<PAGE> 1
PROSPECTUS - JULY 31, 2000
Morgan Stanley Dean Witter
EQUITY FUND
[GRAPHIC]
A MUTUAL FUND THAT SEEKS TOTAL RETURN
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
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CONTENTS
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The Fund Investment Objective........................................ 1
Principal Investment Strategies............................. 1
Principal Risks............................................. 1
Past Performance............................................ 3
Fees and Expenses........................................... 4
Additional Investment Strategy Information.................. 5
Additional Risk Information................................. 6
Fund Management............................................. 7
Shareholder Information Pricing Fund Shares......................................... 9
How to Buy Shares........................................... 9
How to Exchange Shares...................................... 11
How to Sell Shares.......................................... 13
Distributions............................................... 14
Tax Consequences............................................ 15
Share Class Arrangements.................................... 16
Financial Highlights ............................................................ 24
Our Family of Funds ...............................................Inside Back Cover
</TABLE>
<TABLE>
<S> <C> <C>
This Prospectus contains important information about the Fund.
Please read it carefully and keep it for future reference.
</TABLE>
<PAGE> 3
THE FUND
TOTAL RETURN
AN INVESTMENT OBJECTIVE HAVING THE GOAL OF SELECTING SECURITIES WITH THE
POTENTIAL TO RISE IN PRICE AND PAY OUT INCOME.
[TARGET ICON] INVESTMENT OBJECTIVE
Morgan Stanley Dean Witter Equity Fund seeks total return.
[CHESS ICON] PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 65% of its total assets in common stock
and other equity securities, including depository receipts. The Fund's
"Sub-Advisor," Miller Anderson & Sherrerd, LLP, invests the Fund's assets by
pursuing an investing strategy that combines both value and growth styles. The
Fund has two teams of portfolio managers: a value team and a growth team. Each
manager works independently within the style of his or her specific team. Each
team has a team leader who participates in administering the value/growth
style-tilt of the portfolio and monitors certain other oversight functions.
The Sub-Advisor's investment process is designed to identify
growing companies whose stock in the Sub-Advisor's opinion is
attractively valued and has low but rising expectations, and
to diversify holdings across market sectors. Individual
securities are selected based on, among other things,
quantitative screens and fundamental research by in-house
industry analysts.
In addition, the Fund may invest up to 25% of its total assets in foreign
securities. This percentage limitation, however, does not apply to securities of
foreign companies that are listed in the U.S. on a national securities exchange.
Common stock is a share ownership or equity interest in a corporation. It may or
may not pay dividends, as some companies reinvest all of their profits back into
their businesses, while others pay out some of their profits to shareholders as
dividends. A depository receipt is generally issued by a bank or financial
institution and represents an ownership interest in the common stock or other
equity securities of a foreign company.
The Fund also may invest in convertible and fixed-income securities.
In pursuing the Fund's investment objective, the Sub-Advisor has considerable
leeway in deciding which investments it buys, holds or sells on a day-to-day
basis -- and which trading strategies it uses. For example, the Sub-Advisor in
its discretion may determine to use some permitted trading strategies while not
using others.
[SCALE ICON] PRINCIPAL RISKS
There is no assurance that the Fund will achieve its investment objective. The
Fund's share price will fluctuate with changes in the market value of the Fund's
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portfolio securities. When you sell Fund shares, they may be worth less than
what you paid for them and, accordingly, you can lose money investing in this
Fund.
COMMON STOCKS. A principal risk of investing in the Fund is associated with its
common stock investments. In general, stock values fluctuate in response to
activities specific to the company as well as general market, economic and
political conditions. Stock prices can fluctuate widely in response to these
factors.
FOREIGN SECURITIES. The Fund's investments in foreign securities may involve
risks in addition to the risks associated with domestic securities. One
additional risk is currency risk. While the price of Fund shares is quoted in
U.S. dollars, the Fund generally converts U.S. dollars to a foreign market's
local currency to purchase a security in that market. If the value of that local
currency falls relative to the U.S. dollar, the U.S. dollar value of the foreign
security will decrease. This is true even if the foreign security's local price
remains unchanged.
Foreign securities (including depository receipts) also have risks related to
economic and political developments abroad, including expropriations,
confiscatory taxation, exchange control regulation, limitations on the use or
transfer of Fund assets and any effects of foreign social, economic or political
instability. Foreign companies, in general, are not subject to the regulatory
requirements of U.S. companies and, as such, there may be less publicly
available information about these companies. Moreover, foreign accounting,
auditing and financial reporting standards generally are different from those
applicable to U.S. companies. Finally, in the event of a default of any foreign
debt obligations, it may be more difficult for the Fund to obtain or enforce a
judgment against the issuers of the securities.
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 U.S. counterparts. In
addition, differences in clearance and settlement procedures in foreign markets
may occasion delays in settlements of the Fund's trades effected in those
markets.
OTHER RISKS. The performance of the Fund also will depend on whether the Sub-
Advisor is successful in pursuing the Fund's investment strategy. The Fund is
subject to other risks from its permissible investments including the risks
associated with convertible and fixed-income securities. For more information
about these risks, see the "Additional Risk Information" section.
Shares of the Fund are not bank deposits and are not guaranteed or insured by
the FDIC or any other government agency.
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ANNUAL TOTAL RETURN
THIS CHART SHOWS THE
PERFORMANCE OF THE FUND'S
CLASS B SHARES IN THE PAST
CALENDAR YEAR.
AVERAGE ANNUAL TOTAL RETURNS
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS WITH THOSE OF A
BROAD MEASURE OF MARKET PERFORMANCE OVER TIME. THE FUND'S RETURNS INCLUDE THE
MAXIMUM APPLICABLE SALES CHARGE FOR EACH CLASS AND ASSUME YOU SOLD YOUR SHARES
AT THE END OF EACH PERIOD.
[CALENDAR ICON] PAST PERFORMANCE
The bar chart and table below provide some indication of the risks of investing
in the Fund. The Fund's past performance does not indicate how the Fund will
perform in the future.
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURNS -- CALENDAR YEAR
<S> <C> <C> <C>
26.78% 1999 The bar chart reflects
the performance of Class
B shares; the performance
of the other Classes will
differ because the
Classes have different
ongoing fees. The
performance information
in the bar chart does not
reflect the deduction of
sales charges; if these
amounts were reflected,
returns would be less
than shown. Year-to-date
total return as of June
30, 2000 was 0%
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was 19.40% (quarter ended December 31, 1999), and the lowest return for
a calendar quarter was -9.55% (quarter ended September 30, 1999).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF DECEMBER 31, 1999)
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LIFE OF FUND
PAST 1 YEAR (SINCE 7/29/98)
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<S> <C> <C> <C>
Class A 20.94% 17.40%
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Class B 21.78% 18.42%
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Class C 26.17% 21.29%
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Class D 28.00% 22.25%
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S&P 500 Index(1) 21.04% 22.33%
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</TABLE>
1 The Standard & Poor's(R) 500 Stock Index (S&P 500) is a
broad-based index, the performance of which is based on
the performance of 500 widely held common stocks chosen
for market size, liquidity, and industry group
representation. The performance of the Index does not
include any expenses, fees or charges. The Index is
unmanaged and should not be considered an investment.
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SHAREHOLDER FEES
THESE FEES ARE PAID DIRECTLY FROM YOUR INVESTMENT.
ANNUAL FUND
OPERATING EXPENSES
THESE EXPENSES ARE DEDUCTED FROM THE FUND'S ASSETS AND ARE BASED ON EXPENSES
PAID FOR THE FISCAL YEAR ENDED MAY 31, 2000.
[CASH ICON] FEES AND EXPENSES
The table below briefly describes the fees and expenses that you may pay if you
buy and hold shares of the Fund. The Fund offers four Classes of shares: Classes
A, B, C and D. Each Class has a different combination of fees, expenses and
other features. The Fund does not charge account or exchange fees. See the
"Share Class Arrangements" section for further fee and expense information.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
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SHAREHOLDER FEES
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Maximum sales charge (load) imposed
on purchases (as a percentage of
offering price) 5.25%(1) None None None
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Maximum deferred sales charge (load)
(as a percentage based on the lesser
of the offering price or net asset
value at redemption) None(2) 5.00%(3) 1.00%(4) None
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ANNUAL FUND OPERATING EXPENSES
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Management fee 0.85% 0.85% 0.85% 0.85%
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Distribution and service (12b-1)
fees 0.25% 1.00% 1.00% None
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Other expenses 0.19% 0.19% 0.19% 0.19%
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Total annual Fund operating expenses 1.29% 2.04% 2.04% 1.04%
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</TABLE>
1 Reduced for purchases of $25,000 and over.
2 Investments that are not subject to any sales charge at
the time of purchase are subject to a contingent deferred
sales charge ("CDSC") of 1.00% that will be imposed if you
sell your shares within one year after purchase, except
for certain specific circumstances.
3 The CDSC is scaled down to 1.00% during the sixth year,
reaching zero thereafter. See "Share Class Arrangements"
for a complete discussion of the CDSC.
4 Only applicable if you sell your shares within one year
after purchase.
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund, your investment has a
5% return each year, and the Fund's operating expenses remain the same. Although
your actual costs may be higher or lower, the tables below show your costs at
the end of each period based on these assumptions depending upon whether or not
you sell your shares at the end of each period.
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<TABLE>
<CAPTION>
IF YOU SOLD YOUR SHARES: IF YOU HELD YOUR SHARES:
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1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------------------------ ------------------------------------------
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CLASS A $649 $913 $1,195 $2,000 $649 $913 $1,195 $2,000
------------------------------------------------------------ ------------------------------------------
CLASS B $707 $940 $1,298 $2,369 $207 $640 $1,098 $2,369
------------------------------------------------------------ ------------------------------------------
CLASS C $307 $640 $1,098 $2,369 $207 $640 $1,098 $2,369
------------------------------------------------------------ ------------------------------------------
CLASS D $106 $331 $ 574 $1,271 $106 $331 $ 574 $1,271
------------------------------------------------------------ ------------------------------------------
</TABLE>
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.
[CHESS ICON] ADDITIONAL INVESTMENT STRATEGY INFORMATION
This section provides additional information relating to the Fund's principal
investment strategies.
CONVERTIBLE AND FIXED-INCOME SECURITIES. The Fund may invest up to 35% of its
total assets in (i) convertible securities (which may be rated below investment
grade commonly known as "junk bonds"), (ii) investment grade fixed-income
securities of domestic and foreign companies and governments and international
organizations, and (iii) U.S. government securities.
DEFENSIVE INVESTING. The Fund may take temporary "defensive" positions in
attempting to respond to adverse market conditions. The Fund may invest any
amount of its total assets in cash or money market instruments in a defensive
posture when the Investment Manager or Sub-Advisor believes it is advisable to
do so. Although taking a defensive posture is designed to protect the Fund from
an anticipated market downturn, it could have the effect of reducing the benefit
from any upswing in the market. When the Fund takes a defensive position, it may
not achieve its investment objective.
PORTFOLIO TURNOVER. The Fund may engage in active and frequent trading of its
portfolio securities. The Financial Highlights Table at the end of this
Prospectus shows the Fund's portfolio turnover rates during the fiscal year
ended May 31, 2000 and for the period July 29, 1998 (commencement of operations)
through May 31, 1999. A portfolio turnover rate of 200%, for example, is
equivalent to the Fund buying and selling all of its securities two times during
the course of the year. A high portfolio turnover rate (over 100%) could result
in high brokerage costs and an increase in taxable capital gains distributions
to the Fund's shareholders. See the sections on "Distributions" and "Tax
Consequences."
The percentage limitations relating to the composition of the Fund's portfolio
apply at the time the Fund acquires an investment and refer to the Fund's net
assets unless otherwise noted. Subsequent percentage changes that result from
market fluctuations will not require the Fund to sell any portfolio security.
The Fund may
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change its principal investment strategies without shareholder approval;
however, you would be notified of any changes.
[SCALE ICON] ADDITIONAL RISK INFORMATION
This section provides additional information relating to the principal risks of
investing in the Fund.
CONVERTIBLE SECURITIES. Investments in convertible securities subject the Fund
to the risks associated with both fixed-income securities and common stocks. To
the extent that a convertible security's investment value is greater than its
conversion value, its price will likely increase when interest rates fall and
decrease when interest rates rise, as with a fixed-income security. If the
conversion value exceeds the investment value, the price of the convertible
security will tend to fluctuate directly with the price of the underlying equity
security. The convertible securities in which the Fund may invest may be below
investment grade. Securities below investment grade are commonly known as "junk
bonds" and have speculative characteristics.
FIXED-INCOME SECURITIES. All fixed-income securities are subject to two types of
risk: credit risk and interest rate risk. Credit risk refers to the possibility
that the issuer of a security will be unable to make interest payments and/or
repay the principal on its debt. Certain investment grade fixed-income
securities have speculative characteristics.
Interest rate risk refers to fluctuations in the value of a fixed-income
security resulting from changes in the general level of interest rates. When the
general level of interest rate goes up, the prices of most fixed-income
securities goes down. When the general level of interest rates goes down, the
prices of most fixed-income securities goes up. Accordingly, a rise in the
general level of interest rates may cause the price of the Fund's fixed-income
securities to fall substantially.
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MORGAN STANLEY DEAN
WITTER ADVISORS INC.
THE INVESTMENT MANAGER IS WIDELY RECOGNIZED AS A LEADER IN THE MUTUAL FUND
INDUSTRY AND TOGETHER WITH MORGAN STANLEY DEAN WITTER SERVICES COMPANY INC., ITS
WHOLLY-OWNED SUBSIDIARY, HAD APPROXIMATELY $150 BILLION IN ASSETS UNDER
MANAGEMENT AS OF JUNE 30, 2000.
[PEOPLE ICON] FUND MANAGEMENT
The Fund has retained the Investment Manager -- Morgan
Stanley Dean Witter Advisors Inc. -- to provide
administrative services and manage its business affairs. The
Investment Manager has, in turn, contracted with the
Sub-Advisor -- Miller Anderson & Sherrerd, LLP -- to invest
the Fund's assets, including the placing of orders for the
purchase and sale of portfolio securities. The Investment
Manager is a wholly-owned subsidiary of Morgan Stanley Dean
Witter & Co., a preeminent global financial services firm
that maintains leading market positions in each of its three
primary businesses: securities, asset management and credit
services. Its main business office is located at Two World
Trade Center, New York, New York 10048.
The Sub-Advisor manages assets of approximately $78 billion
as of June 30, 2000 for investment companies, employee
benefit plans, endowments, foundation and other institutional
investors. The Sub-Advisor is an indirect subsidiary of
Morgan Stanley Dean Witter & Co. The Sub-Advisor's address is
One Tower Bridge, West Conshohocken, Pennsylvania.
The Fund's assets are managed by a team of four portfolio
managers who may concentrate on either "growth" or "value"
sectors in selecting investments for the Fund's portfolio.
Steven Epstein, Brian Kramp, Christopher Leavy and Eric
Scharpf are currently the primary portfolio managers of the
Fund (Messrs. Epstein, Leavy and Scharpf since December,
1999; Mr. Kramp since the Fund's inception). Mr. Epstein is a
Vice President of the Sub-Advisor and has been a Financial
Analyst with the Sub-Advisor since 1996; prior thereto he
attended the Wharton School of the University of Pennsylvania
(1994-1996), receiving an MBA. Mr. Kramp is a Principal of
the Sub-Advisor and has been affiliated with the Sub-Advisor
since 1997; prior to that he was an analyst/portfolio manager
with Meridian Investment Company (1984-1997). Mr. Leavy is a
Vice President of the Sub-Advisor and has been affiliated
with the Sub-Advisor since 1997; prior thereto he served as a
portfolio manager for Crestar Asset Management (1995-1997).
Mr. Scharpf is a Vice President of the Sub-Advisor and has
been a Financial Analyst with the Sub-Advisor since 1997;
prior thereto he attended the Wharton School of the
University of Pennsylvania (1995-1997), receiving an MBA. In
addition, a group of four individuals, Arden Armstrong, James
Jolinger, Robert Marcin and Gary Schlarbaum, render
assistance
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to the primary portfolio managers by providing financial and market analysis and
idea generation with respect to securities. Ms. Armstrong, Mr. Marcin and Mr.
Schlarbaum are Managing Directors of the Sub-Advisor and have been managing
portfolios for the Sub-Advisor for over five years. Mr. Jolinger is a Principal
of the Sub-Advisor and the Director of Research; he has been associated with the
Sub-Advisor for over five years.
The Fund pays the Investment Manager a monthly management fee as full
compensation for the services and facilities furnished to the Fund, and for Fund
expenses assumed by the Investment Manager. The fee is based on the Fund's
average daily net assets. For the fiscal year ended May 31, 2000, the Fund
accrued total compensation to the Investment Manager amounting to 0.85% of the
Fund's average daily net assets. The Investment Manager pays the Sub-Advisor
compensation equal to 40% of its compensation for services and facilities
furnished to the Fund.
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SHAREHOLDER INFORMATION
CONTACTING A
FINANCIAL ADVISOR
IF YOU ARE NEW TO THE MORGAN STANLEY DEAN WITTER FAMILY OF FUNDS AND WOULD LIKE
TO CONTACT A FINANCIAL ADVISOR, CALL (877) 937-MSDW (TOLL-FREE) FOR THE
TELEPHONE NUMBER OF THE MORGAN STANLEY DEAN WITTER OFFICE NEAREST YOU. YOU MAY
ALSO ACCESS OUR OFFICE LOCATOR ON OUR INTERNET SITE AT:
WWW.MSDW.COM/INDIVIDUAL/FUNDS
[DOLLAR ICON] PRICING FUND SHARES
The price of Fund shares (excluding sales charges), called "net asset value," is
based on the value of the Fund's portfolio securities. While the assets of each
Class are invested in a single portfolio of securities, the net asset value of
each Class will differ because the Classes have different ongoing distribution
fees.
The net asset value per share of the Fund is determined once daily at 4:00 p.m.
Eastern 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). Shares will not be priced on days that the New York Stock Exchange is
closed.
The value of the Fund's portfolio securities is based on the securities' market
price when available. When a market price is not readily available, including
circumstances under which the Investment Manager and/or Sub-Advisor determine
that a security's market price is not accurate, a portfolio security is valued
at its fair value, as determined under procedures established by the Fund's
Board of Trustees. In these cases, the Fund's net asset value will reflect
certain portfolio securities' fair value rather than their market price. With
respect to securities that are primarily listed on foreign exchanges, the value
of the Fund's portfolio securities may change on days when you will not be able
to purchase or sell your shares.
An exception to the Fund's general policy of using market prices concerns its
short-term debt portfolio securities. Debt securities with remaining maturities
of sixty days or less at the time of purchase are valued at amortized cost.
However, if the cost does not reflect the securities' market value, these
securities will be valued at their fair value.
[HANDS ICON] HOW TO BUY SHARES
You may open a new account to buy Fund shares or buy additional Fund shares for
an existing account by contacting your Morgan Stanley Dean Witter Financial
Advisor or other authorized financial representative. Your
Financial Advisor will assist you, step-by-step, with the
procedures to invest in the Fund. You may also purchase
shares directly by calling the Fund's transfer agent and
requesting an application.
Because every investor has different immediate financial
needs and long-term investment goals, the Fund offers
investors four Classes of shares: Classes A, B, C and D.
Class D shares are only offered to a limited group of
investors. Each Class of shares offers a distinct structure
of sales charges, distribution and service fees, and other
features that are designed to address a variety of needs.
Your Financial Advisor or other authorized financial
representative can help you decide which Class may be most
appropriate for
9
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EASYINVEST(SM)
A PURCHASE PLAN THAT ALLOWS YOU TO TRANSFER MONEY AUTOMATICALLY FROM YOUR
CHECKING OR SAVINGS ACCOUNT OR FROM A MONEY MARKET FUND ON A SEMI-MONTHLY,
MONTHLY OR QUARTERLY BASIS. CONTACT YOUR MORGAN STANLEY DEAN WITTER FINANCIAL
ADVISOR FOR FURTHER INFORMATION ABOUT THIS SERVICE.
you. When purchasing Fund shares, you must specify which Class of shares you
wish to purchase.
When you buy Fund shares, the shares are purchased at the next share price
calculated (less any applicable front-end sales charge for Class A shares) after
we receive your purchase order. Your payment is due on the third business day
after you place your purchase order. We reserve the right to reject any order
for the purchase of Fund shares.
<TABLE>
<CAPTION>
MINIMUM INVESTMENT AMOUNTS
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MINIMUM INVESTMENT
-------------------------------
INVESTMENT OPTIONS INITIAL ADDITIONAL
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Regular Accounts $1,000 $100
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Individual Retirement
Accounts: Regular IRAs $1,000 $100
Education IRAs $500 $100
-------------------------------------------------------------------------------------------
EasyInvest(SM)
(Automatically from your
checking or savings account
or Money Market Fund) $100* $100*
-------------------------------------------------------------------------------------------
</TABLE>
* Provided your schedule of investments totals $1,000 in
twelve months.
There is no minimum investment amount if you purchase Fund shares through: (1)
the Investment Manager's mutual fund asset allocation plan, (2) a program,
approved by the Fund's distributor, in which you pay an asset-based fee for
advisory, administrative and/or brokerage services, or (3) employer-sponsored
employee benefit plan accounts.
INVESTMENT OPTIONS FOR CERTAIN INSTITUTIONAL AND OTHER INVESTORS/CLASS D
SHARES. To be eligible to purchase Class D shares, you must qualify under one of
the investor categories specified in the "Share Class Arrangements" section of
this Prospectus.
SUBSEQUENT INVESTMENTS SENT DIRECTLY TO THE FUND. In addition to buying
additional Fund shares for an existing account by contacting your Morgan Stanley
Dean Witter Financial Advisor, you may send a check directly to the Fund. To buy
additional shares in this manner:
- Write a "letter of instruction" to the Fund specifying the name(s) on the
account, the account number, the social security or tax identification number,
the Class of shares you wish to purchase, and the investment amount (which
would include any applicable front-end sales charge). The letter must be
signed by the account owner(s).
- Make out a check for the total amount payable to: Morgan Stanley Dean Witter
Equity Fund.
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- Mail the letter and check to Morgan Stanley Dean Witter Trust FSB at P.O. Box
1040, Jersey City, NJ 07303.
