Stanley Dean Witter Federal Securities Trust
15) Morgan Stanley Dean Witter Financial Services Trust
16) Morgan Stanley Dean Witter Fund of Funds
17) Dean Witter Global Asset Allocation Fund
18) Morgan Stanley Dean Witter Global Dividend Growth Securities
19) Morgan Stanley Dean Witter Global Utilities Fund
20) Morgan Stanley Dean Witter Growth Fund
21) Morgan Stanley Dean Witter Health Sciences Trust
22) Morgan Stanley Dean Witter High Yield Securities Inc.
23) Morgan Stanley Dean Witter Income Builder Fund
24) Morgan Stanley Dean Witter Information Fund
25) Morgan Stanley Dean Witter Intermediate Income Securities
26) Morgan Stanley Dean Witter International SmallCap Fund
27) Morgan Stanley Dean Witter Japan Fund
28) Morgan Stanley Dean Witter Market Leader Trust
29) Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities
30) Morgan Stanley Dean Witter Mid-Cap Growth Fund
31) Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
32) Morgan Stanley Dean Witter New York Tax-Free Income Fund
33) Morgan Stanley Dean Witter Pacific Growth Fund Inc.
34) Morgan Stanley Dean Witter Precious Metals and Minerals Trust
35) Morgan Stanley Dean Witter Research Fund
36) Morgan Stanley Dean Witter Special Value Fund
37) Morgan Stanley Dean Witter S&P 500 Index Fund
38) Morgan Stanley Dean Witter S&P 500 Select Fund
39) Morgan Stanley Dean Witter Strategist Fund
40) Morgan Stanley Dean Witter Tax-Exempt Securities Trust
41) Morgan Stanley Dean Witter U.S. Government Securities Trust
42) Morgan Stanley Dean Witter Utilities Fund
43) Morgan Stanley Dean Witter Value-Added Market Series
44) Morgan Stanley Dean Witter Value Fund
45) Morgan Stanley Dean Witter Worldwide High Income Fund
46) Morgan Stanley Dean Witter World Wide Income Trust
</TABLE>
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> MSDW FUND OF FUNDS INTERNATIONAL - CLASS - A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 4,264,266
<INVESTMENTS-AT-VALUE> 3,900,714
<RECEIVABLES> 28,407
<ASSETS-OTHER> 36,447
<OTHER-ITEMS-ASSETS> 51,780
<TOTAL-ASSETS> 4,017,348
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 63,750
<TOTAL-LIABILITIES> 63,750
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,395,562
<SHARES-COMMON-STOCK> 65,604
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (78,412)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (363,552)
<NET-ASSETS> 595,651
<DIVIDEND-INCOME> 14,488
<INTEREST-INCOME> 22,949
<OTHER-INCOME> 0
<EXPENSES-NET> (25,278)
<NET-INVESTMENT-INCOME> 12,159
<REALIZED-GAINS-CURRENT> (78,412)
<APPREC-INCREASE-CURRENT> (363,552)
<NET-CHANGE-FROM-OPS> (429,805)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (444)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 67,277
<NUMBER-OF-SHARES-REDEEMED> (2,968)
<SHARES-REINVESTED> 45
<NET-CHANGE-IN-ASSETS> 3,903,598
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (202,838)
<AVERAGE-NET-ASSETS> 416,026
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> (0.88)
<PER-SHARE-DIVIDEND> (0.09)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.08
<EXPENSE-RATIO> 0.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> MSDW FUND OF FUNDS INTERNATIONAL - CLASS - B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 4,264,266
<INVESTMENTS-AT-VALUE> 3,900,714
<RECEIVABLES> 28,407
<ASSETS-OTHER> 36,447
<OTHER-ITEMS-ASSETS> 51,780
<TOTAL-ASSETS> 4,017,348
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 63,750
<TOTAL-LIABILITIES> 63,750
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,395,562
<SHARES-COMMON-STOCK> 359,031
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (78,412)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (363,552)
<NET-ASSETS> 3,241,122
<DIVIDEND-INCOME> 14,488
<INTEREST-INCOME> 22,949
<OTHER-INCOME> 0
<EXPENSES-NET> (25,278)
<NET-INVESTMENT-INCOME> 12,159
<REALIZED-GAINS-CURRENT> (78,412)
<APPREC-INCREASE-CURRENT> (363,552)
<NET-CHANGE-FROM-OPS> (429,805)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (18,372)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 397,997
<NUMBER-OF-SHARES-REDEEMED> (41,986)
<SHARES-REINVESTED> 1,770
<NET-CHANGE-IN-ASSETS> 3,903,598
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (202,838)
<AVERAGE-NET-ASSETS> 2,984,850
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> (0.91)
