<PAGE>
MORGAN STANLEY DEAN WITTER
COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
PROSPECTUS--DECEMBER 29, 1997
- -------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND (THE "FUND") IS AN OPEN-END,
DIVERSIFIED MANAGEMENT INVESTMENT COMPANY CURRENTLY CONSISTING OF TWO SEPARATE
PORTFOLIOS: THE "BEST IDEAS" PORTFOLIO AND THE COMPETITIVE EDGE PORTFOLIO. THE
PORTFOLIO COVERED IN THIS PROSPECTUS, THE "BEST IDEAS" PORTFOLIO (THE " 'BEST
IDEAS' PORTFOLIO" OR THE "PORTFOLIO"), HAS AN INVESTMENT OBJECTIVE OF 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 ("MSDW EQUITY RESEARCH"). SEE "INVESTMENT
OBJECTIVE AND POLICIES."
INITIAL OFFERING--Shares of the "Best Ideas" Portfolio are being offered in an
underwriting by Dean Witter Distributors Inc. at $10.00 per share for Class B,
Class C and Class D shares with all proceeds going to the Portfolio and at
$10.00 per share plus a sales charge for Class A shares with the sales charge
paid to the Underwriter and the net asset value of $10.00 per share going to the
Portfolio. All expenses in connection with the organization of the Fund and this
offering will be paid by the Investment Manager and Underwriter except for a
maximum of $250,000 of organizational expenses to be reimbursed by the
Portfolio. The initial offering will run from approximately January 26, 1998
through February 20, 1998. Shares of the Competitive Edge Portfolio are not
being offered to investors at this time.
CONTINUOUS OFFERING--A continuous offering of the shares of the "Best Ideas"
Portfolio will commence approximately two weeks after the closing date of the
initial offering which is anticipated for February 25, 1998. Class B, Class C
and Class D shares will be priced at the net asset value per share and Class A
shares will be priced at the net asset value per share plus a sales charge, in
each case as next determined following receipt of an order.
The "Best Ideas" Portfolio 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 Portfolio
Shares--Alternative Purchase Arrangements.")
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Prospectus Summary................................ 2
Summary of Fund Expenses.......................... 4
The Fund and its Management....................... 5
Investment Objective and Policies................. 5
Risk Considerations and Investment Practices.... 7
Investment Restrictions........................... 11
Underwriting...................................... 11
Purchase of Portfolio Shares--Continuous
Offering......................................... 11
Shareholder Services.............................. 19
Redemptions and Repurchases....................... 21
Dividends, Distributions and Taxes................ 21
Performance Information........................... 22
Additional Information............................ 22
</TABLE>
This Prospectus sets forth concisely the information you should know before
investing in the "Best Ideas" Portfolio of the Fund. It should be read and
retained for future reference. Additional information about the "Best Ideas"
Portfolio of the Fund is contained in the Statement of Additional Information,
dated December 29, 1997, which has been filed with the Securities and Exchange
Commission, and which is available at no charge upon request of the Fund at the
address or telephone numbers listed on this page. The Statement of Additional
Information is incorporated herein by reference.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
MORGAN STANLEY DEAN WITTER
COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 392-2550 or (800) 869-NEWS (toll-free)
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
DEAN WITTER DISTRIBUTORS INC., DISTRIBUTOR
<PAGE>
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
THE FUND The Fund is an open-end, diversified management investment company currently consisting
of two separate portfolios. The portfolio covered by this Prospectus, the "Best Ideas"
Portfolio (the " 'Best Ideas' Portfolio" or the "Portfolio"), 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 ("MSDW Equity Research").
- -------------------------------------------------------------------------------------------------------
SHARES OFFERED Shares of beneficial interest with $0.01 par value of the "Best Ideas" Portfolio (see
page 22). The Portfolio offers four Classes of shares, each with a different combination
of sales charges, ongoing fees and other features (see pages 11-18).
- -------------------------------------------------------------------------------------------------------
INITIAL Shares of the "Best Ideas" Portfolio are being offered in an underwriting by Dean Witter
OFFERING Distributors Inc. at $10.00 per share for each of Class B, Class C and Class D and
$10.00 per share plus a sales charge for Class A. The minimum purchase for each Class is
100 shares; however, Class D shares are only available to persons who are otherwise
qualified to purchase such shares. The initial offering will run approximately from
January 26, 1998 through February 20, 1998. The closing will take place on February 25,
1998 or such other date as may be agreed upon by Dean Witter Distributors Inc. and the
Fund (the "Closing Date"). Shares will not be issued and dividends will not be declared
by the Portfolio until after the Closing Date. If any orders received during the initial
offering period are accompanied by payment, such payment will be returned unless an
accompanying request for investment in a Dean Witter money market fund is received at
the time the payment is made. Any purchase order may be cancelled at any time prior to
the Closing Date.
- -------------------------------------------------------------------------------------------------------
CONTINUOUS A continuous offering of shares of the "Best Ideas" Portfolio, if any, will commence
OFFERING/ within approximately two weeks after the Closing Date. The minimum initial investment
MINIMUM for each Class is $1,000 ($100 if the account is opened through EasyInvest-SM-). Class D
PURCHASE shares are only available to persons investing $5 million ($25 million for certain
qualified plans) or more and to certain other limited categories of investors. For the
purpose of meeting the minimum $5 million (or $25 million) investment for Class D
shares, and subject to the $1,000 minimum initial investment for each Class of the
Portfolio, an investor's existing holdings of Class A shares and shares of funds for
which Dean Witter InterCapital serves as investment manager ("Dean Witter Funds") that
are sold with a front-end sales charge, and concurrent investments in Class D shares of
the Portfolio and other Dean Witter Funds that are multiple class funds will be
aggregated. The minimum subsequent investment is $100 (see page 11).
- -------------------------------------------------------------------------------------------------------
INVESTMENT The investment objective of the "Best Ideas" Portfolio is long-term capital growth (see
OBJECTIVE page 5).
- -------------------------------------------------------------------------------------------------------
INVESTMENT Dean Witter InterCapital Inc. ("InterCapital"), the Investment Manager of the Fund, and
MANAGER its wholly-owned subsidiary, Dean Witter Services Company Inc., serve in various
investment management, advisory, management and administrative capacities to 103
investment companies and other portfolios with assets of approximately $102.3 billion at
November 30, 1997.
- -------------------------------------------------------------------------------------------------------
MANAGEMENT The Investment Manager receives a monthly fee at the annual rate of 0.65% of the
FEE Portfolio's average daily net assets (see page 5).
- -------------------------------------------------------------------------------------------------------
UNDERWRITER Dean Witter Distributors Inc. (the "Distributor") is the Fund's Underwriter and
AND Distributor. The Fund has adopted a distribution plan pursuant to Rule 12b-1 under the
DISTRIBUTOR Investment Company Act (the "12b-1 Plan") with respect to the distribution fees paid by
AND the Class A, Class B and Class C shares of the Portfolio to the Distributor. The entire
DISTRIBUTION 12b-1 fee payable by Class A and a portion of the 12b-1 fee payable by each of Class B
FEE 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 11 and 17).
- -------------------------------------------------------------------------------------------------------
ALTERNATIVE Four Classes of shares of the "Best Ideas" Portfolio are offered:
PURCHASE
ARRANGEMENTS - Class A shares are offered with a front-end sales charge, starting at 5.25% and
reduced for larger purchases. Investments of $1 million or more (and investments by
certain other limited categories of investors) are not subject to any sales charge at
the time of purchase but a contingent deferred sales charge ("CDSC") of 1.0% may be
imposed on redemptions within one year of purchase. The Fund, on behalf of the
Portfolio, is authorized to reimburse the Distributor for specific expenses incurred in
promoting the distribution of the Portfolio's
- -------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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 up
to 0.25% of average daily net assets of the Class of the Portfolio (see pages 11, 14 and
17).
- 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 Portfolio 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 the Portfolio. Class B shares convert
to Class A shares approximately ten years after the date of the original purchase (see
pages 11 and 17).
- 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 the Portfolio, is authorized to reimburse the Distributor for specific
expenses incurred in promoting the distribution of the 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 up to 1.0% of average
daily net assets of the Class of the Portfolio (see pages 11 and 17).
- 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 11 and 17).
- -------------------------------------------------------------------------------------------------------
DIVIDENDS AND Dividends from net investment income and distributions from net capital gains, if any,
CAPITAL GAINS are paid at least once per year. The Portfolio may, however, determine to retain all or
DISTRIBUTIONS part of any net long-term capital gains in any year for reinvestment. Dividends and
capital gains distributions paid on shares of a Class are automatically reinvested in
additional shares of the same Class at net asset value unless the shareholder elects to
receive cash. Shares acquired by dividend and distribution reinvestment will not be
subject to any sales charge or CDSC (see pages 19 and 21).
- -------------------------------------------------------------------------------------------------------
REDEMPTION Shares of the Portfolio 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 21).
- -------------------------------------------------------------------------------------------------------
RISK An investment in the "Best Ideas" Portfolio should be considered a long-term holding and
CONSIDERATIONS subject to all the risks associated with investing in a relatively small universe of
equity securities of companies in domestic and foreign markets. The net asset value of
the Portfolio's shares will fluctuate with changes in the market value of its portfolio
securities, and therefore, will increase or decrease due to a variety of economic,
market or political factors which cannot be predicted. There can be no assurance that
the securities contained in the Competitive Edge "Best Ideas" List, which currently
consists of only 40 companies, will perform as anticipated. Past performance of
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. It should be recognized that foreign securities and
markets in which the Portfolio may invest 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 the Portfolio'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 Portfolio may enter into repurchase agreements 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
7-10).
</TABLE>
- --------------------------------------------------------------------------------
THE ABOVE IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION APPEARING
ELSEWHERE IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION.
3
<PAGE>
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
The following table illustrates all expenses and fees that a shareholder of the
Portfolio will incur. The expenses and fees set forth in the table are based on
the fees and estimated other expenses for the first full fiscal year of the
Portfolio.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B CLASS C CLASS D
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price)........................... 5.25%(1) None None None
Sales Charge Imposed on Dividend Reinvestments........... None None None None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds)...... None(2) 5.00%(3) 1.00%(4) None
Redemption Fees.......................................... None None None None
Exchange Fee............................................. None None None None
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS)
<S> <C> <C> <C> <C>
Management Fees*......................................... 0.65% 0.65% 0.65% 0.65%
12b-1 Fees (5) (6)....................................... 0.25% 1.00% 1.00% None
Other Expenses*.......................................... 0.32% 0.32% 0.32% 0.32%
Total Fund Operating Expenses* (7)....................... 1.22% 1.97% 1.97% 0.97%
</TABLE>
- ------------------------------
* The Investment Manager has undertaken to assume all operating expenses
(except for brokerage and 12b-1 fees) and to waive the compensation provided
for in its Management Agreement for the Portfolio until such time as the
Portfolio has $50 million of net assets or until six months from commencement
of the Portfolio's operations, whichever occurs first. The fees and expenses
disclosed above do not reflect the assumption of any expenses or the waiver
of any compensation by the Investment Manager.
(1) Reduced for purchases of $25,000 and over (see "Purchase of Portfolio
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 Portfolio 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 Portfolio 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 the 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 the Portfolio of the Fund's
shares (see "Purchase of Portfolio 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 Portfolio
Shares--Alternative Purchase Arrangements").
(7) "Total Fund Operating Expenses," as shown above with respect to each Class,
are estimates based upon the sum of Management and 12b-1 Fees, and estimated
"Other Expenses."
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS
- --------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment in the Portfolios assuming
(1) a 5% annual return and (2) redemption at the end of each time period:
Class A............................................................................ $ 64 $ 89
Class B............................................................................ $ 70 $ 92
Class C............................................................................ $ 30 $ 62
Class D............................................................................ $ 10 $ 31
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS
- --------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
You would pay the following expenses on the same $1,000 investment in the Portfolios
assuming no redemption at the end of the period:
Class A............................................................................ $ 64 $ 89
Class B............................................................................ $ 20 $ 62
Class C............................................................................ $ 20 $ 62
Class D............................................................................ $ 10 $ 31
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF THE PORTFOLIO 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 Portfolio will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"The Fund and its Management," "Purchase of Portfolio 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.
4
<PAGE>
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
Morgan Stanley Dean Witter Competitive Edge Fund (the "Fund") is an open-end,
diversified management investment company. The Fund is a trust of the type
commonly known as a "Massachusetts business trust" and was organized under the
laws of the Commonwealth of Massachusetts on October 16, 1997.
Dean Witter InterCapital Inc. ("InterCapital" or the "Investment Manager"),
whose address is Two World Trade Center, New York, New York 10048, is the Fund's
Investment Manager. The Investment Manager, which was incorporated in July,
1992, is a wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover &
Co. ("MSDWD"), a preeminent global financial services firm that maintains
leading market positions in each of its three primary businesses--securities,
asset management and credit services.
InterCapital and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to 103 investment companies, thirty of which are
listed on the New York Stock Exchange, with combined assets of approximately
$98.5 billion as of November 30, 1997. The Investment Manager also manages and
advises portfolios of pension plans, other institutions and individuals which
aggregated approximately $3.8 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 the "Best Ideas" Portfolio's assets
principally among the securities on the Competitive Edge "Best Ideas" List (as
defined below). InterCapital has retained Dean Witter Services Company Inc. to
perform the aforementioned administrative services for the Fund. The Fund's
Board of Trustees reviews the various services provided by or under the
direction of the Investment Manager to ensure that each Portfolio's general
investment policies and programs are being properly carried out and that
administrative services are being provided to the Fund in a satisfactory manner.
As full compensation for the services and facilities furnished to the "Best
Ideas" Portfolio and for expenses of the Portfolio incurred by the Investment
Manager, the Fund pays the Investment Manager monthly compensation calculated
daily by applying the annual rate of 0.65% of the Portfolio's net assets. The
Portfolio's expenses include: the fee of the Investment Manager, the fee
pursuant to the Plan of Distribution (see "Purchase of Portfolio Shares");
taxes; transfer agent and custodian fees; auditing fees; and certain legal fees,
and printing and other expenses relating to the Portfolio's operations which are
not expressly assumed by the Investment Manager under its Investment Management
Agreement with the Fund. The Investment Manager has agreed to assume all
operating expenses (except for brokerage and 12b-1 fees) for the Portfolio until
such time as the Portfolio has $50 million of net assets or until six months
from commencement of the Portfolio's operations, whichever occurs first.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The 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 this Prospectus, the "Best
Ideas" Portfolio (the " 'Best Ideas' Portfolio" or the "Portfolio"), is
long-term capital growth. The objective of the Portfolio is a fundamental policy
and may not be changed without shareholder approval. There is no assurance that
the objective of the Portfolio will be achieved.
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
5
<PAGE>
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. MSDWD 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. MSDWD 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 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 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 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 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.
6
<PAGE>
RISK CONSIDERATIONS AND INVESTMENT PRACTICES
The net asset value of the Portfolio's shares will fluctuate with changes in the
market value of its portfolio securities. The market value of the Portfolio's
portfolio securities will increase or decrease due to a variety of economic,
market or political factors which cannot be predicted. A general description and
the risks involved of the various investment practices and techniques which the
Portfolio may engage in is set forth below. A more detailed discussion can be
found in this Fund's Statement of Additional Information.
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 MSDWD and its affiliates, including
the Investment Manager, as well as the Portfolio. The lists are also subject to
restrictions related to MSDWD'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, MSDWD.
MSDWD BUSINESSES. As a diversified financial services firm, with three primary
businesses--securities, asset management and credit services, MSDWD provides a
wide range of financial services to issuers of securities and investors in
securities. MSDWD 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
MSDWD 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.
FOREIGN SECURITIES. Investors should carefully consider the risks of investing
in securities of foreign issuers and securities denominated in non-U.S.
currencies. Fluctuations in the relative rates of exchange between the
currencies of different nations will affect the value of the Portfolio's
investments. Changes in foreign currency exchange rates relative to the U.S.
dollar will affect the U.S. dollar value of the Portfolio's assets denominated
in that currency and thereby impact upon the Portfolio'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. Foreign companies are not subject to the regulatory requirements of
U.S. companies and, as such, there may be less publicly available information
about such companies. Moreover, foreign companies are not subject to uniform
accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies.
Securities of foreign issuers may be less liquid than comparable securities
of U.S. issuers and, as such, their price changes may be more volatile.
Furthermore, foreign exchanges and broker-dealers are generally subject to less
government and exchange scrutiny and regulation than their American
counterparts. Brokerage commissions, dealer concessions and other transaction
costs may be higher on foreign markets than in the U.S. In addition, differences
in clearance and settlement procedures on
foreign markets may occasion delays in settlements of fund trades effected in
such markets. Inability to dispose of portfolio securities due to settlement
delays could result in losses to the Portfolio due to subsequent declines in
value of such securities and the inability of the Portfolio to make intended
security purchases due to settlement problems could result in a failure of the
Portfolio to make potentially advantageous investments.
The foreign securities in which the Portfolio will be investing 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
7
<PAGE>
industries, and securities markets which trade a small number of securities.
Prices of these securities tend to be especially volatile and, in the past,
securities in these countries have offered greater potential for gain (as well
as loss) than securities of companies located in developed countries.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Portfolio may enter into
forward foreign currency exchange contracts ("forward contracts") in connection
with its foreign securities investments.
A forward contract involves an obligation to purchase or sell a currency at
a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
A fund may enter into forward contracts as a hedge against fluctuations in
future foreign exchange rates.
The Portfolio will enter into forward contracts under various circumstances.
When the Portfolio 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
Portfolio 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 Portfolio 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
Portfolio or the counterparty) and the foreign currency in which the security is
denominated during the period between the date on which the security is
purchased or sold and the date on which payment is made or received.
At other times, when, for example, the 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 Portfolio 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 Portfolio's securities holdings (or securities which the Portfolio has
purchased for its portfolio) denominated in such foreign currency. Under
identical circumstances, the Portfolio may enter into a forward contract to
sell, for a fixed amount of U.S. dollars or other currency, an amount of foreign
currency other than the currency in which the securities to be hedged are
denominated approximating the value of some or all of the portfolio securities
to be hedged. This method of hedging, called "cross-hedging," will be selected
by the Investment Manager when it is determined that the foreign currency in
which the portfolio securities are denominated has insufficient liquidity or is
trading at a discount as compared with some other foreign currency with which it
tends to move in tandem.
In addition, when the 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 Portfolio 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
Portfolio may, however, close out the forward contract without purchasing the
security which was the subject of the "anticipatory" hedge.
In all of the above circumstances, if the currency in which the Portfolio'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 Portfolio will have realized fewer gains than had it not entered into the
forward contracts. Moreover, the precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible,
since the future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The Portfolio
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. The Portfolio generally will not enter into a forward
contract with a term of greater than one year, although it may enter into
forward contracts for periods of up to five years. The Portfolio 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. The Portfolio 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 Portfolio.
The Portfolio is permitted to write covered call options on portfolio
securities and the U.S. dollar and foreign currencies, without limit, in order
to hedge against the decline in the value of a security or currency in which
such security is denominated (although such hedge is limited to the value of the
premium received) and to close out long call option positions. The Portfolio may
write covered put options, under which the Portfolio incurs an obligation to buy
the security (or currency) underlying the option from the purchaser of the put
at the option's exercise price at any time during the option period, at the
purchaser's election.
The Portfolio may purchase listed and OTC call and put options in amounts
equalling up to 5% of its total assets. The Portfolio 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
8
<PAGE>
adverse exchange rate change of the currency in which the security it
anticipates purchasing is denominated vis-a-vis the currency in which the
exercise price is denominated. The Portfolio may purchase put options on
securities which it holds in its portfolio to protect itself against a decline
in the value of the security and to close out written put positions in a manner
similar to call option closing purchase transactions. There are no other limits
on the Portfolio's ability to purchase call and put options other than
compliance with the foregoing policies.
The Portfolio may purchase and sell futures contracts that are currently
traded, or may in the future be traded, on U.S. and foreign commodity exchanges
on underlying portfolio securities, on any currency ("currency" futures), on
U.S. and foreign fixed-income securities ("interest rate" futures) and on such
indexes of U.S. or foreign equity or fixed-income securities as may exist or
come into being ("index" futures). The Portfolio may purchase or sell interest
rate futures contracts for the purpose of hedging some or all of the value of
its portfolio securities (or anticipated portfolio securities) against changes
in prevailing interest rates. The Portfolio may purchase or sell index futures
contracts for the purpose of hedging some or all of its portfolio (or
anticipated portfolio) securities against changes in their prices. The Portfolio
may purchase or sell currency futures contracts to hedge against an anticipated
rise or decline in the value of the currency in which a portfolio security is
denominated vis-a-vis another currency. As a futures contract purchaser, the
Portfolio 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 Portfolio incurs an
obligation to deliver the specified amount of the underlying obligation at a
specified time in return for an agreed upon price.
The Portfolio also may purchase and write call and put options on futures
contracts which are traded on an exchange and enter into closing transactions
with respect to such options to terminate an existing position.
New futures contracts, options and other financial products and various
combinations thereof continue to be developed. The Portfolio may invest in any
such futures, options or products as may be developed, to the extent consistent
with its investment objective and applicable regulatory requirements.
RISKS OF OPTIONS AND FUTURES TRANSACTIONS. The Portfolio 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 could be incorrect in its expectations as to the
direction or extent of various interest rate or price movements or the time span
within which the movements take place. For example, if the Portfolio 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 Portfolio would lose money on the sale. Another risk which will
arise in employing futures contracts to protect against the price volatility of
portfolio securities is that the prices of securities, currencies and indexes
subject to futures contracts (and thereby the futures contract prices) may
correlate imperfectly with the behavior of the U.S. dollar cash prices of the
Portfolio's portfolio securities and their denominated currencies. See the
Statement of Additional Information for a further discussion of these risks.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements,
which may be viewed as a type of secured lending, 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, the Portfolio
follows procedures to minimize such risks. These procedures include effecting
repurchase transactions only with large, well-capitalized and well-established
financial institutions and maintaining adequate collateralization. It is the
current policy of the Portfolio not to invest in repurchase agreements that do
not mature within seven days if any such investment, together with any other
illiquid assets held by the Portfolio, amounts to more than 15% of the
Portfolio's net assets in keeping with its policy on illiquid securities.