[ARROWS ICON] HOW TO EXCHANGE SHARES
PERMISSIBLE FUND EXCHANGES. You may exchange shares of any Class of the Fund for
the same Class of any other continuously offered Multi-Class Fund, or for shares
of a No-Load Fund, a Money Market Fund, North American Government Income Trust
or Short-Term U.S. Treasury Trust, without the imposition of an exchange fee. In
addition, Class A shares of the Fund may be exchanged for shares of an FSC Fund
(funds subject to a front-end sales charge). See the inside back cover of this
Prospectus for each Morgan Stanley Dean Witter Fund's designation as a
Multi-Class Fund, No-Load Fund, Money Market Fund or FSC Fund. If a Morgan
Stanley Dean Witter Fund is not listed, consult the inside back cover of that
Fund's prospectus for its designation.
Exchanges may be made after shares of the Fund acquired by purchase have been
held for thirty days. There is no waiting period for exchanges of shares
acquired by exchange or dividend reinvestment. The current prospectus for each
fund describes its investment objective(s), policies and investment minimum, and
should be read before investment. Since exchanges are available only into
continuously offered Morgan Stanley Dean Witter Funds, exchanges are not
available into any new Morgan Stanley Dean Witter Fund during its initial
offering period, or when shares of a particular Morgan Stanley Dean Witter Fund
are not being offered for purchase.
EXCHANGE PROCEDURES. You can process an exchange by contacting your Morgan
Stanley Dean Witter Financial Advisor or other authorized financial
representative. Otherwise, you must forward an exchange privilege authorization
form to the Fund's transfer agent -- Morgan Stanley Dean Witter Trust FSB -- and
then write the transfer agent or call (800) 869-NEWS to place an exchange order.
You can obtain an exchange privilege authorization form by contacting your
Financial Advisor or other authorized financial representative or by calling
(800) 869-NEWS. If you hold share certificates, no exchanges may be processed
until we have received all applicable share certificates.
An exchange to any Morgan Stanley Dean Witter Fund (except a Money Market Fund)
is made on the basis of the next calculated net asset values of the funds
involved after the exchange instructions are accepted. When exchanging into a
Money Market Fund, the Fund's shares are sold at their next calculated net asset
value and the Money Market Fund's shares are purchased at their net asset value
on the following business day.
The Fund may terminate or revise the exchange privilege upon required notice.
The check writing privilege is not available for Money Market Fund shares you
acquire in an exchange.
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TELEPHONE EXCHANGES. For your protection when calling Morgan Stanley Dean Witter
Trust FSB, we will employ reasonable procedures to confirm that exchange
instructions communicated over the telephone are genuine. These procedures may
include requiring various forms of personal identification such as name, mailing
address, social security or other tax identification number. Telephone
instructions also may be recorded.
Telephone instructions will be accepted if received by the Fund's transfer agent
between 9:00 a.m. and 4:00 p.m. Eastern time on any day the New York Stock
Exchange is open for business. 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 case with the Fund in the past.
MARGIN ACCOUNTS. If you have pledged your Fund shares in a margin account,
contact your Morgan Stanley Dean Witter Financial Advisor or other authorized
financial representative regarding restrictions on the exchange of such shares.
TAX CONSIDERATIONS OF EXCHANGES. If you exchange shares of the Fund for shares
of another Morgan Stanley Dean Witter Fund there are important tax
considerations. For tax purposes, the exchange out of the Fund is considered a
sale of the Fund's shares -- and the exchange into the other fund is considered
a purchase. As a result, you may realize a capital gain or loss.
You should review the "Tax Consequences" section and consult your own tax
professional about the tax consequences of an exchange.
LIMITATIONS ON EXCHANGES. Certain patterns of past exchanges and/or purchase or
sale transactions involving the Fund or other Morgan Stanley Dean Witter Funds
may result in the Fund limiting or prohibiting, at its discretion, additional
purchases and/or exchanges. Determinations in this regard may be made based on
the frequency or dollar amount of the previous exchanges or purchase or sale
transactions. You will be notified in advance of limitations on your exchange
privileges.
CDSC CALCULATIONS ON EXCHANGES. See the "Share Class Arrangements" section of
this Prospectus for a discussion of how applicable contingent deferred sales
charges (CDSCs) are calculated for shares of one Morgan Stanley Dean Witter Fund
that are exchanged for shares of another.
For further information regarding exchange privileges, you should contact your
Morgan Stanley Dean Witter Financial Advisor or call (800) 869-NEWS.
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<PAGE> 15
[HANDS ICON] HOW TO SELL SHARES
You can sell some or all of your Fund shares at any time. If you sell Class A,
Class B or Class C shares, your net sale proceeds are reduced by the amount of
any applicable CDSC. Your shares will be sold at the next price calculated after
we receive your order to sell as described below.
<TABLE>
<CAPTION>
OPTIONS PROCEDURES
<S> <C>
---------------------------------------------------------------------------------
Contact Your To sell your shares, simply call your Morgan Stanley Dean
Financial Advisor Witter Financial Advisor or other authorized financial
[PHONE ICON] representative.
------------------------------------------------------------
Payment will be sent to the address to which the account is
registered or deposited in your brokerage account.
---------------------------------------------------------------------------------
By Letter You can also sell your shares by writing a "letter of
[LETTER ICON] instruction" that includes:
- your account number;
- the dollar amount or the number of shares you wish to
sell;
- the Class of shares you wish to sell; and
- the signature of each owner as it appears on the account.
------------------------------------------------------------
If you are requesting payment to anyone other than the
registered owner(s) or that payment be sent to any address
other than the address of the registered owner(s) or
pre-designated bank account, you will need a signature
guarantee. You can obtain a signature guarantee from an
eligible guarantor acceptable to Morgan Stanley Dean Witter
Trust FSB. (You should contact Morgan Stanley Dean Witter
Trust FSB at (800) 869-NEWS for a determination as to
whether a particular institution is an eligible guarantor.)
A notary public cannot provide a signature guarantee.
Additional documentation may be required for shares held by
a corporation, partnership, trustee or executor.
------------------------------------------------------------
Mail the letter to Morgan Stanley Dean Witter Trust FSB at
P.O. Box 983, Jersey City, NJ 07303. If you hold share
certificates, you must return the certificates, along with
the letter and any required additional documentation.
------------------------------------------------------------
A check will be mailed to the name(s) and address in which
the account is registered, or otherwise according to your
instructions.
---------------------------------------------------------------------------------
Systematic If your investment in all of the Morgan Stanley Dean Witter
Withdrawal Plan Family of Funds has a total market value of at least
[ARROWS ICON] $10,000, you may elect to withdraw amounts of $25 or more,
or in any whole percentage of a fund's balance (provided the
amount is at least $25), on a monthly, quarterly,
semi-annual or annual basis, from any fund with a balance of
at least $1,000. Each time you add a fund to the plan, you
must meet the plan requirements.
------------------------------------------------------------
Amounts withdrawn are subject to any applicable CDSC. A CDSC
may be waived under certain circumstances. See the Class B
waiver categories listed in the "Share Class Arrangements"
section of this Prospectus.
------------------------------------------------------------
To sign up for the systematic withdrawal plan, contact your
Morgan Stanley Dean Witter Financial Advisor or call (800)
869-NEWS. You may terminate or suspend your plan at any
time. Please remember that withdrawals from the plan are
sales of shares, not Fund "distributions," and ultimately
may exhaust your account balance. The Fund may terminate or
revise the plan at any time.
---------------------------------------------------------------------------------
</TABLE>
PAYMENT FOR SOLD SHARES. After we receive your complete instructions to sell as
described above, a check will be mailed to you within seven days, although we
will attempt to make payment within one business day. Payment may also be sent
to your brokerage account.
Payment may be postponed or the right to sell your shares suspended under
unusual circumstances. If you request to sell shares that were recently
purchased by
13
<PAGE> 16
TARGETED DIVIDENDS(SM)
YOU MAY SELECT TO HAVE YOUR FUND DISTRIBUTIONS AUTOMATICALLY INVESTED IN OTHER
CLASSES OF FUND SHARES OR CLASSES OF ANOTHER MORGAN STANLEY DEAN WITTER FUND
THAT YOU OWN. CONTACT YOUR MORGAN STANLEY DEAN WITTER FINANCIAL ADVISOR FOR
FURTHER INFORMATION ABOUT THIS SERVICE.
check, your sale will not be effected until it has been verified that the check
has been honored.
TAX CONSIDERATIONS. Normally, your sale of Fund shares is subject to federal and
state income tax. You should review the "Tax Consequences" section of this
Prospectus and consult your own tax professional about the tax consequences of a
sale.
REINSTATEMENT PRIVILEGE. If you sell Fund shares and have not previously
exercised the reinstatement privilege, you may, within 35 days after the date of
sale, invest any portion of the proceeds in the same Class of Fund shares at
their net asset value and receive a pro rata credit for any CDSC paid in
connection with the sale.
INVOLUNTARY SALES. The Fund reserves the right, on sixty days' notice, to sell
the shares of any shareholder (other than shares held in an IRA or 403(b)
Custodial Account) whose shares, due to sales by the shareholder, have a value
below $100, or in the case of an account opened through EasyInvest(SM), if after
12 months the shareholder has invested less than $1,000 in the account.
However, before the Fund sells your shares in this manner, we will notify you
and allow you sixty days to make an additional investment in an amount that will
increase the value of your account to at least the required amount before the
sale is processed. No CDSC will be imposed on any involuntary sale.
MARGIN ACCOUNTS. If you have pledged your Fund shares in a margin account,
contact your Morgan Stanley Dean Witter Financial Advisor or other authorized
financial representative regarding restrictions on the sale of such shares.
[CHECK BOX ICON] DISTRIBUTIONS
The Fund passes substantially all of its earnings from income and capital gains
along to its investors as "distributions." The Fund earns income from stocks and
interest from fixed-income investments. These amounts are
passed along to Fund shareholders as "income dividend
distributions." The Fund realizes capital gains whenever it
sells securities for a higher price than it paid for them.
These amounts may be passed along as "capital gain
distributions."
The Fund declares income dividends separately for each Class.
Distributions paid on Class A and Class D shares will be
higher than for Class B and Class C because distribution fees
that Class B and Class C pay are higher. Normally, income
dividends are distributed to shareholders annually. Capital
gains, if any, are usually distributed in December.
14
<PAGE> 17
The Fund, however, may retain and reinvest any long-term capital gains. The Fund
may at times make payments from sources other than income or capital gains that
represent a return of a portion of your investment.
Distributions are reinvested automatically in additional shares of the same
Class and automatically credited to your account, unless you request in writing
that all distributions be paid in cash. If you elect the cash option, the Fund
will mail a check to you no later than seven business days after the
distribution is declared. However, if you purchase Fund shares prior to the
record date for the distribution, and payment for such shares is received after
the record date, the distribution will automatically be paid to you in cash,
even if you did not request to receive all distributions in cash. No interest
will accrue on uncashed checks. If you wish to change how your distributions are
paid, your request should be received by the Fund's transfer agent, Morgan
Stanley Dean Witter Trust FSB, at least five business days prior to the record
date of the distributions.
[1040 ICON] TAX CONSEQUENCES
As with any investment, you should consider how your Fund investment will be
taxed. The tax information in this Prospectus is provided as general
information. You should consult your own tax professional about the tax
consequences of an investment in the Fund.
Unless your investment in the Fund is through a tax-deferred retirement account,
such as a 401(k) plan or IRA, you need to be aware of the possible tax
consequences when:
- The Fund makes distributions; and
- You sell Fund shares, including an exchange to another Morgan Stanley Dean
Witter Fund.
TAXES ON DISTRIBUTIONS. Your distributions are normally subject to federal and
state income tax when they are paid, whether you take them in cash or reinvest
them in Fund shares. A distribution also may be subject to local income tax. Any
income dividend distributions and any short-term capital gain distributions are
taxable to you as ordinary income. Any long-term capital gain distributions are
taxable as long-term capital gains, no matter how long you have owned shares in
the Fund.
Every January, you will be sent a statement (IRS Form 1099-DIV) showing the
taxable distributions paid to you in the previous year. The statement provides
information on your dividends and capital gains for tax purposes.
TAXES ON SALES. Your sale of Fund shares normally is subject to federal and
state income tax and may result in a taxable gain or loss to you. A sale also
may be subject to local income tax. Your exchange of Fund shares for shares of
another Morgan Stanley Dean Witter Fund is treated for tax purposes like a sale
of your original shares and a purchase of your new shares. Thus, the exchange
may, like a
15
<PAGE> 18
sale, result in a taxable gain or loss to you and will give you a new tax basis
for your new shares.
When you open your Fund account, you should provide your Social Security or tax
identification number on your investment application. By providing this
information, you will avoid being subject to a federal backup withholding tax of
31% on taxable distributions and redemption proceeds. Any withheld amount would
be sent to the IRS as an advance tax payment.
[ABCD ICON] SHARE CLASS ARRANGEMENTS
The Fund offers several Classes of shares having different distribution
arrangements designed to provide you with different purchase options according
to your investment needs. Your Morgan Stanley Dean Witter Financial Advisor or
other authorized financial representative can help you decide which Class may be
appropriate for you.
The general public is offered three Classes: Class A shares, Class B shares and
Class C shares, which differ principally in terms of sales charges and ongoing
expenses. A fourth Class, Class D shares, is offered only to a limited category
of investors. Shares that you acquire through reinvested distributions will not
be subject to any front-end sales charge or CDSC -- contingent deferred sales
charge. Sales personnel may receive different compensation for selling each
Class of shares. The sales charges applicable to each Class provide for the
distribution financing of shares of that Class.
The chart below compares the sales charge and annual 12b-1 fee applicable to
each Class:
<TABLE>
<CAPTION>
MAXIMUM
CLASS SALES CHARGE ANNUAL 12b-1 FEE
<S> <C> <C>
----------------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales charge reduced for purchase of
$25,000 or more; shares sold without an initial sales charge
are generally subject to a 1.0% CDSC during the first year. 0.25%
----------------------------------------------------------------------------------------------------
B Maximum 5.0% CDSC during the first year decreasing to 0%
after six years. 1.0%
----------------------------------------------------------------------------------------------------
C 1.0% CDSC during first year 1.0%
----------------------------------------------------------------------------------------------------
D None None
----------------------------------------------------------------------------------------------------
</TABLE>
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 purchases
of $25,000 or more according to the schedule below. Investments of $1 million or
more are not subject to an initial sales charge, but are generally subject to a
contingent deferred sales charge, or CDSC, of 1.0% on sales made within one year
after the last day of the month of purchase. The CDSC will be assessed in the
same manner and with the same CDSC waivers as with Class B shares. Class A
shares are also subject to a distribution (12b-1) fee of up to 0.25% of the
average daily net assets of the Class.
16
<PAGE> 19
FRONT-END SALES CHARGE
OR FSC
AN INITIAL SALES CHARGE YOU PAY WHEN PURCHASING CLASS A SHARES THAT IS BASED ON
A PERCENTAGE OF THE OFFERING PRICE. THE PERCENTAGE DECLINES BASED UPON THE
DOLLAR VALUE OF CLASS A SHARES YOU PURCHASE. WE OFFER THREE WAYS TO REDUCE YOUR
CLASS A SALES CHARGES -- THE COMBINED PURCHASE PRIVILEGE, RIGHT OF ACCUMULATION
AND LETTER OF INTENT.
The offering price of Class A shares includes a sales charge (expressed as a
percentage of the offering price) on a single transaction as shown in the
following table:
<TABLE>
<CAPTION>
FRONT-END SALES CHARGE
--------------------------------------------------
PERCENTAGE OF APPROXIMATE PERCENTAGE
AMOUNT OF SINGLE TRANSACTION PUBLIC OFFERING PRICE OF NET AMOUNT INVESTED
--------------------------------------------------------------------------------------
<S> <C> <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>
The reduced sales charge schedule is applicable to purchases
of Class A shares in a single transaction by:
- A single account (including an individual, trust or fiduciary account).
- Family member accounts (limited to husband, wife and children under the age of
21).
- Pension, profit sharing or other employee benefit plans of companies and their
affiliates.
- Tax-exempt organizations.
- Groups organized for a purpose other than to buy mutual fund shares.
COMBINED PURCHASE PRIVILEGE. You also will have the benefit of reduced sales
charges by combining purchases of Class A shares of the Fund in a single
transaction with purchases of Class A shares of other Multi-Class Funds and
shares of FSC Funds.
RIGHT OF ACCUMULATION. You also may benefit from a reduction of sales charges,
if the cumulative net asset value of Class A shares of the Fund purchased in a
single transaction, together with shares of other Funds you currently own which
were previously purchased at a price including a front-end sales charge
(including shares acquired through reinvestment of distributions), amounts to
$25,000 or more. Also, if you have a cumulative net asset value of all your
Class A and Class D shares equal to at least $5 million (or $25 million for
certain employee benefit plans), you are eligible to purchase Class D shares of
any Fund subject to the Fund's minimum initial investment requirement.
17
<PAGE> 20
You must notify your Morgan Stanley Dean Witter Financial Advisor or other
authorized financial representative, (or Morgan Stanley Dean Witter Trust FSB if
you purchase directly through the Fund) at the time a purchase order is placed,
that the purchase qualifies for the reduced sales charge under the Right of
Accumulation. Similar notification must be made in writing when an order is
placed by mail. The reduced sales charge will not be granted if: (i)
notification is not furnished at the time of the order; or (ii) a review of the
records of Dean Witter Reynolds or other authorized dealer of Fund shares or the
Fund's transfer agent does not confirm your represented holdings.
LETTER OF INTENT. The schedule of reduced sales charges for larger purchases
also will be available to you if you enter into a written "letter of intent." A
letter of intent provides for the purchase of Class A shares of the Fund or
other Multi-Class Funds or shares of FSC Funds within a thirteen-month period.
The initial purchase under a letter of intent must be at least 5% of the stated
investment goal. To determine the applicable sales charge reduction, you may
also include: (1) the cost of shares of other Morgan Stanley Dean Witter Funds
which were previously purchased at a price including a front-end sales charge
during the 90-day period prior to the distributor receiving the letter of
intent, and (2) the cost of shares of other funds you currently own acquired in
exchange for shares of funds purchased during that period at a price including a
front-end sales charge. You can obtain a letter of intent by contacting your
Morgan Stanley Dean Witter Financial Advisor or other authorized financial
representative, or by calling (800) 869-NEWS. If you do not achieve the stated
investment goal within the thirteen-month period, you are required to pay the
difference between the sales charges otherwise applicable and sales charges
actually paid, which may be deducted from your investment.
OTHER SALES CHARGE WAIVERS. In addition to investments of $1 million or more,
your purchase of Class A shares is not subject to a front-end sales charge (or a
CDSC upon sale) if your account qualifies under one of the following categories:
- A trust for which Morgan Stanley Dean Witter Trust FSB provides discretionary
trustee services.
- Persons participating in a fee-based investment program (subject to all of its
terms and conditions, including termination fees, mandatory sale or transfer
restrictions on termination) approved by the Fund's distributor pursuant to
which they pay an asset based fee for investment advisory, administrative
and/or brokerage services.
- Employer-sponsored employee benefit plans, whether or not qualified under the
Internal Revenue Code, for which Morgan Stanley Dean Witter Trust FSB serves
as trustee or Morgan Stanley Dean Witter's Retirement Plan Services serves as
recordkeeper under a written Recordkeeping Services Agreement ("MSDW Eligible
Plans") which have at least 200 eligible employees.
18
<PAGE> 21
CONTINGENT DEFERRED
SALES CHARGE OR CDSC
A FEE YOU PAY WHEN YOU SELL SHARES OF CERTAIN MORGAN STANLEY DEAN WITTER FUNDS
PURCHASED WITHOUT AN INITIAL SALES CHARGE. THIS FEE DECLINES THE LONGER YOU HOLD
YOUR SHARES AS SET FORTH IN THE TABLE.
- An MSDW Eligible Plan whose Class B shares have converted to Class A shares,
regardless of the plan's asset size or number of eligible employees.
- A client of a Morgan Stanley Dean Witter Financial Advisor who joined us from
another investment firm within six months prior to the date of purchase of
Fund shares, and you used the proceeds from the sale of shares of a
proprietary mutual fund of that Financial Advisor's previous firm that imposed
either a front-end or deferred sales charge to purchase Class A shares,
provided that: (1) you sold the shares not more than 60 days prior to
purchase, and (2) the sale proceeds were maintained in the interim in cash or
a money market fund.
- Current or retired Directors/Trustees of the Morgan Stanley Dean Witter Funds,
such persons' spouses and children under the age of 21, and trust accounts for
which any of such persons is a beneficiary.
- Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries, such persons' spouses and children
under the age of 21, and trust accounts for which any of such persons is a
beneficiary.
CLASS B SHARES Class B shares are offered at net asset value with no initial
sales charge but are subject to a contingent deferred sales charge, or CDSC, as
set forth in the table below. For the purpose of calculating the CDSC, shares
are deemed to have been purchased on the last day of the month during which they
were purchased.
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE CDSC AS A PERCENTAGE
PAYMENT MADE OF AMOUNT REDEEMED
---------------------------------------------------------------------------------
<S> <C> <C>
First 5.0%
----------------------------------------------------------------------------
Second 4.0%
----------------------------------------------------------------------------
Third 3.0%
----------------------------------------------------------------------------
Fourth 2.0%
----------------------------------------------------------------------------
Fifth 2.0%
----------------------------------------------------------------------------
Sixth 1.0%
----------------------------------------------------------------------------
Seventh and thereafter None
----------------------------------------------------------------------------
</TABLE>
Each time you place an order to sell or exchange shares, shares with no CDSC
will be sold or exchanged first, then shares with the lowest CDSC will be sold
or exchanged next. For any shares subject to a CDSC, the CDSC will be assessed
on an amount equal to the lesser of the current market value or the cost of the
shares being sold.
CDSC WAIVERS. A CDSC, if otherwise applicable, will be waived in the case of:
- Sales of shares held at the time you die or become disabled (within the
definition in Section 72(m)(7) of the Internal Revenue Code which relates to
the ability to
19
<PAGE> 22
engage in gainful employment), if the shares are: (i) registered either in
your name (not a trust) or in the names of you and your spouse as joint
tenants with right of survivorship; or (ii) held in a qualified corporate or
self-employed retirement plan, IRA or 403(b) Custodial Account, provided in
either case that the sale is requested within one year of your death or
initial determination of disability.
- Sales in connection with the following retirement plan "distributions:" (i)
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); (ii) distributions from
an IRA or 403(b) Custodial Account following attainment of age 59 1/2; or
(iii) a tax-free return of an excess IRA contribution (a "distribution" does
not include a direct transfer of IRA, 403(b) Custodial Account or retirement
plan assets to a successor custodian or trustee).
- Sales of shares held for you as a participant in a MSDW Eligible Plan.