<PER-SHARE-DIVIDEND> (0.09)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.03
<EXPENSE-RATIO> 0.94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 013
<NAME> MSDW FUND OF FUNDS INTERNATIONAL - CLASS - C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 4,264,266
<INVESTMENTS-AT-VALUE> 3,900,714
<RECEIVABLES> 28,407
<ASSETS-OTHER> 36,447
<OTHER-ITEMS-ASSETS> 51,780
<TOTAL-ASSETS> 4,017,348
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 63,750
<TOTAL-LIABILITIES> 63,750
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,395,562
<SHARES-COMMON-STOCK> 11,670
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (78,412)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (363,552)
<NET-ASSETS> 105,343
<DIVIDEND-INCOME> 14,488
<INTEREST-INCOME> 22,949
<OTHER-INCOME> 0
<EXPENSES-NET> (25,278)
<NET-INVESTMENT-INCOME> 12,159
<REALIZED-GAINS-CURRENT> (78,412)
<APPREC-INCREASE-CURRENT> (363,552)
<NET-CHANGE-FROM-OPS> (429,805)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (670)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11,806
<NUMBER-OF-SHARES-REDEEMED> (1,454)
<SHARES-REINVESTED> 68
<NET-CHANGE-IN-ASSETS> 3,903,598
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (202,838)
<AVERAGE-NET-ASSETS> 98,622
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> (0.92)
<PER-SHARE-DIVIDEND> (0.09)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.03
<EXPENSE-RATIO> 0.92
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 014
<NAME> MSDW FUND OF FUNDS INTERNATIONAL - CLASS - D
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 4,264,266
<INVESTMENTS-AT-VALUE> 3,900,714
<RECEIVABLES> 28,407
<ASSETS-OTHER> 36,447
<OTHER-ITEMS-ASSETS> 51,780
<TOTAL-ASSETS> 4,017,348
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 63,750
<TOTAL-LIABILITIES> 63,750
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,395,562
<SHARES-COMMON-STOCK> 1,263
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (78,412)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (363,552)
<NET-ASSETS> 11,482
<DIVIDEND-INCOME> 14,488
<INTEREST-INCOME> 22,949
<OTHER-INCOME> 0
<EXPENSES-NET> (25,278)
<NET-INVESTMENT-INCOME> 12,159
<REALIZED-GAINS-CURRENT> (78,412)
<APPREC-INCREASE-CURRENT> (363,552)
<NET-CHANGE-FROM-OPS> (429,805)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (114)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 12
<NET-CHANGE-IN-ASSETS> 3,903,598
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (202,838)
<AVERAGE-NET-ASSETS> 12,715
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.14
<PER-SHARE-GAIN-APPREC> (0.96)
<PER-SHARE-DIVIDEND> (0.09)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.09
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 021
<NAME> MSDW FUND OF FUNDS DOMESTIC - CLASS - A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 26,416,031
<INVESTMENTS-AT-VALUE> 24,394,659
<RECEIVABLES> 3,563,704
<ASSETS-OTHER> 35,961
<OTHER-ITEMS-ASSETS> 2,299,185
<TOTAL-ASSETS> 30,293,509
<PAYABLE-FOR-SECURITIES> 2,788,481
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 93,809
<TOTAL-LIABILITIES> 2,882,290
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 28,613,323
<SHARES-COMMON-STOCK> 139,781
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 255,368
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 563,900
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,021,372)
<NET-ASSETS> 1,358,728
<DIVIDEND-INCOME> 496,466
<INTEREST-INCOME> 65,705
<OTHER-INCOME> 0
<EXPENSES-NET> (203,803)
<NET-INVESTMENT-INCOME> 358,368
<REALIZED-GAINS-CURRENT> 563,900
<APPREC-INCREASE-CURRENT> (2,021,372)
<NET-CHANGE-FROM-OPS> (1,099,104)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,838)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 195,957
<NUMBER-OF-SHARES-REDEEMED> (58,150)
<SHARES-REINVESTED> 724
<NET-CHANGE-IN-ASSETS> 27,361,219
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (429,877)
<AVERAGE-NET-ASSETS> 1,605,654
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.21
<PER-SHARE-GAIN-APPREC> (0.44)
<PER-SHARE-DIVIDEND> (0.05)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.72
<EXPENSE-RATIO> 0.22
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> MSDW FUND OF FUNDS DOMESTIC - CLASS - B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 26,416,031