PRIVATE PLACEMENTS. The Portfolio may invest up to 15% of its net assets in
securities which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), or which are otherwise 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
9
<PAGE>
prices. The Portfolio 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 the Fund, will make a determination as to
the liquidity of each restricted security purchased by the Portfolio. If a
restricted security is determined to be "liquid," such security will not be
included within the category "illiquid securities," which under current policy
may not exceed 15% of the Portfolio's net assets. However, investing in Rule
144A securities could have the effect of increasing the level of Portfolio
illiquidity to the extent the Portfolio, at a particular point in time, may be
unable to find qualified institutional buyers interested in purchasing such
securities.
RIGHTS AND WARRANTS. The Portfolio 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.
SECURITIES RECEIPTS. The Portfolio 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. 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.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Portfolio may lend its portfolio securities to brokers,
dealers and other financial institutions, provided that such loans are callable
at any time by the Portfolio (subject to certain notice provisions described in
the Statement of Additional Information), and are at all times secured by cash
or money market instruments, which are maintained in a segregated account
pursuant to applicable regulations and that are equal to at least the market
value, determined daily, of the loaned securities. As with any extensions of
credit, there are risks of delay in recovery and in some cases even loss of
rights in the collateral should the borrower of the securities fail financially.
However, loans of portfolio securities will only be made to firms deemed by the
Investment Manager to be creditworthy and when the income which can be earned
from such loans justifies the attendant risks.
For additional risk disclosure, please refer to the "Investment Objective
and Policies" section of the Prospectus and to the "Investment Practices and
Policies of the Portfolios" section of the Statement of Additional Information.
Except as specifically noted, all investment policies and practices
discussed above are not fundamental policies of the Portfolio or the Fund and,
as such, may be changed without shareholder approval.
PORTFOLIO MANAGEMENT
The "Best Ideas" Portfolio is actively managed by the Investment Manager with a
view to achieving the Portfolio's investment objective. The assets of the
Portfolio are managed within InterCapital's Growth Group, which manages 33
equity funds and fund portfolios with approximately $14.2 billion in assets as
of November 30, 1997. Mark Bavoso, Senior Vice President of InterCapital, is the
primary portfolio manager of the Portfolio and has been a portfolio manager at
InterCapital for over five years.
Although the Portfolio does not intend to engage in short-term trading of
portfolio securities as a means of achieving its investment objective, it may
sell portfolio securities without regard to the length of time they have been
held whenever such sale will in the Investment Manager's opinion strengthen the
Portfolio's position and contribute to its investment objective.
Substantially all of the orders for transactions in portfolio securities and
commodities listed on exchanges are expected to be placed for the Portfolio with
broker-dealers affiliated with the Investment Manager including Morgan Stanley
and DWR. In addition to Morgan Stanley and DWR, the Portfolio may place such
orders with a number of brokers and dealers, including other brokers and dealers
that are affiliates of the Investment Manager. The Fund may incur brokerage
commissions on transactions conducted through such affiliates. Transactions
effected through Morgan Stanley and other affiliates are effected pursuant to
procedures adopted by the Fund's Board of Trustees that are designed to ensure
that the commissions paid to such affiliated brokers or dealers are not more
than the commissions expected to be paid to unaffiliated brokers or dealers in a
commensurate arms-length transaction. Pursuant to an order of the Securities and
Exchange Commission, the Fund may effect principal transactions in certain money
market instruments with DWR. It is not anticipated that the portfolio trading
will result in the Portfolio's portfolio turnover rate exceeding 100% in any one
year. The Portfolio will incur brokerage costs commensurate with its portfolio
turnover rate. See "Dividends, Distributions and Taxes" for a discussion of the
tax implications of the Portfolio's trading policy.
10
<PAGE>
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The investment restrictions listed below are among the restrictions which have
been adopted by the Fund as fundamental policies of the Portfolio. Under the
Investment Company Act of 1940, as amended (the "Act"), a fundamental policy may
not be changed with respect to the Portfolio, without the vote of a majority of
the outstanding voting securities of the 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.
The Portfolio may not:
1. As to 75% of its total assets, invest more than 5% of the value of its
total assets in the securities of any one issuer (other than obligations issued,
or guaranteed by, the United States Government, its agencies or
instrumentalities), except that the Portfolio may invest all or substantially
all of its assets in another registered investment company having the same
investment objective and policies and substantially the same investment
restrictions as the Portfolio (a "Qualifying Portfolio").
2. As to 75% of its total assets, purchase more than 10% of all outstanding
voting securities or any class of securities of any one issuer, except that the
Portfolio may invest all or substantially all of its assets in a Qualifying
Portfolio.
3. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry. This restriction does not apply to obligations
issued or guaranteed by the United States Government or its agencies or
instrumentalities.
UNDERWRITING
- --------------------------------------------------------------------------------
Dean Witter Distributors Inc. (the "Underwriter") has agreed to purchase up to
10,000,000 shares from the "Best Ideas" Portfolio, which number may be increased
or decreased in accordance with the Underwriting Agreement. The initial offering
will run approximately from January 26, 1998 through February 20, 1998. The
Underwriting Agreement provides that the obligation of the Underwriter is
subject to certain conditions precedent and that the Underwriter will be
obligated to purchase the shares on February 25, 1998, or such other date as may
be agreed upon by the Underwriter and the Portfolio (the "Closing Date"). Shares
will not be issued and dividends will not be declared by the Portfolio until
after the Closing Date. For this reason, payment is not required to be made
prior to the Closing Date. If any orders received during the initial offering
period are accompanied by payment, such payment will be returned unless an
accompanying request for investment in a Dean Witter money market fund is
received at the time the payment is made. Prospective investors in money market
funds should request and read the money market fund prospectus prior to
investing. All such funds received and invested in a Dean Witter money market
fund will be automatically invested in the Portfolio on the Closing Date without
any further action by the investor. Any investor may cancel his or her purchase
of Portfolio shares without penalty at any time prior to the Closing Date.
The Underwriter will purchase Class B, Class C and Class D shares from the
Portfolio at $10.00 per share with all proceeds going to the Portfolio and will
purchase Class A shares at $10.00 per share plus a sales charge with the sales
charge paid to the Underwriter and the net asset value of $10.00 per share going
to the Portfolio. The Underwriter may, however, receive contingent deferred
sales charges from future redemptions of Class A, Class B and Class C shares
(see "Purchase of Portfolio Shares--Continuous Offering").
The Underwriter shall, regardless of its expected underwriting commitment,
be entitled and obligated to purchase only the number of shares for which
purchase orders have been received by the Underwriter prior to 2:00 p.m., New
York time, on the third business day preceding the Closing Date, or such other
date as may be agreed to between the parties.
The minimum number of Portfolio shares which may be purchased by any
shareholder pursuant to this offering is 100 shares. Certificates for shares
purchased will not be issued unless requested by the shareholder in writing.
PURCHASE OF PORTFOLIO SHARES--CONTINUOUS OFFERING
- --------------------------------------------------------------------------------
GENERAL
The "Best Ideas" Portfolio of the Fund offers each class of its shares for sale
to the public on a continuous basis. Pursuant to a Distribution Agreement
between the Fund and Dean Witter Distributors Inc. (the "Distributor"), an
affiliate of the Investment Manager, shares of the Portfolio of the Fund are
distributed by the Distributor and offered by DWR and other dealers which have
entered into agreements with the Distributor ("Selected Broker-Dealers"). The
principal executive office of the Distributor is located at Two World Trade
Center, New York, New York 10048.
The "Best Ideas" 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
11
<PAGE>
(scaled down from 5.0% to 1.0%) payable upon most
redemptions within six years after purchase. (Class B shares purchased by
certain qualified employer-sponsored benefit plans are subject to a CDSC scaled
down from 2.0% to 1.0% if redeemed within three years after purchase.) Class C
shares are sold without an initial sales charge but are subject to a CDSC of
1.0% on most redemptions made within one year after purchase. Class D shares are
sold without an initial sales charge or CDSC and are available only to investors
meeting an initial investment minimum of $5 million ($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 Portfolio. 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 Portfolio, an investor's existing holdings of
Class A shares of the Portfolio and other Dean Witter Funds that are multiple
class funds ("Dean Witter Multi-Class Funds") and shares of Dean Witter Funds
sold with a front-end sales charge ("FSC Funds") and concurrent investments in
Class D shares of the Portfolio and other Dean Witter Multi-Class Funds will be
aggregated. Subsequent purchases of $100 or more may be made by sending a check,
payable to Morgan Stanley Dean Witter Competitive Edge Fund--"Best Ideas"
Portfolio, directly to Dean Witter Trust FSB (the "Transfer Agent" or "DWT") at
P.O. Box 1040, Jersey City, NJ 07303 or by contacting an account executive of
DWR or other Selected Broker-Dealer. When purchasing shares of the Portfolio,
investors must specify whether the purchase is for Class A, Class B, Class C or
Class D shares. If no Class is specified, the Transfer Agent will not process
the transaction until the proper Class is identified. The minimum initial
purchase, in the case of investments through 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
InterCapital 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 or administrative
services, the Portfolio, 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 Portfolio are sold through the Distributor on a normal three
business day settlement basis; that is, payment is due on the third business day
(settlement date) after the order is placed with the Distributor. Since DWR and
other Selected Broker-Dealers forward investors' funds on settlement date, they
will benefit from the temporary use of the funds if payment is made prior
thereto. As noted above, orders placed directly with the Transfer Agent must be
accompanied by payment. Investors will be entitled to receive income dividends
and capital gains distributions if their order is received by the close of
business on the day prior to the record date for such 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 Portfolio and the Distributor reserve the right to reject any
purchase orders.
ALTERNATIVE PURCHASE ARRANGEMENTS
The "Best Ideas" 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 the Portfolio represents
an identical interest in the Portfolio 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 the
Portfolio that are imposed on Class A, Class B and Class C shares will be
imposed directly against those Classes of the 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
12
<PAGE>
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."
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 Portfolio 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 Portfolio. Any investment return on these additional
investment amounts may partially or wholly offset the higher annual expenses of
these Classes. Because the Portfolio's future return cannot be predicted,
however, there can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For
example, although Class C shares are subject to a significantly lower CDSC upon
redemptions, they do not, unlike Class B shares, convert into Class A shares
after approximately ten years, and, therefore, are subject to an ongoing 12b-1
fee of 1.0% (rather than the 0.25% fee applicable to Class A shares) for an
indefinite period of time. Thus, Class B shares may be more attractive than
Class C shares to investors with longer term investment outlooks. Other
investors, however, may elect to purchase Class C shares if, for example, they
determine that they do not wish to be subject to a front-end sales charge and
they are uncertain as to the length of time they intend to hold their shares.
For the purpose of meeting the $5 million (or $25 million) minimum
investment amount for Class D shares, holdings of Class A shares in all Dean
Witter Multi-Class Funds, shares of FSC Funds and shares of Dean Witter Funds
for which such shares have been exchanged, will be included together with the
current investment amount.
Sales personnel may receive different compensation for selling each Class of
shares. Investors should understand that the purpose of a CDSC is the same as
that of the initial sales charge in that the sales charges applicable to each
Class provide for the financing of the distribution of shares of that Class.
13
<PAGE>
Set forth below is a chart comparing the sales charge, 12b-1 fees and
conversion options applicable to each Class of shares:
<TABLE>
<CAPTION>
<C> <S> <C> <C>
CONVERSION
CLASS SALES CHARGE 12B-1 FEE FEATURE
A Maximum 5.25% 0.25% No
initial sales charge
reduced for
purchases of $25,000
and over; shares
sold without an
initial sales charge
generally subject to
a 1.0% CDSC during
first year.
B Maximum 5.0% CDSC 1.0% B shares
during the first convert to A
year decreasing to 0 shares
after six years automatically
after
approximately
ten years
C 1.0% CDSC during 1.0% No
first year
D None None No
</TABLE>
See "Purchase of Portfolio Shares" and "The Fund and its Management" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Determination of Net Asset Value," "Dividends,
Distributions and Taxes" and "Shareholder Services--Exchange Privilege" for
other differences between the Classes of shares.
INITIAL SALES CHARGE ALTERNATIVE-- CLASS A SHARES
Class A shares are sold at net asset value plus an initial sales charge. In some
cases, reduced sales charges may be available, as described below. Investments
of $1 million or more (and investments by certain other limited categories of
investors) are not subject to any sales charges at the time of purchase but are
subject to a CDSC of 1.0% on redemptions made within one year after purchase
(calculated from the last day of the month in which the shares were purchased),
except for certain specific circumstances. The CDSC will be assessed on an
amount equal to the lesser of the current market value or the cost of the shares
being redeemed. The CDSC will not be imposed (i) in the circumstances set forth
below in the section "Contingent Deferred Sales Charge Alternative--Class B
Shares-- CDSC Waivers," except that the references to six years in the first
paragraph of that section shall mean one year in the case of Class A shares, and
(ii) in the circumstances identified in the section "Additional Net Asset Value
Purchase Options" below. Class A shares are also subject to an annual 12b-1 fee
of up to 0.25% of the average daily net assets of the Class.
The offering price of Class A shares will be the net asset value per share
next determined following receipt of an order (see "Determination of Net Asset
Value" below), plus a sales charge (expressed as a percentage of the offering
price) on a single transaction as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------------------
PERCENTAGE OF APPROXIMATE
AMOUNT OF SINGLE PUBLIC OFFERING PERCENTAGE OF AMOUNT
TRANSACTION PRICE INVESTED
- -------------------------- ------------------- ---------------------
<S> <C> <C>
Less than $25,000......... 5.25% 5.54%
$25,000 but less
than $50,000............. 4.75% 4.99%
$50,000 but less
than $100,000............ 4.00% 4.17%
$100,000 but less
than $250,000............ 3.00% 3.09%
$250,000 but less
than $1 million.......... 2.00% 2.04%
$1 million and over....... 0 0
</TABLE>
Upon notice to all Selected Broker-Dealers, the Distributor may reallow up
to the full applicable sales charge as shown in the above schedule during
periods specified in such notice. During periods when 90% or more of the sales
charge is reallowed, such Selected Broker-Dealers may be deemed to be
underwriters as that term is defined in the Securities Act of 1933.
The above schedule of sales charges is applicable to purchases in a single
transaction by, among others: (a) an individual; (b) an individual, his or her
spouse and their children under the age of 21 purchasing shares for his, her or
their own accounts; (c) a trustee or other fiduciary purchasing shares for a
single trust estate or a single fiduciary account; (d) a pension, profit-sharing
or other employee benefit plan qualified or non-qualified under Section 401 of
the Internal Revenue Code; (e) tax-exempt organizations enumerated in Section
501(c)(3) or (13) of the Internal Revenue Code; (f) employee benefit plans
qualified under Section 401 of the Internal Revenue Code of a single employer or
of employers who are "affiliated persons" of each other within the meaning of
Section 2(a)(3)(c) of the Act; and for investments in Individual Retirement
Accounts of employees of a single employer through Systematic Payroll Deduction
plans; or (g) any other organized group of persons, whether incorporated or not,
provided the organization has been in existence for at least six months and has
some purpose other than the purchase of redeemable securities of a registered
investment company at a discount.
COMBINED PURCHASE PRIVILEGE. Investors may have the benefit of reduced sales
charges in accordance with the above schedule by combining purchases of Class A
shares of the Portfolio in single transactions with the purchase of Class A
shares of other Dean Witter Multi-Class Funds and shares of FSC Funds. The sales
charge payable on the purchase of the Class A shares of the Portfolio, the Class
A shares of the other Dean Witter Multi-Class Funds and the shares of the FSC
Funds will be at their respective rates applicable to the total amount of the
combined concurrent purchases of such shares.
RIGHT OF ACCUMULATION. The above persons and entities may benefit from a
reduction of the sales charges in accordance with the above schedule if the
cumulative net asset value of Class A shares purchased in a single transaction,
together with shares of the Portfolio and other Dean
14
<PAGE>
Witter Funds previously purchased at a price including a front-end sales charge
(including shares of the Portfolio and other Dean Witter Funds acquired in
exchange for those shares, and including in each case shares acquired through
reinvestment of dividends and distributions), which are held at the time of such
transaction, amounts to $25,000 or more. If such investor has a cumulative net
asset value of shares of FSC Funds and Class A and Class D shares 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 Portfolio
from DWR or other Selected Broker-Dealers. The cost of Class A shares of the
Portfolio or shares of other Dean Witter Funds which were previously purchased
at a price including a front-end sales charge during the 90-day period prior to
the date of receipt by the Distributor of the Letter of Intent, or of Class A
shares of the Portfolio or shares of other Dean Witter Funds acquired in
exchange for shares of such funds purchased during such period at a price
including a front-end sales charge, which are still owned by the shareholder,
may also be included in determining the applicable reduction.
ADDITIONAL NET ASSET VALUE PURCHASE OPTIONS. In addition to investments of $1
million or more, Class A shares also may be purchased at net asset value by the
following:
(1) trusts for which DWT (an affiliate of the Investment Manager) provides
discretionary trustee services;
(2) persons participating in a fee-based program approved by the
Distributor, pursuant to which such persons pay an asset based fee for services
in the nature of investment advisory or administrative services (such
investments are subject to all of the terms and conditions of such programs,
which may include termination fees, mandatory redemption upon termination and
such other circumstances as specified in the programs' agreements, and
restrictions on transferability of Portfolio 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 DWT 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 DWT 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 Dean Witter account executive who joined
Dean Witter from another investment firm within six months prior to the date of
purchase of Portfolio shares by such investors, if the shares are being
purchased with the proceeds from a redemption of shares of an open-end
proprietary mutual fund of the account executive's previous firm which imposed
either a front-end or deferred sales charge, provided such purchase was made
within sixty days after the redemption and the proceeds of the 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 Portfolio.
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 Portfolio'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 Portfolio. 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 Portfolio 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 Portfolio which are held for
six years or more after purchase (calculated from the last day of the month in
which the shares were purchased) will not be subject to any CDSC upon
redemption. Shares redeemed earlier than six years after purchase may, however,
be subject to a CDSC which will be a percentage of the dollar amount of shares
redeemed and will be assessed on an amount equal to the lesser of the current
market value or the cost of the shares being redeemed. The size of this
percentage will depend upon
15
<PAGE>
how long the shares have been held, as set forth in the following table:
<TABLE>
<CAPTION>
YEAR SINCE CDSC AS A
PURCHASE PERCENTAGE OF
PAYMENT MADE AMOUNT REDEEMED
- ---------------------------------------- ---------------------
<S> <C>
First................................... 5.0%
Second.................................. 4.0%
Third................................... 3.0%
Fourth.................................. 2.0%
Fifth................................... 2.0%
Sixth................................... 1.0%
Seventh and thereafter.................. None
</TABLE>
In the case of Class B shares of the Portfolio purchased by Qualified
Retirement Plans for which DWT serves as Trustee or DWR's Retirement Plan
Services serves as recordkeeper pursuant to a written Recordkeeping Services
Agreement, shares held for three years or more after purchase (calculated as
described in the paragraph above) will not be subject to any CDSC upon
redemption. However, shares redeemed earlier than three years after purchase may
be subject to a CDSC (calculated as described in the paragraph above), the
percentage of which will depend on how long the shares have been held, as set
forth in the following table:
<TABLE>
<CAPTION>
YEAR SINCE CDSC AS A
PURCHASE PERCENTAGE OF
PAYMENT MADE AMOUNT REDEEMED
- ---------------------------------------- ---------------------
<S> <C>
First................................... 2.0%
Second.................................. 2.0%
Third................................... 1.0%
Fourth and thereafter................... None
</TABLE>
CDSC WAIVERS. A CDSC will not be imposed on: (i) any amount which represents an
increase in value of shares purchased within the six years (or, in the case of
shares held by certain 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 other open-end investment companies
for which InterCapital serves as investment manager (collectively, with the
Portfolio, the "Dean Witter Funds") sold with a front-end sales charge or of
other Dean Witter Funds acquired in exchange for such shares. Moreover, in
determining whether a CDSC is applicable it will be assumed that amounts
described in (i), (ii) and (iii) above (in that order) are redeemed first.
In addition, the CDSC, if otherwise applicable, will be waived in the case
of:
(1) redemptions of shares held at the time a shareholder dies or becomes
disabled, only if the shares are: (A) registered either in the name of an
individual shareholder (not a trust), or in the names of such shareholder and
his or her spouse as joint tenants with right of survivorship; or (B) held in a
qualified corporate or self-employed retirement plan, Individual Retirement
Account ("IRA") or Custodial Account under Section 403(b)(7) of the Internal
Revenue Code ("403(b) Custodial Account"), provided in either case that the
redemption is requested within one year of the death or initial determination of
disability;
(2) redemptions in connection with the following retirement plan
distributions: (A) lump-sum or other distributions from a qualified corporate
or self-employed retirement plan following retirement (or, in the case of a "key
employee" of a "top heavy" plan, following attainment of age 59 1/2); (B)
distributions from an IRA or 403(b) Custodial Account following attainment of
age 59 1/2; or (C) a tax-free return of an excess contribution to an IRA; and
(3) all redemptions of shares held for the benefit of a participant in a
Qualified Retirement Plan which offers investment companies managed by the
Investment Manager or its subsidiary, Dean Witter Services Company Inc., as
self-directed investment alternatives and for which DWT serves as Trustee or
DWR's Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement ("Eligible Plan"), provided that either: (A)
the plan continues to be an Eligible Plan after the redemption; or (B) the
redemption is in connection with the complete termination of the plan involving
the distribution of all plan assets to participants.
With reference to (1) above, for the purpose of determining disability, the
Distributor utilizes the definition of disability contained in Section 72(m)(7)
of the Internal
Revenue Code, which relates to the inability to engage in gainful employment.