- Sales of shares in connection with the Systematic Withdrawal Plan of up to 12%
annually of the value of each fund from which plan sales are made. The
percentage is determined on the date you establish the Systematic Withdrawal
Plan and based on the next calculated share price. You may have this CDSC
waiver applied in amounts up to 1% per month, 3% per quarter, 6% semi-annually
or 12% annually. Shares with no CDSC will be sold first, followed by those
with the lowest CDSC. As such, the waiver benefit will be reduced by the
amount of your shares that are not subject to a CDSC. If you suspend your
participation in the plan, you may later resume plan payments without
requiring a new determination of the account value for the 12% CDSC waiver.
- Sales of shares if you simultaneously invest the proceeds in the Investment
Manager's mutual fund asset allocation program, pursuant to which investors
pay an asset-based fee. Any shares you acquire in connection with the
Investment Manager's mutual fund asset allocation program are subject to all
of the terms and conditions of that program, including termination fees,
mandatory sale or transfer restrictions on termination.
All waivers will be granted only following the Fund's distributor receiving
confirmation of your entitlement. If you believe you are eligible for a CDSC
waiver, please contact your Financial Advisor or call (800) 869-NEWS.
DISTRIBUTION FEE. Class B shares are subject to an annual 12b-1 fee of 1.0% of
the average daily net assets of Class B.
CONVERSION FEATURE. After ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund with no initial sales charge. The
ten year period runs 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, from
the last day of the month in
20
<PAGE> 23
which the original Class B shares were purchased; the shares will convert to
Class A shares based on their relative net asset values in the month following
the ten year period. At the same time, an equal proportion of Class B shares
acquired through automatically reinvested distributions will convert to Class A
shares on the same basis. (Class B shares acquired in exchange for shares of
another Morgan Stanley Dean Witter Fund originally purchased before May 1, 1997,
however, will convert to Class A shares in May 2007.)
In the case of Class B shares held in an MSDW Eligible Plan, 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 Class B shares of a Morgan Stanley Dean Witter Fund
purchased by that plan.
Currently, the Class B share conversion is not a taxable event; the conversion
feature may be cancelled if it is deemed a taxable event in the future by the
Internal Revenue Service.
If you exchange your Class B shares for shares of a Money Market Fund, a No-Load
Fund, North American Government Income Trust or Short-Term U.S. Treasury Trust,
the holding period for conversion is frozen as of the last day of the month of
the exchange and resumes on the last day of the month you exchange back into
Class B shares.
EXCHANGING SHARES SUBJECT TO A CDSC. There are special considerations when you
exchange Fund shares that are subject to a CDSC. When determining the length of
time you held the shares and the corresponding CDSC rate, any period (starting
at the end of the month) during which you held shares of a fund that does not
charge a CDSC will not be counted. Thus, in effect the "holding period" for
purposes of calculating the CDSC is frozen upon exchanging into a fund that does
not charge a CDSC.
For example, if you held Class B shares of the Fund for one year, exchanged to
Class B of another Morgan Stanley Dean Witter Multi-Class Fund for another year,
then sold your shares, a CDSC rate of 4% would be imposed on the shares based on
a two year holding period -- one year for each fund. However, if you had
exchanged the shares of the Fund for a Money Market Fund (which does not charge
a CDSC) instead of the Multi-Class Fund, then sold your shares, a CDSC rate of
5% would be imposed on the shares based on a one year holding period. The one
year in the Money Market Fund would not be counted. Nevertheless, if shares
subject to a CDSC are exchanged for a fund that does not charge a CDSC, you will
receive a credit when you sell the shares equal to the distribution (12b-1) fees
you paid on those shares while in that fund up to the amount of any applicable
CDSC.
In addition, shares that are exchanged into or from a Morgan Stanley Dean Witter
Fund subject to a higher CDSC rate will be subject to the higher rate, even if
the shares are re-exchanged into a fund with a lower CDSC rate.
21
<PAGE> 24
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 sales made within one year
after the last day of the month of purchase. The CDSC will be assessed in the
same manner and with the same CDSC waivers as with Class B shares.
DISTRIBUTION FEE. Class C shares are subject to an annual distribution (12b-1)
fee of up to 1.0% of the average daily net assets of that Class. 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. Unlike Class B shares, Class C
shares have no conversion feature and, accordingly, an investor that purchases
Class C shares may be subject to distribution (12b-1) fees applicable to Class C
shares for an indefinite period.
CLASS D SHARES Class D shares are offered without any sales charge on
purchases or sales and without any distribution (12b-1) fee. Class D shares are
offered only to investors meeting an initial investment minimum of $5 million
($25 million for MSDW Eligible Plans) and the following categories of investors:
- Investors participating in the Investment Manager's mutual fund asset
allocation program (subject to all of its terms and conditions, including
termination fees, mandatory sale or transfer restrictions on termination)
pursuant to which they pay an asset-based fee.
- Persons participating in a fee-based investment program (subject to all of its
terms and conditions, including termination fees, mandatory sale or transfer
restrictions on termination) approved by the Fund's distributor pursuant to
which they pay an asset based fee for investment advisory, administrative
and/or brokerage services.
- Employee benefit plans maintained by Morgan Stanley Dean Witter & Co. or any
of its subsidiaries for the benefit of certain employees of Morgan Stanley
Dean Witter & Co. and its subsidiaries.
- Certain unit investment trusts sponsored by Dean Witter Reynolds.
- Certain other open-end investment companies whose shares are distributed by
the Fund's distributor.
- Investors who were shareholders of the Dean Witter Retirement Series on
September 11, 1998 for additional purchases for their former Dean Witter
Retirement Series accounts.
MEETING CLASS D ELIGIBILITY MINIMUMS. To meet the $5 million ($25 million for
MSDW Eligible Plans) initial investment to qualify to purchase Class D shares
you may combine: (1) purchases in a single transaction of Class D shares of the
Fund and other Morgan Stanley Dean Witter Multi-Class Funds; and/or (2) previous
purchases of Class A and Class D shares of Multi-Class Funds and shares of FSC
Funds you currently own, along with shares of Morgan Stanley Dean Witter Funds
you currently own that you acquired in exchange for those shares.
22
<PAGE> 25
NO SALES CHARGES FOR REINVESTED CASH DISTRIBUTIONS If you receive a cash
payment representing an income dividend or capital gain and you reinvest that
amount in the applicable Class of shares by returning the check within 30 days
of the payment date, the purchased shares would not be subject to an initial
sales charge or CDSC.
PLAN OF DISTRIBUTION (RULE 12B-1 FEES) The Fund has adopted a Plan of
Distribution in accordance with Rule 12b-1 under the Investment Company Act of
1940 with respect to the distribution of Class A, Class B and Class C shares.
The Plan allows the Fund to pay distribution fees for the sale and distribution
of these shares. It also allows the Fund to pay for services to shareholders of
Class A, Class B and Class C shares. Because these fees are paid out of the
Fund's assets on an ongoing basis, over time these fees will increase the cost
of your investment in these Classes and may cost you more than paying other
types of sales charges.
23
<PAGE> 26
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the period July 29, 1998 (commencement of operations)
through May 31, 1999 and for the fiscal year ended May 31, 2000. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate an investor would have earned or lost on
an investment in the Fund (assuming reinvestment of all dividends and
distributions).
This information has been audited by PricewaterhouseCoopers, LLP, independent
accountants, whose report, along with the Fund's financial statements, is
included in the annual report, which is available upon request.
<TABLE>
<CAPTION>
CLASS A SHARES++
--------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD JULY 29, 1998*
MAY 31, 2000 THROUGH MAY 31, 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SELECTED PER-SHARE DATA:
--------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $11.76 $10.00
--------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (0.03) 0.01
Net realized and unrealized gain 1.22 1.75
--------------------------------------------------------------------------------------------------------------------
Total income from investment operations 1.19 1.76
--------------------------------------------------------------------------------------------------------------------
Less distributions from net realized gain (0.07) --
Net asset value, end of period $12.88 $11.76
--------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ 10.12% 17.60%(1)
--------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(3):
--------------------------------------------------------------------------------------------------------------------
Expenses 1.29% 1.38%(2)
--------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.25)% 0.07%(2)
--------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
--------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $12,483 $7,933
--------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 184% 80%(1)
--------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
++ The per share amounts were computed using an average number of shares
outstanding.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
24
<PAGE> 27
<TABLE>
<CAPTION>
CLASS B SHARES++
--------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD JULY 29, 1998*
MAY 31, 2000 THROUGH MAY 31, 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SELECTED PER-SHARE DATA:
--------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $11.69 $10.00
--------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss (0.12) (0.07)
Net realized and unrealized gain 1.21 1.76
--------------------------------------------------------------------------------------------------------------------
Total income from investment operations 1.09 1.69
--------------------------------------------------------------------------------------------------------------------
Less distributions from net realized gain (0.07) --
Net asset value, end of period $12.71 $11.69
--------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ 9.32% 16.90%(1)
--------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(3):
--------------------------------------------------------------------------------------------------------------------
Expenses 2.04% 2.13%(2)
--------------------------------------------------------------------------------------------------------------------
Net investment loss (1.00)% (0.68)%(2)
--------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
--------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $374,215 $273,345
--------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 184% 80%(1)
--------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
++ The per share amounts were computed using an average number of shares
outstanding.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
25
<PAGE> 28
<TABLE>
<CAPTION>
CLASS C SHARES++
--------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD JULY 29, 1998*
MAY 31, 2000 THROUGH MAY 31, 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SELECTED PER-SHARE DATA:
--------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $11.70 $10.00
--------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss (0.12) (0.04)
Net realized and unrealized gain 1.22 1.74
--------------------------------------------------------------------------------------------------------------------
Total income from investment operations 1.10 1.70
--------------------------------------------------------------------------------------------------------------------
Less distributions from net realized gain (0.07) --
Net asset value, end of period $12.73 $11.70
--------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ 9.31% 17.10%(1)
--------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(3):
--------------------------------------------------------------------------------------------------------------------
Expenses 2.04% 1.91%(2)
--------------------------------------------------------------------------------------------------------------------
Net investment loss (1.00)% (0.46)%(2)
--------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
--------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $24,711 $15,744
--------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 184% 80%(1)
--------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
++ The per share amounts were computed using an average number of shares
outstanding.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
26
<PAGE> 29
<TABLE>
<CAPTION>
CLASS D SHARES++
--------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD JULY 29, 1998*
MAY 31, 2000 THROUGH MAY 31, 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SELECTED PER-SHARE DATA:
--------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $11.79 $10.00
--------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss (0.01) 0.03
Net realized and unrealized gain 1.24 1.76
--------------------------------------------------------------------------------------------------------------------
Total income from investment operations 1.23 1.79
--------------------------------------------------------------------------------------------------------------------
Less distributions from net realized gain (0.07) --
Net asset value, end of period $12.95 $11.79
--------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+ 10.43% 17.90%(1)
--------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(3):
--------------------------------------------------------------------------------------------------------------------
Expenses 1.04% 1.13%(2)
--------------------------------------------------------------------------------------------------------------------
Net investment income 0.00% 0.32%(2)
--------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
--------------------------------------------------------------------------------------------------------------------
Net assets, end of period, in thousands $5,339 $69
--------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 184% 80%(1)
--------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
++ The per share amounts were computed using an average number of shares
outstanding.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
27
<PAGE> 30
NOTES
28
<PAGE> 31
MORGAN STANLEY DEAN WITTER
FAMILY OF FUNDS
The Morgan Stanley Dean Witter Family of Funds offers
investors a wide range of investment choices. Come on
in and meet the family!
<TABLE>
<S> <C> <C>
GROWTH FUNDS GROWTH FUNDS THEME FUNDS
Aggressive Equity Fund Financial Services Trust
American Opportunities Fund Health Sciences Trust
Capital Growth Securities Information Fund
Developing Growth Securities Natural Resource Development Securities
Growth Fund GLOBAL/INTERNATIONAL FUNDS
Market Leader Trust Competitive Edge Fund - "Best Ideas"
Mid-Cap Equity Trust Portfolio
New Discoveries Fund European Growth Fund
Next Generation Trust Fund of Funds - International Portfolio
Small Cap Growth Fund International Fund
Special Value Fund International SmallCap Fund
Tax-Managed Growth Fund Japan Fund
21st Century Trend Fund Latin American Growth Fund
Pacific Growth Fund
GROWTH & INCOME FUNDS Balanced Growth Fund Total Market Index Fund
Balanced Income Fund Total Return Trust
Convertible Securities Trust Value Fund
Dividend Growth Securities Value-Added Market Series/Equity
Equity Fund Portfolio
Fund of Funds - Domestic Portfolio THEME FUNDS
Income Builder Fund Real Estate Fund
S&P 500 Index Fund Utilities Fund
S&P 500 Select Fund GLOBAL FUNDS
Strategist Fund Global Dividend Growth Securities
Global Utilities Fund
INCOME FUNDS GOVERNMENT INCOME FUNDS GLOBAL INCOME FUNDS
Federal Securities Trust North American Government Income Trust
Short-Term U.S. Treasury Trust World Wide Income Trust
U.S. Government Securities Trust TAX-FREE INCOME FUNDS
DIVERSIFIED INCOME FUNDS California Tax-Free Income Fund
Diversified Income Trust Hawaii Municipal Trust(FSC)
CORPORATE INCOME FUNDS Limited Term Municipal Trust(NL)
High Yield Securities Multi-State Municipal Series Trust(FSC)
Intermediate Income Securities New York Tax-Free Income Fund
Short-Term Bond Fund(NL) Tax-Exempt Securities Trust
MONEY MARKET FUNDS TAXABLE MONEY MARKET FUNDS TAX-FREE MONEY MARKET FUNDS
Liquid Asset Fund(MM) California Tax-Free Daily Income
U.S. Government Money Market Trust(MM)
Trust(MM) New York Municipal Money Market
Trust(MM)
Tax-Free Daily Income Trust(MM)
</TABLE>
There may be funds created after this Prospectus was published. Please consult
the inside back cover of a new fund's prospectus for its designations, e.g.,
Multi Class Fund or Money Market Fund.
Unless otherwise noted, each listed Morgan Stanley Dean Witter Fund, except for
North American Government Income Trust and Short Term U.S. Treasury Trust, is a
Multi Class Fund. A Multi-Class Fund is a mutual fund offering multiple Classes
of shares. The other types of funds are: NL - No-Load (Mutual) Fund; MM - Money
Market Fund; FSC - A mutual fund sold with a front-end sales charge and a
distribution (12b-1) fee.
<PAGE> 32
PROSPECTUS - JULY 31, 2000
(THE FUND'S INVESTMENT COMPANY ACT FILE NO. IS 811-8739)
Additional information about the Fund's investments is available in the Fund's
Annual and Semi-Annual Reports to Shareholders. In the Fund's Annual Report,
you will find a discussion of the market conditions and investment strategies
that significantly affected the Fund's performance during its last fiscal year.
The Fund's Statement of Additional Information also provides additional
information about the Fund. The Statement of Additional Information is
incorporated herein by reference (legally is part of this Prospectus). For a
free copy of any of these documents, to request other information about the
Fund, or to make shareholder inquiries, please call:
(800) 869-NEWS
You also may obtain information about the Fund by calling your Morgan Stanley
Dean Witter Financial Advisor or by visiting our Internet site at:
WWW.MSDW.COM/INDIVIDUAL/FUNDS
Information about the Fund (including the Statement of Additional Information)
can be viewed and copied at the Securities and Exchange Commission's Public
Reference Room in Washington, DC. Information about the Reference Room's
operations may be obtained by calling the SEC at (202) 942-8090. Reports and
other information about the Fund are available on the EDGAR Database on the
SEC's Internet site (www.sec.gov), and copies of this information may be
obtained, after paying a duplicating fee, by electronic request at the
following E-mail address: [email protected], or by writing the Public
Reference Section of the SEC, Washington, DC 20549-0102.
Morgan Stanley Dean Witter
EQUITY FUND
[GRAPHIC]
A MUTUAL FUND THAT
SEEKS TOTAL RETURN
<PAGE> 33
<TABLE>
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION MORGAN STANLEY
DEAN WITTER
JULY 31, 2000 EQUITY FUND
</TABLE>
--------------------------------------------------------------------------------
This Statement of Additional Information is not a Prospectus. The
Prospectus (dated July 31, 2000) for the Morgan Stanley Dean Witter Equity Fund
may be obtained without charge from the Fund at its address or telephone number
listed below or from Dean Witter Reynolds at any of its branch offices.
Morgan Stanley Dean Witter
Equity Fund
Two World Trade Center
New York, New York 10048
(800) 869-NEWS
<PAGE> 34
TABLE OF CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
I. Fund History................................................ 4
II. Description of the Fund and Its Investments and Risks....... 4
A. Classification..................................... 4
B. Investment Strategies and Risks.................... 4
C. Fund Policies/Investment Restrictions.............. 12
III. Management of the Fund...................................... 14
A. Board of Trustees.................................. 14
B. Management Information............................. 14
C. Compensation....................................... 19
IV. Control Persons and Principal Holders of Securities......... 21
V. Investment Management and Other Services.................... 21
A. Investment Manager and Sub-Advisor................. 21
B. Principal Underwriter.............................. 22
C. Services Provided by the Investment Manager and the
Sub-Advisor........................................ 22
D. Dealer Reallowances................................ 23
E. Rule 12b-1 Plan.................................... 23
F. Other Service Providers............................ 27
G. Codes of Ethics.................................... 28
VI. Brokerage Allocation and Other Practices.................... 28
A. Brokerage Transactions............................. 28
B. Commissions........................................ 28
C. Brokerage Selection................................ 29
D. Directed Brokerage................................. 30
E. Regular Broker-Dealers............................. 30
VII. Capital Stock and Other Securities.......................... 30
VIII. Purchase, Redemption and Pricing of Shares.................. 31
A. Purchase/Redemption of Shares...................... 31
B. Offering Price..................................... 31
IX. Taxation of the Fund and Shareholders....................... 32
X. Underwriters................................................ 34
XI. Calculation of Performance Data............................. 34
XII. Financial Statements........................................ 36
</TABLE>
2
<PAGE> 35
GLOSSARY OF SELECTED DEFINED TERMS
The terms defined in this glossary are frequently used in this Statement of
Additional Information (other terms used occasionally are defined in the text of
the document).
"Custodian"--The Bank of New York.
"Dean Witter Reynolds"--Dean Witter Reynolds Inc., a wholly-owned
broker-dealer subsidiary of MSDW.
"Distributor"--Morgan Stanley Dean Witter Distributors Inc., a wholly-owned
broker-dealer subsidiary of MSDW.
"Financial Advisors"--Morgan Stanley Dean Witter authorized financial
services representatives.
"Fund"--Morgan Stanley Dean Witter Equity Fund, a registered open-end
investment company.
"Independent Trustees"--Trustees who are not "interested persons" (as
defined by the Investment Company Act) of the Fund.
"Investment Manager"--Morgan Stanley Dean Witter Advisors Inc., a
wholly-owned investment advisor subsidiary of MSDW.
"Morgan Stanley & Co."--Morgan Stanley & Co. Incorporated, a wholly-owned
broker-dealer subsidiary of MSDW.
"Morgan Stanley Dean Witter Funds"--Registered investment companies (i) for
which the Investment Manager serves as the investment advisor; and (ii) that
hold themselves out to investors as related companies for investment and
investor services.
"MSDW"--Morgan Stanley Dean Witter & Co., a preeminent global financial
services firm.
"MSDW Services Company"--Morgan Stanley Dean Witter Services Company Inc.,
a wholly-owned fund services subsidiary of the Investment Manager.
"Sub-Advisor"--Miller Anderson & Sherrerd, LLP, an indirect subsidiary of
MSDW.
"Transfer Agent"--Morgan Stanley Dean Witter Trust FSB, a wholly-owned
transfer agent subsidiary of MSDW.
"Trustees"--The Board of Trustees of the Fund.
3
<PAGE> 36
I. FUND HISTORY
--------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust, under a
Declaration of Trust, on April 6, 1998.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
--------------------------------------------------------------------------------
A. CLASSIFICATION
The Fund is an open-end, diversified management investment company whose
investment objective is total return.
B. INVESTMENT STRATEGIES AND RISKS
The following discussion of the Fund's investment strategies and risks
should be read with the sections of the Fund's Prospectus titled "Principal
Investment Strategies," "Principal Risks," "Additional Investment Strategy
Information" and "Additional Risk Information."
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may enter into
forward foreign currency exchange contracts ("forward contracts") as a hedge
against fluctuations in future foreign exchange rates. The Fund may conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or 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. Forward contracts only will be entered into with United States banks
and their foreign branches, insurance companies and other dealers whose assets
total $1 billion or more, or foreign banks 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.
The Sub-Advisor also may from time to time utilize forward contracts to
hedge a foreign security held in the portfolio or a security which pays out
principal tied to an exchange rate between the U.S. dollar and a foreign
currency, against a decline in value of the applicable foreign currency. They
also may be used to lock in the current exchange rate of the currency in which
those securities anticipated to be purchased are denominated. At times, the Fund
may enter into "cross-currency" hedging transactions involving currencies other
than those in which securities are held or proposed to be purchased are
denominated.
The Fund will not enter into forward currency contracts or maintain a net
exposure to these contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. It will, however, do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the spread
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
The Fund may be limited in its ability to enter into hedging transactions
involving forward contracts by the Internal Revenue Code requirements relating
to qualification as a regulated investment company.
Forward currency contracts may limit gains on portfolio securities that
could otherwise be realized had they not been utilized and could result in
losses. The contracts also may increase the Fund's volatility and may involve a
significant amount of risk relative to the investment of cash.
4
<PAGE> 37
OPTIONS AND FUTURES TRANSACTIONS. The Fund may engage in transactions in
listed and OTC options. Listed options are issued or guaranteed by the exchange
on which they are traded or by a clearing corporation such as the Options
Clearing Corporation ("OCC"). Ownership of a listed call option gives the Fund
the right to buy from the OCC (in the U.S.) or other clearing corporation or
exchange, the underlying security or currency 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 (in the
U.S.) or other clearing corporation or exchange, the underlying security or
currency at that exercise price prior to the expiration date of the option,
regardless of its then current market price. Ownership of a listed put option
would give the Fund the right to sell the underlying security or currency to the
OCC (in the U.S.) or other clearing corporation or exchange, 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 or currency from
the OCC (in the U.S.) or other clearing corporation or exchange, at the exercise
price.
Covered Call Writing. The Fund is permitted to write covered call options
on portfolio securities and on the U.S. dollar and foreign currencies in which
they are denominated, without limit. The Fund will receive from the purchaser,
in return for a call it has written, a "premium;" i.e., the price of the option.