<INVESTMENTS-AT-VALUE> 24,394,659
<RECEIVABLES> 3,563,704
<ASSETS-OTHER> 35,961
<OTHER-ITEMS-ASSETS> 2,299,185
<TOTAL-ASSETS> 30,293,509
<PAYABLE-FOR-SECURITIES> 2,788,481
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 93,809
<TOTAL-LIABILITIES> 2,882,290
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 28,613,323
<SHARES-COMMON-STOCK> 2,517,533
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 255,368
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 563,900
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,021,372)
<NET-ASSETS> 24,337,990
<DIVIDEND-INCOME> 496,466
<INTEREST-INCOME> 65,705
<OTHER-INCOME> 0
<EXPENSES-NET> (203,803)
<NET-INVESTMENT-INCOME> 358,368
<REALIZED-GAINS-CURRENT> 563,900
<APPREC-INCREASE-CURRENT> (2,021,372)
<NET-CHANGE-FROM-OPS> (1,099,104)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (89,059)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,941,410
<NUMBER-OF-SHARES-REDEEMED> (432,970)
<SHARES-REINVESTED> 7,843
<NET-CHANGE-IN-ASSETS> 27,361,219
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (429,877)
<AVERAGE-NET-ASSETS> 24,084,701
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.14
<PER-SHARE-GAIN-APPREC> (0.42)
<PER-SHARE-DIVIDEND> (0.05)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.67
<EXPENSE-RATIO> 0.92
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 023
<NAME> MSDW FUND OF FUNDS DOMESTIC - CLASS - C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 26,416,031
<INVESTMENTS-AT-VALUE> 24,394,659
<RECEIVABLES> 3,563,704
<ASSETS-OTHER> 35,961
<OTHER-ITEMS-ASSETS> 2,299,185
<TOTAL-ASSETS> 30,293,509
<PAYABLE-FOR-SECURITIES> 2,788,481
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 93,809
<TOTAL-LIABILITIES> 2,882,290
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 28,613,323
<SHARES-COMMON-STOCK> 176,082
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 255,368
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 563,900
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,021,372)
<NET-ASSETS> 1,702,258
<DIVIDEND-INCOME> 496,466
<INTEREST-INCOME> 65,705
<OTHER-INCOME> 0
<EXPENSES-NET> (203,803)
<NET-INVESTMENT-INCOME> 358,368
<REALIZED-GAINS-CURRENT> 563,900
<APPREC-INCREASE-CURRENT> (2,021,372)
<NET-CHANGE-FROM-OPS> (1,099,104)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,042)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 208,500
<NUMBER-OF-SHARES-REDEEMED> (34,232)
<SHARES-REINVESTED> 564
<NET-CHANGE-IN-ASSETS> 27,361,219
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (429,877)
<AVERAGE-NET-ASSETS> 1,658,659
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.13
<PER-SHARE-GAIN-APPREC> (0.41)
<PER-SHARE-DIVIDEND> (0.05)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.67
<EXPENSE-RATIO> 0.92
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 024
<NAME> MSDW FUND OF FUNDS DOMESTIC - CLASS - D
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 26,416,031
<INVESTMENTS-AT-VALUE> 24,394,659
<RECEIVABLES> 3,563,704
<ASSETS-OTHER> 35,961
<OTHER-ITEMS-ASSETS> 2,299,185
<TOTAL-ASSETS> 30,293,509
<PAYABLE-FOR-SECURITIES> 2,788,481
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 93,809
<TOTAL-LIABILITIES> 2,882,290
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 28,613,323
<SHARES-COMMON-STOCK> 1,257
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 255,368
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 563,900
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,021,372)
<NET-ASSETS> 12,243
<DIVIDEND-INCOME> 496,466
<INTEREST-INCOME> 65,705
<OTHER-INCOME> 0
<EXPENSES-NET> (203,803)
<NET-INVESTMENT-INCOME> 358,368
<REALIZED-GAINS-CURRENT> 563,900
<APPREC-INCREASE-CURRENT> (2,021,372)
<NET-CHANGE-FROM-OPS> (1,099,104)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (61)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 6
<NET-CHANGE-IN-ASSETS> 27,361,219
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (429,877)
<AVERAGE-NET-ASSETS> 13,221
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.22
<PER-SHARE-GAIN-APPREC> (0.43)
<PER-SHARE-DIVIDEND> (0.05)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.74
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