With reference to (2) above, the term "distribution" does not encompass a direct
transfer of IRA, 403(b) Custodial Account or retirement plan assets to a
successor custodian or trustee. All waivers will be granted only following
receipt by the Distributor of confirmation of the shareholder's entitlement.
CONVERSION TO CLASS A SHARES. Class B shares of the Portfolio 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
16
<PAGE>
which DWT 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 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 Dean Witter
Multi-Class Fund, the holding period resumes on the last day of the month in
which Class B shares are reacquired.
If a shareholder has received share certificates for Class B shares, such
certificates must be delivered to the Transfer Agent at least one week prior to
the date for conversion. Class B shares evidenced by share certificates that are
not received by the Transfer Agent at least one week prior to any conversion
date will be converted into Class A shares on the next scheduled conversion date
after such certificates are received.
Effectiveness of the conversion feature is subject to the continuing
availability of a ruling of the Internal Revenue Service or an opinion of
counsel that (i) the conversion of shares does not constitute a taxable event
under the Internal Revenue Code, (ii) Class A shares received on conversion will
have a basis equal to the shareholder's basis in the converted Class B shares
immediately prior to the conversion, and (iii) Class A shares received on
conversion will have a holding period that includes the holding period of the
converted Class B shares. The conversion feature may be suspended if the ruling
or opinion is no longer available. In such event, Class B shares would continue
to be subject to Class B 12b-1 fees.
LEVEL LOAD ALTERNATIVE--
CLASS C SHARES
Class C shares are sold at net asset value next determined without an initial
sales charge but are subject to a CDSC of 1.0% on most redemptions made within
one year after purchase (calculated from the last day of the month in which the
shares were purchased). The CDSC will be assessed on an amount equal to the
lesser of the 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 DWT 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 InterCapital mutual fund asset allocation program pursuant
to which such persons pay an asset based fee; (ii) persons participating in a
fee-based program approved by the Distributor, pursuant to which such persons
pay an asset based fee for services in the nature of investment advisory or
administrative services (subject to all of the terms and conditions of such
programs referred to in (i) and (ii) above, which may include termination fees,
mandatory redemption upon termination and such other circumstances as specified
in the programs' agreements, and restrictions on transferability of Fund
shares); (iii) 401(k) plans established by DWR and SPS Transaction Services,
Inc. (an affiliate of DWR) for their employees; (iv) certain Unit Investment
Trusts sponsored by DWR; (v) certain other open-end investment companies whose
shares are distributed by the Distributor; and (vi) other categories of
investors, at the discretion of the Board, as disclosed in the then current
prospectus of the Portfolio. 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 Portfolio and other Dean Witter Multi-Class Funds, subject to the
$1,000 minimum initial investment required for that Class of the Portfolio. In
addition, for the purpose of meeting the $5 million (or $25 million) minimum
investment amount, holdings of Class A shares in all Dean Witter Multi-Class
Funds, shares of FSC Funds and shares of Dean Witter Funds for which such shares
have been exchanged will be included together with the current investment
amount. If a shareholder redeems Class A shares and purchases Class D shares,
such redemption may be a taxable event.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the Act
with respect to the distribution of Class A, Class B and Class C shares of the
Portfolio. In the case of Class A and Class C shares, the Plan provides that the
Fund will, on behalf of the Portfolio, reimburse the
17
<PAGE>
Distributor and others for the expenses of certain activities and services
incurred by them specifically on behalf of those shares. Reimbursements for
these expenses will be made in monthly payments by the 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 the 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 the 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 DWR's account executives
and others who engage in or support distribution of shares or who service
shareholder accounts, including overhead and telephone expenses; printing and
distribution of prospectuses and reports used in connection with the offering of
the Portfolio's shares to other than current shareholders; and preparation,
printing and distribution of sales literature and advertising materials. In
addition, the Distributor may utilize fees paid pursuant to the Plan in the case
of Class B shares to compensate DWR and other Selected
Broker-Dealers for their opportunity costs in advancing such amounts, which
compensation would be in the form of a carrying charge on any unreimbursed
expenses.
In the case of Class B shares, at any given time, the expenses in
distributing Class B shares of the Portfolio may be in excess of the total of
(i) the payments made by the Portfolio pursuant to the Plan, and (ii) the
proceeds of CDSCs paid by investors upon the redemption of Class B shares of the
Portfolio. For example, if $1 million in expenses in distributing Class B shares
of the Portfolio had been incurred and $750,000 had been received as described
in (i) and (ii) above, the excess expense would amount to $250,000. Because
there is no requirement under the Plan that the Distributor be reimbursed for
all distribution expenses or any requirement that the Plan be continued from
year to year, such excess amount does not constitute a liability of the
Portfolio. Although there is no legal obligation for the Portfolio to pay
expenses incurred in excess of payments made to the Distributor under the Plan,
and the proceeds of CDSCs paid by investors upon redemption of shares, if for
any reason the Plan is terminated the Trustees will consider at that time the
manner in which to treat such expenses. Any cumulative expenses incurred, but
not yet recovered through distribution fees or CDSCs, may or may not be
recovered through future distribution fees or CDSCs.
In the case of Class A and Class C shares of the 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 the Portfolio through payments in any subsequent year, except that
expenses representing a gross sales commission credited to account executives at
the time of sale may be reimbursed in the subsequent calendar year. No interest
or other financing charges will be incurred on any Class A or Class C
distribution expenses incurred by the Distributor under the Plan or on any
unreimbursed expenses due to the Distributor pursuant to the Plan.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Portfolio is determined once daily at 4:00
p.m., New York time, on each day that the New York Stock Exchange is open (or,
on days when the New York Stock Exchange closes prior to 4:00 p.m., at such
earlier time) by taking the net assets of the Portfolio, dividing by the
respective number of shares outstanding and adjusting to the nearest cent. The
assets of the 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 the 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.
In the calculation of the Portfolio's net asset value; (1) an equity
portfolio security listed or traded on the New York or American Stock Exchange
or other stock exchange is valued at its latest sale price on that exchange
prior to the time assets are valued; if there were no sales that day, the
security is valued at the latest bid price (in cases where a security is traded
on more than one exchange, the security is valued on the exchange designated as
the primary market pursuant to procedures adopted by the Trustees); (2) all
other portfolio securities for which over-the-counter market quotations are
readily available are valued at the latest bid price; (3) when market quotations
are not readily available, including circumstances under which it is determined
by the Investment Manager that sale or bid prices are not reflective of a
security's market value, portfolio securities are valued at their fair value as
determined in good faith under procedures established by and under the general
supervision of the Fund's Trustees (valuation of debt securities for which
market quotations are not readily available may be based upon current market
prices of securities which are comparable in coupon, rating and maturity or an
appropriate matrix utilizing similar factors); (4) the value of
18
<PAGE>
short-term debt securities which mature at a date less than sixty days
subsequent to valuation date will be determined on an amortized cost or
amortized value basis; and (5) the value of other assets will be determined in
good faith at fair value under procedures established by and under the gen-
eral supervision of the Fund's Trustees. Dividends receivable are accrued as of
the ex-dividend date. Interest income is accrued daily. Certain securities in
the Portfolio's portfolio may be valued by an outside pricing service approved
by the Fund's Trustees.
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 the Portfolio (or, if specified by the shareholder in
shares of any other open-end Dean Witter Fund), unless the shareholder requests
that they be paid in cash. Shares so acquired are acquired at net asset value
and are not subject to the imposition of a front-end sales charge or a CDSC (see
"Redemptions and Repurchases").
INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS RECEIVED IN CASH. Any shareholder who
receives a cash payment representing a dividend or capital gains distribution
may invest such dividend or distribution in shares of the applicable Class at
the net asset value per share next determined after receipt by the Transfer
Agent, by returning the check or the proceeds to the Transfer Agent within
thirty days after the payment date. Shares so acquired are acquired at net asset
value are not subject to the imposition of a front-end sales charge or a CDSC
(see "Redemptions and Repurchases").
EASYINVEST-SM-. Shareholders may subscribe to EasyInvest, an automatic purchase
plan which provides for any amount from $100 to $5,000 to be transferred
automatically from a checking or savings account or following redemption of
shares of a Dean Witter money market fund, on a semi-monthly, monthly or
quarterly basis, to the Transfer Agent for investment in shares of the
Portfolio. (See "Purchase of Fund Shares" and "Redemptions and
Repurchases--Involuntary Redemption.")
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan (the "Withdrawal
Plan") is available for shareholders who own or purchase shares of the Portfolio
having a minimum value of $10,000 based upon the then current net asset value.
The Withdrawal Plan provides for monthly or quarterly (March, June, September
and December) checks in any dollar amount, not less than $25, or in any whole
percentage of the account balance, on an annualized basis. Any applicable CDSC
will be imposed on shares redeemed under the Withdrawal Plan (see "Purchase of
Portfolio Shares"). Therefore, any shareholder participating in the Withdrawal
Plan will have sufficient shares redeemed from his or her account so that the
proceeds (net of any applicable CDSC) to the shareholder will be the designated
monthly or quarterly amount.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted. Each withdrawal constitutes a
redemption of shares and any gain or loss realized must be recognized for
federal income tax purposes.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about any of the
above services.
TAX-SHELTERED RETIREMENT PLANS. Retirement plans are available for use by
corporations, the self-employed, Individual Retirement Accounts and Custodial
Accounts under Section 403(b)(7) of the Internal Revenue Code. Adoption of such
plans should be on advice of legal counsel or tax adviser.
For further information regarding plan administration, custodial fees and
other details, investors should contact their DWR or other Selected Dealer
account executive or the Transfer Agent.
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class of any other
Dean Witter Multi-Class Fund without the imposition of any exchange fee. Shares
may also be exchanged for shares of the following funds: Dean Witter Short-Term
U.S. Treasury Trust, Dean Witter Limited Term Municipal Trust, Dean Witter
Short-Term Bond Fund, Dean Witter Intermediate Term U.S. Treasury Trust and five
Dean Witter funds which are money market funds (the "Exchange Funds"). Class A
shares may also be exchanged for shares of Dean Witter Multi-State Municipal
Series Trust and Dean Witter Hawaii Municipal Trust, which are Dean Witter Funds
sold with a front-end sales charge ("FSC Funds"). Class B shares may also be
exchanged for shares of Dean Witter Global Short-Term Income Fund Inc. ("Global
Short-Term"), which is a Dean Witter Fund offered with a CDSC. Exchanges may be
made after the shares of the Portfolio acquired by purchase (not by exchange or
dividend reinvestment) have been held for thirty days. There is no waiting
period for exchanges of shares acquired by exchange or dividend reinvestment.
An exchange to another Dean Witter Multi-Class Fund, any FSC Fund, Global
Short-Term 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 Portfolio,
shares of the Portfolio are redeemed out of the Portfolio at their next
calculated net asset value and the proceeds of the redemption are used
19
<PAGE>
to purchase shares of the money market fund at the net asset value determined
the following business day. Subsequent exchanges between any of the Dean Witter
Multi-Class Funds, FSC Funds, Global Short-Term or any Exchange Fund that is not
a money market fund can be effected on the same basis.
No CDSC is imposed at the time of any exchange of shares, although any
applicable CDSC will be imposed upon ultimate redemption. During the period of
time the
shareholder remains in an Exchange Fund (calculated from the last day of the
month in which the Exchange Fund shares were acquired), the holding period (for
the purpose of determining the rate of the CDSC) is frozen. If those shares are
subsequently re-exchanged for shares of a Dean Witter Multi-Class Fund or Global
Short-Term, the holding period previously frozen when the first exchange was
made resumes on the last day of the month in which shares of a Dean Witter
Multi-Class Fund or shares of Global Short-Term are reacquired. Thus, the CDSC
is based upon the time (calculated as described above) the shareholder was
invested in shares of a Dean Witter Multi-Class Fund or in shares of Global
Short-Term (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
Portfolio acquired in exchange for Global Short-Term or Class B shares of
another Dean Witter Multi-Class Fund having a different CDSC schedule than that
of this Portfolio will be subject to the higher CDSC schedule, even if such
shares are subsequently re-exchanged for shares of the fund with the lower CDSC
schedule.
ADDITIONAL INFORMATION REGARDING EXCHANGES
Purchases and exchanges should be made for investment purposes only. A
pattern of frequent exchanges may be deemed by the Investment Manager to be
abusive and contrary to the best interests of the Portfolio's other shareholders
and, at the Investment Manager's discretion, may be limited by the Portfolio's
refusal to accept additional purchases and/or exchanges from the investor.
Although the Portfolio 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 Portfolio and its other shareholders, investors should
be aware that the Portfolio and each of the other Dean Witter Funds may in their
discretion limit or otherwise restrict the number of times this Exchange
Privilege may be exercised by any investor. Any such restriction will be made by
the Portfolio on a prospective basis only, upon notice of the shareholder not
later than ten days following such shareholder's most recent exchange. Also, the
Exchange Privilege may be terminated or revised at any time by the Fund and/or
any of such Dean Witter Funds for which shares of the Portfolio have been
exchanged, upon such notice as may be required by applicable regulatory
agencies. Shareholders maintaining margin accounts with DWR or another Selected
Broker-Dealer are referred to their account executive regarding restrictions on
exchange of shares of the Portfolio 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 Portfolio for shares of any of the Dean
Witter Funds (for which the Exchange Privilege is available) pursuant to this
Exchange Privilege by contacting their account executive (no Exchange Privilege
Authorization Form is required). Other shareholders (and those shareholders who
are clients of DWR or another Selected Broker-Dealer but who wish to make
exchanges directly by writing or telephoning the Transfer Agent) must complete
and forward to the Transfer Agent an Exchange Privilege Authorization Form,
copies of which may be obtained from the Transfer Agent, to initiate an
exchange. If the Authorization Form is used, exchanges may be made in writing or
by contacting the Transfer Agent at (800) 869-NEWS (toll-free).
The Fund will employ reasonable procedures to confirm that exchange
instructions communicated over the telephone are genuine. Such procedures may
include requiring various forms of personal identification such as name, mailing
address, social security or other tax identification number and DWR or other
Selected Broker-Dealer account number (if any). Telephone instructions may also
be recorded. If such procedures are not employed, the Portfolio may be liable
for any losses due to unauthorized or fraudulent instructions.
Telephone exchange instructions will be accepted if received by the Transfer
Agent between 9:00 a.m. and 4:00 p.m., New York time, on any day the New York
Stock Exchange is open. Any shareholder wishing to make an
20
<PAGE>
exchange who has previously filed an Exchange Privilege Authorization Form and
who is unable to reach the Fund by telephone should contact his or her DWR or
other Selected Broker-Dealer account executive, if appropriate, or make a
written exchange request. Shareholders are advised that during periods of
drastic economic or market changes, it is possible that the telephone exchange
procedures may be difficult to implement, although this has not been the
experience with the Dean Witter Funds in the past.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about the
Exchange Privilege.
REDEMPTIONS AND REPURCHASES
- --------------------------------------------------------------------------------
REDEMPTION. Shares of each Class of the 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 Portfolio 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
request of the shareholder. The repurchase price is the net asset value next
computed (see "Purchase of Portfolio 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 Portfolio or
the Distributor. 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."
PAYMENT FOR SHARES REDEEMED OR REPURCHASED. Payment for shares presented for
repurchase or redemption will be made by check within seven days after receipt
by the Transfer Agent of the certificate and/or written request in good order.
Such payment may be postponed or the right of redemption suspended under unusual
circumstances,
e.g., when normal trading is not taking place on the New York Stock Exchange. If
the shares to be redeemed have recently been purchased by check, payment of the
redemption proceeds may be delayed for the minimum time needed to verify that
the check used for investment has been honored (not more than fifteen days from
the time of receipt of the check by the Transfer Agent). Shareholders
maintaining margin accounts with DWR or another Selected Broker-Dealer are
referred to their account executive regarding restrictions on redemption of
shares of the Portfolio pledged in the margin account.
REINSTATEMENT PRIVILEGE. A shareholder who has had his or her shares redeemed
or repurchased and has not previously exercised this reinstatement privilege
may, within 35 days after the date of the redemption or repurchase, reinstate
any portion or all of the proceeds of such redemption or repurchase in shares of
the Portfolio in the same Class 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 Portfolio 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 Portfolio 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. The Portfolio intends to distribute substantially
all of its net investment income and distribute capital gains, if any, once each
year. The 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
21
<PAGE>
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 Portfolio 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 Portfolio. 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 Portfolio's shares and regardless of whether the distribution is
received in additional shares or in cash. Capital gains distributions are not
eligible for the dividends received deduction.
After the end of the calendar year, shareholders will be sent full
information on their dividends and capital gains distributions for tax purposes.
To avoid being subject to a 31% Federal backup withholding tax on taxable
dividends, capital gains distributions and the proceeds of redemptions and
repurchases, shareholders' taxpayer identification numbers must be furnished and
certified as to their accuracy.
Shareholders should consult their tax advisers as to the applicability of
the foregoing to their current situation.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Portfolio 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 Portfolio is based on
historical earnings and is not intended to indicate future performance.
The "average annual total return" of the Portfolio refers to a figure
reflecting the average annualized percentage increase (or decrease) in the value
of an initial investment in a Class of the Portfolio of $1,000 over periods of
one, five and ten years, or the life of the Portfolio, if less than any of the
foregoing. Average annual total return reflects all income earned by the
Portfolio, any appreciation or depreciation of the Portfolio'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 Portfolio.
In addition to the foregoing, the Portfolio 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 Portfolio may also advertise the growth of
hypothetical investments of $10,000, $50,000 and $100,000 in each Class of
shares of the Portfolio. The Portfolio 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 Portfolio are of $0.01
par value and are equal as to earnings, assets and voting privileges except
that each Class of the 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 Portfolio is not required to hold Annual Meetings of Shareholders and,
in ordinary circumstances, the Portfolio 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
22
<PAGE>
personally liable as partners for obligations of the Portfolio. However, the
Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations of the Portfolio, requires that Portfolio obligations
include such disclaimer, and provides for indemnification and reimbursement of
expenses out of the Portfolio'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 Portfolio itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability, and
the nature of the Portfolio's assets and operations, the possibility of the
Fund being unable to meet its obligations is remote and thus, in the opinion of
Massachusetts counsel to the Fund, the risk to shareholders of personal
liability is remote.
CODE OF ETHICS. Directors, officers and employees of the Investment Manager,
Dean Witter Services Company Inc. and the Distributor are subject to a strict
Code of Ethics adopted by those companies. The Code of Ethics is intended to
ensure that the interests of shareholders and other clients are placed ahead of
any personal interest, that no undue personal benefit is obtained from a
person's employment activities and that actual and potential conflicts of
interest are avoided. To achieve these goals and comply with regulatory
requirements, the Code of Ethics requires, among other things, that personal
securities transactions by employees of the companies be subject to an advance
clearance process to monitor that no Dean Witter Fund is engaged at the same
time in a purchase or sale of the same security. The Code of Ethics bans the
purchase of securities in an initial public offering, and also prohibits
engaging in futures and options transactions and profiting on short-term
trading (that is, a purchase within sixty days of a sale or a sale within sixty
days of a purchase) of a security. In addition, investment personnel may not
purchase or sell a security for their personal account within thirty days
before or after any transaction in any Dean Witter Fund managed by them. Any
violations of the Code of Ethics are subject to sanctions, including reprimand,
demotion or suspension or termination of employment. The Code of Ethics
comports with regulatory requirements and the recommendations in the 1994
report by the Investment Company Institute Advisory Group on Personal Investing.
MASTER/FEEDER CONVERSION. The Portfolio 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 Portfolio.
SHAREHOLDER INQUIRIES. All inquiries regarding the Portfolio should be
directed to the Fund at the telephone numbers or address set forth on the front
cover of this Prospectus.
The Investment Manager provided the initial capital for each Portfolio of
the Fund by purchasing 1,250 shares each of Class A, Class B, Class C and Class
D of each Portfolio for $12,500, respectively, on November 6, 1997. As of the
date of this Prospectus, the Investment Manager owned 100% of the outstanding
shares of the Fund. The Investment Manager may be deemed to control the Fund
until such time as it owns less than 25% of the outstanding shares of the Fund,
and may be deemed to control each Portfolio until such time as it owns less
than 25% of the outstanding shares of that Portfolio.
23
<PAGE>
MORGAN STANLEY DEAN WITTER
COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Mark Bavoso
Vice President
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
<PAGE>
STATEMENT OF MORGAN STANLEY DEAN WITTER
ADDITIONAL INFORMATION COMPETITIVE EDGE FUND
DECEMBER 29, 1997
- --------------------------------------------------------------------------------
Morgan Stanley Dean Witter Competitive Edge Fund (the "Fund") is an
open-end, diversified management investment company currently consisting of two
separate portfolios (individually a "Portfolio" and collectively the
"Portfolios"). The "BEST IDEAS" PORTFOLIO has an investment objective of long-
term capital growth and invests primarily in common stocks of U.S. and non-U.S.
companies included in the "Best Ideas" subgroup of "Global Investing--The
Competitive Edge" (the " 'Competitive Edge' List"), a research compilation
assembled and maintained by Morgan Stanley Dean Witter Equity Research ("MSDW
Equity Research"). The COMPETITIVE EDGE PORTFOLIO has an investment objective of
long-term capital growth and invests primarily in common stocks of U.S. and
non-U.S. companies included in the Competitive Edge List.
A Prospectus for the "Best Ideas" Portfolio of the Fund dated December 29,
1997, which provides the basic information you should know before investing in
that Portfolio, may be obtained without charge from the Fund at its address or
telephone numbers listed below or from the Fund's Distributor, Dean Witter
Distributors Inc., or from Dean Witter Reynolds Inc. at any of its branch
offices. The Competitive Edge Portfolio is not being offered to investors at
this time. 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 of each Portfolio. It is intended to provide you additional
information regarding the activities and operations of the respective Portfolio,
and should be read in conjunction with each Portfolio's Prospectus.