Receipt of these premiums may better enable the Fund to earn a higher level of
current income than it would earn from holding the underlying securities (or
currencies) alone. Moreover, the premium received will offset a portion of the
potential loss incurred by the Fund if the securities (or currencies) underlying
the option decline in value.
The Fund may be required, at any time during the option period, to deliver
the underlying security (or currency) against payment of the exercise price on
any calls it has written. This obligation is terminated upon the expiration of
the option period or at such earlier time when the writer effects a closing
purchase transaction. A closing purchase transaction is accomplished by
purchasing an option of the same series as the option previously written.
However, once the Fund has been assigned an exercise notice, the Fund will be
unable to effect a closing purchase transaction.
A call option is "covered" if the Fund owns the underlying security subject
to the option or has an absolute and immediate right to acquire that security
without additional cash consideration (or for additional consideration (in cash,
Treasury bills or other liquid portfolio securities) held in a segregated
account on the Fund's books) upon conversion or exchange of other securities
held in its portfolio. A call option is also covered if the Fund holds a call on
the same security as the call written where the exercise price of the call held
is (i) equal to or less than the exercise price of the call written or (ii)
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, Treasury bills or other liquid portfolio
securities in a segregated account on the Fund's books.
Options written by the Fund normally have expiration dates of from up to
eighteen months from the date written. The exercise price of a call option may
be below, equal to or above the current market value of the underlying security
at the time the option is written.
Purchasing Call and Put Options. The Fund may purchase listed and OTC call
and put options in amounts equaling up to 5% of its total assets. The purchase
of a call option would enable the Fund, in return for the premium paid to lock
in a purchase price for a security or currency during the term of the option.
The purchase of a put option would enable the Fund, in return for a premium
paid, to lock in a price at which it may sell a security or currency during the
term of the option.
Options on Foreign Currencies. The Fund may purchase and write options on
foreign currencies for purposes similar to those involved with investing in
forward foreign currency exchange contracts.
OTC Options. OTC options are purchased from or sold (written) to dealers
or financial institutions which have entered into direct agreements with the
Fund. With OTC options, such variables as expiration date, exercise price and
premium will be agreed upon between the Fund and the transacting dealer, without
the intermediation of a third party such as the OCC. The Fund will engage in OTC
option
5
<PAGE> 38
transactions only with member banks of the Federal Reserve Bank System or
primary dealers in U.S. Government securities or with affiliates of such banks
or dealers.
Stock Index Options. The Fund may invest in options on stock indexes.
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 writer of the
option is obligated, in return for the premium received, to make delivery of
this amount.
Risks of Options Transactions. The successful use of options depends on
the ability of the Sub-Advisor to forecast correctly interest rates, currency
exchange rates and/or market movements. If the market value of the portfolio
securities (or the currencies in which they are denominated) upon which call
options have been written increases, the Fund may receive a lower total return
from the portion of its portfolio upon which calls have been written than it
would have had such calls not been written. During the option period, the
covered call writer has, in return for the premium on the option, given up the
opportunity for capital appreciation above the exercise price should the market
price of the underlying security (or the value of its denominated currency)
increase, but has retained the risk of loss should the price of the underlying
security (or the value of its denominated currency) decline. The covered put
writer also retains the risk of loss should the market value of the underlying
security decline below the exercise price of the option less the premium
received on the sale of the option. In both cases, the writer has no control
over the time when it may be required to fulfill its obligation as a writer of
the option. Prior to exercise or expiration, an option position can only be
terminated by entering into a closing purchase or sale transaction. Once an
option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver or receive the underlying securities at the exercise price.
The Fund's ability to close out its position as a writer of an option is
dependent upon the existence of a liquid secondary market on option exchanges.
There is no assurance that such a market will exist, particularly in the case of
OTC options.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in options, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. In the case of OTC
options, 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, due to insolvency or otherwise, the Fund would lose the premium
paid for the option as well as any anticipated benefit of the transaction.
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security which may be
written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). An exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
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.
The markets in foreign currency options are relatively new and the Fund's
ability to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market.
There can be no assurance that a liquid secondary market will exist for a
particular option at any specific time.
6
<PAGE> 39
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. 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.
Futures Contracts. The Fund may purchase and sell interest rate, currency
and index futures contracts that are traded on U.S. and foreign commodity
exchanges on such underlying securities as U.S. Treasury bonds, notes, bills and
GNMA Certificates and/or any foreign government fixed-income security, on
various currencies and on such indexes of U.S. and foreign securities as may
exist or come into existence.
A futures contract purchaser 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. A seller of a futures contract incurs an
obligation to deliver the specified amount of the underlying obligation at a
specified time in return for an agreed upon price. The purchase of a futures
contract enables the Fund, during the term of the contract, to lock in a price
at which it may purchase a security or currency and protect against a rise in
prices pending purchase of portfolio securities. The sale of a futures contract
enables the Fund to lock in a price at which it may sell a security or currency
and protect against declines in the value of portfolio securities.
Although most 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 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 security (currency) 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
security (currency) 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.
Margin. If the Fund enters into a futures contract, it is initially
required to deposit an "initial margin" of cash or U.S. Government securities or
other liquid portfolio securities ranging from approximately 2% to 5% 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 broker's client but is, rather, a good faith deposit on the futures
contract which will be returned to the Fund upon the proper termination of the
futures contract. The margin deposits made are marked to market daily and the
Fund may be required to make
7
<PAGE> 40
subsequent deposits of cash or U.S. Government securities, called "variation
margin," which are reflective of price fluctuations in the futures contract.
Options on Futures Contracts. The Fund may purchase and write call and put
options on futures contracts and enter into closing transactions with respect to
such options to terminate an existing position. An option on a futures contract
gives the purchaser the right (in return for the premium paid), and the writer
the obligation, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option is accompanied by delivery of the accumulated balance in
the writer's futures margin account, which represents the amount by which the
market price of the futures contract at the time of exercise exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.
The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an option
on a futures contract are included in initial margin deposits.
Limitations on Futures Contracts and Options on Futures. The Fund may not
enter into futures contracts or purchase related options thereon if, immediately
thereafter, the amount committed to margin plus the amount paid for premiums for
unexpired options on futures contracts exceeds 5% of the value of the Fund's
total assets, after taking into account unrealized gains and unrealized losses
on such contracts it has entered into, provided, however, that in the case of an
option that is in-the-money (the exercise price of the call (put) option is less
(more) than the market price of the underlying security) at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%.
However, there is no overall limitation on the percentage of the Fund's net
assets which may be subject to a hedge position.
Risks of Transactions in Futures Contracts and Related Options. The prices
of securities and indexes subject to futures contracts (and thereby the futures
contract prices) may correlate imperfectly with the behavior of the cash prices
of the Fund's portfolio securities (and the currencies in which they are
denominated). Also, prices of futures contracts may not move in tandem with the
changes in prevailing interest rates, market movements and/or currency exchange
rates against which the Fund seeks a hedge. A correlation may also be distorted
(a) temporarily, by short-term traders' seeking to profit from the difference
between a contract or security price objective and their cost of borrowed funds;
(b) by investors in futures contracts electing to close out their contracts
through offsetting transactions rather than meet margin deposit requirements;
(c) by investors in futures contracts opting to make or take delivery of
underlying securities rather than engage in closing transactions, thereby
reducing liquidity of the futures market; and (d) temporarily, by speculators
who view the deposit requirements in the futures markets as less onerous than
margin requirements in the cash market. Due to the possibility of price
distortion in the futures market and because of the possible imperfect
correlation between movements in the prices of securities and movements in the
prices of futures contracts, a correct forecast of interest rate, currency
exchange rate and/or market movement 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 the Fund may invest. In the event a
liquid market does not exist, it may not be possible to close out a futures
position and, in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin. The absence of a
liquid market in futures contracts might cause the Fund to make or take delivery
of the underlying securities (currencies) at a time when it may be
disadvantageous to do so.
Exchanges also limit the amount by which the price of a futures contract
may move on any day. If the price moves equal the daily limit on successive
days, then it may prove impossible to liquidate a futures position until the
daily limit moves have ceased. In the event of adverse price movements, the Fund
would continue to be required to make daily cash payments of variation margin on
open futures positions. In these situations, if the Fund has insufficient cash,
it may have to sell portfolio securities to
8
<PAGE> 41
meet daily variation margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to take or make
delivery of the instruments underlying interest rate futures contracts it holds
at a time when it is disadvantageous to do so. The inability to close out
options and futures positions could also have an adverse impact on the Fund's
ability to effectively hedge its portfolio.
Futures contracts and options thereon which are purchased or sold on
foreign commodities exchanges may have greater price volatility than their U.S.
counterparts. Furthermore, foreign commodities exchanges may be less regulated
and under less governmental scrutiny than U.S. exchanges. Brokerage commissions,
clearing costs and other transaction costs may be higher on foreign exchanges.
Greater margin requirements may limit the Fund's ability to enter into certain
commodity transactions on foreign exchanges. Moreover, differences in clearance
and delivery requirements on foreign exchanges may occasion delays in the
settlement of the Fund's transactions effected on foreign exchanges.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
If the Fund maintains a short position in a futures contract or has sold a
call option in a futures contract, it will cover this position by holding, in a
segregated account maintained on the books of the Fund, 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.
In addition, if the Fund holds a long position in a futures contract or has
sold a put option on a futures contract, it will hold cash, U.S. government
securities or other liquid portfolio securities equal to the purchase price of
the contract or the exercise price of the put option (less the amount of initial
or variation margin on deposit) in a segregated account maintained on the books
of the Fund. Alternatively, the Fund could cover its long position by purchasing
a put option on the same futures contract with an exercise price as high or
higher than the price of the contract held by the Fund.
MONEY MARKET SECURITIES. The Fund may invest in various money market securities
for cash management purposes or when assuming a temporary defensive position,
which among others may include commercial paper, bank acceptances, bank
obligations, corporate debt securities, certificates of deposit, U.S. Government
securities, obligations of savings institutions and repurchase agreements. Such
securities are limited to:
U.S. Government Securities. Obligations issued or guaranteed as to
principal and interest by the United States or its agencies (such as the
Export-Import Bank of the United States, Federal Housing Administration and
Government National Mortgage Association) or its instrumentalities (such as the
Federal Home Loan Bank), including Treasury bills, notes and bonds;
Bank Obligations. Obligations (including certificates of deposit, time
deposits and bankers' acceptances) of banks subject to regulation by the U.S.
Government and having total assets of $1 billion or more, and instruments
secured by such obligations, not including obligations of foreign branches of
domestic banks except to the extent below;
Eurodollar Certificates of Deposit. Eurodollar certificates of deposit
issued by foreign branches of domestic banks having total assets of $1 billion
or more;
Obligations of Savings Institutions. Certificates of deposit of savings
banks and savings and loan associations, having total assets of $1 billion or
more;
9
<PAGE> 42
Fully Insured Certificates of Deposit. Certificates of deposit of banks
and savings institutions, having total assets of less than $1 billion, if the
principal amount of the obligation is federally insured by the Bank Insurance
Fund or the Savings Association Insurance Fund (each of which is administered by
the FDIC), limited to $100,000 principal amount per certificate and to 15% or
less of the Fund's total assets in all such obligations and in all illiquid
assets, in the aggregate;
Commercial Paper. Commercial paper rated within the two highest grades by
Standard & Poor's Corporation ("S&P") or the highest grade by Moody's Investors
Service, Inc. ("Moody's") or, if not rated, issued by a company having an
outstanding debt issue rated at least AAA by S&P or Aaa by Moody's; and
Repurchase Agreements. The Fund may invest in repurchase agreements. When
cash may be available for only a few days, it may be invested by the Fund in
repurchase agreements until such time as it may otherwise be invested or used
for payments of obligations of the Fund. These agreements, which may be viewed
as a type of secured lending by the Fund, typically involve the acquisition by
the Fund of debt securities from a selling financial institution such as a bank,
savings and loan association or broker-dealer. The agreement provides that the
Fund will sell back to the institution, and that the institution will
repurchase, the underlying security serving as 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 marked-to-market daily to determine
that the value of the collateral, as specified in the agreement, does not
decrease below the purchase price plus accrued interest. If such decrease
occurs, additional collateral will be requested and, when received, added to the
account to maintain full collateralization. The Fund will accrue interest from
the institution until the time when the repurchase is to occur. Although this
date is deemed by the Fund to be the maturity date of a repurchase agreement,
the maturities of securities subject to repurchase agreements are not subject to
any limits.
While repurchase agreements involve certain risks not associated with
direct investments in debt securities, the Fund follows procedures designed to
minimize such risks. These procedures include effecting repurchase transactions
only with large, well-capitalized and well-established financial institutions
whose financial condition will be continually monitored by the Investment
Manager and/or Sub-Advisor subject to procedures established by the Trustees. In
addition, as described above, the value of the collateral underlying the
repurchase agreement will be at least equal to the repurchase price, including
any accrued interest earned on the repurchase agreement. In the event of a
default or bankruptcy by a selling financial institution, the Fund will seek to
liquidate such collateral. However, the exercising of the Fund's right to
liquidate such collateral could involve certain costs or delays and, to the
extent that proceeds from any sale upon a default of the obligation to
repurchase were less than the repurchase price, the Fund could suffer a loss. It
is the current policy of the Fund not to invest in repurchase agreements that do
not mature within seven days if any such investment, together with any other
illiquid assets held by the Fund, amounts to more than 15% of its net assets.
INVESTMENT COMPANIES. Any Fund investment in an investment company is
subject to the underlying risk of that investment company's portfolio
securities. For example, if the investment company held common stocks, the Fund
also would be exposed to the risk of investing in common stocks. In addition,
the Fund would bear its share of the investment company's fees and expenses.
SPDRS. The Fund may invest in securities referred to as SPDRs (known as
"spiders") that are designed to track the S&P 500 Index. SPDRs represent an
ownership interest in the SPDR Trust, which holds a portfolio of common stocks
that closely tracks the price performance and dividend yield of the S&P 500
Index. SPDRs trade on the American Stock Exchange like shares of common stock.
SPDRs have the same risks as direct investments in common stocks. The
market value of SPDRs is expected to rise and fall as the S&P 500 Index rises
and falls. If the Fund invests in SPDRs, it would, in addition to its own
expenses, indirectly bear its ratable share of the SPDRs' expenses.
ZERO COUPON SECURITIES. A portion of the fixed-income securities purchased
by the Fund may be zero coupon securities. Such securities are purchased at a
discount from their face amount, giving the purchaser the right to receive their
full value at maturity. The interest earned on such securities is,
10
<PAGE> 43
implicitly, automatically compounded and paid out at maturity. While such
compounding at a constant rate eliminates the risk of receiving lower yields
upon reinvestment of interest if prevailing interest rates decline, the owner of
a zero coupon security will be unable to participate in higher yields upon
reinvestment of interest received on interest-paying securities if prevailing
interest rates rise.
A zero coupon security pays no interest to its holder during its life.
Therefore, to the extent the Fund invests in zero coupon securities, it will not
receive current cash available for distribution to shareholders. In addition,
zero coupon securities are subject to substantially greater price fluctuations
during periods of changing prevailing interest rates than are comparable
securities which pay interest on a current basis. Current federal tax law
requires that a holder (such as the Fund) of a zero coupon security accrue a
portion of the discount at which the security was purchased as income each year
even though the Fund receives no interest payments in cash on the security
during the year.
LENDING PORTFOLIO SECURITIES. The Fund may lend its portfolio securities
to brokers, dealers and other financial institutions, provided that the loans
are callable at any time by the Fund, and are at all times secured by cash or
cash equivalents, which are maintained in a segregated account pursuant to
applicable regulations and that are equal to at least 100% of the market value,
determined daily, of the loaned securities. The advantage of these loans is that
the Fund continues to receive the income on the loaned securities while at the
same time earning interest on the cash amounts deposited as collateral, which
will be invested in short-term obligations. The Fund will not lend more than 25%
of the value of its total assets.
As with any extensions of credit, there are risks of delay in recovery and,
in some cases, even loss of rights in the collateral should the borrower of the
securities fail financially. However, these loans of portfolio securities will
only be made to firms deemed by the Fund's management to be creditworthy and
when the income which can be earned from such loans justifies the attendant
risks. Upon termination of the loan, the borrower is required to return the
securities to the Fund. Any gain or loss in the market price during the loan
period would inure to the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of the rights
if the matters involved would have a material effect on the Fund's investment in
the loaned securities. The Fund will pay reasonable finder's, administrative and
custodial fees in connection with a loan of its securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From
time to time the Fund may purchase securities on a when-issued or delayed
delivery basis or may purchase or sell securities on a forward commitment basis.
When these transactions are negotiated, the price is fixed at the time of the
commitment, but delivery and payment can take place a month or more after the
date of commitment. While the Fund will only purchase securities on a
when-issued, delayed delivery or forward commitment basis with the intention of
acquiring the securities, the Fund may sell the securities before the settlement
date, if it is deemed advisable. The securities so purchased or sold are subject
to market fluctuation and no interest or dividends accrue to the purchaser prior
to the settlement date.
At the time the Fund makes the commitment to purchase or sell securities on
a when-issued, delayed delivery or forward commitment basis, it will record the
transaction and thereafter reflect the value, each day, of such security
purchased, or if a sale, the proceeds to be received, in determining its net
asset value. At the time of delivery of the securities, their value may be more
or less than the purchase or sale price. An increase in the percentage of the
Fund's assets committed to the purchase of securities on a when-issued, delayed
delivery or forward commitment basis may increase the volatility of its net
asset value. The Fund will also establish a segregated account on the Fund's
books in which it will continually maintain cash or cash equivalents or other
liquid portfolio securities equal in value to commitments to purchase securities
on a when-issued, delayed delivery or forward commitment basis.
WHEN, AS AND IF ISSUED SECURITIES. The Fund may purchase securities on a
"when, as and if issued" basis under which the issuance of the security depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization or debt restructuring. The commitment for
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<PAGE> 44
the purchase of any such security will not be recognized in the portfolio of the
Fund until the Sub-Advisor determines that issuance of the security is probable.
At that time, the Fund will record the transaction and, in determining its net
asset value, will reflect the value of the security daily. At that time, the
Fund will also establish a segregated account on the Fund's books in which it
will maintain cash or cash equivalents, U.S. Government securities or other
liquid portfolio securities equal in value to recognized commitments for such
securities.
An increase in the percentage of the Fund's total assets committed to the
purchase of securities on a "when, as and if issued" basis may increase the
volatility of its net asset value. The Fund may also sell securities on a "when,
as and if issued" basis provided that the issuance of the security will result
automatically from the exchange or conversion of a security owned by the Fund at
the time of sale.
PRIVATE PLACEMENTS. The Fund 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 (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 these
securities may have an adverse effect on their marketability, and may prevent
the Fund from disposing of them promptly at reasonable prices. The Fund may have
to bear the expense of registering the securities for resale and the risk of
substantial delays in effecting the registration.
Rule 144A permits the Fund to sell restricted securities to qualified
institutional buyers without limitation. The Sub-Advisor, pursuant to procedures
adopted by the Trustees, will make a determination as to the liquidity of each
restricted security purchased by the Fund. If a restricted security is
determined to be "liquid," the security will not be included within the category
"illiquid securities," which may not exceed 15% of the Fund's net assets.
However, investing in Rule 144A securities could have the effect of increasing
the level of Fund illiquidity to the extent the Fund, at a particular point in
time, may be unable to find qualified institutional buyers interested in
purchasing such securities.
WARRANTS AND SUBSCRIPTION RIGHTS. The Fund may invest in warrants and
subscription rights. Warrants are, in effect, an option to purchase equity
securities at a specific price, generally valid for a specific period of time,
and have no voting rights, pay no dividends and have no rights with respect to
the corporations issuing them. The Fund may acquire warrants attached to other
securities without reference to the foregoing limitations.
A subscription right is a privilege granted to existing shareholders of a
corporation to subscribe to shares of a new issue of common stock before it is
offered to the public. A subscription right normally has a life of two to four
weeks and a subscription price lower than the current market value of the common
stock.
C. FUND POLICIES/INVESTMENT RESTRICTIONS
The investment objective, policies and restrictions listed below have been
adopted by the Fund as fundamental policies. Under the Investment Company Act of
1940 (the "Investment Company Act"), a fundamental policy may not be changed
without the vote of a majority of the outstanding voting securities of the Fund.
The Investment Company Act defines a majority as the lesser of (a) 67% or more
of the shares present at a meeting of shareholders, if the holders of 50% of the
outstanding shares of the Fund are present or represented by proxy; or (b) more
than 50% of the outstanding shares of the Fund. For purposes of the following
restrictions: (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.
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<PAGE> 45
The Fund will:
1. Seek total return.
The Fund 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 Fund may seek to achieve its
investment objective by investing all or substantially all of its assets in
another investment company having substantially the same investment
objective and policies as the Fund (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 Fund 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.
4. Purchase or sell real estate or interests therein although the Fund
may purchase securities of issuers which engage in real estate operations
and securities secured by real estate or interests therein.
5. Purchase oil, gas or other mineral leases, rights or royalty
contracts or exploration or development programs, except that the Fund may
invest in the securities of companies which operate, invest in, or sponsor
such programs.
6. Borrow money, except that the Fund may borrow from a bank for
temporary or emergency purposes in amounts not exceeding 5% (taken at the
lower of cost or current value) of its total assets (not including the
amount borrowed).
7. Pledge its assets or assign or otherwise encumber them except to
secure permitted borrowings. For the purpose of this restriction,
collateral arrangements the writing of options by the Fund and collateral
arrangements with respect to initial or variation margin for futures are
not deemed to be pledges of assets.
8. Issue senior securities as defined in the Investment Company Act
except insofar as the Fund may be deemed to have issued a senior security
by reason of (a) entering into any repurchase agreement; (b) borrowing
money; or (c) lending portfolio securities.
9. Make loans of money or securities, except by investment in
repurchase agreements. (For the purpose of this restriction, lending of
portfolio securities by the Fund is not deemed to be a loan.)
10. Purchase or sell commodities or commodities contracts except that
the Fund may purchase or sell interest rate, currency and stock and bond
index futures contracts or options thereon.
11. Make short sales of securities or maintain a short position,
unless at all times when a short position is open it either owns an equal
amount of such securities or owns securities which, without payment of any
further consideration, are convertible into or exchangeable for securities
of the same issue as, and equal in amount to, the securities sold short.
12. Purchase securities on margin, except for such short-term loans as
are necessary for the clearance of portfolio securities. The deposit or
payment by the Fund of initial or variation margin in connection with
futures contracts is not considered the purchase of a security on margin.
13. Engage in the underwriting of securities, except insofar as the
Fund may be deemed an underwriter under the Securities Act in disposing of
a portfolio security.
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<PAGE> 46
14. Invest for the purpose of exercising control or management of any
other issuer.
In addition, as a non-fundamental policy, the Fund will not invest in other
investment companies in reliance on Sections 12(d)(1)(F), 12(d)(1)(G) or
12(d)(1)(J) of the Investment Company Act.
PORTFOLIO TURNOVER
For the period July 29, 1998 (commencement of operations) through May 31,
1999 and for the fiscal year ended May 31, 2000, the Fund's portfolio turnover
rates were 80% and 184%, respectively. This variation resulted from the
portfolio managers' response to varying market conditions during these periods.
III. MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------
A. BOARD OF TRUSTEES
The Board of Trustees of the Fund oversees the management of the Fund but
does not itself manage the Fund. The Trustees review various services provided
by or under the direction of the Investment Manager to ensure that the Fund's
general investment policies and programs are properly carried out. The Trustees
also conduct their review to ensure that administrative services are provided to
the Fund in a satisfactory manner.
Under state law, the duties of the Trustees are generally characterized as
a duty of loyalty and a duty of care. The duty of loyalty requires a Trustee to
exercise his or her powers in the interest of the Fund and not the Trustee's own
interest or the interest of another person or organization. A Trustee satisfies
his or her duty of care by acting in good faith with the care of an ordinarily
prudent person and in a manner the Trustee reasonably believes to be in the best
interest of the Fund and its shareholders.
B. MANAGEMENT INFORMATION
TRUSTEES AND OFFICERS. The Board of the Fund consists of nine (9)
Trustees. These same individuals also serve as directors or trustees for all of
the Morgan Stanley Dean Witter Funds. Six Trustees (67% of the total number)
have no affiliation or business connection with the Investment Manager or any of
its affiliated persons and do not own any stock or other securities issued by
the Investment Manager's parent company, MSDW. These are the "non-interested" or
"independent" Trustees. The other three Trustees (the "management Trustees") are
affiliated with the Investment Manager.
The Trustees and executive officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with the
Investment Manager, and with the Morgan Stanley Dean Witter Funds (there were 93
such Funds as of the calendar year ended December 31, 1999), are shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
----------------------------------------------------------- ---------------------------------------------------
<S> <C>
Michael Bozic (59) Vice Chairman of Kmart Corporation (since December
Trustee 1998); Director or Trustee of the Morgan Stanley
c/o Kmart Corporation Dean Witter Funds; formerly Chairman and Chief
3100 West Big Beaver Road Executive Officer of Levitz Furniture Corporation
Troy, Michigan (November 1995-November 1998) and President and
Chief Executive Officer of Hills Department Stores
(May 1991-July 1995); formerly variously Chairman,
Chief Executive Officer, President and Chief
Operating Officer (1987-1991) of the Sears
Merchandise Group of Sears, Roebuck and Co.;
Director of Weirton Steel Corporation.
</TABLE>
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<PAGE> 47
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
----------------------------------------------------------- ---------------------------------------------------
<S> <C>
Charles A. Fiumefreddo* (67) Chairman, Director or Trustee and Chief Executive
Chairman of the Board, Chief Officer of the Morgan Stanley Dean Witter Funds;
Executive Officer and Trustee formerly Chairman, Chief Executive Officer and
Two World Trade Center Director of the Investment Manager, the Distributor
New York, New York and MSDW Services Company; Executive Vice President
and Director of Dean Witter Reynolds; Chairman and
Director of the Transfer Agent; formerly Director
and/or officer of various MSDW subsidiaries (until
June 1998).
Edwin J. Garn (67) Director or Trustee of the Morgan Stanley Dean
Trustee Witter Funds; formerly United States Senator
c/o Summit Ventures LLC (R-Utah)(1974-1992) and Chairman, Senate Banking
1 Utah Center Committee (1980-1986); formerly Mayor of Salt Lake
201 South Main Street City, Utah (1971- 1974); formerly Astronaut, Space
Salt Lake City, Utah Shuttle Discovery (April 12-19, 1985); Vice
Chairman, Huntsman Corporation (chemical company);
Director of Franklin Covey (time management
systems), BMW Bank of North America, Inc.
(industrial loan corporation), United Space
Alliance (joint venture between Lockheed Martin and
the Boeing Company) and Nuskin Asia Pacific
(multilevel marketing); member of the Utah Regional
Advisory Board of Pacific Corp.; member of the
board of various civic and charitable
organizations.
Wayne E. Hedien (66) Retired; Director or Trustee of the Morgan Stanley
Trustee Dean Witter Funds; Director of The PMI Group, Inc.
c/o Mayer, Brown & Platt (private mortgage insurance); Trustee and Vice
Counsel to the Independent Trustees Chairman of The Field Museum of Natural History;
1675 Broadway formerly associated with the Allstate Companies
New York, New York (1966-1994), most recently as Chairman of The
Allstate Corporation (March 1993-December 1994) and
Chairman and Chief Executive Officer of its
wholly-owned subsidiary, Allstate Insurance Company
(July 1989-December 1994); director of various
other business and charitable organizations.
</TABLE>
15
<PAGE> 48
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
----------------------------------------------------------- ---------------------------------------------------
<S> <C>
James F. Higgins* (52) Chairman of the Private Client Group of MSDW (since
Trustee May 1999); Director of the Transfer Agent and Dean
Two World Trade Center Witter Realty Inc.; Director or Trustee of various
New York, New York Morgan Stanley Dean Witter Funds (since June 2000);
previously President and Chief Operating Officer of
Individual Securities of MSDW (February 1997-May
1999), President and Chief Operating Officer of
Dean Witter Securities of MSDW (1995-February
1997), and President and Chief Operating Officer of
Dean Witter Financial (1989-1995) and Director
(1985-1997) of Dean Witter Reynolds.
Dr. Manuel H. Johnson (51) Senior Partner, Johnson Smick International, Inc.,
Trustee a consulting firm; Co-Chairman and a founder of the
c/o Johnson Smick International, Inc. Group of Seven Council (G7C), an international
1133 Connecticut Avenue, N.W. economic commission; Chairman of the Audit
Washington, D.C. Committee and Director or Trustee of the Morgan
Stanley Dean Witter Funds; Director of Greenwich
Capital Markets, Inc. (broker-dealer), Independence
Standards Board (private sector organization
governing independence of auditors) and NVR, Inc.
(home construction); Chairman and Trustee of the
Financial Accounting Foundation (oversight
organization of the Financial Accounting Standards
Board); formerly Vice Chairman of the Board of
Governors of the Federal Reserve System and
Assistant Secretary of the U.S. Treasury.
Michael E. Nugent (64) General Partner, Triumph Capital, L.P., a private
Trustee investment partnership; Chairman of the Insurance
c/o Triumph Capital, L.P. Committee and Director or Trustee of the Morgan
237 Park Avenue Stanley Dean Witter Funds; formerly Vice President,
New York, New York Bankers Trust Company and BT Capital Corporation;
director of various business organizations.
Philip J. Purcell* (56) Chairman of the Board of Directors and Chief
Trustee Executive Officer of MSDW, Dean Witter Reynolds and
1585 Broadway Novus Credit Services Inc.; Director of the
New York, New York Distributor; Director or Trustee of the Morgan
Stanley Dean Witter Funds; Director of American
Airlines Inc. and its parent company, AMR
Corporation; Director and/or officer of various
MSDW subsidiaries.
</TABLE>
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<PAGE> 49
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
----------------------------------------------------------- ---------------------------------------------------
<S> <C>
John L. Schroeder (69) Retired; Chairman of the Derivatives Committee and
Trustee Director or Trustee of the Morgan Stanley Dean
c/o Mayer, Brown & Platt Witter Funds; Director of Citizens Utilities
Counsel to the Independent Trustees Company (telecommunications, gas, electric and
1675 Broadway water utilities company); formerly Executive Vice
New York, New York President and Chief Investment Officer of the Home
Insurance Company (August 1991-September 1995).
Mitchell M. Merin (46) President and Chief Operating Officer of Asset
President Management of MSDW (since December 1998); President
Two World Trade Center and Director (since April 1997) and Chief Executive
New York, New York Officer (since June 1998) of the Investment Manager
and MSDW Services Company; Chairman, Chief
Executive Officer and Director of the Distributor
(since June 1998); Chairman and Chief Executive
Officer (since June 1998) and Director (since
January 1998) of the Transfer Agent; Director of
various MSDW subsidiaries; President of the Morgan
Stanley Dean Witter Funds (since May 1999); Trustee
of various Van Kampen investment companies (since
December 1999); previously Chief Strategic Officer
of the Investment Manager and MSDW Services Company
and Executive Vice President of the Distributor
(April 1997-June, 1998), Vice President of the
Morgan Stanley Dean Witter Funds (May 1997-April
1999), and Executive Vice President of Dean Witter,
Discover & Co.
Barry Fink (45) General Counsel of Asset Management of MSDW (since
Vice President, May 2000); Executive Vice President (since December
Secretary and General Counsel 1999) and Secretary and General Counsel (since
Two World Trade Center February 1997) and Director (since July 1998) of
New York, New York the Investment Manager and MSDW Services Company;
Vice President, Secretary and General Counsel of
the Morgan Stanley Dean Witter Funds (since
February 1997); Vice President and Secretary of the
Distributor; previously, Senior Vice President
(March 1997-December 1999), First Vice President;
Assistant Secretary and Assistant General Counsel
of the Investment Manager and MSDW Services
Company.
</TABLE>
17
<PAGE> 50
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
----------------------------------------------------------- ---------------------------------------------------
<S> <C>
Thomas F. Caloia (54) First Vice President and Assistant Treasurer of the
Treasurer Investment Manager, the Distributor and MSDW
Two World Trade Center Services Company; Treasurer of the Morgan Stanley
New York, New York Dean Witter Funds.
</TABLE>
------------------------------
* Denotes Trustees who are "interested persons" of the Fund, as defined in the
Investment Company Act.
In addition, Ronald E. Robison, Executive Vice President, Chief
Administrative Officer and Director of the Investment Manager and MSDW Services
Company, Robert S. Giambrone, Senior Vice President of the Investment Manager,
MSDW Services Company, the Distributor and the Transfer Agent and Director of
the Transfer Agent, and Joseph J. McAlinden, Executive Vice President and Chief
Investment Officer of the Investment Manager and Director of the Transfer Agent,
are Vice Presidents of the Fund, and Steven MacNamara, Vice President of the
Investment Manager, is an Assistant Vice President of the Fund.
In addition, Marilyn K. Cranney, Todd Lebo, Lou Anne D. McInnis, Carsten
Otto and Ruth Rossi, First Vice Presidents and Assistant General Counsels of the
Investment Manager and MSDW Services Company, and Natasha Kassian, Assistant
Vice President and Assistant General Counsel of the Investment Manager and MSDW
Services Company, are Assistant Secretaries of the Fund.
INDEPENDENT DIRECTORS/TRUSTEES AND THE COMMITTEES. Law and regulation
establish both general guidelines and specific duties for the independent
directors/trustees. The Morgan Stanley Dean Witter Funds seek as independent
directors/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.
All of the independent directors/trustees serve as members of the Audit
Committee. In addition, three of the directors/trustees, including two
independent directors/trustees, serve as members of the Derivatives Committee
and the Insurance Committee.
The independent directors/trustees are charged with recommending to the
full board approval of management, advisory and administration contracts, Rule
12b-1 plans and distribution and underwriting agreements; continually reviewing
Fund performance; checking on the pricing of portfolio securities, brokerage
commissions, transfer agent costs and performance, and trading among Funds in
the same complex; and approving fidelity bond and related insurance coverage and
allocations, as well as other matters that arise from time to time. The
independent directors/trustees are required to select and nominate individuals
to fill any independent directors/trustees vacancy on the board of any Fund that
has a Rule 12b-1 plan of distribution. Most of the Morgan Stanley Dean Witter
Funds have a Rule 12b-1 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 the 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.
The board of each Fund has a Derivatives Committee to approve parameters
for and monitor the activities of the Fund with respect to derivative
investments, if any, made by the Fund.
Finally, the board of each Fund has formed an Insurance Committee to review
and monitor the insurance coverage maintained by the Fund.
18
<PAGE> 51
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT DIRECTORS/TRUSTEES FOR
ALL MORGAN STANLEY DEAN WITTER FUNDS. The independent directors/trustees and
the Funds' management believe that having the same independent
directors/trustees for each of the Morgan Stanley Dean Witter Funds avoids the
duplication of effort that would arise from having different groups of
individuals serving as independent directors/trustees for each of the Funds or
even of sub-groups of Funds. They believe that having the same individuals serve
as independent directors/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 directors/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
directors/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
directors/trustees, of the caliber, experience and business acumen of the
individuals who serve as Independent Trustees of the Morgan Stanley Dean Witter
Funds.
TRUSTEE AND OFFICER INDEMNIFICATION. The Fund's 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, 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.
C. COMPENSATION
The Fund pays each Independent Trustee an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Trustees, the Independent
Trustees or Committees of the Board of Trustees attended by the Trustee (the
Fund pays the Chairman of the Audit Committee an additional annual fee of $750,
and the Chairmen of the Derivatives and Insurance Committees additional annual
fees of $500). If a Board meeting and a meeting of the Independent Trustees or a
Committee meeting, or a meeting of the Independent Trustees and/or more than one
Committee meeting, take place on a single day, the Trustees are paid a single
meeting fee by the Fund. The Fund also reimburses such Trustees for travel and
other out-of-pocket expenses incurred by them in connection with attending such
meetings. Trustees and officers of the Fund who are or have been employed by the
Investment Manager or an affiliated company receive no compensation or expense
reimbursement from the Fund for their services as Trustee.
The following table illustrates the compensation that the Fund paid to its
Independent Trustees for the fiscal year ended May 31, 2000.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
--------------------------- --------------
<S> <C>
Michael Bozic............................................... $1,600
Edwin J. Garn............................................... 1,600
Wayne E. Hedien............................................. 1,600
Dr. Manuel H. Johnson....................................... 2,350
Michael E. Nugent........................................... 2,100
John L. Schroeder........................................... 2,050
</TABLE>
19
<PAGE> 52
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1999 for services
to the 93 Morgan Stanley Dean Witter Funds that were in operation at December
31, 1999.
CASH COMPENSATION FROM MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
TOTAL CASH COMPENSATION
FOR SERVICES TO 93
MORGAN STANLEY
NAME OF INDEPENDENT TRUSTEE DEAN WITTER FUNDS
--------------------------- -----------------------
<S> <C>
Michael Bozic........................................... $134,600
Edwin J. Garn........................................... 138,700
Wayne E. Hedien......................................... 138,700
Dr. Manuel H. Johnson................................... 208,638
Michael E. Nugent....................................... 193,324
John L. Schroeder....................................... 193,324
</TABLE>
As of the date of this Statement of Additional Information, 55 of the
Morgan Stanley Dean Witter Funds, not including the Fund, have adopted a
retirement program under which an independent director/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/trustee of any Morgan Stanley Dean Witter
Fund that has adopted the retirement program (each such Fund referred to as an
"Adopting Fund" and each such director/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 30.22% of his or her Eligible Compensation plus
0.5036667% of such Eligible Compensation for each full month of service as an
independent director/trustee of any Adopting Fund in excess of five years up to
a maximum of 60.44% 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 accrued as expenses on the books of
the Adopting Funds. Such benefits are not secured or funded by the Adopting
Funds.
------------------------------
(1) An Eligible Trustee may elect alternative payments of his or her retirement
benefits based upon the combined life expectancy of the Eligible Trustee and
his or her spouse on the date of such Eligible Trustee's retirement. In
addition, the Eligible Trustee may elect that the surviving spouse's
periodic payment of benefits will be equal to a lower percentage of the
periodic amount when both spouses were alive. The amount estimated to be
payable under this method, through the remainder of the later of the lives
of the Eligible Trustee and spouse, will be the actuarial equivalent of the
Regular Benefit.
20
<PAGE> 53
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the 55 Morgan Stanley Dean Witter Funds (not
including the Fund) for the calendar year ended December 31, 1999, and the
estimated retirement benefits for the Independent Trustees, to commence upon
their retirement, from the 55 Morgan Stanley Dean Witter Funds as of the
calendar year ended December 31, 1999.
RETIREMENT BENEFITS FROM ALL MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
RETIREMENT ESTIMATED
BENEFITS ANNUAL
ESTIMATED ACCRUED AS BENEFITS UPON
CREDITED YEARS ESTIMATED EXPENSES RETIREMENT
OF SERVICE AT PERCENTAGE OF BY ALL FROM ALL
RETIREMENT ELIGIBLE ADOPTING ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUNDS FUNDS(2)
--------------------------- -------------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Michael Bozic................................ 10 60.44% $20,933 $50,588
Edwin J. Garn................................ 10 60.44 31,737 50,675
Wayne E. Hedien.............................. 9 51.37 39,566 43,000
Dr. Manuel H. Johnson........................ 10 60.44 13,129 75,520
Michael E. Nugent............................ 10 60.44 23,175 67,209
John L. Schroeder............................ 8 50.37 41,558 52,994
</TABLE>
---------------
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1) on
page 20.
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
--------------------------------------------------------------------------------
The following owned more than 5% of the outstanding shares of Class A of
the Fund on July 5, 2000: Walter A. Sherman, Trustee, Walter A. Sherman
Revocable Trust dated 8/25/99, 145 Sherry Avenue, Park Falls, WI
54522-14440 - 6.173%. The following owned more than 5% of the outstanding shares
of Class D of the Fund on July 5, 2000: William C. Davis Trust, John C. Lucas,
Successor Trustee, dated 4/3/87, 6000 S. High Street, Columbus, OH
43215-5656 - 7.032%.
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% of the Fund's shares of beneficial
interest outstanding.
V. INVESTMENT MANAGEMENT AND OTHER SERVICES
--------------------------------------------------------------------------------
A. INVESTMENT MANAGER AND SUB-ADVISOR
The Investment Manager to the Fund is Morgan Stanley Dean Witter Advisors
Inc., a Delaware corporation, whose address is Two World Trade Center, New York,
NY 10048. The Investment Manager is a wholly-owned subsidiary of MSDW, a
Delaware corporation. MSDW is a preeminent global financial services firm that
maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services.
The Sub-Advisor is Miller Anderson & Sherrerd, LLP, a Pennsylvania limited
liability partnership founded in 1969, and is wholly-owned by indirect
subsidiaries of Morgan Stanley Dean Witter & Co. The Sub-Advisor is located at
One Tower Bridge, West Conshohocken, Pennsylvania 19428.
Pursuant to an Investment Management Agreement (the "Management Agreement")
with the Investment Manager, the Fund has retained the Investment Manager to
provide administrative services and manage the business affairs of the Fund. The
Fund pays the Investment Manager monthly compensation calculated daily by
applying the annual rates to the Fund's daily net assets: 0.85% of the portion
of daily net assets not exceeding $500 million; 0.825% of the next $500 million;
and 0.80% of the portion of daily net assets exceeding $1 billion. The
management fee is allocated among the Classes pro rata based on the net assets
of the Fund attributable to each Class. For the period July 29, 1998
(commencement of operations) through May 31, 1999 and for the fiscal year ended
May 31, 2000, the
21
<PAGE> 54
Investment Manager accrued total compensation under the Management Agreement in
the amount of $1,692,914 and $3,088,832, respectively.
Pursuant to a sub-advisory agreement (the "Sub-Advisory Agreement") between
the Investment Manager and the Sub-Advisor, the Sub-Advisor has been retained,
subject to the overall supervision of the Investment Manager and the Trustees of
the Fund, to continuously furnish investment advice concerning individual
security selections, asset allocations and overall economic trends and to manage
the Fund's portfolio. As compensation for its service, the Investment Manager
pays the Sub-Advisor compensation equal to 40% of its monthly compensation. For
the period July 29, 1998 through May 31, 1999, and for the fiscal year ended May
31, 2000, the Sub-Advisor accrued total compensation under the Sub-Advisory
Agreement in the amount of $677,165 and $1,235,533, respectively.
The Investment Manager has retained its wholly-owned subsidiary, MSDW
Services Company, to perform administrative services for the Fund.
B. PRINCIPAL UNDERWRITER
The Fund's principal underwriter is the Distributor (which has the same
address as the Investment Manager). In this capacity, the Fund's shares are
distributed by the Distributor. The Distributor has entered into a selected
dealer agreement with Dean Witter Reynolds, which through its own sales
organization sells shares of the Fund. In addition, the Distributor may enter
into similar agreements with other selected broker-dealers. The Distributor, a
Delaware corporation, is a wholly-owned subsidiary of MSDW.
The Distributor bears all expenses it may incur in providing services under
the Distribution Agreement. These expenses include the payment of commissions
for sales of the Fund's shares and incentive compensation to Financial Advisors,
the cost of educational and/or business-related trips, and educational and/or
promotional and business-related expenses. The Distributor also pays certain
expenses in connection with the distribution of the Fund's shares, including the
costs of preparing, printing and distributing advertising or promotional
materials, and the costs of printing and distributing prospectuses and
supplements thereto used in connection with the offering and sale of the Fund's
shares. The Fund bears the costs of initial typesetting, printing and
distribution of prospectuses and supplements thereto to shareholders. The Fund
also bears the costs of registering the Fund and its shares under federal and
state 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. Under the
Distribution Agreement, the Distributor uses its best efforts in rendering
services to the Fund, but in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations, the Distributor is
not liable to the Fund or any of its shareholders for any error of judgment or
mistake of law or for any act or omission or for any losses sustained by the
Fund or its shareholders.
C. SERVICES PROVIDED BY THE INVESTMENT MANAGER AND SUB-ADVISOR
The Investment Manager manages the Fund's business affairs and supervises
the investment of the Fund's assets. The Sub-Advisor manages the investment of
the Fund's assets, including the placing of orders for the purchase and sale of
portfolio securities. The Sub-Advisor obtains and evaluates the 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.
Under the terms of the Management Agreement, the Investment Manager
maintains certain of the Fund's books and records and furnishes, at its own
expense, the 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
22
<PAGE> 55
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.