Morgan Stanley Dean Witter
Competitive Edge Fund
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The Fund and its Management............................................................ 3
Trustees and Officers.................................................................. 6
Investment Practices and Policies of the Portfolios.................................... 12
Investment Restrictions................................................................ 28
Portfolio Transactions and Brokerage................................................... 29
Underwriting........................................................................... 31
The Distributor........................................................................ 31
Determination of Net Asset Value....................................................... 34
Purchase of Portfolio Shares........................................................... 35
Shareholder Services................................................................... 37
Redemptions and Repurchases............................................................ 42
Dividends, Distributions and Taxes..................................................... 43
Performance Information................................................................ 44
Description of Shares of The Fund...................................................... 45
Custodian and Transfer Agent........................................................... 46
Independent Accountants................................................................ 46
Reports to Shareholders................................................................ 46
Legal Counsel.......................................................................... 46
Experts................................................................................ 46
Registration Statement................................................................. 46
Statements of Assets and Liabilities at December 3, 1997 ............................. 47
Report of Independent Accountants...................................................... 50
</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
October 16, 1997. On December 18, 1997 the Fund changed its name from Dean
Witter "Competitive Edge" Fund to Morgan Stanley Dean Witter Competitive Edge
Fund and changed the name of its "Competitive Edge" Portfolio to Competitive
Edge Portfolio.
THE INVESTMENT MANAGER
Dean Witter InterCapital Inc. (the "Investment Manager" or "InterCapital"),
a Delaware corporation, whose address is Two World Trade Center, New York, New
York, 10048, is the Fund's investment manager. InterCapital is a wholly-owned
subsidiary of Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD"), a Delaware
corporation. In an internal reorganization which took place in January, 1993,
InterCapital assumed the investment advisory, administrative and management
activities previously performed by the InterCapital Division of Dean Witter
Reynolds Inc. ("DWR"), a broker-dealer affiliate of InterCapital. (As
hereinafter used in this Statement of Additional Information, the terms
"InterCapital" and "Investment Manager" refer to DWR's InterCapital Division
prior to the internal reorganization and Dean Witter InterCapital Inc.
thereafter.) The daily management of the Fund and research relating to each
Portfolio of the Fund are 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."
Morgan Stanley Dean Witter Equity Research is not the investment adviser of
the Fund, has not made its stock selections with the Fund or any other
investment product in mind and makes no representation that the stock
selections, taken as a whole, are a suitable investment portfolio, or are
suitable for any type of investor based on their specific investment objectives
and financial position. MSDW Equity Research is under no obligation to the Fund
to continue to publish these types of lists or to advise the Fund of any changes
in its opinion or information.
As a diversified financial services firm, with three primary
businesses--securities, asset management and credit services, MSDWD provides a
wide range of financial services to issuers of securities and investors in
securities. MSDWD 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
MSDWD 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.
InterCapital is also the investment manager or investment adviser of the
following investment companies: Dean Witter Liquid Asset Fund Inc., InterCapital
Income Securities Inc., Dean Witter High Yield Securities Inc., Dean Witter
Tax-Free Daily Income Trust, Dean Witter Value-Added Market Series, Dean Witter
Tax-Exempt Securities Trust, Dean Witter Natural Resource Development Securities
Inc., Dean Witter Dividend Growth Securities Inc., Dean Witter American Value
Fund, Dean Witter U.S. Government Money Market Trust, Dean Witter Variable
Investment Series, Dean Witter World Wide Investment Trust, Dean Witter Select
Municipal Reinvestment Fund, Dean Witter U.S. Government Securities Trust, Dean
Witter California Tax-Free Income Fund, Dean Witter New York Tax-Free Income
Fund, Dean Witter Convertible Securities Trust, Dean Witter Federal Securities
Trust, High Income Advantage Trust, High Income Advantage Trust II, High Income
Advantage Trust III, Dean Witter Government Income Trust, Dean Witter Utilities
Fund, Dean Witter California Tax-Free Daily Income Trust, Dean Witter Strategist
Fund, Dean Witter World Wide Income Trust, Dean Witter Intermediate Income
Securities, Dean Witter New York Municipal Money Market Trust, Dean Witter
Capital Growth Securities, Dean Witter European Growth Fund Inc., Dean Witter
Precious Metals and Minerals Trust, Dean Witter Global
3
<PAGE>
Short-Term Income Fund Inc., Dean Witter Pacific Growth Fund Inc., Dean Witter
Multi-State Municipal Series Trust, Dean Witter Short-Term U.S. Treasury Trust,
InterCapital Insured Municipal Bond Trust, InterCapital Insured Municipal Trust,
InterCapital Insured Municipal Income Trust, InterCapital California Insured
Municipal Income Trust, InterCapital Quality Municipal Investment Trust,
InterCapital Quality Municipal Income Trust, InterCapital Quality Municipal
Securities, InterCapital California Quality Municipal Securities, InterCapital
New York Quality Municipal Securities, Dean Witter Diversified Income Trust,
Dean Witter Health Sciences Trust, Dean Witter Retirement Series, Dean Witter
Global Dividend Growth Securities, Dean Witter Limited Term Municipal Trust,
InterCapital Insured Municipal Securities, InterCapital Insured California
Municipal Securities, Dean Witter Short-Term Bond Fund, Dean Witter Global
Utilities Fund, Dean Witter International SmallCap Fund, Dean Witter Mid-Cap
Growth Fund, Dean Witter Select Dimensions Investment Series, Dean Witter
Balanced Growth Fund, Dean Witter Balanced Income Fund, Dean Witter Hawaii
Municipal Trust, Dean Witter Capital Appreciation Fund, Dean Witter Information
Fund, Dean Witter Intermediate Term U.S. Treasury Trust, Dean Witter Capital
Appreciation Fund, Dean Witter Information Fund, Dean Witter Japan Fund, Dean
Witter Income Builder Fund, Dean Witter Special Value Fund, Dean Witter
Financial Services Trust, Dean Witter Market Leader Trust, Dean Witter S&P 500
Index Fund, Dean Witter Fund of Funds, Active Assets Money Trust, Active Assets
Tax-Free Trust, Active Assets California Tax-Free Trust, Active Assets
Government Securities Trust, Municipal Income Trust, Municipal Income Trust II,
Municipal Income Trust III, Municipal Income Opportunities Trust, Municipal
Income Opportunities Trust II, Municipal Income Opportunities Trust III,
Municipal Premium Income Trust and Prime Income Trust. The foregoing investment
companies, together with the Fund, are collectively referred to as the "Dean
Witter Funds" or the "Funds."
In addition, Dean Witter Services Company Inc. ("DWSC"), a wholly-owned
subsidiary of InterCapital, serves as manager for the following companies for
which TCW Funds Management, Inc. is the investment adviser: TCW/DW Core Equity
Trust, TCW/DW North American Government Income Trust, TCW/DW Latin American
Growth Fund, TCW/DW Income and Growth Fund, TCW/DW Small Cap Growth Fund, TCW/DW
Balanced Fund, TCW/DW Total Return Trust, TCW/DW Mid-Cap Equity Trust, TCW/DW
Global Telecom Trust, TCW/DW Strategic Income Trust, TCW/DW Emerging Markets
Opportunities Trust, TCW/DW Term Trust 2000, TCW/DW Term Trust 2002 and TCW/DW
Term Trust 2003 (the "TCW/ DW Funds"). InterCapital also serves as: (i)
administrator of The BlackRock Strategic Term Trust Inc., a closed-end
investment company; (ii) sub-administrator of MassMutual Participation Investors
and Templeton Global Governments Income Trust, closed-end investment companies
and (iii) investment adviser 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 DWR's 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.
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.
4
<PAGE>
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 Portfolio's shares,
Dean Witter Distributors Inc. ("Distributors" or the "Distributor") (see "The
Distributor"), will be paid by the Portfolio. These expenses will be allocated
among the four classes of shares of the Portfolio of the Fund (each, a "Class")
pro rata based on the net assets of the 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
Portfolio and its shares under federal and state securities laws; the cost and
expenses of printing, including typesetting, and distributing prospectuses of
the Portfolio and supplements thereto to the Portfolio'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 Portfolio's
shares; fees and expenses of legal counsel, including counsel to the Trustees
who are not interested persons of the Fund, the Portfolio 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 Portfolio borrowings; postage; insurance
premiums on property or personnel (including officers and Trustees) of the
Portfolio 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
the Portfolio or may be proportionately allocated on the basis of the size of
the Portfolio. The Trustees have determined that this is an appropriate method
of allocation of such expenses); and all other costs of the Portfolio'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 the
Portfolio will be allocated directly to that Class. In addition, other expenses
associated with a particular Class of a particular Portfolio (except custodial
fees) may be allocated directly to that Class, provided that such expenses are
reasonably identified as specifically attributable to that Class and the direct
allocation to that Class is approved by the Trustees.
The Investment Manager has agreed to assume all operating expenses (except
for brokerage and 12b-1 fees) for each Portfolio until such time as the
respective Portfolio has $50 million of net assets or six months from the date
of commencement of the respective Portfolio's operations, whichever occurs
first.
The Investment Manager will pay the organizational expenses of each
Portfolio incurred prior to the offering of its shares. Each Portfolio has
agreed to bear and reimburse the Investment Manager for such expenses, in an
amount of up to a maximum of $250,000. The organizational expenses of each
Portfolio have been deferred by the Portfolio and are being amortized on the
straight line method over a period not to exceed five years from the date of
commencement of each Portfolio's operations.
As full compensation for the services and facilities furnished to each
Portfolio of the Fund and expenses of each Portfolio assumed by the Investment
Manager, the Fund pays the Investment Manager monthly compensation calculated
daily by applying the annual rate of 0.65% to the daily net assets of the "Best
Ideas" Portfolio and 0.75% to the daily net assets of the "Competitive Edge"
Portfolio. The management fee is allocated among the Classes of each Portfolio
pro rata based on the net assets of the respective Portfolio attributable to
each Class.
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
5
<PAGE>
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 November 6,
1997 and by InterCapital, as the then sole shareholder, on November 6, 1997. The
Agreement may be terminated with respect to any Portfolio, at any time, without
penalty, on thirty days' notice by the Board of Trustees of the Fund, by the
holders of a majority, as defined in the Investment Company Act of 1940 (the
"Act"), of the outstanding shares of the respective Portfolio of the Fund, or by
the Investment Manager. The Agreement will automatically terminate in the event
of its assignment (as defined in the Act).
Under its terms, the Agreement has an initial term ending April 30, 1999 and
will remain in effect from year to year thereafter with respect to each
Portfolio, provided continuance of the Agreement is approved at least annually
by the vote of the holders of a majority, as defined in the Act, of the
outstanding shares of each Portfolio of the Fund, or by the Board of Trustees of
the Fund; provided that in either event such continuance is approved annually by
the vote of a majority of the Trustees of the Fund who are not parties to the
Agreement or "interested persons" (as defined in the Act) of any such party (the
"Independent Trustees"), which vote must be cast in person at a meeting called
for the purpose of voting on such approval.
The Fund has acknowledged that the name "Dean Witter" is a property right of
DWR. The Fund has agreed that DWR or its parent company may use or, at any time,
permit others to use, the name "Dean Witter." The Fund has also agreed that in
the event the Agreement is terminated, or if the affiliation between
InterCapital and its parent company is terminated, the Fund will eliminate the
name "Dean Witter" from its name if DWR or its parent company shall so request.
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The Trustees and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with
InterCapital, and with the 84 Dean Witter Funds and the 14 TCW/DW Funds are
shown below:
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
<S> <C>
Michael Bozic (56) ................................... Chairman and Chief Executive Officer of Levitz Furniture
Trustee Corporation (since November, 1995); Director or Trustee of
c/o Levitz Furniture Corporation the Dean Witter Funds; formerly President and Chief
6111 Broken Sound Parkway, N.W. Executive Officer of Hills Department Stores (May,
Boca Raton, Florida 1991-July, 1995); formerly variously Chairman, Chief
Executive Officer, President and Chief Operating Officer
(1987-1991) of the Sears Merchandise Group of Sears,
Roebuck and Co.; Director of Eaglemark Financial Services,
Inc., the United Negro College Fund and Weirton Steel
Corporation.
Charles A. Fiumefreddo* (64) ......................... Chairman, Chief Executive Officer and Director of
Chairman, President InterCapital, DWSC and Distributors; Executive Vice
Chief Executive Officer and Trustee President and Director of DWR; Chairman, Director or
Two World Trade Center Trustee, President and Chief Executive Officer of the Dean
New York, New York Witter Funds; Chairman, Chief Executive Officer and
Trustee of the TCW/DW Funds; Chairman and Director of Dean
Witter Trust FSB ("DWT"); Director and/or officer of
various MSDWD subsidiaries; formerly Executive Vice
President and Director of Dean Witter, Discover & Co.
(until February, 1993).
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
Edwin J. Garn (65) ................................... Director or Trustee of the Dean Witter Funds; formerly
Trustee United States Senator (R-Utah) (1974-1992) and Chairman,
c/o Huntsman Corporation Senate Banking Committee (1980-1986); formerly Mayor of
500 Huntsman Way Salt Lake City, Utah (1972-1974); formerly Astronaut,
Salt Lake City, Utah Space Shuttle Discovery (April 12-19, 1985); Vice
Chairman, Huntsman Corporation (since January, 1993);
Director of Franklin Covey (time management systems) and
John Alden Financial Corp. (health insurance); United
Space Alliance (joint venture between Lockheed Martin and
the Boeing Company) and Nuskin Asia Pacific (Multilevel
Marketing); member of the board of various civic and
charitable organizations.
<S> <C>
John R. Haire (72) ................................... Chairman of the Audit Committee and Chairman of the
Trustee Committee of the Independent Directors or Trustees and
Two World Trade Center Director or Trustee of the Dean Witter Funds; Chairman of
New York, New York the Audit Committee and Chairman of the Committee of the
Independent Trustees and Trustee of the TCW/DW Funds;
formerly President, Council for Aid to Education
(1978-1989) and Chairman and Chief Executive Officer of
Anchor Corporation, an Investment Adviser (1964-1978);
Director of Washington National Corporation (insurance).
Wayne E. Hedien (63) ................................. Retired, Director or Trustee of the Dean Witter Funds;
Trustee Director of The PMI Group, Inc. (private mortgage
c/o Gordon Altman Butowsky insurance); Trustee and Vice Chairman of The Field Museum
Weitzen Shalov & Wein of Natural History; formerly associated with the Allstate
Counsel to the Independent Trustees Companies (1966-1994), most recently as Chairman of The
114 West 47th Street Allstate Corporation (March, 1993-December, 1994) and
New York, New York Chairman and Chief Executive Officer of its wholly-owned
subsidiary, Allstate Insurance Company (July,
1989-December, 1994); director of various other business
and charitable organizations.
Dr. Manuel H. Johnson (48) ........................... Senior Partner, Johnson Smick International, Inc., a
Trustee consulting firm; Co-Chairman and a founder of the Group of
c/o Johnson Smick International, Inc. Seven Council (G7C), an international economic commission;
1133 Connecticut Avenue, N.W. Trustee of the TCW/DW Funds; Director of Greenwich Capital
Washington, DC Markets, Inc. (broker-dealer); Director of NASDAQ (since
June, 1995); 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).
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
Michael E. Nugent (61) ............................... General Partner, Triumph Capital, L.P., a private in-
Trustee vestment partnership; Director or Trustee of the Dean
c/o Triumph Capital, L.P. Witter Funds; Trustee of the TCW/DW Funds; formerly Vice
237 Park Avenue President, Bankers Trust Company and BT Capital
New York, New York Corporation (1984-1988); director of various business
organizations.
<S> <C>
Philip J. Purcell* (54) .............................. Chairman of the Board of Directors and Chief Executive
Trustee Officer of MSDWD, DWR and Novus Credit Services Inc.;
1585 Broadway Director of InterCapital, DWSC and Distributors; Director
New York, New York or Trustee of the Dean Witter Funds; Director and/or
officer of various MSDWD subsidiaries.
John L. Schroeder (67) ............................... Retired; Director or Trustee of the Dean Witter Funds;
Trustee Trustee of the TCW/DW Funds; Director of Citizens
c/o Gordon Altman Butowsky Weitzen Utilities Company; formerly Executive Vice President and
Shalov & Wein Chief Investment Officer of the Home Insurance Company
Counsel to the Independent Trustees (August, 1991-September, 1995).
114 West 47th Street
New York, New York
Barry Fink (42) ...................................... Senior Vice President (since March, 1997) and Secretary
Vice President, Secretary and General Counsel (since February, 1997) of InterCapital
and General Counsel and DWSC; Senior Vice President (since March, 1997) and
Two World Trade Center Assistant Secretary and Assistant General Counsel (since
New York, New York February, 1997) of Distributors; Assistant Secretary of
DWR (since August, 1996); Vice President, Secretary and
General Counsel of the Dean Witter Funds and the TCW/DW
Funds (since February, 1997); previously First Vice
President (June, 1993-February, 1997), Vice President
(until June, 1993) and Assistant Secretary and Assistant
General Counsel of InterCapital and DWSC and Assistant
Secretary of the Dean Witter Funds and the TCW/DW Funds.
Thomas F. Caloia (51) ................................ First Vice President and Assistant Treasurer of Inter-
Treasurer Capital and DWSC; Treasurer of the Dean Witter Funds and
Two World Trade Center the TCW/DW Funds.
New York, New York
</TABLE>
- ------------
* Denotes Trustees who are "interested persons" of the Fund, as defined in the
Act.
In addition, Robert M. Scanlan, President and Chief Operating Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWT and
Director of DWT, Mitchell M. Merin, President and Chief Strategic Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWT and
Director of DWT, Executive Vice President, Chief Administrative Officer and
Director of DWR and Director of SPS Transaction Services, Inc. and various other
MSDWD subsidiaries, Joseph J. McAlinden, Executive Vice President and Chief
Investment Officer of InterCapital and Director of DWT, Robert S. Giambrone,
Senior Vice President of InterCapital, DWSC, Distributors and DWT and a Director
of DWT, and Paul D. Vance and Guy D. Rutherford, Jr., Senior Vice Presidents of
InterCapital, are Vice Presidents of the Fund, and Marilyn K. Cranney, First
Vice President and Assistant General Counsel of InterCapital and
8
<PAGE>
DWSC, Lou Anne D. McInnis, Carsten Otto and Ruth Rossi, Vice Presidents and
Assistant General Counsels of InterCapital and DWSC, and Frank Bruttomesso and
Todd Lebo, Staff Attorneys with InterCapital, are Assistant Secretaries of the
Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees consists of nine (9) trustees. These same individuals
also serve as directors or trustees for all of the Dean Witter Funds, and are
referred to in this section as Trustees. As of the date of this Statement of
Additional Information, there are a total of 85 Dean Witter Funds, comprised of
128 portfolios. As of September 30, 1997, the Dean Witter Funds had total net
assets of approximately $93.2 billion and more than five million shareholders.
Seven Trustees (77% of the total number) have no affiliation or business
connection with InterCapital or any of its affiliated persons and do not own any
stock or other securities issued by InterCapital's parent company, MSDWD. These
are the "disinterested" or "independent" Trustees. The other two Trustees (the
"management Trustees") are affiliated with InterCapital. Four of the seven
Independent Trustees are also Independent Trustees of the TCW/DW Funds.
Law and regulation establish both general guidelines and specific duties for
the Independent Trustees. The Dean Witter Funds seek as Independent Trustees
individuals of distinction and experience in business and finance, government
service or academia; these are people whose advice and counsel are in demand by
others and for whom there is often competition. To accept a position on the
Funds' Boards, such individuals may reject other attractive assignments because
the Funds make substantial demands on their time. Indeed, by serving on the
Funds' Boards, certain Trustees who would otherwise be qualified and in demand
to serve on bank boards would be prohibited by law from doing so.
All of the Independent Trustees serve as members of the Audit Committee and
the Committee of the Independent Trustees. Three of them also serve as members
of the Derivatives Committee. During the calendar year ended December 31, 1996,
the three Committees held a combined total of sixteen meetings. The Committees
hold some meetings at InterCapital's offices and some outside InterCapital.
Management Trustees or officers do not attend these meetings unless they are
invited for purposes of furnishing information or making a report.
The Committee of the Independent Trustees is charged with recommending to
the full Board approval of management, advisory and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing Fund performance; checking on the pricing of portfolio securities,
brokerage commissions, transfer agent costs and performance, and trading among
Funds in the same complex; and approving fidelity bond and related insurance
coverage and allocations, as well as other matters that arise from time to time.
The Independent Trustees are required to select and nominate individuals to fill
any Independent Trustee vacancy on the Board of any Fund that has a Rule 12b-1
plan of distribution. Most of the Dean Witter Funds have such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of such services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; reviewing the adequacy of the Fund's system of internal
controls; and preparing and submitting Committee meeting minutes to the full
Board.
Finally, the Board of each Fund has formed a Derivatives Committee to
establish parameters for and oversee the activities of the Fund with respect to
derivative investments, if any, made by the Fund.
DUTIES OF CHAIRMAN OF COMMITTEE OF THE INDEPENDENT TRUSTEES AND AUDIT COMMITTEE
The Chairman of the Committee of the Independent Trustees and the Audit
Committee maintains an office at the Funds' headquarters in New York. He is
responsible for keeping abreast of regulatory and
9
<PAGE>
industry developments and the Funds' operations and management. He screens
and/or prepares written materials and identifies critical issues for the
Independent Trustees to consider, develops agendas for Committee meetings,
determines the type and amount of information that the Committees will need to
form a judgment on various issues, and arranges to have that information
furnished to Committee members. He also arranges for the services of independent
experts and consults with them in advance of meetings to help refine reports and
to focus on critical issues. Members of the Committees believe that the person
who serves as Chairman of both Committees and guides their efforts is pivotal to
the effective functioning of the Committees.
The Chairman of the Committees also maintains continuous contact with the
Funds' management, with independent counsel to the Independent Trustees and with
the Funds' independent auditors. He arranges for a series of special meetings
involving the annual review of investment advisory, management and other
operating contracts of the Funds and, on behalf of the Committees, conducts
negotiations with the Investment Manager and other service providers. In effect,
the Chairman of the Committees serves as a combination of chief executive and
support staff of the Independent Trustees.