Expenses not expressly assumed by the Investment Manager under the
Management Agreement, the Sub-Advisor under the Sub-Advisory Agreement or the
Distributor, will be paid by the Fund. These expenses will be allocated among
the four Classes of shares pro rata based on the net assets of the Fund
attributable to each Class, except as described below. Such expenses include,
but are not limited to: expenses of the Plan of Distribution pursuant to Rule
12b-1; charges and expenses of any registrar, custodian, stock transfer and
dividend disbursing agent; brokerage commissions; taxes; engraving and printing
share certificates; registration costs of the Fund and its shares under federal
and state securities laws; the cost and expense of printing, including
typesetting, and distributing prospectuses of the Fund and supplements thereto
to the Fund's shareholders; all expenses of shareholders' and Trustees' meetings
and of preparing, printing and mailing of proxy statements and reports to
shareholders; fees and travel expenses of Trustees or members of any advisory
board or committee who are not employees of the Investment Manager or any
corporate affiliate of the Investment Manager; all expenses incident to any
dividend, withdrawal or redemption options; charges and expenses of any outside
service used for pricing of the Fund's shares; fees and expenses of legal
counsel, including counsel to the Trustees who are not interested persons of the
Fund or of the Investment Manager or the Sub-Advisor (not including compensation
or expenses of attorneys who are employees of the Investment Manager or the
Sub-Advisor); fees and expenses of the Fund's independent accountants;
membership dues of industry associations; interest on Fund borrowings; postage;
insurance premiums on property or personnel (including officers and Trustees) of
the Fund which inure to its benefit; extraordinary expenses (including, but not
limited to, legal claims and liabilities and litigation costs and any
indemnification relating thereto); and all other costs of the Fund's operation.
The 12b-1 fees relating to a particular Class will be allocated directly to that
Class. In addition, other expenses associated with a particular Class (except
advisory or custodial fees) may be allocated directly to that Class, provided
that such expenses are reasonably identified as specifically attributable to
that Class and the direct allocation to that Class is approved by the Trustees.
The Management Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Investment Manager is not liable to the Fund or any
of its investors for any act or omission by the Investment Manager or for any
losses sustained by the Fund or its investors.
The Management Agreement will remain in effect from year to year, provided
continuance of the Management Agreement is approved at least annually by the
vote of the holders of a majority, as defined in the Investment Company Act, of
the outstanding shares of the Fund, or by the Trustees; provided that in either
event such continuance is approved annually by the vote of a majority of the
Trustees, including a majority of the Independent Trustees.
D. DEALER REALLOWANCES
Upon notice to selected broker-dealers, the Distributor may reallow up to
the full applicable front-end sales charge 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.
E. RULE 12b-1 PLAN
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under
the Investment Company Act (the "Plan") pursuant to which each Class, other than
Class D, pays the Distributor compensation accrued daily and payable monthly at
the following annual rates: 0.25%, 1.0% and 1.0% of the average daily net assets
of Class A, Class B and Class C, respectively.
The Distributor also receives the proceeds of front-end sales charges
("FSCs") and of contingent deferred sales charges ("CDSCs") imposed on certain
redemptions of shares, which are separate and
23
<PAGE> 56
apart from payments made pursuant to the Plan. The Distributor has informed the
Fund that it and/or Dean Witter Reynolds received the proceeds of CDSCs and
FSCs, for the periods ended May 31, in approximate amounts as provided in
the table below (the Distributor did not retain any of these amounts).
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 29, 1998
THROUGH
2000 MAY 31, 1999
----------------------------- ------------------
<S> <C> <C> <C> <C>
Class A..................................... FSCs:(1) $ 76,280 FSCs:(1) $ 49,580
CDSCs: $ 121 CDSCs: $ 1,059
Class B..................................... CDSCs: $802,961 CDSCs: $531,731
Class C..................................... CDSCs: $ 12,889 CDSCs: $ 19,126
</TABLE>
---------------
(1) FSCs apply to Class A only.
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' average daily net assets are
currently each characterized as a "service fee" under the Rules 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 Rules of the Association.
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. For the fiscal year ended May 31, 2000, Class
A, Class B and Class C shares of the Fund accrued payments under the Plan
amounting to $26,899, $3,308,717 and $200,582, respectively, which amounts are
equal to 0.25%, 1.00% and 1.00% of the average daily net assets of Class A,
Class B and Class C, respectively, for the fiscal year.
The Plan was adopted in order to permit the implementation of the Fund's
method of distribution. Under this distribution method the Fund offers four
Classes, each with a different distribution arrangement.
With respect to Class A shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from proceeds of the FSC, commissions for the
sale of Class A shares, currently a gross sales credit of up to 5.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.25% of the current value of
the respective accounts for which they are the Financial Advisors or dealers of
record in all cases. On orders of $1 million or more (for which no sales charge
was paid) or net asset value purchases by employer-sponsored employee benefit
plans, whether or not qualified under the Internal Revenue Code, for which the
Transfer Agent serves as Trustee or MSDW's Retirement Plan Services serves as
recordkeeper pursuant to a written Recordkeeping Services Agreement ("MSDW
Eligible Plans"), the Investment Manager compensates Financial Advisors by
paying them, from its own funds, a gross sales credit of 1.0% of the amount
sold.
With respect to Class B shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class B shares, currently a gross sales credit of up to 5.0% of the amount
sold (except as provided in the following sentence) and an annual residual
commission, currently a residual of up to 0.25% of the current value (not
including reinvested dividends or distributions) of the amount sold in all
cases. In the case of Class B shares purchased by MSDW Eligible Plans, Dean
Witter Reynolds compensates its Financial Advisors by paying them, from its own
funds, a gross sales credit of 3.0% of the amount sold.
With respect to Class C shares, Dean Witter Reynolds compensates its
Financial Advisors by paying them, from its own funds, commissions for the sale
of Class C shares, currently a gross sales
24
<PAGE> 57
credit of up to 1.0% of the amount sold and an annual residual commission,
currently up to 1.0% of the current value of the respective accounts for which
they are the Financial Advisors of record.
With respect to Class D shares other than shares held by participants in
the Investment Manager's mutual fund asset allocation program, the Investment
Manager compensates Dean Witter Reynolds' Financial Advisors by paying them,
from its own funds, commissions for the sale of Class D shares, currently a
gross sales credit of up to 1.0% of the amount sold. There is a chargeback of
100% of the amount paid if the Class D shares are redeemed in the first year and
a chargeback of 50% of the amount paid if the Class D shares are redeemed in the
second year after purchase. The Investment Manager also compensates Dean Witter
Reynolds' Financial Advisors by paying them, from its own funds, an annual
residual commission, currently up to 0.10% of the current value of the
respective accounts for which they are the Financial Advisors of record (not
including accounts of participants in the Investment Manager's mutual fund asset
allocation program).
The gross sales credit is a charge which reflects commissions paid by Dean
Witter Reynolds to its Financial Advisors and Dean Witter Reynolds'
Fund-associated distribution-related expenses, including sales compensation, and
overhead and other branch office distribution-related expenses including (a) the
expenses of operating Dean Witter Reynolds' 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 Investment Manager pays a retention fee to Financial Advisors at an
annual rate of 0.05% of the value of shares of the Fund sold after January 1,
2000 and held for at least one year. Shares purchased through the reinvestment
of dividends will be eligible for a retention fee, provided that such dividends
were earned on shares otherwise eligible for a retention fee payment. Shares
owned in variable annuities, closed-end fund shares and shares held in 401(k)
plans where the Transfer Agent or MSDW's Retirement Plan Services is either
recordkeeper or trustee are not eligible for a retention fee.
For the first year only, the retention fee is paid on any shares of the
Fund sold after January 1, 2000 and held by shareholders on December 31, 2000.
The retention fees are paid by the Investment Manager from its own assets,
which may include profits from investment management fees payable under the
Management Agreement, as well as from borrowed funds.
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").
These expenses may include the cost of Fund-related educational and/or
business-related trips or payment of Fund-related educational and/or promotional
expenses of Financial Advisors. In the Distributor's reporting of the
distribution expenses to the Fund, in the case of Class B shares, such assumed
interest (computed at the "broker's call rate") has been calculated on the gross
credit as it is reduced by amounts received by the Distributor under the Plan
and any contingent deferred sales charges received by the Distributor upon
redemption of shares of the Fund. No other interest charge is included as a
distribution expense in the Distributor's calculation of its distribution costs
for this purpose. The broker's call rate is the interest rate charged to
securities brokers on loans secured by exchange-listed securities.
The Fund is authorized to reimburse expenses incurred or to be incurred in
promoting the distribution of the Fund's Class A and Class C shares and in
servicing shareholder accounts. Reimbursement will be made through payments at
the end of each month. The amount of each monthly payment may in no event exceed
an amount equal to a payment at the annual rate of 0.25%, in the case of Class
A, and 1.0%, in the case of Class C, of the average net assets of the respective
Class during the month. No interest or other financing charges, if any, incurred
on any distribution expenses on behalf of Class A and Class C will be
reimbursable under the Plan. With respect to Class A, in the case of all
expenses
25
<PAGE> 58
other than expenses representing the service fee, and, with respect to Class C,
in the case of all expenses other than expenses representing a gross sales
credit or a residual to Financial Advisors and other authorized financial
representatives, such amounts shall be determined at the beginning of each
calendar quarter by the Trustees, including, a majority of the Independent
Trustees. Expenses representing the service fee (for Class A) or a gross sales
credit or a residual to Financial Advisors and other authorized financial
representatives (for Class C) may be reimbursed without prior determination. In
the event that the Distributor proposes that monies shall be reimbursed for
other than such expenses, then in making quarterly determinations of the amounts
that may be reimbursed by the Fund, the Distributor will provide and the
Trustees will review a quarterly budget of projected distribution expenses to be
incurred on behalf of the Fund, together with a report explaining the purposes
and anticipated benefits of incurring such expenses. The Trustees will determine
which particular expenses, and the portions thereof, that may be borne by the
Fund, and in making such a determination shall consider the scope of the
Distributor's commitment to promoting the distribution of the Fund's Class A and
Class C shares.
Each Class paid 100% of the amounts accrued under the Plan with respect to
that Class for the fiscal year ended May 31, 2000 to the Distributor. The
Distributor and Dean Witter Reynolds estimate that they have spent, pursuant to
the Plan, $21,155,557 on behalf of Class B since the inception of the Plan. It
is estimated that this amount was spent in approximately the following ways: (i)
15.80% ($3,342,189)--advertising and promotional expenses; (ii) 0.45%
($94,825)--printing of prospectuses for distribution to other than current
shareholders; and (iii) 83.75% ($17,718,543)--other expenses, including the
gross sales credit and the carrying charge, of which 5.73% ($1,014,528)
represents carrying charges, 39.03% ($6,915,462) represents commission credits
to Dean Witter Reynolds branch offices and other selected broker-dealers for
payments of commissions to Financial Advisors and other authorized financial
representatives, and 55.24% ($9,788,553) represents overhead and other branch
office distribution-related expenses. The amounts accrued by Class A and a
portion of the amounts accrued by Class C under the Plan during the fiscal year
ended May 31, 2000 were service fees. The remainder of the amounts accrued by
Class C were for expenses which relate to compensation of sales personnel and
associated overhead expenses.
In the case of Class B shares, at any given time, the expenses of
distributing shares of the Fund may be more or less than the total of (i) the
payments made by the Fund pursuant to the Plan; and (ii) the proceeds of CDSCs
paid by investors upon redemption of shares. For example, if $1 million in
expenses in distributing Class B shares of the Fund had been incurred and
$750,000 had been received as described in (i) and (ii) above, the excess
expense would amount to $250,000. The Distributor has advised the Fund that in
the case of Class B shares the excess distribution expenses, including the
carrying charge designed to approximate the opportunity costs incurred by Dean
Witter Reynolds which arise from it having advanced monies without having
received the amount of any sales charges imposed at the time of sale of the
Fund's Class B shares, totaled $14,681,445 as of May 31, 2000 (the end of the
fiscal year), which was equal to 3.92% of the net assets of Class B on such
date. Because there is no requirement under the Plan that the Distributor be
reimbursed for all distribution expenses with respect to Class B shares or any
requirement that the Plan be continued from year to year, this excess amount
does not constitute a liability of the Fund. Although there is no legal
obligation for the Fund to pay expenses incurred in excess of payments made to
the Distributor under the Plan and the proceeds of CDSCs paid by investors upon
redemption of shares, if for any reason the Plan is terminated, the Trustees
will consider at that time the manner in which to treat such expenses. Any
cumulative expenses incurred, but not yet recovered through distribution fees or
CDSCs, may or may not be recovered through future distribution fees or CDSCs.
In the case of Class A and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales commission credited to Morgan Stanley Dean Witter Financial
Advisors and other authorized financial representatives at the time of sale may
be reimbursed in the subsequent calendar year. The Distributor has advised the
Fund that there were no such expenses that may be reimbursed in the subsequent
year in the case of Class A or Class C at December 31, 1999 (end of the
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<PAGE> 59
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.
No interested person of the Fund nor any Independent Trustee has any direct
financial interest in the operation of the Plan except to the extent that the
Distributor, the Investment Manager, Dean Witter Reynolds, MSDW Services Company
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.
On an annual basis the Trustees, including a majority of the Independent
Trustees, consider whether the Plan should be continued. Prior to approving the
last continuation of the Plan, the Trustees requested and received from the
Distributor and reviewed all the information which they deemed necessary to
arrive at an informed determination. In making their determination to continue
the Plan, the Trustees considered: (1) the Fund's experience under the Plan and
whether such experience indicates that the Plan is operating as anticipated; (2)
the benefits the Fund had obtained, was obtaining and would be likely to obtain
under the Plan, including that: (a) the Plan is essential in order to give Fund
investors a choice of alternatives for payment of distribution and service
charges and to enable the Fund to continue to grow and avoid a pattern of net
redemptions which, in turn, are essential for effective investment management;
and (b) without the compensation to individual brokers and the reimbursement of
distribution and account maintenance expenses of Dean Witter Reynolds' branch
offices made possible by the 12b-1 fees, Dean Witter Reynolds could not
establish and maintain an effective system for distribution, servicing of Fund
shareholders and maintenance of shareholder accounts; and (3) what services had
been provided and were continuing to be provided under the Plan to the Fund and
its shareholders. Based upon their review, the Trustees, including each of the
Independent Trustees, determined that continuation of the Plan would be in the
best interest of the Fund and would have a reasonable likelihood of continuing
to benefit the Fund and its shareholders. In the Trustees' quarterly review of
the Plan, they will consider its continued appropriateness and the level of
compensation provided therein.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of the
affected Class or Classes of 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 Trustees or by a vote of a majority of the
outstanding voting securities of the Fund (as defined in the Investment Company
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 Trustees shall be committed to the discretion of the Independent
Trustees.
F. OTHER SERVICE PROVIDERS
(1) TRANSFER AGENT/DIVIDEND-PAYING AGENT
Morgan Stanley Dean Witter Trust FSB is the Transfer Agent for the Fund's
shares and the Dividend Disbursing Agent for payment of dividends and
distributions on Fund shares and Agent for shareholders under various investment
plans. The principal business address of the Transfer Agent is Harborside
Financial Center, Plaza Two, Jersey City, NJ 07311.
(2) CUSTODIAN AND INDEPENDENT ACCOUNTANTS
The Bank of New York, 100 Church Street, New York, NY 10007, 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.
These balances may, at times, be substantial.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, NY
10036, served as the independent accountants of the Fund for the fiscal year
ended May 31, 2000. Effective July 1, 2000, PricewaterhouseCoopers LLP resigned
and Deloitte & Touche LLP, Two World Financial Center, New
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York, NY 10281, was appointed the independent accountants for the Fund. The
independent accountants are responsible for auditing the annual financial
statements of the Fund.
(3) AFFILIATED PERSONS
The Transfer Agent is an affiliate of the Investment Manager, the
Sub-Advisor and of the Distributor. As Transfer Agent and Dividend Disbursing
Agent, the Transfer Agent'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, the Transfer Agent receives a per shareholder account fee
from the Fund and is reimbursed for its out-of-pocket expenses in connection
with such services.
G. CODES OF ETHICS
The Fund, the Investment Manager, the Sub-Advisor and the Distributor have
each adopted a Code of Ethics pursuant to Rule 17j-1 under the Investment
Company Act. The Codes of Ethics are designed to detect and prevent improper
personal trading. The Codes of Ethics permit personnel subject to the Codes to
invest in securities, including securities that may be purchased, sold or held
by the Fund, subject to a number of restrictions and controls including
prohibitions against purchases of securities in an Initial Public Offering and a
preclearance requirement with respect to personal securities transactions.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
--------------------------------------------------------------------------------
A. BROKERAGE TRANSACTIONS
Subject to the general supervision of the Trustees, the Investment Manager
and the Sub-Adviser are responsible for decisions to buy and sell securities for
the Fund, the selection of brokers and dealers to effect the transactions, and
the negotiation of brokerage commissions, if any. Purchases and sales of
securities on a stock exchange are effected through brokers who charge a
commission for their services. In the over-the-counter market, securities are
generally traded on a "net" basis with dealers acting as principal for their own
accounts without a stated commission, although the price of the security usually
includes a profit to the dealer. The Fund also expects 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. On occasion, the Fund may also purchase certain money market
instruments directly from an issuer, in which case no commissions or discounts
are paid.
For the period July 29, 1998 through May 31, 1999, and for the fiscal year
ended May 31, 2000, the Fund paid a total of $585,960 and $1,335,676,
respectively, in brokerage commissions.
B. COMMISSIONS
Pursuant to an order of the SEC, the Fund may effect principal transactions
in certain money market instruments with Dean Witter Reynolds. The Fund will
limit its transactions with Dean Witter Reynolds to U.S. Government and
government agency securities, bank money instruments (i.e., certificates of
deposit and bankers' acceptances) and commercial paper. The transactions will be
effected with Dean Witter Reynolds only when the price available from Dean
Witter Reynolds is better than that available from other dealers.
During the period July 29, 1998 through May 31, 1999, and for the fiscal
year ended May 31, 2000, the Fund did not effect any principal transactions with
Dean Witter Reynolds.
Brokerage transactions in securities listed on exchanges or admitted to
unlisted trading privileges may be effected through Dean Witter Reynolds, Morgan
Stanley & Co. and other affiliated brokers and dealers. In order for an
affiliated broker or dealer to effect any portfolio transactions on an exchange
for the Fund, the commissions, fees or other remuneration received by the
affiliated broker or dealer must
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<PAGE> 61
be reasonable and fair compared to the commissions, fees or other remuneration
paid to other brokers in connection with comparable transactions involving
similar securities being purchased or sold on an exchange during a comparable
period of time. This standard would allow the affiliated broker or dealer to
receive no more than the remuneration which would be expected to be received by
an unaffiliated broker in a commensurate arm's-length transaction. Furthermore,
the Trustees, including the Independent Trustees, have adopted procedures which
are reasonably designed to provide that any commissions, fees or other
remuneration paid to an affiliated broker or dealer are consistent with the
foregoing standard. The Fund does not reduce the management fee it pays to the
Investment Manager by any amount of the brokerage commissions it may pay to an
affiliated broker or dealer.
During the period July 29, 1998 through May 31, 1999, and the fiscal year
ended May 31, 2000, the Fund did not pay any brokerage commissions to an
affiliated broker or dealer.
C. BROKERAGE SELECTION
The policy of the Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid in
all circumstances. The Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Investment Manager and/or the Sub-Advisor 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 and/or the Sub-Advisor rely 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. These determinations are necessarily
subjective and imprecise, as in most cases an exact dollar value for those
services is not ascertainable.
The Fund anticipates that certain of its transactions involving foreign
securities will be effected on foreign securities exchanges. Fixed commissions
on such transactions are generally higher than negotiated commissions on
domestic transactions. There is also generally less government supervision and
regulation of foreign securities exchanges and brokers than in the United
States.
In seeking to implement the Fund's policies, the Investment Manager and/or
the Sub-Advisor effect transactions with those brokers and dealers who the
Investment Manager and/or the Sub-Advisor believe provide the most favorable
prices and are capable of providing efficient executions. If the Investment
Manager and/or the Sub-Advisor believe the prices and executions are obtainable
from more than one broker or dealer, it may give consideration to placing
portfolio transactions with those brokers and dealers who also furnish research
and other services to the Fund or the Investment Manager or the Sub-Advisor. The
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 investment; wire
services; and appraisals or evaluations of portfolio securities. The information
and services received by the Investment Manager and the Sub-Advisor from brokers
and dealers may be of benefit to them in the management of accounts of some of
their other clients and may not in all cases benefit the Fund directly.
The Investment Manager and the Sub-Advisor each currently serves as
investment adviser to a number of clients, including other investment companies,
and may in the future act as investment manager or advisor to others. It is the
practice of the Investment Manager and the Sub-Advisor to cause purchase and
sale transactions to be allocated among the Fund and others whose assets it
manages in such manner as it deems equitable. In making such allocations among
the Fund and other client accounts, 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 the opinions of the persons
responsible for managing the portfolios of the Fund and other client accounts.
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D. DIRECTED BROKERAGE
During the fiscal year ended May 31, 2000, the Fund paid $6,408 in
brokerage commissions in connection with transactions in the aggregate amount of
$8,083,713 to brokers because of research services provided.
E. REGULAR BROKER-DEALERS
During the fiscal year ended May 31, 2000, the Fund did not purchase
securities issued by brokers or dealers that were among the ten brokers or the
ten dealers that executed transactions for or with the Fund in the largest
dollar amounts during the year. At May 31, 2000, the Fund did not own any
securities issued by any of these issuers.
VII. CAPITAL STOCK AND OTHER SECURITIES
--------------------------------------------------------------------------------
The shareholders of the Fund are entitled to a full vote for each full
share of beneficial interest held. The Fund is authorized to issue an unlimited
number of shares of beneficial interest. All shares of beneficial interest of
the Fund are of $0.01 par value and are equal as to earnings, assets and voting
privileges except that each Class will have exclusive voting privileges with
respect to matters relating to distribution expenses borne solely by such Class
or any other matter in which the interests of one Class differ from the
interests of any other Class. In addition, Class B shareholders will have the
right to vote on any proposed material increase in Class A's expenses, if such
proposal is submitted separately to Class A shareholders. Also, Class A, Class B
and Class C bear expenses related to the distribution of their respective
shares.
The Fund's 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 presently authorized any such
additional series or Classes of shares other than as set forth in the
Prospectus.
The Fund is not required to hold annual meetings of shareholders and in
ordinary circumstances the Fund does not intend to hold such meetings. The
Trustees may call special meetings of shareholders for action by shareholder
vote as may be required by the Investment Company Act or the Declaration of
Trust. Under certain circumstances the Trustees may be removed by the actions of
the Trustees. Under certain circumstances, the Trustees may be removed by the
actions of the Trustees. In addition, under certain circumstances, the
shareholders may call a meeting to remove the Trustees and the Fund is required
to provide assistance in communicating with shareholders about such a meeting.
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.
Under Massachusetts law, shareholders of a business trust may, under
certain limited circumstances, be held personally liable as partners for the
obligations of the Fund. However, the Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Fund,
requires that notice of such Fund obligations include such disclaimer, and
provides for indemnification out of the Fund's property for any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability, and
the nature of the Fund's assets and operations, the possibility of the Fund
being unable to meet its obligations is remote and thus, in the opinion of
Massachusetts counsel to the Fund, the risk to Fund shareholders of personal
liability is remote.
The Trustees themselves have the power to alter the number and the terms of
office of the Trustees (as provided for in the Declaration of Trust), and they
may at any time lengthen or shorten 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.
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VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
--------------------------------------------------------------------------------
A. PURCHASE/REDEMPTION OF SHARES
Information concerning how Fund shares are offered to the public (and how
they are redeemed and exchanged) is provided in the Fund's Prospectus.
TRANSFER AGENT AS AGENT. With respect to the redemption or repurchase of
Fund shares, the application of proceeds to the purchase of new shares in the
Fund or any other Morgan Stanley Dean Witter Funds and the general
administration of the exchange privilege, the Transfer Agent acts as agent for
the Distributor and for the shareholder's authorized broker-dealer, if any, in
the performance of such functions. With respect to exchanges, redemptions or
repurchases, the Transfer Agent shall be liable for its own negligence and not
for the default or negligence of its correspondents or for losses in transit.
The Fund shall not be liable for any default or negligence of the Transfer
Agent, the Distributor or any authorized broker-dealer.
The Distributor and any authorized broker-dealer have 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
Morgan Stanley Dean Witter Fund and the general administration of the exchange
privilege. No commission or discounts will be paid to the Distributor or any
authorized broker-dealer for any transactions pursuant to the exchange
privilege.
TRANSFERS OF SHARES. In the event a shareholder requests a transfer of
Fund shares to a new registration, the shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to a CDSC or free of such charge (and with regard to the length
of time shares subject to the charge have been held), any transfer involving
less than all of the shares in an account will be made on a pro rata basis (that
is, by transferring shares in the same proportion that the transferred shares
bear to the total shares in the account immediately prior to the transfer). The
transferred shares will continue to be subject to any applicable CDSC as if they
had not been so transferred.
B. OFFERING PRICE
The Fund's Class B, Class C and Class D shares are offered at net asset
value per share and the Class A shares are offered at net asset value per share
plus any applicable FSC which is distributed among the Fund's Distributor, Dean
Witter Reynolds and other authorized dealers as described in Section "V.
Investment Management and Other Services--E. Rule 12b-1 Plan."
The price of Fund shares, called "net asset value," is based on the value
of the Fund's portfolio securities. Net asset value per share of each Class is
calculated by dividing the value of the portion of the Fund's securities and
other assets attributable to that Class, less the liabilities attributable to
that Class, by the number of shares of that Class outstanding. The assets of
each Class of shares are invested in a single portfolio. The net asset value of
each Class, however, will differ because the Classes have different ongoing
fees.
In the calculation of the Fund's net asset value: (1) an equity portfolio
security listed or traded on the New York or American Stock Exchange, NASDAQ, or
other exchange is valued at its latest sale price, prior to the time when assets
are valued; if there were no sales that day, the security is valued at the
latest bid price (in cases where 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); and (2) all other portfolio securities
for which over-the-counter market quotations are readily available are valued at
the latest bid price. When market quotations are not readily available,
including circumstances under which it is determined by the Investment Manager
and/or the Sub-Advisor 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. For valuation purposes, quotations of
foreign portfolio securities, other
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assets and liabilities and forward contracts stated in foreign currency are
translated into U.S. dollar equivalents at the prevailing market rates prior to
the close of the New York Stock Exchange.
Short-term debt 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.
Certain of the Fund's portfolio securities may be valued by an outside
pricing service approved by the Fund's Trustees. The pricing service may utilize
a matrix system incorporating security quality, maturity and coupon as the
evaluation model parameters, and/or research evaluations by its staff, including
review of broker-dealer market price quotations in determining what it believes
is the fair valuation of the portfolio securities valued by such pricing
service.
Listed options on debt securities are valued at the latest sale price on
the exchange on which they are listed unless no sales of such options have taken
place that day, in which case they will be valued at the mean between their
latest bid and asked prices. Unlisted options on debt securities are valued at
the mean between their latest bid and asked price. Futures are valued at the
latest sale price on the commodities exchange on which they trade unless the
Trustees determine that such price does not reflect their market value, in which
case they will be valued at their fair value as determined in good faith under
procedures established by and under the supervision of the Trustees.
Generally, trading in foreign securities, as well as corporate bonds, U.S.
Government securities and money market instruments, is substantially completed
each day at various times prior to the close of the New York Stock Exchange. The
values of such securities used in computing the net asset value of the Fund's
shares are determined as of such times. Foreign currency exchange rates are also
generally determined prior to the close of the New York Stock Exchange.
Occasionally, events which may affect the values of such securities and such
exchange rates may occur between the times at which they are determined and the
close of the New York Stock Exchange and will therefore not be reflected in the
computation of the Fund's net asset value. If events that may affect the value
of such securities occur during such period, then these securities may be valued
at their fair value as determined in good faith under procedures established by
and under the supervision of the Trustees.
IX. TAXATION OF THE FUND AND SHAREHOLDERS
--------------------------------------------------------------------------------
The Fund generally will make two basic types of distributions: ordinary
dividends and long-term capital gain distributions. These two types of
distributions are reported differently on a shareholder's income tax return and
they are also subject to different rates of tax. The tax treatment of the
investment activities of the Fund will affect the amount and timing and
character of the distributions made by the Fund. Tax issues relating to the Fund
are not generally a consideration for shareholders such as tax-exempt entities
and tax-advantaged retirement vehicles such as an IRA or 401(k) plan.
Shareholders are urged to consult their own tax professionals regarding specific
questions as to federal, state or local taxes.
INVESTMENT COMPANY TAXATION. The Fund intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986. As such, the Fund will not be subject to federal income tax on its net
investment income and capital gains, if any, to the extent that it distributes
such income and capital gains to its shareholders.
The Fund generally intends to distribute sufficient income and gains so
that the Fund will not pay corporate income tax on its earnings. The Fund also
generally intends to distribute to its shareholders in each calendar year a
sufficient amount of ordinary income and capital gains to avoid the imposition
of a 4% excise tax. However, the Fund may instead determine to retain all or
part of any net long-term capital gains in any year for reinvestment. In such
event, the Fund will pay federal income tax (and possibly excise tax) on such
retained gains.
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Gains or losses on sales of securities by the Fund will be long-term
capital gains or losses if the securities have a tax holding period of more than
one year. Gains or losses on the sale of securities with a tax holding period of
one year or less will be short-term gains or losses.
Gains or losses on the Fund's transactions in listed non-equity options,
futures and options on futures generally are treated as 60% long-term and 40%
short-term. When the Fund engages in options and futures transactions, various
tax rules may accelerate or defer recognition of certain gains and losses,
change the character of certain gains or losses, or alter the holding period of
other investments held by the Fund. The application of these rules would
therefore also affect the amount, timing and character of distributions made by
the Fund.
The Fund's foreign currency gains or losses from forward contracts, futures
contracts that are not "regulated futures contracts," and unlisted options, and
certain other foreign currency gains or losses derived with respect to
fixed-income securities, are treated as ordinary income or loss. In general,
such foreign currency gains or losses will increase or decrease the amount of
the Fund's income available to be distributed to shareholders as ordinary
income, rather than increasing or decreasing the amount of the Fund's net
capital gain. Additionally, if such foreign currency losses exceed other
ordinary income during a taxable year, the Fund would not be able to make
ordinary income distributions for the year.
Under certain tax rules, the Fund may be required to accrue a portion of
any discount at which certain securities are purchased as income each year even
though the Fund receives no payments in cash on the security during the year. In
addition, if the Fund invests in an equity security of a non-U.S. corporation
classified as a "passive foreign investment company" for U.S. tax purposes, the
application of certain technical tax provisions applying to investments in such
companies may result in the Fund being required to accrue income in respect of
the security without any receipt of cash attributable to such income. To the
extent that the Fund invests in such securities, it would be required to pay out
such accrued discount as an income distribution in each year in order to avoid
taxation at the Fund level. Such distributions will be made from the available
cash of the Fund or by liquidation of portfolio securities if necessary. If a
distribution of cash necessitates the liquidation of portfolio securities, the
Investment Manager will select which securities to sell. The Fund may realize a
gain or loss from such sales. In the event the Fund realizes net capital gains
from such transactions, its shareholders may receive a larger capital gain
distribution, if any, than they would in the absence of such transactions.
TAXATION OF DIVIDENDS AND DISTRIBUTIONS. Shareholders normally will have
to pay federal income taxes, and any state and/or local income taxes, on the
dividends and other distributions they receive from the Fund. Such dividends and
distributions, to the extent that they are derived from net investment income or
short-term capital gains, are taxable to the shareholder as ordinary income
regardless of whether the shareholder receives such payments in additional
shares or in cash.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder has
held the Fund's shares and regardless of whether the distribution is received in
additional shares or in cash. The maximum tax rate on long-term capital gains
realized by non-corporate shareholders is 20%.
Shareholders are generally taxed on any ordinary dividend or capital gain
distributions from the Fund in the year they are actually distributed. However,
if any such dividends or distributions are declared in October, November or
December and paid in January then such amounts will be treated for tax purposes
as received by the shareholders on December 31, to shareholders of record of
such month.
Subject to certain exceptions, a corporate shareholder may be eligible for
a 70% dividends received deduction to the extent that the Fund earns and
distributes qualifying dividends from its investments. Distributions of net
capital gains by the Fund will not be eligible for the dividends received
deduction.
Shareholders who are not citizens or residents of the United States and
certain foreign entities may be subject to withholding of United States tax on
distributions made by the Fund of investment income and short-term capital
gains.
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After the end of each calendar year, shareholders will be sent information
on their dividends and capital gain distributions for tax purposes, including
the portion taxable as ordinary income, the portion taxable as long-term capital
gains and the amount of any dividends eligible for the federal dividends
received deduction for corporations.
PURCHASES AND REDEMPTIONS AND EXCHANGES OF FUND SHARES. Any dividend or
capital gains distribution received by a shareholder from any investment company
will have the effect of reducing the net asset value of the shareholder's stock
in that company by the exact amount of the dividend or capital gains
distribution. Furthermore, such dividends and capital gains distributions 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
the distribution of realized long-term capital gains, such payment or
distribution would be in part a return of the shareholder's investment but
nonetheless would be taxable to the shareholder. Therefore, an investor should
consider the tax implications of purchasing Fund shares immediately prior to a
distribution record date.
In general, a sale of shares results in capital gain or loss, and for
individual shareholders, is taxable at a federal rate dependent upon the length
of time the shares were held. A redemption of a shareholder's Fund shares is
normally treated as a sale for tax purposes. Fund shares held for a period of
one year or less will, for tax purposes, generally result in short-term gains or
losses and those held for more than one year generally result in long-term gain
or loss. Under current law, the maximum tax rate on long-term capital gains
realized by non-corporate shareholders is 20%. Any loss realized by shareholders
upon a sale or redemption of shares within six months of the date of their
purchase will be treated as a long-term capital loss to the extent of any
distributions of net long-term capital gains with respect to such shares during
the six-month period.
Gain or loss on the sale or redemption of shares in the Fund is measured by
the difference between the amount received and the tax basis of the shares.
Shareholders should keep records of investments made (including shares acquired
through reinvestment of dividends and distributions) so they can compute the tax
basis of their shares. Under certain circumstances a shareholder may compute and
use an average cost basis in determining the gain or loss on the sale or
redemption of shares.
Exchanges of Fund shares for shares of another fund, including shares of
other Morgan Stanley Dean Witter Funds, are also subject to similar tax
treatment. Such an exchange is treated for tax purposes as a sale of the
original shares in the first fund, followed by the purchase of shares in the
second fund.
If a shareholder realizes a loss on the redemption or exchange of a fund's
shares and reinvests in that fund's shares within 30 days before or after the
redemption or exchange, the transactions may be subject to the "wash sale"
rules, resulting in a postponement of the recognition of such loss for tax
purposes.
X. UNDERWRITERS
--------------------------------------------------------------------------------
The Fund's shares are offered to the public on a continuous basis. The
Distributor, as the principal underwriter of the shares, has certain obligations
under the Distribution Agreement concerning the distribution of the shares.
These obligations and the compensation the Distributor receives are described
above in the sections titled "Principal Underwriter" and "Rule 12b-1 Plan."
XI. CALCULATION OF PERFORMANCE DATA
--------------------------------------------------------------------------------
From time to time, the Fund may quote its "total return" in advertisements
and sales literature. These figures are computed separately for Class A, Class
B, Class C and Class D shares. The Fund's "average annual total return"
represents an annualization of the Fund's total return over a particular period
and is computed by finding the annual percentage rate which will result in the
ending redeemable value of a hypothetical $1,000 investment made at the
beginning of a one, five or ten year period, or for the period from the date of
commencement of operations, if shorter than any of the foregoing. The
34
<PAGE> 67
ending redeemable value is reduced by any contingent deferred sales charge
("CDSC") at the end of the one, five, ten year or other period. For the purpose
of this calculation, it is assumed that all dividends and distributions are
reinvested. The formula for computing the average annual total return involves a
percentage obtained by dividing the ending redeemable value by the amount of the
initial investment (which in the case of Class A shares is reduced by the Class
A initial sales charge), 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. The average annual total returns of Class A, Class B, Class C and Class
D for the one year period ended May 31, 2000 and for the period July 29, 1998
(commencement of operations) through May 31, 2000 were as follows: Class A:
4.34% and 11.76%, respectively; Class B: 4.32% and 12.30%, respectively; Class
C: 8.31% and 14.36%, respectively; and Class D: 10.43% and 15.42%, respectively.
In addition, the Fund may advertise its total return for each Class over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. These 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 the Fund may
be calculated in the manner described above, but without deduction for any
applicable sales charge. Based on this calculation, the annual total returns of
Class A, Class B, Class C and Class D for the one year period ended May 31, 2000
and for the period July 29, 1998 (commencement of operations) through May 31,
2000 were as follows: Class A: 10.12% and 15.09%, respectively; Class B: 9.32%
and 14.26%, respectively; Class C: 9.31% and 14.36%, respectively; and Class D:
10.43% and 15.42%, respectively.
In addition, the Fund may compute its aggregate total return for each Class
for specified periods by determining the aggregate percentage rate which will
result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is assumed that
all dividends and distributions are reinvested. The formula for computing
aggregate total return involves a percentage obtained by dividing the ending
value (without reduction for any sales charge) by the initial $1,000 investment
and subtracting 1 from the result. Based on the foregoing calculation, the total
returns of Class A, Class B, Class C and Class D for the one year period ended
May 31, 2000 and for the period July 29, 1998 (commencement of operations)
through May 31, 2000 were as follows: Class A: 10.12% and 29.50%, respectively;
Class B: 9.32% and 27.80%, respectively; Class C: 9.31% and 28.00%,
respectively; and Class D: 10.43% and 30.20%, respectively.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in each Class of shares of the Fund by adding 1 to
the Fund's aggregate total return to date (expressed as a decimal and without
taking into account the effect of any applicable CDSC) and multiplying by
$9,475, $48,000 and $97,000 in the case of Class A (investments of $10,000,
$50,000 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. Investments of $10,000, $50,000 and $100,000 in each Class at
inception of the Class would have grown to the following amounts at May 31,
2000:
<TABLE>
<CAPTION>
INVESTMENT AT INCEPTION OF:
INCEPTION ----------------------------
CLASS DATE: $10,000 $50,000 $100,000
----- --------- ------- ------- --------
<S> <C> <C> <C> <C>
Class A............................................ 7/29/98 $12,270 $62,160 $125,615
Class B............................................ 7/29/98 12,780 63,900 127,800
Class C............................................ 7/29/98 12,800 64,000 128,000
Class D............................................ 7/29/98 13,020 65,100 130,200
</TABLE>
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by recognized organizations.
35
<PAGE> 68
XII. FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
EXPERTS. The financial statements of the Fund for the fiscal year ended
May 31, 2000, included in this Statement of Additional Information and
incorporated by reference in the Prospectus have been so included and
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
* * * * *
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 SEC. The complete Registration Statement may be obtained from the
SEC.
36
<PAGE> 69
37
MORGAN STANLEY DEAN WITTER EQUITY FUND
PORTFOLIO OF INVESTMENTS May 31, 2000
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-------------------------------------------------------
<C> <S> <C>
COMMON AND PREFERRED STOCKS (96.7%)
Alcoholic Beverages (0.9%)
49,200 Anheuser-Busch Companies,
Inc. $ 3,813,000
------------
Aluminum (0.2%)
15,222 Alcoa, Inc. ................. 889,536
------------
Beverages - Non-Alcoholic (1.9%)
88,900 Coca Cola Co. ............... 4,745,038
75,100 PepsiCo, Inc. ............... 3,055,631
------------
7,800,669
------------
Biotechnology (1.3%)
37,100 Amgen Inc.*.................. 2,360,488
29,000 Genentech, Inc.*............. 3,113,875
------------
5,474,363
------------
Building Materials/DIY Chains (1.0%)
84,650 Home Depot, Inc. (The)....... 4,131,978
------------
Building Products (0.5%)
104,800 Masco Corp. ................. 2,063,250
------------
Cable Television (1.6%)
17,600 AT&T Corp. - Liberty Media
Group (Class A)*............ 779,900
34,700 Comcast Corp. (Class A
Special)*................... 1,314,263
28,000 EchoStar Communications Corp.
(Class A)*.................. 1,118,250
51,700 MediaOne Group, Inc.*........ 3,454,206
------------
6,666,619
------------
Cellular Telephone (1.0%)
39,800 Sprint Corp. (PCS Group)*.... 2,208,900
40,950 Vodafone AirTouch PLC (ADR)
(United Kingdom)............ 1,876,022
------------
4,084,922
------------
Clothing/Shoe/Accessory Stores (1.2%)
140,800 Gap, Inc. (The).............. 4,936,800
------------
Computer Communications (2.4%)
175,800 Cisco Systems, Inc.*......... 10,009,613
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-------------------------------------------------------
<C> <S> <C>
Computer Software (5.3%)
21,900 Citrix Systems, Inc.*........ $ 1,152,488
58,100 Computer Associates
International, Inc. ........ 2,992,150
167,700 Microsoft Corp.*............. 10,481,249
92,900 Oracle Corp.*................ 6,671,381
6,500 Veritas Software Corp.*...... 756,844
------------
22,054,112
------------
Computer/Video Chains (1.1%)
21,600 Best Buy Co., Inc.*.......... 1,382,400
27,100 Circuit City Stores, Inc. -
Circuit City Group.......... 1,349,919
45,300 RadioShack Corp. ............ 1,922,419
------------
4,654,738
------------
Construction/Agricultural Equipment/Trucks
(0.8%)
46,100 Caterpillar, Inc. ........... 1,763,325
35,300 Deere & Co. ................. 1,467,156
------------
3,230,481
------------
Contract Drilling (3.0%)
89,700 Global Marine, Inc.*......... 2,539,631
105,400 Nabors Industries, Inc.*..... 4,532,200
131,000 R & B Falcon Corp.*.......... 3,070,313
56,800 Santa Fe International
Corp. ...................... 2,204,550
------------
12,346,694
------------
Discount Chains (2.6%)
100,900 Costco Wholesale Corp.*...... 3,222,494
128,900 Wal-Mart Stores, Inc......... 7,427,862
------------
10,650,356
------------
Diversified Electronic Products (0.2%)
10,300 JDS Uniphase Corp.*.......... 905,756
------------
Diversified Financial Services (3.4%)
101,000 American Express Co. ........ 5,435,062
139,625 Citigroup, Inc. ............. 8,682,929
------------
14,117,991
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 70
MORGAN STANLEY DEAN WITTER EQUITY FUND
PORTFOLIO OF INVESTMENTS May 31, 2000, continued
38
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-------------------------------------------------------
<C> <S> <C>
Diversified Manufacturing (4.3%)
50,300 Dover Corp. ................. $ 2,338,950
98,400 Honeywell International,
Inc. ....................... 5,381,250
31,400 Minnesota Mining &
Manufacturing Co. .......... 2,692,550
158,000 Tyco International Ltd.
(Bermuda)................... 7,435,874
------------
17,848,624
------------
Drugstore Chains (0.5%)
49,700 CVS Corp. ................... 2,161,950
------------
E.D.P. Peripherals (0.9%)
23,900 EMC Corp.*................... 2,779,869
12,500 Network Appliance, Inc.*..... 806,250
------------
3,586,119
------------
E.D.P. Services (0.9%)
59,600 Electronic Data Systems
Corp. ...................... 3,833,025
------------
Electronic Data Processing (4.7%)
182,000 Compaq Computer Corp. ....... 4,777,499
233,900 Dell Computer Corp.*......... 10,086,937
19,800 International Business
Machines Corp. ............. 2,124,788
34,600 Sun Microsystems, Inc.*...... 2,651,225
------------
19,640,449
------------
Electronic Production Equipment (0.7%)
27,300 Applied Materials, Inc.*..... 2,279,550
17,600 Celestica, Inc.*............. 819,500
------------
3,099,050
------------
Finance Companies (0.9%)
10,600 Capital One Financial
Corp. ...................... 500,850
58,400 Freddie Mac.................. 2,598,800
21,900 SLM Holding Corp. ........... 737,756
------------
3,837,406
------------
Food Chains (0.5%)
46,000 Safeway Inc.*................ 2,121,750
------------
Hospital/Nursing Management (1.4%)
129,900 HCA - The Healthcare Corp.... 3,507,300
85,500 Tenet Healthcare Corp.*...... 2,190,938
------------
5,698,238
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-------------------------------------------------------
<C> <S> <C>
Insurance Brokers/Services (1.0%)
36,500 AON Corp. ................... $ 1,282,063
26,600 Marsh & McLennan Companies,
Inc. ....................... 2,927,662
------------
4,209,725
------------
Integrated Oil Companies (3.0%)
55,800 Exxon Mobil Corp. ........... 4,648,838
84,500 Royal Dutch Petroleum Co.