The Chairman of the Committee of the Independent Trustees and the Audit
Committee is not employed by any other organization and devotes his time
primarily to the services he performs as Committee Chairman and Independent
Trustee of the Dean Witter Funds and as an Independent Trustee and, since July
1, 1996, as Chairman of the Committee of the Independent Trustees and the Audit
Committee of the TCW/DW Funds. The current Committee Chairman has had more than
35 years experience as a senior executive in the investment company industry.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL DEAN
WITTER FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the Dean Witter Funds avoids the
duplication of effort that would arise from having different groups of
individuals serving as Independent Trustees for each of the Funds or even of
sub-groups of Funds. They believe that having the same individuals serve as
Independent Trustees of all the Funds tends to increase their knowledge and
expertise regarding matters which affect the Fund complex generally and enhances
their ability to negotiate on behalf of each Fund with the Fund's service
providers. This arrangement also precludes the possibility of separate groups of
Independent Trustees arriving at conflicting decisions regarding operations and
management of the Funds and avoids the cost and confusion that would likely
ensue. Finally, having the same Independent Trustees serve on all Fund Boards
enhances the ability of each Fund to obtain, at modest cost to each separate
Fund, the services of Independent Trustees, and a Chairman of their Committees,
of the caliber, experience and business acumen of the individuals who serve as
Independent Trustees of the Dean Witter Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Fund intends to pay each Independent Trustee an annual fee of $800 plus
a per meeting fee of $50 for meetings of the Board of Trustees or committees of
the Board of Trustees attended by the Trustee (the Fund intends to pay the
Chairman of the Audit Committee an annual fee of $750 and the Chairman of the
Committee of the Independent Trustees an additional annual fee of $1,200). If a
Board meeting and a Committee meeting, or more than one Committee Meeting, take
place on a single day, the Trustees are paid a single meeting fee by the Fund.
The Fund will also reimburse such Trustees for travel and other out-of-pocket
expenses incurred by them in connection with attending such meetings. Trustees
and officers of the Fund who are or have been employed by the Investment Manager
or an affiliated company will receive no compensation or expense reimbursement
from the Fund. Payments will commence as of the time the Fund begins paying
management fees, which, pursuant to an undertaking by the Investment Manager,
will be at such time as the Fund has $50 million of net assets or six months
from the date of commencement of the Fund's operations, whichever occurs first.
At such time as the Fund has been in operation, and has paid fees to the
Independent Trustees, for a full fiscal year, and assuming that during such
fiscal year the Fund holds the same number of Board and committee meetings as
were held by the other Dean Witter Funds during the calendar year ended
10
<PAGE>
December 31, 1996, it is estimated that the compensation paid to each
Independent Trustee during such fiscal year will be the amount shown in the
following table:
FUND COMPENSATION (ESTIMATED)
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- -------------------------------------------------------------- ---------------
<S> <C>
Michael Bozic................................................. $1,700
Edwin J. Garn................................................. 700
John R. Haire................................................. 3,685
Wayne E. Hedien............................................... 1,700
Dr. Manuel H. Johnson......................................... 1,700
Michael E. Nugent............................................. 1,700
John L. Schroeder............................................. 1,700
</TABLE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1996 for services
to the 82 Dean Witter Funds and, in the case of Messrs. Haire, Johnson, Nugent
and Schroeder, the 14 TCW/DW Funds that were in operation at December 31, 1996.
With respect to Messrs. Haire, Johnson, Nugent and Schroeder, the TCW/DW Funds
are included solely because of a limited exchange privilege between those Funds
and five Dean Witter Money Market Funds. Mr. Hedien's term as Director or
Trustee of each Dean Witter Fund commenced on September 1, 1997.
COMPENSATION FROM DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
FOR SERVICE AS FOR SERVICE AS
CHAIRMAN OF CHAIRMAN OF TOTAL
COMMITTEES OF COMMITTEES OF COMPENSATION
FOR SERVICE AS INDEPENDENT INDEPENDENT PAID FOR
DIRECTOR OR FOR SERVICE AS DIRECTORS/ TRUSTEES SERVICES TO
TRUSTEE AND TRUSTEE AND TRUSTEES AND AND AUDIT 82 DEAN
COMMITTEE MEMBER COMMITTEE MEMBER AUDIT COMMITTEES COMMITTEES WITTER FUNDS
OF 82 DEAN OF 14 TCW/DW OF 82 DEAN OF 14 AND 14 TCW/DW
NAME OF INDEPENDENT TRUSTEE WITTER FUNDS FUNDS WITTER FUNDS TCW/DW FUNDS FUNDS
- --------------------------- ---------------- ---------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Michael Bozic.............. $138,850 -- -- -- $138,850
Edwin J. Garn.............. 140,900 -- -- -- 140,900
John R. Haire.............. 106,400 $ 64,283 $195,450 $ 12,187 378,320
Dr. Manuel H. Johnson...... 137,100 66,483 -- -- 203,583
Michael E. Nugent.......... 138,850 64,283 -- -- 203,133
John L. Schroeder.......... 137,150 69,083 -- -- 206,233
</TABLE>
As of the date of this Statement of Additional Information, 57 of the Dean
Witter Funds, not including the Fund, have adopted a retirement program under
which an Independent Trustee who retires after serving for at least five years
(or such lesser period as may be determined by the Board) as an Independent
Director or Trustee of any Dean Witter Fund that has adopted the retirement
program (each such Fund referred to as an "Adopting Fund" and each such Trustee
referred to as an "Eligible Trustee") is entitled to retirement payments upon
reaching the eligible retirement age (normally, after attaining age 72). Annual
payments are based upon length of service. Currently, upon retirement, each
Eligible Trustee is entitled to receive from the Adopting Fund, commencing as of
his or her retirement date and continuing for the remainder of his or her life,
an annual retirement benefit (the "Regular Benefit") equal to 25.0% of his or
her Eligible Compensation plus 0.4166666% of such Eligible Compensation for each
full month of service as an Independent Director or Trustee of any Adopting Fund
in excess of five years up to a maximum of 50.0% after ten years of service. The
foregoing percentages may be changed by the Board.(1)"Eligible Compensation" is
one-fifth of the total compensation earned by such Eligible Trustee for service
to the Adopting Fund in the five year period prior to the date of the Eligible
Trustee's retirement. Benefits under the retirement program are not secured or
funded by the Adopting Funds.
- ---------------
(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.
11
<PAGE>
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the 57 Dean Witter Funds (not including the Fund)
for the year ended December 31, 1996, and the estimated retirement benefits for
the Fund's Independent Trustees, to commence upon their retirement, from the 57
Dean Witter Funds as of December 31, 1996.
RETIREMENT BENEFITS FROM ALL DEAN WITTER FUNDS
<TABLE>
<CAPTION>
RETIREMENT
ESTIMATED BENEFITS ESTIMATED ANNUAL
CREDITED YEARS ESTIMATED ACCRUED AS BENEFITS
OF SERVICE AT PERCENTAGE OF EXPENSES UPON RETIREMENT
RETIREMENT ELIGIBLE BY ALL ADOPTING FROM ALL ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUNDS FUNDS(2)
- ------------------------------------------ ------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Michael Bozic............................. 10 50.0% $ 20,147 $ 51,325
Edwin J. Garn............................. 10 50.0 27,772 51,325
John R. Haire............................. 10 50.0 46,952 129,550
Wayne E. Hedien........................... 9 42.9 Not Applicable Not Applicable
Dr. Manuel H. Johnson..................... 10 50.0 10,926 51,325
Michael E. Nugent......................... 10 50.0 19,217 51,325
John L. Schroeder......................... 8 41.7 38,700 42,771
</TABLE>
- ---------------
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1) above.
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 PORTFOLIOS
- --------------------------------------------------------------------------------
"BEST IDEAS" LIST. As of September 30, 1997, the list of companies in the
"Best Ideas" subgroup as published in "Global Industry -- The Competitive Edge"
Update -- October 1997 were as follows: AT&T, AES Corp., Asia Pulp & Paper, BMW,
Boeing, Cisco, Citicorp, Coca-Cola, Coca-Cola Enterprises, Corning, Dresser
Industries, DuPont, Emerson Electric, Federal Express, Four Seasons, Freeport
McMoRan Copper & Gold, General Electric, General Re, Grand Met, Holderbank,
Intel, Lilly (Eli), Lockheed Martin, MAN, Manpower, Mattel, Microsoft, Novartis,
Praxair, Proctor & Gamble, Sandvik, Sankyo, SAP, Schlumberger, Sealed Air,
SGS-Thompson, Sony, Siebe, Time Warner, and Unilever plc. The "Best Ideas" List
is updated quarterly.
A description of the various investment practices and techniques in which
certain or all of the Portfolios may engage is set forth below as well as in the
Prospectus of each Portfolio. Shareholders are referred to the Prospectuses of
those Portfolios for more detailed information.
MONEY MARKET INSTRUMENTS. As stated in the Prospectus for each Portfolio,
the money market instruments which each Portfolio of the Fund may purchase
include U.S. Government securities, bank obligations, Eurodollar certificates of
deposit, obligations of savings institutions, fully insured certificates of
deposit and commercial paper. Such securities are limited to:
U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed as to
principal and interest by the United States or its agencies (such as the
Export-Import Bank of the United States, Federal Housing Administration and
Government National Mortgage Association) or its instrumentalities (such as the
Federal Home Loan Bank), including Treasury bills, notes and bonds;
12
<PAGE>
BANK OBLIGATIONS. Obligations (including certificates of deposit and
bankers' acceptances) of banks subject to regulation by the U.S. Government and
having total assets of $1,000,000,000 or more, and instruments secured by such
obligations, not including obligations of foreign branches of domestic banks
except to the extent below;
EURODOLLAR CERTIFICATES OF DEPOSIT. Eurodollar certificates of deposit
issued by foreign branches of domestic banks, having total assets of
$1,000,000,000 or more;
OBLIGATIONS OF SAVINGS INSTITUTIONS. Certificates of deposit of savings
banks and savings and loan associations, having total assets of $1,000,000,000
or more;
FULLY INSURED CERTIFICATES OF DEPOSIT. Certificates of deposit of banks
and savings institutions, having total assets of less than $1,000,000,000, if
the principal amount of the obligation is insured by the Federal Deposit
Insurance Corporation, limited to $100,000 principal amount per certificate and
to 10% or less of each Portfolio's total assets;
COMMERCIAL PAPER. Commercial paper rated within the two highest grades
by Standard & Poor's (S&P) or the highest grade by Moody's or, if not rated,
issue by a company having an outstanding debt issue rated at least AA by S&P or
Aa by Moody's.
FOREIGN SECURITIES. As stated in the Prospectuses for the Portfolio,
foreign securities investments may be affected by changes in currency rates or
exchange control regulations, changes in governmental administration or economic
or monetary policy (in the United States and abroad) or changed circumstances in
dealings between nations. Fluctuations in the relative rates of exchange between
the currencies of different nations will affect the value of the Portfolio'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 Portfolio's assets denominated in that currency and thereby impact upon the
Portfolio'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). The Portfolio
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
Portfolio assets and any effects of foreign social, economic or political
instability. Foreign companies are not subject to the regulatory requirements of
U.S. companies and, as such, there may be less publicly available information
about such companies. Moreover, foreign companies are not subject to the more
rigorous uniform accounting, auditing and financial reporting standards and
requirements applicable to U.S. companies.
Securities of foreign issuers may be less liquid than comparable securities
of U.S. issuers and, as such, their price changes may be more volatile.
Furthermore, foreign exchanges and broker-dealers are generally subject to less
government and exchange scrutiny and regulation than their American
counterparts. Brokerage commissions, dealer concessions and other transaction
costs may be higher on foreign markets than in the U.S. In addition, differences
in clearance and settlement procedures on foreign markets may occasion delays in
settlements of certain Portfolio trades effected in such markets. Inability to
dispose of portfolio securities due to settlement delays could result in losses
to the Portfolio due to subsequent declines in value of such securities and the
inability of the Portfolio to make intended security purchases due to settlement
problems could result in a failure of the Portfolio to make potentially
advantageous investments. To the extent the Portfolio 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
opera-
13
<PAGE>
tions, 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 Prospectuses
for the Global Best Ideas Portfolio and the Global Competitive Edge Portfolio,
the Portfolios may enter into forward foreign currency exchange contracts
("forward contracts") as a hedge against fluctuations in future foreign exchange
rates. A Portfolio 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 the Portfolio 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 Portfolio's portfolio securities denominated in such
foreign currency.
The Portfolio will enter into forward contracts under various circumstances.
When the Portfolio 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
Portfolio 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 Portfolio 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
Portfolio or the counterparty) and the foreign currency in which the security is
denominated during the period between the date on which the security is
purchased or sold and the date on which payment is made or received.
At other times, when, for example, the Portfolio'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
Portfolio 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 Portfolio's securities holdings (or securities which
the fund has purchased for its portfolio) denominated in such foreign currency.
Under identical circumstances, the Portfolio may enter into a forward contract
to sell, for a fixed amount of U.S. dollars or other currency, an amount of
foreign currency other than the currency in which the securities to be hedged
are denominated approximating the value of some or all of the portfolio
securities to be hedged. This method of hedging, called "cross-hedging," will be
selected by the Investment Manager when it is determined that the foreign
currency in which the portfolio securities are denominated has insufficient
liquidity or is trading at a discount as compared with some other foreign
currency with which it tends to move in tandem.
In addition, when the 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 Portfolio 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
Portfolio may, however, close out the forward contract without purchasing the
security which was the subject of the "anticipatory" hedge.
The Portfolio will not enter into forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts would
obligate the Portfolio to deliver an amount of foreign currency
14
<PAGE>
in excess of the value of the Portfolio'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 Portfolio believes that it is important
to have the flexibility to enter into such forward contracts when it determines
that the best interests of the Portfolio will be served. The Portfolio's
custodian bank will place cash, U.S. Government securities or other appropriate
liquid portfolio securities in a segregated account of the Portfolio in an
amount equal to the value of the Portfolio'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 Portfolio's
commitments with respect to such contracts.
Where, for example, the Portfolio 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 Portfolio of a foreign currency, the Portfolio may either
sell the portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract with the same currency
trader obligating it to purchase, on the same maturity date, the same amount of
the foreign currency (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 the Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency 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 the Portfolio retains the portfolio securities and engages in an
offsetting transaction, the Portfolio will incur a gain or loss to the extent
that there has been movement in spot or forward contract prices. If the
Portfolio 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 Portfolio'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 Portfolio 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 Portfolio 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 the Portfolio 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 the Portfolio has written a call option on a security or the
currency in which it is denominated, it may wish to enter into a forward
contract to purchase or sell the foreign currency in which the security is
denominated. A forward contract would, for example, hedge the risk of the
security on which a call option has been written declining in value to a greater
extent than the value of the premium received for the option. The Portfolio 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 the Portfolio 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,
15
<PAGE>
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 the Portfolio
securities holdings (or anticipated portfolio securities) are denominated rises
in value with respect to the currency which is being purchased (or sold), then
the Portfolio will have realized fewer gains than had the fund not entered into
the forward contracts. Moreover, the precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible,
since the future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The Portfolio
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. The Portfolio generally will not enter into a forward
contract with a term of greater than one year, although it may enter into
forward contracts for periods of up to five years. The Portfolio 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").
REPURCHASE AGREEMENTS. As discussed in each Portfolio's Prospectus, when
cash may be available for only a few days, it may be invested by the Portfolio
in repurchase agreements until such time as it may otherwise be invested or used
for payments of obligations of the Portfolio. These agreements, which may be
viewed as a type of secured lending by the Portfolio, 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 ("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 Portfolio 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 Portfolio follows procedures designed to
minimize such risks. These procedures include effecting repurchase transactions
only with large, well-capitalized and well-established financial institutions
whose financial condition will be continually monitored by the Investment
Manager subject to procedures established by the Board of Trustees of the fund.
In addition, as described above, the value of the collateral underlying the
repurchase agreement will be at least equal to the repurchase price, including
any accrued interest earned on the repurchase agreement. In the event of a
default or bankruptcy by a selling financial institution, the Portfolio will
seek to liquidate such collateral. However, the exercising of the Portfolio'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 Portfolio could suffer a
loss. It is the current policy of the Portfolios 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 Portfolio, amounts to more than 15% of
its net assets. A Portfolio's investments in repurchase agreements may at times
be substantial when, in the view of the Investment Manager, liquidity, tax or
other considerations warrant.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, each Portfolio may lend its portfolio securities to brokers,
dealers and other financial institutions, provided that such loans are callable
at any time by the Portfolio (subject to notice provisions described below), and
are at
16
<PAGE>
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 Portfolio 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 Portfolio 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 Portfolio
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 Portfolio'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 Portfolio. Any gain or loss in the market price during the loan period would
inure to the Portfolio. The creditworthiness of firms to which the Portfolio
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 Portfolio 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 Portfolio will pay reasonable finder's,
administrative and custodial fees in connection with a loan of its securities.
PRIVATE PLACEMENTS. As discussed in each Portfolio's Prospectus, the
Portfolio may invest up to 15% of its net assets in securities which are subject
to restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or which are
otherwise 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 Portfolio from
disposing of them promptly at reasonable prices. The Portfolio 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 Portfolio to sell restricted securities to
qualified institutional buyers without limitation. The Investment Manager,
pursuant to procedures adopted by the Trustees of the Fund, will make a
determination as to the liquidity of each restricted security purchased by the
Portfolio. 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 current policies may not exceed
15% of the Portfolio's net assets.
The Rule 144A marketplace of sellers and qualified institutional buyers is
new and still developing and may take a period of time to develop into a mature
liquid market. As such, the market for certain private placements purchased
pursuant to Rule 144A may be initially small or may, subsequent to purchase,
become illiquid. Furthermore, the Investment Manager may not posses all the
information concerning an issue of securities that it wishes to purchase in a
private placement to which it would normally have had access, had the
registration statement necessitated by a public offering been filed with the
Securities and Exchange Commission.
17
<PAGE>
RIGHTS AND WARRANTS. As stated in each Portfolio's Prospectus, the
Portfolio 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.
OPTIONS AND FUTURES TRANSACTIONS As stated in the Prospectus, each
Portfolio 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
Portfolio 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 Portfolio 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
Portfolio the right to sell the underlying security to the OCC at the stated
exercise price. Upon notice of exercise of the put option, the writer of the put
would have the obligation to purchase the underlying security from the OCC at
the exercise price.
OPTIONS ON TREASURY BONDS AND NOTES. Because trading in options written on
Treasury bonds and notes tends to center on the most recently auctioned issues,
the exchanges on which such securities trade will not continue indefinitely to
introduce options with new expirations to replace expiring options on particular
issues. Instead, the expirations introduced at the commencement of options
trading on a particular issue will be allowed to run their course, with the
possible addition of a limited number of new expirations as the original ones
expire. Options trading on each issue of bonds or notes will thus be phased out
as new options are listed on more recent issues, and options representing a full
range of expirations will not ordinarily be available for every issue on which
options are traded.
OPTIONS ON TREASURY BILLS. Because a deliverable Treasury bill changes from
week to week, writers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Portfolio 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 Portfolio will
hold the Treasury bills in a segregated account with its Custodian, so that they
will be treated as being covered.
OPTIONS ON FOREIGN CURRENCIES. The Portfolio may purchase and write options
on foreign currencies for purposes similar to those involved with investing in
forward foreign currency exchange contracts. For example, in order to protect
against declines in the dollar value of portfolio securities which are
denominated in a foreign currency, the Portfolio may purchase put options on an
amount of such foreign currency equivalent to the current value of the portfolio
securities involved. As a result, the Portfolio would be enabled to sell the
foreign currency for a fixed amount of U.S. dollars, thereby "locking in" the
dollar value of the portfolio securities (less the amount of the premiums paid
for the options). Conversely, the Portfolio may purchase call options on foreign
currencies in which securities it
18
<PAGE>
anticipates purchasing are denominated to secure a set U.S. dollar price for
such securities and protect against a decline in the value of the U.S. dollar
against such foreign currency. The Portfolio may also purchase call and put
options to close out written option positions.
The Portfolio 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 Portfolio gives up the
benefit of any rise in value of the relevant portfolio securities above the
exercise price of the option and, in fact, only receives a benefit from the
writing of the option to the extent that the value of the portfolio securities
falls below the price of the premium received. The Portfolio may also write
options to close out long call option positions.
The markets in foreign currency options are relatively new and the
Portfolio's ability to establish and close out positions on such options is
subject to the maintenance of a liquid secondary market. Although the Portfolio
will not purchase or write such options unless and until, in the opinion of the
management of the Portfolio, the market for them has developed sufficiently to
ensure that the risks in connection with such options are not greater than the
risks in connection with the underlying currency, there can be no assurance that
a liquid secondary market will exist for a particular option at any specific
time. In addition, options on foreign currencies are affected by all of those
factors which influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and have no relationship to the investment merits of a foreign security,
including foreign securities held in a "hedged" investment portfolio. Because
foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that are not reflected in the options market.
OTC OPTIONS. Exchange-listed options are issued by the OCC which assures
that all transactions in such options are properly executed. OTC options are
purchased from or sold (written) to dealers or financial institutions which have
entered into direct agreements with the respective Portfolio. With OTC options,
such variables as expiration date, exercise price and premium will be agreed
upon between a Portfolio 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 Portfolio would lose the premium
paid for the option as well as any anticipated benefit of the transaction. A
Portfolio will engage in OTC option transactions only with primary U.S.
Government securities dealers recognized by the Federal Reserve Bank of New
York.
COVERED CALL WRITING. The Portfolio is permitted to write covered call
options on portfolio securities and the U.S. dollar and foreign currencies,
without limit. Generally, a call option is "covered" if the Portfolio owns, or
has the right to acquire, without additional cash consideration (or for
additional cash consideration held for the Portfolio 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
19
<PAGE>
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 the
Portfolio 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 Portfolio in cash, U.S. Government
securities or other liquid portfolio securities which the fund holds in a
segregated account maintained with its Custodian.
The Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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,
the Portfolio 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 the
Portfolio has been assigned an exercise notice, it 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 the Portfolio 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 Portfolio. The Portfolio
may realize a net gain or loss from a closing purchase transaction depending
upon whether the amount of the premium received on the call option is more or
less than the cost of effecting the closing purchase transaction. Any loss
incurred in a closing purchase transaction may be wholly or partially offset by
unrealized appreciation in the market value of the underlying security
(currency). Conversely, a gain resulting from a closing purchase transaction
could be offset in whole or in part or exceeded by a decline in the market value
of the underlying security (currency).
If a call option expires unexercised, the Portfolio 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
Portfolio 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 the Portfolio 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, the Portfolio
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 Portfolio will be exercisable by the purchaser only on a specific
date). A put is "covered" if, at all times,
20
<PAGE>
the Portfolio maintains, in a segregated account maintained on its behalf at the
Portfolio'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 Portfolio 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 Portfolio in cash, U.S. Government securities or
other liquid portfolio securities which the Portfolio holds in a segregated
account maintained at its Custodian. In writing puts, the Portfolio 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 Portfolio may be required, at any time, to make payment of the
exercise price against delivery of the underlying security. The operation of and
limitations on covered put options in other respects are substantially identical
to those of call options.
The Portfolio 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. The Portfolio may purchase listed and OTC
call and put options in amounts equalling up to 5% of its total assets. The
Portfolio 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. The Portfolio may also purchase a call
option on foreign currency to hedge against an adverse exchange rate move of the
currency in which the security it anticipates purchasing is denominated
vis-a-vis the currency in which the exercise price is denominated. The purchase
of the call option to effect a closing transaction or a call written
over-the-counter may be a listed or an OTC option. In either case, the call
purchased is likely to be on the same securities (currencies) and have the same
terms as the written option. If purchased over-the-counter, the option would
generally be acquired from the dealer or financial institution which purchased
the call written by the Portfolio.
The Portfolio 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
Portfolio would incur no additional loss. A Portfolio may also purchase put
options to close out written put positions in a manner similar to call options
closing purchase transactions. In addition, the Portfolio 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 Portfolio
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
21
<PAGE>
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.
The Portfolio'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, the Portfolio 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 Portfolio is not able to
either enter into a closing purchase transaction or purchase an offsetting
position, it will be required to maintain the securities subject to the call, or
the collateral underlying the put, even though it might not be advantageous to
do so, until a closing transaction can be entered into (or the option is
exercised or expires).
Among the possible reasons for the absence of a liquid secondary market on
an Exchange are: (i) insufficient trading interest in certain options; (ii)
restrictions on transactions imposed by an Exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (iv) interruption of the normal
operations on an Exchange; (v) inadequacy of the facilities of an Exchange or
the Options Clearing Corporation ("OCC") to handle current trading volume; or
(vi) a decision by one or more Exchanges to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that Exchange (or in that class or series of options) would cease to
exist, although outstanding options on that Exchange that had been issued by the
OCC as a result of trades on that Exchange would generally continue to be
exercisable in accordance with their terms.
Exchanges limit the amount by which the price of a futures contract may move
on any day. If the price moves equal the daily limit on successive days, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, a fund would continue to
be required to make daily cash payments of variation margin on open futures
positions. In such situations, if the Portfolio 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 Portfolio 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 Portfolio's ability to effectively hedge its portfolio.
In the event of the bankruptcy of a broker through which a Portfolio engages
in transactions in options, futures or options thereon, the Portfolio 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 Portfolio, the Portfolio could experience a loss of
all or part of the value of the option. Transactions are entered into by the
Portfolio only with brokers or financial institutions deemed creditworthy by the
Investment Manager.
22
<PAGE>
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 the
Portfolio for the purpose of hedging the Portfolio'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 Portfolio's portfolio securities. Another such risk is that prices of
interest rate futures contracts may not move in tandem with the changes in
prevailing interest rates against which the fund seeks a hedge. A correlation
may also be distorted by the fact that the futures market is dominated by
short-term traders seeking to profit from the difference between a contract or
security price objective and their cost of borrowed funds. Such distortions are
generally minor and would diminish as the contract approached maturity.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
STOCK INDEX OPTIONS. Options on stock indexes are similar to options on
stock except that, rather than the right to take or make delivery of stock at a
specified price, an option on a stock index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the stock index upon which the option is based is greater than, in the case of a
call, or less than, in the case of a put, the exercise price of the option. This
amount of cash is equal to such difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple (the "multiplier"). The multiplier for an index option
performs a function similar to the unit of trading for a stock option. It
determines the total dollar value per contract of each point in the difference
between the exercise price of an option and the current level of the underlying
index. A multiplier of 100 means that a one-point difference will yield $100.
Options on different indexes may have different multipliers. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. Unlike stock options, all settlements are in cash and a gain or
loss depends on price movements in the stock market generally (or in a
particular segment of the market) rather than the price movements in individual
stocks. Currently, options are traded on the Standard & Poor's 100 Index and the
Standard & Poor's 500 Index on the Chicago Board Options Exchange, the Major
Market Index and the Computer Technology Index, Oil Index and Institutional
Index on the American Stock Exchange and the NYSE Index and NYSE Beta Index on
the New York Stock Exchange, The Financial News Composite Index on the Pacific
Stock Exchange and the Value Line Index, National O-T-C Index and Utilities
Index on the Philadelphia Stock Exchange, each of which and any similar index on
which options are traded in the future which include stocks that are not limited
to any particular industry or segment of the market is referred to as a "broadly
based stock market index." Options on stock indexes provide a fund with a means
of protecting a Portfolio against the risk of market wide price movements. If
the Investment Manager anticipates a market decline, the Portfolio could
purchase a stock index put option. If the expected market decline materialized,
the resulting decrease in the value of the Portfolio'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 Portfolio may purchase a stock index call
option to enable the Portfolio 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.
23
<PAGE>
The Portfolio 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 Portfolio in a segregated account maintained for it by the fund's
Custodian. All call options on stock indexes written by the Portfolio 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 Portfolio cannot provide in advance
for their potential settlement obligations by acquiring and holding the
underlying securities. A call writer can offset some of the risk of its writing
position by holding a diversified portfolio of stocks similar to those on which
the underlying index is based. However, most investors cannot, as a practical
matter, acquire and hold a portfolio containing exactly the same stocks as the
underlying index, and, as a result, bear a risk that the value of the securities
held will vary from the value of the index. Even if an index call writer could
assemble a stock portfolio that exactly reproduced the composition of the
underlying index, the writer still would not be fully covered from a risk
standpoint because of the "timing risk" inherent in writing index options. When
an index option is exercised, the amount of cash that the holder is entitled to
receive is determined by the difference between the exercise price and the
closing index level on the date when the option is exercised. As with other
kinds of options, the writer will not learn that it has been assigned until the
next business day, at the earliest. The time lag between exercise and notice of
assignment poses no risk for the writer of a covered call on a specific
underlying security, such as a common stock, because there the writer's
obligation is to deliver the underlying security, not to pay its value as of a
fixed time in the past. So long as the writer already owns the underlying
security, it can satisfy its settlement obligations by simply delivering it, and
the risk that its value may have declined since the exercise date is borne by
the exercising holder. In contrast, even if the writer of an index call holds
stocks that exactly match the composition of the underlying index, it will not
be able to satisfy its assignment obligations by delivering those stocks against
payment of the exercise price. Instead, it will be required to pay cash in an
amount based on the closing index value on the exercise date; and by the time it
learns that it has been assigned, the index may have declined, with a
corresponding decrease in the value of its stock portfolio. This "timing risk"
is an inherent limitation on the ability of index call writers to cover their
risk exposure by holding stock positions.
A holder of an index option who exercises it before the closing index value
for that day is available runs the risk that the level of the underlying index
may subsequently change. If such a change causes the exercised option to fall
out-of-the-money, the exercising holder will be required to pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
If dissemination of the current level of an underlying index is interrupted,
or if trading is interrupted in stocks accounting for a substantial portion of
the value of an index, the trading of options on that index will ordinarily be
halted. If the trading of options on an underlying index is halted, an exchange
may impose restrictions prohibiting the exercise of such options.
FUTURES CONTRACTS. Each Portfolio 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 Portfolio 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 Portfolio incurs an obligation to deliver the specified amount of
the underlying obligation at a specified time in return for an agreed upon
price.
24
<PAGE>
The Portfolio 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 Portfolio may purchase an interest rate
futures contract to protect against a potential increase in the price of U.S.
Government securities the Portfolio intends to purchase. Subsequently,
appropriate fixed-income securities may be purchased by the Portfolio in an
orderly fashion; as securities are purchased, corresponding futures positions
would be terminated by offsetting sales of contracts.
The Portfolio will purchase or sell futures contracts on the U.S. dollar and
on foreign currencies to hedge against an anticipated rise or decline in the
value of the U.S. dollar or foreign currency in which a portfolio security of
the fund is denominated vis-a-vis another currency.
The Portfolio will purchase or sell stock index futures contracts for the
purpose of hedging its equity portfolio (or anticipated portfolio) securities
against changes in their prices. If the Investment Manager anticipates that the
prices of stock held by the Portfolio 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 Portfolio intends to purchase,
the fund may purchase stock index futures contracts. In addition, interest rate
and stock index futures contracts will be bought or sold in order to close out a
short or long position in a corresponding futures contract.
Although most interest rate futures contracts call for actual delivery or
acceptance of securities, the contracts usually are closed out before the
settlement date without the making or taking of delivery. Index futures
contracts provide for the delivery of an amount of cash equal to a specified
dollar amount times the difference between the stock index value at the open or
close of the last trading day of the contract and the futures contract price. A
futures contract sale is closed out by effecting a futures contract purchase for
the same aggregate amount of the specific type of equity security and the same
delivery date. If the sale price exceeds the offsetting purchase price, the
seller would be paid the difference and would realize a gain. If the offsetting
purchase price exceeds the sale price, the seller would pay the difference and
would realize a loss. Similarly, a futures contract purchase is closed out by
effecting a futures contract sale for the same aggregate amount of the specific
type of equity security and the same delivery date. If the offsetting sale price
exceeds the purchase price, the purchaser would realize a gain, whereas if the
purchase price exceeds the offsetting sale price, the purchaser would realize a
loss. There is no assurance that the Fund will be able to enter into a closing
transaction.
INTEREST RATE FUTURES CONTRACTS. When the Portfolio enters into an interest
rate futures contract, it is initially required to deposit with the Portfolio'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 Portfolio upon the proper termination of
the futures contract. The margin deposits made are marked to market daily and
the Portfolio may be required to make subsequent deposits called "variation
margin", with the Portfolio'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. The Portfolio may invest in index futures
contracts. An index futures contract sale creates an obligation by the
Portfolio, as seller, to deliver cash at a specified future time. An
25
<PAGE>
index futures contract purchase would create an obligation by the Portfolio, as
purchaser, to take delivery of cash at a specified future time. Futures
contracts on indexes do not require the physical delivery of securities, but
provide for a final cash settlement on the expiration date which reflects
accumulated profits and losses credited or debited to each party's account.
The Portfolio 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, the Portfolio 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 Portfolio and the Portfolio 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. The Portfolio may purchase and write call and
put options on futures contracts and enter into closing transactions with
respect to such options to terminate an existing position. An option on a
futures contract gives the purchaser the right (in return for the premium paid),
and the writer the obligation, to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the term of the option.
Upon exercise of the option, the delivery of the futures position by the writer
of the option to the holder of the option is accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contract at the time of exercise
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract.
The Portfolio 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 Portfolio's holdings.
The writer of an option on a futures contract is required to deposit initial
and variation margin pursuant to requirements similar to those applicable to
futures contracts. Premiums received from the writing of an option on a futures
contract are included in initial margin deposits.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Portfolio 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 Portfolio'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)
26
<PAGE>
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
Portfolio'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 Portfolio 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 Portfolio would be
permitted to write options on futures contracts for purposes other than hedging
the Portfolio's investments without CFTC registration, the Portfolio may engage
in such transactions for those purposes. Except as described above, there are no
other limitations on the use of futures and options thereon by the fund.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. The
Portfolio 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
Portfolio may decline. If this occurred, the Portfolio would lose money on the
futures contract and also experience a decline in value of its portfolio
securities. However, while this could occur for a very brief period or to a very
small degree, over time the value of a diversified portfolio will tend to move
in the same direction as the futures contracts.
If the Portfolio 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 Portfolio 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 the Portfolio 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 Portfolio.
If the Portfolio 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 the Portfolio 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 the Portfolio 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
27
<PAGE>
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 Portfolio 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 Portfolio. 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.
NEW INSTRUMENTS. New financial products and various combinations thereof
continue to be developed. The Fund may invest in any such products as may be
developed, to the extent consistent with its investment objective and applicable
regulatory requirements.
PORTFOLIO TURNOVER. It is anticipated that the portfolio turnover rate of
each Portfolio of the Fund will not exceed 100%. A 100% turnover rate would
occur, for example, if 100% of the securities held in a Portfolio of the Fund
(excluding all securities whose maturities at acquisition were one year or less)
were sold and replaced within one year.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
In addition to the investment restrictions enumerated in each Portfolio's
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 (including limited
partnership interests), although each Portfolio may 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 5% (taken at the
lower of cost or current value) of its total assets (not including the
amount borrowed).
28
<PAGE>
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 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 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
Portfolio and collateral arrangements with respect to initial or variation
margin for futures by the Portfolio 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 a Portfolio 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 Portfolio 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
- --------------------------------------------------------------------------------
Subject to the general supervision of the Board of Trustees, the Investment
Manager is responsible for decisions to buy and sell securities for the
Portfolios, the selection of brokers and dealers to effect the transactions, and
the negotiation of brokerage commissions, if any. The Investment Manager
currently intends to effect substantially all such transactions through
broker-dealers affiliated with the Investment Manager, including Morgan Stanley
& Co. Incorporated ("Morgan Stanley"), and Dean Witter Reynolds Inc. ("DWR"),
subject to the policies and procedures applicable for affiliated brokers or
dealers described below. Purchases and sales of securities on a stock exchange
are effected through brokers who charge a commission for their services. In the
over-the-counter market, securities are generally traded on a "net" basis with
dealers acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a profit to the dealer. The
Portfolios also expect that securities will be purchased at times in
underwritten offerings where the price includes a fixed amount of compensation,
generally referred to as the underwriter's concession or discount. Futures
transactions are usually effected through a broker and a commission will be
charged. On occasion, the Portfolio may also purchase certain money market
instruments directly from an issuer, in which case no commissions or discounts
are paid.
The Investment Manager currently serves as investment manager to a number of
clients, including other investment companies, and may in the future act as
investment manager or adviser to others. It is the practice of the Investment
Manager to cause purchase and sale transactions to be allocated among the
Portfolios and others whose assets it manages in such manner as it deems
equitable. In making such allocations among the Portfolios and other client
accounts, various factors may be considered, including the respective investment
objectives, the relative size of portfolio holdings of the same or comparable
securities, the availability of cash for investment, the size of investment
commitments generally held and
29
<PAGE>
the opinions of the persons responsible for managing the Portfolio and other
client accounts. In the case of certain initial and secondary public offerings,
the Investment Manager may utilize a pro rata allocation process based on the
size of the Dean Witter Funds involved and the number of shares available from
the public offering.
The policy of the Portfolios regarding purchases and sales of securities for
its portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Portfolios' policy is to pay commissions which are considered fair and
reasonable without necessarily determining that the lowest possible commissions
are paid in all circumstances. The Portfolios believe that a requirement always
to seek the lowest possible commission cost could impede effective portfolio
management and preclude the Portfolios and the Investment Manager from obtaining
a high quality of brokerage and research services. In seeking to determine the
reasonableness of brokerage commissions paid in any transaction, the Investment
Manager relies upon its experience and knowledge regarding commissions generally
charged by various brokers and on its judgment in evaluating the brokerage and
research services received from the broker effecting the transaction. Such
determinations are necessarily subjective and imprecise, as in most cases an
exact dollar value for those services is not ascertainable.
In seeking to implement the Portfolios' policies, the Investment Manager
effects transactions with those brokers and dealers who the Investment Manager
believes provide the most favorable prices and are capable of providing
efficient executions. If the Investment Manager believes such prices and
executions are obtainable from more than one broker or dealer, it may give
consideration to placing portfolio transactions with those brokers and dealers
who also furnish research and other services to the 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 purchase 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 brokers
and dealers may be of benefit to the Investment Manager in the management of
accounts of some of its other clients and may not in all cases benefit the
Portfolios directly. While the receipt of such information and services is
useful in varying degrees and would generally reduce the amount of research or
services otherwise performed by the Investment Manager and thereby reduce its
expenses, it is of indeterminable value and the management fee paid to the
Investment Manager is not reduced by any amount that may be attributable to the
value of such services.
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 Bankers' Acceptances) and Commercial Paper. Such
transactions will be effected with DWR only when the price available from DWR is
better than that available from other dealers.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may be
effected through Morgan Stanley, DWR and other affiliated brokers and dealers.
In order for an affiliated broker or dealer to effect any portfolio transactions
for 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 Board of Trustees of the Fund,
including a majority of the Trustees who are not "interested" persons of the
Fund, as defined in the Act, have adopted procedures which are reasonably
designed to provide that
30
<PAGE>
any commissions, fees or other remuneration paid to an affiliated broker or
dealer are consistent with the foregoing standard. The Portfolios do not reduce
the management fee they pay to the Investment Manager by any amount of the
brokerage commissions they may pay to an affiliated broker or dealer.
UNDERWRITING
- --------------------------------------------------------------------------------
Dean Witter Distributors Inc. (the "Underwriter") has agreed to purchase up
to 10,000,000 shares from each of the "Best Ideas" Portfolio and the Competitive
Edge Portfolio of the Fund, which number may be increased or decreased in
accordance with the Underwriting Agreement. The Underwriting Agreement provides
that the obligation of the Underwriter is subject to certain conditions
precedent (such as the filing of certain forms and documents required by various
federal and state agencies and the rendering of certain opinions of counsel) and
that the Underwriter will be obligated to purchase the shares of the "Best
Ideas" Portfolio on February 25, 1998, or such other date as may be agreed upon
between the Underwriter and the Fund and to purchase shares of the Competitive
Edge Portfolio at a later date to be agreed upon between the Underwriter and the
Fund (each a "Closing Date"). Shares will not be issued and dividends will not
be declared by the Fund until after the Closing Date.
The Underwriter will purchase Class B, Class C and Class D shares from the
Portfolio at $10.00 per share with all proceeds going to the Portfolio and will
purchase Class A shares at $10.00 per share plus a sales charge with the sales
charge paid to the Underwriter and the $10.00 per share going to the Portfolio.
The Underwriter may, however, receive contingent deferred sales charges for
future redemptions of Class A, Class B and Class C shares (see "Purchase of Fund
Shares--Continuous Offering" in the Prospectus).
The Underwriter shall, regardless of its expected underwriting commitment,
be entitled and obligated to purchase only the number of shares for which
purchase orders have been received by the Underwriter prior to 2:00 p.m., New
York time, on the third business day preceding the Closing Date, or such other
date as may be agreed to between the parties.
The minimum number of Portfolio shares which may be purchased pursuant to
this offering is 100 shares. Certificates for shares purchased will not be
issued unless requested by the shareholder in writing.
The Underwriter has agreed to pay certain expenses of the initial offering
and the subsequent Continuous Offering of the Portfolio's shares. The Portfolio
has agreed to pay certain compensation to the Underwriter pursuant to a Plan of
Distribution pursuant to Rule 12b-1 under the Act, to compensate the Underwriter
for services it renders and the expenses it bears under the Underwriting
Agreement (see "The Distributor"). The Portfolio will bear the cost of initial
typesetting, printing and distribution of Prospectuses and Statements of
Additional Information and supplements thereto to shareholders. The Portfolio
has agreed to indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
THE DISTRIBUTOR
- --------------------------------------------------------------------------------
As discussed in the Prospectus, shares of each Portfolio of the Fund are
distributed by Dean Witter Distributors Inc. (the "Distributor"). The
Distributor has entered into a selected dealer agreement with DWR, which through
its own sales organization sells shares of the Fund. In addition, the
Distributor may enter into selected dealer agreements with other selected
broker-dealers. The Distributor, a Delaware corporation, is a wholly-owned
subsidiary of MSDWD. The Trustees of the Fund, including a majority of the
Trustees who are not, and were not at the time they voted, interested persons of
the Fund, as defined in the Act (the "Independent Trustees"), approved, at their
meeting held on November 6, 1997, the current Distribution Agreement appointing
the Distributor as exclusive distributor of the Fund's shares and providing for
the Distributor to bear distribution expenses not borne by the Fund. By its
terms, the Distribution Agreement has an initial term ending April 30, 1998 and
will remain in effect from year to year thereafter if approved by the Board.
31
<PAGE>
The Distributor bears all expenses it may incur in providing services under
the Distribution Agreement. Such expenses include the payment of commissions for
sales of the Fund's shares and incentive compensation to account executives. The
Distributor also pays certain expenses in connection with the distribution of
each Portfolio of the Fund's shares, including the costs of preparing, printing
and distributing advertising or promotional materials, and the costs of printing
and distributing prospectuses and supplements thereto used in connection with
the offering and sale of each Portfolio of the Fund's shares. The Fund bears the
costs of initial typesetting, printing and distribution of prospectuses and
supplements thereto to shareholders. The Fund also bears the costs of
registering the Fund and its shares under federal securities laws and pays
filing fees in accordance with state securities laws. The Fund and the
Distributor have agreed to indemnify each other against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. Under the
Distribution Agreement, the Distributor uses its best efforts in rendering
services to the Fund, but in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations, the Distributor is
not liable to the Fund or any of its shareholders for any error of judgment or
mistake of law or for any act or omission or for losses sustained by the Fund or
its shareholders.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Act (the "Plan") pursuant to which each Class of each Portfolio, 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 the entire fee payable by Class A
and a portion of the fees payable by each of Class B and Class C each year
pursuant to the Plan equal to 0.25% of such Class's average daily net assets are
currently each characterized as a "service fee" under the Rules of the
Association of the National Association of Securities Dealers, Inc. (of which
the Distributor is a member). The "service fee" is a payment made for personal
service and/or the maintenance of shareholder accounts. The remaining portion of
the Plan fees payable by a Class, if any, is characterized as an "asset-based
sales charge" as such is defined by the aforementioned Rules of the Association.