(Netherlands)............... 5,275,969
42,300 Texaco, Inc. ................ 2,429,606
------------
12,354,413
------------
Internet Services (1.7%)
90,800 America Online, Inc.*........ 4,812,400
19,500 Yahoo! Inc.*................. 2,203,500
------------
7,015,900
------------
Investment Bankers/Brokers/Services (1.0%)
26,800 Merrill Lynch & Co., Inc. ... 2,643,150
55,950 Schwab (Charles) Corp. ...... 1,608,563
------------
4,251,713
------------
Life Insurance (0.3%)
19,900 American General Corp. ...... 1,274,844
------------
Major Banks (2.5%)
65,400 Bank of America Corp. ....... 3,633,788
89,800 Bank of New York Co.,
Inc. ....................... 4,214,987
29,900 Chase Manhattan Corp.
(The)....................... 2,233,156
2,100 SunTrust Banks, Inc. ........ 125,475
------------
10,207,406
------------
Major Chemicals (1.2%)
34,700 Du Pont (E.I.) de Nemours &
Co., Inc. .................. 1,700,300
100,000 Rohm & Haas Co. ............. 3,412,500
------------
5,112,800
------------
Major Pharmaceuticals (7.2%)
44,700 American Home Products
Corp. ...................... 2,408,213
26,000 Bristol-Myers Squibb Co. .... 1,431,625
30,400 Johnson & Johnson............ 2,720,800
39,000 Lilly (Eli) & Co. ........... 2,968,875
50,200 Merck & Co., Inc. ........... 3,746,174
54,700 Pfizer, Inc. ................ 2,437,569
67,700 Pharmacia Corp. ............. 3,516,169
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 71
MORGAN STANLEY DEAN WITTER EQUITY FUND
PORTFOLIO OF INVESTMENTS May 31, 2000, continued
39
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-------------------------------------------------------
<C> <S> <C>
48,900 Schering-Plough Corp. ....... $ 2,365,538
68,400 Warner-Lambert Co. .......... 8,353,349
------------
29,948,312
------------
Major U.S. Telecommunications (5.3%)
70,559 AT&T Corp. .................. 2,447,515
70,900 Bell Atlantic Corp. ......... 3,748,838
156,472 SBC Communications, Inc. .... 6,835,870
80,000 Sprint Corp. (FON Group)..... 4,840,000
113,103 WorldCom, Inc.*.............. 4,248,431
------------
22,120,654
------------
Media Conglomerates (2.9%)
55,500 Disney (Walt) Co. ........... 2,341,406
108,400 News Corporation Ltd. (The)
(Pref.) (ADR) (Australia)... 4,247,926
44,300 Time Warner Inc. ............ 3,496,931
31,600 Viacom, Inc. (Class B)....... 1,959,200
------------
12,045,463
------------
Medical Equipment & Supplies (0.6%)
46,900 Medtronic, Inc. ............. 2,421,213
------------
Medical Specialties (1.8%)
27,800 Baxter International,
Inc. ....................... 1,848,700
52,700 Guidant Corp.*............... 2,667,938
55,700 PE Corporation-PE Biosystems
Group....................... 3,091,350
------------
7,607,988
------------
Medical/Nursing Services (0.1%)
32,700 Healthsouth Corp.*........... 210,506
------------
Mid-Sized Banks (0.7%)
110,600 Firstar Corp. ............... 2,827,213
------------
Military/Gov't/Technical (0.1%)
5,544 General Motors Corp. (Class
H)*......................... 545,738
------------
Motor Vehicles (0.5%)
19,500 Ford Motor Co. .............. 946,969
15,794 General Motors Corp.......... 1,113,477
------------
2,060,446
------------
Movies/Entertainment (0.0%)
5,900 Liberty Digital, Inc. (Class
A)*......................... 185,850
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-------------------------------------------------------
<C> <S> <C>
Multi-Line Insurance (1.3%)
49,000 American International Group,
Inc. ....................... $ 5,515,563
------------
Multi-Sector Companies (4.3%)
337,300 General Electric Co. ........ 17,750,412
------------
Oil/Gas Transmission (0.6%)
43,100 Coastal Corp. ............... 2,645,263
------------
Oilfield Services/Equipment (1.7%)
108,100 Halliburton Co. ............. 5,513,100
21,200 Smith International, Inc.*... 1,676,125
------------
7,189,225
------------
Other Telecommunications (0.8%)
48,400 Global Crossing Ltd.
(Bermuda)*.................. 1,213,025
53,900 Qwest Communications
International, Inc.*........ 2,280,644
------------
3,493,669
------------
Package Goods/Cosmetics (2.3%)
112,100 Avon Products, Inc. ......... 4,631,131
50,900 Kimberly-Clark Corp. ........ 3,079,450
29,800 Procter & Gamble Co. ........ 1,981,700
------------
9,692,281
------------
Packaged Foods (0.6%)
65,200 General Mills, Inc. ......... 2,587,625
------------
Semiconductors (6.1%)
142,200 Intel Corp. ................. 17,730,562
13,400 LSI Logic Corp.*............. 706,013
15,600 National Semiconductor
Corp.*...................... 838,500
79,800 Texas Instruments, Inc. ..... 5,765,549
------------
25,040,624
------------
Specialty Chemicals (0.5%)
178,300 Grace (W. R.) & Co.*......... 2,239,894
------------
Specialty Insurers (0.4%)
28,300 XL Capital Ltd. (Class A)
(Bermuda)................... 1,683,850
------------
Telecommunications Equipment (4.5%)
16,000 Corning Inc. ................ 3,094,999
53,500 Lucent Technologies Inc. .... 3,069,563
16,805 Motorola, Inc. .............. 1,575,469
26,600 Nokia Corp. (ADR)
(Finland)................... 1,383,200
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 72
MORGAN STANLEY DEAN WITTER EQUITY FUND
PORTFOLIO OF INVESTMENTS May 31, 2000, continued
40
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-------------------------------------------------------
<C> <S> <C>
129,400 Nortel Networks Corp. ....... $ 7,028,037
37,600 QUALCOMM Inc.*............... 2,493,350
------------
18,644,618
------------
Tobacco (0.5%)
84,400 Philip Morris Companies,
Inc......................... 2,204,950
------------
TOTAL COMMON AND PREFERRED
STOCKS
(Identified Cost
$373,501,072)................ 402,745,647
------------
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
---------
SHORT-TERM INVESTMENT (a) (2.6%)
U.S. GOVERNMENT AGENCY
$11,000 Federal Home Loan Banks 6.30%
due 06/01/00
(Amortized Cost
$11,000,000)................ 11,000,000
------------
</TABLE>
<TABLE>
<CAPTION>
VALUE
------------------------------------------------------
<C> <S> <C>
TOTAL INVESTMENTS
(Identified Cost
$384,501,072) (b).............. 99.3% $413,745,647
OTHER ASSETS IN
EXCESS OF LIABILITIES.......... 0.7 3,002,029
---- ------------
NET ASSETS..................... 100.0% $416,747,676
===== ============
</TABLE>
---------------------
<TABLE>
<C> <S>
ADR American Depository Receipt.
* Non-income producing security.
(a) Purchased on a discount basis. The interest rate
shown has been adjusted to reflect a money market
equivalent yield.
(b) The aggregate cost for federal income tax
purposes approximates identified cost. The
aggregate gross unrealized appreciation is
$46,754,635 and the aggregate gross unrealized
depreciation is $17,510,060, resulting in net
unrealized appreciation of $29,244,575.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 73
41
MORGAN STANLEY DEAN WITTER EQUITY FUND
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
May 31, 2000
ASSETS:
Investments in securities, at value
(identified cost $384,501,072)............................. $413,745,647
Cash........................................................ 61,559
Receivable for:
Investments sold........................................ 7,165,811
Shares of beneficial interest sold...................... 1,027,780
Dividends............................................... 306,867
Prepaid expenses and other assets........................... 97,924
------------
TOTAL ASSETS............................................ 422,405,588
------------
LIABILITIES:
Payable for:
Investments purchased................................... 4,454,875
Shares of beneficial interest repurchased............... 442,660
Plan of distribution fee................................ 362,608
Investment management fee............................... 319,462
Accrued expenses and other payables......................... 78,307
------------
TOTAL LIABILITIES....................................... 5,657,912
------------
NET ASSETS.............................................. $416,747,676
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $342,813,456
Net unrealized appreciation................................. 29,244,575
Accumulated undistributed net realized gain................. 44,689,645
------------
NET ASSETS.............................................. $416,747,676
============
CLASS A SHARES:
Net Assets.................................................. $12,482,785
Shares Outstanding (unlimited authorized, $.01 par value)... 968,946
NET ASSET VALUE PER SHARE............................... $12.88
============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value)........ $13.59
============
CLASS B SHARES:
Net Assets.................................................. $374,215,095
Shares Outstanding (unlimited authorized, $.01 par value)... 29,452,428
NET ASSET VALUE PER SHARE............................... $12.71
============
CLASS C SHARES:
Net Assets.................................................. $24,710,700
Shares Outstanding (unlimited authorized, $.01 par value)... 1,941,238
NET ASSET VALUE PER SHARE............................... $12.73
============
CLASS D SHARES:
Net Assets.................................................. $5,339,096
Shares Outstanding (unlimited authorized, $.01 par value)... 412,376
NET ASSET VALUE PER SHARE............................... $12.95
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 74
MORGAN STANLEY DEAN WITTER EQUITY FUND
FINANCIAL STATEMENTS, continued
42
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended May 31, 2000
NET INVESTMENT LOSS:
INCOME
Dividends (net of $31,740 foreign withholding tax).......... $ 3,032,216
Interest.................................................... 762,698
------------
TOTAL INCOME............................................ 3,794,914
------------
EXPENSES
Plan of distribution fee (Class A shares)................... 26,899
Plan of distribution fee (Class B shares)................... 3,308,717
Plan of distribution fee (Class C shares)................... 200,582
Investment management fee................................... 3,088,832
Transfer agent fees and expenses............................ 382,622
Shareholder reports and notices............................. 75,767
Professional fees........................................... 66,257
Registration fees........................................... 66,253
Custodian fees.............................................. 41,612
Trustees' fees and expenses................................. 12,564
Offering costs.............................................. 7,533
Other....................................................... 27,969
------------
TOTAL EXPENSES.......................................... 7,305,607
------------
NET INVESTMENT LOSS..................................... (3,510,693)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain........................................... 48,901,924
Net unrealized appreciation................................. (14,053,513)
------------
NET GAIN................................................ 34,848,411
------------
NET INCREASE................................................ $ 31,337,718
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 75
MORGAN STANLEY DEAN WITTER EQUITY FUND
FINANCIAL STATEMENTS, continued
43
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD
FOR THE YEAR JULY 29, 1998*
ENDED THROUGH
MAY 31, 2000 MAY 31, 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss................................... $ (3,510,693) $ (1,293,228)
Net realized gain..................................... 48,901,924 2,324,956
Net unrealized appreciation........................... (14,053,513) 43,298,088
------------ ------------
NET INCREASE...................................... 31,337,718 44,329,816
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAIN:
Class A shares........................................ (56,992) --
Class B shares........................................ (1,843,858) --
Class C shares........................................ (108,119) --
Class D shares........................................ (5,936) --
------------ ------------
TOTAL DISTRIBUTIONS............................... (2,014,905) --
------------ ------------
Net increase from transactions in shares of
beneficial interest.................................. 90,334,680 252,660,367
------------ ------------
NET INCREASE...................................... 119,657,493 296,990,183
NET ASSETS:
Beginning of period................................... 297,090,183 100,000
------------ ------------
END OF PERIOD..................................... $416,747,676 $297,090,183
============ ============
</TABLE>
---------------------
* Commencement of operations.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 76
44
MORGAN STANLEY DEAN WITTER EQUITY FUND
NOTES TO FINANCIAL STATEMENTS May 31, 2000
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Equity Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is total
return. The Fund seeks to achieve its objective by investing at least 65% of its
total assets in equity securities. The Fund was organized as a Massachusetts
business trust on April 6, 1998 and had no operations other than those relating
to organizational matters and the issuance of 2,500 shares of beneficial
interest by each class for $25,000 of each class to Morgan Stanley Dean Witter
Advisors Inc. (the "Investment Manager"), to effect the Fund's initial
capitalization. The Fund commenced operations on July 29, 1998.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price;
(2) all other portfolio securities for which over-the-counter market quotations
are readily available are valued at the latest available bid price prior to the
time of valuation; (3) when market quotations are not readily available,
including circumstances under which it is determined by the Investment Manager
or Miller Anderson & Sherrerd, LLP (the "Sub-Advisor"), an affiliate of 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 Trustees (valuation of debt securities for which market quotations are
not readily available may be based upon current market prices of securities
which are comparable in coupon, rating and maturity or an appropriate matrix
utilizing similar factors); and (4) short-term debt securities
<PAGE> 77
MORGAN STANLEY DEAN WITTER EQUITY FUND
NOTES TO FINANCIAL STATEMENTS May 31, 2000, continued
45
having a maturity date of more than sixty days at time of purchase are valued on
a mark-to-market basis until sixty days prior to maturity and thereafter at
amortized cost based on their value on the 61st day. Short-term debt securities
having a maturity date of sixty days or less at the time of purchase are valued
at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
F. OFFERING COSTS -- The Investment Manager incurred offering costs on behalf of
the Fund in the amount of approximately $116,000 which has been reimbursed for
the full amount thereof. Such expenses were deferred and were fully amortized as
of July 29, 1999.
<PAGE> 78
MORGAN STANLEY DEAN WITTER EQUITY FUND
NOTES TO FINANCIAL STATEMENTS May 31, 2000, continued
46
2. INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.85% to the net assets of the Fund determined as of the close of
each business day. Effective May 1, 2000, the Agreement was amended to reduce
the annual rate to 0.825% of the portion of daily net assets exceeding $500
million but not exceeding $1 billion; and 0.80% of the portion of daily net
assets in excess of $1 billion.
Under a Sub-Advisory Agreement between the Sub-Advisor and the Investment
Manager, the Sub-Advisor provides the Fund with investment advice and portfolio
management relating to the Fund's investments in securities, subject to the
overall supervision of the Investment Manager. As compensation for its services
provided pursuant to the Sub-Advisory Agreement, the Investment Manager pays the
Sub-Advisor compensation equal to 40% of its monthly compensation.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager and
Sub-Advisor. The Fund has adopted a Plan of Distribution (the "Plan") pursuant
to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the
Distributor a fee which is accrued daily and paid monthly at the following
annual rates: (i) Class A -- up to 0.25% of the average daily net assets of
Class A; (ii) Class B -- 1.0% of the average daily net assets of Class B; and
(iii) Class C -- up to 1.0% of the average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled
$14,681,445 at May 31, 2000.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C,
<PAGE> 79
MORGAN STANLEY DEAN WITTER EQUITY FUND
NOTES TO FINANCIAL STATEMENTS May 31, 2000, continued
47
respectively, will not be reimbursed by the Fund through payments in any
subsequent year, except that expenses representing a gross sales credit to
Morgan Stanley Dean Witter Financial Advisors or other selected broker-dealer
representatives may be reimbursed in the subsequent calendar year. For the year
ended May 31, 2000, the distribution fee was accrued for Class A shares and
Class C shares at the annual rate of 0.25% and 1.0%, respectively.
The Distributor has informed the Fund that for the year ended May 31, 2000, it
received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $121, $802,961 and
$12,889, respectively and received $76,280 in front-end sales charges from sales
of the Fund's Class A shares. The respective shareholders pay such charges which
are not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended May 31, 2000 aggregated $726,265,914
and $645,045,654, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager,
Distributor and Sub-Advisor, is the Fund's transfer agent.
5. FEDERAL INCOME TAX STATUS
As of May 31, 2000, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and permanent book/tax
differences primarily attributable to a net operating loss. To reflect
reclassifications arising from the permanent differences, accumulated
undistributed net realized gain was charged $3,528,913, paid-in-capital was
credited $18,220 and net investment loss was credited $3,510,693.
<PAGE> 80
MORGAN STANLEY DEAN WITTER EQUITY FUND
NOTES TO FINANCIAL STATEMENTS May 31, 2000, continued
48
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 29, 1998*
ENDED THROUGH
MAY 31, 2000 MAY 31, 1999
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold........................................................ 680,622 $ 8,450,081 986,023 $ 9,815,933
Reinvestment of distributions............................... 4,491 56,008 -- --
Redeemed.................................................... (390,693) (4,809,851) (313,997) (3,248,973)
---------- ------------ ---------- ------------
Net increase - Class A...................................... 294,420 3,696,238 672,026 6,566,960
---------- ------------ ---------- ------------
CLASS B SHARES
Sold........................................................ 11,552,357 142,064,646 26,743,761 266,671,820
Reinvestment of distributions............................... 138,513 1,709,254 -- --
Redeemed.................................................... (5,628,367) (69,821,299) (3,356,336) (33,876,428)
---------- ------------ ---------- ------------
Net increase - Class B...................................... 6,062,503 73,952,601 23,387,425 232,795,392
---------- ------------ ---------- ------------
CLASS C SHARES
Sold........................................................ 1,000,623 12,393,231 1,753,484 17,458,304
Reinvestment of distributions............................... 8,374 103,671 -- --
Redeemed.................................................... (412,853) (5,078,743) (410,890) (4,196,497)
---------- ------------ ---------- ------------
Net increase - Class C...................................... 596,144 7,418,159 1,342,594 13,261,807
---------- ------------ ---------- ------------
CLASS D SHARES
Sold........................................................ 794,026 10,366,417 3,326 36,208
Reinvestment of distributions............................... 397 4,971 -- --
Redeemed.................................................... (387,873) (5,103,706) -- --
---------- ------------ ---------- ------------
Net increase - Class D...................................... 406,550 5,267,682 3,326 36,208
---------- ------------ ---------- ------------
Net increase in Fund........................................ 7,359,617 $ 90,334,680 25,405,371 $252,660,367
========== ============ ========== ============
</TABLE>
---------------------
* Commencement of operations.
<PAGE> 81
49
MORGAN STANLEY DEAN WITTER EQUITY FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 29, 1998*
ENDED THROUGH
MAY 31, 2000 MAY 31, 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS A SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $11.76 $10.00
------ ------
Income (loss) from investment operations:
Net investment income (loss)............................... (0.03) 0.01
Net realized and unrealized gain........................... 1.22 1.75
------ ------
Total income from investment operations..................... 1.19 1.76
------ ------
Less distributions from net realized gain................... (0.07) --
------ ------
Net asset value, end of period.............................. $12.88 $11.76
====== ======
TOTAL RETURN+............................................... 10.12 % 17.60%(1)
RATIOS TO AVERAGE NET ASSETS(3):
Expenses.................................................... 1.29 % 1.38%(2)
Net investment income (loss)................................ (0.25)% 0.07%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $12,483 $7,933
Portfolio turnover rate..................................... 184 % 80%(1)
</TABLE>
---------------------
* Commencement of operations.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 82
MORGAN STANLEY DEAN WITTER EQUITY FUND
FINANCIAL HIGHLIGHTS, continued
50
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 29, 1998*
ENDED THROUGH
MAY 31, 2000 MAY 31, 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS B SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $11.69 $10.00
------ ------
Income (loss) from investment operations:
Net investment loss........................................ (0.12) (0.07)
Net realized and unrealized gain........................... 1.21 1.76
------ ------
Total income from investment operations..................... 1.09 1.69
------ ------
Less distributions from net realized gain................... (0.07) --
------ ------
Net asset value, end of period.............................. $12.71 $11.69
====== ======
TOTAL RETURN+............................................... 9.32 % 16.90 %(1)
RATIOS TO AVERAGE NET ASSETS(3):
Expenses.................................................... 2.04 % 2.13 %(2)
Net investment loss......................................... (1.00)% (0.68)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $374,215 $273,345
Portfolio turnover rate..................................... 184 % 80 %(1)
</TABLE>
---------------------
* Commencement of operations.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 83
MORGAN STANLEY DEAN WITTER EQUITY FUND
FINANCIAL HIGHLIGHTS, continued
51
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 29, 1998*
ENDED THROUGH
MAY 31, 2000 MAY 31, 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS C SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $11.70 $ 10.00
------ -------
Income (loss) from investment operations:
Net investment loss........................................ (0.12) (0.04)
Net realized and unrealized gain........................... 1.22 1.74
------ -------
Total income from investment operations..................... 1.10 1.70
------ -------
Less distributions from net realized gain................... (0.07) --
------ -------
Net asset value, end of period.............................. $12.73 $ 11.70
====== =======
TOTAL RETURN+............................................... 9.31 % 17.10 %(1)
RATIOS TO AVERAGE NET ASSETS(3):
Expenses.................................................... 2.04 % 1.91 %(2)
Net investment loss......................................... (1.00)% (0.46)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $24,711 $15,744
Portfolio turnover rate..................................... 184 % 80 %(1)
</TABLE>
---------------------
* Commencement of operations.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 84
MORGAN STANLEY DEAN WITTER EQUITY FUND
FINANCIAL HIGHLIGHTS, continued
52
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 29, 1998*
ENDED THROUGH
MAY 31, 2000 MAY 31, 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS D SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $11.79 $10.00
------ ------
Income (loss) from investment operations:
Net investment income (loss)............................... (0.01) 0.03
Net realized and unrealized gain........................... 1.24 1.76
------ ------
Total income from investment operations..................... 1.23 1.79
------ ------
Less distributions from net realized gain................... (0.07) --
------ ------
Net asset value, end of period.............................. $12.95 $11.79
====== ======
TOTAL RETURN+............................................... 10.43% 17.90%(1)
RATIOS TO AVERAGE NET ASSETS(3):
Expenses.................................................... 1.04% 1.13%(2)
Net investment income....................................... 0.00% 0.32%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $5,339 $69
Portfolio turnover rate..................................... 184% 80%(1)
</TABLE>
---------------------
* Commencement of operations.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 85
53
MORGAN STANLEY DEAN WITTER EQUITY FUND
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER EQUITY FUND
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Morgan Stanley Dean Witter Equity
Fund (the "Fund") at May 31, 2000, and the results of its operations for the
year then ended, and the changes in its net assets and the financial highlights
for each of the periods indicated, in conformity with accounting principles
generally accepted in the United States. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at May 31,
2000 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
June 30, 2000
<PAGE> 86
54
MORGAN STANLEY DEAN WITTER EQUITY FUND
CHANGE IN INDEPENDENT ACCOUNTANTS
On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.
The reports of PricewaterhouseCoopers LLP on the financial statements of the
Fund for the past fiscal year and the period ended May 31, 1999 contained no
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principle.
In connection with its audits for the most recent fiscal year and the period
ended May 31, 1999 and through July 1, 2000, there have been no disagreements
with PricewaterhouseCoopers LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP
would have caused them to make reference thereto in their report on the
financial statements for such periods.
The Fund, with the approval of its Board of Trustees and its Audit Committee,
engaged Deloitte & Touche LLP as its new independent accountants as of July 1,
2000.