The Plan was adopted by a majority vote of the Board of Trustees, including
all of the Trustees of the Fund who are not "interested persons" of the Fund (as
defined in the Act) and who have no direct or indirect financial interest in the
operation of the Plan (the "Independent 12b-1 Trustees"), cast in person at a
meeting called for the purpose of voting on the Plan, on November 6, 1997.
Under the Plan and as required by Rule 12b-1, the Trustees receive and
review promptly after the end of each calendar quarter a written report provided
by the Distributor of the amounts expended under the Plan and the purpose for
which such expenditures were made.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method each Portfolio of the
Fund offers four Classes of shares, each with a different distribution
arrangement as set forth in the Prospectus.
With respect to Class A shares, DWR compensates its account executives by
paying them, from proceeds of the front-end sales charge, commissions for the
sale of Class A shares, currently a gross sales credit of up to 5.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.25% of the current value of
the respective accounts for which they are the account executives or dealers of
record in all cases. On orders of $1 million or more (for which no sales charge
was paid) or net asset value purchases by employer-sponsored 401(k) and other
plans qualified under Section 401(a) of the Internal Revenue Code ("Qualified
Retirement Plans") for which Dean Witter Trust FSB ("DWT") serves as Trustee or
DWR's Retirement
32
<PAGE>
Plan Services serves as recordkeeper pursuant to a written Recordkeeping
Services Agreement, the Investment Manager compensates DWR's account executives
by paying them, from its own funds, a gross sales credit of 1.0% of the amount
sold.
With respect to Class B shares, DWR compensates its account executives by
paying them, from its own funds, commissions for the sale of Class B shares,
currently a gross sales credit of up to 5.0% of the amount sold (except as
provided in the following sentence) and an annual residual commission, currently
a residual of up to 0.25% of the current value (not including reinvested
dividends or distributions) of the amount sold in all cases. In the case of
Class B shares purchased by Qualified Retirement Plans for which DWT serves as
Trustee or DWR's Retirement Plan Services serves as recordkeeper pursuant to a
written Recordkeeping Services Agreement, DWR compensates its account executives
by paying them, from its own funds, a gross sales credit of 3.0% of the amount
sold.
With respect to Class C shares, DWR compensates its account executives by
paying them, from its own funds, commissions for the sale of Class C shares,
currently a gross sales credit of up to 1.0% of the amount sold and an annual
residual commission, currently a residual of up to 1.0% of the current value of
the respective accounts for which they are the account executives of record.
With respect to Class D shares other than shares held by participants in
InterCapital's mutual fund asset allocation program, the Investment Manager
compensates DWR's account executives by paying them, from its own funds,
commissions for the sale of Class D shares, currently a gross sales credit of up
to 1.0% of the amount sold. There is a chargeback of 100% of the amount paid if
the Class D shares are redeemed in the first year and a chargeback of 50% of the
amount paid if the Class D shares are redeemed in the second year after
purchase. The Investment Manager also compensates DWR's account executives by
paying them, from its own funds, an annual residual commission, currently a
residual of up to 0.10% of the current value of the respective accounts for
which they are the account executives of record (not including accounts of
participants in the InterCapital mutual fund asset allocation program).
The gross sales credit is a charge which reflects commissions paid by DWR to
its account executives and DWR's Fund-associated distribution-related expenses,
including sales compensation, and overhead and other branch office
distribution-related expenses including (a) the expenses of operating DWR's
branch offices in connection with the sale of Fund shares, including lease
costs, the salaries and employee benefits of operations and sales support
personnel, utility costs, communications costs and the costs of stationery and
supplies, (b) the costs of client sales seminars, (c) travel expenses of mutual
fund sales coordinators to promote the sale of Fund shares and (d) other
expenses relating to branch promotion of Fund sales. The distribution fee that
the Distributor receives from the Fund under the Plan, in effect, offsets
distribution expenses incurred under the Plan on behalf of the Fund and, in the
case of Class B shares, opportunity costs, such as the gross sales credit and an
assumed interest charge thereon ("carrying charge"). In the Distributor's
reporting of the distribution expenses to the Fund, in the case of Class B
shares, such assumed interest (computed at the "broker's call rate") has been
calculated on the gross credit as it is reduced by amounts received by the
Distributor under the Plan and any contingent deferred sales charges received by
the Distributor upon redemption of shares of the Fund. No other interest charge
is included as a distribution expense in the Distributor's calculation of its
distribution costs for this purpose. The broker's call rate is the interest rate
charged to securities brokers on loans secured by exchange-listed securities.
Each Portfolio is authorized to reimburse expenses incurred or to be
incurred in promoting the distribution of the Portfolio'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
33
<PAGE>
Class C, in the case of all expenses other than expenses representing a gross
sales credit or a residual to account executives, such amounts shall be
determined at the beginning of each calendar quarter by the Trustees, including
a majority of the Independent 12b-1 Trustees. Expenses representing the service
fee (for Class A) or a gross sales credit or a residual to account executives
(for Class C) may be reimbursed without prior determination. In the event that
the Distributor proposes that monies shall be reimbursed for other than such
expenses, then in making quarterly determinations of the amounts that may be
reimbursed by the Fund, the Distributor will provide and the Trustees will
review a quarterly budget of projected distribution expenses to be incurred on
behalf of each Portfolio of the Fund, together with a report explaining the
purposes and anticipated benefits of incurring such expenses. The Trustees will
determine which particular expenses, and the portions thereof, that may be borne
by each Portfolio of the Fund, and in making such a determination shall consider
the scope of the Distributor's commitment to promoting the distribution of the
Fund's Class A and Class C shares.
At any given time, the expenses of distributing shares of a Portfolio may be
more or less than the total of (i) the payments made by the Portfolio pursuant
to the Plan and (ii) the proceeds of contingent deferred sales charges paid by
investors upon redemption of shares. Because there is no requirement under the
Plan that the Distributor be reimbursed for all distribution expenses with
respect to Class B shares or any requirement that the Plan be continued from
year to year, this excess amount does not constitute a liability of the
Portfolio. Although there is no legal obligation for the Portfolio 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,
InterCapital, DWR, DWSC or certain of their employees may be deemed to have such
an interest as a result of benefits derived from the successful operation of the
Plan or as a result of receiving a portion of the amounts expended thereunder by
the Fund.
Under its terms, the Plan has an initial term ending April 30, 1998 and will
continue from year to year thereafter, provided such continuance is approved
annually by a vote of the Trustees in the manner described above.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of the
affected Class or Classes of each Portfolio of the Fund, and all material
amendments to the Plan must also be approved by the Trustees in the manner
described above. The Plan may be terminated at any time, without payment of any
penalty, by vote of a majority of the Independent 12b-1 Trustees or by a vote of
a majority of the outstanding voting securities of each Portfolio of the Fund
(as defined in the Act) on not more than thirty days' written notice to any
other party to the Plan. So long as the Plan is in effect, the election and
nomination of Independent 12b-1 Trustees shall be committed to the discretion of
the Independent 12b-1 Trustees.
DETERMINATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
The procedures for valuing securities held in each Portfolio are set forth
in the Portfolio's Prospectus. As stated in each Portfolio's 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
34
<PAGE>
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 PORTFOLIO SHARES
- --------------------------------------------------------------------------------
As discussed in the Prospectus of each Portfolio, each Portfolio of 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 Portfolio 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 Portfolio and/ or other Dean Witter Funds that are multiple class
funds ("Dean Witter Multi-Class Funds") or shares of other Dean Witter Funds
sold with a front-end sales charge purchased at a price including a front-end
sales charge having a current value of $5,000, and purchases $20,000 of
additional shares of the Portfolio, the sales charge applicable to the $20,000
purchase would be 4.75% of the offering price.
The Distributor must be notified by the selected broker-dealer or the
shareholder at the time a purchase order is placed that the purchase qualifies
for the reduced charge under the Right of Accumulation. Similar notification
must be made in writing by the selected broker-dealer or shareholder when such
an order is placed by mail. The reduced sales charge will not be granted if: (a)
such notification is not furnished at the time of the order; or (b) a review of
the records of the Distributor or Dean Witter Trust FSB (the "Transfer Agent")
fails to confirm the investor's represented holdings.
LETTER OF INTENT. As discussed in the Prospectus, reduced sales charges are
available to investors who enter into a written Letter of Intent providing for
the purchase, within a thirteen-month period, of Class A shares of the Portfolio
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
Portfolio 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.
35
<PAGE>
If the goal is exceeded and purchases pass the next sales charge level, the
sales charge on the entire amount of the purchase that results in passing that
level and on subsequent purchases will be subject to further reduced sales
charges in the same manner as set forth above under "Right of Accumulation," but
there will be no retroactive reduction of sales charges on previous purchases.
For the purpose of determining whether the investor is entitled to a further
reduced sales charge applicable to purchases at or above a sales charge level
which exceeds the stated goal of a Letter of Intent, the cumulative current net
asset value of any shares owned by the investor in any other Dean Witter Funds
held by the shareholder which were previously purchased at a price including a
front-end sales charge (including shares of the Portfolio and other Dean Witter
Funds acquired in exchange for those shares, and including in each case shares
acquired through reinvestment of dividends and distributions) will be added to
the cost or net asset value of shares of the Portfolio owned by the investor.
However, shares of "Exchange Funds" (see "Shareholder Services--Exchange
Privilege") and the purchase of shares of other Dean Witter Funds will not be
included in determining whether the stated goal of a Letter of Intent has been
reached.
At any time while a Letter of Intent is in effect, a shareholder may, by
written notice to the Distributor, increase the amount of the stated goal. In
that event, only shares purchased during the previous 90-day period and still
owned by the shareholder will be included in the new sales charge reduction. The
5% escrow and minimum purchase requirements will be applicable to the new stated
goal. Investors electing to purchase shares of the Portfolio 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
Portfolio is less than the dollar amount of all payments by the shareholder for
the purchase of Class B shares during the preceding six years (or, in the case
of shares held by certain employer-sponsored benefit plans, three years).
However, no CDSC will be imposed to the extent that the net asset value of the
shares redeemed does not exceed: (a) the current net asset value of shares
purchased more than six years (or, in the case of shares held by certain
employer-sponsored benefit plans, three years) prior to the redemption, plus (b)
the current net asset value of shares purchased through reinvestment of
dividends or distributions of the Portfolio or another Dean Witter Fund (see
"Shareholder Services-- Targeted Dividends"), plus (c) the current net asset
value of shares acquired in exchange for (i) shares of Dean Witter front-end
sales charge funds, or (ii) shares of other Dean Witter Funds for which shares
of front-end sales charge funds have been exchanged (see "Shareholder
Services--Exchange Privilege"), plus (d) increases in the net asset value of the
investor's shares above the total amount of payments for the purchase of
Portfolio shares made during the preceding six (three) years. The CDSC will be
paid to the Distributor. [In addition, no CDSC will be imposed on redemptions of
shares which are attributable to reinvestment of dividends or distributions
from, or the proceeds of, certain Unit Investment Trusts.]
In determining the applicability of the CDSC to each redemption, the amount
which represents an increase in the net asset value of the investor's shares
above the amount of the total payments for the purchase of shares within the
last six years (or, in the case of shares held by certain 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 Dean Witter front-end sales charge funds, or
for shares of other Dean Witter funds for which shares of front-end sales charge
funds have been exchanged. A portion of the amount redeemed which exceeds an
amount which represents both such increase in value and the value of shares
purchased more than six years (or, in the case of shares held by certain
employer-sponsored benefit plans, three years) prior to the redemption and/or
shares purchased through reinvestment of dividends or distributions and/or
shares acquired in the above-described exchanges will be subject to a CDSC.
36
<PAGE>
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 Portfolio
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 Portfolio:
<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 Portfolio shares purchased by Qualified Retirement Plans for which
DWT 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>
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 a Portfolio, a Shareholder Investment Account
is opened for the investor on the books of the 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.
37
<PAGE>
AUTOMATIC INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. As stated in the
Prospectus of each Portfolio, all income dividends and capital gains
distributions are automatically paid in full and fractional shares of the
applicable Class of the Portfolio, unless the shareholder requests that they be
paid in cash. Each purchase of shares of the Portfolio 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 Portfolio (or in
cash if the shareholder so requests) as of the close of business on the record
date. At any time an investor may request the Transfer Agent, in writing, to
have subsequent dividends and/or capital gains distributions paid to him or her
in cash rather than shares. To assure sufficient time to process the change,
such request should be received by the Transfer Agent at least five business
days prior to the record date of the dividend or distribution. In the case of
recently purchased shares for which registration instructions have not been
received on the record date, cash payments will be made to DWR or other selected
broker-dealer, and will be forwarded to the shareholder, upon the receipt of
proper instructions. It is the Portfolio'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 Dean Witter Fund
other than Dean Witter Fund of Funds or in another Class or Portfolio of Dean
Witter Fund of Funds. Such investment will be made as described above for
automatic investment in shares of the applicable Class of the Fund, at the net
asset value per share of the selected Dean Witter Fund as of the close of
business on the payment date of the dividend or distribution and will begin to
earn dividends, if any, in the selected Dean Witter Fund the next business day.
To participate in the Targeted Dividends program, shareholders should contact
their DWR or other selected broker-dealer account executive or the Transfer
Agent. Shareholders of the Portfolio must be shareholders of the selected Class
of the Dean Witter Fund targeted to receive investments from dividends at the
time they enter the Targeted Dividends program. Investors should review the
prospectus of the targeted Dean Witter Fund before entering the program.
EASYINVEST.-SM- Shareholders may subscribe to EasyInvest, an automatic
purchase plan which provides for any amount from $100 to $5,000 to be
transferred automatically from a checking or savings account or following
redemption of shares of a Dean Witter money market fund, on a semi-monthly,
monthly or quarterly basis, to the Transfer Agent for investment in shares of
the Fund. Shares purchased through EasyInvest will be added to the shareholder's
existing account at the net asset value calculated the same business day the
transfer of funds is effected (subject to any applicable sales charges). Shares
of the 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 DWR
or other selected broker-dealer account executive or the Transfer Agent.
INVESTMENT OF DIVIDENDS OR DISTRIBUTIONS RECEIVED IN CASH. As discussed in
the Prospectus, any shareholder who receives a cash payment representing a
dividend or distribution may invest such dividend or distribution in shares of
the applicable Class at net asset value, without the imposition of a CDSC upon
redemption, by returning the check or the proceeds to the Transfer Agent within
thirty days after the payment date. If the shareholder returns the proceeds of a
dividend or distribution, such funds must be accompanied by a signed statement
indicating that the proceeds constitute a dividend or distribution to be
invested. Such investment will be made at the net asset value per share next
determined after receipt of the check or the proceeds by the Transfer Agent.
SYSTEMATIC WITHDRAWAL PLAN. As discussed in the Prospectus, a systematic
withdrawal plan (the "Withdrawal Plan") is available for shareholders who own or
purchase shares of the Fund having a minimum value of $10,000 based upon the
then current net asset value. The Withdrawal Plan provides for monthly or
quarterly (March, June, September and December) checks in any dollar amount, not
less than $25, or in any whole percentage of the account balance, on an
annualized basis. Any applicable
38
<PAGE>
CDSC will be imposed on shares redeemed under the Withdrawal Plan (see "Purchase
of Portfolio Shares"). Therefore, any shareholder participating in the
Withdrawal Plan will have sufficient shares redeemed from his or her account so
that the proceeds (net of any applicable CDSC) to the shareholder will be the
designated monthly or quarterly amount.
The Transfer Agent acts as agent for the shareholder in tendering to the
Portfolio for redemption sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment designated in the application. The
shares will be redeemed at their net asset value determined, at the
shareholder's option, on the tenth or twenty-fifth day (or next following
business day) of the relevant month or quarter and normally a check for the
proceeds will be mailed by the Transfer Agent, or amounts credited to a
shareholder's DWR or other selected broker-dealer brokerage account, within five
business days after the date of redemption. The Withdrawal Plan may be
terminated at any time by the Portfolio.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted.
Each withdrawal constitutes a redemption of shares and any gain or loss
realized must be recognized for federal income tax purposes. Although the
shareholder may make additional investments of $2,500 or more under the
Withdrawal Plan, withdrawals made concurrently with purchases of additional
shares may be inadvisable because of sales charges which may be applicable to
purchases or redemptions of shares (see "Purchase of Fund Shares").
Any shareholder who wishes to have payments under the Withdrawal Plan made
to a third party or sent to an address other than the one listed on the account
must send complete written instructions to the Transfer Agent to enroll in the
Withdrawal Plan. The shareholder's signature on such instructions must be
guaranteed by an eligible guarantor acceptable to the Transfer Agent
(shareholders should contact the Transfer Agent for a determination as to
whether a particular institution is such an eligible guarantor). A shareholder
may, at any time, change the amount and interval of withdrawal payments through
his or her account executive or by written notification to the Transfer Agent.
In addition, the party and/or the address to which checks are mailed may be
changed by written notification to the Transfer Agent, with signature guarantees
required in the manner described above. The shareholder may also terminate the
Withdrawal Plan at any time by written notice to the Transfer Agent. In the
event of such termination, the account will be continued as a regular
shareholder investment account. The shareholder may also redeem all or part of
the shares held in the Withdrawal Plan account (see "Redemptions and
Repurchases" in the Prospectus) at any time.
DIRECT INVESTMENTS THROUGH TRANSFER AGENT. As discussed in the Prospectus,
shareholders may make additional investments in any Class of shares of any
Portfolio of the Fund for which they qualify at any time by sending a check in
any amount, not less than $100, payable to Morgan Stanley Dean Witter
Competitive Edge Fund, 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
Portfolio shares, and, in the case of shares of the other Classes, the entire
amount will be applied to the purchase of Portfolio 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, each Portfolio makes available to its
shareholders an Exchange Privilege whereby shareholders of each Class of shares
of any Portfolio of the Fund may exchange their shares for shares of the same
Class of shares of any other Portfolio of the Fund or any other Dean Witter
Multi-Class Fund without the imposition of any exchange fee. Shares may also be
exchanged for shares of any of the following funds: Dean Witter Short-Term U.S.
Treasury Trust, Dean Witter Limited Term Municipal Trust, Dean Witter Short-Term
Bond Fund, Dean Witter Intermediate Term U.S. Treasury Trust and five Dean
Witter Funds which are money market funds (the foregoing nine funds are
hereinafter referred to as the "Exchange Funds"). Class A shares may also be
exchanged for shares of Dean Witter
39
<PAGE>
Multi-State Municipal Series Trust and Dean Witter Hawaii Municipal Trust, which
are Dean Witter Funds sold with a front-end sales charge ("FSC Funds"). Class B
shares may also be exchanged for shares of Dean Witter Global Short-Term Income
Fund Inc. ("Global Short-Term") which are Dean Witter Funds offered with a CDSC.
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
Portfolio Shares," a CDSC may be imposed upon a redemption, depending on a
number of factors, including the number of years from the time of purchase until
the time of redemption or exchange ("holding period"). When shares of a Dean
Witter Multi-Class Fund or Global Short-Term are exchanged for shares of an
Exchange Fund, the exchange is executed at no charge to the shareholder, without
the imposition of the CDSC at the time of the exchange. During the period of
time the shareholder remains in the Exchange Fund (calculated from the last day
of the month in which the Exchange Fund shares were acquired), the holding
period or "year since purchase payment made" is frozen. When shares are redeemed
out of the Exchange Fund, they will be subject to a CDSC which would be based
upon the period of time the shareholder held shares in a Dean Witter Multi-Class
Fund or Global Short-Term. However, in the case of shares exchanged into an
Exchange Fund on or after April 23, 1990, upon a redemption of shares which
results in a CDSC being imposed, a credit (not to exceed the amount of the CDSC)
will be given in an amount equal to the Exchange Fund 12b-1 distribution fees
incurred on or after that date which are attributable to those shares.
Shareholders acquiring shares of an Exchange Fund pursuant to this exchange
privilege may exchange those shares back into a Dean Witter Multi-Class Fund or
Global Short-Term from the Exchange Fund, with no CDSC being imposed on such
exchange. The holding period previously frozen when shares were first exchanged
for shares of the Exchange Fund resumes on the last day of the month in which
shares of a Dean Witter Multi-Class Fund or Global Short-Term are reacquired. A
CDSC is imposed only upon an ultimate redemption, based upon the time
(calculated as described above) the shareholder was invested in a Dean Witter
Multi-Class Fund or in Global Short-Term. In the case of exchanges of Class A
shares which are subject to a CDSC, the holding period also includes the time
(calculated as described above) the shareholder was invested in a FSC Fund.
When shares initially purchased in a Dean Witter Multi-Class Fund or in
Global Short-Term are exchanged for shares of a Dean Witter Multi-Class Fund,
shares of a CDSC Fund, shares of a FSC Fund, or shares of an Exchange Fund, the
date of purchase of the shares of the fund exchanged into, for purposes of the
CDSC upon redemption, will be the last day of the month in which the shares
being exchanged were originally purchased. In allocating the purchase payments
between funds for purposes of the CDSC, the amount which represents the current
net asset value of shares at the time of the exchange which were (i) purchased
more than one, three or six years (depending on the CDSC schedule applicable to
the shares) prior to the exchange, (ii) originally acquired through reinvestment
of dividends or distributions and (iii) acquired in exchange for shares of FSC
Funds, or for shares of other Dean Witter Funds for which shares of FSC Funds
have been exchanged (all such shares called "Free Shares"), will be exchanged
first. After an exchange, all dividends earned on shares in an Exchange Fund
will be considered Free Shares. If the exchanged amount exceeds the value of
such Free Shares, an exchange is made, on a block-by-block basis, of non-Free
Shares held for the longest period of time (except that, with respect to Class B
shares, if shares held for identical periods of time but subject to
40
<PAGE>
different CDSC schedules are held in the same Exchange Privilege account, the
shares of that block that are subject to a lower CDSC rate will be exchanged
prior to the shares of that block that are subject to a higher CDSC rate).
Shares equal to any appreciation in the value of non-Free Shares exchanged will
be treated as Free Shares, and the amount of the purchase payments for the
non-Free Shares of the fund exchanged into will be equal to the lesser of (a)
the purchase payments for, or (b) the current net asset value of, the exchanged
non-Free Shares. If an exchange between funds would result in exchange of only
part of a particular block of non-Free Shares, then shares equal to any
appreciation in the value of the block (up to the amount of the exchange) will
be treated as Free Shares and exchanged first, and the purchase payment for that
block will be allocated on a pro rata basis between the non-Free Shares of that
block to be retained and the non-Free Shares to be exchanged. The prorated
amount of such purchase payment attributable to the retained non-Free Shares
will remain as the purchase payment for such shares, and the amount of purchase
payment for the exchanged non-Free Shares will be equal to the lesser of (a) the
prorated amount of the purchase payment for, or (b) the current net asset value
of, those exchanged non-Free Shares. Based upon the procedures described in the
Prospectus under the caption "Purchase of Portfolio 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
Portfolio 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 Portfolio shall
not be liable for any default or negligence of the Transfer Agent, the
Distributor or any selected broker-dealer.
The Distributor and any selected broker-dealer have authorized and appointed
the Transfer Agent to act as their agent in connection with the application of
proceeds of any redemption of Fund shares to the purchase of shares of any other
Portfolio or any other fund and the general administration of the Exchange
Privilege. No commission or discounts will be paid to the Distributor or any
selected broker-dealer for any transactions pursuant to this Exchange Privilege.
Exchanges are subject to the minimum investment requirement and any other
conditions imposed by each fund. (The minimum initial investment for the
Exchange Privilege account of each Class is $5,000 for Dean Witter Liquid Asset
Fund Inc., Dean Witter Tax-Free Daily Income Trust, Dean Witter California
Tax-Free Daily Income Trust and Dean Witter New York Municipal Money Market
Trust, although those funds may, in their discretion, accept initial investments
of as low as $1,000. The minimum initial investment for the Exchange Privilege
account of each Class is $10,000 for Dean Witter Short-Term U.S. Treasury Trust,
although that fund, in its discretion, may accept initial purchases of as low as
$5,000. The minimum initial investment for the Exchange Privilege account of
each Class is $5,000 for Dean Witter Special Value Fund. The minimum initial
investment for the Exchange Privilege account of each Class of all other Dean
Witter Funds for which the Exchange Privilege is available is $1,000.) Upon
exchange into an Exchange Fund, the shares of that fund will be held in a
special Exchange Privilege Account separately from accounts of those
shareholders who have acquired their shares directly from that fund. As a
result, certain services normally available to shareholders of those funds,
including the check writing feature, will not be available for funds held in
that account.
The Portfolios and each of the other Dean Witter Funds may limit the number
of times this Exchange Privilege may be exercised by any investor within a
specified period of time. Also, the Exchange Privilege may be terminated or
revised at any time by the Portfolios and/or any of the Dean Witter funds for
which shares of the Portfolios 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
41
<PAGE>
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 Portfolio of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Portfolio fairly to
determine the value of its net assets, (d) during any other period when the
Securities and Exchange Commission by order so permits (provided that applicable
rules and regulations of the Securities and Exchange Commission shall govern as
to whether the conditions prescribed in (b) or (c) exist) or (e) if the Fund
would be unable to invest amounts effectively in accordance with its investment
objective, policies and restrictions.
For further information regarding the Exchange Privilege, shareholders
should contact their DWR or other selected broker-dealer account executive or
the Transfer Agent.
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. The term "good order" means
that the share certificate, if any, and request for redemption are properly
signed, accompanied by any documentation required by the Transfer Agent, and
bear signature guarantees when required by the Fund or the Transfer Agent. If
redemption is requested by a corporation, partnership, trust or fiduciary, the
Transfer Agent may require that written evidence of authority acceptable to the
Transfer Agent be submitted before such request is accepted.
Whether certificates are held by the shareholder or shares are held in a
shareholder's account, if the proceeds are to be paid to any person other than
the record owner, or if the proceeds are to be paid to a corporation (other than
the Distributor or a selected broker-dealer for the account of the shareholder),
partnership, trust or fiduciary, or sent to the shareholder at an address other
than the registered address, signatures must be guaranteed by an eligible
guarantor acceptable to the Transfer Agent (shareholders should contact the
Transfer Agent for a determination as to whether a particular institution is
such an eligible guarantor). A stock power may be obtained from any dealer or
commercial bank. The Fund may change the signature guarantee requirements from
time to time upon notice to shareholders, which may be by means of a 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. 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 Portfolio of
42
<PAGE>
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or (d)
during any other period when the Securities and Exchange Commission by order so
permits; provided that applicable rules and regulations of the Securities and
Exchange Commission shall govern as to whether the conditions prescribed in (b)
or (c) exist. If the shares to be redeemed have recently been purchased by check
(including a certificate or bank cashier's check), payment of redemption
proceeds may be delayed for the minimum time needed to verify that the check
used for investment has been honored (not more than fifteen days from the time
of receipt of the check by the Transfer Agent). It is the Portfolio's policy and
practice that, if checks for redemption proceeds remain uncashed, no interest
will accrue on amounts represented by such uncashed checks. Shareholders
maintaining margin accounts with DWR or another selected broker-dealer are
referred to their account executive regarding restrictions on redemption of
shares of the Fund pledged in the margin account.
TRANSFERS OF SHARES. In the event a shareholder requests a transfer of any
shares to a new registration, such shares will be transferred without sales
charge at the time of transfer. With regard to the 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 Portfolio 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 Portfolio will be required to pay any
federal income tax. Shareholders will normally have to pay federal income taxes,
and any state income taxes, on the dividends and distributions they receive from
each Portfolio of the Fund. Such dividends and distributions, to the extent that
they are derived from net investment income or short-term capital gains, are
taxable to the shareholder as ordinary income regardless of whether the
shareholder receives such payments in additional shares or in cash. Any
dividends declared in the last quarter of any calendar year which are paid in
the following year prior to February 1 will be deemed received by the
shareholder in the prior calendar year.
43
<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 Treasury has announced that it will issue
regulations or other guidance to permit shareholders to take into account their
proportionate share of the Fund's capital gains distributions that will be
subject to a reduced rate under the Taxpayer Relief Act of 1997. The Taxpayer
Relief Act reduces the maximum tax on long-term capital gains from 28% to 20%;
however, it also lengthens the required holding period to obtain the lower rate
from more than 12 months to more than 18 months. The lower rates do not apply to
collectibles and certain other assets. Additionally, the maximum capital gain
rate for assets that are held more than 5 years and that are acquired after
December 31, 2000 is 18%.
Any ordinary income dividends or capital gains distributions received by a
shareholder from any investment company will have the effect of reducing the net
asset value of the shareholder's shares in that company by the exact amount of
the dividend or capital gains distribution. Furthermore, capital gains
distributions and ordinary income dividends are subject to federal income taxes.
If the net asset 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 Portfolio's corporate shareholders only to the extent
the aggregate dividends received by the Portfolio would be eligible for the
deduction if the Portfolio were the shareholder claiming the dividends received
deduction. The amount of dividends paid by the Portfolio 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 Portfolio has held for a minimum period, usually 46 days within a 90 day
period beginning 45 days before the ex dividend date of each qualifying
dividend. Shareholders must meet a similar holding period requirement with
respect to their shares to claim the dividends received deduction with respect
to any distribution of qualifying dividends. Any long-term capital gain
distributions will also not be eligible for the dividends received deduction.
The ability to take the dividends received deduction will also be limited in the
case of a Portfolio shareholder which incurs or continues indebtedness which is
directly attributable to its investment in the Portfolio.
After the end of the year, shareholders will be sent full information on
their dividends and capital gains distributions for tax purposes, including
information as to the portion taxable as ordinary income, the portion taxable as
long-term capital gains and the portion eligible for the dividends received
deduction. To avoid being subject to a 31% federal backup withholding tax on
taxable dividends, capital gains distributions and the proceeds of redemptions
and repurchases, shareholders' taxpayer identification numbers must be furnished
and certified as to their accuracy.
Shareholders are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, state or local taxes.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
As discussed in the Prospectus, from time to time each Portfolio of the Fund
may quote its "total return" in advertisements and sales literature. These
figures are computed separately for Class A, Class B, Class C and Class D
shares. Each Portfolio's "average annual total return" represents an
annualization of that Portfolio's total return over a specified period and is
computed by finding the annual percentage rate which will result in the ending
redeemable value of a hypothetical $1,000 investment made at the beginning of a
one, five or ten year period, or for the period from the date of commencement of
the Portfolio's operations, if shorter than any of the foregoing. For periods of
less than one year, the Fund quotes its total return on a non-annualized basis.
The ending redeemable value is reduced by any
44
<PAGE>
CDSC at the end of the applicable period. For the purpose of this calculation,
it is assumed that all dividends and distributions are reinvested. The formula
for computing the average annual total return involves a percentage obtained by
dividing the ending redeemable value by the amount of the initial investment,
taking a root of the quotient (where the root is equivalent to the number of
years in the period) and subtracting 1 from the result.
In addition to the foregoing, each Portfolio may advertise its total return
for each Class over different periods of time by means of aggregate, average,
year-by-year or other types of total return figures. Such calculations may or
may not reflect the imposition of the maximum front-end sales charge for Class A
or the deduction of the CDSC for each of Class B and Class C which, if
reflected, would reduce the performance quoted. For example, the average annual
total return of each Portfolio may be calculated in the manner described in the
preceding paragraph, but without deduction for any applicable sales charge.
In addition, each Portfolio may compute its aggregate total return for each
Class for specified periods by determining the aggregate percentage rate which
will result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is assumed that
all dividends and distributions are reinvested. The formula for computing
aggregate total return involves a percentage obtained by dividing the ending
value (without reduction for any sales charge) by the initial $1,000 investment
and subtracting 1 from the result.
Each Portfolio may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in each Class of shares of the respective
Portfolio by adding 1 to the respective Portfolio's aggregate total return to
date (expressed as a decimal and without taking into account the effect of any
applicable CDSC) and multiplying by $9,475, $48,000 and $97,000 in the case of
Class A (investments of $10,000, $50,000 and $100,000 adjusted for the initial
sales charge) or by $10,000, $50,000 and $100,000 in the case of each of Class
B, Class C and Class D, as the case may be.
Each Portfolio from time to time may also advertise its performance relative
to certain performance rankings and indexes compiled by independent
organizations.
DESCRIPTION OF SHARES OF THE FUND
- --------------------------------------------------------------------------------
The shareholders of each Portfolio 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.
45
<PAGE>
The Fund is authorized to issue an unlimited number of shares of beneficial
interest. The Fund shall be of unlimited duration, subject to the provisions in
the Declaration of Trust concerning termination by action of the shareholders.
CUSTODIAN AND TRANSFER AGENT
- --------------------------------------------------------------------------------
The Bank of New York, 90 Washington Street, New York, New York 10286 is the
Custodian of the Fund's assets. Any of the Fund's cash balances with the
Custodian in excess of $100,000 are unprotected by federal deposit insurance.
Such balances may, at times, be substantial.
Dean Witter Trust FSB, Harborside Financial Center, Plaza Two, Jersey City,
New Jersey 07311 is the Transfer Agent of the Portfolio's shares and Dividend
Disbursing Agent for payment of dividends and distributions on Portfolio shares
and Agent for shareholders under various investment plans described herein. Dean
Witter Trust FSB is an affiliate of Dean Witter InterCapital Inc., the Fund's
Investment Manager, and of Dean Witter Distributors Inc., the Fund's
Distributor. As Transfer Agent and Dividend Disbursing Agent, Dean Witter Trust
FSB's responsibilities include maintaining shareholder accounts, disbursing cash
dividends and reinvesting dividends, processing account registration changes,
handling purchase and redemption transactions, mailing prospectuses and reports,
mailing and tabulating proxies, processing share certificate transactions, and
maintaining shareholder records and lists. For these services Dean Witter Trust
FSB receives a per shareholder account fee.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
Price Waterhouse LLP serves as the independent accountants of each Portfolio
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 Portfolio of the Fund's portfolio and other information. An annual report
containing financial statements audited by independent accountants will be sent
to shareholders each year.
The Fund's fiscal year ends on May 31. The financial statements of the Fund
must be audited at least once a year by independent accountants whose selection
is made annually by the Fund's Board of Trustees.
LEGAL COUNSEL
- --------------------------------------------------------------------------------
Barry Fink, Esq., who is an officer and the General Counsel of the
Investment Manager, is an officer and the General Counsel of the Fund.
EXPERTS
- --------------------------------------------------------------------------------
The financial statement of the Portfolios included in this Statement of
Additional Information and incorporated by reference in the Prospectus has been
so included and incorporated in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
46
<PAGE>
DEAN WITTER "COMPETITIVE EDGE" FUND
STATEMENT OF ASSETS AND LIABILITIES AT DECEMBER 3, 1997
- --------------------------------------------------------------------------------
"BEST IDEAS" PORTFOLIO
<TABLE>
<S> <C>
ASSETS:
Cash.................................................................................................... $ 50,000
Deferred organizational expenses (Note 1)............................................................... 141,225
---------
Total Assets........................................................................................ 191,225
---------
LIABILITIES:
Organizational expenses payable (Note 1)................................................................ 141,225
Commitments (Notes 1 and 2).............................................................................
---------
Net Assets.......................................................................................... $ 50,000
---------
---------
CLASS A SHARES:
Net Assets................................................................................................ $ 12,500
Shares Outstanding (unlimited authorized, $.01 par value)................................................. 1,250
NET ASSET VALUE PER SHARE............................................................................. $ 10.00
---------
---------
MAXIMUM OFFERING PRICE
(net asset value plus 5.5% of net asset value)....................................................... $ 10.55
---------
---------
CLASS B SHARES:
Net Assets................................................................................................ $ 12,500
Shares Outstanding (unlimited authorized, $.01 par value)................................................. 1,250
NET ASSET VALUE PER SHARE............................................................................. $ 10.00
---------
---------
CLASS C SHARES:
Net Assets................................................................................................ $ 12,500
Shares Outstanding (unlimited authorized, $.01 par value)................................................. 1,250
NET ASSET VALUE PER SHARE............................................................................. $ 10.00
---------
---------
CLASS D SHARES:
Net Assets................................................................................................ $ 12,500
Shares Outstanding (unlimited authorized, $.01 par value)................................................. 1,250
NET ASSET VALUE PER SHARE............................................................................. $ 10.00
---------
---------
</TABLE>
See Notes to Financial Statements
47
<PAGE>
DEAN WITTER "COMPETITIVE EDGE" FUND
STATEMENT OF ASSETS AND LIABILITIES AT DECEMBER 3, 1997
- --------------------------------------------------------------------------------
"COMPETITIVE EDGE" PORTFOLIO
<TABLE>
<S> <C>
ASSETS:
Cash.................................................................................................... $ 50,000
Deferred organizational expenses (Note 1)............................................................... 141,225
---------
Total Assets........................................................................................ 191,225
---------
LIABILITIES:
Organizational expenses payable (Note 1)................................................................ 141,225
Commitments (Notes 1 and 2).............................................................................
---------
Net Assets.......................................................................................... $ 50,000
---------
---------
CLASS A SHARES:
Net Assets................................................................................................ $ 12,500
Shares Outstanding (unlimited authorized, $.01 par value)................................................. 1,250
NET ASSET VALUE PER SHARE............................................................................. $ 10.00
---------
---------
MAXIMUM OFFERING PRICE
(net asset value plus 5.5% of net asset value)....................................................... $ 10.55
---------
---------
CLASS B SHARES:
Net Assets................................................................................................ $ 12,500
Shares Outstanding (unlimited authorized, $.01 par value)................................................. 1,250
NET ASSET VALUE PER SHARE............................................................................. $ 10.00
---------
---------
CLASS C SHARES:
Net Assets................................................................................................ $ 12,500
Shares Outstanding (unlimited authorized, $.01 par value)................................................. 1,250
NET ASSET VALUE PER SHARE............................................................................. $ 10.00
---------
---------
CLASS D SHARES:
Net Assets................................................................................................ $ 12,500
Shares Outstanding (unlimited authorized, $.01 par value)................................................. 1,250
NET ASSET VALUE PER SHARE............................................................................. $ 10.00
---------
---------
</TABLE>
- ------------
NOTE 1--Dean Witter "Competitive Edge" Fund (the "Fund") was organized as a
Massachusetts business trust on October 16, 1997. To date the Fund has had no
transactions other than those relating to organizational matters and the sale of
1,250 shares of beneficial interest for $12,500 of each class of the "Best
Ideas" Portfolio and the "Competitive Edge" Portfolio (the "Portfolios") to Dean
Witter InterCapital Inc. (the "Investment Manager"). The Fund is registered
under the Investment Company Act of 1940, as amended (the "Act"), as a
non-diversified, open-end management investment company. The investment
objective of the Portfolios is long-term capital appreciation. Organizational
expenses of the Fund incurred prior to the offering of the Fund's shares will be
paid by the Investment Manager. It is currently estimated that the Investment
Manager will incur, and be reimbursed, approximately $141,225 by each Portfolio
in organizational expenses. Actual expenses could differ from these estimates.
These expenses will be deferred and amortized by each Portfolio on the
straight-line method over a period not to exceed five years from the date of
commencement of each Portfolio's operations. In the event that, at any time
during the five year period beginning with the date of commencement of
operations, the initial shares acquired by the Investment Manager prior to such
date are redeemed, by any holder thereof, the redemption proceeds payable in
respect of such shares will be reduced by the pro rata share (based on the
proportionate share of the initial Portfolio shares redeemed to the total number
of original Portfolio shares outstanding at the time of redemption) of the then
unamortized deferred organizational expenses as of the date of such redemption.
In the event that the Portfolio liquidates before the deferred organizational
expenses are fully amortized, the Investment Manager shall bear such unamortized
deferred organizational expenses.
NOTE 2--The Fund has entered into an investment management agreement with the
Investment Manager. Certain officers and/or trustees of the Fund are officers
and/or directors of the Investment Manager. The Fund has retained the Investment
Manager to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. Under the terms of the
Investment Management Agreement, the Investment Manager maintains certain of the
Fund's books and records and furnishes, at its own expense, such office space,
facilities, equipment, supplies, clerical help and bookkeeping and certain
48
<PAGE>
legal services as the Fund may reasonably require in the conduct of its
business. In addition, the Investment Manager pays the salaries of all
personnel, including officers of the Fund, who are employees of the Investment
Manager. The Investment Manager also bears the cost of the Fund's telephone
service, heat, light, power and other utilities.
As full compensation for the services and facilities furnished to the Fund
and expenses of the Fund incurred by the Investment Manager, the Fund will pay
the Investment Manager monthly compensation calculated daily by applying the
annual rate of 0.65% for the "Best Ideas" Portfolio and 0.75% for the
"Competitive Edge" Portfolio to the respective Portfolio's daily net assets.
Shares of each Portfolio of the Fund will be distributed by Dean Witter
Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager.
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the Act
(the "Plan") with respect to the distribution of Class A, Class B and Class C
shares of each Portfolio of the Fund. The Plan provides that the Distributor
will bear the expense of all promotional and distribution related activities on
behalf of those shares of each Portfolio of the Fund, including the payment of
commissions for sales of such shares and incentive compensation to and expenses
of Dean Witter Reynolds Inc. ("DWR"), an affiliate of the Investment Manager and
the Distributor, account executives and others who engage in or support
distribution of shares or who service shareholder accounts, including overhead
and telephone expenses; printing and distribution of prospectuses and reports
used in connection with the offering of the Portfolios' shares to other than
current shareholders; and preparation, printing and distribution of sales
literature and advertising materials. In addition, with respect to Class B, the
Distributor may utilize fees paid pursuant to the Plan to compensate DWR and
others for their opportunity costs in advancing such amounts, which compensation
would be in the form of a carrying charge on any unreimbursed distribution
expenses incurred.
To compensate the Distributor for the services provided and for the expenses
borne by the Distributor and others under the Plan, Class A, Class B and Class C
of each Portfolio will pay the Distributor compensation accrued daily and
payable monthly at the annual rate of 0.25% of the average daily net assets of
Class A and 1.0% of the average daily net assets of each of Class B and Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Portfolio
pursuant to the Plan and contingent deferred sales charges paid by investors
upon redemption of Class B shares. With respect to Class B, although there is no
legal obligation for the Fund to pay expenses incurred in excess of payments
made to the Distributor under the Plan and the proceeds of contingent deferred
sales charges paid by investors upon redemption of shares, if for any reason the
Plan is terminated, the Trustees will consider at that time the manner in which
to treat such expenses. In the case of Class A shares and Class C shares,
expenses incurred pursuant to the Plan in any calendar year in excess of 0.25%
or 1.00% of the average daily net assets of Class A or Class C, respectively,
will not be reimbursed by the Fund through payments in any subsequent year,
except that expenses representing a gross sales credit to account executives may
be reimbursed in the subsequent calendar year.
Dean Witter Trust FSB, an affiliate of the Investment Manager and the
Distributor, is the transfer agent of the Portfolios' shares, dividend
disbursing agent for payment of dividends and distributions on Portfolio shares
and agent for shareholders under various investment plans.
The Investment Manager has undertaken, with respect to each Portfolio of the
Fund, to assume all operating expenses (except for the Plan fee and brokerage
fees) and to waive its compensation provided for in its Management Agreement
until such time as each Portfolio has $50 million of net assets or until six
months from the date of commencement of the Portfolio's operations, whichever
occurs first.
49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholder and Trustees of
Dean Witter "Competitive Edge" Fund
In our opinion, the accompanying statements of assets and liabilities present
fairly, in all material respects, the financial position of the "Best Ideas"
Portfolio and the "Competitive Edge" Portfolio (constituting Dean Witter
"Competitive Edge" Fund, hereafter referred to as the "Fund") at December 3,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
December 4, 1997
50
